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HOPE BANCORP INC - Quarter Report: 2012 June (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________ 
FORM 10-Q
______________________________________________ 
(Mark One)
x
Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2012
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
o
 
Accelerated filer
x
 
 
 
 
 
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 June 30, 2012, there were 78,014,107 outstanding shares of the issuer’s Common Stock, $0.001 par value.


Table of Contents

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
 


2

Table of Contents

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


3

Table of Contents

PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements

BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Unaudited)
 
 
 
June 30,
2012
 
December 31,
2011
ASSETS
(In thousands, except share data)
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
74,675

 
$
81,785

Interest-earning deposit at Federal Reserve Bank
104,946

 
217,800

Federal funds sold
0

 
525

Total cash and cash equivalents
179,621

 
300,110

Term federal funds sold, original maturities more than 90 days
0

 
40,000

Securities available for sale, at fair value
666,852

 
740,920

Loans held for sale, at the lower of cost or fair value
32,590

 
42,407

Loans receivable, net of allowance for loan losses (June 30, 2012 - $65,505; December 31, 2011 - $61,952)
3,809,033

 
3,676,874

Other real estate owned, net
6,712

 
7,624

Federal Home Loan Bank ("FHLB") stock, at cost
24,778

 
27,373

Premises and equipment, net of accumulated depreciation and amortization (June 30, 2012 - $20,275; December 31, 2011 - $19,018)
21,805

 
20,913

Accrued interest receivable
12,062

 
13,439

Deferred tax assets, net
64,780

 
72,604

Customers’ liabilities on acceptances
11,206

 
10,515

Bank owned life insurance
43,119

 
42,514

Investments in affordable housing partnerships
14,161

 
15,367

Goodwill
89,882

 
90,473

Other intangible assets, net
3,636

 
4,276

Prepaid FDIC insurance
8,782

 
9,720

FDIC loss share receivable
9,287

 
10,819

Other assets
51,099

 
40,656

Total assets
$
5,049,405

 
$
5,166,604

 
 
 
 
(Continued)
 

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Table of Contents

BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Unaudited)
 
 
 
June 30,
2012
 
December 31,
2011
LIABILITIES AND STOCKHOLDERS’ EQUITY
(In thousands, except share data)
LIABILITIES:
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,064,013

 
$
984,350

Interest bearing:
 
 
 
Money market and NOW accounts
1,143,329

 
1,237,378

Savings deposits
183,087

 
198,063

Time deposits of $100,000 or more
834,719

 
759,923

Other time deposits
657,532

 
761,178

Total deposits
3,882,680

 
3,940,892

Federal Home Loan Bank borrowings
371,143

 
344,402

Subordinated debentures
41,772

 
52,102

Accrued interest payable
5,924

 
6,519

Acceptances outstanding
11,206

 
10,515

Other liabilities
21,219

 
16,235

Total liabilities
4,333,944

 
4,370,665

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, $0.001 par value - authorized 10,000,000 undesignated shares; issued and outstanding 122,000 shares as of December 31, 2011
 
 
 
Series A, Fixed Rate Cumulative Perpetual Preferred Stock, issued and outstanding 67,000 shares at December 31, 2011, net, with a liquidation preference of $67,428,000 at December 31, 2011
0

 
65,158

Series B, Fixed Rate Cumulative Perpetual Preferred Stock, issued and outstanding 55,000 shares at December 31, 2011, net, with a liquidation preference of $55,229,000 at December 31, 2011
0

 
54,192

Common stock, $0.001 par value; authorized, 150,000,000 shares at June 30, 2012 and December 31, 2011; issued and outstanding, 78,014,107 and 77,984,252 shares at June 30, 2012 and December 31, 2011, respectively
78

 
78

Additional Paid-in Capital
525,985

 
524,644

Retained earnings
180,567

 
142,909

Accumulated other comprehensive income, net
8,831

 
8,958

Total stockholders’ equity
715,461

 
795,939

Total liabilities and stockholders’ equity
$
5,049,405

 
$
5,166,604


See accompanying notes to condensed consolidated financial statements (unaudited)

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Table of Contents

BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2012 and 2011
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except share data)
 
(In thousands, except share data)
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
62,504

 
$
33,150

 
$
125,923

 
$
66,235

Interest on securities
4,249

 
3,965

 
9,158

 
7,895

Interest on federal funds sold and other investments
190

 
179

 
417

 
358

Total interest income
66,943

 
37,294

 
135,498

 
74,488

INTEREST EXPENSE:
 
 
 
 
 
 
 
Interest on deposits
5,245

 
5,090

 
10,648

 
10,221

Interest on FHLB advances
1,603

 
2,412

 
3,229

 
4,984

Interest on other borrowings
593

 
461

 
1,260

 
1,069

Total interest expense
7,441

 
7,963

 
15,137

 
16,274

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
59,502

 
29,331

 
120,361

 
58,214

PROVISION FOR LOAN LOSSES
7,182

 
10,047

 
9,782

 
15,309

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
52,320

 
19,284

 
110,579

 
42,905

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Service fees on deposit accounts
3,269

 
1,413

 
6,429

 
2,910

International service fees
1,403

 
669

 
2,627

 
1,239

Loan servicing fees, net
810

 
418

 
2,147

 
881

Wire transfer fees
775

 
348

 
1,516

 
670

Other income and fees
1,354

 
557

 
2,694

 
1,064

Net gains on sales of SBA loans
2,463

 
4,354

 
5,426

 
5,514

Net gains on sales of other loans
146

 
0

 
146

 
0

Net gains on sales and calls of securities available for sale
0

 
6

 
816

 
6

Net valuation gains (losses) on interest rate swaps and caps
10

 
(106)

 
13

 
(117
)
Net gains (losses) on sales of OREO
(8)

 
25

 
53

 
27

Total non-interest income
10,222

 
7,684

 
21,867

 
12,194

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
14,658

 
7,625

 
28,737

 
14,779

Occupancy
4,232

 
2,445

 
7,878

 
4,882

Furniture and equipment
1,468

 
934

 
2,686

 
1,869

Advertising and marketing
1,525

 
594

 
2,983

 
1,173

Data processing and communications
1,573

 
923

 
3,184

 
1,906

Professional fees
1,069

 
769

 
1,682

 
1,478

FDIC assessments
51

 
877

 
1,088

 
2,166

Credit related expenses
2,290

 
1,004

 
4,470


1,748

Merger and integration expense
1,348

 
381

 
3,121

 
892

Other
2,863

 
1,334

 
5,683

 
2,688

Total non-interest expense
31,077

 
16,886

 
61,512

 
33,581

INCOME BEFORE INCOME TAX PROVISION
31,465

 
10,082

 
70,934
 
21,518

INCOME TAX PROVISION
12,101

 
3,764

 
27,636

 
8,454

NET INCOME
$
19,364

 
$
6,318

 
$
43,298

 
$
13,064

DIVIDENDS AND DISCOUNT ACCRETION ON PREFERRED STOCK
$
(3,771
)
 
$
(1,075
)
 
$
(5,640
)
 
$
(2,150
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
15,593

 
$
5,243

 
$
37,658

 
$
10,914

EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.20

 
$
0.14

 
$
0.48

 
$
0.29

Diluted
$
0.20

 
$
0.14

 
$
0.48

 
$
0.29

See accompanying notes to condensed consolidated financial statements (unaudited)

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Table of Contents


BBCN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended June 30, 2012 and 2011
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
(In thousands)
Net income
$
19,364

 
$
6,318

 
$
43,298

 
$
13,064

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on securities available for sale and interest only strips
809

 
3,384

 
493

 
3,127

Reclassification adjustments for gains realized in income
0

 
(6
)
 
(816
)
 
(6
)
Tax expense (benefit)
269

 
1,318

 
(209
)
 
1,224

Change in unrealized gain on securities available for sale and interest only strips
540

 
2,060

 
(114
)
 
1,897

 
 
 
 
 
 
 
 
Reclassification adjustment for the deferred gain on early settlement of interest-rate caps
(11
)
 
(11
)
 
(22
)
 
(22
)
Tax benefit
(5
)
 
(4
)
 
(9
)
 
(9
)
Change in unrealized gain on interest-rate caps
(6
)
 
(7
)
 
(13
)
 
(13
)
 
 
 
 
 
 
 
 
Total other comprehensive gain (loss)
534

 
2,053

 
(127
)
 
1,884

Total comprehensive income
$
19,898

 
$
8,371

 
$
43,171

 
$
14,948


See accompanying notes to condensed consolidated financial statements (unaudited)


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Table of Contents

BBCN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited)
 
 
 
Common Stock
 
 
 
 
 
 
 
Preferred
Stock
 
Shares
 
Amount
 
Capital
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss), net
 
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2011
$
64,203

 
37,983,027


$
38


$
171,364


$
120,361


$
2,597

Issuance of additional shares pursuant to various stock plans

 
114,300




524





Tax effects of stock plans

 




139





Stock-based compensation

 




39





Preferred stock cash dividends accrued (5%)

 






(1,674
)


Accretion of preferred stock discount
476

 






(476
)


Comprehensive income:

 









Net income

 






13,064



Other comprehensive income (loss):

 









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

 








1,892

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

 








5

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

 








(13
)
BALANCE, JUNE 30, 2011
$
64,679

 
38,097,327

 
$
38

 
$
172,066

 
$
131,275

 
$
4,481

 
 
 
 
 
 
 
 
 
 
 
 
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


29,855





200







Tax effects of stock plans
















Stock-based compensation








1,141







Preferred stock cash dividends accrued (5%)











(2,990
)



Accretion of preferred stock discount
2,650











(2,650
)



Comprehensive income:
















Net income











43,298




Other comprehensive income (loss):
















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














(141
)
Change in unrealized gain on interest-only strips, net of tax














27

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














(13
)
BALANCE, JUNE 30, 2012
$
0


78,014,107


$
78


$
525,985


$
180,567


$
8,831

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements (unaudited)


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Table of Contents

BBCN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited) 

Six Months Ended June 30,
 
2012

2011
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES



Net income
$
43,298


$
13,064

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





      Depreciation, amortization, net of discount accretion
(14,353
)

4,329

Stock-based compensation expense
1,141


39

Provision for loan losses
9,782


15,309

Valuation adjustment of loans held for sale
668


35

Valuation adjustment of OREO
1,067


105

Proceeds from sales of loans
88,822


65,602

Originations of loans held for sale
(73,003
)

(43,007
)
Net gains on sales of SBA and other loans
(6,014
)

(5,514
)
Net change in bank owned life insurance
(605
)

(372
)
Net gains on sales and calls of securities available for sale
(816
)

(6
)
Net gains on sales of OREO
(53
)

(27
)
Net valuation (gains) losses on interest rate swaps and caps
(13
)

117

Change in accrued interest receivable
1,377


579

Change in deferred income taxes
7,604


5,131

Change in prepaid FDIC insurance
938


2,056

Change in investments in affordable housing partnership
1,206


0

            Change in FDIC loss share receivable
1,781


0

            Change in other assets
(10,384
)

(12,008
)
Change in accrued interest payable
(595
)

(1,448
)
Change in other liabilities
6,421


(2,676
)
            Net cash provided by operating activities
58,269


41,308

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
            Net change in loans receivable
(128,519
)

(95,082
)
Proceeds from sales of securities available for sale
1,883


0

Proceeds from sales of OREO
3,160


2,238

Proceeds from matured term federal funds
100,000


0

Proceeds from sales of equipment
3


0

Purchase of premises and equipment
(3,494
)

(586
)
Purchase of securities available for sale
(15,457
)

(19,808
)
            Purchase of Federal Reserve Bank stock
0

 
(5
)
Redemption of Federal Home Loan Bank Stock
2,595


1,432

Purchase of term federal funds
(60,000
)

0

Proceeds from matured, called, or paid-down securities available for sale
84,735


76,143

          Net cash used in investing activities
(15,094
)

(35,668
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
            Net change in deposits
(56,693
)

56,066

Net change in secured borrowings
0


(11,758
)
Redemption of subordinated debenture
(10,400
)
 
0

            Redemption of preferred stock
(122,000
)
 
0

Payment of cash dividends on Preferred Stock
(3,647
)

(1,674
)
Proceeds from FHLB borrowings
125,000


0

Repayment of FHLB borrowings
(96,124
)

(50,000
)
Issuance of additional stock pursuant to various stock plans
200


524

            Net cash used in financing activities
(163,664
)

(6,842
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(120,489
)

(1,202
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
300,110


172,331

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
179,621


$
171,129

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION





      Interest paid
$
15,732


$
17,722

      Income taxes paid
$
19,022


$
15,169

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
 
 
 
      Transfer from loans receivable to other real estate owned
$
3,262


$
5,139

Transfer from loan receivables to loans held for sale
$
656


$
17,309

Non-cash goodwill adjustment, net
$
591


0

See accompanying notes to condensed consolidated financial statements (unaudited)

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Table of Contents

BBCN Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
1.
BBCN Bancorp, Inc.
BBCN Bancorp, Inc. ("BBCN Bancorp", on a parent-only basis, and "Company," "we" or "our" on a consolidated basis), formerly named Nara Bancorp, Inc., is a bank holding company headquartered in Los Angeles, California. BBCN Bank ("BBCN Bank" or "the Bank"), formerly named Nara Bank, opened for business in June 1989 under the name “United Citizens National Bank” as a national banking association, was renamed “Nara Bank, National Association” in January 1994 and, in January 2005, became “Nara Bank” upon converting to a California state-chartered bank in connection with its holding company reorganization transaction. On November 30, 2011, we merged with Center Financial Corporation ("Center Financial" or "Center") in a merger of equals transaction. Concurrent with the merger, Nara Bancorp, Inc. ("Nara") changed its name to "BBCN Bancorp, Inc." At the bank level, Nara Bank merged into Center Bank, and concurrent with the merger, Center Bank changed its name to "BBCN Bank." The Bank has branches in California, the New York metropolitan area, New Jersey, Washington and Chicago as well as loan production offices in Dallas, Seattle and Denver.


