BBCN-9.30.13 10Q

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 September 30, 2013
or
o
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  o
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  o
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
x
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
 
Smaller Reporting Company
o



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x
As of November 1, 2013, there were 79,267,580 outstanding shares of the issuer’s Common Stock, $0.001 par value.



Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
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, see "Part II, Item 1A. Risk Factors" contained herein and “Part I, Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2012.


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PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements


BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Unaudited)
 
 
 
September 30,
2013
 
December 31,
2012
ASSETS
(In thousands, except share data)
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
172,483

 
$
88,506

Interest earning deposit at the Federal Reserve Bank (the "FRB")
172,869

 
224,410

Total cash and cash equivalents
345,352

 
312,916

Securities available for sale, at fair value
708,566

 
704,403

Loans held for sale, at the lower of cost or fair value
49,480

 
51,635

Loans receivable, net of allowance for loan losses (September 30, 2013 - $65,715; December 31, 2012 - $66,941)
4,833,224

 
4,229,311

Other real estate owned ("OREO"), net
27,582

 
2,698

Federal Home Loan Bank ("FHLB") stock, at cost
27,958

 
22,495

Premises and equipment, net of accumulated depreciation and amortization (September 30, 2013 - $24,925; December 31, 2012 - $22,201)
29,747

 
22,609

Accrued interest receivable
13,108

 
12,117

Deferred tax assets, net
80,768

 
60,240

Customers’ liabilities on acceptances
6,126

 
10,493

Bank owned life insurance
44,593

 
43,767

Investments in affordable housing partnerships
11,983

 
13,164

Goodwill
119,881

 
89,878

Other intangible assets, net
5,563

 
3,033

Prepaid FDIC insurance

 
7,574

FDIC loss share receivable
2,430

 
5,797

Other assets
34,626

 
48,531

Total assets
$
6,340,987

 
$
5,640,661

 
 
 
 
(Continued)
 

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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Unaudited)
 
 
 
September 30,
2013
 
December 31,
2012
LIABILITIES AND STOCKHOLDERS’ EQUITY
(In thousands, except share data)
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
1,362,675

 
$
1,184,285

Interest bearing:
 
 
 
Money market and NOW accounts
1,267,113

 
1,248,304

Savings deposits
228,073

 
180,686

Time deposits of $100,000 or more
1,475,321

 
1,088,611

Other time deposits
687,920

 
682,149

Total deposits
5,021,102

 
4,384,035

FHLB advances
421,446

 
420,722

Subordinated debentures
57,303

 
41,846

Accrued interest payable
4,827

 
4,355

Acceptances outstanding
6,126

 
10,493

Other liabilities
28,953

 
28,106

Total liabilities
5,539,757

 
4,889,557

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $0.001 par value; authorized 150,000,000 shares at September 30, 2013 and December 31, 2012; issued and outstanding, 79,247,719 and 78,041,511 shares at September 30, 2013 and December 31, 2012, respectively
79

 
78

Additional paid-in capital
538,062

 
525,354

Retained earnings
266,478

 
216,590

Accumulated other comprehensive income, net
(3,389
)
 
9,082

Total stockholders’ equity
801,230

 
751,104

Total liabilities and stockholders’ equity
$
6,340,987

 
$
5,640,661


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except share data)
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
67,747

 
$
61,553

 
$
196,249

 
$
187,476

Interest on securities
3,802

 
3,782

 
10,755

 
12,940

Interest on federal funds sold and other investments
486

 
120

 
1,153

 
537

Total interest income
72,035

 
65,455

 
208,157

 
200,953

INTEREST EXPENSE:
 
 
 
 
 
 
 
Interest on deposits
5,959

 
5,214

 
17,014

 
15,862

Interest on FHLB advances
1,251

 
1,603

 
3,693

 
4,832

Interest on other borrowings
465

 
407

 
1,271

 
1,667

Total interest expense
7,675

 
7,224

 
21,978

 
22,361

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
64,360

 
58,231

 
186,179

 
178,592

PROVISION FOR LOAN LOSSES
744

 
6,900

 
9,050

 
16,682

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
63,616

 
51,331

 
177,129

 
161,910

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service fees on deposit accounts
3,321

 
3,121

 
9,118

 
9,550

International service fees
1,196

 
1,183

 
3,700

 
3,810

Loan servicing fees, net
1,004

 
1,031

 
3,009

 
3,178

Wire transfer fees
916

 
833

 
2,619

 
2,349

Other income and fees
1,583

 
1,364

 
4,036

 
4,058

Net gains on sales of SBA loans
2,827

 

 
8,816

 
5,426

Net gains on sales of other loans

 

 
62

 
146

Net gains on sales of securities available for sale

 
133

 
54

 
949

Net valuation gains on interest rate swaps and caps

 
11

 

 
24

Net (losses) gains on sales of OREO
(48
)
 
(12
)
 
(57
)
 
41

Total noninterest income
10,799

 
7,664

 
31,357

 
29,531

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
16,535

 
13,611

 
49,086

 
42,348

Occupancy
4,360

 
3,910

 
13,206

 
11,788

Furniture and equipment
1,728

 
1,495

 
4,914

 
4,181

Advertising and marketing
1,393

 
1,159

 
3,856

 
4,142

Data processing and communications
1,983

 
1,659

 
5,488

 
4,843

Professional fees
1,440

 
876

 
4,184

 
2,558

FDIC assessments
818

 
644

 
2,370

 
1,732

Credit related expenses
2,646

 
2,613

 
6,564


6,967

Merger and integration expense
931

 
183

 
2,621

 
3,304

Other
3,912

 
2,620

 
11,161

 
8,419

Total noninterest expense
35,746

 
28,770

 
103,450

 
90,282

INCOME BEFORE INCOME TAX PROVISION
38,669

 
30,225

 
105,036

 
101,159

INCOME TAX PROVISION
15,117

 
11,827

 
41,352

 
39,463

NET INCOME
$
23,552

 
$
18,398

 
63,684

 
$
61,696

DIVIDENDS AND DISCOUNT ACCRETION ON PREFERRED STOCK
$

 
$

 
$

 
$
(5,640
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
23,552

 
$
18,398

 
$
63,684

 
$
56,056

EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.30

 
$
0.24

 
$
0.81

 
$
0.72

Diluted
$
0.30

 
$
0.24

 
$
0.80

 
$
0.72

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Net income
$
23,552

 
$
18,398

 
$
63,684

 
$
61,696

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on securities available for sale and interest only strips
2,021

 
3,374

 
(21,389
)
 
3,867

Reclassification adjustments for gains realized in income (1)

 
(133
)
 
(54
)
 
(949
)
Tax expense (benefit)
405

 
1,261

 
(8,972
)
 
1,051

Change in unrealized gains (losses) on securities available for sale and interest only strips
1,616

 
1,980

 
(12,471
)
 
1,867

 
 
 
 
 
 
 
 
Reclassification adjustment for the deferred gain on early settlement of interest-rate caps (2)

 
(11
)
 

 
(33
)
Tax benefit

 
(5
)
 

 
(13
)
Change in unrealized gain on interest-rate caps, net of tax (3)

 
(6
)
 

 
(20
)
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
1,616

 
1,974

 
(12,471
)
 
1,847

Total comprehensive income
$
25,168

 
$
20,372

 
$
51,213

 
$
63,543


(1) 
Reclassification adjustments were recognized in net gains on sales of securities available for sale in the consolidated statements of income.
(2) 
Reclassification adjustments were recognized in accumulated other comprehensive income in the consolidated statements of financial position.
(3) 
Reclassification adjustments were recognized in other income in the consolidated statements of income.

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
 
 
 
Common stock
 
 
 
 
 
 
 
Preferred
stock
 
Shares
 
Amount
 
Additional paid-in capital
 
Retained
earnings
 
Accumulated other comprehensive income (loss), net
 
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2012
$
119,350

 
77,984,252

 
$
78

 
$
524,644

 
$
142,909

 
$
8,958

Redemption of 122,000 shares of TARP preferred stock
(122,000
)
 
 
 
 
 
 
 
 
 
 
Issuance of additional shares pursuant to various stock plans

 
32,008

 

 
200

 

 

Tax effect of stock plans

 

 

 
(6
)
 

 

Stock-based compensation

 

 

 
1,959

 

 

Redemption of common stock warrant
 
 
 
 
 
 
(2,189
)
 
 
 
 
Preferred stock cash dividends accrued (5%)

 

 

 

 
(2,991
)
 

Accretion of preferred stock discount
2,650

 

 

 

 
(2,650
)
 

Comprehensive income:

 

 

 

 

 

Net income

 

 

 

 
61,696

 

Other comprehensive loss

 

 

 

 

 
1,847

BALANCE, SEPTEMBER 30, 2012
$

 
78,016,260

 
$
78

 
$
524,608

 
$
198,964

 
$
10,805

 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2013
$

 
78,041,511

 
$
78

 
$
525,354

 
$
216,590

 
$
9,082

Acquisition of Pacific International Bancorp, Inc.
 
 
632,050

 
1

 
8,640

 
 
 
 
Acquisition of Foster Bankshares, Inc.
 
 
49,496

 
 
 
778

 
 
 
 
Issuance of additional shares pursuant to various stock plans

 
524,662

 


 
1,954

 


 


Tax effect of stock plans
 
 
 
 
 
 
208

 
 
 
 
Stock-based compensation

 


 


 
1,128

 


 


Cash dividends declared on common stock

 


 


 


 
(13,796
)
 


Comprehensive income:

 


 


 


 


 


Net income

 


 


 


 
63,684

 


Other comprehensive loss

 


 


 


 


 
(12,471
)
BALANCE, SEPTEMBER 30, 2013
$

 
79,247,719

 
$
79

 
$
538,062

 
$
266,478

 
$
(3,389
)
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2013
 
2012
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES

 

Net income
$
63,684

 
$
61,696

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

 


      Depreciation, amortization, net of discount accretion
(13,402
)
 
(18,518
)
Stock-based compensation expense
1,128

 
1,959

Provision for loan losses
9,050

 
16,682

Valuation adjustment of loans held for sale
53

 
703

Valuation adjustment of OREO
1,229

 
2,659

Proceeds from sales of loans held for sale
107,712

 
90,022

Originations of loans held for sale
(89,832
)
 
(97,968
)
Net gains on sales of SBA and other loans
(8,878
)
 
(6,014
)
Net change in bank owned life insurance
(826
)
 
(902
)
Net gains on sales of securities available for sale
(54
)
 
(949
)
Net gains on sales of OREO
57

 
(41
)
Net valuation gains on interest rate swaps and caps

 
(24
)
Change in accrued interest receivable
539

 
558

Change in deferred income taxes
9,487

 
7,625

Change in prepaid FDIC insurance
7,771

 
1,508

Change in investments in affordable housing partnership
1,181

 
1,591

Change in FDIC loss share receivable
3,367

 
3,743

Change in other assets
17,517

 
(9,532
)
Change in accrued interest payable
472

 
(1,068
)
Change in other liabilities
(9,486
)
 
11,754

            Net cash provided by operating activities
100,769

 
65,484

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net change in loans receivable
(228,758
)
 
(326,194
)
Proceeds from sales of securities available for sale
6,636

 
28,446

Proceeds from sales of OREO
1,708

 
4,341

Proceeds from matured term federal funds

 
100,000

Proceeds from sales of equipment

 
3

Purchase of premises and equipment
(6,524
)
 
(5,572
)
Purchase of securities available for sale
(167,850
)
 
(111,696
)
Purchase of FHLB stock
(1,969
)
 

Redemption of FHLB stock
49

 
3,873

Purchase of term federal funds

 
(60,000
)
Proceeds from matured or paid-down securities available for sale
143,627

 
135,686

Net cash received from acquisition - Pacific International Bancorp, Inc.
25,967

 

Net cash received from acquisition - Foster Bankshares, Inc.
41,167

 

Redemption of preferred stock upon the acquisition
(7,475
)
 

          Net cash used in investing activities
(193,422
)
 
(231,113
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net change in deposits
172,800

 
114,344

Redemption of preferred stock

 
(122,000
)
Cash dividends paid on Preferred Stock

 
(3,648
)
Redemption of subordinated debentures
(4,124
)
 
(10,400
)
Proceeds from FHLB advances
155,000

 
625,000

Repayment of FHLB advances
(186,745
)
 
(506,145
)
Redemption of common stock warrant

 
(2,189
)
Cash dividends paid on Common Stock
(13,796
)
 

Issuance of additional stock pursuant to various stock plans
1,954

 
200

            Net cash provided by financing activities
125,089

 
95,162

NET CHANGE IN CASH AND CASH EQUIVALENTS
32,436

 
(70,467
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
312,916

 
300,110

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
345,352

 
$
229,643

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 


      Interest paid
$
21,506

 
$
23,429

      Income taxes paid
$
23,650

 
$
26,663

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
 
 
 
Transfer from loans receivable to OREO
$
7,557

 
$
3,470


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Table of Contents

BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Transfer from loans receivable to loans held for sale
$
6,900

 
$
2,820

Pacific International Bancorp, Inc. Acquisition:
 
 
 
     Assets acquired
$
183,120

 
$

     Liabilities assumed
$
167,545

 
$

Foster Bankshares, Inc. Acquisition:
 
 
 
     Assets acquired
$
333,243

 
$

     Liabilities assumed
$
(358,274
)
 
$

 
 
 
 
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 the "Company" on a consolidated basis), headquartered in Los Angeles, California, is the holding company for BBCN Bank ("BBCN Bank" or the "Bank"). The Bank has branches in California, New York, New Jersey, Washington, Illinois and Virginia, as well as loan production offices in the Atlanta, Dallas, Denver, Northern California, Seattle and metropolitan Washington, D.C. markets. The Company is a corporation organized under the laws of Delaware and a financial holding company and bank holding company registered under the Bank Holding Company Act of 1956, as amended.
         
2.
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), except for the Condensed Consolidated Statement of Financial Condition as of December 31, 2012 which was derived from audited financial statements included in the Company's 2012 Annual Report on Form 10-K. 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.
The Company has made all adjustments, consisting solely of normal recurring accruals, that in the opinion of management, are necessary to fairly present the Company's financial position at September 30, 2013 and the results of operations for the three and nine months then ended. The results of operations for the interim periods are not necessarily indicative of results to be anticipated for the full year.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are susceptible to change in the near term relate to the determination of the allowance and provision for loan losses, the evaluation of other than temporary impairment of investment securities, accounting for derivatives and hedging activities, the determination of the carrying value for cash surrender value of life insurance, the determination of the carrying value of goodwill and other intangible assets, accounting for deferred tax assets and related valuation allowances, the determination of the fair values of investment securities and other financial instruments, accounting for lease arrangements, accounting for incentive compensation, profit sharing and bonus payments, the valuation of servicing assets, and the determination of the fair values of acquired assets and liabilities including the fair value of loans acquired with credit deterioration.
These unaudited condensed consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in the Company's 2012 Annual Report on Form 10-K.
Recent Accounting Pronouncements:
FASB ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's consolidated financial statements.




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3.
Business Combinations

The Company applies the acquisition method of accounting for business combinations under ASC 805 - Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred as merger and integration expense.
Acquisition of Foster Bankshares, Inc.     
On August 13, 2013, the Company completed the acquisition of Foster Bankshares, Inc. ("Foster"), the holding company of Foster Bank. The Company acquired Foster in order to expand its market in Illinois and into Virginia. Foster's primary subsidiary, Foster Bank, operated eight branches in Illinois and one branch in Virginia.
Under the terms of the acquisition agreement, Foster shareholders can elect to receive a cash price of $34.6703 per share or, for shareholders who qualified as accredited investors, 2.62771 shares of Company common stock for each share of Foster common stock. As of September 30, 2013, the Company issued 54,620 shares of Company common stock in exchange for 20,790 shares of Foster common stock, paid $1.7 million for 49,496 shares of Foster common stock and there were 61,714 shares of Foster common stock that had not been redeemed. At September 30, 2013, the accrued liability for the unredeemed Foster common shares was $2.1 million, which was based on the cash conversion price.
The consideration paid, the assets acquired, and the liabilities assumed are summarized in the following table:

 
(In thousands)

Consideration paid:
 
 
BBCN common stock issued in exchange for Foster common stock
$
778

 
Cash paid for the redemption of Foster common stock
1,716

 
Liability for unredeemed Foster common stock
2,140

 
     Total consideration paid
$
4,634

 
 
 
Assets Acquired:
 
 
Cash and cash equivalents
$
42,883

 
Investment securities available for sale
4,844

 
Loans, net
245,558

 
FRB and FHLB stock
1,714

 
OREO
16,630

 
Premises and equipment
4,733

 
Core deposit intangibles
2,763

 
Deferred tax assets, net
11,655

 
Other assets
2,463

Liabilities Assumed:
 
 
Deposits
(321,596
)
 
Borrowings
(18,045
)
 
Subordinated debentures
(15,309
)
 
Other liabilities
(3,324
)
Total identifiable net assets
$
(25,031
)
Excess of consideration paid over fair value of net assets acquired (goodwill)
$
29,665


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The assets and liabilities of Foster were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. The purchase price may change as additional information becomes available and when unredeemed Foster shares are redeemed. The fair values of the net deferred tax assets, loans, and OREO acquired and certain liabilities assumed from Foster were provisional and adjustments to the provisional amounts may occur during the measurement period as the Company obtains additional information about the facts and circumstances that existed as of the acquisition date.

