10-Q 1 d335950d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number: 000-50245

 

 

BBCN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4849715

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

3731 Wilshire Boulevard, Suite 1000, Los Angeles,

California

  90010
(Address of Principal executive offices)   (ZIP Code)

(213) 639-1700

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of March 31, 2012, there were 77,996,391 outstanding shares of the issuer’s Common Stock, $0.001 par value.

 

 

 


Table of Contents

Table of Contents

 

          Page  

PART I FINANCIAL INFORMATION

  
   Forward - Looking Information      3   

Item 1.

   FINANCIAL STATEMENTS   
   Condensed Consolidated Statements of Financial Condition March 31, 2012 (unaudited) and December 31, 2011      4   
   Condensed Consolidated Statements of Income - Three Months Ended March 31, 2012 and 2011 (unaudited)      6   
   Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2012 and 2011 (unaudited)      7   
   Condensed Consolidated Statements of Changes in Stockholders’ Equity - Three Months Ended March 31, 2012 and 2011 (unaudited)      8   
   Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011 (unaudited)      9   
   Notes to Condensed Consolidated Financial Statements (unaudited)      10   

Item 2

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      42   

Item 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      61   

Item 4.

   CONTROLS AND PROCEDURES      62   

PART II OTHER INFORMATION

  

Item 1.

   Legal Proceedings      62   

Item 1A.

   Risk Factors      62   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      62   

Item 3.

   Defaults Upon Senior Securities      62   

Item 4.

   Mine Safety Disclosures      62   

Item 5.

   Other Information      62   

Item 6.

   Exhibits      62   
   Signatures      63   
   Index to Exhibits      64   
   Certifications   

 

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Forward-Looking Information

Certain matters discussed in this report may constitute forward-looking statements under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because our business involves inherent risks and uncertainties. The risks and uncertainties include: possible deterioration in economic conditions in our areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; and regulatory risks associated with current and future regulations. For additional information concerning these and other risk factors, and “Part I, Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

BBCN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

ASSETS    (Unaudited)         
     March 31, 2012      December 31, 2011  
     (Dollars in thousands, except share data)  

Cash and cash equivalents:

     

Cash and due from banks

   $ 79,439       $ 81,785   

Interest-bearing deposit at Federal Reserve Bank

     284,970         217,800   

Federal funds sold

     1,270         525   
  

 

 

    

 

 

 

Total cash and cash equivalents

     365,679         300,110   

Term federal funds sold, original maturities more than 90 days

     20,000         40,000   

Securities available for sale, at fair value

     697,808         740,920   

Loans held for sale, at the lower of cost or fair value

     50,620         42,407   

Loans receivable, net of allowance for loan losses (March 31, 2012 - $62,309; December 31, 2011 - $61,952)

     3,674,890         3,676,874   

Other real estate owned, net

     5,641         7,624   

Federal Home Loan Bank (FHLB) stock, at cost

     26,064         27,373   

Premises and equipment, net of accumulated depreciation and amortization (March 31, 2012 - $20,309; December 31, 2011 - $19,018)

     20,353         20,913   

Accrued interest receivable

     12,253         13,439   

Deferred tax assets, net

     66,590         72,604   

Customers’ liabilities on acceptances

     12,187         10,515   

Bank owned life insurance

     42,819         42,514   

Investments in affordable housing partnerships

     14,854         15,367   

Goodwill

     89,882         90,473   

Other intangible assets, net

     3,938         4,276   

Prepaid FDIC insurance

     8,760         9,720   

FDIC loss share receivable

     11,095         10,819   

Other assets

     45,882         40,656   
  

 

 

    

 

 

 

Total assets

   $ 5,169,315       $ 5,166,604   
  

 

 

    

 

 

 

(Continued)

 

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BBCN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY    (Unaudited)         
     March 31, 2012      December 31, 2011  
     (Dollars in thousands, except share data)  

LIABILITIES:

     

Deposits:

     

Non-interest bearing

   $ 1,011,466       $ 984,350   

Interest bearing:

     

Money market and NOW accounts

     1,240,295         1,237,378   

Savings deposits

     193,458         198,063   

Time deposits of $100,000 or more

     787,774         759,923   

Other time deposits

     687,471         761,178   

Total deposits

     3,920,464         3,940,892   

Federal Home Loan Bank borrowings

     332,109         344,402   

Subordinated debentures

     52,137         52,102   

Accrued interest payable

     6,485         6,519   

Acceptances outstanding

     12,187         10,515   

Other liabilities

     27,767         16,235   

Total liabilities

     4,351,149         4,370,665   

STOCKHOLDERS’ EQUITY:

     

Preferred stock, $0.001 par value—authorized 10,000,000 undesignated shares; issued and outstanding 122,000 shares as of March 31, 2012 and December 31, 2011

     

Series A, Fixed Rate Cumulative Perpetual Preferred Stock, issued and outstanding 67,000 shares at March 31, 2012 and December 31, 2011, net, with a liquidation preference of $67,428,000 at March 31, 2012 and December 31, 2011

     65,399         65,158   

Series B, Fixed Rate Cumulative Perpetual Preferred Stock, issued and outstanding 55,000 shares at March 31, 2012 and December 31, 2011, net, with a liquidation preference of $55,229,000 at March 31, 2012 and December 31, 2011

     54,295         54,192   

Common stock, $0.001 par value; authorized, 150,000,000 shares at March 31, 2012 and December 31, 2011; issued and outstanding, 77,996,391 and 77,984,252 shares at March 31, 2012 and December 31, 2011, respectively

     78         78   

Capital surplus

     525,123         524,644   

Retained earnings

     164,974         142,909   

Accumulated other comprehensive income, net

     8,297         8,958   
  

 

 

    

 

 

 

Total stockholders’ equity

     818,166         795,939   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 5,169,315       $ 5,166,604   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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BBCN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the three months ended March 31, 2012 and 2011

(Unaudited)

 

     Three Months Ended March 31,  
     2012     2011  
     (In thousands, except share data)  

INTEREST INCOME:

    

Interest and fees on loans

   $ 63,419      $ 33,085   

Interest on securities

     4,909        3,930   

Interest on federal funds sold and other investments

     227        179   
  

 

 

   

 

 

 

Total interest income

     68,555        37,194   
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Interest on deposits

     5,403        5,131   

Interest on FHLB advances

     1,626        2,572   

Interest on other borrowings

     667        608   
  

 

 

   

 

 

 

Total interest expense

     7,696        8,311   
  

 

 

   

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES

     60,859        28,883   

PROVISION FOR LOAN LOSSES

     2,600        5,262   
  

 

 

   

 

 

 

NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES

     58,259        23,621   
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Service fees on deposit accounts

     3,160        1,497   

International service fees

     1,224        570   

Loan servicing fees, net

     1,337        463   

Wire transfer fees

     741        322   

Other income and fees

     1,340        507   

Net gains on sales of SBA loans

     2,963        1,160   

Net gains on sales and calls of securities available for sale

     816        0   

Net valuation gains (losses) on interest rate swaps and caps

     3        (11

Net gains on sales of OREO

     61        2   
  

 

 

   

 

 

 

Total non-interest income

     11,645        4,510   
  

 

 

   

 

 

 

NON-INTEREST EXPENSE:

    

Salaries and employee benefits

     14,079        7,154   

Occupancy

     3,646        2,437   

Furniture and equipment

     1,218        935   

Advertising and marketing

     1,458        579   

Data processing and communications

     1,611        983   

Professional fees

     613        709   

FDIC assessments

     1,037        1,289   

Credit related expenses

     2,180        744   

Merger and integration expense

     1,773        511   

Other

     2,820        1,354   
  

 

 

   

 

 

 

Total non-interest expense

     30,435        16,695   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAX PROVISION

     39,469        11,436   

INCOME TAX PROVISION

     15,535        4,690   
  

 

 

   

 

 

 

NET INCOME

   $ 23,934      $ 6,746   
  

 

 

   

 

 

 

DIVIDENDS AND DISCOUNT ACCRETION ON PREFERRED STOCK

   $ (1,869   $ (1,075
  

 

 

   

 

 

 

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

   $ 22,065      $ 5,671   
  

 

 

   

 

 

 

EARNINGS PER COMMON SHARE

    

Basic

   $ 0.28      $ 0.15   

Diluted

   $ 0.28      $ 0.15   

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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BBCN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)

 

     Three Months Ended March 31,  
     2012     2011  
     (In thousands)   

Net income

   $ 23,934      $ 6,746   

Other comprehensive income (loss):

    

Unrealized loss on securities available for sale and interest only strips

     (312     (257

Reclassification adjustments for gains realized in income

     (816     0   

Tax expense (benefit)

     (474     (95
  

 

 

   

 

 

 

Change in unrealized loss on securities available for sale and interest only strips

     (654     (162

Reclassification adjustment for the deferred gain on early settlement of interest-rate caps

     (11     (11

Tax expense (benefit)

     (4     (4

Change in unrealized gain on interest-rate caps

     (7     (7
  

 

 

   

 

 

 

Total other comprehensive loss

     (661     (169
  

 

 

   

 

 

 

Total comprehensive income

   $ 23,273      $ 6,577   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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BBCN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)

 

          Common Stock                    
    Preferred
Stock
    Shares     Amount     Capital
Surplus
    Retained
Earnings
    Accumulated
Other
Comprehensive

Income (loss), net
 
    (In thousands, except share data)   

BALANCE, JANUARY 1, 2011

  $ 64,203        37,983,027      $ 38      $ 171,364      $ 120,361      $ 2,597   

Issuance of additional shares pursuant to various stock plans

      10,300          6       

Tax effects of stock plans

           

Stock-based compensation

          27       

Preferred stock cash dividends accrued (5%)

            (837  

Accretion of preferred stock discount

    238              (238  

Comprehensive income:

           

Net income

            6,746     

Other comprehensive income (loss):

           

Change in unrealized gain on securities available for sale, net of tax

              (164

Change in unrealized gain on interest-only strips, net of tax

              2   

Change in unrealized gain (loss) on interest-rate caps, net of tax

              (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, MARCH 31, 2011

  $ 64,441        37,993,327      $ 38      $ 171,397      $ 126,032      $ 2,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JANUARY 1, 2012

  $ 119,350        77,984,252      $ 78      $ 524,644      $ 142,909      $ 8,958   

Issuance of additional shares pursuant to various stock plans

      12,139          81       

Tax effects of stock plans

           

Stock-based compensation

          398       

Preferred stock cash dividends accrued (5%)

            (1,525  

Accretion of preferred stock discount

    344              (344  

Comprehensive income:

           

Net income

            23,934     

Other comprehensive income (loss):

           

Change in unrealized gain on securities available for sale, net of tax

              (656

Change in unrealized gain on interest-only strips, net of tax

              2   

Change in unrealized gain (loss) on interest-rate caps, net of tax

              (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, MARCH 31, 2012

  $ 119,694        77,996,391      $ 78      $ 525,123      $ 164,974      $ 8,297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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BBCN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2012     2011  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 23,934      $ 6,746   

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation, amortization, net of discount accretion

     2,023        2,293   

Stock-based compensation expense

     398        27   

Provision for loan losses

     2,600        5,262   

Valuation adjustment of loans held for sale

     668        0   

Valuation adjustment of OREO

     390        27   

Proceeds from sales of loans

     37,904        11,695   

Originations of loans held for sale

     (43,822     (20,326

Deferred gain on transfer of assets

     0        (1,474

Net gains on sales of SBA and other loans

     (2,963     (1,160

Net change in bank owned life insurance

     (305     (184

Net gains on sales and calls of securities available for sale

     (816     0   

Net gains on sales of OREO

     (61     (2

Net valuation losses on interest rate swaps and caps

     (3     11   

Change in accrued interest receivable

     1,186        (83

Change in deferred income taxes

     6,058        2,391   

Change in prepaid FDIC insurance

     960        1,181   

Change in investments in affordable housing partnership

     513        0   

Change in FDIC loss share receivable

     (27     0   

Change in other assets

     (5,227     628   

Change in accrued interest payable

     (34     (97

Change in other liabilities

     12,197        2,774   
  

 

 

   

 

 

 

Net cash provided by operating activities

     35,573        9,709   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net change in loans receivable

     (1,028     (14,680

Proceeds from sales of securities available for sale

     1,883        0   

Proceeds from sales of OREO

     2,066        422   

Proceeds from matured term federal funds

     40,000        0   

Proceeds from sales of equipment

     3        0   

Purchase of premises and equipment

     (752     (397

Purchase of securities available for sale

     0        (19,808

Redemption of Federal Home Loan Bank Stock

     1,309        702   

Purchase of term federal funds

     (20,000     0   

Proceeds from matured, called, or paiddown securities available for sale

     39,334        34,359   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     62,815        598   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     (20,428     (16

Net change in secured borrowings

     0        3,550   

Payment of cash dividends on Preferred Stock

     (1,410     (837

Proceeds from FHLB borrowings

     0        0   

Repayment of FHLB borrowings

     (11,062     (50,000

Issuance of additional stock pursuant to various stock plans

     81        6   

Tax effects on issuance of shares from stock plan

     0        0   
  

 

 

   

 

 

 

Net cash used in financing activities

     (32,819     (47,297
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     65,569        (36,990

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     300,110        172,331   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 365,679      $ 135,341   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Interest paid

   $ 7,730      $ 8,408   

Income taxes paid (refunds received)

   $ (4,250   $ 45   

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES

    

Transfer from loans receivable to other real estate owned

   $ 412      $ 1,574   

Transfer from loan receivables to loans held for sale

   $ 0      $ 2,496   

Non-cash goodwill adjustment, net

   $ 591      $ 0   

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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BBCN Bancorp, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1.   BBCN Bancorp, Inc.

BBCN Bancorp, Inc. (“BBCN Bancorp”, on a parent-only basis, and “Company,” “we” or “our” on a consolidated basis), formerly named Nara Bancorp, Inc., is a bank holding company headquartered in Los Angeles, California. BBCN Bank (“BBCN Bank” or “the Bank”), formerly named Nara Bank, opened for business in June 1989 under the name “United Citizens National Bank” as a national banking association, was renamed “Nara Bank, National Association” in January 1994 and, in January 2005, became “Nara Bank” upon converting to a California state-chartered bank in connection with its holding company reorganization transaction. On November 30, 2011, we merged with Center Financial Corporation (“Center Financial” or “Center”) in a merger of equals transaction. Concurrently with the merger, Nara Bancorp, Inc. (“Nara”) changed its name to “BBCN Bancorp, Inc.” At the bank level, Nara Bank merged into Center Bank, and concurrently with the merger, Center Bank changed its name to “BBCN Bank.” The Bank has branches in California, the New York metropolitan area, New Jersey, Washington and Chicago as well as loan production offices located in Dallas, Seattle and Denver.

 

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2.   Basis of Presentation

Our condensed consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.

The condensed consolidated financial statements include the accounts of BBCN Bancorp and its wholly owned subsidiaries, principally BBCN Bank. All intercompany transactions and balances have been eliminated in consolidation.

We believe that we have made all adjustments, consisting solely of normal recurring accruals, necessary to fairly present our financial position at March 31, 2012 and the results of our operations for the three months then ended. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. The results of operations for the interim periods are not necessarily indicative of results to be anticipated for the full year.

These unaudited condensed consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K.

Adoption of New Accounting Standards:

ASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820)”—This ASU provides guidance on fair value measurement and disclosure requirements that the FASB deemed largely identical across U.S. GAAP and IFRS. The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or allowed. ASU 2011-04 supersedes most of the guidance in ASC topic 820, but many of the changes are clarifications of existing guidance or wording changes to reflect IFRS 13. Amendments in ASU 2011-04 change the wording used to describe U.S. GAAP requirements for fair value and disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011, and early application is not permitted. We adopted ASU 2011-04 on its guidance and disclosures in the consolidated financial statements effective first quarter 2012.

FASB ASU 2011-05, “Presentation of Comprehensive Income (Topic 220)”— This ASU is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update. These amendments apply to all entities that report items of other comprehensive income, in any period presented. Under the amendments to Topic 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. However, based on an amendment, FASB ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” issued in December 2011, companies are not required to present separate line items on the income statement for reclassifications adjustments of items out of accumulated other comprehensive income into net income as would have been required under the initial standard. Companies are required to present reclassification adjustments within other comprehensive income or in the notes to the financial statements. We adopted ASU 2011-05 and presented the components of net income, the components of other comprehensive income, and total comprehensive income in two consecutive statements effective first quarter 2012.

FASB ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350); Testing Goodwill for Impairment”—This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity can support the conclusion that is is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. The ASU is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. We adopted ASU 2011-08 effective first quarter 2012.

 

3.   Center Merger

On November 30, 2011, the merger of Center and Nara was completed. Pursuant to the merger agreement, holders of Center common stock received 0.7805 of a share of common stock of BBCN for each share of Center common stock held immediately prior to the effective time of the merger, rounded to the nearest whole share, plus cash in lieu of the issuance of fractional shares, resulting in our issuance of approximately 31.2 million shares of Company common stock, with a merger date

 

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fair value of $292 million. Outstanding Center stock options and restricted stock awards were converted into stock options with respect to shares of BBCN common stock or shares of BBCN common stock, respectively, with appropriate adjustments to reflect the exchange ratio.