2.
Basis of Presentation
Our condensed consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.
The condensed consolidated financial statements include the accounts of BBCN Bancorp and its wholly owned subsidiaries, principally BBCN Bank. All intercompany transactions and balances have been eliminated in consolidation.
We believe that we have made all adjustments, consisting solely of normal recurring accruals, necessary to fairly present our financial position at June 30, 2012 and the results of our operations for the three and six months then ended. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. The results of operations for the interim periods are not necessarily indicative of results to be anticipated for the full year.
        
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, determining the carrying value for cash surrender value of life insurance, 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 and the valuation of servicing assets.
These unaudited condensed consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K.

3.
Center Merger
On November 30, 2011, the merger of Center and Nara (the "Merger") was completed. Pursuant to the merger agreement, holders of Center common stock received 0.7805 of a share of common stock of BBCN for each share of Center common stock held immediately prior to the effective time of the merger, rounded to the nearest whole share, plus cash in lieu of the issuance of fractional shares, resulting in our issuance of approximately 31.2 million shares of Company common stock, with a Merger date fair value of $292 million. Outstanding Center stock options and restricted stock awards were converted into stock options with respect to shares of BBCN common stock or shares of BBCN common stock, respectively, with appropriate adjustments to reflect the exchange ratio.
The Merger was accounted for by BBCN using the acquisition method of accounting under ASC 805, Business Combinations. Accordingly, the assets and liabilities of Center were recorded at their respective fair values and represent management's estimates based on available information. Through the Merger, we acquired Center Bank's 21 full-service branch offices as well as two Loan Production Offices, $326 million in cash, loans with a fair value of $1.4 billion, deposits with a fair value of $1.8 billion, and borrowings with a fair value of $149 million. Goodwill of approximately $88 million was initially recorded in conjunction with the transaction. The goodwill arising from the merger is intangible future benefit to the

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Company of acquiring Center Financial, thereby creating a platform for future operations, strengthening our presence in the primary existing markets in Southern California, expanding our national presence through the addition of Center's offices in Chicago, Seattle and Northern California, and realizing annual cost synergies. The results of Center's operations are included in our Consolidated Statements of Income from the date of merger.
The change in goodwill during the three and six months ended June 30, 2012 and 2011 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In Thousands)
Beginning of period
$
89,882

 
$
2,509

 
$
90,473

 
$
2,509

Adjustment
0

 
0

 
(591
)
 
0

Impairment
0

 
0

 
0

 
0

End of period
$
89,882

 
$
2,509

 
$
89,882

 
$
2,509


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

Direct costs related to the Merger were expensed as incurred. During the three months ended June 30, 2012, we incurred $1.3 million in merger and integration expenses, including $0.5 million in salaries and benefits and $0.9 million in professional fees. During the three months ended June 30, 2011, we incurred $381 thousand in merger and integration expenses. During the six months ended June 30, 2012, we incurred $3.1 million in merger and integration expenses, including $1.1 million in salaries and benefits and $2.0 million in professional fees. During the six months ended June 30, 2011, we incurred $892 thousand in merger and integration expenses.
   

4.
Stock-Based Compensation

The Company has a stock-based incentive plan, the 2007 BBCN Bancorp Equity Incentive Plan (“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 Plan participants with those of the Company’s stockholders. The exercise price for shares under an ISO may not be less than 100% of fair market value (“FMV”) on the date the award is granted under Code Section 422. Similarly, under the terms of the 2007 Plan the exercise price for SARs and NQSOs may not be less than 100% of FMV on the date of grant. Performance units are awarded to a participant at the market price of the Company’s common stock on the date of award (after the lapse of the restriction period and the attainment of the performance criteria). No minimum exercise price is prescribed for performance shares and restricted stock awarded under the 2007 Plan.
ISOs, SARs and NQSOs have vesting periods of three to five years and have 10-year contractual terms. Restricted stock, performance shares, and performance units will be granted with a restriction period of not less than one year from the grant date for performance-based awards and not more than three years from the grant date for time-based vesting of grants. Compensation expense for awards is recorded over the vesting period. 
Concurrent with the merger, Center's stock-based incentive plan the Center Financial Corporation 2006 Stock Incentive Plan, adopted April 12, 2006, as amended and restated June 13, 2007 ("2006 Plan") converted the outstanding share awards of 585,860 shares and 2,443,513 shares available for future grants at November 30, 2011 at an exchange ratio of 0.7805.

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The 2006 Plan provides for the granting of incentive stock options to officers and employees, and non-qualified stock options and restricted stock awards to employees (including officers) and non-employee directors. The options prices of all options granted under the 2006 Plan must be not less than 100% of the fair market value at the date of grant. All options granted generally vest at the rate of 20% per year except that the options granted to the non-employee directors vest at the rate of 33% per year. All options not exercised generally expire ten years after the date of grant.
From both 2007 and 2006 plans, 2,630,451 shares were available for future grants as of June 30, 2012.
The total shares reserved for issuance will serve as the underlying value for all equity awards under the 2007 Plan and the 2006 Plan. With the exception of the shares underlying stock options and restricted stock awards, the board of directors may choose to settle the awards by paying the equivalent cash value or by delivering the appropriate number of shares.
The following is a summary of stock option activity under the 2007 and 2006 Plans for the six months ended June 30, 2012:
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Outstanding - January 1, 2012
830,011

 
$
16.35

 
 
 
 
Granted
0

 
0

 
 
 
 
Exercised
(28,639
)
 
7.11

 
 
 
 
Forfeited
0

 
0

 
 
 
 
Outstanding - June 30, 2012
801,372

 
$
16.68

 
5.94
 
$
584,000

Options exercisable - June 30, 2012
791,146

 
$
16.66

 
5.89
 
$
584,000

Unvested options expected to vest after June 30, 2012
10,226

 
$
18.63

 
9.42
 
$
0


The following is a summary of restricted and performance unit activity under the 2007 and 2006 Plans for the six months ended June 30, 2012:
 
 
Number of
Shares
 
Weighted-
Average
Grant
Date Fair
Value
 
Weighted-
Average
Remaining
Contractual
Life (Years)
Outstanding - January 1, 2012
52,480

 
$
7.42

 
 
Granted
497,710

 
10.42

 
 
Vested
(2,000
)
 
8.52

 
 
Forfeited
0

 
0

 
 
Outstanding - June 30, 2012
548,190

 
$
10.21

 
9.52

The total fair value of performance units vested for the six months ending June 30, 2012 and 2011 was $22 thousand and $79 thousand, respectively.
The amount charged against income, before income tax benefit of $308 thousand and $5 thousand, in relation to the stock-based payment arrangements, was $743 thousand and $12 thousand for the three months ending June 30, 2012 and 2011, respectively. The amount charged against income, before income tax benefit of $477 thousand and $16 thousand, in relation to the stock-based payment arrangements, was $1.1 million and $39 thousand for the six months ending June 30, 2012 and 2011, respectively. At June 30, 2012, unrecognized compensation expense related to non-vested stock option grants and restricted and performance units aggregated $4.3 million, and is expected to be recognized over a remaining weighted average vesting period of 1.69 years.
The estimated annual stock-based compensation expense as of June 30, 2012 for each of the succeeding years is indicated in the table below:
 

12

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Stock Based
Compensation Expense
 
(In thousands)
Remainder of 2012
$
1,480

For the year ended December 31:
 
2013
1,413

2014
666

2015
645

2016
102

2017
7

Total
$
4,313



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 June 30, 2012 and 2011, stock options and restricted shares awards for approximately 564 thousand shares and 190 thousand shares of common stock were excluded in computing diluted earnings per common share because they were antidilutive. For the six months ended June 30, 2012 and 2011, stock options and restricted shares awards for approximately 564 thousand and 150 thousand of common stock were excluded in computing diluted earnings per common share because they were antidilutive. Additionally, warrants to purchase 337,000 shares of common stock (related to the TARP Capital Purchase Plan) were also antidilutive and excluded for the three and six months ended June 30, 2012. Warrants to purchase 337,000 shares of common stock (related to the TARP Capital Purchase Plan) were excluded for the three and six months ended June 30, 2011.
The following table shows the computation of basic and diluted EPS for the three and six months ended June 30, 2012 and 2011.
 
 
For the three months ended June 30,
 
2012
 
2011
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
(Dollars in thousands, except share and per share data)
Net income as reported
$
19,364

 
 
 
 
 
$
6,318

 
 
 
 
Less: preferred stock dividends and accretion of preferred stock discount
(3,771
)
 
 
 
 
 
(1,075
)
 
 
 
 
Basic EPS - common stock
$
15,593

 
78,007,270

 
$
0.20

 
$
5,243

 
38,047,371

 
$
0.14

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options and Performance Units
 
 
79,063

 
 
 
 
 
34,652

 
 
Common stock warrants
 
 
55,194

 
 
 
 
 
0

 
 
Diluted EPS - common stock
$
15,593

 
78,141,527

 
$
0.20

 
$
5,243

 
38,082,023

 
$
0.14



13

Table of Contents

 
For the six months ended June 30,
 
June 30, 2012
 
June 30, 2011
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
Net income
available to
common
stockholders
(Numerator)
 
Shares
(Denominator)
 
Per
Share
(Amount)
 
(Dollars in thousands, except share and per share data)
Net income as reported
$
43,298

 
 
 
 
 
$
13,064

 
 
 
 
Less: preferred stock dividends and accretion of preferred stock discount
(5,640
)
 
 
 
 
 
(2,150
)
 
 
 
 
Basic EPS - common stock
$
37,658

 
77,997,305

 
$
0.48

 
$
10,914

 
38,017,473

 
$
0.29

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options and Performance Units
 
 
75,621

 
 
 
 
 
62,177

 
 
Common stock warrants
 
 
48,333

 
 
 
 
 
0

 
 
Diluted EPS - common stock
$
37,658

 
78,121,259

 
$
0.48

 
$
10,914

 
38,079,650

 
$
0.29




14

Table of Contents

6.    Securities Available for Sale
The following is a summary of securities available for sale as of the dates indicated:
 
 
At June 30, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
0

 
$
0

 
$
0

 
$
0

GSE collateralized mortgage obligations*
189,221

 
4,335

 
(25
)
 
193,531

GSE mortgage-backed securities*
439,123

 
10,967

 
(245
)
 
449,845

Trust preferred security
4,494

 
0

 
(1,112
)
 
3,382

Municipal bonds
4,507

 
551

 
0

 
5,058

Total debt securities
637,345

 
15,853

 
(1,382
)
 
651,816

Mutual funds - GSE mortgage related securities
14,710

 
326

 
0

 
15,036

 
$
652,055

 
$
16,179

 
$
(1,382
)
 
$
666,852

 
At December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
300

 
$
0

 
$
0

 
$
300

GSE collateralized mortgage obligations*
222,400

 
5,480

 
(44
)
 
227,836

GSE mortgage-backed securities*
477,555

 
10,322

 
(123
)
 
487,754

Trust preferred securities
5,532

 
0

 
(1,184
)
 
4,348

Municipal bonds
5,257

 
507

 
0

 
5,764

Total debt securities
711,044

 
16,309

 
(1,351
)
 
726,002

Mutual funds - GSE mortgage related securities
14,710

 
227

 
(19
)
 
14,918

 
$
725,754

 
$
16,536

 
$
(1,370
)
 
$
740,920

 * Government Sponsored Enterprises (GSE) investments are backed by GNMA, FNMA and FHLMC, and are all residential based investments.
As of June 30, 2012 and December 31, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders' equity.
The proceeds from sales of securities and the associated gains are listed below:
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Proceeds
$
0

 
$
0

 
$
1,883

 
$
0

Gross gains
0

 
0

 
816

 
0

Gross losses
0

 
0

 
0

 
0


The amortized cost and estimated fair value of debt securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
 

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Table of Contents

 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Available for sale:
 
 
 
Due within one year
$
0

 
$
0

Due after one year through five years
340

 
359

Due after five years through ten years
2,480

 
2,791

Due after ten years
6,181

 
5,290

GSE collaterized mortgage obligations
189,221

 
193,531

GSE mortgage-backed securities
439,123

 
449,845

Mutual funds - GSE mortgage related securities
14,710

 
15,036

 
$
652,055

 
$
666,852


Securities with carrying values of approximately $380.9 million and $425.5 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, various borrowings and for other purposes as required or permitted by law.
The following table shows our investments’ gross unrealized losses and estimated fair value, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position as of the dates indicated.
 
 
At June 30, 2012
 
Less than 12 months
 
12 months or longer
 
Total
Description of
Securities
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
 (In thousands)
GSE collaterized mortgage obligations
3

 
$
6,879

 
$
(25
)
 
0

 
$
0

 
$
0

 
3

 
$
6,879

 
$
(25
)
GSE mortgage-backed securities
5

 
35,691

 
(217
)
 
1

 
3,956

 
(28
)
 
6

 
39,647

 
(245
)
Trust preferred security
0

 
0

 
0

 
1

 
3,382

 
(1,112
)
 
1

 
3,382

 
(1,112
)
Mutual funds - GSE mortgage related security
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
8

 
$
42,570

 
$
(242
)
 
2

 
$
7,338

 
$
(1,140
)
 
10

 
$
49,908

 
$
(1,382
)

 
At December 31, 2011
 
Less than 12 months
 
12 months or longer
 
Total
Description of
Securities
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Gross
Unrealized
Losses
 
 (In thousands)
GSE collaterized mortgage obligations
2

 
$
3,305

 
$
(28
)
 
1

 
$
14,007

 
$
(16
)
 
3

 
$
17,312

 
$
(44
)
GSE mortgage-backed securities
5

 
38,082

 
(123
)
 
0

 
0

 
0

 
5

 
38,082

 
(123
)
Trust Preferred security
0

 
0

 
0

 
1

 
3,303

 
(1,184
)
 
1

 
3,303

 
(1,184
)
Mutual funds - GSE mortgage related security
1

 
5,229

 
(19
)
 
0

 
0

 
0

 
1

 
5,229

 
(19
)
 
8

 
$
46,616

 
$
(170
)
 
2

 
$
17,310

 
$
(1,200
)
 
10

 
$
63,926

 
$
(1,370
)

16

Table of Contents

We evaluate securities for other-than-temporary-impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair value of the securities has been less than our cost for the securities, and our intention to sell, or whether it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
The trust preferred security at June 30, 2012 has an amortized cost of $4.5 million and an unrealized loss of $1.1 million at June 30, 2012. The trust preferred security is scheduled to mature in May 2047, with a first call date option in May 2012. Management determined this unrealized loss did not represent OTTI at June 30, 2012 as the investment is rated investment grade and there are no credit quality concerns with the obligor. The market value decline is deemed to be due to the current market volatility and is not reflective of management’s expectations of our ability to fully recover this investment, which may be at maturity. Interest on the trust preferred security been paid as agreed and management believes this will continue in the future and the trust preferred security will be repaid in full as scheduled. For these reasons, no OTTI was recognized on the trust preferred security at June 30, 2012.
We consider the losses on our investments in an unrealized loss position at June 30, 2012 to be temporary based on: 1) the likelihood of recovery; 2) the information relative to the extent and duration of the decline in market value; and 3) the Company’s intention not to sell, and our determination that it is more likely than not that we will not be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.