Acquisition of Pacific International Bancorp, Inc.     
On February 15, 2013, the Company completed the acquisition of Pacific International Bancorp, Inc. ("PIB"), a Seattle based company, pursuant to an Agreement and Plan of Merger, dated October 22, 2012. The Company acquired PIB in order to increase the Company's presence in terms of branch offices and deposit market share in the Seattle market. PIB's primary subsidiary, Pacific International Bank, a Washington state-chartered bank, operated four bank branches in the Seattle metropolitan area.
In connection with the acquisition, the consideration paid, the assets acquired, and the liabilities assumed are summarized in the following table:
 
(In thousands)

Consideration paid:
 
 
BBCN common stock issued
$
8,437

 
Cash in lieu of fractional shares paid to PIB stockholders
1

 
Redemption of Preferred Stock
7,475

 
     Total consideration paid
$
15,913

 
 
 
Assets Acquired:
 
 
Cash and cash equivalents
$
25,968

 
Investment securities available for sale
7,810

 
Loans, net
131,589

 
FRB and FHLB stock
1,829

 
OREO
3,418

 
Deferred tax assets, net
9,388

 
Other assets
3,118

Liabilities Assumed:
 
 
Deposits
(143,665
)
 
Borrowings
(14,698
)
 
Subordinated debentures
(4,108
)
 
Other liabilities
(5,074
)
Total identifiable net assets
$
15,575

Excess of consideration paid over fair value of net assets acquired (goodwill)
$
338


The $29.7 million and $338 thousand of goodwill recognized in the Foster and PIB acquisitions, respectively, represent the future economic benefit arising from the acquisitions including the creation of a platform that can support future operations and strengthening the Company's existing presence in the Chicago metropolitan and Pacific Northwest markets and expansion into the Virginia market. Goodwill is not amortized for book purposes and is not deductible for tax purposes.
Acquired Loans
The Company estimated the fair value for most loans acquired by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity and repricing terms. Cash flows for each pool were

14

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determined by estimating future credit losses and prepayment rates. Projected monthly cash flows were then discounted using a risk-adjusted market rate for similar loans to determine the fair value of each pool. To estimate the fair value of the remaining loans, management analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices. The Company discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of the allowance for loan losses associated with the loans the Company acquired as the loans were initially recorded at fair value. The following table presents loans acquired with deteriorated credit quality as of the date of acquisition:
 
Foster
 
PIB
 
(In thousands)
Contractually required principal and interest at acquisition
$
150,430

 
$
54,462

Contractual cash flows not expected to be collected (nonaccretable discount)
37,447

 
9,687

Expected cash flows at acquisition
112,983

 
44,775

Interest component of expected cash flows (accretable discount)
14,928

 
4,945

Fair value of acquired impaired loans
$
98,055

 
$
39,830


The outstanding principal balances and the related carrying amounts of the acquired loans included in the statement of financial condition are $296.1 million and $239.0 million, respectively for Foster and $117.8 million and $112.6 million, respectively for PIB, as of September 30, 2013.
Pro Forma Information
The operating results of Foster and PIB from the dates of acquisitions through September 30, 2013 are included in the Condensed Consolidated Statement of Income for 2013 and are not material to the total consolidated operating results for the three and nine month periods ended September 30, 2013.
The following unaudited combined pro forma information presents the operating results for the three and nine months ended September 30, 2013 and 2012, as if the Foster and PIB acquisitions had occurred on January 1, 2012:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except share data)
Net Interest income
$
67,498

 
$
64,769

 
$
198,315

 
$
199,562

Net income
$
25,277

 
$
15,475

 
$
64,211

 
$
55,754

 
 
 
 
 
 
 
 
Pro forma earnings per share:
 
 
 
 
 
 
 
     Basic
$
0.32

 
$
0.20

 
$
0.81

 
$
0.64

     Diluted
0.32

 
0.20

 
0.81

 
0.64

The above pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the merged companies that would have been achieved had the acquisition occurred at January 1, 2012, nor are they intended to represent or be indicative of future results of operations. The pro forma results do not include expected operating cost savings as a result of the acquisitions. These pro forma results require significant estimates and judgments particularly as it relates to valuation and accretion of income associated with acquired loans.

Acquisition-Related Expenses
The Company incurred acquisition-related expenses associated with the Foster and PIB acquisitions which were reflected on the Company's income statement. During the three and nine months ended September 30, 2013, the Company incurred $1.2 million and $1.5 million, respectively, in expenses related to the Foster acquisition. During the three and nine months ended

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September 30, 2013, the Company incurred $29 thousand and $1.1 million, respectively, in expenses related to the PIB acquisition. These expenses are comprised primarily of salaries and benefits, occupancy expenses, professional services, and other noninterest expense.


    
4.
Stock-Based Compensation
The Company has a stock-based incentive plan, the 2007 BBCN Bancorp Equity Incentive Plan (the “2007 Plan”). The 2007 Plan, approved by our stockholders on May 31, 2007, was amended and restated on July 25, 2007 and again on December 1, 2011. The 2007 Plan 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 the 2007 Plan participants with those of the Company’s stockholders. The exercise price for shares under an ISO may not be less than 1% of fair market value 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 1% of fair market value 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 recognized over the vesting period. 
The Company has another stock-based incentive plan, the Center Financial Corporation 2006 Stock Incentive Plan, adopted April 12, 2006, as amended and restated June 13, 2007 (the "2006 Plan"), which was assumed by the Company during the merger with Center Bank.
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 option prices of all options granted under the 2006 Plan must be not less than 1% of the fair market value at the date of grant. All options granted generally vest at the rate of 0.2% per year except that the options granted to the non-employee directors vest at the rate of 0% per year. All options not exercised generally expire ten years after the date of grant.
Under the 2007 and 2006 Plans, 2,739,703 shares were available for future grants as of September 30, 2013.
The total shares reserved for issuance will serve as the underlying value for all equity awards under the 2007 and 2006 Plans. 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 2007 and 2006 Plans for the nine months ended September 30, 2013:
 

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Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Outstanding - January 1, 2013
797,805

 
$

 
 
 
 
Granted

 

 
 
 
 
Exercised
(226,242
)
 
8.64

 
 
 
 
Expired
(29,267
)
 
15.90

 
 
 
 
Forfeited
(51,702
)
 
24.20

 
 
 
 
Outstanding - September 30, 2013
490,594

 
$
19.67

 
3.14
 
$

Options exercisable - September 30, 2013
490,594

 
$
19.67

 
3.10
 
$


The following is a summary of restricted and performance unit activity under the 2007 and 2006 Plans for the nine months ended September 30, 2013:
 
 
Number of
Shares
 
Weighted-
Average
Grant
Date Fair
Value
 
Outstanding - January 1, 2013
512,183

 
$
9.78

 
Granted
58,000

 
12.86

 
Vested
(306,541
)
 
10.17

 
Forfeited
(83,009
)
 
10.79

 
Outstanding - September 30, 2013
180,633

 
$
10.79

 

The total fair value of performance units vested for the nine months ended September 30, 2013 and 2012 was $3.9 million and $100 thousand, respectively.
The amount charged against income related to stock-based payment arrangements was $119 thousand and $818 thousand for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, $1.1 million and $2.0 million, respectively, was charged against income related to stock-based payment arrangements.
The income tax benefit recognized was $50 thousand and $328 thousand, for the three months ended September 30, 2013 and 2012, respectively, and $474 thousand and $805 thousand for the nine months ended September 30, 2013 and 2012, respectively.
At September 30, 2013, total unrecognized compensation expense related to non-vested stock option grants and restricted and performance units aggregated $1.5 million, and is expected to be recognized over a weighted average vesting period of 2.55 years.
        


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Table of Contents

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 September 30, 2013 and 2012, stock options and restricted shares awards for approximately 126 thousand shares and 565 thousand shares of common stock, respectively, were excluded in computing diluted earnings per common share because they were antidilutive. For the nine months ended September 30, 2013 and 2012, stock options and restricted shares awards for approximately 172 thousand shares and 564 thousand shares of common stock, respectively, were excluded in computing diluted earnings per common share because they were antidilutive. Additionally, warrants to purchase 51 thousand shares and 28 thousand shares of common stock (related to the TARP Capital Purchase Plan) were antidilutive and excluded for the three and nine months ended September 30, 2013, respectively. Warrants to purchase 337 thousand shares common stock (related to the TARP Capital Purchase Plan) were antidilutive and excluded for the three and nine months ended September 30, 2012.
The following table shows the computation of basic and diluted EPS for the three months ended September 30, 2013 and 2012.
 
 
Three Months Ended September 30,
 
2013

2012
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
(In thousands, except share and per share data)
Net income as reported
$
23,552

 
 
 
 
 
$
18,398

 
 
 
 
Less: preferred stock dividends and accretion of preferred stock discount

 
 
 
 
 

 
 
 
 
Basic EPS - common stock
$
23,552

 
79,223,636

 
$
0.30

 
$
18,398

 
78,015,960

 
$
0.24

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options and Performance Units
 
 
60,188

 
 
 
 
 
87,835

 
 
Common stock warrants
 
 
51,041

 
 
 
 
 

 
 
Diluted EPS - common stock
$
23,552

 
79,334,865

 
$
0.30

 
$
18,398

 
78,103,795

 
$
0.24


 
Nine Months Ended September 30,
 
2013
 
2012
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
(In thousands, except share and per share data)
Net income as reported
$
63,684

 
 
 
 
 
$
61,696

 
 
 
 
Less: preferred stock dividends and accretion of preferred stock discount

 
 
 
 
 
(5,640
)
 
 
 
 
Basic EPS - common stock
$
63,684

 
78,914,360

 
$
0.81

 
$
56,056

 
78,004,458

 
$
0.72

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options and Performance Units
 
 
179,206

 
 
 
 
 
77,601

 
 
Common stock warrants
 
 
28,494

 
 
 
 
 

 
 
Diluted EPS - common stock
$
63,684

 
79,122,060

 
$
0.80

 
$
56,056

 
78,082,059

 
$
0.72




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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 September 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government agency and U.S. Government sponsored enterprises
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
290,061

 
$
2,001

 
$
(7,171
)
 
$
284,891

Mortgage-backed securities
396,877

 
4,947

 
(5,090
)
 
396,734

Trust preferred securities
4,513

 

 
(807
)
 
3,706

Municipal bonds
5,692

 
368

 
(44
)
 
6,016

Total debt securities
697,143

 
7,316

 
(13,112
)
 
691,347

Mutual funds
17,425

 

 
(206
)
 
17,219

 
$
714,568

 
$
7,316

 
$
(13,318
)
 
$
708,566

 
 
 
 
 
 
 
 
 
At December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government agency and U.S. Government sponsored enterprises
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
249,373

 
$
5,649

 
$
(110
)
 
$
254,912

Mortgage-backed securities
415,925

 
10,277

 
(662
)
 
425,540

Trust preferred securities
4,502

 

 
(665
)
 
3,837

Municipal bonds
4,506

 
612

 

 
5,118

Total debt securities
674,306

 
16,538

 
(1,437
)
 
689,407

Mutual funds
14,710

 
286

 

 
14,996

 
$
689,016

 
$
16,824

 
$
(1,437
)
 
$
704,403

 
As of September 30, 2013 and December 31, 2012, 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.
For the three months ended September 30, 2013 and 2012, $2.0 million and $3.4 million of gross unrealized gains, respectively, were included in accumulated other comprehensive income during the periods. For the nine months ended September 30, 2013 and 2012, $21.4 million of gross unrealized losses and $3.9 million of gross unrealized gains, respectively, were included in accumulated other comprehensive income during the periods. A total of $0 and $133 thousand of net gains on sales of securities were reclassified out of accumulated other comprehensive income into earnings for the three months ended September 30, 2013 and 2012, respectively. A total of $54 thousand and $949 thousand of net gains on sales of securities were reclassified out of accumulated other comprehensive income into earnings for the nine months ended September 30, 2013 and 2012, respectively, as a result of securities being sold.





19

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The proceeds from sales of securities and the associated gross gains and losses recorded in earnings are listed below:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Proceeds
$

 
$
26,563

 
$
6,636

 
$
28,446

Gross gains

 
132

 
54

 
948

Gross losses

 

 

 


The amortized cost and estimated fair value of debt securities at September 30, 2013, 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.
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Available for sale:
 
 
 
Due within one year
$

 
$

Due after one year through five years
340

 
351

Due after five years through ten years
3,883

 
4,213

Due after ten years
5,982

 
5,158

U.S. Government agency and U.S. Government sponsored enterprises
 
 
 
Collateralized mortgage obligations
290,061

 
284,891

Mortgage-backed securities
396,877

 
396,734

Mutual funds
17,425

 
17,219

 
$
714,568

 
$
708,566


Securities with carrying values of approximately $362.3 million and $338.6 million at September 30, 2013 and December 31, 2012, respectively, were pledged to secure public deposits, various borrowings and for other purposes as required or permitted by law.
















20

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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 September 30, 2013
 
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)
Collateralized mortgage obligations*
17

 
$
180,322

 
$
(7,170
)
 

 
$

 
$

 
17

 
$
180,322

 
$
(7,170
)
Mortgage-backed securities*
22

 
117,369

 
(4,683
)
 
7

 
14,647

 
(407
)
 
29

 
132,016

 
(5,090
)
Trust preferred securities

 

 

 
1

 
3,706

 
(807
)
 
1

 
3,706

 
(807
)
Municipal bonds
1

 
1,143

 
(44
)
 

 

 

 
1

 
1,143

 
(44
)
Mutual funds
1

 
13,219

 
(207
)
 

 

 

 
1

 
13,219

 
(207
)
 
41

 
$
312,053

 
$
(12,104
)
 
8

 
$
18,353

 
$
(1,214
)
 
49

 
$
330,406

 
$
(13,318
)
* Investments in U.S. Government agency and U.S. Government sponsored enterprises

 
At December 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)
Collateralized mortgage obligations*
3

 
$
18,009

 
$
(110
)
 

 
$

 
$

 
3

 
$
18,009

 
$
(110
)
Mortgage-backed securities*
7

 
32,406

 
(597
)
 
3

 
8,251

 
(65
)
 
10

 
40,657

 
(662
)
Trust Preferred securities

 

 

 
1

 
3,837

 
(665
)
 
1

 
3,837

 
(665
)
 
10

 
$
50,415

 
$
(707
)
 
4

 
$
12,088

 
$
(730
)
 
14

 
$
62,503

 
$
(1,437
)
* Investments in U.S. Government agency and U.S. Government sponsored enterprises

The Company evaluates 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 values of the securities have been less than the cost of the securities, and management's intention to sell, or whether it is more likely than not that management 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, the Company considers 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 Company has certain trust preferred securities and U.S. Government agency and U.S. Government sponsored enterprise collateralized mortgage obligations that were in a continuous unrealized loss position for twelve months or longer as of September 30, 2013. The trust preferred securities at September 30, 2013 had an amortized cost of $4.5 million and an unrealized loss of $807 thousand at September 30, 2013. The trust preferred securities are scheduled to mature in May 2047. These securities are rated investment grade and there are no credit quality concerns with the obligor. Certain of the Company's U.S. Government agency and U.S. Government sponsored enterprise investments were in an unrealized loss position at September 30, 2013. All of the Company's U.S. Government agency and U.S. Government sponsored enterprise investments have high credit ratings ("AA" grade or better). Interest on the trust preferred securities and the U.S. Government agency and

21

Table of Contents

U.S. Government sponsored enterprise investments have been paid as agreed, and management believes this will continue in the future and that the securities will be repaid in full as scheduled. The market value declines for these securities are deemed to be due to the current market volatility and are not reflective of management’s expectations of its ability to fully recover these investments, which may be at maturity. For these reasons, no OTTI was recognized on the trust preferred securities and the U.S. Government agency and U.S. Government sponsored collateralized mortgage obligations and mortgage-backed securities that are in an unrealized loss position at September 30, 2013.
The Company considers the losses on the investments in unrealized loss positions at September 30, 2013 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 management's determination that it is more likely than not that management will not be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.



22

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7.
Loans Receivable and Allowance for Loan Losses
The following is a summary of loans receivable by major category:
 
 
September 30, 2013
 
December 31, 2012
 
(In thousands)
Loan portfolio composition
 
 
 
Real estate loans:
 
 
 
Residential
$
10,294

 
$
9,247

Commercial & industrial
3,652,815

 
3,100,466

Construction
73,116

 
65,045

Total real estate loans
3,736,225

 
3,174,758

Commercial business
932,955

 
921,556

Trade finance
135,889

 
152,070

Consumer and other
95,693

 
49,954

Total loans outstanding
4,900,762

 
4,298,338

Less: deferred loan fees
(1,823
)
 
(2,086
)
Gross loans receivable
4,898,939

 
4,296,252

Less: allowance for loan losses
(65,715
)
 
(66,941
)
Loans receivable, net
$
4,833,224

 
$
4,229,311


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 loans accounted for under the amortized cost method ("Legacy Loans") and acquired loans that were originally recorded at fair value with no carryover of the related pre-acquisition allowance for loan losses ("Acquired Loans"). The Acquired Loans are further segregated between Acquired Credit Impaired Loans (loans with credit deterioration on the acquisition date and accounted for under ASC 310-30, or "ACILs") and Acquired Performing Loans (loans that were pass graded on the acquisition date and the fair value adjustment is amortized over the contractual life under ASC 310-20, or "APLs").

The following table presents changes in the accretable discount on the ACILs for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Balance at beginning of period
$
37,090

 
$
22,966

 
$
18,651

 
$
31,999

Additions due to acquisitions during the period
14,928

 

 
19,873

 

Accretion
(4,250
)
 
(3,415
)
 
(11,281
)
 
(10,866
)
Changes in expected cash flows
5,689

 
516

 
26,214

 
(1,066
)
Balance at end of period
$
53,457

 
$
20,067

 
$
53,457

 
$
20,067


On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the ACILs is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The accretable yield will change from period to period due to the following: 1) estimates of the remaining life of acquired loans will affect the amount of future interest income; 2) indices for variable rates of interest on ACILs may change; and 3) estimates of the amount of the contractual principal and interest that will not be collected (nonaccretable difference) may change.


