HOPE BANCORP INC annual report, FY2011

HOPE Bancorp, Inc. — 2011 Form 10-K Summary

Entity note: The supplied filing is for BBCN Bancorp, Inc., formerly Nara Bancorp, Inc., not an entity named HOPE Bancorp, Inc. Verify that this is the intended filing. The fiscal year ended December 31, 2011; the filing was signed March 13, 2012. Amounts below are in U.S. dollars.

Business context and reporting period

The company was a Los Angeles-based bank holding company focused on commercial banking in Korean-American communities. On November 30, 2011, it completed a merger of equals with Center Financial Corporation, renamed itself BBCN Bancorp, and combined the banks as BBCN Bank. The acquisition added 21 branches and materially expanded the balance sheet. 2011 results include Center for December only, so annual comparisons with 2010 are not like-for-like.

The combined bank operated 44 branches and three loan production offices, serving California, New York/New Jersey, Chicago, Seattle and other markets. Lending was concentrated in commercial real estate, commercial business, trade finance and SBA loans.

Key financial metrics

Metric	2011	2010
Interest income	$161.9 million	$150.4 million
Net interest income	$129.8 million	$108.4 million
Net interest margin	4.29%	3.75%
Provision for loan losses	$27.9 million	$84.6 million
Noninterest income	$23.1 million	$24.5 million
Noninterest expense	$82.2 million	$63.4 million
Net income (loss)	$27.1 million	($7.2 million)
Net income (loss) available to common shareholders	$22.5 million	($11.5 million)
Diluted earnings (loss) per share	$0.53	($0.30)

Fourth quarter: Net income was $4.2 million and diluted EPS was $0.05. Noninterest expense was $31.8 million, including merger-related and other elevated costs.
Balance sheet at year-end: Assets were $5.17 billion, loans net of allowance were $3.68 billion, deposits were $3.94 billion, and stockholders’ equity was $795.9 million. Assets, loans and deposits rose sharply from 2010, primarily because of the merger.
Credit quality: Nonperforming assets were $74.7 million, or 1.45% of assets, versus $80.5 million, or 2.72%, in 2010. The allowance for loan losses was $62.0 million, 1.66% of gross loans, compared with 2.90% in 2010. Net charge-offs declined to $28.3 million from $81.7 million.
Watch-list loans increased to $302.8 million from $165.6 million; management attributed $163.1 million of the 2011 balance to acquired Center loans. Loans 90 days or more past due but accruing totaled $17.3 million and were acquired loans accounted for at fair value.
Cash flow: Operating activities provided $96.6 million; investing activities provided $190.3 million, largely reflecting merger cash; financing activities used $159.1 million. Cash and cash equivalents ended the year at $300.1 million, up from $172.3 million.
Debt and liquidity: FHLB borrowings were $344.4 million and subordinated debentures were $52.1 million. The company reported $689.8 million of liquid assets, $930.2 million of remaining FHLB borrowing capacity, and no outstanding borrowings at the Federal Reserve discount window.
Capital: The company’s and bank’s leverage ratios were 19.81% and 18.13%, respectively; both were reported above well-capitalized thresholds. Stockholders’ equity rose substantially following the merger and a $59.9 million net common-stock offering.
Common dividends remained suspended; none were declared in 2011. Preferred-stock dividends and discount accretion were $4.6 million.

Material changes versus the prior period

Net income turned positive from losses in 2010 and 2009. Management attributed the improvement chiefly to lower loan-loss provisions and a higher net interest margin.
Net interest income rose 20%, as interest expense declined 24% and interest income increased 8%. Lower deposit pricing and a more favorable deposit mix helped, while acquired loans contributed only one month of income in 2011.
The provision for loan losses fell 67%, alongside lower net charge-offs. However, the allowance-to-loans ratio fell partly because acquired loans were recorded at fair value without a carried-over allowance.
Noninterest expense increased 30%. The year included $4.7 million of merger and integration expense, a $6.4 million FHLB debt prepayment charge, and increased staffing and occupancy costs.
Noninterest income declined 6%, as higher SBA loan-sale gains were more than offset by lower gains on securities and other loan sales. SBA loan-sale gains increased to $7.4 million from $1.4 million.
The merger was accounted for as an acquisition using fair-value purchase accounting. BBCN issued approximately 31.2 million common shares, valued at approximately $292 million, and recorded approximately $88.0 million of goodwill.

Outlook, commentary, risks and unusual items

The filing provides no specific earnings, revenue, margin or credit-loss guidance. Management described a strategic shift toward relationship banking and expected merger synergies, but stated that savings were not included in pro forma results and were not assured.
Management said liquidity sources were stable and adequate and reported no known trend or uncertainty expected to materially affect liquidity at year-end. Interest-rate sensitivity modeling estimated that a 200-basis-point rate increase would raise net interest income by 5.46% while reducing market value of equity by 4.61%; these are scenario estimates, not forecasts.
Credit risk remains significant: approximately 72% of loans were secured by real estate, and 72% of outstanding loans were in California. The company cited Southern California commercial-property conditions, unemployment and collateral values as relevant risks.
Other disclosed risks include integration of Center, concentration in particular communities and geographies, interest-rate changes, deposit retention and refinancing, regulatory requirements and deposit-insurance costs, natural disasters, and the possibility that actual loan losses exceed the allowance.
Preferred stock issued under the Treasury Capital Purchase Program totaled approximately $122 million at year-end. Its cumulative dividend rate is 5% through February 2014 and 9% thereafter; the company stated an intention to redeem the preferred stock and related warrants at an appropriate time before February 15, 2014, subject to applicable conditions.
The DOJ consent decree concerning past indirect auto-lending practices remained in effect through 2013. A merger-related shareholder suit was settled; in March 2012, the court approved the settlement and awarded $250,000 in attorneys’ fees and expenses. The company also disclosed a $400,000 accrued liability for litigation settlements at year-end. It stated routine litigation was not expected to have a material adverse effect.
Auditors gave unqualified opinions on the financial statements and internal control over financial reporting. However, Center Financial, representing approximately 43% of year-end assets, was excluded from the internal-control audit scope as permitted for a recent acquisition.

Important facts for investors to verify

Confirm the intended issuer: the filing is for BBCN Bancorp, not HOPE Bancorp.
Separate acquired-company effects from legacy results; 2011 includes Center’s results for only one month, while pro forma figures are unaudited and rely on assumptions.
Review acquired-loan fair-value marks, subsequent credit performance, the growing watch list, and the rationale for accruing interest on acquired loans past due 90 days or more.
Assess whether the lower provision and charge-offs are sustainable and whether the allowance remains adequate despite the acquisition-accounting treatment.
Track integration costs and realized merger synergies, including whether recurring expenses normalize after one-time charges.
Review funding stability, near-term time-deposit maturities, reliance on FHLB capacity, and the terms and cost of preferred stock and subordinated debt.
Confirm the status of the DOJ consent decree, litigation accruals, dividend restrictions and any required regulatory approvals for capital actions.