7.
Loans Receivable and Allowance for Loan Losses
The following is a summary of loans receivable by major category:
 
 
June 30, 2012
 
December 31, 2011
 
(In thousands)
Loan portfolio composition
 
 
 
Real estate loans:
 
 
 
Residential
$
1,931

 
$
2,043

Commercial & industrial
2,717,924

 
2,631,880

Construction
43,365

 
44,756

Total real estate loans
2,763,220

 
2,678,679

Commercial business
877,405

 
849,576

Trade finance
175,638

 
146,684

Consumer and other
60,732

 
66,631

Total loans outstanding
3,876,995

 
3,741,570

Less: deferred loan fees
(2,457
)
 
(2,744
)
Gross loans receivable
3,874,538

 
3,738,826

Less: allowance for loan losses
(65,505
)
 
(61,952
)
Loans receivable, net
$
3,809,033

 
$
3,676,874


Our loan portfolio is made up of four segments: real estate loans, commercial business, trade finance and consumer and other. These segments are further segregated between our loans accounted for under the amortized cost method (referred to as "legacy" loans) and loans acquired (referred to as "acquired" loans), as acquired loans were originally recorded at fair value with no carryover of the related allowance for loan losses. The acquired loans are further segregated between Credit Impaired Loans (ASC 310-30, Loans Acquired with the Credit Deterioration) and Performing Loans (pass graded loans acquired from Center at the time of merger). The following table presents the outstanding principal balance and the related carrying amount of the acquired loans included in our Consolidated Statements of Condition at June 30, 2012 and December 31, 2011:
 
June 30, 2012
 
December 31, 2011
 
(In thousands)
Outstanding principal balance
$
1,200,216

 
$
1,458,133

Carrying amount
1,110,669

 
1,347,524


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Table of Contents


The following table presents changes in the accretable discount on the acquired Credit Impaired Loans in the merger for three and six months ended June 30, 2012:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
(In thousands)
Balance at beginning of period
$
29,788

 
$
0

 
$
31,999

 
$
0

Accretion
(3,890
)
 
0

 
(7,451
)
 
0

Changes in expected cash flows
(2,932
)
 
0

 
(1,582
)
 
0

Balance at end of period
$
22,966

 
$
0

 
$
22,966

 
$
0


The activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2012 is as follows:
 
 
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 June 30, 2012
Balance, beginning of period
$
35,809

 
$
21,591

 
$
1,823

 
$
1,010

 
$
1,543

 
$
517

 
$
16

 
$
0

 
$
62,309

Provision (credit) for loan losses
2,650

 
588

 
1,341

 
569

 
895

 
440

 
624

 
75

 
7,182

Loans charged off
(2,330
)
 
(1,534
)
 
0

 
(482
)
 
(155
)
 
(590
)
 
(300
)
 
(218
)
 
(5,609
)
Recoveries of charged offs
1,108

 
235

 
0

 
18

 
0

 
30

 
0

 
232

 
1,623

Balance, end of period
$
37,237

 
$
20,880

 
$
3,164

 
$
1,115

 
$
2,283

 
$
397

 
$
340

 
$
89

 
$
65,505

Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
39,040

 
$
20,681

 
$
1,786

 
$
445

 
$
0

 
$
0

 
$
0

 
$
0

 
$
61,952

Provision (credit) for loan losses
1,333

 
2,215

 
1,318

 
1,118

 
2,149

 
917

 
640

 
92

 
9,782

Loans charged off
(4,264
)
 
(2,896
)
 
0

 
(483
)
 
(169
)
 
(637
)
 
(300
)
 
(243
)
 
(8,992
)
Recoveries of charged offs
1,128

 
880

 
60

 
35

 
303

 
117

 
0

 
240

 
2,763

Balance, end of period
$
37,237

 
$
20,880

 
$
3,164

 
$
1,115

 
$
2,283

 
$
397

 
$
340

 
$
89

 
$
65,505


The activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2011 is as follows:
 
 
Legacy
 
Total
 
Real Estate
 
Commercial Business
 
Trade Finance
 
Consumer and Other
 
 
(In thousands)
Three Months Ended June 30, 2011
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
40,910

 
$
21,771

 
$
170

 
$
489

 
$
63,340

Provision (credit) for loan losses
10,394

 
(239
)
 
18

 
(126
)
 
10,047

Loans charged off
(12,752
)
 
(2,431
)
 
0

 
(8
)
 
(15,191
)
Recoveries of charged offs
511

 
957

 
0

 
32

 
1,500

Balance, end of period
$
39,063

 
$
20,058

 
$
188

 
$
387

 
$
59,696

Six Months Ended June 30, 2011
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
36,563

 
$
24,930

 
$
192

 
$
635

 
$
62,320

Provision (credit) for loan losses
17,589

 
(1,944
)
 
(4
)
 
(332
)
 
15,309

Loans charged off
(15,834
)
 
(4,544
)
 
0

 
(123
)
 
(20,501
)
Recoveries of charged offs
745

 
1,616

 
0

 
207

 
2,568

Balance, end of period
$
39,063

 
$
20,058

 
$
188

 
$
387

 
$
59,696



18

Table of Contents

The following table disaggregates the allowance for loan losses and the loans receivables by impairment methodology at June 30, 2012 and December 31, 2011:

 
June 30, 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
$
5,735

 
$
6,919

 
$
57

 
$
0

 
$
368

 
$
121

 
$
0

 
$
0

 
$
13,200

Collectively evaluated for impairment
31,502

 
13,961

 
3,107

 
1,115

 
(4
)
 
276

 
340

 
89

 
50,386

Loans acquired with credit deterioration
0

 
0

 
0

 
0

 
1,919

 
0

 
0

 
0

 
1,919

Total
$
37,237

 
$
20,880

 
$
3,164

 
$
1,115

 
$
2,283

 
$
397

 
$
340

 
$
89

 
$
65,505

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
48,694

 
$
23,581

 
$
4,970

 
$
136

 
$
12,039

 
$
1,949

 
$
0

 
$
0

 
$
91,369

Collectively evaluated for impairment
1,896,017

 
606,281

 
159,289

 
27,358

 
700,593

 
191,281

 
9,783

 
30,065

 
3,620,667

Loans acquired with credit deterioration
0

 
0

 
0

 
0

 
105,877

 
54,313

 
1,596

 
3,173

 
164,959

Total
$
1,944,711

 
$
629,862

 
$
164,259

 
$
27,494

 
$
818,509

 
$
247,543

 
$
11,379

 
$
33,238

 
$
3,876,995


 
December 31, 2011
 
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
$
10,525

 
$
7,168

 
$
342

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
18,035

Collectively evaluated for impairment
28,515

 
13,513

 
1,444

 
445

 
0

 
0

 
0

 
0

 
43,917

Loans acquired with credit deterioration
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Total
$
39,040

 
$
20,681

 
$
1,786

 
$
445

 
$
0

 
$
0

 
$
0

 
$
0

 
$
61,952

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
51,752

 
$
25,150

 
$
4,997

 
$
150

 
$
0

 
$
0

 
$
0

 
$
0

 
$
82,049

Collectively evaluated for impairment
1,694,483

 
507,841

 
97,013

 
12,660

 
824,786

 
250,050

 
43,327

 
50,003

 
3,480,163

Loans acquired with credit deterioration
0

 
0

 
0

 
0

 
107,658

 
66,535

 
1,347

 
3,818

 
179,358

Total
$
1,746,235

 
$
532,991

 
$
102,010

 
$
12,810

 
$
932,444

 
$
316,585

 
$
44,674

 
$
53,821

 
$
3,741,570

As of June 30, 2012 and December 31, 2011, we had a liability for unfunded commitments of $802 thousand and $686 thousand, respectively. For the three months ended June 30, 2012 and 2011, we recognized provision for credit losses related to our unfunded commitments of $116 thousand and $0. For the six months ended June 30, 2012 and 2011, we recognized provision for credit losses related to our unfunded commitments of $116 thousand and $0.

19

Table of Contents

Individually impaired loans were as follows:
 
 
June 30, 2012
 
December 31, 2011
 
(In Thousands)
With Allocated Allowance
 
 
 
Without charge-off
$
70,704

 
$
67,202

With charge-off
2,057

 
341

With No Allocated Allowance
 
 
 
Without charge-off
15,073

 
8,123

With charge-off
3,919

 
6,383

Allowance on Impaired Loans
(13,200
)
 
(18,035
)
Impaired Loans, net of allowance
$
78,553

 
$
64,014

Note that the impaired loans balances represent recorded investment balances.

20

Table of Contents

The following table details the amount of our impaired loans by class with no related allowance for loan losses, as well as the amount of impaired loans for which there is a related allowance for loan losses as of June 30, 2012 and December 31, 2011. Loans with no related allowance for loan losses have adequate collateral securing their carrying value, and in some circumstances, have been written down to their current carrying value, which is based on the fair value of the collateral.
 
 
 
As of June 30, 2012
 
For the six months ended June 30, 2012
 
For the three months ended June 30, 2012
Total Impaired Loans
 
Recorded Investment
 
Gross Carrying Value*
 
Unpaid Contractual Principal Balance
 
Related
Allowance
 
Average
Recorded Investment
 
Interest Income Recognized during Impairment
 
Average
Recorded Investment
 
Interest Income Recognized during Impairment
 
 

As of and for the three and six months ended June 30, 2012
With Related Allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
3,340

 
3,291

 
3,381

 
(604
)
 
2,571

 
53

 
2,952

 
21

Hotel & Motel
 
23,210

 
23,117

 
24,404

 
(3,210
)
 
21,137

 
433

 
22,986

 
211

Gas Station & Car Wash
 
3,312

 
3,304

 
5,065

 
(908
)
 
3,676

 
46

 
4,381

 
23

Mixed Use
 
5,253

 
5,242

 
5,283

 
(163
)
 
4,401

 
103

 
5,187

 
46

Industrial & Warehouse
 
1,446

 
1,442

 
1,456

 
(394
)
 
3,658

 
27

 
3,355

 
13

Other
 
11,964

 
11,942

 
12,120

 
(824
)
 
13,132

 
179

 
12,264

 
87

Real Estate—Construction
 
0

 
0

 
0

 
0

 
42

 
0

 
0

 
0

Commercial Business
 
23,696

 
23,606

 
26,236

 
(7,040
)
 
23,126

 
426

 
24,982

 
209

Trade Finance
 
540

 
518

 
968

 
(57
)
 
1,837

 
14

 
491

 
7

Consumer and Other
 
0

 
0

 
0

 
0

 
160

 
0

 
240

 
0

 
 
$
72,761

 
$
72,462

 
$
78,913

 
$
(13,200
)
 
$
73,740

 
$
1,281

 
$
76,838

 
$
617

With No Related Allowance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
953

 
930

 
3,627

 
0

 
1,321

 
0

 
1,288

 
0

Hotel & Motel
 
282

 
282

 
491

 
0

 
94

 
0

 
141

 
0

Gas Station & Car Wash
 
1,675

 
1,667

 
4,127

 
0

 
964

 
0

 
1,302

 
0

Mixed Use
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Industrial & Warehouse
 
5,893

 
5,874

 
11,450

 
0

 
4,743

 
18

 
5,789

 
9

Other
 
1,937

 
1,931

 
3,346

 
0

 
2,339

 
17

 
2,457

 
8

Real Estate—Construction
 
1,714

 
1,710

 
1,710

 
0

 
1,719

 
56

 
1,719

 
28

Commercial Business
 
1,920

 
1,924

 
3,188

 
0

 
3,240

 
10

 
1,992

 
5

Trade Finance
 
4,482

 
4,452

 
4,452

 
0

 
3,079

 
57

 
4,384

 
42

Consumer and Other
 
136

 
136

 
171

 
0

 
144

 
0

 
141

 
0

 
 
$
18,992

 
$
18,906

 
$
32,562

 
$
0

 
$
17,643

 
$
158

 
$
19,213

 
$
92

Total
 
$
91,753

 
$
91,368

 
$
111,475

 
$
(13,200
)
 
$
91,383

 
$
1,439

 
$
96,051

 
$
709

The table above includes total impaired loans (Legacy and Acquired impaired loans).
* Gross carrying value represents unpaid principal balances that were net of charge-offs.