23

Table of Contents

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2013 and 2012:
 
 
 
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Three Months Ended September 30, 2013
Balance, beginning of period
$
41,932

 
$
16,520

 
$
2,335

 
$
528

 
$
9,632

 
$
654

 
$

 
$
74

 
$
71,675

Provision (credit) for loan losses
545

 
(2,085
)
 
178

 
52

 
1,221

 
830

 

 
3

 
744

Loans charged off
(528
)
 
(774
)
 

 

 
(5,668
)
 
(813
)
 

 
(7
)
 
(7,790
)
Recoveries of charge offs
62

 
958

 

 
50

 
5

 
10

 

 
1

 
1,086

Balance, end of period
$
42,011

 
$
14,619

 
$
2,513

 
$
630

 
$
5,190

 
$
681

 
$

 
$
71

 
$
65,715

Nine Months Ended September 30, 2013
Balance, beginning of period
$
41,505

 
$
16,490

 
$
2,349

 
$
658

 
$
4,718

 
$
1,115

 
$
3

 
$
103

 
$
66,941

Provision (credit) for loan losses
2,557

 
(1,004
)
 
190

 
(96
)
 
6,308

 
1,126

 
(3
)
 
(28
)
 
9,050

Loans charged off
(2,209
)
 
(2,370
)
 
(26
)
 
(9
)
 
(5,843
)
 
(1,621
)
 

 
(41
)
 
(12,119
)
Recoveries of charge offs
158

 
1,503

 
0

 
77

 
7

 
61

 

 
37

 
1,843

Balance, end of period
$
42,011

 
$
14,619

 
$
2,513

 
$
630

 
$
5,190

 
$
681

 
$

 
$
71

 
$
65,715



 
 
 
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Three Months Ended September 30, 2012
Balance, beginning of period
$
37,237

 
$
20,880

 
$
3,164

 
$
1,115

 
$
2,283

 
$
397

 
$
340

 
$
89

 
$
65,505

Provision (credit) for loan losses
5,499

 
988

 
(495
)
 
(418
)
 
750

 
784

 
(157
)
 
(51
)
 
6,900

Loans charged off
(1,832
)
 
(5,574
)
 

 
(2
)
 
(242
)
 
(118
)
 

 
(1
)
 
(7,769
)
Recoveries of charge offs
973

 
275

 

 
24

 

 
15

 

 
29

 
1,316

Balance, end of period
$
41,877

 
$
16,569

 
$
2,669

 
$
719

 
$
2,791

 
$
1,078

 
$
183

 
$
66

 
$
65,952

Nine Months Ended September 30, 2012
Balance, beginning of period
$
39,040

 
$
20,681

 
$
1,786

 
$
445

 
$

 
$

 
$

 
$

 
$
61,952

Provision (credit) for loan losses
6,831

 
3,203

 
823

 
700

 
2,899

 
1,701

 
483

 
42

 
16,682

Loans charged off
(6,095
)
 
(8,470
)
 

 
(485
)
 
(411
)
 
(755
)
 
(300
)
 
(244
)
 
(16,760
)
Recoveries of charge offs
2,101

 
1,155

 
60

 
59

 
303

 
132

 

 
268

 
4,078

Balance, end of period
$
41,877

 
$
16,569

 
$
2,669

 
$
719

 
$
2,791

 
$
1,078

 
$
183

 
$
66

 
$
65,952



24

Table of Contents

The following tables disaggregate the allowance for loan losses and the loans receivables by impairment methodology at September 30, 2013 and December 31, 2012:

 
September 30, 2013
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment
$
5,516

 
$
2,753

 
$
794

 
$
90

 
$
1,202

 
$
680

 
$

 
$

 
$
11,035

Collectively evaluated for impairment
36,495

 
11,866

 
1,719

 
540

 
10

 
1

 

 
71

 
50,702

Acquired Credit Impaired Loans

 

 

 

 
3,978

 

 

 

 
3,978

Total
$
42,011

 
$
14,619

 
$
2,513

 
$
630

 
$
5,190

 
$
681

 
$

 
$
71

 
$
65,715

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
41,343

 
$
26,683

 
$
6,938

 
$
544

 
$
20,023

 
$
2,892

 
$

 
$
770

 
$
99,193

Collectively evaluated for impairment
2,873,167

 
749,597

 
128,951

 
30,246

 
651,528

 
103,674

 

 
36,994

 
4,574,157

Acquired Credit Impaired Loans

 

 

 

 
150,164

 
50,109

 

 
27,139

 
227,412

Total
$
2,914,510

 
$
776,280

 
$
135,889

 
$
30,790

 
$
821,715

 
$
156,675

 
$

 
$
64,903

 
$
4,900,762


 
December 31, 2012
 
Legacy
 
Acquired
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Allowance for loan losses:
Individually evaluated for impairment
$
4,723

 
$
3,084

 
$
96

 
$

 
$
183

 
$
1,074

 
$

 
$

 
$
9,160

Collectively evaluated for impairment
36,782

 
13,406

 
2,253

 
658

 

 
41

 
3

 
103

 
53,246

Acquired Credit Impaired Loans

 

 

 

 
4,535

 

 

 

 
4,535

Total
$
41,505

 
$
16,490

 
$
2,349

 
$
658

 
$
4,718

 
$
1,115

 
$
3

 
$
103

 
$
66,941

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
37,394

 
$
23,951

 
$
6,199

 
$
536

 
$
17,951

 
$
3,323

 
$

 
$
802

 
$
90,156

Collectively evaluated for impairment
2,387,080

 
729,904

 
144,173

 
27,284

 
628,449

 
114,621

 
242

 
18,257

 
4,050,010

Acquired Credit Impaired Loans

 

 

 

 
103,884

 
49,757

 
1,456

 
3,075

 
158,172

Total
$
2,424,474

 
$
753,855

 
$
150,372

 
$
27,820

 
$
750,284

 
$
167,701

 
$
1,698

 
$
22,134

 
$
4,298,338

As of September 30, 2013 and December 31, 2012, the liability for unfunded commitments was $802 thousand at both dates. Three Months Ended September 30, 2013 and 2012, the recognized provision for credit losses related to unfunded commitments was $0 thousand and $0 thousand, respectively. For the nine months ended September 30, 2013 and 2012, the recognized provision for credit losses related to unfunded commitments was $0 and $116 thousand, respectively.

25

Table of Contents

The recorded investment in individually impaired loans was as follows:
 
 
September 30, 2013
 
December 31, 2012
 
(In thousands)
With Allocated Allowance
 
 
 
Without charge off
$
71,634

 
$
65,526

With charge off
966

 
2,599

With No Allocated Allowance
 
 
 
Without charge off
20,451

 
17,536

With charge off
6,142

 
4,495

Allowance on Impaired Loans
(11,035
)
 
(9,160
)
Impaired Loans, net of allowance
$
88,158

 
$
80,996



26

Table of Contents

The following tables detail impaired loans (Legacy and Acquired) as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and September 30, 2012 and for the year ended December 31, 2012. Loans with no related allowance for loan losses are believed by management to have adequate collateral securing their carrying value.
 
 
 
As of September 30, 2013
 
For the Nine Months Ended September 30, 2013
 
For the Three Months Ended September 30, 2013
Total Impaired Loans
 
Recorded Investment*
 
Unpaid Contractual Principal Balance
 
Related
Allowance
 
Average
Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With Related Allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
9,011

 
9,552

 
1,298

 
7,900

 
172

 
9,221

 
76

Hotel & Motel
 
12,009

 
12,833

 
2,884

 
11,310

 
413

 
12,056

 
138

Gas Station & Car Wash
 
2,171

 
2,236

 
415

 
1,826

 
46

 
2,017

 
15

Mixed Use
 
938

 
959

 
224

 
1,152

 
33

 
1,378

 
10

Industrial & Warehouse
 
8,442

 
8,442

 
883

 
8,770

 
171

 
10,940

 
44

Other
 
5,749

 
6,511

 
1,014

 
9,717

 
165

 
5,765

 
55

Real Estate—Construction
 

 

 

 

 

 

 

Commercial Business
 
26,798

 
29,083

 
3,433

 
25,096

 
947

 
25,881

 
306

Trade Finance
 
6,938

 
6,966

 
794

 
5,241

 
228

 
3,939

 
80

Consumer and Other
 
544

 
544

 
90

 
302

 
17

 
548

 
6

 
 
$
72,600

 
$
77,126

 
$
11,035

 
$
71,314

 
$
2,192

 
$
71,745

 
$
730

With No Related Allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
3,927

 
6,557

 

 
3,279

 
30

 
4,645

 
10

Hotel & Motel
 
6,676

 
10,416

 

 
6,254

 

 
6,340

 


Gas Station & Car Wash
 
4,918

 
7,890

 

 
3,543

 
104

 
4,105

 
35

Mixed Use
 
859

 
915

 

 
660

 

 
430

 


Industrial & Warehouse
 
1,932

 
3,976

 

 
3,996

 
8

 
3,374

 
3

Other
 
3,076

 
5,265

 

 
3,417

 
32

 
2,621

 
11

Real Estate—Construction
 
1,658

 
1,658

 

 
1,682

 
67

 
1,667

 
22

Commercial Business
 
2,777

 
3,850

 

 
2,102

 
20

 
2,748

 
4

Trade Finance
 

 

 

 

 

 

 


Consumer and Other
 
770

 
831

 

 
1,142

 

 
1,012

 


 
 
$
26,593

 
$
41,358

 
$

 
$
26,075

 
$
261

 
$
26,942

 
$
85

Total
 
$
99,193

 
$
118,484

 
$
11,035

 
$
97,389

 
$
2,453

 
$
98,687

 
$
815


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.

27

Table of Contents

 
 
For the Nine Months Ended September 30, 2012
 
For the Three Months Ended September 30, 2012
Total Impaired Loans
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
 
With Related Allowance:
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
Retail
 
3,021

 
124

 
3,872

 
39

Hotel & Motel
 
19,673

 
327

 
19,349

 
106

Gas Station & Car Wash
 
3,162

 
69

 
2,496

 
23

Mixed Use
 
3,752

 


 
3,539

 


Industrial & Warehouse
 
3,297

 
67

 
1,845

 
22

Other
 
13,857

 
483

 
13,960

 
160

Real Estate—Construction
 
32

 

 

 

Commercial Business
 
24,946

 
1,048

 
26,858

 
341

Trade Finance
 
2,838

 
108

 
3,208

 
63

Consumer and Other
 
135

 
3

 
30

 
2

 
 
$
74,713

 
$
2,229

 
$
75,157

 
$
756

With No Related Allowance:
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
Retail
 
1,374

 


 
919

 


Hotel & Motel
 
154

 


 
307

 


Gas Station & Car Wash
 
1,786

 


 
2,689

 


Mixed Use
 

 


 

 


Industrial & Warehouse
 
4,412

 


 
3,840

 


Other
 
2,654

 


 
2,133

 


Real Estate—Construction
 
1,710

 
85

 
1,710

 
28

Commercial Business
 
9,805

 
15

 
5,928

 
5

Trade Finance
 
1,182

 


 

 


Consumer and Other
 
126

 


 
105

 


 
 
$
23,203

 
$
100

 
$
17,631

 
$
33

Total
 
$
97,916

 
$
2,329

 
$
92,788

 
$
789

*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.


28

Table of Contents

 
 
As of September 30, 2013
 
For the Nine Months Ended September 30, 2013
 
For the Three Months Ended September 30, 2013
Impaired APLs(1)
 
Recorded Investment*
 
Unpaid
Contractual Principal
Balance
 
Related
Allowance
 
Average
Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With Related Allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
390

 
834

 
53

 
1,247

 
10

 
831

 
4

Hotel & Motel
 

 

 

 

 


 

 


Gas Station & Car Wash
 
821

 
885

 
362

 
544

 


 
816

 


Mixed Use
 

 

 

 

 


 

 


Industrial & Warehouse
 
5,200

 
5,200

 
772

 
8,551

 


 
7,690

 


Other
 
159

 
165

 
16

 
1,154

 
8

 
158

 
2

Real Estate—Construction
 

 

 

 

 


 

 


Commercial Business
 
2,813

 
3,141

 
680

 
3,058

 
5

 
3,011

 
2

Trade Finance
 

 

 

 

 


 

 


Consumer and Other
 

 

 

 

 


 

 


 
 
$
9,383

 
$
10,225

 
$
1,883

 
$
14,554

 
$
23

 
$
12,506

 
$
8

With No Related Allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
1,788

 
2,124

 

 
907

 
30

 
1,330

 
10

Hotel & Motel
 
6,616

 
8,595

 

 
6,138

 

 
6,243

 


Gas Station & Car Wash
 
1,821

 
3,251

 

 
1,481

 
46

 
1,293

 
16

Mixed Use
 

 

 

 

 

 

 


Industrial & Warehouse
 
553

 
790

 

 
2,445

 
8

 
1,968

 
3

Other
 
2,675

 
3,120

 

 
2,020

 
32

 
2,157

 
11

Real Estate—Construction
 

 

 

 

 

 

 


Commercial Business
 
79

 
79

 

 
99

 

 
50

 


Trade Finance
 

 

 

 

 

 

 


Consumer and Other
 
770

 
831

 

 
776

 

 
772

 


 
 
$
14,302

 
$
18,790

 
$

 
$
13,866

 
$
116

 
$
13,813

 
$
40

Total
 
$
23,685

 
$
29,015

 
$
1,883

 
$
28,420

 
$
139

 
$
26,319

 
$
48


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.
(1) 
APLs that became impaired subsequent to being acquired.



29

Table of Contents

 
 
For the Nine Months Ended September 30, 2012
 
For the Three Months Ended September 30, 2012
Impaired APLs(1)
 
Average
Recorded Investment*
 
Interest Income Recognized during Impairment
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
With Related Allowance:
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
Retail
 
828

 
86

 
1,546

 
26

Hotel & Motel
 
4,594

 


 
6,081

 


Gas Station & Car Wash
 
71

 


 

 


Mixed Use
 

 


 

 


Industrial & Warehouse
 
206

 
27

 
411

 
9

Other
 
1,071

 
216

 
2,124

 
72

Real Estate—Construction
 

 

 

 
 
Commercial Business
 
1,287

 
69

 
2,276

 
21

Trade Finance
 

 


 

 


Consumer and Other
 

 


 

 


 
 
$
8,057

 
$
398

 
$
12,438

 
$
128

With No Related Allowance:
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
Retail
 
1

 

 
2

 

Hotel & Motel
 

 

 

 

Gas Station & Car Wash
 
566

 

 
805

 

Mixed Use
 

 

 

 

Industrial & Warehouse
 
1,709

 

 
1,903

 

Other
 
1,040

 

 
1,249

 

Real Estate—Construction
 

 

 

 

Commercial Business
 
763

 
15

 
927

 
5

Trade Finance
 

 

 

 

Consumer and Other
 

 

 

 

 
 
$
4,079

 
$
15

 
$
4,886

 
$
5

Total
 
$
12,136

 
$
413

 
$
17,324

 
$
133


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.
(1) 
APLs that became impaired subsequent to being acquired.







30

Table of Contents

 
 
As of December 31, 2012
 
For the Year Ended
December 31, 2012
Total Impaired Loans
 
Recorded Investment*
 
Unpaid
Contractual Principal
Balance
 
Related
Allowance
 
Average
Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With Related Allowance:
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
Retail
 
5,477

 
5,610

 
1,167

 
3,512

 
255

Hotel & Motel
 
8,990

 
8,995

 
1,860

 
17,536

 
426

Gas Station & Car Wash
 
1,892

 
2,440

 
73

 
2,908

 

Mixed Use
 
900

 
976

 
250

 
3,182

 

Industrial & Warehouse
 
2,074

 
2,153

 
567

 
3,052

 
66

Other
 
16,184

 
16,389

 
989

 
14,322

 
805

Real Estate—Construction
 

 

 

 
26

 

Commercial Business
 
26,354

 
29,073

 
4,158

 
25,227

 
1,252

Trade Finance
 
6,199

 
7,173

 
96

 
3,510

 
248

Consumer and Other
 
55

 
56

 

 
119

 
4

 
 
$
68,125

 
$
72,865

 
$
9,160

 
$
73,394

 
$
3,056

With No Related Allowance:
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
Retail
 
2,516

 
5,404

 

 
1,602

 
48

Hotel & Motel
 
6,212

 
8,202

 

 
1,365

 

Gas Station & Car Wash
 
1,731

 
4,359

 

 
1,775

 

Mixed Use
 
899

 
923

 

 
180

 

Industrial & Warehouse
 
4,392

 
6,450

 

 
4,408

 
160

Other
 
2,371

 
6,283

 

 
2,598

 

Real Estate—Construction
 
1,710

 
1,710

 

 
1,710

 
111

Commercial Business
 
920

 
1,368

 

 
8,028

 
18

Trade Finance
 

 

 

 
946

 

Consumer and Other
 
1,280

 
1,316

 

 
357

 
20

 
 
$
22,031

 
$
36,015

 
$

 
$
22,969

 
$
357

Total
 
$
90,156

 
$
108,880

 
$
9,160

 
$
96,363

 
$
3,413


*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.





31

Table of Contents

 
 
As of December 31, 2012
 
For the Year Ended
December 31, 2012
Impaired APLs(1)
 
Recorded Investment*
 
Unpaid Contractual Principal Balance
 
Related Allowance
 
Average Recorded Investment*
 
Interest Income Recognized during Impairment
 
 
(In thousands)
With Related Allowance:
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
Retail
 
1,286

 
1,286

 
9

 
920

 
64

Hotel & Motel
 

 

 

 
3,676

 

Gas Station & Car Wash
 

 

 

 
57

 

Mixed Use
 

 

 

 

 

Industrial & Warehouse
 
832

 
887

 
2

 
331

 
36

Other
 
4,272

 
4,461

 
172

 
1,711

 
288

Real Estate—Construction
 

 

 

 

 

Commercial Business
 
2,974

 
3,072

 
1,074

 
1,625

 
26

Trade Finance
 

 

 

 

 

Consumer and Other
 

 

 

 

 

 
 
$
9,364

 
$
9,706

 
$
1,257

 
$
8,320

 
$
414

With No Related Allowance:
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$

 
$

 
$

 
$

 
$

Real Estate—Commercial
 
 
 

 
 
 
 
 
 
Retail
 
800

 
840

 

 
161

 
48

Hotel & Motel
 
5,990

 
7,375

 

 
1,198

 

Gas Station & Car Wash
 
774

 
1,865

 

 
608

 

Mixed Use
 

 

 

 

 

Industrial & Warehouse
 
3,190

 
3,302

 

 
2,005

 
160

Other
 
807

 
3,156

 

 
993

 

Real Estate—Construction
 

 

 

 

 

Commercial Business
 
349

 
681

 

 
680

 
15

Trade Finance
 

 

 

 

 

Consumer and Other
 
802

 
836

 

 
160

 

 
 
$
12,712

 
$
18,055

 
$

 
$
5,805

 
$
223

Total
 
$
22,076

 
$
27,761

 
$
1,257

 
$
14,125

 
$
637

*
Unpaid contractual principal balance less charge offs, interest applied to principal and purchase discounts.
(1) 
APLs that became impaired subsequent to being acquired.


Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to a customer whose financial condition has deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. Generally, payments received on nonaccrual loans are recorded as principal reductions. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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Table of Contents

The following tables present the aging of past due loans as of September 30, 2013 and December 31, 2012 by class of loans:
 
As of September 30, 2013
 
Past Due and Accruing
 
 
 
 
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 or More Days Past Due
 
Total
 
Nonaccrual Loans (3)
 
Total Delinquent Loans
 
(In thousands)
Legacy Loans:
 
Real estate—Residential
$

 
$

 
$

 
$

 
$

 
$

Real estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
133

 

 

 
133

 
4,683

 
4,816

Hotel & Motel

 

 

 

 
121

 
121

Gas Station & Car Wash
737

 

 

 
737

 
2,091

 
2,828

Mixed Use

 

 

 

 
990

 
990

Industrial & Warehouse
217

 
577

 

 
794

 
1,379

 
2,173

Other

 

 

 

 
1,162

 
1,162

Real estate—Construction

 

 

 

 

 

Commercial business
590

 
154

 

 
744

 
4,990

 
5,734

Trade finance

 

 

 

 
938

 
938

Consumer and other
28

 
1

 

 
29

 

 
29

     Subtotal
$
1,705

 
$
732

 
$

 
$
2,437

 
$
16,354

 
$
18,791

Acquired Loans: (1)
 
 
 
 
 
 
 
 
 
 
 
Real estate—Residential
$

 
$

 
$
377

 
$
377

 
$

 
$
377

Real estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
6,776

 
1,667

 
11,802

 
20,245

 
913

 
21,158

Hotel & Motel
79

 

 
4,840

 
4,919

 
6,616

 
11,535

Gas Station & Car Wash
955

 
2,835

 
4,240

 
8,030

 
1,571

 
9,601

Mixed Use
292

 

 
236

 
528

 

 
528

Industrial & Warehouse
1,023

 
1,045

 
4,084

 
6,152

 
5,633

 
11,785

Other
2,836

 
772

 
5,856

 
9,464

 
1,458

 
10,922

Real estate—Construction

 

 

 

 

 

Commercial business
9,907

 
772

 
4,043

 
14,722

 
2,814

 
17,536

Trade finance

 

 

 

 

 

Consumer and other
436

 
275

 
4,082

 
4,793

 
770

 
5,563

     Subtotal(2)
$
22,304

 
$
7,366

 
$
39,560

 
$
69,230

 
$
19,775

 
$
89,005

TOTAL
$
24,009

 
$
8,098

 
$
39,560

 
$
71,667

 
$
36,129

 
$
107,796

(1) 
The Acquired Loans include ACILs and APLs.
(2) 
The past due and accruing Acquired Loans include ACILs of $18.3 million, $5.7 million and $38.6 million that were 30-59 days, 60-89 days and 90 or more days past due, respectively.
(3) 
Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $25.2 million.