The merger was accounted for by BBCN using the acquisition method of accounting under ASC 805, Business Combinations. Accordingly, the assets and liabilities of Center were recorded at their respective fair values and represent management’s estimates based on available information. Through the merger with Center, we acquired Center Bank’s 21 full-service branch offices as well as two Loan Production Offices, $326 million in cash, loans with a fair value of $1.4 billion, and core deposit intangibles of $4 million, as well as deposits with a fair value of $1.8 billion, and borrowings with a fair value of $149 million. Goodwill of approximately $88 million was initially recorded in conjunction with the transaction. The goodwill arising from the merger is intangible future benefit to the Company of acquiring Center Financial, thereby creating a platform for future operations, strengthening our presence in the primary existing markets in Southern California, expanding our national presence through the addition of Center’s offices in Chicago, Seattle and Northern California. The results of Center’s operations are included in our Consolidated Statements of Income from the date of merger.

The change in goodwill during the three months ended March 31, 2012 and 2011 is as follows:

 

     2012     2011  
     (In Thousands)  

Beginning of period

   $ 90,473      $ 2,509   

Adjustment

     (591     0   

Impairment

     0        0   
  

 

 

   

 

 

 

End of period

   $   89,882      $   2,509   
  

 

 

   

 

 

 

The goodwill arising from the Center merger was reduced by a net $591 thousand to $87.4 million due to adjustments of certain acquisition date fair value asset and liability estimates during first quarter 2012. There are a number of estimates made in the acquisition accounting as of the acquisition date that may be subject to revisions during the subsequent one-year measurement period. Due to the immateriality of the revision amount, the Company elected not to retrospectively adjust the acquisition date accounting and instead recorded the adjustments in first quarter 2012. Goodwill is not amortized for book purposes and is not deductible for tax purposes.

Direct costs related to the Center merger were expensed as incurred. During the three months ended March 31, 2012, we incurred $1.8 million in merger and integration expenses, including $0.6 million in salaries and benefits, $1.0 million in professional fees and other non-interest expenses of $0.1 million. During the three months ended March 31, 2011, we incurred $511 thousand in merger and integration expenses.

 

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4.   Stock-Based Compensation

The Company has a stock based incentive plan, the 2007 BBCN Bancorp Equity Incentive Plan (“2007 Plan”). The 2007 Plan, which was approved by our stockholders on May 31, 2007 as amended and restated on July 25, 2007 and again on December 1, 2011, provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and performance units (sometimes referred to individually or collectively as “awards”) to non-employee directors, officers, employees and consultants of the Company. Stock options may be either “incentive stock options” (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock options (“NQSOs”).

The 2007 Plan gives the Company flexibility to (i) attract and retain qualified non-employee directors, executives and other key employees and consultants with appropriate equity-based awards, (ii) motivate high levels of performance, (iii) recognize employee contributions to the Company’s success, and (iv) align the interests of Plan participants with those of the Company’s stockholders. The exercise price for shares under an ISO may not be less than 100% of fair market value (“FMV”) on the date the award is granted under Code Section 422. Similarly, under the terms of the 2007 Plan the exercise price for SARs and NQSOs may not be less than 100% of FMV on the date of grant. Performance units are awarded to a participant at the market price of the Company’s common stock on the date of award (after the lapse of the restriction period and the attainment of the performance criteria). No minimum exercise price is prescribed for performance shares and restricted stock awarded under the 2007 Plan.

ISOs, SARs and NQSOs have vesting periods of three to five years and have 10-year contractual terms. Restricted stock, performance shares, and performance units will be granted with a restriction period of not less than one year from the grant date for performance-based awards and not more than three years from the grant date for time-based vesting of grants. Compensation expense for awards is recorded over the vesting period.

Upon the merger with Center Financial Corporation effective November 30, 2011, the former Center’s stock based incentive plan the Center Financial Corporation 2006 Stock Incentive Plan, adopted April 12, 2006, as amended and restated June 13, 2007 (“2006 Plan”) converted the outstanding share awards of 585,860 shares and 2,443,513 shares available for future grants at November 30, 2011 at an exchange ratio of 0.7805.

The 2006 Plan provides for the granting of incentive stock options to officers and employees, and non-qualified stock options and restricted stock awards to employees (including officers) and non-employee directors. The options prices of all options granted under the 2006 Plan must be not less than 100% of the fair market value at the date of grant. All options granted generally vest at the rate of 20% per year except that the options granted to the non-employee directors vest at the rate of 33 1/3% per year. All options not exercised generally expire ten years after the date of grant.

From both 2006 and 2007 plans, 2,637,000 shares were available for future grants as of March 31, 2012.

The total shares reserved for issuance will serve as the underlying value for all equity awards under the 2007 Plan and the 2006 Plan. With the exception of the shares underlying stock options and restricted stock awards, the board of directors may choose to settle the awards by paying the equivalent cash value or by delivering the appropriate number of shares.

The following is a summary of stock option activity under the Plan for the three months ended March 31, 2012:

 

     Number of
Shares
    Weighted-
Average
Exercise
Price Per
Share
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value
 

Outstanding - January 1, 2012

     830,011      $ 16.35      

Granted

     0        0      

Exercised

     (12,139     7.07      

Forfeited

     0        0      
  

 

 

         

Outstanding - March 31, 2012

     817,872      $ 16.49         6.07       $ 707,000   
  

 

 

         

Options exercisable - March 31, 2012

     787,588      $ 16.33         5.93       $ 707,000   

Unvested options expected to vest after March 31, 2012

     30,284      $ 20.73         9.67       $ 0   

 

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The following is a summary of restricted and performance unit activity under the Plan for the three months ended March 31, 2012:

 

     Number of
Shares
     Weighted-
Average
Grant
Date Fair
Value
     Weighted-
Average
Remaining
Contractual
Life (Years)
 

Outstanding - January 1, 2012

     52,480       $ 7.42      

Granted

     490,710         10.42      

Vested

     0         0      

Forfeited

     0         0      
  

 

 

       

Outstanding - March 31, 2012

     543,190       $ 10.20         9.76   
  

 

 

       

The total fair value of performance units vested for the three months ending March 31, 2012 and 2011 was $0 and $79 thousand, respectively.

The amount charged against income, before income tax benefit of $169 thousand and $11 thousand, in relation to the stock-based payment arrangements, was $398 thousand and $27 thousand for the three months ending March 31, 2012 and 2011, respectively. At March 31, 2012, unrecognized compensation expense related to non-vested stock option grants and restricted and performance units aggregated $5.0 million, and is expected to be recognized over a remaining weighted average vesting period of 1.7 years.

The estimated annual stock-based compensation expense as of March 31, 2012 for each of the succeeding years is indicated in the table below:

 

     Stock Based
Compensation Expense
 
     (In thousands)  

Remainder of 2012

   $ 2,235   

For the year ended December 31:

  

2013

     1,404   

2014

     651   

2015

     630   

2016

     86   
  

 

 

 

Total

   $ 5,006   
  

 

 

 

 

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5.   Earnings Per Share (“EPS”)

Basic EPS does not reflect the possibility of dilution that could result from the issuance of additional shares of common stock upon exercise or conversion of outstanding securities, and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in our earnings. For the three months ended March 31, 2012 and 2011, stock options and restricted shares awards for approximately 564,000 shares and 150,000 shares of common stock were excluded in computing diluted earnings per common share because they were antidilutive. Additionally, warrants to purchase 337,480 shares and 521,266 shares of common stock (related to the TARP Capital Purchase Plan) were also antidilutive and excluded for the three months ended March 31, 2012 and 2011, respectively.

The following table shows the computation of basic and diluted EPS for the three months ended March 31, 2012 and 2011.

 

     For the three months ended March 31,  
     2012      2011  
     Net income
available to
common
stockholders
(Numerator)
    Shares
(Denominator)
     Per
Share
(Amount)
     Net income
available to
common
stockholders
(Numerator)
    Shares
(Denominator)
     Per
Share
(Amount)
 
     (Dollars in thousands, except share and per share data)  

Net income as reported

   $ 23,934         $ 6,746     

Less: preferred stock dividends and accretion of preferred stock discount

     (1,869        (1,075  
  

 

 

         

 

 

      

Basic EPS - common stock

   $ 22,065        77,987,342       $ 0.28       $ 5,671        37,987,345       $ 0.15   
       

 

 

         

 

 

 

Effect of Dilutive Securities:

      

Stock Options and Performance Units

       73,323              105,622      

Common stock warrants

       41,153              5,881      
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Diluted EPS - common stock

   $ 22,065        78,101,818       $ 0.28       $ 5,671        38,098,848       $ 0.15   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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6.   Securities Available for Sale

The following is a summary of securities available for sale as of the dates indicated:

 

     At March 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair  Value
 
     (In thousands)  

Debt securities:

          

U.S. Treasury

   $ 300       $ 0       $ 0      $ 300   

GSE collateralized mortgage obligations*

     206,679         4,717         0        211,396   

GSE mortgage-backed securities*

     453,091         9,537         (130     462,498   

Trust preferred security

     4,491         0         (793     3,698   

Municipal bonds

     4,507         511         0        5,018   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     669,068         14,765         (923     682,910   

Mutual funds - GSE mortgage related securities

     14,709         217         (28     14,898   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 683,777       $ 14,982       $ (951   $ 697,808   
  

 

 

    

 

 

    

 

 

   

 

 

 
     At December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair  Value
 
     (In thousands)  

Debt securities:

          

U.S. Treasury

   $ 300       $ 0       $ 0      $ 300   

GSE collateralized mortgage obligations*

     222,400         5,480         (44     227,836   

GSE mortgage-backed securities*

     477,555         10,322         (123     487,754   

Trust preferred securities

     5,532         0         (1,184     4,348   

Municipal bonds

     5,257         507         0        5,764   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     711,044         16,309         (1,351     726,002   

Mutual funds - GSE mortgage related securities

     14,710         227         (19     14,918   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 725,754       $ 16,536       $ (1,370   $ 740,920   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

* As of March 31, 2012 and December 31, 2011, Government Sponsored Enterprises (GSE) included GNMA, FHLB, FNMA, FHLMC, and FFCB, and are all residential based investments.

As of March 31, 2012 and December 31, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

The proceeds from sales of securities and the associated gains are listed below:

 

     For the three months ended March 31,  
     2012      2011  
     (In thousands)  

Proceeds

   $ 1,883       $      0   

Gross gains

     816         0   

Gross losses

     0         0   

The amortized cost and estimated fair value of debt securities at March 31, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

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     Amortized
Cost
     Estimated
Fair  Value
 
     (In thousands)  

Available for sale:

     

Due within one year

   $ 300       $ 300   

Due after one year through five years

     340         359   

Due after five years through ten years

     2,480         2,770   

Due after ten years

     6,178         5,587   

GSE collaterized mortgage obligations

     206,679         211,396   

GSE mortgage-backed securities

     453,091         462,498   

Mutual funds - GSE mortgage related securities

     14,709         14,898   
  

 

 

    

 

 

 
   $ 683,777       $ 697,808   
  

 

 

    

 

 

 

Securities with carrying values of approximately $398.1 million and $425.5 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, various borrowings and for other purposes as required or permitted by law.

The following table shows our investments’ gross unrealized losses and estimated fair value, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position as of the dates indicated.

 

At March 31, 2012   Less than 12 months     12 months or longer     Total  

Description of

Securities

  Number  of
Securities
    Fair Value     Gross
Unrealized
Losses
    Number  of
Securities
    Fair Value     Gross
Unrealized
Losses
    Number  of
Securities
    Fair Value     Gross
Unrealized
Losses
 
   

(In thousands)

 

GSE collaterized mortgage obligations

    0      $ 0      $ 0        0      $ 0      $ 0        0      $ 0      $ 0   

GSE mortgage-backed securities

    6        28,148        (129     0        0        0        6        28,148        (129

Trust preferred security

    0        0        0        1        3,698        (793     1        3,698        (793

Mutual funds - GSE mortgage related securities

    1        5,219        (28     0        0        0        1        5,219        (28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    7      $ 33,367      $ (157     1      $ 3,698      $ (793     8      $ 37,065      $ (950
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

At December 31, 2011   Less than 12 months     12 months or longer     Total  

Description of

Securities

  Number  of
Securities
    Fair Value     Gross
Unrealized
Losses
    Number  of
Securities
    Fair Value     Gross
Unrealized
Losses
    Number  of
Securities
    Fair Value     Gross
Unrealized
Losses
 
   

(In thousands)

 

GSE collaterized mortgage obligations

    2      $ 3,305      $ (28     1      $ 14,007      $ (16     3      $ 17,312      $ (44

GSE mortgage-backed securities

    5        38,082        (123     0        0        0        5        38,082        (123

Trust preferred securities

    0        0        0        1        3,303        (1,184     1        3,303        (1,184

Mutual funds - GSE mortgage related securities

    1        5,229        (19     0        0        0        1        5,229        (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    8      $ 46,616      $ (170     2      $ 17,310      $ (1,200     10      $ 63,926      $ (1,370
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We evaluate securities for other-than-temporary-impairment, (“OTTI”) on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair value of the securities has been less than our cost for the securities, and our intention to

 

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sell, or whether it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

The trust preferred security at March 31, 2012 has an amortized cost of $4.5 million and an unrealized loss of $793 thousand. The trust preferred security is scheduled to mature in May 2047, with a first call date option in May 2012. Management determined this unrealized loss did not represent OTTI at March 31, 2012 as the investment is rated investment grade and there are no credit quality concerns with the obligor. The market value decline is deemed to be due to the current market volatility and is not reflective of management’s expectations of our ability to fully recover this investment, which may be at maturity. Interest on the trust preferred security has been paid as agreed and management believes this will continue in the future and the trust preferred security will be repaid in full as scheduled. For these reasons, no OTTI was recognized on the trust preferred security at March 31, 2012.

We consider the losses on our investments in an unrealized loss position at March 31, 2012 to be temporary based on: 1) the likelihood of recovery; 2) the information relative to the extent and duration of the decline in market value; and 3) the Company’s intention not to sell, and our determination that it is more likely than not that we will not be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.

 

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7.   Loans Receivable and Allowance for Loan Losses

The following is a summary of loans receivable by major category:

 

     March 31, 2012     December 31, 2011  
     (In thousands)  

Loan portfolio composition

    

Real estate loans:

    

Residential

   $ 1,995      $ 2,043   

Commercial & industrial

     2,626,530        2,631,880   

Construction

     48,064        44,756   
  

 

 

   

 

 

 

Total real estate loans

     2,676,589        2,678,679   

Commercial business

     846,307        849,576   

Trade finance

     152,704        146,684   

Consumer and other

     64,095        66,631   
  

 

 

   

 

 

 

Total loans outstanding

     3,739,695        3,741,570   

Less: deferred loan fees

     (2,496     (2,744
  

 

 

   

 

 

 

Gross loans receivable

     3,737,199        3,738,826   

Less: allowance for loan losses

     (62,309     (61,952
  

 

 

   

 

 

 

Loans receivable, net

   $ 3,674,890      $ 3,676,874   
  

 

 

   

 

 

 

Our loan portfolio is made up of four segments: real estate loans, commercial business, trade finance and consumer and other. These segments are further segregated between our loans accounted for under the amortized cost method (referred to as “legacy” loans) and loans acquired from Center Financial (referred to as “acquired” loans), as acquired loans were originally recorded at fair value with no carryover of the related allowance for loan losses. The acquired loans are further segregated between Credit Impaired Loans (ASC 310-30 loans acquired with the credit deterioration) and performing loans (pass graded loans acquired from Center at the time of merger). The following table presents the outstanding principal balance and the related carrying amount of the acquired Center Financial loans included in our Consolidated Statements of Condition at March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     (In thousands)  

Outstanding principal balance

   $ 1,327,898       $ 1,458,133   

Carrying amount

     1,229,410         1,347,525   

The following table presents changes in the accretable discount on the acquired Credit Impaired Loans in the Center merger for the dates indicated:

 

     (In thousands)  

Balance at January 1, 2011

   $ 0   

Center merger

     32,872   

Accretion

     (873
  

 

 

 

Balance at December 31, 2011

     31,999   

Accretion

     (3,561

Changes in expected cash flows

     1,350   
  

 

 

 

Balance at March 31, 2012

   $ 29,788   
  

 

 

 

 

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The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 is as follows:

 

     Legacy      Acquired  
     Real Estate     Commercial
Business
    Trade
Finance
    Consumer
and Other
     Real
Estate
    Commercial
Business
    Trade
Finance
     Consumer
and Other
    Total  
     (In thousands)  

Allowance for loan losses:

                    

Balance, beginning of period

   $ 39,040      $ 20,681      $ 1,786      $ 445       $ 0      $ 0      $ 0       $ 0      $ 61,952   