21

Table of Contents

 
 
As of June 30, 2012
 
For the six months ended June 30, 2012
 
For the three months ended June 30, 2012
Acquired Impaired Loans
 
Recorded Investment
 
Gross Carrying Value*
 
Unpaid
Contractual Principal
Balance
 
Related
Allowance
 
Average
Recorded Investment
 
Interest Income Recognized during Impairment
 
Average
Recorded Investment
 
Interest Income Recognized during Impairment
 
 
(In Thousands)
As of and for the three and six months ended June 30, 2012
With Related Allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
953

 
948

 
948

 
(23
)
 
392

 
27

 
588

 
8

Hotel & Motel
 
6,112

 
6,112

 
7,375

 
(345
)
 
4,151

 
120

 
6,227

 
(12
)
Gas Station & Car Wash
 
0

 
0

 
0

 
0

 
95

 
0

 
142

 
0

Mixed Use
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Industrial & Warehouse
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Other
 
0

 
0

 
0

 
0

 
12

 
0

 
18

 
0

Real Estate—Construction
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Commercial Business
 
547

 
544

 
1,454

 
(121
)
 
357

 
39

 
535

 
16

Trade Finance
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Consumer and Other
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
 
$
7,612

 
$
7,604

 
$
9,777

 
$
(489
)
 
$
5,007

 
$
186

 
$
7,510

 
$
12

With No Related Allowance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Hotel & Motel
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Gas Station & Car Wash
 
276

 
276

 
1,878

 
0

 
125

 
11

 
167

 
1

Mixed Use
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Industrial & Warehouse
 
3,810

 
3,807

 
3,935

 
0

 
2,279

 
(1
)
 
3,039

 
9

Other
 
899

 
896

 
1,760

 
0

 
596

 
26

 
795

 
12

Real Estate—Construction
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Commercial Business
 
1,404

 
1,405

 
1,459

 
0

 
569

 
21

 
758

 
13

Trade Finance
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Consumer and Other
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
 
$
6,389

 
$
6,384

 
$
9,032

 
$
0

 
$
3,569

 
$
57

 
$
4,759

 
$
35

Total
 
$
14,001

 
$
13,988

 
$
18,809

 
$
(489
)
 
$
8,576

 
$
243

 
$
12,269

 
$
47

The table above includes only Acquired Loans that became impaired.
* Gross carrying value represents unpaid principal balances that were net of charge-offs.


22

Table of Contents

 
For the six months ended June 30, 2011
 
For the three months ended June 30, 2011
 
Average
Recorded Investment
 
Interest Income Recognized during Impairment
 
Average
Recorded Investment
 
Interest Income Recognized during Impairment
 
 
As of and for the three and six months ended June 30, 2012
With Related Allowance:
 
 
 
 
 
 
 
Real Estate—Residential
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
Retail
4,509

 
41

 
3,091

 
22

Hotel & Motel
12,631

 
487

 
16,272

 
229

Gas Station & Car Wash
3,256

 
47

 
3,313

 
24

Mixed Use
1,438

 
0

 
2,568

 
0

Industrial & Warehouse
5,194

 
166

 
4,021

 
83

Other
1,744

 
28

 
1,267

 
14

Real Estate—Construction
4,131

 
240

 
3,303

 
120

Commercial Business
25,448

 
0

 
20,192

 
0

Trade Finance
0

 
0

 
0

 
0

Consumer and Other
0

 
0

 
0

 
0

 
$
58,351

 
$
1,009

 
$
54,027

 
$
492

With No Related Allowance
 
 
 
 
 
 
 
Real Estate—Residential
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
Retail
6,190

 
0

 
5,212

 
0

Hotel & Motel
6,090

 
8

 
5,247

 
4

Gas Station & Car Wash
4,101

 
0

 
3,736

 
0

Mixed Use
3,113

 
35

 
2,931

 
17

Industrial & Warehouse
2,186

 
0

 
2,792

 
0

Other
13,479

 
160

 
12,129

 
80

Real Estate—Construction
3,799

 
56

 
3,576

 
28

Commercial Business
5,411

 
41

 
5,538

 
29

Trade Finance
461

 
0

 
458

 
0

Consumer and Other
140

 
0

 
157

 
0

 
$
44,970

 
$
300

 
$
41,776

 
$
158

Total
$
103,321

 
$
1,309

 
$
95,803

 
$
650



23

Table of Contents

 
 
As of December 31, 2011
 
For the year ended December 31, 2011
 
 
Recorded Investment
 
Gross Carrying Value*
 
Unpaid
Contractual Principal
Balance
 
Related
Allowance
 
Average
Recorded Investment
 
Interest Income Recognized during Impairment
 
 
(In Thousands)
 
 
As of and for the year ended December 31, 2011
With Related Allowance:
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
1,810

 
1,810

 
2,686

 
(668
)
 
3,475

 
34

Hotel & Motel
 
17,439

 
17,441

 
17,459

 
(4,093
)
 
14,581

 
1,013

Gas Station & Car Wash
 
2,266

 
2,265

 
2,669

 
(550
)
 
2,825

 
95

Mixed Use
 
2,828

 
2,822

 
2,840

 
(128
)
 
1,953

 
158

Industrial & Warehouse
 
4,262

 
4,242

 
4,246

 
(407
)
 
4,826

 
310

Other
 
14,870

 
14,982

 
14,994

 
(4,630
)
 
6,192

 
298

Real Estate—Construction
 
127

 
128

 
128

 
(49
)
 
2,504

 
0

Commercial Business
 
19,413

 
19,416

 
20,248

 
(7,168
)
 
22,929

 
538

Trade Finance
 
4,528

 
4,497

 
4,497

 
(342
)
 
906

 
71

Consumer and Other
 
0

 
0

 
0

 
0

 
0

 
0

 
 
$
67,543

 
$
67,603

 
$
69,767

 
$
(18,035
)
 
$
60,191

 
$
2,517

With No Related Allowance
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate—Residential
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real Estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
1,388

 
1,391

 
4,113

 
0

 
4,485

 
0

Hotel & Motel
 
0

 
0

 
0

 
0

 
3,770

 
0

Gas Station & Car Wash
 
288

 
287

 
2,851

 
0

 
2,621

 
0

Mixed Use
 
0

 
0

 
0

 
0

 
1,868

 
0

Industrial & Warehouse
 
2,651

 
2,662

 
8,346

 
0

 
2,380

 
0

Other
 
2,102

 
2,092

 
3,739

 
0

 
8,934

 
0

Real Estate—Construction
 
1,721

 
1,710

 
1,710

 
0

 
3,283

 
113

Commercial Business
 
5,737

 
5,740

 
6,964

 
0

 
5,191

 
203

Trade Finance
 
469

 
467

 
467

 
0

 
759

 
30

Consumer and Other
 
150

 
150

 
180

 
0

 
145

 
0

 
 
$
14,506

 
$
14,499

 
$
28,370

 
$
0

 
$
33,436

 
$
346

Total
 
$
82,049

 
$
82,102

 
$
98,137

 
$
(18,035
)
 
$
93,627

 
$
2,863

The table has been revised to present unpaid contractual principal balances, whereas the Company had previously disclosed unpaid contractual principal balances that were net of charge-offs.
* Gross carrying value represents unpaid principal balances that were net of charge-offs.



24

Table of Contents

The following table presents the aging of past due loans as of June 30, 2012 and December 31, 2011 by class of loans:
 
As of June 30, 2012
 
30-59
Days Past
Due
 
60-89 Days
Past Due
 
Greater
than 90
Days Past
Due
 
Total Past
Due
 
Non-accrual loans
 
Total Delinquent loans
 
Greater than 90 days and accruing
 
(In Thousands)
Legacy Loans
 
Real estate—Residential
$
31

 
$
0

 
$
0

 
$
31

 
$
0

 
$
31

 
$
0

Real estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
459

 
0

 
0

 
459

 
2,360

 
2,819

 
0

Hotel & Motel
2,160

 
0

 
0

 
2,160

 
991

 
3,151

 
0

Gas Station & Car Wash
2,182

 
0

 
0

 
2,182

 
3,539

 
5,721

 
0

Mixed Use
0

 
0

 
0

 
0

 
1,886

 
1,886

 
0

Industrial & Warehouse
356

 
0

 
0

 
356

 
2,473

 
2,829

 
0

Other
0

 
118

 
0

 
118

 
6,615

 
6,733

 
0

Real estate—Construction
0

 
0

 
0

 
0

 
0

 
0

 
0

Commercial business
313

 
725

 
0

 
1,038

 
10,166

 
11,204

 
0

Trade finance
0

 
0

 
0

 
0

 
50

 
50

 
0

Consumer and other
16

 
0

 
0

 
16

 
136

 
152

 
0

     Subtotal
$
5,517

 
$
843

 
$
0

 
$
6,360

 
$
28,216

 
$
34,576

 
$
0

Acquired Loans (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—Residential
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
333

 
19

 
2,149

 
2,501

 
0

 
2,501

 
2,149

Hotel & Motel
0

 
1,530

 
948

 
2,478

 
6,112

 
8,590

 
948

Gas Station & Car Wash
254

 
1,249

 
3,062

 
4,565

 
276

 
4,841

 
3,062

Mixed Use
0

 
0

 
2,815

 
2,815

 
0

 
2,815

 
2,815

Industrial & Warehouse
48

 
813

 
0

 
861

 
2,996

 
3,857

 
0

Other
1,325

 
1,077

 
4,500

 
6,902

 
681

 
7,583

 
4,500

Real estate—Construction
0

 
0

 
6,245

 
6,245

 
0

 
6,245

 
6,245

Commercial business
1,326

 
1,020

 
459

 
2,805

 
1,303

 
4,108

 
459

Trade finance
77

 
3

 
74

 
154

 
0

 
154

 
74

Consumer and other
253

 
376

 
449

 
1,078

 
146

 
1,224

 
449

     Subtotal
3,616

 
6,087

 
20,701

 
30,404

 
11,514

 
41,918

 
20,701

TOTAL
9,133

 
6,930

 
20,701

 
36,764

 
39,730

 
76,494

 
20,701

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

25

Table of Contents

 
As of December 31, 2011
 
30-59
Days Past
Due
 
60-89 Days
Past Due
 
Greater
than 90
Days Past
Due
 
Total Past
Due
 
Non-accrual loans
 
Total Delinquent loans
 
Greater than 90 days and accruing
 
(In Thousands)
Legacy Loans
 
Real estate—Residential
$
36

 
$
0

 
$
0

 
$
36

 
$
0

 
$
36

 
$
0

Real estate—Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
431

 
0

 
0

 
431

 
2,612

 
3,043

 
0

Hotel & Motel
0

 
0

 
0

 
0

 
482

 
482

 
0

Gas Station & Car Wash
634

 
0

 
0

 
634

 
1,368

 
2,002

 
0

Mixed Use
0

 
0

 
0

 
0

 
822

 
822

 
0

Industrial & Warehouse
360

 
0

 
0

 
360

 
3,055

 
3,415

 
0

Other
0

 
119

 
0

 
119

 
10,865

 
10,984

 
0

Real estate—Construction
0

 
0

 
0

 
0

 
127

 
127

 
0

Commercial business
1,396

 
392

 
0

 
1,788

 
11,462

 
13,250

 
0

Trade finance
0

 
0

 
0

 
0

 
117

 
117

 
0

Consumer and other
5

 
0

 
0

 
5

 
150

 
155

 
0

     Subtotal
2,862

 
511

 
0

 
3,373

 
31,060

 
34,433

 
0

Acquired Loans (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—Residential
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Real estate—Commercial
 
 
 
 
 
 


 
 
 


 
 
Retail
147

 
64

 
1,675

 
1,886

 
0

 
1,886

 
1,675

Hotel & Motel
0

 
45

 
0

 
45

 
0

 
45

 
0

Gas Station & Car Wash
2,547

 
177

 
817

 
3,541

 
0

 
3,541

 
817

Mixed Use
1,178

 
1,702

 
389

 
3,269

 
0

 
3,269

 
389

Industrial & Warehouse
3,393

 
0

 
110

 
3,503

 
0

 
3,503

 
110

Other
1,472

 
228

 
4,237

 
5,937

 
0

 
5,937

 
4,237

Real estate—Construction
0

 
4,499

 
0

 
4,499

 
0

 
4,499

 
0

Commercial business
1,747

 
1,402

 
9,125

 
12,274

 
0

 
12,274

 
9,125

Trade finance
0

 
0

 
202

 
202

 
0

 
202

 
202

Consumer and other
705

 
370

 
700

 
1,775

 
0

 
1,775

 
700

     Subtotal
$
11,189

 
$
8,487

 
$
17,255

 
$
36,931

 
$
0

 
$
36,931

 
$
17,255

TOTAL
$
14,051

 
$
8,998

 
$
17,255

 
$
40,304

 
$
31,060

 
$
71,364

 
$
17,255

 (1) The acquired loans include credit impaired loans (ASC 310-30 loans) and performing loans (pass graded loans acquired from Center at the time of merger).
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans. This analysis is performed at least on a quarterly basis. We use the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful/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.