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Table of Contents

 
As of December 31, 2012
 
Past Due and Accruing
 
 
 
 
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 or More Days Past Due
 
Total
 
Nonaccrual Loans (3)
 
Total Delinquent Loans
 
(In Thousands)
Legacy Loans:
 
Real estate—Residential
$

 
$

 
$

 
$

 
$

 
$

Real estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
87

 

 

 
87

 
3,316

 
3,403

Hotel & Motel

 

 

 

 
437

 
437

Gas Station & Car Wash
359

 

 

 
359

 
2,848

 
3,207

Mixed Use
34

 

 

 
34

 
1,799

 
1,833

Industrial & Warehouse

 

 

 

 
1,950

 
1,950

Other

 
115

 

 
115

 
2,379

 
2,494

Real estate—Construction

 

 

 

 

 

Commercial business
298

 
234

 

 
532

 
4,942

 
5,474

Trade finance

 

 

 

 
869

 
869

Consumer and other
190

 

 

 
190

 

 
190

     Subtotal
$
968

 
$
349

 
$

 
$
1,317

 
$
18,540

 
$
19,857

Acquired Loans: (1)
 
 
 
 
 
 
 
 
 
 
 
Real estate—Residential
$

 
$

 
$

 
$

 
$

 
$

Real estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
Retail
1,126

 
6,604

 
1,190

 
8,920

 

 
8,920

Hotel & Motel
1,522

 
2,668

 
944

 
5,134

 
5,990

 
11,124

Gas Station & Car Wash
2,218

 
1,109

 
875

 
4,202

 
774

 
4,976

Mixed Use
985

 
1,918

 
1,507

 
4,410

 

 
4,410

Industrial & Warehouse
53

 
3,320

 
61

 
3,434

 

 
3,434

Other
50

 
25

 
5,542

 
5,617

 
937

 
6,554

Real estate—Construction

 

 
5,972

 
5,972

 

 
5,972

Commercial business
1,359

 
1,174

 
1,236

 
3,769

 
2,442

 
6,211

Trade finance

 

 

 

 

 

Consumer and other
98

 
17

 
415

 
530

 
970

 
1,500

     Subtotal(2)
$
7,411

 
$
16,835

 
$
17,742

 
$
41,988

 
$
11,113

 
$
53,101

TOTAL
$
8,379

 
$
17,184

 
$
17,742

 
$
43,305

 
$
29,653

 
$
72,958

(1) 
The Acquired Loans include ACILs and APLs.
(2) 
The past due and accruing Acquired Loans include ACILs of $7.0 million, $12.1 million and $17.7 million that were 30-59 days, 60-89 days and 90 or more days past due, respectively.
(3) Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are in liquidation totaling $17.6 million.


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 estimated life of the loan when cash flows are reasonably estimable. Accordingly, ACILs that are contractually past due are still considered to be accruing and performing loans. The loans may be classified as nonaccrual if the timing and amount of future cash flows is not reasonably estimable.
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. 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:
Pass: Loans that meet a preponderance or more of the Company's underwriting criteria and evidence an acceptable level of risk.

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Table of Contents

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/Loss: 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.
The following tables present the risk rating for Legacy Loans and Acquired Loans as of September 30, 2013 and December 31, 2012 by class of loans:
 
As of September 30, 2013
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful/Loss
 
Total
 
(In thousands)
Legacy Loans:
 
 
 
Real estate—Residential
$
8,125

 
$

 
$
17

 
$

 
$
8,142

Real estate—Commercial
 
 
 
 
 
 
 
 
 
Retail
765,450

 
455

 
15,038

 

 
780,943

Hotel & Motel
508,721

 
1,854

 
13,770

 

 
524,345

Gas Station & Car Wash
452,808

 

 
9,759

 

 
462,567

Mixed Use
242,725

 
2,090

 
3,361

 

 
248,176

Industrial & Warehouse
222,185

 
8,794

 
6,835

 

 
237,814

Other
566,252

 
5,773

 
8,261

 

 
580,286

Real estate—Construction
70,579

 

 
1,658

 

 
72,237

Commercial business
718,178

 
25,601

 
32,493

 
8

 
776,280

Trade finance
110,348

 
17,226

 
8,315

 

 
135,889

Consumer and other
29,735

 
11

 
1,044

 

 
30,790

Subtotal
$
3,695,106

 
$
61,804

 
$
100,551

 
$
8

 
$
3,857,469

Acquired Loans:
 
 
 
 
 
 
 
 
 
Real estate—Residential
$
1,211

 
$
300

 
$
641

 
$

 
$
2,152

Real estate—Commercial
 
 
 
 
 
 
 
 
 
Retail
246,793

 
9,970

 
29,015

 

 
285,778

Hotel & Motel
115,022

 
8,122

 
15,560

 

 
138,704

Gas Station & Car Wash
36,011

 
5,174

 
14,910

 
253

 
56,348

Mixed Use
33,078

 
2,036

 
5,864

 

 
40,978

Industrial & Warehouse
102,187

 
4,357

 
18,342

 

 
124,886

Other
142,221

 
6,265

 
22,865

 
638

 
171,989

Real estate—Construction
880

 

 

 

 
880

Commercial business
116,800

 
11,514

 
26,434

 
1,927

 
156,675

Trade finance

 

 

 

 

Consumer and other
53,079

 
2,089

 
9,518

 
217

 
64,903

Subtotal
$
847,282

 
$
49,827

 
$
143,149

 
$
3,035

 
$
1,043,293

Total
$
4,542,388

 
$
111,631

 
$
243,700

 
$
3,043

 
$
4,900,762


 

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Table of Contents

 
As of December 31, 2012
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful/Loss
 
Total
 
(In thousands)
Legacy Loans:
 
 
 
Real estate—Residential
$
9,223

 
$

 
$
24

 
$

 
$
9,247

Real estate—Commercial
 
 
 
 
 
 
 
 
 
Retail
589,720

 
3,584

 
12,303

 

 
605,607

Hotel & Motel
453,908

 
1,894

 
16,795

 

 
472,597

Gas Station & Car Wash
370,803

 
1,288

 
9,982

 

 
382,073

Mixed Use
233,687

 
2,131

 
3,423

 

 
239,241

Industrial & Warehouse
202,066

 
1,010

 
4,295

 
370

 
207,741

Other
431,685

 
1,219

 
17,084

 

 
449,988

Real estate—Construction
56,270

 

 
1,710

 

 
57,980

Commercial business
726,073

 
6,164

 
21,514

 
104

 
753,855

Trade finance
136,197

 
7,976

 
6,199

 

 
150,372

Consumer and other
26,801

 
13

 
1,006

 

 
27,820

Subtotal
$
3,236,433

 
$
25,279

 
$
94,335

 
$
474

 
$
3,356,521

Acquired Loans:
 
 
 
Real estate—Residential
$

 
$

 
$

 
$

 
$

Real estate—Commercial
 
 
 
 
 
 
 
 
 
Retail
225,982

 
6,469

 
17,331

 

 
249,782

Hotel & Motel
105,032

 
16,150

 
13,215

 

 
134,397

Gas Station & Car Wash
33,360

 
7,192

 
4,119

 

 
44,671

Mixed Use
34,927

 
3,826

 
6,526

 

 
45,279

Industrial & Warehouse
114,616

 
1,385

 
9,470

 

 
125,471

Other
121,667

 
4,473

 
17,479

 

 
143,619

Real estate—Construction
1,093

 

 
5,972

 

 
7,065

Commercial business
119,026

 
14,057

 
34,047

 
571

 
167,701

Trade finance
242

 
334

 
1,122

 

 
1,698

Consumer and other
17,292

 
424

 
4,329

 
89

 
22,134

Subtotal
$
773,237

 
$
54,310

 
$
113,610

 
$
660

 
$
941,817

Total
$
4,009,670

 
$
79,589

 
$
207,945

 
$
1,134

 
$
4,298,338

 
 
 
 
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 class (type) pool, and risk grade. 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 Bank's general loan loss allowance has two components: quantitative and qualitative risk factors. The quantitative risk factors are based on a historical loss migration methodology. The loans are classified by class and risk grade and the historical loss migration is tracked for the various classes. Loss experience is quantified for a specified period and then weighted to place more significance to the most recent loss history. That loss experience is then applied to the stratified portfolio at each quarter end. For the ACILs, a general loan loss allowance is provided to the extent that there has been credit deterioration since the date of acquisition. 
  

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Table of Contents

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 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 loans, Classified Loans, nonaccrual loans, 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; and
The effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated losses in our loan portfolio.

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 became impaired. The appraisals are based on an “as is” valuation. To ensure that appraised values remain current, we either obtain updated appraisals every twelve months from a qualified independent appraiser or an internal evaluation of the collateral is performed by qualified personnel. 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 underlying 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, less estimated costs to sell, if the loan is collateral dependent. We evaluate most consumer loans for impairment on a collective basis because these loans generally have smaller balances and are homogeneous in the underwriting of terms and conditions and in the type of collateral.
For our ACILs, the allowance for loan losses is based upon expected cash flows for these loans. To the extent that a deterioration in borrower credit quality results in a decrease in expected cash flows subsequent to the acquisition of the loans,

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Table of Contents

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 September 30, 2013 and December 31, 2012:
 
 
As of September 30, 2013
 
Real estate -
Residential
 
Real estate -
Commercial
 
Real estate -
Construction
 
Commercial
business
 
Trade
finance
 
Consumer
and other
 
Total
 
(In thousands)
Impaired loans (Gross carrying value)
$

 
$
59,708

 
$
1,658

 
$
29,575

 
$
6,938

 
$
1,314

 
$
99,193

Specific allowance
$

 
$
6,718

 
$

 
$
3,433

 
$
794

 
$
90

 
$
11,035

Loss coverage ratio
0.0
%
 
11.3
%
 
0.0
%
 
11.6
%
 
11.4
%
 
6.8
%
 
11.1
%
Non-impaired loans
$
10,294

 
$
3,593,107

 
$
71,458

 
$
903,380

 
$
128,951

 
$
94,379

 
$
4,801,569

General allowance
$
68

 
$
39,575

 
$
840

 
$
11,867

 
$
1,719

 
$
611

 
$
54,680

Loss coverage ratio
0.7
%
 
1.1
%
 
1.2
%
 
1.3
%
 
1.3
%
 
0.6
%
 
1.1
%
Total loans
$
10,294

 
$
3,652,815

 
$
73,116

 
$
932,955

 
$
135,889

 
$
95,693

 
$
4,900,762

Total allowance for loan losses
$
68

 
$
46,293

 
$
840

 
$
15,300

 
$
2,513

 
$
701

 
$
65,715

Loss coverage ratio
0.7
%
 
1.3
%
 
1.1
%
 
1.6
%
 
1.8
%
 
0.7
%
 
1.3
%

 
As of December 31, 2012
 
Real estate -
Residential
 
Real estate -
Commercial
 
Real estate -
Construction
 
Commercial
business
 
Trade
finance
 
Consumer
and other
 
Total
 
(In thousands)
Impaired loans (Gross carrying value)
$

 
$
53,634

 
$
1,710

 
$
27,274

 
$
6,199

 
$
1,338

 
$
90,155

Specific allowance
$

 
$
4,906

 
$

 
$
4,158

 
$
96

 
$

 
$
9,160

Loss coverage ratio
0.0
%
 
9.1
%
 
0.0
%
 
15.2
%
 
1.5
%
 
0.0
%
 
10.2
%
Non-impaired loans
$
9,247

 
$
3,046,832

 
$
63,335

 
$
894,282

 
$
145,871

 
$
48,616

 
$
4,208,183

General allowance
$
74

 
$
40,256

 
$
986

 
$
13,448

 
$
2,256

 
$
761

 
$
57,781

Loss coverage ratio
0.8
%
 
1.3
%
 
1.6
%
 
1.5
%
 
1.5
%
 
1.6
%
 
1.4
%
Total loans
$
9,247

 
$
3,100,466

 
$
65,045

 
$
921,556

 
$
152,070

 
$
49,954

 
$
4,298,338

Total allowance for loan losses
$
74

 
$
45,162

 
$
986

 
$
17,606

 
$
2,352

 
$
761

 
$
66,941

Loss coverage ratio
0.8
%
 
1.5
%
 
1.5
%
 
1.9
%
 
1.5
%
 
1.5
%
 
1.6
%
Under certain circumstances, we provide borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”) or are more substantive. At September 30, 2013, total modified loans were $60.7 million, compared to $51.5 million at December 31, 2012. 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 Special Mention or Substandard. At the end of the modification period, the loan either 1) returns

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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 Restructurings (“TDRs”) of 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 on 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 nonaccrual by type of concession as of September 30, 2013 and December 31, 2012 is presented below:
 
As of September 30, 2013
 
TDRs on Accrual
 
TDRs on Nonaccrual
 
Total
 
Real estate -
Commercial
 
Commercial
Business
 
Other
 
Total
 
Real estate -
Commercial
 
Commercial
Business
 
Other
 
Total
 
 
(In thousands)
Payment concession
$
7,218

 
$
1,758

 
$

 
$
8,976

 
$
9,918

 
$
1,279

 
$
770

 
$
11,967

 
$
20,943

Maturity / Amortization concession
771

 
6,434

 
544

 
7,749

 
1,701

 
3,239

 

 
4,940

 
12,689

Rate concession
14,591

 
4,703

 

 
19,294

 
7,687

 

 

 
7,687

 
26,981

Principal forgiveness

 

 

 

 

 
52

 

 
52

 
52

 
$
22,580

 
$
12,895

 
$
544

 
$
36,019

 
$
19,306

 
$
4,570

 
$
770

 
$
24,646

 
$
60,665


 
As of December 31, 2012
 
TDRs on Accrual
 
TDRs on Nonaccrual
 
Total
 
Real estate -
Commercial
 
Commercial
Business
 
Other
 
Total
 
Real estate -
Commercial
 
Commercial
Business
 
Other
 
Total
 
 
(In thousands)
Payment concession
$
9,608

 
$
687

 
$

 
$
10,295

 
$
4,735

 
$
4,618

 
$
802

 
$
10,155

 
$
20,450

Maturity / Amortization concession
348

 
3,847

 
536

 
4,731

 
652

 
1,941

 
869

 
3,462

 
8,193

Rate concession
13,594

 
1,229

 

 
14,823

 
7,923

 

 

 
7,923

 
22,746

Principal forgiveness

 

 

 

 

 
62

 

 
62

 
62

 
$
23,550

 
$
5,763

 
$
536

 
$
29,849

 
$
13,310

 
$
6,621

 
$
1,671

 
$
21,602

 
$
51,451

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 under the restructured terms. TDRs that are on nonaccrual can be returned to accrual status after a 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 September 30, 2013 were comprised of 15 commercial real estate loans totaling $22.6 million, 30 commercial business loans totaling $12.9 million, and 2 consumer loans totaling $544 thousand. TDRs on accrual status at December 31, 2012 were comprised of 12 commercial real estate loans totaling $23.6 million, 20 commercial business loans totaling $5.8 million and 2 consumer loans totaling $536 thousand.  The Company expects that the TDRs on accrual status as of September 30, 2013, which were 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 but are still monitored for potential impairment.
 
We have allocated $7.7 million and $6.3 million of specific reserves to TDRs as of September 30, 2013 and December 31, 2012, respectively.  As of September 30, 2013 and December 31, 2012, we did not have any outstanding commitments to extend additional funds to these borrowers.

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Table of Contents

The following table presents loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2013:
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
Number of
Loans 
 
Pre-
Modification
 
Post-
Modification 
 
(Dollars in thousand)
Legacy Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate - Commercial
 
 
 

 
 

 
 
 
 
 
 
Retail
1

 
$
568

 
$
568

 
5

 
$
5,443

 
$
5,521

Hotel & Motel

 

 

 

 

 

Gas Station & Car Wash

 

 

 
1

 
1,371

 
909

Mixed Use

 

 

 

 

 

Industrial & Warehouse

 

 

 
1

 
370

 
346

Other

 

 

 

 

 

Real estate - Construction

 

 

 

 

 

Commercial business
3

 
569

 
258

 
12

 
7,550

 
7,473

Trade Finance

 

 

 

 

 

Consumer and other
1

 
500

 
496

 
1

 
500

 
496

Subtotal
5

 
$
1,637

 
$
1,322

 
20

 
$
15,234

 
$
14,745

Acquired Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate - Commercial
 
 
 

 
 

 
 
 
 
 
 
Retail
1

 
$
58

 
$
57

 
1

 
$
59

 
$
57

Hotel & Motel

 

 

 

 

 

Gas Station & Car Wash

 

 

 
1

 
165

 
170

Mixed Use

 

 

 

 

 

Industrial & Warehouse

 

 

 
2

 
10,336

 
5,282

Other

 

 

 
2

 
1,137

 
1,132

Real estate - Construction

 

 

 

 

 

Commercial business
1

 
31

 
31

 
6

 
1,089

 
390

Trade Finance

 

 

 

 

 

Subtotal
2

 
$
89

 
$
88

 
12

 
$
12,786

 
$
7,031

Total
7

 
$
1,726

 
$
1,410

 
32

 
$
28,020

 
$
21,776

 
 
 
 
 
 
 
 
 
 
 
 
The specific reserves for the TDRs that occurred during the three months and nine months period ended September 30, 2013 totaled $316 thousand and $2.4 million, respectively, and there were $0 and $150 thousand in charge offs for the three months and nine months ended September 30, 2013, respectively.
The following table presents loans by class for TDRs that have been modified within the previous twelve months and have subsequently had a payment default during the three and nine months ended September 30, 2013:



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Table of Contents

 
Three Months Ended
September 30, 2013
 
Nine Months Ended
September 30, 2013
 
Number of Loans
 
Balance
 
Number of
Loans
 
 
Balance
 
 
(Dollars In thousands)
Legacy Loans:
 
 
 
 
 
 
 
Real estate - Commercial
 
 
 
 
 
 
 
Retail
1

 
$
709

 
2

 
$
1,220

Gas Station & Car Wash

 

 

 

Industrial & Warehouse

 

 

 

Other

 

 

 

Commercial Business
2

 
1,822

 
4

 
1,852

Subtotal
3

 
$
2,531

 
6

 
$
3,072

Acquired Loans:
 
 
 
 
 
 
 
Real estate - Commercial
 

 
 

 
 
 
 
Retail
1

 
$
57

 
1

 
$
57

Gas Station & Car Wash
1

 
170

 
1

 
170

Hotel & Motel

 

 

 

Industrial & Warehouse
1

 
5,200

 
1

 
5,200

Other

 

 

 

Commercial Business
3

 
33

 
4

 
182

Subtotal
6

 
$
5,460

 
7

 
$
5,609

 
9

 
$
7,991

 
13

 
$
8,681

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. As of September 30, 2013, the specific reserves totaled $856 thousand and $1.0 million for the TDRs that had payment defaults during the three months and nine months ended September 30, 2013, respectively. The total charge offs for the TDRs that had payment defaults during the three and nine months ended September 30, 2013 were $304 thousand and $1.1 million, respectively.
There were three Legacy Loans that subsequently defaulted during the three months ended September 30, 2013 that were modified as follows: two Commercial Business loans totaling $1.8 million were modified through maturity/amortization concessions and one Real Estate Commercial - Retail loan totaling $709 thousand was modified through a rate concession.
The six Legacy Loans that subsequently defaulted during the nine months ended September 30, 2013 were modified as follows: four Commercial Business loans totaling $1.9 million were modified through maturity/amortization concessions and two Real Estate Commercial - Retail loans totaling $1.2 million were modified through rate concessions.
There were six Acquired Loans that subsequently defaulted during the three months ended September 30, 2013 which were modified as follows: three Commercial Business loans totaling $33 thousand were modified through payment concessions and three Real Estate Commercial loans totaling $5.4 million were modified through payment concessions
The seven Acquired Loans that subsequently defaulted during the nine months ended September 30, 2013 were modified as follows: three Commercial Business loans totaling $33 thousand were modified through payment concessions, one Commercial Business loan totaling $149 thousand was modified through a maturity/amortization concession and three Real Estate Commercial loans totaling $5.4 million were modified through payment concessions.