Provision (credit) for loan losses

     (1,317     1,627        (23     548         1,254        477        16         18        2,600   

Loans charged off

     (1,934     (1,362     0        0         (14     (47     0         (25     (3,382

Recoveries of charged offs

     20        645        60        17         303        87        0         7        1,139   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 35,809      $ 21,591      $ 1,823      $ 1,010       $ 1,543      $ 517      $ 16       $ 0      $ 62,309   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 6,624      $ 8,434      $ 1      $ 479       $ 673      $ 241      $ 0       $ 0      $ 16,452   

Collectively evaluated for impairment

     29,185        13,157        1,822        531         56        276        16         0        45,043   

Loans acquired with credit deterioration

     0        0        0        0         814        0        0         0        814   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 35,809      $ 21,591      $ 1,823      $ 1,010       $ 1,543      $ 517      $ 16       $ 0      $ 62,309   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans outstanding:

                    

Individually evaluated for impairment

   $ 55,448      $ 27,423      $ 4,702      $ 624       $ 10,770      $ 821      $ 0       $ 0      $ 99,788   

Collectively evaluated for impairment

     1,737,254        530,484        132,926        21,424         725,865        211,926        14,108         17,931        3,391,918   

Loans acquired with credit deterioration

     0        0        0           147,252        75,653        968         24,116        247,989   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,792,702      $ 557,907      $ 137,628      $ 22,048       $ 883,887      $ 288,400      $ 15,076       $ 42,047      $ 3,739,695   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2011 is as follows:

 

     Legacy        
     Real Estate     Commercial
Business
    Trade
Finance
    Consumer
and Other
    Total  
     (In thousands)  

Allowance for loan losses:

          

Balance, beginning of period

   $ 36,563      $ 24,930      $ 192      $ 635      $ 62,320   

Provision (credit) for loan losses

     7,195        (1,705     (22     (206     5,262   

Loans charged off

     (3,082     (2,113     0        (115     (5,310

Recoveries of charged offs

     234        659        0        175        1,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 40,910      $ 21,771      $ 170      $ 489      $ 63,340   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses:

          

Individually evaluated for impairment

   $ 10,651      $ 7,839      $ 0      $ 0      $ 18,490   

Collectively evaluated for impairment

     30,259        13,932        170        489        44,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 40,910      $ 21,771      $ 170      $ 489      $ 63,340   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans outstanding:

          

Individually evaluated for impairment

   $ 79,142      $ 29,866      $ 460      $ 170      $ 109,638   

Collectively evaluated for impairment

     1,498,889        478,104        57,064        12,465        2,046,522   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,578,031      $ 507,970      $ 57,524      $ 12,635      $ 2,156,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2012 and December 31, 2011, we had a liability for unfunded commitments of $686 thousand and $686 thousand, respectively. For the three months ended March 31, 2012 and 2011, we recognized provision for credit losses related to our unfunded commitments of $0.

 

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Table of Contents

Individually impaired loans were as follows:

 

     March 31, 2012     December 31, 2011  
     (In Thousands)  

With Allocated Allowance

    

Without charge-off

   $ 79,838      $ 67,202   

With charge-off

     628        341   

With No Allocated Allowance

    

Without charge-off

     13,138        8,123   

With charge-off

     6,184        6,383   

Allowance on Impaired Loans

     (16,452     (18,035
  

 

 

   

 

 

 

Impaired Loans, net of allowance

   $ 83,336      $ 64,014   
  

 

 

   

 

 

 

Average Impaired Loans

   $ 89,398      $ 93,627   

 

     For the Three Months Ended March 31,  
     2012      2011  
     (In Thousands)  

Interest income recognized during impairment

   $ 823       $ 991   

Interest income recognized during impairment represents the related amount of interest income recognized during the time within the period that the loans were impaired.

 

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Table of Contents

The following table details the amount of our impaired loans by class with no related allowance for loan losses, as well as the amount of impaired loans for which there is a related allowance for loan losses as of March 31, 2012 and December 31, 2011. Loans with no related allowance for loan losses have adequate collateral securing their carrying value, and in some circumstances, have been written down to their current carrying value, which is based on the fair value of the collateral.

 

     As of March 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
    Average
Recorded
Investment
 
     (In Thousands)  

With Related Allowance:

          

Real Estate - Residential

   $ 0       $ 0       $ 0      $ 0   

Real Estate - Commercial

          

Retail

     2,563         2,529         (1,179     2,518   

Hotel & Motel

     22,762         22,553         (3,351     18,064   

Gas Station & Car Wash

     5,449         5,389         (1,310     3,286   

Mixed Use

     5,120         5,108         (162     3,156   

Industrial & Warehouse

     5,265         5,254         (405     4,371   

Other

     12,564         12,527         (890     8,166   

Real Estate - Construction

     0         0         0        1,346   

Commercial Business

     26,269         26,187         (8,675     20,990   

Trade Finance

     442         440         (1     994   

Consumer and Other

     479         479         (479     96   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 80,913       $ 80,466       ($ 16,452   $ 62,987   
  

 

 

    

 

 

    

 

 

   

 

 

 

With No Related Allowance

          

Real Estate - Residential

   $ 0       $ 0       $ 0      $ 0   

Real Estate - Commercial

          

Retail

     1,622         1,591         0        2,984   

Hotel & Motel

     0         0         0        2,046   

Gas Station & Car Wash

     928         924         0        1,767   

Mixed Use

     0         0         0        1,136   

Industrial & Warehouse

     5,684         5,663         0        3,444   

Other

     2,977         2,970         0        6,023   

Real Estate - Construction

     1,723         1,710         0        2,733   

Commercial Business

     2,063         2,057         0        4,598   

Trade Finance

     4,285         4,262         0        1,523   

Consumer and Other

     145         145         0        157   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 19,427       $ 19,322       $ 0      $ 26,411   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 100,340       $ 99,788       ($ 16,452   $ 89,398   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     As of December 31, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
    Average
Recorded
Investment
 
     (In Thousands)  

With Related Allowance:

          

Real Estate - Residential

   $ 0       $ 0       $ 0      $ 0   

Real Estate - Commercial

          

Retail

     1,810         1,810         (668     3,475   

Hotel & Motel

     17,439         17,441         (4,093     14,581   

Gas Station & Car Wash

     2,266         2,265         (550     2,825   

Mixed Use

     2,828         2,822         (128     1,953   

Industrial & Warehouse

     4,262         4,242         (407     4,826   

Other

     14,870         14,982         (4,630     6,192   

Real Estate - Construction

     127         128         (49     2,504   

Commercial Business

     19,413         19,416         (7,168     22,929   

Trade Finance

     4,528         4,497         (342     906   

Consumer and Other

     0         0         0        0   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 67,543       $ 67,603       $ (18,035   $ 60,191   
  

 

 

    

 

 

    

 

 

   

 

 

 

With No Related Allowance

          

Real Estate - Residential

   $ 0       $ 0       $ 0      $ 0   

Real Estate - Commercial

          

Retail

     1,388         1,391         0        4,485   

Hotel & Motel

     0         0         0        3,770   

Gas Station & Car Wash

     288         287         0        2,621   

Mixed Use

     0         0         0        1,868   

Industrial & Warehouse

     2,651         2,662         0        2,380   

Other

     2,102         2,092         0        8,934   

Real Estate - Construction

     1,721         1,710         0        3,283   

Commercial Business

     5,737         5,740         0        5,191   

Trade Finance

     469         467         0        759   

Consumer and Other

     150         150         0        145   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 14,506       $ 14,499       $ 0      $ 33,436   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 82,049       $ 82,102       $ (18,035   $ 93,627   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following table presents the aging of past due loans as of March 31, 2012 and December 31, 2011 by class of loans:

 

     As of March 31, 2012  
     30-59
Days Past
Due
     60-89 Days
Past Due
     Greater
than 90
Days Past
Due
     Total Past
Due
     Non-accrual
loans
     Total
Delinquent
loans
     Greater
than 90

days and
accruing
 
     (In Thousands)  

Legacy Loans

                    

Real estate - Residential

   $ 34       $ 0       $ 0       $ 34       $ 0       $ 34       $ 0   

Real estate - Commercial

                    

Retail

     606         273         0         879         2,979         3,858         0   

Hotel & Motel

     228         0         0         228         487         715         0   

Gas Station & Car Wash

     377         2,881         0         3,258         1,934         5,192         0   

Mixed Use

     0         0         0         0         805         805         0   

Industrial & Warehouse

     358         0         0         358         3,054         3,412         0   

Other

     745         118         0         863         7,810         8,673         0   

Real estate - Construction

     0         0         0         0         0         0         0   

Commercial business

     745         542         0         1,287         11,065         12,352         0   

Trade finance

     0         0         0         0         0         0         0   

Consumer and other

     0         0         0         0         624         624         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 3,093       $ 3,814       $ 0       $ 6,907       $ 28,758       $ 35,665       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans (1)

                    

Real estate - Residential

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Real estate - Commercial

                    

Retail

     79         8         2,047         2,134         0         2,134         2,047   

Hotel & Motel

     990         15         0         1,005         6,341         7,346         0   

Gas Station & Car Wash

     1,467         146         3,206         4,819         384         5,203         3,206   

Mixed Use

     1,392         1,564         19         2,975         0         2,975         19   

Industrial & Warehouse

     3         5         32         40         3,028         3,068         32   

Other

     639         623         4,529         5,791         705         6,496         4,529   

Real estate - Construction

     0         0         6,363         6,363         0         6,363         6,363   

Commercial business

     1,036         513         1,335         2,884         371         3,255         1,335   

Trade finance

     100         13         0         113         0         113         0   

Consumer and other

     633         243         726         1,602         348         1,950         726   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     6,339         3,130         18,257         27,726         11,177         38,903         18,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

     9,432         6,944         18,257         34,633         39,935         74,568         18,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The acquired loans include credit impaired loans (ASC 310-30 loans) and performing loans (pass graded loans acquired from Center at the time of merger).

 

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Table of Contents
     As of December 31, 2011  
     30-59
Days Past
Due
     60-89 Days
Past Due
     Greater
than 90

Days Past
Due
     Total Past
Due
     Non-accrual
loans
     Total
Delinquent
loans
     Greater
than 90
days and
accruing
 
     (In Thousands)  

Legacy Loans

                    

Real estate - Residential

   $ 36       $ 0       $ 0       $ 36       $ 0       $ 36       $ 0   

Real estate - Commercial

                    

Retail

     431         0         0         431         2,612         3,043         0   

Hotel & Motel

     0         0         0         0         482         482         0   

Gas Station & Car Wash

     634         0         0         634         1,368         2,002         0   

Mixed Use

     0         0         0         0         822         822         0   

Industrial & Warehouse

     360         0         0         360         3,055         3,415         0   

Other

     0         119         0         119         10,865         10,984         0   

Real estate - Construction

     0         0         0         0         127         127         0   

Commercial business

     1,396         392         0         1,788         11,462         13,250         0   

Trade finance

     0         0         0         0         117         117         0   

Consumer and other

     5         0         0         5         150         155         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,862         511         0         3,373         31,060         34,433         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans (1)

                    

Real estate - Residential

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Real estate - Commercial

                    

Retail

     147         64         1,675         1,886         0         1,886         1,675   

Hotel & Motel

     0         45         0         45         0         45         0   

Gas Station & Car Wash

     2,547         177         817         3,541         0         3,541         817   

Mixed Use

     1,178         1,702         389         3,269         0         3,269         389   

Industrial & Warehouse

     3,393         0         110         3,503         0         3,503         110   

Other

     1,472         228         4,237         5,937         0         5,937         4,237   

Real estate - Construction

     0         4,499         0         4,499         0         4,499         0   

Commercial business

     1,747         1,402         9,125         12,274         0         12,274         9,125   

Trade finance

     0         0         202         202         0         202         202   

Consumer and other

     705         370         700         1,775         0         1,775         700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 11,189       $ 8,487       $ 17,255       $ 36,931       $ 0       $ 36,931       $ 17,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 14,051       $ 8,998       $ 17,255       $ 40,304       $ 31,060       $ 71,364       $ 17,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The acquired loans include credit impaired loans (ASC 310-30 loans) and performing loans (pass graded loans acquired from Center at the time of merger).

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans. This analysis is performed at least on a quarterly basis. We use the following definitions for risk ratings:

 

   

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

   

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

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Table of Contents

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass-rated loans. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

     As of March 31, 2012  
     Special
Mention
     Substandard      Doubtful/Loss      Total  
     (In thousands)  

Legacy Loans:

           

Real estate - Residential

   $ 0       $ 34       $ 0       $ 34   

Real estate - Commercial

           

Retail

     3,710         13,657         0         17,367   

Hotel & Motel

     2,279         16,854         0         19,133   

Gas Station & Car Wash

     3,484         5,994         0         9,478   

Mixed Use

     2,224         5,319         0         7,543   

Industrial & Warehouse

     3,976         8,245         398         12,619   

Other

     11,326         12,486         0         23,812   

Real estate - Construction

     0         1,723         0         1,723   

Commercial business

     12,234         30,352         5,845         48,431   

Trade finance

     516         4,727         0         5,243   

Consumer and other

     0         1,521         0         1,521   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 39,749       $ 100,912       $ 6,243       $ 146,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans:

           

Real estate - Residential

   $ 0       $ 0       $ 0       $ 0   

Real estate - Commercial

           

Retail

     13,101         11,671         0         24,772   

Hotel & Motel

     16,870         23,280         0         40,150   

Gas Station & Car Wash

     5,696         5,892         0         11,588   

Mixed Use

     2,467         4,184         0         6,651   

Industrial & Warehouse

     3,675         6,821         0         10,496   

Other

     6,704         13,161         0         19,865   

Real estate - Construction

     0         7,514         0         7,514   

Commercial business

     18,486         32,853         210         51,549   

Trade finance

     284         589         0         873   

Consumer and other

     649         3,941         341         4,931   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 67,932       $ 109,906       $ 551       $ 178,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 107,681       $ 210,818       $ 6,794       $ 325,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents
     As of December 31, 2011  
     Special
Mention
     Substandard      Doubtful/Loss      Total  
     (In thousands)  

Legacy Loans:

           

Real estate - Residential

   $ 0       $ 36       $ 0       $ 36   

Real estate - Commercial

           

Retail

     3,430         13,477         0         16,907   

Hotel & Motel

     5,008         17,875         0         22,883   

Gas Station & Car Wash

     3,489         2,554         0         6,043   

Mixed Use

     2,279         3,026         0         5,305   

Industrial & Warehouse

     3,998         7,238         404         11,640   

Other

     5,914         15,393         0         21,307   

Real estate - Construction

     0         1,848         0         1,848   

Commercial business

     11,357         30,114         5,994         47,465   

Trade finance

     274         4,997         0         5,271   

Consumer and other

     0         1,081         0         1,081   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 35,749       $ 97,639       $ 6,398       $ 139,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans:

           

Real estate - Residential

   $ 0       $ 0       $ 0       $ 0   

Real estate - Commercial

           

Retail

     11,591         11,334         0         22,925   

Hotel & Motel

     13,138         16,746         0         29,884   

Gas Station & Car Wash

     5,665         5,760         0         11,425   

Mixed Use

     3,532         2,829         0         6,361   

Industrial & Warehouse

     2,673         3,770         0         6,443   

Other

     6,702         12,598         0         19,300   

Real estate - Construction

     0         5,489         0         5,489   

Commercial business

     16,096         39,630         353         56,079   

Trade finance

     128         829         0         957   

Consumer and other

     1,662         2,526         0         4,188   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 61,187       $ 101,511       $ 353       $ 163,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 96,936       $ 199,150       $ 6,751       $ 302,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents loans sold from loans held for investment during the three months ended March 31, 2012 and 2011 by portfolio segment:

 

     Real estate -
Commercial
     Real estate -
Construction
     Commercial
Business
     Total  
     (In thousands)  

March 31, 2012:

           

Sales or reclassification to held for sale

   $ 0       $ 0       $ 0       $ 0   

March 31, 2011:

           

Sales or reclassification to held for sale

   $ 2,713       $ 0       $ 0       $ 2,713   

The adequacy of the allowance for loan losses is determined by management based upon an evaluation and review of the credit quality of the loan portfolio, consideration of historical loan loss experience, relevant internal and external factors that affect the collection of a loan, and other pertinent factors.

The Migration Analysis is a formula methodology based on the Bank’s actual historical net charge-off experience for each loan pool and loan risk grade (Pass, Special Mention, Substandard and Doubtful). The migration analysis is centered on the Bank’s internal credit risk rating system. Our internal loan review and external contracted credit review examinations are used to determine and validate loan risk grades. This credit review system takes into consideration factors such as: borrower’s background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, fair value and volatility of the fair value of collateral; lien position; and the financial strength of any guarantors.