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Table of Contents

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass-rated loans. As of June 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
 
As of June 30, 2012
 
Special
Mention
 
Substandard
 
Doubtful/Loss
 
Total
 
(In thousands)
Legacy Loans:
 
Real estate—Residential
$
0

 
$
31

 
$
0

 
$
31

Real estate—Commercial
 
 
 
 
 
 
 
Retail
3,411

 
13,231

 
0

 
16,642

Hotel & Motel
3,724

 
16,353

 
0

 
20,077

Gas Station & Car Wash
3,824

 
4,712

 
0

 
8,536

Mixed Use
1,786

 
5,867

 
0

 
7,653

Industrial & Warehouse
3,953

 
4,099

 
390

 
8,442

Other
8,010

 
10,866

 
0

 
18,876

Real estate—Construction
0

 
1,714

 
0

 
1,714

Commercial business
16,301

 
26,095

 
5,140

 
47,536

Trade finance
7,802

 
5,006

 
0

 
12,808

Consumer and other
0

 
995

 
0

 
995

Subtotal
$
48,811

 
$
88,969

 
$
5,530

 
$
143,310

Acquired Loans:
 
 
 
 
 
 
 
Real estate—Residential
$
0

 
$
0

 
$
0

 
$
0

Real estate—Commercial
 
 
 
 
 
 
 
Retail
13,219

 
12,774

 
0

 
25,993

Hotel & Motel
16,017

 
22,593

 
0

 
38,610

Gas Station & Car Wash
6,383

 
5,803

 
0

 
12,186

Mixed Use
2,354

 
4,026

 
0

 
6,380

Industrial & Warehouse
1,379

 
9,184

 
0

 
10,563

Other
4,823

 
12,728

 
0

 
17,551

Real estate—Construction
0

 
7,338

 
0

 
7,338

Commercial business
16,099

 
31,184

 
174

 
47,457

Trade finance
248

 
491

 
0

 
739

Consumer and other
338

 
4,432

 
99

 
4,869

Subtotal
$
60,860

 
$
110,553

 
$
273

 
$
171,686

Total
$
109,671

 
$
199,522

 
$
5,803

 
$
314,996


 

27

Table of Contents

 
As of December 31, 2011
 
Special
Mention
 
Substandard
 
Doubtful/Loss
 
Total
 
(In thousands)
Legacy Loans:
 
Real estate—Residential
$
0

 
$
36

 
$
0

 
$
36

Real estate—Commercial
 
 
 
 
 
 
 
Retail
3,430

 
13,477

 
0

 
16,907

Hotel & Motel
5,008

 
17,875

 
0

 
22,883

Gas Station & Car Wash
3,489

 
2,554

 
0

 
6,043

Mixed Use
2,279

 
3,026

 
0

 
5,305

Industrial & Warehouse
3,998

 
7,238

 
404

 
11,640

Other
5,914

 
15,393

 
0

 
21,307

Real estate—Construction
0

 
1,848

 
0

 
1,848

Commercial business
11,357

 
30,114

 
5,994

 
47,465

Trade finance
274

 
4,997

 
0

 
5,271

Consumer and other
0

 
1,081

 
0

 
1,081

Subtotal
$
35,749

 
$
97,639

 
$
6,398

 
$
139,786

Acquired Loans:
 
Real estate—Residential
$
0

 
$
0

 
$
0

 
$
0

Real estate—Commercial
 
 
 
 
 
 
 
Retail
11,591

 
11,334

 
0

 
22,925

Hotel & Motel
13,138

 
16,746

 
0

 
29,884

Gas Station & Car Wash
5,665

 
5,760

 
0

 
11,425

Mixed Use
3,532

 
2,829

 
0

 
6,361

Industrial & Warehouse
2,673

 
3,770

 
0

 
6,443

Other
6,702

 
12,598

 
0

 
19,300

Real estate—Construction
0

 
5,489

 
0

 
5,489

Commercial business
16,096

 
39,630

 
353

 
56,079

Trade finance
128

 
829

 
0

 
957

Consumer and other
1,662

 
2,526

 
0

 
4,188

Subtotal
$
61,187

 
$
101,511

 
$
353

 
$
163,051

Total
$
96,936

 
$
199,150

 
$
6,751

 
$
302,837


The following table presents loans sold from loans held for investment or transfered from held for investment to held for sale during the three and six months ended June 30, 2012 and 2011 by portfolio segment:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Sales or reclassification to held for sale
(In thousands)
Real estate - Commercial
$
656

 
$
10,739

 
$
1,882

 
$
15,985

Real estate - Construction
0

 
4,600

 
0

 
4,600

Commercial Business
20,892

 
49

 
20,892

 
49

     Total
$
21,548

 
$
15,388

 
$
22,774

 
$
20,634

 
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.

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Table of Contents

The Migration Analysis is a formula methodology based on the Bank's actual historical net charge-off experience for each loan pool and loan risk grade (Pass, Special Mention, Substandard and Doubtful). The migration analysis is centered on the Bank's internal credit risk rating system. Our internal loan review and external contracted credit review examinations are used to determine and validate loan risk grades. This credit review system takes into consideration factors such as: borrower's background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, fair value and volatility of the fair value of collateral; lien position; and the financial strength of any guarantors.
A general loan loss allowance is provided on loans not specifically identified as impaired (“non-impaired loans”). The allowance is determined first based on a quantitative analysis using a historical loss migration methodology. The loans are classified by type and loan grade, and the historical loss migration is tracked for the various stratifications. Loss experience is quantified for the most recent 12 quarters and then weighted to give more weight to the most recent losses. That loss experience is then applied to the stratified portfolio at each quarter end. For the Performing Loans acquired from Center, a general loan loss allowance is provided to the extent that there has been credit deterioration since the acquisition.  The estimation of that credit deterioration becomes more evident as time passes since the acquisition.  As of June 30, 2012, the recent loss experience on the acquired portfolio was utilized to provide for a nominal allowance. 
The quantitative general loan loss allowance was $21.6 million ($20.9 million for legacy loans and $0.7 million for acquired loans) at June 30, 2012, compared to $20.4 million at December 31, 2011.
Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Bank utilizes qualitative adjustments to the Migration Analysis within established parameters. The parameters for making adjustments are established under a Credit Risk Matrix that provides seven possible scenarios for each of the factors below. The matrix allows for up to three positive (Major, Moderate, and Minor), three negative (Major, Moderate, and Minor), and one neutral credit risk scenarios within each factor for each loan type pool. Generally, the factors are considered to have no significant impact (neutral) to our historical migration ratios. However, if information exists to warrant adjustment to the Migration Analysis, changes are made in accordance with the established parameters supported by narrative and/or statistical analysis. The Credit Risk Matrix and the nine possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio or individual specific reserve allocations by as much as 50 basis points in either direction (positive or negative) for each loan type pool. This matrix considers the following nine factors, which are patterned after the guidelines provided under the FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses:
Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
Changes in national and local economic and business conditions and developments, including the condition of various market segments.
Changes in the nature and volume of the loan portfolio.
Changes in the experience, ability, and depth of lending management and staff.
Changes in the trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans and troubled debt restructurings, and other loan modifications.
Changes in the quality of our loan review system and the degree of oversight by the Directors.
Changes in the value of underlying collateral for collateral-dependent loans.
The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
The effect of external factors such as competition and legal and regulatory requirements on the level of estimated losses in our loan portfolio.
The qualitative loan loss allowance on the loan portfolio was $28.8 million at June 30, 2012, compared to $23.5 million at December 31, 2011.
We also establish specific loss allowances for loans where we have identified potential credit risk conditions or circumstances related to a specific individual credit. The specific allowance amounts are determined by a method prescribed by FASB ASC 310-10-35-22, Measurement of Impairment. The loans identified as impaired will be accounted for in accordance with one of the three acceptable valuation methods: 1) the present value of future cash flows discounted at the loan's effective interest rate; 2) the loan's observable market price; or 3) the fair value of the collateral, if the loan is collateral dependent. For the collateral dependent impaired loans, we obtain a new appraisal to determine the amount of impairment as of the date that the loan became impaired. The appraisals are based on an “as is” valuation. To ensure that appraised values remain current, we generally obtain an updated appraisal every twelve months from a qualified independent appraiser. Furthermore, if the most current appraisal is dated more than six months prior to the effective date of the impairment test, we validate the most current value with third party market data appropriate to the location and property type of the collateral. If the third party market data

29

Table of Contents

indicates that the value of our collateral property has declined since the most recent valuation date, we adjust the value of the property downward to reflect current market conditions. If the fair value of the collateral, less cost to sell, is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the collateral, the loan is deemed to be collateral dependent and the amount of impairment is charged off against the allowance for loan losses.
The Bank considers a loan to be impaired when it is probable that not all amounts due (principal and interest) will be collectible in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis by taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.
For commercial business loans, real estate loans and certain consumer loans, we base the measurement of loan impairment on the present value of the expected future cash flows, discounted at the loan's effective interest rate or on the fair value of the loan's collateral if the loan is collateral dependent. We evaluate most consumer loans for impairment on a collective basis, because these loans have generally smaller balances and are homogeneous in the underwriting terms and conditions, and in the type of collateral.
Impaired loans (recorded investment balance) at June 30, 2012, were $91.8 million, a net increase of $9.7 million from $82.0 million at December 31, 2011. This net increase in impaired loans is due primarily to inflow of acquired loans.
For our Credit Impaired Loans, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
The following table presents loans by portfolio segment and impairment method at June 30, 2012 and December 31, 2011:
 
 
As of June 30, 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)
$
0

 
$
59,023

 
$
1,710

 
$
25,529

 
$
4,970

 
$
136

 
$
91,368

Specific allowance
$
0

 
$
6,103

 
$
0

 
$
7,040

 
$
57

 
$
0

 
$
13,200

Loss coverage ratio
0.0
%
 
10.3
%
 
0.0
%
 
27.6
%
 
1.1
%
 
0.0
%
 
14.4
%
Non-impaired loans
$
1,931

 
$
2,658,901

 
$
41,655

 
$
851,876

 
$
170,668

 
$
60,596

 
$
3,785,627

General allowance
$
9

 
$
32,891

 
$
521

 
$
14,233

 
$
3,447

 
$
1,204

 
$
52,305

Loss coverage ratio
0.5
%
 
1.2
%
 
1.3
%
 
1.7
%
 
2.0
%
 
2.0
%
 
1.4
%
Total loans
$
1,931

 
$
2,717,924

 
$
43,365

 
$
877,405

 
$
175,638

 
$
60,732

 
$
3,876,995

Total allowance for loan losses
$
9

 
$
38,994

 
$
521

 
$
21,273

 
$
3,504

 
$
1,204

 
$
65,505

Loss coverage ratio
0.5
%
 
1.4
%
 
1.2
%
 
2.4
%
 
2.0
%
 
2.0
%
 
1.7
%


30

Table of Contents

 
As of December 31, 2011
 
Real estate -
Residential
 
Real estate -
Commercial
 
Real estate -
Construction
 
Commercial
business
 
Trade
finance
 
Consumer
and other
 
Total
 
(In Thousands)
Impaired loans (Gross carrying value)
$
0

 
$
49,994

 
$
1,838

 
$
25,156

 
$
4,964

 
$
150

 
$
82,102

Specific allowance
$
0

 
$
10,476

 
$
49

 
$
7,168

 
$
342

 
$
0

 
$
18,035

Loss coverage ratio
0.0
%
 
21.0
%
 
2.7
%
 
28.5
%
 
6.9
%
 
0.0
%
 
22.0
%
Non-impaired loans
$
2,043

 
$
2,581,886

 
$
42,918

 
$
824,420

 
$
141,720

 
$
66,481

 
$
3,659,468

General allowance
$
9

 
$
27,831

 
$
675

 
$
13,513

 
$
1,444

 
$
445

 
$
43,917

Loss coverage ratio
0.4
%
 
1.1
%
 
1.6
%
 
1.6
%
 
1.0
%
 
0.7
%
 
1.2
%
Total loans
$
2,043

 
$
2,631,880

 
$
44,756

 
$
849,576

 
$
146,684

 
$
66,631

 
$
3,741,570

Total allowance for loan losses
$
9

 
$
38,307

 
$
724

 
$
20,681

 
$
1,786

 
$
445

 
$
61,952

Loss coverage ratio
0.4
%
 
1.5
%
 
1.6
%
 
2.4
%
 
1.2
%
 
0.7
%
 
1.7
%
Under certain circumstances, we provide borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”), or are more substantive. At June 30, 2012, total modified loans were $48.1 million, compared to $32.7 million at December 31, 2011. The temporary modifications generally consist of interest only payments for a three- to six- month period, whereby principal payments are deferred. At the end of the modification period, the remaining principal balance is re-amortized based on the original maturity date. Loans subject to temporary modifications are generally downgraded to Substandard or Special Mention. At the end of the modification period, the loan either 1) returns to the original contractual terms; 2) is further modified and accounted for as a troubled debt restructuring in accordance with ASC 310-10-35; or 3) is disposed of through foreclosure or liquidation.
 
Troubled Debt Restructured (“TDR”) loans are defined by ASC 310-40, “Troubled Debt Restructurings by Creditors” and ASC 470-60, “Troubled Debt Restructurings by Debtors,” and evaluated for impairment in accordance with ASC 310-10-35. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.
A summary of TDRs on accrual and non-accrual by type of concession as of June 30, 2012 and December 31, 2011 is presented below:
 
As of June 30, 2012
 
TDR on accrual
 
TDR on non-accrual
 
TOTAL
 
Real estate -
Commercial
 
Commercial
Business
 
Trade Finance
 
Total
 
Real estate -
Commercial
 
Commercial
Business
 
Consumer & Other
 
Total
 
 
(In thousands)
Payment concession
$
2,514

 
$
1,639

 
$
0

 
$
4,153

 
$
8,665

 
$
3,614

 
$
0

 
$
12,279

 
$
16,432

Maturity / Amortization concession
0

 
2,789

 
490

 
3,279

 
678

 
1,841

 
186

 
2,705

 
5,984

Rate concession
14,344

 
1,306

 
0

 
15,650

 
9,842

 
48

 
0

 
9,890

 
25,540

Principal forgiveness
0

 
0

 
0

 
0

 
0

 
109

 
0

 
109

 
109

 
$
16,858

 
$
5,734

 
$
490

 
$
23,082

 
$
19,185

 
$
5,612

 
$
186

 
$
24,983

 
$
48,065



31

Table of Contents

 
As of December 31, 2011
 
TDR on accrual
 
TDR on non-accrual
 
TOTAL
 
Real estate -
Commercial
 
Commercial
Business
 
Trade Finance
 
Total
 
Real estate -
Commercial
 
Commercial
Business
 
Trade Finance and Other
 
Total
 
 
(In thousands)
Payment concession
$
949

 
$
1,365

 
$
0

 
$
2,314

 
$
3,769

 
$
3,441

 
$
0

 
$
7,210

 
$
9,524

Maturity / Amortization concession
0

 
888

 
469

 
1,357

 
1,178

 
1,578

 
150

 
2,906

 
4,263

Rate concession
12,384

 
2,740

 
0

 
15,124

 
3,335

 
396

 
0

 
3,731

 
18,855

Principal forgiveness
0

 
0

 
0

 
0

 
0

 
78

 
0

 
78

 
78

 
$
13,333

 
$
4,993

 
$
469

 
$
18,795

 
$
8,282

 
$
5,493

 
$
150

 
$
13,925

 
$
32,720

TDRs on accrual status are comprised of loans that were accruing at the time of restructuring and for which the Bank anticipates full repayment of both principal and interest under the restructured terms. TDRs that are on non-accrual 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 June 30, 2012 were comprised of 9 commercial real estate loans totaling $16.9 million and 25 commercial business loans totaling $5.7 million. TDRs on accrual status at December 31, 2011 were comprised of 6 commercial real estate loans totaling $13.3 million and 19 commercial business loans totaling $5.0 million. We expect that the TDRs on accrual status as of June 30, 2012, 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.
 