Covered Assets
On April 16, 2010, the Department of Financial Institutions closed Innovative Bank, California, and appointed the FDIC as its receiver. On the same date, the 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.
Covered nonperforming assets totaled $2.4 million and $882 thousand at September 30, 2013 and December 31, 2012, respectively. These covered nonperforming assets are subject to the loss sharing agreements with the FDIC. The covered nonperforming assets at September 30, 2013 and December 31, 2012 were as follows:

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Table of Contents

 
September 30, 2013
 
December 31, 2012
 
(In thousands)
Covered loans on nonaccrual status
$
427

 
$
489

Covered OREO
1,963

 
393

     Total covered nonperforming assets
$
2,390

 
$
882

 
 
 
 
Acquired covered loans
$
58,637

 
$
72,528

Related Party Loans
In the ordinary course of business, the Company entered into loan transactions with certain of its directors or associates of such directors (“Related Parties”). The loans to Related Parties are on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties. In management’s opinion, these transactions did not involve more than normal credit risk or present other unfavorable features. All loans to Related Parties were current as of September 30, 2013 and December 31, 2012, and the outstanding principal balance as of September 30, 2013 and December 31, 2012 was $7.7 million and $11.1 million, respectively.

8.
Borrowings
We maintain a secured credit facility with the FHLB against which the Bank may take advances. The borrowing capacity is limited to the lower of 30% of the Bank’s total assets or the Bank’s collateral capacity, which was $1.58 billion at September 30, 2013 and $1.35 billion at December 31, 2012. 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 September 30, 2013 and December 31, 2012, real estate secured loans with a carrying amount of approximately $2.08 billion and $2.04 billion, respectively, were pledged as collateral for borrowings from the FHLB. At September 30, 2013 other than FHLB stock, securities with a carrying value of $13.9 million were pledged as collateral for borrowings from the FHLB, and at December 31, 2012, no securities were pledged as collateral for borrowings from the FHLB.
At September 30, 2013 and December 31, 2012, FHLB advances were $421.4 million and $420.7 million, had a weighted average interest rate of 1.10% and 1.24%, respectively, and had various maturities through October 2018. At September 30, 2013 and December 31, 2012, $51.4 million and $66.7 million, respectively, of the advances were putable advances with various putable dates and strike prices. The cost of FHLB advances as of September 30, 2013 ranged between 0.47% and 3.81%. At September 30, 2013, the Company had a remaining borrowing capacity of $1.18 billion.
At September 30, 2013, the contractual maturities for FHLB advances were as follows:
 

Contractual
Maturities

Maturity/
Put Date
 
(In thousands)
Due within one year
$
39,000

 
$
76,446

Due after one year through five years
382,446

 
345,000


$
421,446

 
$
421,446


In addition, as a member of the FRB system, we may also borrow from the FRB of San Francisco. The maximum amount that we may borrow from the FRB’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 September 30, 2013, the outstanding principal balance of the qualifying loans was $465.9 million, and no borrowings were outstanding against this line.

9.
Subordinated Debentures
At September 30, 2013, four wholly-owned subsidiary grantor trusts established by former Nara Bancorp had issued $28 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. Upon the acquisition of PIB, the Company assumed one grantor trust established by former PIB which issued $15.0 million of trust preferred securities, which the Company redeemed on June 17, 2013. Upon the acquisition of Foster Bankshares, the Company assumed one grantor trust established by former Foster Bank which issued $15 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 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

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Table of Contents

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 September 30, 2013:
 
Issuance Trust

Issuance
Date

Trust
Preferred
Security
Amount

Subordinated
Debentures
Amount

Rate
Type

Initial
Rate

Coupon Rate at
September 30, 2013

Maturity
Date
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Nara Capital Trust III

6/5/2003

$
5,000


$
5,155


Variable

4.44
%

3.40
%

6/15/2033
Nara Statutory Trust IV

12/22/2003

5,000


5,155


Variable

4.02
%

3.12
%

1/7/2034
Nara Statutory Trust V

12/17/2003

10,000


10,310


Variable

4.12
%

3.20
%

12/17/2033
Nara Statutory Trust VI

3/22/2007

8,000


8,248


Variable

7.00
%

1.90
%

6/15/2037
Center Capital Trust I

12/30/2003

18,000


13,091


Variable

4.01
%

3.12
%
(1) 
1/7/2034
Foster Capital Trust I
 
7/8/2005
 
15,000

 
15,344

 
Variable
 
1.70
%
 
1.95
%
(2) 
7/8/2035
TOTAL ISSUANCE



$
61,000


$
57,303










(1)
The Center Capital Trust I trust preferred security was assumed in the merger with Center Financial Corporation. The remaining discount was $5.5 million at September 30, 2013 and the effective rate of the security, including the effect of the discount accretion, was 6.03% at September 30, 2013.
(2)
The Foster Capital Trust I trust preferred security was assumed in the merger with Foster Bankshares. The remaining discount was $119 thousand at September 30, 2013 and the effective rate of the security, including the effect of the discount accretion, was 3.75% at September 30, 2013.



The Company’s investment in the common trust securities of the issuer trusts of $1.9 million and $1.6 million at September 30, 2013 and December 31, 2012, 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. 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 September 30, 2013, $55.4 million of the trusts’ securities qualified as Tier 1 capital. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law which, among other things, limits the ability of bank holding companies with total assets of more than $15 billion to treat trust preferred security debt issuances as Tier 1 capital. Since the Company had less than $15 billion in assets at September 30, 2013, we will be able to continue to include its existing trust preferred securities in Tier 1 capital under the Dodd-Frank Act.


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Table of Contents

10.
Goodwill and Other Intangible Assets
Changes in the carrying amount of the Company's goodwill for the nine months ended September 30, 2013 are as follows:
 
For the Nine Months Ended September 30, 2013
 
(In thousands)
Balance, beginning of period
$
89,878

Acquired goodwill - PIB
3,526

Acquired goodwill - Foster
29,665

Measurement period adjustment - PIB
(3,188
)
Impairment

Balance, end of period
$
119,881

 
 
The goodwill arising from the PIB acquisition was reduced by a net $3.2 million to $338 thousand due to adjustments to the deferred tax asset, which was provisional as of March 31, 2013, and other adjustments of certain acquisition date fair value asset and liability estimates during the nine months ended September 30, 2013.
Core deposit intangibles assets are amortized over their estimated lives, which range from seven to ten years. The Company acquired, through the acquisitions of PIB and Foster during the second and third quarters of 2013, respectively, core deposit intangibles which totaled $603 thousand and $2.8 million, respectively. Amortization expense related to core deposit intangible assets totaled $325 thousand and $302 thousand for the three months ended September 30, 2013 and 2012, respectively, and $837 thousand and $942 thousand for the nine months ended September 30, 2013 and 2012, respectively. The following table provides information regarding the core deposit intangibles at September 30, 2013:
 
 
 
As of September 30, 2013
 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Intangible assets:
Amortization
period
 
 
 
 
Core deposit—IBKNY acquisition
10 years
 
$
1,187

 
$
(1,187
)
Core deposit—Asiana Bank acquistion
10 years
 
1,018

 
(1,017
)
Core deposit—KEB, Broadway acquisition
10 years
 
2,726

 
(2,720
)
Core deposit—Center Financial Corporation acquisition
7 years
 
4,100

 
(1,748
)
Core deposit—PIB acquisition
7 years
 
$
603

 
$
(101
)
Core deposit—Foster acquisition
10 years
 
$
2,763

 
$
(63
)
Total
 
 
$
12,397

 
$
(6,836
)

 
 
 
 
 
 
 
 
 
 
 



44

Table of Contents

11.
Income Taxes
The Company and its subsidiaries are subject to U.S. federal income tax, as well as state income taxes.  The Company had total unrecognized tax benefits of $0.97 million and $748 thousand at September 30, 2013 and December 31, 2012, respectively, that relate primarily to uncertainties related to California enterprise zone loan interest deductions.
We anticipate an increase of approximately $416 thousand in the unrecognized tax benefit related to the California enterprise zone loan interest deduction.
The statute of limitations related to the consolidated Federal income tax return is closed for all tax years up to and including 2008. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state. The Company is currently under examination by IRS for the 2010 and 2011 tax years and by the California Franchise Tax Board (FTB) for the 2009 and 2010 tax years. While the outcome of the examinations is unknown, the Company expects no material adjustments. Within the last twelve months, examinations by the City of New York for tax years 2007, 2008, and 2009, and the FTB for tax years 2007 and 2008, were concluded with no material adjustments.
We recognize interest and penalties related to income tax matters in income tax expense.  We had approximately $44 thousand and $52 thousand for accrued interest and penalties at September 30, 2013 and December 31, 2012, 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 a valuation allowance for deferred tax assets was not required as of September 30, 2013.


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Table of Contents

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 estimates of assumptions that market participants would use in pricing the 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 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).
The fair values of the Company's Level 3 securities available for sale were measured using an income approach valuation technique. The primary inputs and assumptions used in the fair value measurement were derived from the securities' underlying collateral which included discount rates, prepayment speeds, payment delays, and an assessment of the risk of default of the underlying collateral, among other factors. Significant increases or decreases in any of the inputs or assumptions would result in a significant increase or decrease in the fair value measurement.
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, less costs to sell and result in a Level 2.
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).
OREO
OREO is fair valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell and result in a Level 2 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least an annual basis for additional impairment and adjusted to lower of cost or market 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 (Level 2 inputs), 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 3 inputs) or may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals (Level 3 inputs). These appraisals may utilize a single valuation approach or a combination of approaches including 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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Table of Contents

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
 
September 30, 2013

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:







GSE collateralized mortgage obligations
$
284,891


$


$
284,891


$

GSE mortgage-backed securities
396,734




396,734



Trust preferred securities
3,706




3,706



Municipal bonds
6,016




4,874


1,142

Mutual funds
17,219


17,219





 
 
 
 
 
 
 
 


 
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
December 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:
 
 
 
 
 
 
 
GSE collateralized mortgage obligations
$
254,912

 
$

 
$
254,912

 
$

GSE mortgage-backed securities
425,540

 

 
425,540

 

Trust preferred securities
3,837

 

 
3,837

 

Municipal bonds
5,118

 

 
5,118

 

Mutual funds
14,996

 
14,996

 

 


There were no transfers between Level 1, 2 and 3 during the period ended September 30, 2013 and 2012. There were no gains or losses recognized in earnings
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2013:
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
(In thousands)
Beginning Balance, January 1
 
$

 
$

Purchases, issuances and settlements
 
1,202

 

Amortization
 
(15
)
 

Total gains or (losses) included in earnings
 

 

Total gains or (losses) included in other comprehensive income
 
(45
)
 

Ending Balance, September 30
 
$
1,142

 
$




47

Table of Contents

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

Fair Value Measurements at the End of the Reporting Period Using
 
September 30, 2013

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Assets:







Impaired loans at fair value:







Real estate loans
$
16,822


$


$
16,822


$

Commercial business
2,818




2,818



Loans held for sale, net
6,900




6,900



OREO
4,003




4,003




 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
December 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:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
4,443

 
$

 
$
4,443

 
$

Commercial business
1,164

 

 
1,164

 

Loans held for sale, net
803

 

 
803

 

OREO
2,636

 

 
2,636

 


For assets measured at fair value on a non-recurring basis, the total net (losses) gains, which include charge offs, recoveries, specific reserves, and gains and losses on sales recognized are summarized below:

 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
(1,759
)
 
$
(186
)
 
$
(9,700
)
 
$
1,234

Commercial business
(509
)
 
(1,064
)
 
(1,703
)
 
(3,472
)
Loans held for sale, net
(530
)
 
(380
)
 
(530
)
 
(536
)
OREO
(570
)
 
(1,611
)
 
(956
)
 
(2,433
)


48

Table of Contents

Fair Value of Financial Instruments
Carrying amounts and estimated fair values of financial instruments, not previously presented, at September 30, 2013 and December 31, 2012 were as follows:
 
 
September 30, 2013
 
Carrying
Amount

Estimated
Fair Value
 
Fair Value Measurement Using
 
(In thousands)
Financial Assets:



 

Cash and cash equivalents
$
345,352


$
345,352

 
Level 1
Loans held for sale
49,480


54,476

 
Level 2
Loans receivable—net
4,833,224


5,266,747

 
Level 3
FHLB stock
27,958


N/A

 
N/A
FDIC loss share receivable
2,430


2,430

 
Level 3
Customers’ liabilities on acceptances
6,126


6,126

 
Level 2
Financial Liabilities:



 

Noninterest bearing deposits
$
1,362,675


$
1,362,675

 
Level 2
Saving and other interest bearing demand deposits
1,495,186


1,495,186

 
Level 2
Time deposits
2,163,241


2,167,307

 
Level 2
FHLB advances
421,446


422,108

 
Level 2
Subordinated debentures
57,303


56,434

 
Level 2
Bank’s liabilities on acceptances outstanding
6,126


6,126

 
Level 2
 
December 31, 2012
 
Carrying
Amount

Estimated
Fair Value
 
Fair Value Measurement Using
 
(In thousands)
Financial Assets:



 
 
Cash and cash equivalents
$
312,916


$
312,916

 
Level 1
Loans held for sale
51,635


57,856

 
Level 2
Loans receivable—net
4,229,311


4,591,685

 
Level 3
FHLB stock
22,495


N/A

 
N/A
FDIC loss share receivable
5,797


5,797

 
Level 3
Customers’ liabilities on acceptances
10,493


10,493

 
Level 2
Financial Liabilities:
 
 
 
 
 
Noninterest bearing deposits
$
1,184,285


$
1,184,285

 
Level 2
Saving and other interest bearing demand deposits
1,428,990


1,428,990

 
Level 2
Time deposits
1,770,760


1,772,778

 
Level 2
FHLB advances
420,722


425,107

 
Level 2
Subordinated debentures
41,846


32,218

 
Level 2
Bank’s liabilities on acceptances outstanding
10,493


10,493

 
Level 2

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, noninterest 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 SBA loans held for sale is based on market quotes. For fair value of non-SBA loans held for sale, see the measurement method discussed previously. Fair value of

49

Table of Contents

time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of FRB stock or FHLB 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.

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.
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 September 30, 2013 and December 31, 2012, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of September 30, 2013 and December 31, 2012, 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.
In June 2012, the Company redeemed $55 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B, issued by Center Financial under the Treasury Department's TARP Capital Purchase Program. A ten-year warrant to purchase Center Financial common stock issued in connection with Center Financial's sale of 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. The Company has not reached an agreement with the Treasury Department regarding repurchase of this warrant.
In December 2008, PIB granted a ten-year warrant to purchase up to 127,785 shares of its common stock (in relation to the TARP Capital Purchase Plan) which were assumed by the Company upon the acquisition of PIB. On the acquisition date of February 15, 2013, these warrants were canceled and converted into a warrant to purchase BBCN Bancorp common stock. The warrant entitles the holder to purchase, on one or more exercises of the warrant, up to 18,045 shares of BBCN Bancorp common stock at a price of $54.03 per share. The warrant expires on December 12, 2018. The Company has not reached an agreement with the Treasury Department regarding repurchase of this warrant.

50

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 September 30, 2013
 

 

 

 

 

 
Total capital (to risk-weighted assets):











Company
$
793,569

 
14.89
%

$
426,401


8.00
%

N/A


N/A

Bank
$
784,601

 
14.73
%

$
426,149


8.00
%

$
532,686


10.00
%
Tier I capital (to risk-weighted assets):

 









Company
$
727,053

 
13.64
%

$
213,200


4.00
%

N/A


N/A

Bank
$
718,084

 
13.48
%

$
213,074


4.00
%

$
319,612


6.00
%
Tier I capital (to average assets):

 









Company
$
727,053

 
12.06
%

$
241,094


4.00
%

N/A


N/A

Bank
$
718,084

 
11.90
%

$
241,392


4.00
%

$
301,740


5.00
%
 
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, 2012
 

 

 

 

 

 
Total capital (to risk-weighted assets):











Company
$
746,396


16.16
%

$
369,417


8.00
%

N/A


N/A

Bank
$
725,655


15.73
%

$
369,134


8.00
%

$
461,417


10.00
%
Tier I capital (to risk-weighted assets):











Company
$
688,422


14.91
%

$
184,708


4.00
%

N/A


N/A

Bank
$
667,725


14.47
%

$
184,567


4.00
%

$
276,850


6.00
%
Tier I capital (to average assets):











Company
$
688,422


12.76
%

$
215,861


4.00
%

N/A


N/A

Bank
$
667,725


12.38
%

$
215,813


4.00
%

$
269,767


5.00
%

The following table presents the components of accumulated other comprehensive (loss) income at September 30, 2013 and December 31, 2012:

 
September 30,
2013
 
December 31, 2012
 
(In thousands)
Net unrealized (loss) gain on securities available for sale
$
(3,472
)
 
$
9,004

Net unrealized gain on interest-only strips
83

 
78

Total accumulated other comprehensive (loss) income
$
(3,389
)
 
$
9,082



51

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, 2012 and the unaudited consolidated financial statements and notes set forth elsewhere in this report.