A general loan loss allowance is provided on loans not specifically identified as impaired (“non-impaired loans”). The allowance is determined first based on a quantitative analysis using a loss migration methodology. The loans are classified by type and loan grade, and the historical loss migration is tracked for the various stratifications. Loss experience is quantified for the most recent 12 quarters and then weighted to give more weight to the most recent losses. That loss experience is then applied to the stratified portfolio at each quarter end. For the Performing Loans acquired from Center, a general loan loss allowance is provided to the extent that there has been credit deterioration since the acquisition. The estimate of that credit deterioration becomes more evident as time passes since the acquisition. As of March 31, 2012, the historical loss experience from Center was utilized to provide for a nominal allowance. The quantitative general loan loss allowance was $19.5 million ($19.1 million for legacy loans and $348 thousand for acquired loans) at March 31, 2012, compared to $20.4 million at December 31, 2011.

 

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Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Bank utilizes qualitative adjustments to the Migration Analysis within established parameters. The parameters for making adjustments are established under a Credit Risk Matrix that provides seven possible scenarios for each of the factors below. The matrix allows for up to three positive (Major, Moderate, and Minor), three negative (Major, Moderate, and Minor), and one neutral credit risk scenarios within each factor for each loan type pool. Generally, the factors are considered to have no significant impact (neutral) to our historical migration ratios. However, if information exists to warrant adjustment to the Migration Analysis, changes are made in accordance with the established parameters supported by narrative and/or statistical analysis. The Credit Risk Matrix and the nine possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio or individual specific reserve allocations by as much as 50 basis points in either direction (positive or negative) for each loan type pool. This matrix considers the following nine factors, which are patterned after the guidelines provided under the FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses:

 

   

Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

 

   

Changes in national and local economic and business conditions and developments, including the condition of various market segments.

 

   

Changes in the nature and volume of the loan portfolio.

 

   

Changes in the experience, ability, and depth of lending management and staff.

 

   

Changes in the trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans and troubled debt restructurings, and other loan modifications.

 

   

Changes in the quality of our loan review system and the degree of oversight by the Directors.

 

   

Changes in the value of underlying collateral for collateral-dependent loans.

 

   

The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

 

   

The effect of external factors such as competition and legal and regulatory requirements on the level of estimated losses in our loan portfolio.

The qualitative loan loss allowance on the loan portfolio was $25.6 million at March 31, 2012, compared to $23.5 million at December 31, 2011.

We also establish specific loss allowances for loans where we have identified potential credit risk conditions or circumstances related to a specific individual credit. The specific allowance amounts are determined by a method prescribed by FASB ASC 310-10-35-22, Measurement of Impairment. The loans identified as impaired will be accounted for in accordance with one of the three acceptable valuation methods: 1) the present value of future cash flows discounted at the loan’s effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral, if the loan is collateral dependent. For the collateral dependent impaired loans, we obtain a new appraisal to determine the amount of impairment as of the date that the loan become impaired. The appraisals are based on an “as is” valuation. To ensure that appraised values remain current, we generally obtain an updated appraisal every twelve months from a qualified independent appraiser. Furthermore, if the most current appraisal is dated more than six months prior to the effective date of the impairment test, we validate the most current value with third party market data appropriate to the location and property type of the collateral. If the third party market data indicates that the value of our collateral property has declined since the most recent valuation date, we adjust the value of the property downward to reflect current market conditions. If the fair value of the collateral, less cost to sell, is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the collateral, the loan is deemed to be collateral dependent and the amount of impairment is charged off against the allowance for loan losses.

The Bank considers a loan to be impaired when it is probable that not all amounts due (principal and interest) will be collectible in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis by taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

For commercial business loans, real estate loans and certain consumer loans, we base the measurement of loan impairment on the present value of the expected future cash flows, discounted at the loan’s effective interest rate or on the fair value of the loan’s collateral if the loan is collateral dependent. We evaluate most consumer loans for impairment on a collective basis, because these loans have generally smaller balances and are homogeneous in the underwriting terms and conditions, and in the type of collateral. If a loan is deemed to be impaired, the amount of the impairment is supported by a specific allowance amount which is included in the allowance for loan losses through a charge to the provision for loan losses.

 

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Impaired loans at March 31, 2012, were $99.8 million, a net increase of $17.7 million from $82.1 million at December 31, 2011. This net increase in impaired loans is due primarily to three commercial real estate (CRE) loans, aggregating $9.9 million, which were placed on non-accrual status and three loans, two CRE and one C&I, totaling $5.4 million, which were restructured.

For our Credit Impaired Loans, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

The following table presents loans by portfolio segment and impairment method at March 31, 2012 and December 31, 2011:

 

     As of March 31, 2012  
     Real estate  -
Residential
    Real estate -
Commercial
    Real estate -
Construction
    Commercial
business
    Trade
finance
    Consumer
and other
    Total  
     (In Thousands)  

Impaired loans

   $ 0      $ 64,508      $ 1,710      $ 28,244      $ 4,702      $ 624      $ 99,788   

Specific allowance

   $ 0      $ 7,297      $ 0      $ 8,675      $ 1      $ 479      $ 16,452   

Loss coverage ratio

     0.0     11.3     0.0     30.7     0.0     76.8     16.5

Non-impaired loans

   $ 1,995      $ 2,562,022      $ 46,354      $ 818,063      $ 148,002      $ 63,471      $ 3,639,907   

General allowance

   $ 9      $ 29,406      $ 640      $ 13,433      $ 1,838      $ 531      $ 45,857   

Loss coverage ratio

     0.5     1.1     1.4     1.6     1.2     0.8     1.3

Total loans

   $ 1,995      $ 2,626,530      $ 48,064      $ 846,307      $ 152,704      $ 64,095      $ 3,739,695   

Total allowance for loan losses

   $ 9      $ 36,703      $ 640      $ 22,108      $ 1,839      $ 1,010      $ 62,309   

Loss coverage ratio

     0.5     1.4     1.3     2.6     1.2     1.6     1.7

 

     As of December 31, 2011  
     Real estate  -
Residential
    Real estate -
Commercial
    Real estate -
Construction
    Commercial
business
    Trade
finance
    Consumer
and other
    Total  
     (In Thousands)  

Impaired loans

   $ 0      $ 49,904      $ 1,848      $ 25,150      $ 4,997      $ 150      $ 82,049   

Specific allowance

   $ 0      $ 10,476      $ 49      $ 7,168      $ 342      $ 0      $ 18,035   

Loss coverage ratio

     0.0     21.0     2.7     28.5     6.8     0.0     22.0

Non-impaired loans

   $ 2,043      $ 2,581,976      $ 42,908      $ 824,426      $ 141,687      $ 66,482      $ 3,659,522   

General allowance

   $ 9      $ 27,831      $ 675      $ 13,513      $ 1,444      $ 445      $ 43,917   

Loss coverage ratio

     0.4     1.1     1.6     1.6     1.0     0.7     1.2

Total loans

   $ 2,043      $ 2,631,880      $ 44,756      $ 849,576      $ 146,684      $ 66,632      $ 3,741,571   

Total allowance for loan losses

   $ 9      $ 38,307      $ 724      $ 20,681      $ 1,786      $ 445      $ 61,952   

Loss coverage ratio

     0.4     1.5     1.6     2.4     1.2     0.7     1.7

 

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Under certain circumstances, we provide borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”), or are more substantive troubled debt restructurings. At March 31, 2012, total modified loans were $43.7 million, compared to $32.7 million at December 31, 2011. The temporary modifications generally consist of interest only payments for a three- to six- month period, whereby principal payments are deferred. At the end of the modification period, the remaining principal balance is re-amortized based on the original maturity date. Loans subject to temporary modifications are generally downgraded to Substandard or Special Mention. At the end of the modification period, the loan either 1) returns to the original contractual terms; 2) is further modified and accounted for as a troubled debt restructuring in accordance with ASC 310-10-35; or 3) is disposed of through foreclosure or liquidation.

Troubled Debt Restructured (“TDR”) loans are defined by ASC 310-40, “Troubled Debt Restructurings by Creditors” and ASC 470-60, “Troubled Debt Restructurings by Debtors,” and evaluated for impairment in accordance with ASC 310-10-35. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.

A summary of TDRs on accrual and non-accrual by type of concession as of March 31, 2012 and December 31, 2011 is presented below:

 

     As of March 31, 2012  
     TDR on accrual      TDR on non-accrual         
(In thousands)    Real estate -
Commercial
     Commercial
Business
     Trade
Finance
     Total      Real estate -
Commercial
     Commercial
Business
     Consumer
& Other
     Total      TOTAL  

Payment concession

   $ 2,230       $ 1,578       $ 442       $ 4,250       $ 9,729       $ 3,790       $ 0       $ 13,519       $ 17,769   

Maturity / Amortization concession

     0         2,899         0         2,899         963         1,450         145         2,558         5,457   

Rate concession

     14,389         2,637         0         17,026         3,320         0         0         3,320         20,346   

Principal forgiveness

     0         0         0         0         0         112         0         112         112   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,619       $ 7,114       $ 442       $ 24,175       $ 14,012       $ 5,352       $ 145       $ 19,509       $ 43,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2011  
     TDR on accrual      TDR on non-accrual         
(In thousands)    Real estate -
Commercial
     Commercial
Business
     Trade
Finance
     Total      Real estate -
Commercial
     Commercial
Business
     Trade
Finance
and Other
     Total      TOTAL  

Payment concession

   $ 949       $ 1,365       $ 0       $ 2,314       $ 3,769       $ 3,441       $ 0       $ 7,210       $ 9,524   

Maturity / Amortization concession

     0         888         469         1,357         1,178         1,578         150         2,906         4,263   

Rate concession

     12,384         2,740         0         15,124         3,335         396         0         3,731         18,855   

Principal forgiveness

     0         0         0         0         0         78         0         78         78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,333       $ 4,993       $ 469       $ 18,795       $ 8,282       $ 5,493       $ 150       $ 13,925       $ 32,720   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TDRs on accrual status are comprised of loans that were accruing at the time of restructuring and for which the Bank anticipates full repayment of both principal and interest. TDRs that are on non-accrual can be returned to accrual status after a

 

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period of sustained performance, generally determined to be six months of timely payments as modified. Sustained performance includes the periods prior to the modification if the prior performance met or exceeded the modified terms. TDRs on accrual status at March 31, 2012 were comprised of 10 commercial real estate loans totaling $16.4 million and 25 commercial business loans totaling $7.1 million. TDRs on accrual status at December 31, 2011 were comprised of 6 commercial real estate loans totaling $13.3 million and 19 commercial business loans totaling $5.0 million. We expect that the TDRs on accrual status as of March 31, 2012, which are all performing in accordance with their restructured terms, to continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. TDRs that were restructured at market interest rates and had sustained performance as agreed under the modified loan terms may be reclassified as non-TDRs after each year end.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2012:

 

(In thousands)    Number of
Loans
     Pre-
Modification
     Post-
Modification
 

Real estate - Commercial

  

Retail

     4       $ 903       $ 906   

Hotel & Motel

     0         0         0   

Gas Station & Car Wash

     1         218         217   

Mixed Use

     1         2,319         2,317   

Industrial & Warehouse

     1         1,064         1,064   

Other

     2         7,335         5,733   

Real estate - Construction

     0         0         0   

Commercial business

     8         2,538         2,524   
  

 

 

    

 

 

    

 

 

 

Total

     17       $ 14,377       $ 12,761   
  

 

 

    

 

 

    

 

 

 

The specific reserves for the troubled debt restructurings described above as of March 31, 2012 was $1.3 million and the charge offs for the three months ended March 31, 2012 was $1.7 million.

The following table presents loans by class for TDR loans that have been modified within the previous twelve months and have subsequently had a payment default during the three months ended March 31, 2012:

 

     Number of
Loans
     Balance  
     (In thousands)  

Real estate - Commercial

  

Retail

     1       $ 258   

Industrial & Warehouse

     2         1,102   

Other

     2         1,031   

Commercial Business

     7         2,883   
  

 

 

    

 

 

 
     12       $ 5,274   
  

 

 

    

 

 

 

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The specific reserves for the troubled debt restructurings described above as of March 31, 2012 was $472 thousand and the charge offs for the three months ended March 31, 2012 was $0.

We have allocated $7.2 million and $6.4 million of specific reserves to TDRs as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, we did not have any outstanding commitments to extend additional funds to these borrowers.

Covered Loans

On April 16, 2010, the Department of Financial Institutions closed Innovative Bank, California, and appointed the FDIC as its receiver. On the same date, Center Bank assumed the banking operations of Innovative Bank from the FDIC under a purchase and assumption agreement and two related loss sharing agreements with the FDIC. Upon the merger between Nara Bancorp and Center Financial, the Company assumed the loss sharing agreements with the FDIC.

 

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Covered nonperforming assets totaled $3.7 million and $3.6 million at March 31, 2012 and December 31, 2011, respectively. These covered nonperforming assets are subject to the loss sharing agreements with the FDIC. The covered nonperforming assets at March 31, 2012 and December 31, 2011 were as follows:

 

(in thousands)    March 31,
2012
     December 31,
2011
 

Covered loans on non-accrual status

   $ 0       $ 0   

Covered other real estate owned

     3,677         3,575   
  

 

 

    

 

 

 

Total covered nonperforming assets

   $ 3,677       $ 3,575   
  

 

 

    

 

 

 

Acquired covered loans

   $ 78,748       $ 89,959   
  

 

 

    

 

 

 

Loans accounted for under ASC 310-30 are generally considered accruing and performing loans and the accretable discount is accreted to interest income over the estimate life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing loans. The loans may be classified as nonaccrual if the timing and amount of future cash flows is not reasonably estimable.

 

8.   Borrowings

We maintain a secured credit facility with the Federal Home Loan Bank of San Francisco (“FHLB”) against which the Company may take advances. The borrowing capacity is limited to the lower of 25% of the Bank’s total assets or the Bank’s collateral capacity, which was $1.3 billion at March 31, 2012 and December 31, 2011. The terms of this credit facility require the Company to pledge eligible collateral with the FHLB equal to at least 100% of outstanding advances.

At March 31, 2012 and December 31, 2011, real estate secured loans with a carrying amount of approximately $2.0 billion were pledged as collateral for borrowings from the FHLB. At March 31, 2012 and December 31, 2011, other than FHLB stock, securities totaling $2.2 million and $3.0 million, respectively, were pledged as collateral for borrowings from the FHLB.

At March 31, 2012 and December 31, 2011, FHLB borrowings were $332.1 million and $344.4 million, had a weighted average interest rate of 1.85% and 1.93%, respectively, and had various maturities through September 2017. At March 31, 2012 and December 31, 2011, $205 million of the advances were putable advances with various putable dates and strike prices. The cost of FHLB borrowings as of March 31, 2012 ranged between 0.23% and 4.52%. At March 31, 2012, the Company had a remaining borrowing capacity of $906.6 million.

At March 31, 2012, the contractual maturities for FHLB-SF borrowings were as follows:

 

     Contractual
Maturities
     Maturity/
Put Date
 
     (In thousands)  

Due within one year

   $ 239,084       $ 304,084   

Due after one year through five years

     70,000         25,000   

Due after five years through ten years

     20,000         0   
  

 

 

    

 

 

 
   $ 329,084       $ 329,084   
  

 

 

    

 

 

 

In addition, as a member of the Federal Reserve Bank system, we may also borrow from the Federal Reserve Bank of San Francisco. The maximum amount that we may borrow from the Federal Reserve Bank’s discount window is up to 95% of the outstanding principal balance of the qualifying loans and the fair value of the securities that we pledge. At March 31, 2012, the principal balance of the qualifying loans were $511.1 million and the collateral value of investment securities were $46.9 million, and no borrowing were outstanding against this line.

 

9.   Subordinated Debentures

At March 31, 2012, five wholly-owned subsidiary grantor trusts established by former Nara Bancorp had issued $38 million of pooled Trust Preferred Securities (“trust preferred securities”) and one wholly-owned subsidiary grantor trust established by former Center Financial Corporation had issued $18 million of trust preferred securities. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the

 

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net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”) of BBCN Bancorp. The Debentures are the sole assets of the trusts. BBCN Bancorp’s obligations under the subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by BBCN Bancorp of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. BBCN Bancorp has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. BBCN Bancorp also has a right to defer consecutive payments of interest on the debentures for up to five years.