The following table presents loans by class modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2012:

32

Table of Contents

 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2012
 
Number of
Loans 
Pre-
Modification
Post-
Modification 
 
Number of
Loans 
Pre-
Modification
Post-
Modification 
 
($ in thousand)
Legacy Loans:
 
 
 
 
 
 
 
Real estate - Commercial
 
 

 

 
 
 
 
Retail
1

$
288

$
283

 
4

$
969

$
943

Hotel & Motel
0

0

0

 
0

0

0

Gas Station & Car Wash
0

0

0

 
1

218

101

Mixed Use
0

0

0

 
1

2,319

2,316

Industrial & Warehouse
0

0

0

 
1

1,064

1,056

Other
0

0

0

 
2

7,335

5,646

Real estate - Construction
0

0

0

 
0

0

0

Commercial business
2

89

88

 
8

2,397

2,339

Trade Finance
1

157

50

 
1

157

50

Subtotal
4

$
534

$
421

 
18

$
14,459

$
12,451

Acquired Loans:
 
 
 
 
 
 
 
Real estate - Commercial
 
 

 

 
 
 
 
Retail
1

$
957

$
953

 
1

$
957

$
953

Hotel & Motel
1

6,341

6,112

 
1

6,341

6,112

Gas Station & Car Wash
0

0

0

 
0

0

0

Mixed Use
0

0

0

 
0

0

0

Industrial & Warehouse
0

0

0

 
0

0

0

Other
0

0

0

 
0

0

0

Real estate - Construction
0

0

0

 
0

0

0

Commercial business
2

244

1,062

 
4

474

1,278

Trade Finance
0

0

0

 
0

0

0

Subtotal
4

$
7,542

$
8,127

 
6

$
7,772

$
8,343

Total
8

$
8,076

$
8,548

 
24

$
22,231

$
20,794

 
 
 
 
 
 
 
 
The specific reserves for the troubled debt restructurings described above as of June 30, 2012 was $1.3 million and the charge offs for the three and six months ended June 30, 2012 were $0 and $0, respectively.
The following table presents loans by class for TDR loans that have been modified within the previous twelve months and have subsequently had a payment default during the three and six months ended June 30, 2012:



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Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2012
 
Number of
Loans 
 
Balance 
 
 
Number of
Loans 
 
Balance 
 
 
($ In thousands)
Legacy Loans:
 
 
 
 
 
Real estate - Commercial
 
 
 
 
 
Retail
1

$
283

 
2

$
536

Gas Station & Car Wash
1

219

 
1

219

Industrial & Warehouse
2

1,093

 
2

1,093

Other
2

1,021

 
2

1,021

Commercial Business
4

992

 
7

1,188

Subtotal
10

$
3,608

 
14

$
4,057

Acquired Loans:
 
 
 
 
 
Real estate - Commercial
 

 

 
 
 
Retail
0

$
0

 
0

$
0

Hotel & Motel
1

6,112

 
1

6,112

Industrial & Warehouse
0

0

 
0

0

Other
0

0

 
0

0

Commercial Business
1

153

 
2

244

Subtotal
2

$
6,265

 
3

$
6,356

 
12

$
9,873

 
17

$
10,413

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The specific reserves for the troubled debt restructurings described above as of June 30, 2012 were $133 thousand and the charge offs for the three and six months ended June 30, 2012 was $118 thousand and $118 thousand, respectively.
We have allocated $6.4 million and $6.4 million of specific reserves to TDRs as of June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012 and December 31, 2011, we did not have any outstanding commitments to extend additional funds to these borrowers.

Covered Loans
On April 16, 2010, the Department of Financial Institutions closed Innovative Bank, California, and appointed the FDIC as its receiver. On the same date, Center Bank assumed the banking operations of Innovative Bank from the FDIC under a purchase and assumption agreement and two related loss sharing agreements with the FDIC. Upon the merger between Nara Bancorp and Center Financial, the Company assumed the loss sharing agreements with the FDIC.
Covered nonperforming assets totaled $4.2 million and $3.6 million at June 30, 2012 and December 31, 2011, respectively. These covered nonperforming assets are subject to the loss sharing agreements with the FDIC. The covered nonperforming assets at June 30, 2012 and December 31, 2011 were as follows:
 
June 30, 2012
 
December 31, 2011
 
(In thousand)
Covered loans on non-accrual status
$
242

 
$
0

Covered other real estate owned
3,961

 
3,575

     Total covered nonperforming assets
$
4,203

 
$
3,575

 
 
 
 
Acquired covered loans
$
76,339

 
$
89,959

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


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Table of Contents




8.
Borrowings
We maintain a secured credit facility with the Federal Home Loan Bank of San Francisco (“FHLB”) against which the Bank may take advances. The borrowing capacity is limited to the lower of 25% of the Bank’s total assets or the Bank’s collateral capacity, which was $1.2 billion and $1.3 billion at June 30, 2012 and December 31, 2011, respectively. 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 June 30, 2012 and December 31, 2011, real estate secured loans with a carrying amount of approximately $1.9 billion and $2.0 billion, respectively, were pledged as collateral for borrowings from the FHLB. At June 30, 2012 and December 31, 2011, other than FHLB stock, securities totaling $1.5 million and $3.0 million, respectively, were pledged as collateral for borrowings from the FHLB.
At June 30, 2012 and December 31, 2011, FHLB borrowings were $371.1 million and $344.4 million, had a weighted average interest rate of 1.77% and 1.93%, respectively, and had various maturities through September 2017. At June 30, 2012 and December 31, 2011, $155.0 million and $205.0 million, respectively, of the advances were putable advances with various putable dates and strike prices. The cost of FHLB borrowings as of June 30, 2012 ranged between 0.28% and 4.52%. At June 30, 2012, the Company had a remaining borrowing capacity of $837.7 million.
At June 30, 2012, the contractual maturities for FHLB borrowings were as follows:
 

Contractual
Maturities

Maturity/
Put Date
 
(In thousands)
Due within one year
$
174,021

 
$
264,021

Due after one year through five years
175,000

 
105,000

Due after five years through ten years
20,000

 
0


$
369,021

 
$
369,021


In addition, as a member of the Federal Reserve Bank system, we may also borrow from the Federal Reserve Bank of San Francisco. The maximum amount that we may borrow from the Federal Reserve Bank’s discount window is up to 95% of the outstanding principal balance of the qualifying loans and the fair value of the securities that we pledge. At June 30, 2012, the principal balance of the qualifying loans was $472.2 million and the collateral value of investment securities were $43.0 million, and no borrowings were outstanding against this line.

9.
Subordinated Debentures
At June 30, 2012, 4 wholly-owned subsidiary grantor trusts established by former Nara Bancorp had issued $28 million of pooled Trust Preferred Securities (“trust preferred securities”) and 1 wholly-owned subsidiary grantor trust established by former Center Financial Corporation had issued $18 million of trust preferred securities. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”) of BBCN Bancorp. The Debentures are the sole assets of the trusts. BBCN Bancorp’s obligations under the subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by BBCN Bancorp of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. BBCN Bancorp has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. BBCN Bancorp also has a right to defer consecutive payments of interest on the debentures for up to five years.
The following table is a summary of trust preferred securities and debentures at June 30, 2012:
 

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Table of Contents

 

 

(Dollars in Thousands)

 

 

 

 
Issuance Trust

Issuance
Date

Trust
Preferred
Security
Amount

Subordinated
Debentures
Amount

Rate
Type

Initial
Rate

Rate at
June 30, 2012

Maturity
Date
Nara Capital Trust III

6/5/2003

$
5,000


$
5,155


Variable

4.44
%

3.62
%

6/15/2033
Nara Statutory Trust IV

12/22/2003

5,000


5,155


Variable

4.02
%

3.32
%

1/7/2034
Nara Statutory Trust V

12/17/2003

10,000


10,310


Variable

4.12
%

3.42
%

12/17/2033
Nara Statutory Trust VI

3/22/2007

8,000


8,248


Variable

7.00
%

2.12
%

6/15/2037
Center Capital Trust I

12/29/2003

18,000


12,904


Variable

4.01
%

3.32
%

1/7/2034
TOTAL ISSUANCE



$
46,000


$
41,772









The Company’s investment in the common trust securities of the issuer trusts of $1.6 million and $2.0 million at June 30, 2012 and December 31, 2011, respectively, is included in other assets. Although the subordinated debt issued by the trusts are not included as a component of stockholders' equity in the consolidated balance sheets, the debt is treated as capital for regulatory purposes. 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 June 30, 2012, all of the $46 million of the trusts’ securities qualified as Tier 1 capital. In July 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law which, among other things, limits to bank holding companies having total assets of more than $15 billion the ability to treat trust preferred security debt issuances as Tier 1 capital. Since the Company had less than $15 billion in assets at June 30, 2012, under the Dodd-Frank Act, we will be able to continue to include its existing trust preferred securities in Tier 1 capital.

10.
Derivative Financial Instruments and Hedging Activities
As part of our asset and liability management strategy, the Company may enter into derivative financial instruments, such as interest rate swaps, caps and floors, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin. Interest rate swaps and caps involve the exchange of fixed-rate and variable-rate interest payment obligations without the exchange of the underlying notional amounts.
During the first quarter of 2010, the Company entered into a three-year interest rate cap agreement with an aggregate notional amount of $50.0 million. Under this cap agreement, the Company receives quarterly payments from the counterparty when the quarterly resetting 3 Month London-Interbank Offered Rate exceeds the strike level of 2.00%. The upfront fee paid to the counterparty in entering into this interest rate cap agreement was $890 thousand.
These interest rate cap agreements are considered “free-standing” due to non-designation of a hedge relationship to any of its financial assets or liabilities. Under FASB ASC 815, valuation gains or losses on interest rate caps not designated as hedging instruments are recognized in earnings. At June 30, 2012, the aggregate fair value of the outstanding interest rate caps was $0, and we recognized mark-to-market losses on valuation of $1 thousand and $9 thousand for the three and six months ended June 30, 2012.
At June 30, 2012 and December 31, 2011, summary information about these interest-rate caps is as follows:
 

June 30, 2012
December 31, 2011
Notional amounts
$
50
 million
$
50
 million
Weighted average pay rates
N/A

N/A

Weighted average receive rates
N/A

N/A

Weighted average maturity
0.65 years

1.16 years

Fair value of combined interest rate caps
$
0

$
9
 thousand

The effect of derivative instruments on the Consolidated Statement of Income for the three and six months ended June 30, 2012 and 2011 are as follows:
 

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Table of Contents



Three Months Ended June 30,

Six Months Ended June 30,


2012

2011

2012

2011

Location of Gain or (Loss)
Recognized in Income on
Derivatives
(In thousands)
Amount of Gain or (Loss)
Recognized in Income on
Derivatives

(In thousands)
Amount of Gain or (Loss)
Recognized in Income on
Derivatives
Derivatives not designated as hedging instruments under FASB ASC 815:








Interest rate contracts (1)
Other income
$
(1
)

$
(118
)

$
(9
)

$
(140
)
 
(1)
Includes amounts representing the net interest payments as stated in the contractual agreements and the valuation gains or (losses) on interest rate contracts not designated as hedging instruments.

11.
Income Taxes
Our Company and its subsidiaries are subject to U.S. federal income tax as well as state income taxes. We had total unrecognized tax benefits of $665 thousand at June 30, 2012 and $569 thousand at December 31, 2011 that relate primarily to uncertainties related to California enterprise zone loan interest deductions.
We anticipate an increase of approximately $193 thousand in the unrecognized tax benefit related to the California enterprise zone loan interest deduction within the next twelve months. We are subject to U.S. federal income taxes, California franchise taxes and various other state income and franchise taxes.
The statute of limitations related to the consolidated Federal income tax return is closed for all tax years up to and including 2007. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state. We are currently under examination by New York City for the 2007, 2008, and 2009 tax years. While the outcome of the examination is unknown, we do not expect any material adjustments.
We recognize interest and penalties related to income tax matters in income tax expense. We had approximately $53 thousand and $77 thousand for interest and penalties accrued at June 30, 2012 and December 31, 2011, respectively.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that except for the valuation allowance against the capital loss carryforwards of $53 thousand, a valuation allowance for deferred tax assets was not required as of June 30, 2012.

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.

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Table of Contents

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).
Impaired Loans
The fair values of impaired loans are generally measured for impairment permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These are considered Level 3 inputs.
Derivatives
The fair value of our derivative financial instruments, including interest rate swaps and caps, is based on derivative valuation models using market data inputs as of the valuation date that can generally be verified and do not typically involve significant management judgments. (Level 2 inputs).
Other Real Estate Owned
Other real estate owned is fair valued at the time the loan is foreclosed upon and the asset is transferred to other real estate owned. The value is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Other real estate owned is reviewed and evaluated on at least an annual basis for additional impairment and adjusted 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, if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 2 inputs) or may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.
For the quarter ended March 31, 2012, there were no changes in valuation techniques and related inputs resulting from the adoption of ASU 2011-04. The table below summarizes information about valuation method and unobservable inputs for nonrecurring Level 3 fair value measurements. The weight assigned to each input is based on the facts and circumstances that exist at the date of measurement.

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Table of Contents

 
Valuation Method
Unobservable Inputs
 
 
Impaired loans at fair value
Market
Adjustments to external or internal appraised values for selling cost of 8.5%.
 
Probability weighting of broker price opinions

 
Management assumptions regarding market trends or
other relevant factors

Loans held for sale, net
Market
Adjustments to external or internal appraised values for selling cost in a range of 0% to 5%.
 
 
Probability weighting of broker price opinions

 
 
Management assumptions regarding market trends or
other relevant factors

Other real estate owned
Market
Adjustments to external or internal appraised values for selling cost of 8.5%.
 
 
Probability weighting of broker price opinions

 
 
Management assumptions regarding market trends or
other relevant factors


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
 
June 30, 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
$
193,531


$
0


$
193,531


$
0

GSE mortgage-backed securities
449,845


0


449,845


0

Trust preferred security
3,382


0


3,382


0

Municipal bonds
5,058


0


5,058


0

Mutual funds
15,036


15,036


0


0

 
 
 
 
 
 
 
 

There were no transfers between Level 1, 2 and 3 during the period ended June 30, 2012.
 