GENERAL
Selected Financial Data
The following table sets forth certain selected financial data concerning the periods indicated:
 
 
At or for the Three Months Ended September 30,
 
At or for the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands, except
share and per share data)
Income Statement Data:
 
 
 
 
 
 
 
Interest income
$
72,035

 
$
65,455

 
$
208,157

 
$
200,953

Interest expense
7,675

 
7,224

 
21,978

 
22,361

Net interest income
64,360

 
58,231

 
186,179

 
178,592

Provision for loan losses
744

 
6,900

 
9,050

 
16,682

Net interest income after provision for loan losses
63,616

 
51,331

 
177,129

 
161,910

Noninterest income
10,799

 
7,664

 
31,357

 
29,531

Noninterest expense
35,746

 
28,770

 
103,450

 
90,282

Income before income tax provision
38,669

 
30,225

 
105,036

 
101,159

Income tax provision
15,117

 
11,827

 
41,352

 
39,463

Net income
$
23,552

 
$
18,398

 
$
63,684

 
$
61,696

Dividends and discount accretion on preferred stock

 

 

 
(5,640
)
Net income available to common stockholders
$
23,552

 
$
18,398

 
$
63,684

 
$
56,056

Per Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.30

 
$
0.24

 
$
0.81

 
$
0.72

Earnings per common share - diluted
$
0.30

 
$
0.24

 
$
0.80

 
$
0.72

Book value per common share (period end, excluding preferred stock and warrants)
$
10.11

 
$
9.41

 
$
10.11

 
$
9.41

Cash dividends declared per common share
$
.05

 
$

 
$
.175

 
$

Tangible book value per common share (period end, excluding preferred stock and warrants) (11)
$
8.52

 
$
8.21

 
$
8.52

 
$
8.21

Number of common shares outstanding (period end)
79,247,719

 
78,016,260

 
79,247,719

 
78,016,260

Weighted average shares - basic
79,223,636

 
78,015,960

 
78,914,360

 
78,004,458

Weighted average shares - diluted
79,334,865

 
78,103,795

 
79,122,060

 
78,082,059

Tangible common equity ratio (9)
10.87
%
 
12.23
%
 
10.87
%
 
12.23
%
Statement of Financial Condition Data - at Period End:
 
 
 
 
 
 
 
Assets
$
6,340,987

 
$
5,331,979

 
$
6,340,987

 
$
5,331,979

Securities available for sale
708,566

 
687,059

 
708,566

 
687,059

Gross loans, net of deferred loan fees and costs (excludes loans held for sale)
4,898,939

 
4,069,494

 
4,898,939

 
4,069,494

Deposits
5,021,102

 
4,052,524

 
5,021,102

 
4,052,524

FHLB advances
421,446

 
460,815

 
421,446

 
460,815

Subordinated debentures
57,303

 
41,809

 
57,303

 
41,809

Stockholders’ equity
801,230

 
734,455

 
801,230

 
734,455


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Table of Contents

 
At or for the Three Months Ended September 30,
 
At or for the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands)
Average Balance Sheet Data:
 
 
 
 
 
 
 
Assets
$
6,160,132

 
$
5,179,186

 
$
5,924,397

 
$
5,140,591

Securities available for sale
714,660

 
679,764

 
704,124

 
699,225

Gross loans, including loans held for sale
4,771,022

 
4,007,402

 
4,588,464

 
3,878,080

Deposits
4,845,402

 
3,961,484

 
4,629,925

 
3,906,834

Stockholders’ equity
794,737

 
728,038

 
781,159

 
785,875

Selected Performance Ratios:
 
 
 
 
 
 
 
Return on average assets (1) (8)
1.53
%
 
1.42
%
 
1.43
%
 
1.60
%
Return on average stockholders’ equity (1) (8)
11.85
%
 
10.11
%
 
10.87
%
 
10.47
%
Average stockholders' equity to average assets
12.90
%
 
14.06
%
 
13.19
%
 
15.29
%
Return on average tangible equity (1) (8) (10)
13.90
%
 
11.60
%
 
12.52
%
 
11.89
%
Dividend payout ratio (dividends per share / earnings per share)
25.00
%
 
0.0
%
 
21.60
%
 
0.0
%
Pre-Tax Pre-Provision income to average assets (1)
2.56
%
 
2.87
%
 
2.57
%
 
3.06
%
Efficiency ratio (2)
47.56
%
 
43.66
%
 
47.56
%
 
43.38
%
Net interest spread
4.19
%
 
4.51
%
 
4.23
%
 
4.68
%
Net interest margin (3)
4.42
%
 
4.79
%
 
4.46
%
 
4.97
%
Regulatory Capital Ratios (4)
 
 
 
 
 
 
 
Leverage capital ratio (5)
12.06
%
 
13.15
%
 
12.06
%
 
13.15
%
Tier 1 risk-based capital ratio
13.64
%
 
15.22
%
 
13.64
%
 
15.22
%
Total risk-based capital ratio
14.89
%
 
16.48
%
 
14.89
%
 
16.48
%
Tier 1 common risk-based capital ratio (12)
12.60
%
 
14.30
%
 
12.60
%
 
14.30
%
Asset Quality Ratios:
 
 
 
 
 
 
 
Allowance for loan losses to gross loans, excluding loans held for sale
1.34
%
 
1.62
%
 
1.34
%
 
1.62
%
Allowance for loan losses to nonaccrual loans
181.89
%
 
212.06
%
 
181.89
%
 
212.06
%
Allowance for loan losses to nonperforming loans (6)
91.08
%
 
123.70
%
 
91.08
%
 
123.70
%
Allowance for loan losses to nonperforming assets (7)
47.18
%
 
80.86
%
 
47.18
%
 
80.86
%
Nonaccrual loans to gross loans, excluding loans held for sale
0.74
%
 
0.76
%
 
0.74
%
 
0.76
%
Nonperforming loans to gross loans, excluding loans held for sale (6)
2.28
%
 
1.90
%
 
2.28
%
 
1.90
%
Nonperforming assets to gross loans and OREO (7)
2.83
%
 
2.00
%
 
2.83
%
 
2.00
%
Nonperforming assets to total assets (7)
2.20
%
 
1.53
%
 
2.20
%
 
1.53
%
(1) 
Annualized.
(2) 
Efficiency ratio is defined as non-interest expense divided by the sum of net interest income before provision for loan losses and noninterest 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) 
Nonperforming loans include nonaccrual 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) 
Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing interest, OREO, and accruing restructured loans.
(8) 
Based on net income before effect of dividends and discount accretion on preferred stock.

53

Table of Contents

(9) 
Excludes TARP preferred stock, net of discount, of $0 and $0 million and stock warrants of $378 thousand and $378 thousand at September 30, 2013 and 2012, respectively.
(10) 
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.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(Dollars in thousands)
Net income
 
$
23,552

 
$
18,398

 
$
63,684

 
$
61,696

 
 
 
 
 
 
 
 
 
Average stockholders' equity
 
$
794,737

 
$
728,038

 
$
781,159

 
$
785,875

Less: Average goodwill and other intangible assets, net
 
(116,885
)
 
(93,407
)
 
(102,935
)
 
(93,771
)
Average tangible equity
 
$
677,852

 
$
634,631

 
$
678,224

 
$
692,104

 
 
 
 
 
 
 
 
 
Net income (annualized) to average tangible equity
 
13.90
%
 
11.60
%
 
12.52
%
 
11.89
%

(11) 
Tangible book value per common share is calculated by subtracting goodwill and other intangible assets from total stockholders' equity and dividing 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.
 
 
September 30, 2013
 
September 30, 2012
 
 
(In thousands)
Total stockholders' equity
 
$
801,230

 
$
734,455

Less: Preferred stock, net of discount
 

 

Common stock warrant
 
(378
)
 
(378
)
Goodwill and other intangible assets, net
 
(125,444
)
 
(93,217
)
Tangible common equity
 
$
675,408

 
$
640,860

 
 
 
 
 
Common shares outstanding
 
79,247,719

 
78,016,260

 
 
 
 
 
Tangible book value per common share
 
$
8.52

 
$
8.21


(12) 
The Tier 1 common risk-based capital ratio is calculated by dividing 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 by total risk-weighted assets less the disallowed allowance for loan losses.
 
 
September 30, 2013
 
September 30, 2012
 
 
(In thousands)
Tier 1 capital
 
$
727,053

 
$
668,710

Less: Preferred stock, net of discount
 

 

Trust preferred securities less unamortized acquisition discount
 
(55,414
)
 
(40,384
)
Tier 1 common risk-based capital
 
$
671,639

 
$
628,326

 
 
 
 
 
Total risk weighted assets less disallowed allowance for loan losses
 
5,330,009

 
4,392,505

 
 
 
 
 
Tier 1 common risk-based capital ratio
 
12.60
%
 
14.30
%





54

Table of Contents

Results of Operations
Overview
Total assets increased $700.3 million from $5.64 billion at December 31, 2012 to $6.34 billion at September 30, 2013. The increase in total assets was primarily due to a $603.9 million increase in loans receivable, net of allowance for loan losses, from $4.23 billion at December 31, 2012 to $4.83 billion at September 30, 2013 and a $32.4 million increase in cash and due from banks, from $312.9 million at December 31, 2012 to $345.4 million at September 30, 2013. The increase in total assets was funded by a $637.1 million increase in deposits from $4.38 billion at December 31, 2012 to $5.02 billion at September 30, 2013, a $724 thousand increase in FHLB advances from $420.7 million at December 31, 2012 to $421.4 million at September 30, 2013, a $15.5 million increase in subordinated debentures from $41.8 million at December 31, 2012 to $57.3 at September 30, 2013 and net income available to common stockholders of $63.7 million.
The net income available to common stockholders for the third quarter of 2013 was $23.6 million, or $0.30 per diluted common share, compared to $18.4 million, or $0.24 per diluted common share, for the same period of 2012, an increase of $5.2 million, or 28.0%. The net income available to common stockholders for the nine months ended September 30, 2012 was $63.7 million, or $0.80 per diluted common share, compared to $56.1 million, or $0.72 per diluted common share, for the same period of 2012, an increase of $7.6 million, or 13.6%. Acquisitions impact the comparability of the operating results for the third quarter and the nine months ended September 30 of 2013 and 2012, because the acquired assets and liabilities were recorded at fair value and certain acquisition premiums and discounts are being amortized or accreted into income or expense as adjustments to the yield/cost of the related asset or liability. In addition, the PIB and Foster acquisitions resulted in increases in interest earning assets, interest bearing liabilities, employees and branch locations in 2013. The operating results for the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012 include the following major pre-tax acquisition accounting adjustments and expenses related to acquisitions.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(Dollars in thousands)
Accretion of discounts on acquired performing loans
 
$
4,074

 
$
4,890

 
$
14,787

 
$
16,983

Accretion of discounts on acquired credit impaired loans
 
2,806

 
1,215

 
5,360

 
6,462

Amortization of premiums on assumed FHLB advances
 
94

 
307

 
277

 
2,442

Accretion of discounts on assumed subordinated debt
 
(81
)
 
(37
)
 
(172
)
 
(108
)
Amortization of premiums on assumed time deposits
 
308

 
650

 
993

 
2,712

Increase to pre-tax income
 
$
7,201

 
$
7,025

 
$
21,245

 
$
28,491


The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.53% for the third quarter of 2013, compared to 1.42% for the same period of 2012. The annualized return on average stockholders' equity, before the effect of dividends and discount accretion on preferred stock, was 11.85% for the third quarter of 2013, compared to 10.11% for the same period of 2012. The efficiency ratio was 47.56% for the third quarter of 2013, compared to 43.66% for the same period of 2012.
The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.43% for the nine months ended September 30, 2013, compared to 1.60% for the same period of 2012. The annualized return on average stockholders' equity, before the effect of dividends and discount accretion on preferred stock, was 10.87% for the nine months ended September 30, 2013, compared to 10.47% for the same period of 2012. The efficiency ratio was 47.56% for the nine months ended September 30, 2013, compared to 43.38% for the same period of 2012.

Net Interest Income and Net Interest Margin
Net Interest Income
A principal component of the Company's 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 the net interest margin. The net interest spread is the yield on average interest earning assets less the cost of average interest bearing liabilities. Net interest income is affected by changes in

55

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the balances of interest earning assets and interest bearing liabilities and changes in the yields earned on interest earning assets and the rates paid on interest bearing liabilities.
Comparison of Three Months Ended September 30, 2013 with the Same Period of 2012
Net interest income before provision for loan losses was $64.4 million for the third quarter of 2013, an increase of $6.1 million, or 10.5%, compared to $58.2 million for the same period of 2012. The increase was principally attributable to the increase in interest earnings assets, which was partially offset by the decline in the net interest margin.
Interest income for the third quarter of 2013 was $72.0 million, an increase of $6.6 million, or 10.1%, compared to $65.5 million for the same period of 2012. The increase resulted from an $11.6 million increase in interest income due to an increase in average interest earning assets and partially offset by a $5.0 million decrease in interest income due to a decrease in the yield on average interest earnings assets.
Comparison of Nine Months Ended September 30, 2013 with the Same Period of 2012
Net interest income before provision for loan losses was $186.2 million for the nine months ended September 30, 2013, an increase of $7.6 million, or 4.2%, compared to $178.6 million for the same period of 2012. The increase was principally attributable to the increase in average interest earning assets, which was partially offset by the decline in the net interest margin.
Interest income for the nine months ended September 30, 2013 was $208.2 million, an increase of $7.2 million, or 3.6%, compared to $201.0million for the same period of 2012. The increase resulted from a $32.0 million increase in interest income due to an increase in average interest earning assets and partially offset by a $24.8 million decrease in interest income due to a decrease in the yield on average interest earnings assets.

Net Interest Margin

The Company's reported net interest margin is impacted by the weighted average rates it earns on interest earning assets and pays on interest earning liabilities and the effect of acquisition accounting adjustments. The net interest margin for the third quarter of 2013 was 4.42%, a decrease of 37 basis points from 4.79% for the same period of 2012. The decrease in the net interest margin was due to a decline in the weighted average yield on the Company's loan portfolio and a decline in the effect of acquisition accounting adjustments. The net interest margin for the first nine months of 2013 was 4.46%, a decrease of 51 basis points from 4.97% for the same period of 2012. The decrease in the net interest margin was principally due to a decline in the weighted average yield on the Company's loan portfolio and a decline in the effect of acquisition accounting adjustments. The change in the Company's reported net interest margin for the three and nine months ended September 30, 2013 and 2012 is summarized in the table below.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Net interest margin, excluding the effect of acquisition accounting adjustments
 
3.86
%
 
4.14
%
 
3.90
%
 
4.29
%
Acquisition accounting adjustments(1)
 
0.56

 
0.65

 
0.56

 
0.68

Reported net interest margin
 
4.42
%
 
4.79
%
 
4.46
%
 
4.97
%
(1) Acquisition accounting adjustments are calculated by subtracting net interest margin, excluding effect of acquisition accounting adjustments, from reported net interest margin.

Excluding the effect of acquisition accounting adjustments, the net interest margin for the third quarter of 2013 decreased 28 basis points to 3.86% from 4.14% for the same period of 2012. Excluding the effect of acquisition accounting adjustments, the net interest margin for the nine months ended September 30, 2013 decreased 39 basis points to 3.90%, from 4.29% for the same period of 2012.
The weighted average yield on loans decreased to 5.63% for the third quarter of 2013 from 6.11% for the third quarter of 2012 and decreased to 5.72% for the nine months ended September 30, 2013 from 6.46% for the same period in 2012. The change in the yield was due to continued pricing pressure on loan interest rates and 5 basis point and 25 basis point declines in the effects of acquisition accounting adjustments for the respective periods, as summarized in the following table.


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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
The weighted average yield on loans, excluding the effect of acquisition accounting adjustments
 
4.96
%
 
5.39
%
 
5.04
%
 
5.53
%
Acquisition accounting adjustments(1)
 
0.67

 
0.72

 
0.68

 
0.93

Reported weighted average yield on loans
 
5.63
%
 
6.11
%
 
5.72
%
 
6.46
%
(1)     Acquisition accounting adjustments are calculated by subtracting the weighted average yield on loans, excluding the effect of acquisition accounting adjustments, from the reported weighted average yield on loans.

Excluding the effects of acquisition accounting adjustments, the weighted average yield on loans for the third quarter of 2013 decreased 43 basis points to 4.96% from 5.39% for the same period of 2012. This decrease was primarily due to the lower yields on acquired loan portfolios and the reduction in market rates compared to a year ago due to continued pricing pressures. At September 30, 2013, fixed rate loans accounted for 45% of the loan portfolio, compared to 38% at September 30, 2012, reflecting a higher mix of fixed rate loans in the acquired loan portfolios and the high demand for fixed rate loans in the current market. The weighted average yield on the variable rate and fixed rate loan portfolios (excluding loan discount accretion) at September 30, 2013 was 5.16% and 4.43%, respectively, compared with 5.97% and 4.57% at September 30, 2012.

The weighted average yield on securities available for sale for the third quarter of 2013 was 2.13%, compared to 2.23% for the same period of 2012. The weighted average yield on securities available for sale for the nine months ended September 30, 2013 was 2.04%, compared to 2.47% for the same period of 2012. The decrease was primarily attributable to the replacement of maturing securities with lower yielding investments as market interest rates declined.

The weighted average cost of deposits for the third quarter of 2013 was 0.49%, a decrease of 3 basis points from 0.52% for the same period of 2012. The amortization of the premium on time deposits assumed in the acquisition positively affected the weighted average cost of deposits, as summarized in the following table.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
The weighted average cost of deposits, excluding effect of acquisition accounting adjustments
 
0.51
 %
 
0.59
 %
 
0.52
 %
 
0.64
 %
Acquisition accounting adjustments(1)
 
(0.02
)
 
(0.07
)
 
(0.03
)
 
(0.09
)
Reported weighted average cost of deposits
 
0.49
 %
 
0.52
 %
 
0.49
 %
 
0.55
 %
(1)     Acquisition accounting adjustments are calculated by subtracting the weighted average cost of deposits, excluding the effect of acquisition accounting adjustments, from the reported weighted average cost of deposits.