The following table is a summary of trust preferred securities and debentures at March 31, 2012:

 

            (Dollars in Thousands)                            

Issuance Trust

   Issuance
Date
     Trust
Preferred
Security
Amount
     Subordinated
Debentures
Amount
     Rate
Type
     Initial
Rate
    Rate at
March 31,
2012
    Maturity
Date
 

Nara Bancorp Capital Trust I

     3/28/2001       $ 10,000       $ 10,400         Fixed         10.18     10.18     6/8/2031   

Nara Capital Trust III

     6/5/2003         5,000         5,155         Variable         4.44     3.62     6/15/2033   

Nara Statutory Trust IV

     12/22/2003         5,000         5,155         Variable         4.02     3.42     1/7/2034   

Nara Statutory Trust V

     12/17/2003         10,000         10,310         Variable         4.12     3.42     12/17/2033   

Nara Statutory Trust VI

     3/22/2007         8,000         8,248         Variable         7.00     2.12     6/15/2037   

Center Capital Trust I

     12/29/2003         18,000         12,869         Variable           3.42     1/7/2034   
     

 

 

    

 

 

           

TOTAL ISSUANCE

      $ 56,000       $ 52,137             
     

 

 

    

 

 

           

The Company’s investment in the common trust securities of the issuer trusts of $2.0 million and $2.0 million at March 31, 2012 and December 31, 2011, respectively, is included in other assets. Although the subordinated debt issued by the trusts are not included as a component of stockholders’ equity in the consolidated balance sheets, the debt is treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the $56 million of securities issued by the trusts qualify as Tier 1 capital, along with the $120 million of our outstanding Fixed Rate Cumulative Perpetual Preferred Stock, net of discount. The trust preferred security debt issuances are includable in Tier I capital up to a maximum of 25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital. At March 31, 2012, all of the $56 million of the trusts’ securities qualified as Tier 1 capital along with the $120 million of preferred stock. In July 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law which, among other things, limits to bank holding companies having total assets of more than $15 billion the ability to treat trust preferred security debt issuances as Tier 1 capital. Since the Company had less than $15 billion in assets at March 31, 2012, under the Dodd-Frank Act, wewill be able to continue to include its existing trust preferred securities in Tier 1 capital.

 

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10.   Derivative Financial Instruments and Hedging Activities

As part of our asset and liability management strategy, the Company may enter into derivative financial instruments, such as interest rate swaps, caps and floors, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin. Interest rate swaps and caps involve the exchange of fixed-rate and variable-rate interest payment obligations without the exchange of the underlying notional amounts.

During the first quarter of 2010, the Company entered into a three-year interest rate cap agreement with an aggregate notional amount of $50 million. Under this cap agreement, the Company receives quarterly payments from the counterparty when the quarterly resetting 3 Month London-Interbank Offered Rate exceeds the strike level of 2.00%. The upfront fee paid to the counterparty in entering into this interest rate cap agreement was $890 thousand.

These interest rate cap agreements are considered “free-standing” due to non-designation of a hedge relationship to any of its financial assets or liabilities. Under FASB ASC 815, valuation gains or losses on interest rate caps not designated as hedging instruments are recognized in earnings. At March 31, 2012, the aggregate fair value of the outstanding interest rate caps was $1 thousand, and we recognized mark-to-market losses on valuation of $8 thousand for the three months ended March 31, 2012.

At March 31, 2012 and December 31, 2011, summary information about these interest-rate caps is as follows:

 

     March 31, 2012      December 31, 2011  

Notional amounts

   $ 50.0 million       $ 50.0 million   

Weighted average pay rates

     N/A         N/A   

Weighted average receive rates

     N/A         N/A   

Weighted average maturity

     0.91 years         1.16 years   

Fair value of combined interest rate caps

   $ 1 thousand       $ 9 thousand   

The effect of derivative instruments on the Consolidated Statement of Income for the three months ended March 31, 2012 and 2011 are as follows:

 

            Three Months Ended  
            March 31, 2012     March 31, 2011  
     Location of Gain or (Loss)
Recognized in Income on
Derivatives
     (In thousands)
Amount of Gain or (Loss)
Recognized in Income on
Derivatives
 

Derivatives not designated as hedging instruments under FASB ASC 815:

       

Interest rate contracts (1)

     Other income       $ (8   $ (22
     

 

 

   

 

 

 

 

(1) Includes amounts representing the net interest payments as stated in the contractual agreements and the valuation gains or (losses) on interest rate contracts not designated as hedging instruments.

 

11.   Income Taxes

Our Company and its subsidiaries are subject to U.S. federal income tax as well as state income taxes. We had total unrecognized tax benefits of $685 thousand at March 31, 2012 and $569 thousand at December 31, 2011 that relate primarily to uncertainties related to California enterprise zone loan interest deductions taken in prior years.

We anticipate an increase of approximately $126 thousand in the unrecognized tax benefit related to the California enterprise zone loan interest deduction within the next twelve months. We are subject to U.S. federal income taxes, California franchise taxes and various other state franchise taxes.

The statute of limitations related to the consolidated Federal income tax return is closed for all tax years up to and including 2007. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state.

We are currently under examination by New York City for the 2007, 2008, and 2009 tax years. While the outcome of the examination is unknown, we expect no material adjustments.

 

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We recognize interest and penalties related to income tax matters in income tax expense. We had approximately $47 thousand and $77 thousand for interest and penalties accrued at March 31, 2012 and December 31, 2011, respectively.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that except for the valuation allowance against the capital loss carryforwards of $53 thousand, a valuation allowance for deferred tax assets was not required as of March 31, 2012.

 

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12.   Fair Value Measurements

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Securities Available for Sale

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired Loans

The fair values of impaired loans are generally measured for impairment using the practical expedients permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These are considered Level 3 inputs.

Derivatives

The fair value of our derivative financial instruments, including interest rate swaps and caps, is based on derivative valuation models using market data inputs as of the valuation date that can generally be verified and do not typically involve significant management judgments. (Level 2 inputs).

Other Real Estate Owned

Other real estate owned is valued at the time the loan is foreclosed upon and the asset is transferred to other real estate owned. The value is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Other real estate owned is reviewed and evaluated on at least an annual basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments from investors, or based on recent comparable sales, if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 2 inputs) or may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.

 

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For the quarter ended March 31, 2012, there were no changes in valuation techniques and related inputs resulting from the adoption of ASU 2011-04.

The table below summarizes information about valuation method, inputs and assumptions for nonrecurring Level 3 fair value measurements. The weight assigned to each input is based on the facts and circumstances that exist at the date of measurement.

 

    

Valuation

Method

  

Unobservable Inputs

  

Range of
Quantitative
Information

Impaired loans at fair value    Market   

Adjustments to appraisal value;

Selling costs

  

8.5%

Other real estate owned    Market   

Adjustments to appraisal value;

Discount to reflect realizable value,

Selling costs

  

0% - 8.5%

8.5%

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

            Fair Value Measurements
at the End of the Reporting Period Using
 
     March 31,
2012
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 
     (In thousands)  

Assets:

           

Securities available for sale:

           

U.S. Treasury

   $ 300       $ 0       $ 300       $ 0   

GSE collateralized mortgage obligations

     211,396         0         211,396         0   

GSE mortgage-backed securities

     462,498         0         462,498         0   

Trust preferred security

     3,698         0         3,698         0   

Municipal bonds

     5,018         0         5,018         0   

Mutual funds

     14,898         14,898         0         0   

Derivatives—Interest rate caps

     1         0         1         0   

There were no transfers between Level 1, 2 and 3 during the quarter ended March 31, 2012.

 

            Fair Value Measurements
at the End of the Reporting Period Using
 
     December 31,
2011
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (In thousands)  

Assets:

           

Securities available for sale:

           

U.S. Treasury

   $ 300       $ 0       $ 300       $ 0   

GSE collateralized mortgage obligations

     227,836         0         227,836         0   

GSE mortgage-backed securities

     487,754         0         487,754         0   

Trust preferred securities

     4,348         0         4,348         0   

Municipal bonds

     5,764         0         5,764         0   

Mutual funds

     14,918         14,918         0         0   

Derivatives—Interest rate caps

     9         0         9         0   

Fair value adjustments for interest rate caps resulted in a net expense of $8 thousand for the three months ended March 31, 2012 and $157 thousand for the year ended December 31, 2011.

Assets measured at fair value on a non-recurring basis are summarized below:

 

            Fair Value Measurements
at the End of the Reporting Period Using
        
     March 31,
2012
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total
Gains (Losses)
for the Three
Months Ended
March 31,
2012
 
     (In thousands)         

Assets:

           

Impaired loans at fair value:

           

Real estate loans

   $ 13,464       $ 0       $ 0       $ 13,464       $ (630

Commercial business

     5,824         0         0         5,824         530   

Loans held for sale, net*

     11,140         0         11,140         0         (668

Other real estate owned*

     2,986         0         0         2,986         (363

 

* The balance consists of real estate portfolio segment only.

 

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            Fair Value Measurements
at the End of the Reporting Period Using
        
     December 31,
2011
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Gains
(Losses) for the
Twelve Months
Ended
December 31,
2011
 
     (In thousands)  

Assets:

              

Impaired loans at fair value:

              

Real estate loans

   $ 15,485       $ 0       $ 0       $ 15,485       $ (6,018

Commercial business

     6,360         0         0         6,360         (2,553

Loans held for sale, net*

     6,901         0         6,901         0         (3,393

Other real estate owned*

     3,471         0         0         3,471         (1,031

 

* The balance consists of real estate portfolio segment only.

 

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Table of Contents

Fair Value of Financial Instruments

Carrying amounts and estimated fair values of financial instruments, not previously presented, at March 31, 2012 and December 31, 2011 were as follows:

 

     March 31, 2012
     Carrying
Amount
     Estimated
Fair Value
     Fair Value
Measurement
Using
     (In thousands)       

Financial Assets:

        

Cash and cash equivalents

   $ 365,679       $ 365,679       Level 1

Term federal funds sold

     20,000         20,000       Level 1

Loans held for sale

     28,107         30,508       Level 2

Loans receivable—net

     3,655,602         3,941,945       Level 3

Federal Home Loan Bank stock

     26,064         N/A       N/A

Accrued interest receivable

     12,253         12,253       Level 2

FDIC loss share receivable

     11,095         11,095       Level 3

Customers’ liabilities on acceptances

     12,187         12,187       Level 2

Financial Liabilities:

        

Noninterest-bearing deposits

   $ 1,011,466       $ 1,011,466       Level 2

Saving and other interest bearing demand deposits

     1,433,752         1,433,752       Level 2

Time deposits

     1,475,245         1,482,475       Level 2

Borrowings from Federal Home Loan Bank

     332,109         336,606       Level 2

Subordinated debentures

     52,137         49,848       Level 2

Accrued interest payable

     6,485         6,485       Level 2

Bank’s liabilities on acceptances outstanding

     12,187         12,187       Level 2
     December 31, 2011       
     Carrying
Amount
     Estimated
Fair Value
      
     (In thousands)       

Financial Assets:

        

Cash and cash equivalents

   $ 300,110       $ 300,110      

Term federal funds sold

     40,000         40,000      

Loans held for sale

     18,000         19,374      

Loans receivable—net

     3,655,029         3,911,865      

Federal Home Loan Bank stock

     27,373         N/A      

Accrued interest receivable

     13,439         13,439      

FDIC loss share receivable

     10,819         10,819      

Customers’ liabilities on acceptances

     10,515         10,515      

Financial Liabilities:

        

Noninterest-bearing deposits

     984,350         984,350      

Saving and other interest bearing demand deposits

     1,435,441         1,435,441      

Time deposits

     1,521,101         1,532,152      

Borrowings from Federal Home Loan Bank

     344,402         349,311      

Subordinated debentures

     52,102         53,757      

Accrued interest payable

     6,519         6,519      

Bank’s liabilities on acceptances outstanding

     10,515         10,515      

The methods and assumptions used to estimate fair value are described as follows.

The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, accrued interest receivable and payable, customer’s and Bank’s liabilities on acceptances, non-interest-bearing deposits, short-term debt, secured borrowings, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Fair value of loans held for sale is based on market quotes. Fair value of time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of Federal Reserve Bank stock or Federal Home Loan Bank stock due to restrictions placed on their transferability. The fair value of commitments to fund loans represents fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.

 

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13.   Stockholders’ Equity and Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements, such as restrictions on the growth, expansion or the payment of dividends or other capital distributions or management fees. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of March 31, 2012 and December 31, 2011, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of March 31, 2012 and December 31, 2011, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category.

On November 21, 2008, the Company received $67 million from the U.S. Treasury through its TARP capital purchase plan and issued 67,000 shares of cumulative preferred stock. The preferred stock will pay cumulative dividends at the rate of 5% per year for the first five years and 9% per year thereafter. The shares are callable by the Company at par after three years if the repurchase is made with proceeds of a new offering or placement of common equity or of certain preferred stock treated as Tier 1 capital under applicable Federal banking regulations.

In conjunction with the purchase of the Company’s preferred stock, the U.S. Treasury received a warrant to purchase 1,042,531 shares of the Company’s common stock at $9.64 per share. The term of the warrant is ten years. On December 3, 2009, US Treasury approved the Company’s request for an adjustment to the Company’s warrant share position due to a qualified equity offering in November 2009. The adjusted number of warrant is 521,266, or 50% of original issuance of 1,042,531.

Upon the merger with Center Financial, we issued 55,000 shares of a new series of our preferred stock having substantially the same rights, preferences, privileges and voting powers as our Series A Preferred Stock in exchange for the shares of similar preferred issued by Center Financial under the Treasury Department’s TARP Capital Purchase Program. The new series of preferred stock is designated as our Fixed Rate Cumulative Perpetual Preferred Stock, Series B. The ten-year warrant to purchase Center Financial common stock that was issued in connection with Center Financial’s sale of its Series A Preferred Stock to the Treasury Department was converted into a warrant to purchase BBCN Bancorp common stock upon our merger with Center. Reflecting the merger exchange ratio of 0.7805, the warrant now entitles the holder of the warrant to purchase, in one or more exercises of the warrant, up to 337,480 shares of BBCN Bancorp common stock at a price of $12.22 per share.

Prior to the earlier of the third anniversary of the closing date and the date on which the preferred shares have been redeemed in whole or the investor has transferred all of the preferred shares to third parties which are not affiliates of the investor, neither the Company nor any Company subsidiary shall, without the consent of the investor, declare or pay any dividend or make any distribution on its common stock (other than (A) regular quarterly cash dividends of not more than $0.0275, which was the amount of the last quarterly cash dividend per share declared or, if lower, publicly announced an intention to declare, on the common stock prior to October 14, 2008, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, (B) dividends payable solely in shares of common stock and (C) dividends or distributions of rights or junior stock in connection with a stockholders’ rights plan). The preferred stock issued qualifies as Tier 1 capital.

 

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Table of Contents

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table below:

 

     Actual     Required
For Capital
Adequacy Purposes
    Required
To Be Well
Capitalized under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

As of March 31, 2012

                                       

Total capital (to risk-weighted assets):

               

Company

   $ 810,404         20.1   $ 322,431         8.0     N/A         N/A   

Bank

   $ 746,199         18.5   $ 322,174         8.0   $ 402,717         10.0

Tier I capital (to risk-weighted assets):

           

Company

   $ 759,784         18.9   $ 161,215         4.0     N/A         N/A   

Bank

   $ 695,618         17.3   $ 161,087         4.0   $ 241,630         6.0

Tier I capital (to average assets):

           

Company

   $ 759,784         15.1   $ 201,560         4.0     N/A         N/A   

Bank

   $ 695,618         13.8   $ 201,486         4.0   $ 251,858         5.0

 

     Actual     Required
For Capital
Adequacy Purposes
    Required
To Be Well
Capitalized under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

As of December 31, 2011

                                       

Total capital (to risk-weighted assets):

               

Company

   $ 784,054         19.4   $ 323,144         8.0     N/A         N/A   

Bank

   $ 721,551         17.9   $ 322,891         8.0   $ 403,613         10.0

Tier I capital (to risk-weighted assets):

           

Company

   $ 733,319         18.2   $ 161,572         4.0     N/A         N/A   

Bank

   $ 670,855         16.6   $ 161,445         4.0   $ 242,168         6.0

Tier I capital (to average assets):

           

Company

   $ 733,319         19.8   $ 148,044         4.0     N/A         N/A   

Bank

   $ 670,855         18.1   $ 148,038         4.0   $ 185,048         5.0

Under federal banking law, dividends declared by the Bank in any calendar year may not, without the approval of the regulatory agency, exceed its net income for that year combined with its retained income from the preceding two years. However, the regulatory agency has previously issued a bulletin to all banks outlining guidelines limiting the circumstances under which banks may pay dividends even if the banks are otherwise statutorily authorized to pay dividends. The limitations impose a requirement or in some cases suggest that prior approval of the regulatory agency should be obtained before a dividend is paid if a bank is the subject of administrative action or if the payment could be viewed by the regulatory agency as unsafe or unusual.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 and the unaudited consolidated financial statements and notes set forth elsewhere in this report.