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Table of Contents

 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
December 31, 2011
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury
$
300

 
$
0

 
$
300

 
$
0

GSE collateralized mortgage obligations
227,836

 
0

 
227,836

 
0

GSE mortgage-backed securities
487,754

 
0

 
487,754

 
0

Trust preferred security
4,348

 
0

 
4,348

 
0

Municipal bonds
5,764

 
0

 
5,764

 
0

Mutual funds
14,918

 
14,918

 
0

 
0

Derivatives - Interest rate caps
9

 
0

 
9

 
0

Fair value adjustments for interest rate caps resulted in a net expense of $9 thousand for the six months ended June 30, 2012 and $157 thousand for the year ended December 31, 2011.
Assets measured at fair value on a non-recurring basis are summarized below:
 
 
 

Fair Value Measurements at the End of the Reporting Period Using


 
June 30, 2012

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

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total Gains (Losses) for the Six Months Ended June 30, 2012
 
(In thousands)
Assets:









Impaired loans at fair value:









Real estate loans
$
12,221


$
0


$
0


$
12,221


$
(1,863
)
Commercial business
6,265


0

0

6,265


492

Loans held for sale, net
656


0


656


0


(156
)
Other real estate owned
5,379


0


0


5,379


(922
)


 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
June 30, 2012
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Gains (Losses) for the Three Months Ended June 30, 2012
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
       Impaired loans at fair value:
 
 
 
 
 
 
 
 
 
            Real estate loans
$
12,378

 
$
0

 
$
0

 
$
12,378

 
$
(1,050
)
            Commercial business
1,887

 
0

 
0

 
1,887

 
(28
)
       Loans held for sale, net
656

 
0

 
656

 
0

 
(156
)
       Other real estate owned
2,634

 
0

 
0

 
2,634

 
(560
)


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Table of Contents

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

 

 

 

 

Real estate loans
$
15,485

 
$
0

 
$
0

 
$
15,485

 
$
(6,018
)
Commercial business
6,360

 
0
 
0
 
6,360

 
(2,553
)
Loans held for sale, net
6,901

 
0

 
6,901

 
0

 
(3,393
)
Other real estate owned
3,471

 
0

 
0

 
3,471

 
(1,031
)
Fair Value of Financial Instruments
Carrying amounts and estimated fair values of financial instruments, not previously presented, at June 30, 2012 and December 31, 2011 were as follows:
 

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Table of Contents

 
June 30, 2012
 
Carrying
Amount

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



 

Cash and cash equivalents
$
179,621


$
179,621

 
Level 1
Term federal funds sold
0


0

 
Level 1
Loans held for sale
32,590


35,674

 
Level 2
Loans receivable—net
3,809,033


4,147,077

 
Level 3
Federal Home Loan Bank stock
24,778


N/A

 
N/A
Accrued interest receivable
12,062


12,062

 
Level 2
FDIC loss share receivable
9,287


9,287

 
Level 3
Customers’ liabilities on acceptances
11,206


11,206

 
Level 2
Financial Liabilities:



 

Noninterest-bearing deposits
$
1,064,013


$
1,064,013

 
Level 2
Saving and other interest bearing demand deposits
1,326,416


1,326,416

 
Level 2
Time deposits
1,492,251


1,496,548

 
Level 2
Borrowings from Federal Home Loan Bank
371,143


376,222

 
Level 2
Subordinated debentures
41,772


40,174

 
Level 2
Accrued interest payable
5,924


5,924

 
Level 2
Bank’s liabilities on acceptances outstanding
11,206


11,206

 
Level 2
 
December 31, 2011
 
 
 
Carrying
Amount

Estimated
Fair Value
 
 
 
(In thousands)
 
 
Financial Assets:



 
 
Cash and cash equivalents
$
300,110


$
300,110

 
 
Term federal funds sold
40,000


40,000

 
 
Loans held for sale
42,407


43,782

 
 
Loans receivable—net
3,676,874


3,933,710

 
 
Federal Home Loan Bank stock
27,373


N/A

 
 
Accrued interest receivable
13,439


13,439

 
 
FDIC loss share receivable
10,819


10,819

 
 
Customers’ liabilities on acceptances
10,515


10,515

 
 
Financial Liabilities:





 
 
Noninterest-bearing deposits
984,350


984,350

 
 
Saving and other interest bearing demand deposits
1,435,441


1,435,441

 
 
Time deposits
1,521,101


1,532,152

 
 
Borrowings from Federal Home Loan Bank
344,402


349,311

 
 
Subordinated debentures
52,102


53,757

 
 
Accrued interest payable
6,519


6,519

 
 
Bank’s liabilities on acceptances outstanding
10,515


10,515

 
 

The methods and assumptions used to estimate fair value are described as follows.
The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, accrued interest receivable and payable, customer’s and Bank’s liabilities on acceptances, non-interest-bearing deposits, short-term debt, secured borrowings, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The allowance for loan losses is

42

Table of Contents

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 time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of Federal Reserve Bank stock or Federal Home Loan Bank stock due to restrictions placed on their transferability. The fair value of commitments to fund loans represents fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.

13.
Stockholders’ Equity and Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements, such as restrictions on the growth, expansion or the payment of dividends or other capital distributions or management fees. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of June 30, 2012 and December 31, 2011, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of June 30, 2012 and December 31, 2011, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category.
On November 21, 2008, the Company received $67 million from the U.S. Treasury through its TARP capital purchase plan and issued 67,000 shares of cumulative preferred stock, Series A. The preferred stock pays cumulative dividends at the rate of 5% per year for the first five years and 9% per year thereafter. The shares are callable by the Company at par after three years if the repurchase is made with proceeds of a new offering or placement of common equity or of certain preferred stock treated as Tier 1 capital under applicable Federal banking regulations.
In conjunction with the purchase of the Company’s preferred stock, the U.S. Treasury received a warrant to purchase 1,042,531 shares of the Company’s common stock at $9.64 per share. The term of the warrant is ten years. On December 3, 2009, US Treasury approved the Company’s request for an adjustment to the Company’s warrant share position due to a qualified equity offering in November 2009. The adjusted number of warrant shares is 521,266, which is 50% of original number of warrant shares 1,042,531.
Upon the merger with Center Financial, the Company issued 55,000 shares of a new series of our preferred stock having substantially the same rights, preferences, privileges and voting powers as our Series A Preferred Stock in exchange for the shares of similar preferred stock issued by Center Financial under the Treasury Department's TARP Capital Purchase Program. The new series of preferred stock is designated as our Fixed Rate Cumulative Perpetual Preferred Stock, Series B. The ten-year warrant to purchase Center Financial common stock that was issued in connection with Center Financial's sale of its Series A Preferred Stock to the Treasury Department was converted into a warrant to purchase BBCN Bancorp common stock upon our merger with Center. Reflecting the merger exchange ratio of 0.7805, and a reduction of 50% of the original number of warrant shares is issued due to additional capital raise, 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.
On June 27, 2012, the Company redeemed $67 million and $55 million of the aforementioned Series A and Series B Preferred Stock, respectively. The preferred stock issued qualifies as Tier 1 capital.

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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 June 30, 2012
 

 

 

 

 

 
Total capital (to risk-weighted assets):











Company
$
701,835

 
16.8
%

$
334,218


8.0
%

N/A


N/A

Bank
$
677,914

 
16.2
%

$
333,972


8.0
%

$
417,465


10.0
%
Tier I capital (to risk-weighted assets):

 









Company
$
649,293

 
15.5
%

$
167,109


4.0
%

N/A


N/A

Bank
$
625,409

 
15.0
%

$
166,986


4.0
%

$
250,479


6.0
%
Tier I capital (to average assets):

 









Company
$
649,293

 
13.0
%

$
200,203


4.0
%

N/A


N/A

Bank
$
625,409

 
12.5
%

$
200,284


4.0
%

$
250,355


5.0
%
 
Actual

Required
For Capital
Adequacy Purposes

Required
To Be Well
Capitalized under
Prompt Corrective
Action Provisions
 
Amount

Ratio

Amount

Ratio

Amount

Ratio
 
(Dollars in thousands)
As of December 31, 2011
 

 

 

 

 

 
Total capital (to risk-weighted assets):











Company
$
784,054


19.4
%

$
323,144


8.0
%

N/A


N/A

Bank
$
721,551


17.9
%

$
322,891


8.0
%

$
403,613


10.0
%
Tier I capital (to risk-weighted assets):











Company
$
733,319


18.2
%

$
161,572


4.0
%

N/A


N/A

Bank
$
670,855


16.6
%

$
161,445


4.0
%

$
242,168


6.0
%
Tier I capital (to average assets):











Company
$
733,319


19.8
%

$
148,044


4.0
%

N/A


N/A

Bank
$
670,855


18.1
%

$
148,038


4.0
%

$
185,048


5.0
%

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


44

Table of Contents

14.
Subsequent Event

On August 8, 2012, we purchased from the Treasury Department, the outstanding warrant dated November 21, 2008 relating to 521,266 shares of the Company's common stock, at a purchase price of $2.2 million. We have not reached agreement with the Treasury Department regarding repurchase of the warrant for the purchase of 337,480 shares of of the Company's common stock that we issued in connection with our merger with Center Financial. See Note 13 Stock holders' Equity and Regulatory Matters for further information regarding the warrants.


45

Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 and the unaudited consolidated financial statements and notes set forth elsewhere in this report.

GENERAL
Selected Financial Data
The following table sets forth certain selected financial data concerning the periods indicated:
 
 
At or for the Three Months Ended June 30,
 
At or for the Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in thousands, except
share and per share data)
Income Statement Data:
 
 
 
 
 
 
 
Interest income
$
66,943

 
$
37,294

 
$
135,498

 
$
74,488

Interest expense
7,441

 
7,963

 
15,137

 
16,274

Net interest income
59,502

 
29,331

 
120,361

 
58,214

Provision for loan losses
7,182

 
10,047

 
9,782

 
15,309

Net interest income after provision for loan losses
52,320

 
19,284

 
110,579

 
42,905

Non-interest income
10,222

 
7,684

 
21,867

 
12,194

Non-interest expense
31,077

 
16,886

 
61,512

 
33,581

Income before income tax expense
31,465

 
10,082

 
70,934

 
21,518

Income tax expense
12,101

 
3,764

 
27,636

 
8,454

Net income
$
19,364

 
$
6,318

 
$
43,298

 
$
13,064

Dividends and discount accretion on preferred stock
$
(3,771
)
 
$
(1,075
)
 
$
(5,640
)
 
$
(2,150
)
Net income available to common stockholders
$
15,593

 
$
5,243

 
$
37,658

 
$
10,914

Per Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.20

 
$
0.14

 
$
0.48

 
$
0.29

Earnings per common share - diluted
$
0.20

 
$
0.14

 
$
0.48

 
$
0.29

Book value per common share (period end, excluding preferred stock and warrants)
$
9.14

 
$
8.02

 
$
9.14

 
$
8.02

Tangible book value per common share (period end, excluding preferred stock and warrants) (1) (12)
$
7.94

 
$
7.94

 
$
7.94

 
$
7.94

Number of common shares outstanding (period end)
78,014,107

 
38,097,327

 
78,014,107

 
38,097,327

Weighted average shares - basic
78,007,270

 
38,047,371

 
77,997,305

 
38,017,473

Weighted average shares - diluted
78,141,527

 
38,082,023

 
78,121,259

 
38,079,650

Tangible common equity ratio (9)
12.49
%
 
10.21
%
 
12.49
%
 
10.21
%
Statement of Financial Condition Data - at Period End:
 
 
 
 
 
 
 
Assets
$
5,049,405

 
$
2,967,288

 
$
5,049,405

 
$
2,967,288

Securities available for sale
666,852

 
472,420

 
666,852

 
472,420

Gross loans, net of deferred loan fees and costs (excludes loans held for sale)
3,874,538

 
2,202,446

 
3,874,538

 
2,202,446

Deposits
3,882,680

 
2,232,180

 
3,882,680

 
2,232,180

Federal Home Loan Bank borrowings
371,143

 
300,000

 
371,143

 
300,000

Subordinated debentures
41,772

 
39,268

 
41,772

 
39,268

Stockholders’ equity
715,461

 
372,539

 
715,461

 
372,539


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Table of Contents

 
At or for the Three Months Ended
June 30,
 
At or for the Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in thousands)
Average Balance Sheet Data:
 
 
 
 
 
 
 
Assets
$
5,102,769

 
$
2,933,003

 
$
5,121,082

 
$
2,934,546

Securities available for sale
692,399

 
501,298

 
709,063

 
513,751

Gross loans, including loans held for sale
3,847,921

 
2,190,436

 
3,812,708

 
2,179,150

Deposits
3,854,756

 
2,193,202

 
3,879,207

 
2,175,751

Stockholders’ equity
823,839

 
369,485

 
815,111

 
366,343

Selected Performance Ratios:
 
 
 
 
 
 
 
Return on average assets (1) (8)
1.52
%
 
0.86
%
 
1.69
%
 
0.89
%
Return on average stockholders’ equity (1) (8)
9.40
%
 
6.84
%
 
10.62
%
 
7.13
%
Return on average tangible equity (8) (11)
10.61
%
 
6.89
%
 
12.01
%
 
7.19
%
Pre Tax- Pre Provision income to average assets (1)
3.03
%
 
2.75
%
 
3.15
%
 
2.51
%
Efficiency ratio (2)
44.57
%
 
45.62
%
 
43.25
%
 
47.69
%
Net interest margin (3)
5.02
%
 
4.16
%
 
5.07
%
 
4.15
%
Regulatory Capital Ratios (4)
 
 
 
 
 
 
 
Leverage capital ratio (5)
12.97
%
 
13.32
%
 
12.97
%
 
13.32
%
Tier 1 risk-based capital ratio
15.54
%
 
16.42
%
 
15.54
%
 
16.42
%
Total risk-based capital ratio
16.80
%
 
17.69
%
 
16.80
%
 
17.69
%
Tier 1 common -risk based capital ratio (13)
14.58
%
 
12.08
%
 
14.58
%
 
12.08
%
Asset Quality Ratios:
 