Excluding the amortization of premiums on time deposits assumed in acquisitions, the weighted average cost of deposits was 0.51% for the third quarter of 2013, compared to 0.59% for the same period of 2012 and 0.52% for the nine months ended September 30, 2013, compared to 0.64% for the same period of 2012. The decrease was due to reductions in the cost of interest bearing demand deposits with no significant changes in the proportion of noninterest bearing demand deposits to total deposits. Noninterest bearing demand deposits accounted for 27.1% of total deposits at September 30, 2013, compared with 27.3% at September 30, 2012.

The weighted average cost of FHLB advances for the third quarter of 2013 was 1.18%, a decrease of 38 basis points from 1.56% for the same period of 2012. The decrease was attributable to decreases in FHLB advance rates, which was partially offset by the decline in the amortization of premiums on FHLB advances assumed in acquisitions, as summarized in the following table.

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
The weighted average cost on FHLB advances, excluding effect of acquisition accounting adjustments
 
1.27
 %
 
1.87
 %
 
1.23
 %
 
2.72
 %
Acquisition accounting adjustments
 
(0.09
)
 
(0.31
)
 
(0.06
)
 
(0.93
)
Reported weighted average cost on FHLB advances
 
1.18
 %
 
1.56
 %
 
1.17
 %
 
1.79
 %
(1)     Acquisition accounting adjustments are calculated by subtracting the weighted average cost on FHLB advances, excluding the effect of acquisition accounting adjustments, from reported weighted average cost on FHLB advances.

Excluding amortization of premiums on FHLB advances assumed in acquisitions, the weighted average cost of FHLB advances decreased to 1.27% for the third quarter of 2013 from 1.87% for the same period of 2012, reflecting the addition of $255.0 million in new borrowings and FHLB advances assumed from acquisitions at an average rate of 0.70%, which was lower than the weighted average rate paid on matured borrowings. The weighted average original maturity of the new borrowings was 2.27 years. In addition, a total of $294.0 million of FHLB advances, with weighted average rates of 1.12%, matured over the past twelve months.




58

Table of Contents

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 September 30, 2013
 
Three Months Ended September 30, 2012
 
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)
$
4,771,022

 
$
67,747

 
5.63
%
 
$
4,007,402

 
$
61,553

 
6.11
%
Securities available for sale(3)
714,660

 
3,802

 
2.13
%
 
679,764

 
3,782

 
2.23
%
FRB and FHLB stock and other investments
291,672

 
486

 
0.65
%
 
155,590

 
120

 
0.30
%
Federal funds sold

 

 
N/A

 

 

 
N/A

Total interest earning assets
$
5,777,354

 
$
72,035

 
4.95
%
 
$
4,842,756

 
$
65,455

 
5.38
%
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest bearing
$
1,276,732

 
$
1,927

 
0.60
%
 
$
1,156,915

 
$
1,775

 
0.61
%
Savings
204,049

 
668

 
1.30
%
 
184,219

 
820

 
1.77
%
Time deposits:
 
 
 
 
 
 
 
 
 
 
 
$100,000 or more
1,380,962

 
2,361

 
0.68
%
 
843,388

 
1,533

 
0.72
%
Other
677,352

 
1,003

 
0.59
%
 
672,861

 
1,086

 
0.64
%
Total time deposits
2,058,314

 
3,364

 
0.65
%
 
1,516,249

 
2,619

 
0.69
%
Total interest bearing deposits
3,539,095

 
5,959

 
0.67
%
 
2,857,383

 
5,214

 
0.73
%
FHLB advances
422,084

 
1,251

 
1.18
%
 
407,325

 
1,603

 
1.56
%
Other borrowings
48,273

 
465

 
3.77
%
 
40,407

 
407

 
3.95
%
Total interest bearing liabilities
4,009,452

 
$
7,675

 
0.76
%
 
3,305,115

 
$
7,224

 
0.87
%
Noninterest bearing demand deposits
1,306,308

 
 
 
 
 
1,104,996

 
 
 
 
Total funding liabilities/cost of funds
$
5,315,760

 
 
 
0.57
%
 
$
4,410,111

 
 
 
0.65
%
Net interest income/net interest spread
 
 
$
64,360

 
4.19
%
 
 
 
$
58,231

 
4.51
%
Net interest margin
 
 
 
 
4.42
%
 
 
 
 
 
4.79
%
Net interest margin, excluding the effect of nonaccrual loan income (expense)(4)
 
 
 
 
4.42
%
 
 
 
 
 
4.79
%
Net interest margin, excluding the effect of nonaccrual loan income (expense) and prepayment fee income(4) (5)
 
 
 
 
4.37
%
 
 
 
 
 
4.78
%
Cost of deposits:
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand deposits
$
1,306,308

 
$

 
 
 
$
1,104,996

 
$

 
 
Interest bearing deposits
3,539,095

 
5,959

 
0.67
%
 
2,857,383

 
5,214

 
0.73
%
Total deposits
$
4,845,403

 
$
5,959

 
0.49
%
 
$
3,962,379

 
$
5,214

 
0.52
%
*
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) 
Nonaccrual interest income reversed was $153 thousand and $44 thousand for the three months ended September 30, 2013 and 2012, respectively.
(5) 
Loan prepayment fee income excluded was $580 thousand and $119 thousand for the three months ended September 30, 2013 and 2012, respectively.

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Table of Contents


 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
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)
$
4,588,464

 
$
196,249

 
5.72
%
 
$
3,878,080

 
$
187,476

 
6.46
%
Securities available for sale(3)
704,124

 
10,755

 
2.04
%
 
699,225

 
12,940

 
2.47
%
FRB and FHLB stock and other investments
282,120

 
1,153

 
0.54
%
 
205,540

 
459

 
0.29
%
Federal funds sold

 

 
N/A

 
15,136

 
78

 
0.68
%
Total interest earning assets
$
5,574,708

 
$
208,157

 
4.99
%
 
$
4,797,981

 
$
200,953

 
5.59
%
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest bearing
$
1,276,195

 
$
5,736

 
0.60
%
 
$
1,191,213

 
$
5,748

 
0.64
%
Savings
192,006

 
2,144

 
1.49
%
 
189,322

 
2,571

 
1.81
%
Time deposits:
 
 
 
 
 
 
 
 
 
 
 
$100,000 or more
1,265,877

 
6,066

 
0.64
%
 
806,244

 
4,428

 
0.73
%
Other
675,239

 
3,068

 
0.61
%
 
682,903

 
3,115

 
0.61
%
Total time deposits
1,941,116

 
9,134

 
0.63
%
 
1,489,147

 
7,543

 
0.68
%
Total interest bearing deposits
3,409,317

 
17,014

 
0.67
%
 
2,869,682

 
15,862

 
0.74
%
FHLB advances
422,205

 
3,693

 
1.17
%
 
358,962

 
4,832

 
1.79
%
Other borrowings
44,721

 
1,271

 
3.75
%
 
45,981

 
1,667

 
4.77
%
Total interest bearing liabilities
3,876,243

 
$
21,978

 
0.76
%
 
3,274,625

 
$
22,361

 
0.91
%
Noninterest bearing demand deposits
1,220,608

 
 
 
 
 
1,037,152

 
 
 
 
Total funding liabilities/cost of funds
$
5,096,851

 
 
 
0.58
%
 
$
4,311,777

 
 
 
0.69
%
Net interest income/net interest spread
 
 
$
186,179

 
4.23
%
 
 
 
$
178,592

 
4.68
%
Net interest margin
 
 
 
 
4.46
%
 
 
 
 
 
4.97
%
Net interest margin, excluding the effect of nonaccrual loan income (expense)(4)
 
 
 
 
4.46
%
 
 
 
 
 
4.99
%
Net interest margin, excluding the effect of nonaccrual loan income (expense) and prepayment fee income(4) (5)
 
 
 
 
4.44
%
 
 
 
 
 
4.98
%
Cost of deposits:
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand deposits
$
1,220,608

 
$

 
 
 
$
1,037,152

 
$

 
 
Interest bearing deposits
3,409,317

 
17,014

 
0.67
%
 
2,869,682

 
15,862

 
0.74
%
Total deposits
$
4,629,925

 
$
17,014

 
0.49
%
 
$
3,906,834

 
$
15,862

 
0.55
%
*
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)
Nonaccrual interest income recognized (reversed) was $6 thousand and ($793) thousand for the nine months ended September 30, 2013 and 2012, respectively.
(5)
Loan prepayment fee income excluded was $948 thousand and $433 thousand for the nine months ended September 30, 2013 and 2012, respectively.


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Table of Contents

Changes in net interest income are a function of changes in interest rates and volumes of interest earning assets and interest bearing liabilities. The following table sets forth information regarding the changes in interest income and interest expense for the periods indicated. The total change for each category of interest earning assets and interest bearing liabilities is segmented into the change attributable to variations in volume (changes in volume multiplied by the old rate) and the change attributable to variations in interest rates (changes in rates multiplied by the old volume). Nonaccrual loans are included in average loans used to compute this table.

 
 
 
 
 
 
 
Three Months Ended
September 30, 2013 over September 30, 2012
 
Net
Increase
(Decrease)
 
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
$
6,194

 
$
(5,013
)
 
$
11,207

Interest on securities
20

 
(168
)
 
188

Interest on FRB and FHLB stock and other investments
366

 
207

 
159

Interest on federal funds sold

 

 

Total interest income
$
6,580

 
$
(4,974
)
 
$
11,554

INTEREST EXPENSE:
 
 
 
 
 
Interest on demand, interest bearing
$
152

 
$
(28
)
 
$
180

Interest on savings
(152
)
 
(233
)
 
81

Interest on time deposits
745

 
(155
)
 
900

Interest on FHLB advances
(352
)
 
(409
)
 
57

Interest on other borrowings
58

 
(18
)
 
76

Total interest expense
$
451

 
$
(843
)
 
$
1,294

NET INTEREST INCOME
$
6,129

 
$
(4,131
)
 
$
10,260



 
 
 
 
 
 
 
Nine Months Ended
September 30, 2013 over September 30, 2012
 
Net
Increase
(Decrease)
 
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
$
8,773

 
$
(23,054
)
 
$
31,827

Interest on securities
694

 
479

 
215

Interest on FRB and FHLB stock and other investments
(2,185
)
 
(2,251
)
 
66

Interest on federal funds sold
(78
)
 

 
(78
)
Total interest income
$
7,204

 
$
(24,826
)
 
$
32,030

INTEREST EXPENSE:
 
 
 
 
 
Interest on demand, interest bearing
$
(12
)
 
$
(400
)
 
$
388

Interest on savings
(427
)
 
(469
)
 
42

Interest on time deposits
1,591

 
(589
)
 
2,180

Interest on FHLB advances
(1,139
)
 
(1,904
)
 
765

Interest on other borrowings
(396
)
 
(356
)
 
(40
)
Total interest expense
$
(383
)
 
$
(3,718
)
 
$
3,335

NET INTEREST INCOME
$
7,587

 
$
(21,108
)
 
$
28,695




61

Table of Contents

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 third quarter of 2013 was $744 thousand, a decrease of $6.2 million, or 89.2%, from $6.9 million for the same period last year. The decrease was primarily due to decreased historical loss rates compared to the third quarter of 2012, which was partially offset by loan growth.
The provision for loan losses for the nine months ended September 30, 2013 was $9.1 million, a decrease of $7.6 million, or 45.75%, from $16.7 million for the same period last year. The decrease is primarily due an overall reduction in quantitative reserves as a result of decreasing historical loss rates. Net charge offs also decreased to $10.3 million for the nine months ended September 30, 2013 from $12.7 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.
Noninterest Income
Noninterest income is primarily comprised of service fees on deposit accounts, fees received on trade finance letters of credit and net gains on sales of loans.
Noninterest income for the third quarter of 2013 was $10.8 million, compared to $7.7 million for the same quarter of 2012, an increase of $3.1 million, or 40.9%. The increase was principally due to net gains of $2.8 million recorded from the sales of $36.8 million of SBA loans to the secondary market during the third quarter of 2013. No SBA loans were sold to the secondary market during the third quarter of 2012. Noninterest income also increased due to a $200 thousand increase in service fees on deposit accounts and a $219 thousand increase from other income and fees.
Noninterest income for the nine months ended 2013 was $31.4 million, compared to $29.5 million for the same period of 2012, an increase of $1.8 million, or 6.2 %. The increase was primarily due to an increase in the volume of SBA loans sold, resulting in net gains on sales of SBA loans of $8.8 million during the period, compared to $5.4 million in the previous period. The increase in noninterest income was offset by decreases in net gains on sales of securities available for sale and a decrease in service fees on deposit accounts. We recorded $54 thousand of net gains on sales of securities available for sale during the first nine months of 2013. During the same period in 2012, we recoded a net gain of $816 thousand from the sale of a Trust Preferred security, which had been marked to market in a prior period. Service fees on deposit accounts decreased primarily due to a decrease in non-sufficient funds charges of $497 thousand.
Noninterest income by category is summarized below:
 

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Table of Contents

 
Three Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
%
 
(Dollars in thousands)
Service fees on deposit accounts
$
3,321

 
$
3,121

 
$
200

 
6.4
 %
International service fees
1,196

 
1,183

 
13

 
1.1
 %
Loan servicing fees, net
1,004

 
1,031

 
(27
)
 
(2.6
)%
Wire transfer fees
916

 
833

 
83

 
10.0
 %
Other income and fees
1,583

 
1,364

 
219

 
16.1
 %
Net gains on sales of SBA loans
2,827

 

 
2,827

 
100.0
 %
Net losses on sales of other loans

 

 

 
 %
Net gains on sales of securities available for sale

 
133

 
(133
)
 
(100.0
)%
Net valuation gains on interest rate contracts

 
11

 
(11
)
 
(100.0
)%
Net losses on sales of OREO
(48
)
 
(12
)
 
(36
)
 
300.0
 %
Total noninterest income
$
10,799

 
$
7,664

 
$
3,135

 
40.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Service fees on deposit accounts
$
9,118

 
$
9,550

 
$
(432
)
 
(4.5
%)
International service fees
3,700

 
3,810

 
(110
)
 
(2.9
%)
Loan servicing fees, net
3,009

 
3,178

 
(169
)
 
(5.3
%)
Wire transfer fees
2,619

 
2,349

 
270

 
11.5
%
Other income and fees
4,036

 
4,058

 
(22
)
 
(0.5
%)
Net gains on sales of SBA loans
8,816

 
5,426

 
3,390

 
62.5
%
Net gains on sales of other loans
62

 
146

 
(84
)
 
57.5
%
Net gains on sales of securities available for sale
54

 
949

 
(895
)
 
(94.3
%)
Net valuation gains on interest rate contracts

 
24

 
(24
)
 
100.0
%
Net (losses) gains on sales of OREO
(57
)
 
41

 
(98
)
 
(239.0
%)
Total noninterest income
$
31,357

 
$
29,531

 
$
1,826

 
6.2
%

Noninterest Expense
Noninterest expense for the third quarter of 2013 was $35.7 million, an increase of $7.0 million, or 24.2%, from $28.8 million for the same period of 2012. Salaries and employee benefits expense increased $2.9 million due to an increase in the number of full-time equivalent employees, which increased to 831 at September 30, 2013 from 684 at September 30, 2012, which was partially due to the PI and Foster acquisitions that were completed in 2013. Occupancy expense increased by a total of $450 thousand principally due to increased rental commitments of $342 thousand from an increased number of leases and reflects minimal increases in property taxes and utilities related to the leased properties. Professional fees increased by $564 thousand due to additional legal services and consulting fees for our information systems during the quarter. Merger and integration expenses increased by $748 thousand, as we incurred the majority of the expenses from the Foster acquisition, including salaries and benefits expenses and professional service fees, during the quarter. The majority of expenses related to the Center Financial Merger were incurred in the first and second quarters of 2012, while only $183 thousand was incurred in the third quarter of 2012. Other noninterest expense, which is comprised of directors fees, amortization on intangibles and other miscellaneous expenses, increased by $1.3 million during the quarter.
Noninterest expense for the nine months ended of 2013 was $103.5 million, an increase of $13.2 million, or 14.6%, compared to $90.3 million for the same period of 2012. Salaries and employee benefits expense increased $6.7 million due to one-time costs incurrred as part of a management transition and an increase in the number of full-time equivalent employees. Occupancy expense increased by a total of $1.4 million principally due to increased rental commitments during the period causing an increase in lease expense of $1.2 million and increases in property taxes and utilities for the leased properties. Professional fees increased by $1.6 million due to increased legal fees, fees for accounting services and consulting services for our information systems. Merger and integration expenses decreased by $683 thousand, as the Company incurred greater

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salaries and benefits expenses and professional service fees related to the merger with Center Financial in 2012 than were incurred on the PIB and Foster acquisitions in 2013. Other noninterest expense increased by $2.7 million during the period.
The breakdown of changes in noninterest expense by category is shown below:
 
 
Three Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
%
 
(Dollars in thousands)
Salaries and employee benefits
$
16,535

 
$
13,611

 
$
2,924

 
21.5
 %
Occupancy
4,360

 
3,910

 
450

 
11.5
 %
Furniture and equipment
1,728

 
1,495

 
233

 
15.6
 %
Advertising and marketing
1,393

 
1,159

 
234

 
20.2
 %
Data processing and communications
1,983

 
1,659

 
324

 
19.5
 %
Professional fees
1,440

 
876

 
564

 
64.4
 %
FDIC assessment
818

 
644

 
174

 
27.0
 %
Credit related expenses
2,646

 
2,613

 
33

 
1.3
 %
Merger and integration expenses
931

 
183

 
748

 
408.7
 %
Other
3,912

 
2,620

 
1,292

 
49.3
 %
Total noninterest expense
$
35,746

 
$
28,770

 
$
6,976

 
24.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Salaries and employee benefits
$
49,086

 
$
42,348

 
$
6,738

 
15.9
 %
Occupancy
13,206

 
11,788

 
1,418

 
12.0
 %
Furniture and equipment
4,914

 
4,181

 
733

 
17.5
 %
Advertising and marketing
3,856

 
4,142

 
(286
)
 
(6.9
)%
Data processing and communications
5,488

 
4,843

 
645

 
13.3
 %
Professional fees
4,184

 
2,558

 
1,626

 
63.6
 %
FDIC assessment
2,370

 
1,732

 
638

 
36.8
 %
Credit related expenses
6,564

 
6,967

 
(403
)
 
(5.8
)%
Merger and integration expenses
2,621

 
3,304

 
(683
)
 
(20.7
)%
Other
11,161

 
8,419

 
2,742

 
32.6
 %
Total noninterest expense
$
103,450

 
$
90,282

 
$
13,168

 
14.6
 %

Provision for Income Taxes
Income tax expense was $15.1 million and $11.8 million for the quarters ended September 30, 2013 and 2012, respectively. The effective income tax rates were 39.1% for the quarters ended September 30, 2013 and 2012. Income tax expense was $41.4 million and $39.5 million for the nine months ended September 30, 2013 and 2012, respectively. The effective income tax rates for the nine months ended September 30, 2013 and 2012 were 39.4% and 39.0%, respectively.