 

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GENERAL

Selected Financial Data

The following table sets forth certain selected financial data concerning the periods indicated:

 

     At or for the Three Months Ended
March 31,
 
     2012     2011  
    

(Dollars in thousands, except

share and per share data)

 

Income Statement Data:

    

Interest income

   $ 68,555      $ 37,194   

Interest expense

     7,696        8,311   
  

 

 

   

 

 

 

Net interest income

     60,859        28,883   

Provision for loan losses

     2,600        5,262   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     58,259        23,621   

Non-interest income

     11,645        4,510   

Non-interest expense

     30,435        16,695   
  

 

 

   

 

 

 

Income before income tax expense

     39,469        11,436   

Income tax expense

     15,535        4,690   

Net income

   $ 23,934      $ 6,746   
  

 

 

   

 

 

 

Dividends and discount accretion on preferred stock

   $ (1,869   $ (1,075
  

 

 

   

 

 

 

Net income available to common stockholders

   $ 22,065      $ 5,671   
  

 

 

   

 

 

 

Per Share Data:

    

Earnings per common share-basic

   $ 0.28      $ 0.15   

Earnings per common share-diluted

   $ 0.28      $ 0.15   

Book value per common share (period end, excluding preferred stock and warrants)

   $ 8.92      $ 7.83   

Tangible book value per common share (period end, excluding preferred stock and warrants) (1) (12)

   $ 7.72      $ 7.75   

Number of common shares outstanding (period end)

     77,996,391        37,993,327   

Weighted average shares-basic

     77,996,391        37,987,345   

Weighted average shares-diluted

     78,101,818        38,098,848   

Tangible common equity ratio (9)

     11.86     10.08

Statement of Financial Condition Data-at Period End:

    

Assets

   $ 5,169,315      $ 2,926,143   

Securities available for sale

     697,808        512,000   

Gross loans, net of deferred loan fees and costs (excludes loans held for sale)

     3,737,199        2,154,113   

Deposits

     3,920,464        2,176,098   

Federal Home Loan Bank borrowings

     332,109        300,000   

Subordinated debentures

     52,137        39,268   

Stockholders’ equity

     818,166        364,336   

 

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Table of Contents
     At or for the Three Months Ended
March 31,
 
     2012     2011  
     (Dollars in thousands)  

Average Balance Sheet Data:

    

Assets

   $ 5,139,396      $ 2,936,114   

Securities available for sale

     725,728        526,341   

Gross loans, including loans held for sale

     3,777,495        2,167,739   

Deposits

     3,903,661        2,158,100   

Stockholders’ equity

     806,384        363,166   

Selected Performance Ratios:

    

Return on average assets (1) (8)

     1.86     0.92

Return on average stockholders’ equity (1) (8)

     11.87     7.43

Return on average tangible equity (8) (11)

     13.44     7.49

Pre Tax- Pre Provision income to average assets (1)

     3.27     2.27

Efficiency ratio (2)

     41.98     50.00

Net interest margin (3)

     5.11     4.13

Regulatory Capital Ratios (4)

    

Leverage capital ratio (5)

     15.08     12.92

Tier 1 risk-based capital ratio

     18.85     16.47

Total risk-based capital ratio

     20.11     17.74

Tier 1 common risk-based capital ratio (13)

     14.63     11.99

Asset Quality Ratios:

    

Allowance for loan losses to gross loans, excluding loans held for sale

     1.67     2.94

Allowance for loan losses to legacy loans (10)

     2.40     2.94

Allowance for loan losses to non-accrual loans

     157.14     134.88

Allowance for loan losses to non-performing loans (6)

     75.97     82.93

Allowance for loan losses to non-performing assets (7)

     71.08     80.09

Nonaccrual loans to gross loans, excluding loans held for sale

     1.06     2.18

Nonperforming loans to gross loans, excluding loans held for sale (6)

     2.19     3.55

Nonperforming assets to gross loans and OREO (7)

     2.34     3.67

Total non-performing assets to total assets (7)

     1.69     2.70

 

(1) Annualized.
(2) Efficiency ratio is defined as non-interest expense divided by the sum of net interest income and non-interest income.
(3) Net interest margin is calculated by dividing annualized net interest income by average total interest-earning assets.
(4) The ratios required to meet the definition of a “well-capitalized” institution under certain banking regulations are 5% leverage capital, 6% tier I risk-based capital and 10% total risk-based capital.
(5) Calculations are based on average quarterly asset balances.
(6) Non-performing loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and accruing restructured loans. Loans 90 days or more past due and still accruing consist of acquired loans that were originally recorded at fair value upon acquisitions. These loans are considered to be accruing as we can reasonably estimate future cash flows on acquired loans and we expect to fully collect the carrying value of these loans.
(7) Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing interest, other real estate owned, and accruing restructured loans.
(8) Based on net income (loss) before effect of dividends and discount accretion on preferred stock.
(9) Excludes TARP preferred stock, net of discount, of $119.7 million and $64.9 million and stock warrants of $2.8 million and $2.4 million at March 31, 2012 and 2011, respectively.
(10) Legacy loans are those loans accounted for under the amortized cost method, and do not include loans acquired from Center Financial Corporation on November 30, 2011. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position. Allowance for loan losses to legacy loans is calculated by dividing gross legacy loan balance by allowance for loan losses.
(11) Average tangible equity is calculated by subtracting average goodwill and average other intangibles from average stockholders’ equity. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

 

     March 31, 2012     March 31, 2011  
     (In Thousands)  

Net income

   $ 23,934      $ 6,746   

Average stockholders’ equity

   $ 806,384      $ 363,166   

Less: Average goodwill and other intangible assets, net

     (94,197     (3,015
  

 

 

   

 

 

 

Average tangible equity

   $ 712,187      $ 360,151   
  

 

 

   

 

 

 

Net income (annualized) to average tangible equity

     13.44     7.49

 

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(12) Tangible book value per share is calculated by subtracting goodwill and other intangible assets from total stockholders’ equity and diving the difference by the number of shares of common stock outstanding. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

 

     March 31, 2012     March 31, 2011  
     (In Thousands)  

Total stockholders’ equity

   $ 818,166      $ 364,336   

Less: Preferred stock, net of discount

     (119,694     (64,441

Common stock warrant

     (2,760     (2,383

Goodwill and other intangible assets, net

     (93,820     (2,965
  

 

 

   

 

 

 

Tangible common equity

   $ 601,892      $ 294,547   
  

 

 

   

 

 

 

Common shares outstanding

     77,996,391        37,993,327   

Tangible common equity per share

   $ 7.72      $ 7.75   

 

(13) Tier 1 common is calculated as tier 1 capital less non-common elements, including perpetual preferred stock and related surplus, minority interest in subsidiaries, trust preferred securities and mandatory convertible preferred securities.

 

     March 31, 2012     March 31, 2011  
     (In Thousands)  

Tier 1 capital

   $ 759,784      $ 376,383   

Less: Preferred stock, net of discount

     (119,694     (64,441

Subordinated debentures

     (50,312     (38,000
  

 

 

   

 

 

 

Tier 1 common-risk based capital

   $ 589,778      $ 273,942   
  

 

 

   

 

 

 

Total Risk-weighted assets less disallowed allowance for loan losses

     4,030,387        2,285,268   
  

 

 

   

 

 

 

Tier 1 common-risk based capital ratio

     14.63     11.99

 

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Results of Operations

Overview

Our total assets were unchanged at $5.17 billion at March 31, 2012 and December 31, 2011. Gross loans receivable was unchanged at $3.74 billion during the three months ended March 31, 2012. Our deposits decreased $20 million, or 1%, to $3.92 billion at March 31, 2012 from $3.94 billion at December 31, 2011. Securities available for sale declined 6% during the first three months of 2012 as a result of paydowns and maturities.

Our net income available to common stockholders for the first quarter of 2012 was $22.1 million, or $0.28 per diluted common share, compared to the net income available to common stockholders of $5.7 million, or $0.15 per diluted common share, for the same period of 2011, representing an increase in net income of $16.4 million, or 289%. The merger with Center Financial Corporation (“Center”) completed on November 30, 2011 impacts the comparability of operating results for the first quarter of 2012 compared to the same period of 2011. Our operating results for the three months ended March 31, 2012 and 2011, include the following pre-tax acquisition accounting adjustments and expenses related to the merger. The increase (decrease) to pre-tax income of these adjustments is summarized below. The impact which these adjustments have on certain yields and costs are described in subsequent sections.

 

     Three Months Ended March 31,  
(In thousands)    2012     2011  

Accretion of discount on acquired Center loans (1)

   $ 9,114      $ 0   

Amortization of premiums on Center FHLB borrowings (2)

     1,231        0   

Accretion of discount on Center subordinated debt (3)

     (35     0   

Amortization of premium on Center time deposits (4)

     1,275        0   

Amortization of core deposit intangibles from Center (5)

     (290     0   

Accretion of discounts on other Center assets (6)

     57        0   

Amortization of unfavorable lease liability (7)

     58        0   

Merger and integration expense (8)

     (1,773     (511

Increase (decrease) to pre-tax income

   $ 9,637      $ (511
  

 

 

   

 

 

 

 

(1) 

We have estimated the fair value of the loans acquired as the result of our merger. The valuation resulted in a discount of approximately $118.0 million as of November 30, 2011. The accretion of this purchase discount over the remaining lives of the acquired loans is included in our reported interest income on loans.

 

(2) 

The fair value of the outstanding FHLB borrowings assumed from Center was estimated to be above the face amount of such debt. Our reported interest expense on FHLB advances includes amortization to the face amount of these advances over the remaining term of the debt.

 

(3) 

The fair value of the outstanding subordinated debt assumed from Center was estimated to be below the face amount of such debt. Our reported interest expense on other borrowings includes accretion to the face amount of this debt over the remaining term of the debt.

 

(4) 

The fair value of certificate of deposit liabilities assumed from Center was estimated to be above the face amount of such deposits. Our reported interest expense on deposits includes amortization to the face amount of such liabilities over the remaining term of the deposits.

 

(5) 

A core deposit intangible arises from a financial institution or a financial institution branch having a deposit base comprised of funds associated with stable customer relationships. These customer relationships provide a cost benefit to the acquiring institution since the associated customer deposits typically are at lower interest rates and can be expected to be retained on a long-term basis. Deposit customer relationships have value due to their favorable interest rates in comparison to market rates for alternative funding sources with expected lives comparable to expected lives of the core deposits. The discounted cash flow method, which we have used to estimate this value, is based upon the principle of future benefits; economic value tends to be based on anticipated future benefits as measured by cash flows expected to occur in the future. The core deposit intangible asset recognized as part of the Center merger is being amortized over its estimated useful life of approximately seven years utilizing an accelerated method.

 

(6) 

Accretion of discounts on other assets primarily consist of servicing assets, investments in affordable housing partnerships and the fair value of the favorable operating leases.

 

(7) 

Amortization of unfavorable lease liability represents the Center facilities lease contracts having rental rates that exceeded current market rates at the merger date.

 

(8)

Direct costs related to the Center merger were expensed as incurred. During the three months ended March 31, 2012, we incurred $1.8 million in merger and integration expenses related to the Center merger , including $0.6 million in salaries and benefits, $1.0 million in professional fees, and $0.1 million in other noninterest expense. During the three months ended March 31, 2011, we incurred $0.5 million in merger related expenses.

 

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The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.86% for the first quarter of 2012, compared to 0.92% for the same period of 2011. The annualized return on average equity, before effect of dividends and discount accretion on preferred stock, was 11.87% for the first quarter of 2012, compared to 7.43% for the same period of 2011. The efficiency ratio was 41.98% for the first quarter of 2012, compared to 50.00% for the same period of 2011.

Net Interest Income and Net Interest Margin

Net Interest Income and Expense

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is referred to as net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities (interest-bearing deposits and borrowed funds). Net interest income is affected by changes in the respective volumes of interest-earning assets and funding liabilities as well as by changes in the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities.

Net interest income before provision for loan losses was $60.9 million for the first quarter of 2012, an increase of $32.0 million, or 111%, compared to $28.9 million for the same period of 2011. The increase was principally attributable to the higher level of interest earning assets, as well as the net interest margin improvement, following the merger. The net interest margin improved to 5.11% for the first quarter of 2012, compared to 4.13% for the same period of 2011. The improvement in the net interest margin was largely attributable to the effect of acquisition accounting adjustments.

Interest income for the first quarter of 2012 was $68.6 million compared to $37.2 million for the same period of 2011. The increase of $31.4 million was primarily the result of a $2.8 million increase in interest income due to an increase in the average yield earnings on average interest-earnings assets and a $28.6 million increase in interest income due to an increase in the volume of average interest-earning assets.

Interest expense for the first quarter of 2012 was $7.7 million, a decrease of $0.6 million, or 7%, compared to interest expense of $8.3 million for the same quarter of 2011. The decrease was the result of a $3.3 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities, which was offset by an increase in the volume of average interest-bearing liabilities of $2.7 million.

Net Interest Margin

The net interest margin (net interest income divided by average interest-earning assets) for the first quarter of 2012 was 5.11%, an increase of 98 basis points from 4.13% for the first quarter of 2011. The improvement in net interest margin was largely attributable to the effect of acquisition accounting adjustments, as summarized in the following table.

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Net interest margin, excluding effect of acquisition accounting adjustments

     4.04     4.13

Acquisition accounting adjustments (1)

     1.07        0.00   

Reported net interest margin

     5.11     4.13
  

 

 

   

 

 

 
    

 

1) Acquisition accounting adjustments is calculated by subtracting net interest margin, excluding effect of acquisition accounting adjustments, from reported net interest margin.

The weighted average yield on loans increased to 6.75% for the first quarter of 2012 from 6.19% for the first quarter of 2011. The increase in the yield is largely attributable to the accretion of discounts on loans acquired from Center in the merger, as summarized in the following table.

 

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Table of Contents
     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

The weighted average yield on loans, excluding effect of acquisition accounting adjustments

     5.61     6.19

Acquisition accounting adjustments (1)

     1.14        0.00   
  

 

 

   

 

 

 

Reported weighted average yield on loans

     6.75     6.19
  

 

 

   

 

 

 

 

(1) Acquisition accounting adjustments is calculated by subtracting the weighted average yield on loans, excluding effect of acquisition accounting adjustments, from reported weighted average yield on loans.

Excluding the accretion of discounts on loans acquired from Center, the weighted average yield on loans for the first quarter of 2012 was 5.61%, down 58 basis points from the first quarter of 2011. The reduction in yield, excluding the effect of acquisition accounting adjustments, is primarily due the lower yielding former Center Bank loan portfolio, and to a lesser extent, continued pricing pressures in the market place. At March 31, 2012, fixed rate loans accounted for 39% of the loan portfolio, compared with 46% at March 31, 2011, reflecting the Company’s focus on variable rate commercial lending. The weighted average yield on the variable rate and fixed rate loan portfolios (excluding loan discount accretion) at March 31, 2012 was 4.61% and 6.49%, respectively, compared with 4.82% and 7.12% at March 31, 2011.

The weighted average yield on securities available for sale for the first quarter of 2012 was 2.71%, compared with 2.99% for the first quarter of 2011. The decline in yield from the quarter ended March 31, 2011 was the result of the replacement of maturing securities with lower yield investments as market interest rates declined and the impact of acquisition accounting adjustments. The acquired Center securities portfolio of approximately $290 million was adjusted to fair value of $293 million as of the merger date, resulting in interest income on investment securities for that portfolio being recognized at a lower average yield, compared with the yield on the balance of the Company’s securities portfolio.

The weighted average cost of deposits for the first quarter of 2012 was 0.56%, an improvement of 40 basis points from 0.96% for the first quarter of 2011. The amortization of premium on time deposits assumed from Center positively affected the weighted average cost of deposits, as summarized in the following table.

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

The weighted average cost of deposits, excluding effect of acquisition accounting adjustments

     0.69     0.96

Acquisition accounting adjustments (1)

     (0.13     0.00   
  

 

 

   

 

 

 

Reported weighted average cost of deposits

     0.56     0.96
  

 

 

   

 

 

 

 

(1) 

Acquisition accounting adjustments is calculated by subtracting the weighted average cost of deposits, excluding effect of acquisition accounting adjustments, from reported weighted average cost of deposits.

Excluding amortization of premium on time deposits assumed from Center, the weighted average cost of deposits was 0.69% for the first quarter of 2012, compared with 0.96% for the same period of 2011. The improvement was driven by reductions in the cost of interest-bearing demand deposits, as well as a favorable shift in the mix of deposits to higher concentrations of non-interest bearing demand deposits. Non-interest bearing demand deposits accounted for 26% of total deposits at March 31, 2012, compared with 19% at March 31, 2011.

The weighted average cost of FHLB advances for the first quarter of 2012 was 1.92%, a decrease of 129 basis points from 3.21% in the first quarter of 2011. The significant improvement was attributable to the amortization of premiums on Center FHLB borrowings, as summarized in the following table.

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

The weighted average cost on FHLB advances, excluding effect of acquisition accounting adjustments

     3.41     3.21

Acquisition accounting adjustments

     (1.49     0.00   
  

 

 

   

 

 

 

Reported weighted average cost on FHLB advances

     1.92     3.21
  

 

 

   

 

 

 

 

(1) Acquisition accounting adjustments is calculated by subtracting the weighted average cost on FHLB advances, excluding effect of acquisition accounting adjustments, from reported weighted average cost on FHLB advances.

 

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Excluding amortization of premiums on assumed Center FHLB borrowings, the weighted average cost of FHLB advances increased slightly to 3.41% for the first quarter of 2012 from 3.21% for the same period of 2011. The increase is attributed to higher rates on the assumed Center FHLB borrowings in relation to the Company’s legacy rates.

Prepayment penalty income for the first quarter of 2012 and 2011 was $116 thousand and $229 thousand, respectively. Non-accrual interest income reversed was $349 thousand and $100 thousand for the first quarter of 2012 and 2011, respectively. Excluding the effects of both non-accrual loan interest income and prepayment penalty income, the net interest margin for the first quarter 2012 and 2011 would have been as 5.13 and 4.11%, respectively.

 

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The following table presents our condensed consolidated average balance sheet information, together with interest rates earned and paid on the various sources and uses of funds for the periods indicated:

 

    

Three months ended

March 31, 2012

   

Three months ended

March 31, 2011

 
     Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate *
    Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate *
 
     (Dollars in thousands)  

INTEREST EARNINGS ASSETS:

           

Loans(1)  (2)

   $ 3,777,495       $ 63,419         6.75   $ 2,167,739       $ 33,085         6.19

Securities available for sale(3)

     725,728         4,909         2.71     526,341         3,930         2.99

FRB and FHLB stock and other investments

     257,583         178         0.27     137,094         179         0.52

Federal funds sold

     25,780         49         0.74     0         0         N/A   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest earning assets

   $ 4,786,586       $ 68,555         5.76   $ 2,831,174       $ 37,194         5.32
  

 

 

    

 

 

      

 

 

    

 

 

    

INTEREST BEARING LIABILITIES:

           

Deposits:

           

Demand, interest-bearing

   $ 1,232,763       $ 2,123         0.69   $ 680,254       $ 1,464         0.87

Savings

     195,932         922         1.89     126,661         709         2.27

Time deposits:

           

$100,000 or more

     767,171         1,411         0.74     321,708         455         0.57

Other

     722,982         947         0.53     640,549         2,502         1.58
  

 

 

    

 

 

      

 

 

    

 

 

    

Total time deposits

     1,490,153         2,358         0.64     962,257         2,957         1.25
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest bearing deposits

     2,918,848         5,403         0.74     1,769,172         5,130         1.18
  

 

 

    

 

 

      

 

 

    

 

 

    

FHLB advances

     339,964         1,626         1.92     324,611         2,572         3.21

Other borrowings

     50,108         667         5.26     55,088         608         4.42
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest bearing liabilities

     3,308,920       $ 7,696         0.93     2,148,871       $ 8,310         1.57
     

 

 

         

 

 

    

Non-interest bearing demand deposits

             388,928         
          

 

 

       

Total funding liabilities / cost of funds

   $ 3,308,920            0.72   $ 2,537,799            1.33
  

 

 

         

 

 

       

Net interest income/net interest spread

      $ 60,859         4.83      $ 28,884         3.75
     

 

 

         

 

 

    

Net interest margin

           5.11           4.13

Net interest margin, excluding effect of non-accrual loan income (expense)(4)

           5.14           4.14

Net interest margin, excluding effect of non-accrual loan income (expense) and prepayment fee income(4) (5)

           5.13           4.11

Cost of deposits:

           

Non-interest bearing demand deposits

   $ 984,813       $ 0         $ 388,928       $ 0      

Interest bearing deposits

     2,918,848         5,403         0.74     1,769,172         5,130         1.18
  

 

 

    

 

 

      

 

 

    

 

 

    

Total deposits

   $ 3,903,661       $ 5,403         0.56   $ 2,158,100       $ 5,130         0.96
  

 

 

    

 

 

      

 

 

    

 

 

    
* Annualized
(1) Interest income on loans includes loan fees.
(2) Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale.
(3) Interest income and yields are not presented on a tax-equivalent basis.
(4) Non-accrual interest income reversed was $349 thousand and $100 thousand for the three months ended March 31, 2012 and 2011, respectively.
(5) Loan prepayment fee income excluded was $116 thousand and $229 thousand for the three months ended March 31, 2012 and 2011, respectively.

 

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The following table illustrates the changes in our interest income, interest expense, and amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the changes due to volume and the changes due to rate categories in proportion to the relationship of the absolute dollar amounts attributable solely to the change in volume and to the change in rate.

 

     Three months ended
March 31, 2012 over March 31, 2011
 
     Net Increase     Change due to  
     (Decrease)     Rate     Volume  
     (Dollars in thousands)  

INTEREST INCOME:

      

Interest and fees on loans

   $ 30,334      $ 3,271      $ 27,063   

Interest on securities

     979        (395     1,374   

Interest on FRB and FHLB stock and other investments

     (1     (112     111   

Interest on federal funds sold

     49        0        49   
  

 

 

   

 

 

   

 

 

 

Total interest income

   $ 31,361      $ 2,764      $ 28,597   
  

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE:

      

Interest on demand, interest bearing

   $ 659      $ (356   $ 1,015   

Interest on savings

     213        (136     349   

Interest on time deposits

     (599     (1,841     1,242   

Interest on FHLB advances

     (946     (1,089     143   

Interest on other borrowings

     59        108        (49
  

 

 

   

 

 

   

 

 

 

Total interest expense

   $ (614   $ (3,314   $ 2,700   
  

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ 31,975      $ 6,078      $ 25,897   
  

 

 

   

 

 

   

 

 

 

Provision for Loan Losses

The provision for loan losses reflects our judgment of the current period cost associated with credit risk inherent in our loan portfolio. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, assessments by management, third parties’ and regulators’ examination of the loan portfolio, the value of the underlying collateral for problem loans and the general economic conditions in our market areas. Specifically, the provision for loan losses represents the amount charged against current period earnings to achieve an allowance for loan losses that, in our judgment, is adequate to absorb probable incurred losses inherent in our loan portfolio. Periodic fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary in material respects from current estimates. If the allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition.

The provision for loan losses for the first quarter of 2012 was $2.6 million, a decrease of $2.7 million, or 51%, from $5.3 million for the same period last year. The decrease is primarily due to lower charge-offs for the most recent quarters resulting in lower historical loss rates that are used to calculate general reserve requirements. Net charge-offs decreased to $2.2 million for the three months ended March 31, 2012, compared to $4.2 million for the same period last year.

See Note 7 of the Notes to Condensed Consolidated Financial Statements (unaudited) and Financial Condition-Loans Receivable and Allowance for Loan Losses for further discussion.

Non-interest Income

Non-interest income is primarily comprised of service fees on deposits accounts, fees received from our trade finance letter of credit operations and net gains on sales of loans and securities available for sale.

Non-interest income for the first quarter of 2012 was $11.6 million, compared to $4.5 million for the same quarter of 2011, an increase of $7.1 million, or 158%. The increase was primarily attributable to the merger with Center. Net gains on sales of SBA loans totaled $3.0 million and $1.2 million for the first quarter of 2012 and 2011, respectively. We sold $33.4 million in SBA loans to the secondary market during the first quarter of 2012. We posted a net gain on sale of securities available-for-sale of $816 thousand in the first quarter of 2012. This compares with none in first quarter 2011. This included sale of a relatively illiquid trust preferred security which had been marked to market in a prior period. We had no sales of securities in first quarter 2011.

 

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The breakdown of changes in our non-interest income by category is shown below:

 

     Three Months Ended March 31,     Increase (Decrease)  
     2012      2011     Amount      Percent (%)  
     (Dollars in thousands)  

Service fees on deposit accounts

   $ 3,160       $ 1,497      $ 1,663         111.1

International service fees

     1,224         570        654         114.7

Loan servicing fees, net

     1,337         463        874         188.8

Wire transfer fees

     741         322        419         130.1

Other income and fees

     1,340         507        833         164.3

Net gains on sales of SBA loans

     2,963         1,160        1,803         155.4

Net gains on sales and calls of securities available for sale

     816         0        816         100.0

Net valuation losses on interest rate contracts

     3         (11     14         -127.3

Net gains (losses) on sales of OREO

     61         2        59         2,950.0
  

 

 

    

 

 

   

 

 

    

Total non-interest income

   $ 11,645       $ 4,510      $ 7,135         158.2
  

 

 

    

 

 

   

 

 

    

Non-interest Expense

Non-interest expense for the first quarter of 2012 was $30.4 million, an increase of $13.7 million, or 82%, from $16.7 million for the same period of last year. The increase largely reflected the combined operations of new BBCN.

Salaries and benefits expense increased $6.9 million, or 97%, to $14.1 million for the first quarter of 2012, compared to $7.2 million for the same period of 2011. The increase was due to an increase in the number of full-time equivalent (FTE) employees, which increased to 661 at March 31, 2012 from 376 at March 31, 2011. Occupancy expense for the first quarter of 2012 rose 50% to $3.6 million from $2.4 million for the same period of 2011 due to the increase in the number of branches from 23 pre-merger to 44 post-merger.

 

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Table of Contents

The breakdown of changes in non-interest expense by category is shown below:

 

     Three Months Ended March 31,      Increase (Decrease)  
     2012      2011      Amount     Percent (%)  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 14,079       $ 7,154       $ 6,925        96.8

Occupancy

     3,646         2,437         1,209        49.6

Furniture and equipment

     1,218         935         283        30.3

Advertising and marketing

     1,458         579         879        151.8

Data processing and communications

     1,611         983         628        63.9

Professional fees

     613         709         (96     (13.5 )% 

FDIC assessment

     1,037         1,289         (252     (19.6 )% 

Credit related expenses

     2,180         744         1,436        193.0

Merge and integration expenses

     1,773         511         1,262        247.0

Other

     2,820         1,354         1,466        108.3
  

 

 

    

 

 

    

 

 

   

Total non-interest expense

   $ 30,435       $ 16,695       $ 13,740        82.3
  

 

 

    

 

 

    

 

 

   

Provision for Income Taxes

Income tax expense was $15.5 million and $4.7 million for the first quarter ended March 31, 2012 and 2011, respectively. The effective income tax rate for the quarters ended March 31, 2012 and 2011 was 39.4% and 41.0%, respectively. The lower effective tax rate during the first quarter of 2012 compared to 2011 was primarily due to an increase in the Federal affordable housing tax credits, California enterprise zone hiring credits, California enterprise zone loan interest deductions.

 

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Financial Condition

At March 31, 2012, our total assets were $5.18 billion, an increase of $9.9 million from $5.17 billion at December 31, 2011.

Investment Securities Portfolio

As of March 31, 2012, we had $697.8 million in available-for-sale securities, compared to $740.9 million of such securities at December 31, 2011. The net unrealized gain on the available-for sale securities at March 31, 2012 was $14.0 million, compared to a net unrealized gain on such securities of $15.2 million at December 31, 2011. During the three months ended March 31, 2012, no securities was purchased, $38.6 million in mortgage related securities were paid down, and $0.8 million in securities were either called or matured. We sold $1.0 million corporate trust preferred security acquired from Center Financial, and recognized a gain of $0.8 million. No securities were sold during the same period of last year,.

Loan Portfolio

As of March 31, 2012, gross loans outstanding, net of deferred loan fees and costs and excluding loans held for sale, was $3.737 billion, a decrease of $2 million from $3.739 billion at December 31, 2011. Total loan originations during the three months ended March 31, 2012 was $167.6 million, including SBA loan originations of $34.6 million, compared to $88.1 million during the same period of 2011.

The following table summarizes our loan portfolio by amount and percentage of gross loans in each major loan type at the dates indicated:

 

     March 31, 2012     December 31, 2011  
     Amount     Percent     Amount     Percent  
           (In thousands)        

Loan portfolio composition

      

Real estate loans:

      

Residential

   $ 1,995        0   $ 2,043        0

Commercial & industrial

     2,626,530        70     2,631,880        70

Construction

     48,064        1     44,756        1

Total real estate loans

     2,676,589        72     2,678,679        73

Commercial business

     846,307        23     849,576        23

Trade finance

     152,704        4     146,684        4

Consumer and other

     64,095        2     66,631        2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans outstanding

     3,739,695        100     3,741,570        100
    

 

 

     

 

 

 

Less: deferred loan fees

     (2,496       (2,744  
  

 

 

     

 

 

   

Gross loans receivable

     3,737,199          3,738,826     

Less: allowance for loan losses

     (62,309       (61,952  
  

 

 

     

 

 

   

Loans receivable, net

   $ 3,674,890        $ 3,676,874     
  

 

 

     

 

 

   

SBA loans, consisting principally of the unguaranteed portion, are included in commercial business loans and commercial and industrial real estate loans. SBA loans included in commercial business loans were $73.3 million at March 31, 2012 and $81.6 million at December 31, 2011. SBA loans included in commercial and industrial real estate loans were $139.9 million at March 31, 2012 and $152.5 million at December 31, 2011.

 

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We normally do not extend lines of credit or make loan commitments to business customers for periods in excess of one year. We use the same credit policies in making commitments and conditional obligations as we do for providing loan facilities to our customers. We perform annual reviews of such commitments prior to renewal.

The following table shows our loan commitments and letters of credit outstanding at the dates indicated:

 

     March 31, 2012      December 31, 2011  
     (Dollars in thousands)  

Loan commitments

   $ 534,070       $ 458,096   

Standby letters of credit

     33,039         29,028   

Other commercial letters of credit

     58,938         49,457   
  

 

 

    

 

 

 
   $ 626,047       $ 536,581   
  

 

 

    

 

 

 

Nonperforming Assets

Nonperforming assets, which include non-accrual loans, loans past due 90 days or more and accruing, restructured loans, and other real estate owned, were $87.7 million at March 31, 2012, compared to $73.8 million at December 31, 2011. The increase in the dollar amount of non-performing loans primarily reflects three commercial real estate (CRE) loans, aggregating $9.9 million, which were placed on non-accrual status and three loans, two CRE and one C&I, totaling $5.4 million, which were restructured. The ratio of nonperforming assets to gross loans plus OREO was 2.34% and 1.97% at March 31, 2012 and December 31, 2011, respectively.

The following table summarizes the composition of our nonperforming assets as of the dates indicated.

 

     March 31, 2012     December 31, 2011  
     (Dollars in thousands)  

Nonaccrual loans

   $ 39,935      $ 31,212   

Delinquent loans 90 days or more on accrual status

     18,257        16,169   

Accruing restructured loans

     23,888        18,775   

Total Nonperforming Loans

     82,080        66,156   

Other real estate owned

     5,641        7,625   
  

 

 

   

 

 

 

Total Nonperforming Assets

   $ 87,721      $ 73,781   
  

 

 

   

 

 

 

Nonperforming loans to total gross loans, excluding loans held for sale

     2.19     1.77

Nonperforming assets to gross loans plus OREO

     2.34     1.97

Nonperforming assets to total assets

     1.70     1.43

Allowance for loan losses to non-performing loans

     75.97     123.94

Allowance for loan losses to non-performing assets

     71.08     83.97

Allowance for Loan Losses

The allowance for loan losses was $62.3 million at March 31, 2012, compared to $62.0 million at December 31, 2011. We recorded a provision for loan losses of $2.6 million during the three months ended March 31, 2012, compared to $5.3 million for the same period of 2011. The allowance for loan losses was 1.67% of gross loans at March 31, 2012 and 1.66% of gross loans at December 31, 2011. Impaired loans as defined by FASB ASC 310-10-35, “Accounting by Creditors for Impairment of a Loan,” totaled $99.8 million and $82.1 million as of March 31, 2012 and December 31, 2011, respectively, with specific allowances of $16.5 million and $18.0 million, respectively. The $17.7 million increase in impaired loans by from December 31, 2011 to March 31, 2012 was due primarily to three CRE loans, aggregating $9.9 million, which were placed on non-accrual status and three loans, two CRE and one C&I, totaling $5.4 million, which were restructured.

 

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The following table reflects our allocation of the allowance for loan and lease losses (“ALLL”) by loan category and the ratio of each loan category to total loans as of the dates indicated:

 

     Allocation of Allowance for Loan Losses  
     March 31, 2012     December 31, 2011  
     Amount of
allowance
for loan
losses
     Percent of
loans to
total
loans
    Amount of
allowance
for loan
losses
     Percent of
loans to
total
loans
 
     (Dollars in thousands)  

Loan Type

        

Real estate - Residential

   $ 9         0   $ 9         0

Real estate - Commercial

     36,703         70     38,307         70

Real estate - Construction

     640         1     724         1

Commercial business

     22,108         23     20,681         23

Trade finance

     1,839         4     1,786         4

Consumer and other

     1,010         2     445         2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 62,309         100   $ 61,952         100
  

 

 

    

 

 

   

 

 

    

 

 

 

For a better understanding of the changes in the ALLL, the loan portfolio has been segmented for disclosures purposes between loans, which are accounted for under the amortized cost method (referred to as “legacy” loans) and loans acquired from Center (referred to as “acquired” loans). The acquired loans were further segregated between credit impaired loans (ASC 310-30 loans) and performing loans (pass graded loans acquired from Center in the merger). The activity in the ALLL for the three months ended March 31, 2012 is as follows:

 

     Acquired Loans (2)  
     Legacy
Loans (1)
    Credit
Impaired
Loans
    Performing
Loans
    Total  

Balance, beginning of period

   $ 61,952      $ 0      $ 0      $ 61,952   

Provision for loan losses

     835        814        951        2,600   

Loans charged off

     (3,296     0        (86     (3,382

Recoveries of charged offs

     742        0        397        1,139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

     60,233        814        1,262        62,309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans, net of deferred loan fees and costs

   $ 2,507,789        170,837        1,058,573      $ 3,737,199   

Loss coverage ratio

     2.40     0.48     0.12     1.67
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Legacy Loans includes acquired loans that have been renewed or refinanced after the merger.