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Financial Condition
At September 30, 2013, our total assets were $6.34 billion, an increase of $700.3 million from $5.64 billion at December 31, 2012. The increase was principally due to a $603.9 million increase in loans receivable, net of allowance for loan losses, a $32.4 million increase in cash and due from banks and a $30 million increase in goodwill. The increase in total assets was funded by a $637.1 million increase in deposits, a $724 thousand increase in FHLB advances, a $15.5 million increase in subordinated debentures and net income of $63.7 million. As previously discussed, the increases in assets and liabilities were principally due to the PIB and Foster acquisitions.
Investment Securities Portfolio
As of September 30, 2013, we had $708.6 million in available for sale securities, compared to $704.4 million at December 31, 2012. The net unrealized loss on the available for sale securities at September 30, 2013 was $6.0 million, compared to a net unrealized gain on such securities of $15.4 million at December 31, 2012. During the nine months ended September 30, 2013, $169.9 million in securities were purchased, $143.6 million in mortgage related securities were paid down, and $6.6 million in securities were sold. We recognized net gains of $54 thousand on the securities that were sold. During the same period last year, we sold a corporate trust preferred security and other debt securities and recognized a gain of $949 thousand. The weighted average duration (the weighted average of the times of the present values of all the cash flows) of the available for sale securities was 4.81 years and 3.26 years at September 30, 2013 and December 31, 2012, respectively. The weighted average life (the weighted average of the times of the principal repayments) of the available for sale securities was 5.50 years and 3.5 years at September 30, 2013 and December 31, 2012, respectively.
Loan Portfolio
As of September 30, 2013, gross loans outstanding, net of deferred loan fees and costs and excluding loans held for sale, was $4.90 billion, an increase of $602.7 million from $4.30 billion at December 31, 2012. Total loan originations during the three months ended September 30, 2013 were $387.6 million, including SBA loan originations of $72.7 million. Of the $72.7 million in SBA loan originations, $38.9 million was included as additions to loans held for sale during the period.
The following table summarizes our loan portfolio by amount and percentage of gross loans in each major loan category at the dates indicated:
 
 
September 30, 2013
 
December 31, 2012
 
Amount
 
%
 
Amount
 
%
 
 
 
(Dollars in thousands)
 
 
Loan portfolio composition
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Residential
$
10,294

 
0
%
 
$
9,247

 
0
%
Commercial & industrial
3,652,815

 
75
%
 
3,100,466

 
72
%
Construction
73,116

 
1
%
 
65,045

 
2
%
Total real estate loans
3,736,225

 
76
%
 
3,174,758

 
73
%
Commercial business
932,955

 
19
%
 
921,556

 
21
%
Trade finance
135,889

 
3
%
 
152,070

 
4
%
Consumer and other
95,693

 
2
%
 
49,954

 
1
%
Total loans outstanding
4,900,762

 
100
%
 
4,298,338

 
100
%
Less: deferred loan fees
(1,823
)
 
 
 
(2,086
)
 
 
Gross loans receivable
4,898,939

 
 
 
4,296,252

 
 
Less: allowance for loan losses
(65,715
)
 
 
 
(66,941
)
 
 
Loans receivable, net
$
4,833,224

 
 
 
$
4,229,311

 
 

SBA loans are included in commercial business loans and commercial and industrial real estate loans. SBA loans included in commercial business loans were $61.2 million at September 30, 2013 and $69.8 million at December 31, 2012. SBA loans included in commercial and industrial real estate loans were $199.5 million at September 30, 2013 and $148.0 million at December 31, 2012.

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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:
 
 
September 30, 2013
 
December 31, 2012
 
(Dollars in thousands)
Loan commitments
$
669,248

 
$
690,917

Standby letters of credit
36,744

 
39,176

Other commercial letters of credit
55,055

 
51,257

 
$
761,047

 
$
781,350


Nonperforming Assets
Nonperforming assets, which include nonaccrual loans, loans 90 days or more past due and on accrual status, restructured loans, and OREO, were $139.3 million at September 30, 2013, compared to $79.9 million at December 31, 2012. The ratio of nonperforming assets to gross loans plus OREO was 2.83% and 1.86% at September 30, 2013 and December 31, 2012, respectively.
The following table summarizes the composition of our nonperforming assets as of the dates indicated.
 
 
September 30, 2013
 
December 31, 2012
 
(Dollars in thousands)
Nonaccrual loans (1)
$
36,129

 
$
29,653

Loans 90 days or more days past due on accrual status (2)
39,560

 
17,742

Accruing restructured loans
36,018

 
29,849

Total Nonperforming Loans
111,707

 
77,244

OREO
27,582

 
2,698

Total Nonperforming Assets
$
139,289

 
$
79,942

Nonperforming loans to total gross loans, excluding loans held for sale
2.28
%
 
1.80
%
Nonperforming assets to gross loans plus OREO
2.83
%
 
1.86
%
Nonperforming assets to total assets
2.20
%
 
1.42
%
Allowance for loan losses to nonperforming loans (excludes delinquent loans 90 days or more on accrual status)
91.08
%
 
112.50
%
Allowance for loan losses to nonperforming assets
47.18
%
 
83.74
%
(1) 
Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation totaling $25.2 million and $17.6 million as of September 30, 2013 and December 31, 2012, respectively.
(2) 
Loans 90 days or more past due on accrual status are acquired loans accounted for under ASC 310-30.
Allowance for Loan Losses
The allowance for loan losses was $65.7 million at September 30, 2013, compared to $66.9 million at December 31, 2012. We recorded a provision for loan losses of $9.1 million during the nine months ended September 30, 2013, compared to $16.7 million for the same period of 2012. The allowance for loan losses was 1.34% of gross loans at September 30, 2013 and 1.56% of gross loans at December 31, 2012. Impaired loans as defined by FASB ASC 310-10-35, “Accounting by Creditors for Impairment of a Loan,” totaled $99.2 million and $90.2 million as of September 30, 2013 and December 31, 2012, respectively, with specific allowances of $11.0 million and $9.2 million, respectively.

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The following table reflects our allocation of the allowance for loan and lease losses ("ALLL") by loan type and the ratio of each loan category to total loans as of the dates indicated:
 
 
Allocation of Allowance for Loan Losses
 
September 30, 2013
 
December 31, 2012
 
Amount of Allowance for Loan Losses
 
Percent of ALLL to Total ALLL
 
Amount of Allowance for Loan Losses
 
Percent of ALLL to Total ALLL
 
(Dollars in thousands)
Loan Type
 
 
 
 
 
 
 
Real estate - Residential
$
68

 
0.10
%
 
$
74

 
0.11
%
Real estate - Commercial
46,293

 
70.45
%
 
45,162

 
67.47
%
Real estate - Construction
840

 
1.28
%
 
986

 
1.47
%
Commercial business
15,300

 
23.28
%
 
17,606

 
26.30
%
Trade finance
2,513

 
3.82
%
 
2,352

 
3.51
%
Consumer and other
701

 
1.07
%
 
761

 
1.14
%
Total
$
65,715

 
100
%
 
$
66,941

 
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 (Legacy Loans) and loans acquired from acquisitions (Acquired Loans). The Acquired Loans were further segregated between Acquired Credit Impaired Loans (loans with credit deterioration at the time they were acquired and accounted for under ASC 310-30, or "ACILs") and performing loans (loans that were pass graded at the time they were acquired, or "APLs"). The activity in the ALLL for the three and nine months ended September 30, 2013 is as follows:



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Table of Contents

 
 
 
 
Acquired Loans(2)
 
 
Three Months Ended September, 2013
 
Legacy Loans(1)
 
ACILs
 
APLs
 
Total
 
 
(Dollars in thousands)
Balance, beginning of period
 
$
61,315

 
$
4,535

 
$
5,825

 
$
71,675

Provision for loan losses
 
(1,310
)
 

 
2,054

 
744

Loan charge offs
 
(1,302
)
 
(557
)
 
(5,931
)
 
(7,790
)
Recoveries of loan charge offs
 
1,070

 

 
16

 
1,086

Balance, end of period
 
$
59,773

 
$
3,978

 
$
1,964

 
$
65,715

 
 
 
 
 
 
 
 
 
Gross loans, net of deferred loan fees and costs
 
$
3,857,469

 
227,412

 
815,881

 
$
4,900,762

Loss coverage ratio
 
1.55
%
 
1.75
%
 
0.24
%
 
1.34
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Loans (2)
 
 
Nine Months Ended September 30, 2013
 
Legacy Loans (1)
 
ACILs
 
APLs
 
Total
 
 
(Dollars in thousands)
Balance, beginning of period
 
$
61,002

 
$
4,535

 
$
1,404

 
$
66,941

Provision for loan losses
 
1,647

 

 
7,403

 
9,050

Loans charged off
 
(4,614
)
 
(557
)
 
(6,948
)
 
(12,119
)
Recoveries of charged offs
 
1,738

 

 
105

 
1,843

Balance, end of period
 
$
59,773

 
$
3,978

 
$
1,964

 
$
65,715

 
 
 
 
 
 
 
 
 
(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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Table of Contents

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:
 
 
At or for the Nine Months Ended September 30,
 
2013
 
2012
 
(Dollars in thousands)
LOANS
 
 
 
Average gross loans receivable, including loans held for sale (net of deferred fees)
$
4,588,464

 
$
3,878,080

Total gross loans receivables, excluding loans held for sale (net of deferred fees)
$
4,898,939

 
$
4,069,494

ALLOWANCE:
 
 
 
Balance, beginning of period
$
66,941

 
$
65,505

Less: Loan charge offs:
 
 
 
Commercial & industrial real estate
(8,052
)
 
(2,074
)
Commercial business loans
(3,991
)
 
(5,692
)
Trade finance
(26
)
 

Consumer and other loans
(50
)
 
(3
)
Total loan charge offs
(12,119
)
 
(7,769
)
Plus: Loan recoveries
 
 
 
Commercial & industrial real estate
165

 
973

Commercial business loans
1,564

 
290

Trade Finance

 

Consumer and other loans
114

 
53

Total loans recoveries
1,843

 
1,316

Net loan charge offs
(10,276
)
 
(6,453
)
Provision for loan losses
9,050

 
6,900

Balance, end of period
$
65,715

 
$
65,952

Net loan charge offs to average gross loans, including loans held for sale (net of deferred fees) *
0.30
%
 
0.22
%
Allowance for loan losses to gross loans at end of period
1.34
%
 
1.62
%
Net loan charge offs to beginning allowance *
20.47
%
 
13.13
%
Net loan charge offs to provision for loan losses
113.55
%
 
93.52
%
* Annualized
 
 
 
We believe the allowance for loan losses as of September 30, 2013 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 September 30, 2013, deposits increased $637.1 million, or 14.5%, to $5.02 billion from $4.38 billion at December 31, 2012. The net increase in deposits is primarily due to the PIB and Foster acquisitions in which we assumed $143.7 million and $321.6 million in deposits, respectively. Interest bearing demand deposits, including money market and Super Now accounts, totaled $1.50 billion at September 30, 2013, an increase of $66.2 million from $1.43 billion at December 31, 2012.
At September 30, 2013, 27% of total deposits were noninterest bearing demand deposits, 43% were time deposits and 30% were interest bearing demand and savings deposits. By comparison, at December 31, 2012, 27% of total deposits were noninterest bearing demand deposits, 40% were time deposits, and 33% were interest bearing demand and savings deposits.
At September 30, 2013, we had $290.1 million in brokered deposits and $300.0 million in California State Treasurer deposits, compared to $307.2 million and $300.0 million of such deposits at December 31, 2012, respectively. The California State Treasurer deposits had three-month maturities with a weighted average interest rate of 0.09% at September 30, 2013 and were collateralized with securities with a carrying value of $345.7 million. The weighted average interest rate for wholesale deposits was 0.33% at September 30, 2013.

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The following is a schedule of certificates of deposit maturities as of September 30, 2013 which do not include the certificates of deposits totaling $141,093 as of September 30, 2013 from the acquisition of Foster:
 
 
 
 
 
 
Balance
 
%
 
(Dollars in thousands)
Three months or less
722,960

 
35.75
%
Over three months through six months
368,962

 
18.25
%
Over six months through nine months
314,340

 
15.54
%
Over nine months through twelve months
335,169

 
16.57
%
Over twelve months
280,717

 
13.88
%
Total time deposits
2,022,148

 
100.00
%

Other Borrowings. Advances may be obtained from the FHLB as an alternative source of funds. FHLB advances 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 September 30, 2013, we had $421.4 million of FHLB advances with average remaining maturities of 3.0 years, compared to $420.7 million with average remaining maturities of 2.6 years at December 31, 2012. The weighted average rate, including acquisition accounting adjustments, was 1.18% and 1.31% at September 30, 2013 and at December 31, 2012, respectively.
At September 30, 2013, five wholly-owned subsidiary grantor trusts ("Trusts") established by us had issued $46 million of pooled trust preferred securities (“Trust Preferred Securities”). Upon the acquisition of Foster Bankshares, we assumed one grantor trust established by former Foster Bank, which issued $15.0 million of trust preferred securities, which we plan to redeem by the first quarter of 2014. 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 15 years.
Stockholders’ Equity and Regulatory Capital

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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 $801.2 million at September 30, 2013 compared to $751.1 million at December 31, 2012.
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 September 30, 2013, our Tier I capital, defined as stockholders’ equity less intangible assets, plus proceeds from the trust preferred securities (subject to limitations), was $727.1 million, compared to $688.4 million at December 31, 2012, representing an increase of $38.6 million, or 5.6%. The increase was primarily due to the increase in additional paid-in capital from the net income during the nine months ended September 30, 2013 of $63.7 million. At September 30, 2013, the total capital to risk-weighted assets ratio was 14.89% and the Tier I capital to risk-weighted assets ratio was 13.64%. The Tier I leverage capital ratio was 12.06%.
As of September 30, 2013 and December 31, 2012, 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 September 30, 2013 (Dollars in thousands)
 
Actual
 
To Be Well-Capitalized
 
Excess
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
BBCN Bancorp, Inc
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
793,569

 
14.89
%
 
N/A

 
N/A

 
 
 
 
Tier 1 risk-based capital ratio
$
727,053

 
13.64
%
 
N/A

 
N/A

 
 
 
 
Tier 1 capital to total assets
$
727,053

 
12.06
%
 
N/A

 
N/A

 


 


BBCN Bank
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
784,601

 
14.73
%
 
$
532,686

 
10.00
%
 
$
251,915

 
4.73
%
Tier 1 risk-based capital ratio
$
718,084

 
13.48
%
 
$
319,612

 
6.00
%
 
$
398,472

 
7.48
%
Tier I capital to total assets
$
718,084

 
11.90
%
 
$
301,740

 
5.00
%
 
$
416,344

 
6.90
%
 
As of December 31, 2012 (Dollars in thousands)
 
Actual
 
To Be Well-Capitalized
 
Excess
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
BBCN Bancorp, Inc
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
746,396

 
16.16
%
 
N/A

 
N/A

 
 
 
 
Tier 1 risk-based capital ratio
$
688,422

 
14.91
%
 
N/A

 
N/A

 
 
 
 
Tier 1 capital to total assets
$
688,422

 
12.76
%
 
N/A

 
N/A

 


 


BBCN Bank
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
725,655

 
15.73
%
 
$
461,417

 
10.00
%
 
$
264,238

 
5.73
%
Tier 1 risk-based capital ratio
$
667,725

 
14.47
%
 
$
276,850

 
6.00
%
 
$
390,875

 
8.47
%
Tier I capital to total assets
$
667,725

 
12.38
%
 
$
269,767

 
5.00
%
 
$
397,958

 
7.38
%

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.

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Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and borrowings from the FHLB and the FRB 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.
At September 30, 2013, our total borrowing capacity from the FHLB was $1.58 billion, of which $1.18 billion was unused and available to borrow. At September 30, 2013, our total borrowing capacity from the FRB was $465.9 million, of which $465.9 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 $653.8 million at September 30, 2013, compared to $661.3 million at December 31, 2012. Cash and cash equivalents, including federal funds sold, were $345.4 million at September 30, 2013, compared to $312.9 million at December 31, 2012. 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 noninterest expense, and enhancing noninterest 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 the 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 September 30, 2013, 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.
 
 
September 30, 2013
 
December 31, 2012
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
7.13
 %
 
(2.90
)%
 
5.31
 %
 
(2.24
)%
 + 100 basis points
3.17
 %
 
(1.05
)%
 
2.51
 %
 
1.01
 %
 - 100 basis points
(1.28
)%
 
0.63
 %
 
(3.78
)%
 
3.06
 %
 - 200 basis points
(1.87
)%
 
0.50
 %
 
(4.52
)%
 
4.68
 %

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 September 30, 2013. 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 September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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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. There were no material developments in legal proceedings which were previously disclosed in our 2012 Annual Report on Form 10-K.
Item 1A.
Risk Factors
There were no material changes from risk factors previously disclosed in our 2012 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:
November 8, 2013
/s/ Kevin S. Kim
 
 
 
Kevin S. Kim
 
 
 
Chairman, President and Chief Executive Officer
 
 
 
 
 
Date:
November 8, 2013
 
 
 
 
 
 
 
 
/s/ Douglas J. Goddard
 
 
 
Douglas J. Goddard
 
 
 
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 Exhibit 3.3 of the Registration Statement on Form S-8 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 Exhibit 3.1.1 of the Quarterly Report on Form 10-Q 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 Appendix B of the Proxy Statement on DEF14 A, 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 Appendix C of the Proxy 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 (incorporated herein by reference to Exhibit 3.6 of the Quarterly Report on Form 10-Q filed with SEC on May 10, 2012)
 
 
 
3.7
 
Amended and Restated Bylaws of BBCN Bancorp, Inc. (incorporated herein by reference to Exhibit 3.7 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2013)
 
 
 
4.1
 
Amended and Restated Declaration of Trust, Foster Capital Trust I, dated as of July 8, 2005, by and among Christiana Bank and Trust as Delaware Trustee, LaSalle Bank National Association as Institutional Trustee, Foster Bankshares, Inc. as Sponsor and the Administrators named therein*
 
 
 
4.2
 
Indenture, Junior Subordinated Debt Securities, dated as of July 8, 2005, between Foster Bankshares, Inc. as Issuer and LaSalle Bank National Association as Trustee*
 
 
 
4.3
 
Guarantee Agreement, dated as of July 8, 2005, by and between Foster Bankshares, Inc. and LaSalle Bank National Association as Trustee*
 
 
 
10.1
 
CCO Employment Agreement between BBCN Bank and Mark Lee, dated August 20, 2013*
 
 
 
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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