(2) 

Acquired loans were marked to fair value at the acquisition date, and provisions for loan losses reflect credit deterioration since the acquisition date.

 

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The following table shows the provisions made for loan losses, the amount of loans charged off and the recoveries on loans previously charged off, together with the balance in the allowance for loan losses at the beginning and end of each period, the amount of average and gross loans outstanding, and certain other ratios as of the dates and for the periods indicated:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (Dollars in thousands)  

LOANS

    

Average gross loans receivable, including loans held for sale (net of deferred fees)

   $ 3,777,495      $ 2,167,739   
  

 

 

   

 

 

 

Total gross loans receivables, excluding loans held for sale at end of year (net of deferred fees)

   $ 3,737,199      $ 2,139,933   
  

 

 

   

 

 

 

ALLOWANCE:

    

Balance-beginning of period

   $ 61,952      $ 62,320   

Less: Loan charge-offs:

    

Residential real estate

     0        0   

Commercial & industrial real estate

     (1,934     (2,389

Construction

     0        (693

Commercial business loans

     (1,422     (2,113

Trade finance

     0        0   

Consumer and other loans

     (26     (115
  

 

 

   

 

 

 

Total loans charged off

     (3,382     (5,310
  

 

 

   

 

 

 

Plus: Loan recoveries

    

Commercial & industrial real estate

     323        234   

Commercial business loans

     792        659   

Consumer and other loans

     24        175   
  

 

 

   

 

 

 

Total loans recoveries

     1,139        1,068   
  

 

 

   

 

 

 

Net loan charge-offs

     (2,243     (4,242
    

Provision for loan losses

     2,600        5,262   
  

 

 

   

 

 

 

Balance-end of period

   $ 62,309      $ 63,340   
  

 

 

   

 

 

 

Net loan charge-offs to average gross loans, including loans held for sale (net of deferred fees) *

     0.24     0.78

Allowance for loan losses to gross loans at end of period

     1.67     2.96

Net loan charge-offs to beginning allowance *

     14.48     27.23

Net loan charge-offs to provision for loan losses

     86.27     80.62
    

 

* Annualized

We believe the allowance for loan losses as of March 31, 2012 is adequate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that actual losses will not exceed the estimated amounts.

Deposits and Other Borrowings

Deposits. Deposits are our primary source of funds used in our lending and investment activities. At March 31, 2012, our deposits had decreased by $20 million, or 1%, to $3.92 billion from $3.94 billion at December 31, 2011. Retail deposits totaled $3.55 billion at March 31, 2012, a decrease of $6 million from $3.56 billion at December 31, 2011. Interest-bearing demand deposits, including money market and Super Now accounts, totaled $1.43 billion at March 31, 2012, a decrease of $1.7 million from $1.44 billion at December 31, 2011.

At March 31, 2012, 25.8% of total deposits were non-interest bearing demand deposits, 37.6% were time deposits and 36.6% were interest bearing demand and savings deposits. By comparison, at December 31, 2011, 25.0% of total deposits were non-interest bearing demand deposits, 38.6% were time deposits, and 36.4% were interest bearing demand and saving deposits.

At March 31, 2012, we had $66.5 million in brokered deposits and $300.0 million in California State Treasurer deposits, compared to $80.7 million and $300.0 million of such deposits at December 31, 2011, respectively. The California State Treasurer deposits had three-month maturities with a weighted average interest rate of 0.09% at March 31, 2012 and were collateralized with securities with a carrying value of $347.6 million. The weighted average interest rate for brokered deposits was 0.33% at March 31, 2012.

 

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The following is a schedule of CD maturities as of March 31, 2012:

Maturity Schedule of Time Deposits

(in thousands)

 

            Weighted Average  

Quarter Ending

   Balance*      Interest Rate  

June 30, 2012

   $ 551,705         0.55

September 30, 2012

     232,391         1.10

December 31, 2012

     244,836         1.28

March 31, 2013

     258,822         1.21
  

 

 

    

Total one year or less

     1,287,754         0.92

Over one year

     187,491         1.25
  

 

 

    

Total time deposits

   $ 1,475,245         0.96
  

 

 

    

Other Borrowings. Advances may be obtained from the FHLB as an alternative source of funds. Advances from the FHLB are typically secured by a pledge of commercial real estate loans and/or securities with a market value at least equal to the outstanding advances plus our investment in FHLB stock.

At March 31, 2012, we had $332.1 million of FHLB advances with average remaining maturities of 1.1 years, compared to $344.4 million with average remaining maturities of 1.3 years at December 31, 2011. The weighted average rate, including the acquisition accounting adjustments was 1.85% and 1.93% at March 31, 2012 and at December 31, 2011, respectively.

At March 31, 2012 and December 31, 2011, six wholly-owned subsidiary grantor trusts (“Trusts”) established by us had issued $56 million of pooled trust preferred securities (“Trust Preferred Securities”). The Trust Preferred Securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures for the securities. The Trusts used the net proceeds from their respective offerings to purchase a like amount of subordinated debentures (the “Debentures”) issued by us. The Debentures are the sole assets of the trusts. Our obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by us of the obligations of the trusts. The Trust Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. We have the right to redeem the Debentures in whole (but not in part) on or after specific dates, at redemption prices specified in the indentures plus any accrued but unpaid interest to the redemption date.

Off-Balance-Sheet Activities and Contractual Obligations

We routinely engage in activities that involve, to varying degrees, elements of risk that are not reflected, in whole or in part, in the consolidated financial statements. These activities are part of our normal course of business and include traditional off-balance-sheet credit-related financial instruments, interest rate swap contracts, operating leases and long-term debt.

Traditional off-balance-sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities could require us to make cash payments to third parties if certain specified future events occur. The contractual amounts represent the extent of our exposure in these off-balance-sheet activities. However, since certain off-balance-sheet commitments, particularly standby letters of credit, are expected to expire or be only partially used, the total amount of commitments does not necessarily represent future cash requirements. These activities are necessary to meet the financing needs of our customers.

We enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. We also purchase interest rate caps to protect against increases in market interest rates. We utilize interest rate swap contracts and interest rate caps to help manage the risk of changing interest rates.

We do not anticipate that our current off-balance-sheet activities will have a material impact on our future results of operations or our financial condition. Further information regarding our financial instruments with off-balance-sheet risk can be found in Item 3 “Quantitative and Qualitative Disclosures about Market Risk”.

Our leased banking facilities and equipment are leased under non-cancelable operating leases under which we must make monthly payments over periods up to 20 years.

Stockholders’ Equity and Regulatory Capital

Historically, our primary source of capital has been the retention of earnings, net of dividend payments to shareholders. We seek to maintain capital at a level sufficient to assure our stockholders, our customers, and our regulators that our company and our bank subsidiary are financially sound. For this purpose, we perform ongoing assessments of our components of capital as well as projected sources and uses of capital in conjunction with projected increases in assets and levels of risks.

Total stockholders’ equity was $818.2 million at March 31, 2012 compared to $795.9 million at December 31, 2011. The increase was primarily due to net income to common stockholders of $22.1 million for the three months ended March 31, 2012. Our ratio of tangible common equity to tangible assets was 11.86% at March 31, 2012, compared to 11.42% at December 31, 2011. The increase was attributable to the increase in stockholders’ equity.

 

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The federal banking agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8% and a minimum ratio of Tier I capital to risk-weighted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier I capital to average total assets, referred to as the leverage ratio. Capital requirements apply to the Company and the Bank separately. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

At March 31, 2012, our Tier I capital, defined as stockholders’ equity less intangible assets, plus proceeds from the trust preferred securities (subject to limitations), was $759.8 million, compared to $733.3 million at December 31, 2011, representing an increase of $26.5 million, or 4%. This increase was primarily due to the net income available to common stockholders of $22.1 million for the three months ended March 31, 2012. At March 31, 2012, the total capital to risk-weighted assets ratio was 20.11% and the Tier I capital to risk-weighted assets ratio was 18.85%. The Tier I leverage capital ratio was 15.08%.

As of March 31, 2012 and December 31, 2011, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage capital ratios as set forth in the table below.

 

     As of March 31, 2012 (Dollars in thousands)  
     Actual     To Be Well-Capitalized     Excess  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

BBCN Bancorp, Inc

               

Tier I capital to total assets

   $ 759,784         15.1     N/A         N/A        

Tier I risk-based capital ratio

   $ 759,784         18.9     N/A         N/A        

Total risk-based capital ratio

   $ 810,404         20.1     N/A         N/A        

BBCN Bank

               

Tier I capital to total assets

   $ 695,618         13.8   $ 251,858         5.0   $ 443,760         8.8

Tier I risk-based capital ratio

   $ 695,618         17.3   $ 241,630         6.0   $ 453,988         11.3

Total risk-based capital ratio

   $ 746,199         18.5   $ 402,717         10.0   $ 343,482         8.5
     As of December 31, 2011 (Dollars in thousands)  
     Actual     To Be Well-Capitalized     Excess  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

BBCN Bancorp, Inc

               

Tier I capital to total assets

   $ 733,319         19.8     N/A         N/A        

Tier I risk-based capital ratio

   $ 733,319         18.2     N/A         N/A        

Total risk-based capital ratio

   $ 784,054         19.4     N/A         N/A        

BBCN Bank

               

Tier I capital to total assets

   $ 670,855         18.1   $ 185,048         5.0   $ 485,807         13.1

Tier I risk-based capital ratio

   $ 670,855         16.6   $ 242,168         6.0   $ 428,687         10.6

Total risk-based capital ratio

   $ 721,551         17.9   $ 403,613         10.0   $ 317,938         7.9

Liquidity Management

Liquidity risk is the risk of reduction in our earnings or capital that would result if we were not able to meet our obligations when they come due without incurring unacceptable losses. Liquidity risk includes the risk of unplanned decreases or changes in funding sources and changes in market conditions that affect our ability to liquidate assets quickly and with minimum loss of value. Factors considered in liquidity risk management are the stability of the deposit base; the marketability, maturity, and pledging of our investments; the availability of alternative sources of funds; and our demand for credit. The objective of our liquidity management is to have funds available to meet cash flow requirements arising from fluctuations in deposit levels and the demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs, and ongoing repayment of borrowings.

Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and borrowings from the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank Discount Window. These funding sources are augmented by payments of principal and interest on loans and securities, proceeds from sale of loans and the liquidation or sale of securities from our available for sale portfolio. Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses.

 

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At March 31, 2012, our total borrowing capacity from the Federal Home Loan Bank of San Francisco was $1.2 billion, of which $$907 million was unused and available to borrow. At March 31, 2012, our total borrowing capacity from the Federal Reserve Bank was $472 million, of which $472 million was unused and available to borrow. In addition to these lines, our liquid assets, consisting of cash and cash equivalent, interest-bearing cash deposits with other banks, overnight federal funds sold to other banks, liquid investment securities available for sale, and loan repayments within 30 days, were $735.2 million at March 31, 2012 compared to $689.8 million at December 31, 2011. Cash and cash equivalents, including federal funds sold were $365.7 million at March 31, 2012 compared to $300.1 million at December 31, 2011. We believe our liquidity sources to be stable and adequate to meet our day-to-day cash flow requirements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The objective of our asset and liability management activities is to improve our earnings by adjusting the type and mix of assets and liabilities to effectively address changing conditions and risks. Through overall management of our balance sheet and by controlling various risks, we seek to optimize our financial returns within safe and sound parameters. Our operating strategies for attaining this objective include managing net interest margin through appropriate risk/return pricing of assets and liabilities and emphasizing growth in retail deposits, as a percentage of interest-bearing liabilities, to reduce our cost of funds. We also seek to improve earnings by controlling non-interest expense, and enhancing non-interest income. We also use risk management instruments to modify interest rate characteristics of certain assets and liabilities to hedge against our exposure to interest rate fluctuations with the objective of, reducing the effects these fluctuations might have on associated cash flows or values. Finally, we perform internal analysis to measure, evaluate and monitor risk.

Interest Rate Risk

Interest rate risk is the most significant market risk impacting us. Interest rate risk occurs when interest rate sensitive assets and liabilities do not reprice simultaneously and in equal volume. A key objective of asset and liability management is to manage interest rate risk associated with changing asset and liability cash flows and values of our assets and liabilities and market interest rate movements. The management of interest rate risk is governed by policies reviewed and approved annually by the Board of Directors. Our Board delegates responsibility for interest rate risk management to the Asset Liability Committee of the Board (“ALCO”) and to the Asset and Liability Management Committee (“ALM”), which is composed of Nara Bank’s senior executives and other designated officers.

Market risk is the risk of adverse impacts on our future earnings, the fair values of our assets and liabilities, or our future cash flows that may result from changes in the price of a financial instrument. The fundamental objective of our ALM is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our ALM meets regularly to monitor interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of our assets and liabilities, and our investment activities. It also directs changes in the composition of our assets and liabilities . Our strategy has been to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Furthermore, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind. We consider the anticipated effects of these factors when implementing our interest rate risk management objectives.

Interest Rate Sensitivity

We monitor interest rate risk through the use of a simulation model that provides us with the ability to simulate our net interest income. In order to measure, at March 31, 2012, the sensitivity of our forecasted net interest income to changing interest rates, both rising and falling interest rate scenarios were projected and compared to base market interest rate forecasts. One application of our simulation model measures the impact of market interest rate changes on the net present value of estimated cash flows from our assets and liabilities, defined as our market value of equity. This analysis assesses the changes in market values of interest rate sensitive financial instruments that would occur in response to immediate and parallel changes in market interest rates.

The impacts on our net interest income and market value of equity exposed to immediate and parallel hypothetical changes in market interest rates as projected by the model we use for this purpose are illustrated in the following table.

 

     March 31, 2012     December 31, 2011  
Simulated    Estimated Net
Interest Income
Sensitivity
    Market Value
Of Equity
Volatility
    Estimated Net
Interest Income
Sensitivity
    Market Value
Of Equity
Volatility
 

Rate Changes

        

+ 200 basis points

     10.53     0.55     5.46     (4.61 )% 

+ 100 basis points

     5.29     0.68     2.91     (1.84 )% 

- 100 basis points

     0.08     3.47     0.77     4.57

- 200 basis points

     0.32     7.28     0.83     8.58

The results obtained from using the simulation model are somewhat uncertain as the model does not take into account other impacts or changes and the effect they could have on Company’s business or changes in business strategy the Company might make in reaction to changes in the interest rate environment.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) for the period ended March 31, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

We are involved in routine litigation incidental to our business, none of which is expected to have a material adverse effect on us.

 

Item 1A. Risk Factors

There were no material changes from risk factors previously disclosed in our 2011 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Mine Safety Disclosures

None

 

Item 5. Other Information

None

 

Item 6. Exhibits

See “Index to Exhibits”.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      BBCN BANCORP, INC.

Date: May 10, 2012

      /s/ Alvin D. Kang
      Alvin D. Kang
      President and Chief Executive Officer

 

   

Date: May 10, 2012

      /s/ Philip E. Guldeman
      Philip E. Guldeman
      Executive Vice President and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit Number

 

Description

  3.1   Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on June 5, 2000 (incorporated herein by reference to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission (“SEC”) on November 16, 2000)
  3.2   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on May 31, 2002 (incorporated herein by reference to the Registration Statement on Form S-8 Exhibit 3.3 filed with the SEC on February 5, 2003)
  3.3   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on June 1, 2004 (incorporated herein by reference to the Registration Statement on Form 10-Q Exhibit 3.1.1 filed with the SEC on November 8, 2004)
  3.4   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on November 2, 2005 (incorporated herein by reference to the Registration Statement on DEF14 A, Appendix B filed with the SEC on September 6, 2005)
  3.5   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on July 20, 2007 (incorporated herein by reference to the Registration Statement on DEF14 A, Appendix C filed with the SEC on April 19, 2007)
  3.6  

Certificate of Merger, filed with the Delaware Secretary of State on November 30, 2011*

  3.7   Amended and Restated Bylaws of BBCN Bancorp, Inc. (incorporated herein by reference to Current Report on Form 8-K Exhibit 5.1 filed with the SEC on February 1, 2012, SEC file number 000-50245)
10.1   Amendment No. 2 to Agreement and Plan of Merger, dated as of July 6, 2011, between Nara Bancorp, Inc. and Center Financial Corporation (incorporated herein by reference to the Current Report on Form 8-K, Exhibit 2.1, filed with the SEC on July 7, 2011)
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*
32.2   Certification of Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith
** Furnished herewith

 

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