 
 
 
 
 
 
Allowance for loan losses to gross loans, excluding loans held for sale
1.69
%
 
2.71
%
 
1.69
%
 
2.71
%
Allowance for loan losses to legacy loans (10)
2.26
%
 
2.71
%
 
2.26
%
 
2.71
%
Allowance for loan losses to non-accrual loans
164.88
%
 
168.70
%
 
164.88
%
 
168.70
%
Allowance for loan losses to non-performing loans (6)
78.44
%
 
116.66
%
 
78.44
%
 
116.66
%
Allowance for loan losses to non-performing assets (7)
72.60
%
 
107.41
%
 
72.60
%
 
107.41
%
Nonaccrual loans to gross loans, excluding loans held for sale
1.03
%
 
1.61
%
 
1.03
%
 
1.61
%
Nonperforming loans to gross loans, excluding loans held for sale (6)
2.16
%
 
2.32
%
 
2.16
%
 
2.32
%
Nonperforming assets to gross loans and OREO (7)
2.32
%
 
2.52
%
 
2.32
%
 
2.52
%
Total non-performing assets to total assets (7)
1.79
%
 
1.87
%
 
1.79
%
 
1.87
%
(1)
Annualized.
(2)
Efficiency ratio is defined as non-interest expense divided by the sum of net interest income and non-interest income.
(3)
Net interest margin is calculated by dividing annualized net interest income by average total interest-earning assets.
(4)
The ratios required to meet the definition of a “well-capitalized” institution under certain banking regulations are 5% leverage capital, 6% tier I risk-based capital and 10% total risk-based capital.
(5)
Calculations are based on average quarterly asset balances.
(6)
Non-performing loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and accruing restructured loans. Loans 90 days or more past due and still accruing consist of acquired loans that were originally recorded at fair value upon acquisitions. These loans are considered to be accruing as we can reasonably estimate future cash flows on acquired loans and we expect to fully collect the carrying value of these loans.
(7)
Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing interest, other real estate owned, and accruing restructured loans.
(8)
Based on net income before effect of dividends and discount accretion on preferred stock.
(9)
Excludes TARP preferred stock, net of discount, of $0 and $64.7 million and stock warrants of $2.8 million and $2.4 million at June 30, 2012 and 2011, respectively.
(10)
Legacy loans are those loans accounted for under the amortized cost method, and do not include loans acquired from Center Financial Corporation on November 30, 2011. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position. Allowance for loan losses to legacy loans is calculated by

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Table of Contents

dividing gross legacy loan balance by allowance for loan losses.
(11)
Average tangible equity is calculated by subtracting average goodwill and average other intangibles from average stockholders' equity. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(In Thousands)
Net income
 
$
19,364

 
$
6,318

 
$
43,298

 
$
13,064

 
 
 
 
 
 
 
 
 
Average stockholders' equity
 
$
823,839

 
$
369,485

 
$
815,111

 
$
366,343

Less: Average goodwill and other intangible assets, net
 
(93,713
)
 
(2,939
)
 
(93,955
)
 
(2,977
)
Average tangible equity
 
$
730,126

 
$
366,546

 
$
721,156

 
$
363,366

 
 
 
 
 
 
 
 
 
Net income (annualized) to average tangible equity
 
10.61
%
 
6.89
%
 
12.01
%
 
7.19
%

(12)
Tangible book value per share is calculated by subtracting goodwill and other intangible assets from total stockholders' equity and diving the difference by the number of shares of common stock outstanding. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.
 
 
June 30, 2012
 
June 30, 2011
 
 
(In Thousands)
Total stockholders' equity
 
$
715,461

 
$
372,539

Less: Preferred stock, net of discount
 
0

 
(64,679
)
Common stock warrant
 
(2,760
)
 
(2,383
)
Goodwill and other intangible assets, net
 
(93,518
)
 
(2,888
)
Tangible common equity
 
$
619,183

 
$
302,589

 
 
 
 
 
Common shares outstanding
 
78,014,107

 
38,097,327

 
 
 
 
 
Tangible common equity per share
 
$
7.94

 
$
7.94


(13)
Tier 1 common is calculated as Tier 1 capital less non-common elements, including perpetual preferred stock and related surplus, minority interest in subsidiaries, trust preferred securities and mandatory convertible preferred securities.
 
 
June 30, 2012
 
June 30, 2011
 
 
(In Thousands)
Tier 1 capital
 
$
649,293

 
$
388,176

Less: Preferred stock, net of discount
 
0

 
(64,679
)
Trust Preferred
 
(40,347
)
 
(38,000
)
Tier 1 common-risk based capital
 
$
608,946

 
$
285,497

 
 
 
 
 
Total risk weighted assets less disallowed allowance for loan losses
 
4,177,728

 
2,363,799

 
 
 
 
 
Tier 1 common-risk based capital ratio
 
14.58
%
 
12.08
%




48

Table of Contents

Results of Operations
Overview
Our total assets decreased from $5.17 billion at December 31, 2011 to $5.05 billion at June 30, 2012. The decrease in total assets was due to the decrease in cash and cash equivalent from $300.1 million at December 31, 2011 to $179.6 million at June 30, 2012 to redeem $122 million of Series A and Series B Preferred Stock issued under the U.S. Treasury's TARP Capital Purchase Program on June 27, 2012. The redemption covered the total combined preferred stock investment by the U.S. Treasury of $67 million in the former Nara Bancorp, Inc. and $55 million in the former Center Financial Corporation ("Center"). Gross loans receivable increased by $136 million at $3.87 billion during the six months ended June 30, 2012. Our deposits decreased $58 million, or 1%, to $3.88 billion at June 30, 2012 from $3.94 billion at December 31, 2011. Securities available for sale declined 10% during the first six months of 2012 as a result of paydowns and maturities.
Our net income available to common stockholders for the second quarter of 2012 was $15.6 million, or $0.20 per diluted common share, compared to the net income available to common stockholders of $5.2 million, or $0.14 per diluted common share, for the same period of 2011, representing an increase in net income of $10.4 million, or 197%. Our net income available to common stockholders for the six months ended June 30, 2012 was $37.7 million, or $0.48 per diluted common share, compared to the net income available to common stockholders of $10.9 million, or $0.29 per diluted common share, for the same period of 2011, representing an increase in net income of $26.7 million, or 245%. The merger with Center completed on November 30, 2011 impacts the comparability of operating results for the second quarter of 2012 compared to the same period of 2011 and for the six months ended June 30, 2012 compared to the same reporting period of 2011. As the balances of interest earning assets and liabilities significantly increased as a result of the merger of equals, the amounts of interest income and expenses were significantly larger when comparing to the same reporting period of 2011. In addition, the application of acquisition accounting results in the acquisition premiums and discounts, reflecting the acquisition date fair value adjustment being recorded and impacting yields as they are amortized or accreted by the interest method based on the related assets or liabilities. Our operating results for the three months ended June 30, 2012 and 2011 and the six months ended June 30, 2012 and 2011, include the following pre-tax acquisition accounting adjustments and expenses related to the merger. The increase (decrease) to pre-tax income of these adjustments is summarized below. The impact which these adjustments have on certain yields and costs are described in subsequent sections.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2012
 
2011
 
2012
 
2011
Accretion of discount on acquired Center loans (1)
 
$
7,696

 
$
0

 
$
17,340

 
$
0

Amortization of premiums on Center FHLB borrowings (2)
 
904

 
0

 
2,135

 
0

Accretion of discount on Center subordinated debt (3)
 
(36
)
 
0

 
(71
)
 
0

Amortization of premium on Center time deposits (4)
 
787

 
0

 
2,062

 
0

Amortization of core deposit intangibles from Center (5)
 
(253
)
 
0

 
(543
)
 
0

Accretion of discounts on other Center assets (6)
 
57

 
0

 
114

 
0

Amortization of unfavorable lease liability (7)
 
57

 
0

 
115

 
0

Merger and integration expense (8)
 
(1,348
)
 
(381
)
 
(3,121
)
 
(892
)
Increase (decrease) to pre-tax income
 
$
7,864

 
$
(381
)
 
$
18,031

 
$
(892
)
(1) We have estimated the fair value of the loans acquired as the result of our merger. The valuation resulted in a discount of approximately $118.0 million as of November 30, 2011. The accretion of this purchase discount over the remaining lives of the acquired loans is included in our reported interest income on loans.
(2) The fair value of the outstanding FHLB borrowings assumed from Center was estimated to be above the face amount of such debt. Our reported interest expense on FHLB advances includes amortization to the face amount of these advances over the remaining term of the debt.
(3) The fair value of the outstanding subordinated debt assumed from Center was estimated to be below the face amount of such debt. Our reported interest expense on other borrowings includes accretion to the face amount of this debt over the remaining term of the debt.
(4) The fair value of certificate of deposit liabilities assumed from Center was estimated to be above the face amount of such deposits. Our reported interest expense on deposits includes amortization to the face amount of such liabilities over the remaining term of the deposits.
(5) A core deposit intangible arises from a financial institution or a financial institution branch having a deposit base comprised of funds associated with stable customer relationships. These customer relationships provide a cost benefit to the acquiring

49

Table of Contents

institution since the associated customer deposits typically are at lower interest rates and can be expected to be retained on a long-term basis. Deposit customer relationships have value due to their favorable interest rates in comparison to market rates for alternative funding sources with expected lives comparable to expected lives of the core deposits. The discounted cash flow method, which we have used to estimate this value, is based upon the principle of future benefits; economic value tends to be based on anticipated future benefits as measured by cash flows expected to occur in the future. The core deposit intangible asset recognized as part of the Center merger is being amortized over its estimated useful life of approximately seven years utilizing an accelerated method.
(6) Accretion of discounts on other assets primarily consist of servicing assets, investments in affordable housing partnerships and the fair value of the favorable operating leases.
(7) Amortization of unfavorable lease liability represents the Center facilities lease contracts having rental rates that exceeded current market rates at the merger date.
(8) Direct costs related to the Center merger were expensed as incurred. During the three months ended June 30, 2012, we incurred $1.3 million in merger and integration expenses, including $0.5 million in salaries and benefits and $0.9 million in professional fees. During the three months ended June 30, 2011, we incurred $381 thousand in merger and integration expenses. During the six months ended June 30, 2012, we incurred $3.1 million in merger and integration expenses, including $1.1 million in salaries and benefits and $2.0 million in professional fees. During the six months ended June 30, 2011, we incurred $892 thousand in merger and integration expenses.
The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.52% for the second quarter of 2012, compared to 0.86% for the same period of 2011. The annualized return on average equity, before effect of dividends and discount accretion on preferred stock, was 9.40% for the second quarter of 2012, compared to 6.84% for the same period of 2011. The efficiency ratio was 44.57% for the second quarter of 2012, compared to 45.62% for the same period of 2011.
The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.69% for the six months ended June 30, 2012, compared to 0.89% for the same period of 2011. The annualized return on average equity, before the effect of dividends and discount accretion on preferred stock, was 10.62% for the six months ended June 30, 2012, compared to 7.13% for the same period of 2011. The efficiency ratio was 43.25% for the six months ended June 30, 2012, compared to 47.69% for the same period of 2011.
Net Interest Income and Net Interest Margin
Net Interest Income and Expense
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is referred to as net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities (interest-bearing deposits and borrowed funds). Net interest income is affected by changes in the respective volumes of interest-earning assets and funding liabilities as well as by changes in the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities.
Comparison of Three Months Ended June 30, 2012 with the Same Period of 2011
Net interest income before provision for loan losses was $59.5 million for the second quarter of 2012, an increase of $30.2 million, or 103%, compared to $29.3 million for the same period of 2011. The increase was principally attributable to the higher level of interest earning assets, as well as the improvement in net interest margin, following the merger. The net interest margin improved to 5.02% for the second quarter of 2012, compared to 4.16% for the same period of 2011. The improvement in the net interest margin was largely attributable to the effect of acquisition accounting adjustments.
Interest income for the second quarter of 2012 was $66.9 million compared to $37.3 million for the same period of 2011. The increase of $29.6 million was primarily the result of a $1.6 million increase in interest income due to an increase in the average yield on average interest-earnings assets and a $28.1 million increase in interest income due to an increase in the volume of average interest-earning assets.
Interest expense for the second quarter of 2012 was $7.4 million, a decrease of $0.6 million, or 7%, compared to interest expense of $8.0 million for the same quarter of 2011. The decrease was the result of a $3.1 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities, which was offset by an increase in the volume of average interest-bearing liabilities of $2.6 million.
Comparison of Six Months Ended June 30, 2012 with the Same Period of 2011
Net interest income before provision for loan losses was $120.4 million for the six months ended June 30, 2012, an increase of $62.1 million, or 107%, compared to $58.2 million for the same period of 2011. The increase was principally attributable to the higher level of interest earning assets, as well as the improvement in net interest margin, following the merger.

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Table of Contents

Interest income for the six months ended June 30, 2012 was $135.5 million compared to $74.5 million for the same period of 2011. The increase of $61.0 million was primarily the result of a $4.6 million increase in interest income due to an increase in the average yield earnings on average interest-earnings assets and a $56.4 million increase in interest income due to an increase in the volume of average interest-earning assets.
Interest expense for the six months ended June 30, 2012 was $15.1 million, a decrease of $1.1 million, or 7%, compared to interest expense of $16.3 million for the same quarter of 2011. The decrease was the result of a $6.3 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities, which was offset by an increase in the volume of average interest-bearing liabilities of $5.2 million.

Net Interest Margin

Net interest margin (net interest income divided by average interest-earning assets) for the second quarter of 2012 was 5.02%, an increase of 86 basis points from 4.16% for the same period of 2011. Net interest margin for the six months ended June 30, 2012 was 5.07%, an increase of 92 basis points from 4.15% for the same period of 2011. The improvement in net interest margin was largely attributable to the effect of acquisition accounting adjustments, as summarized in the following table.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Net interest margin, excluding the effect of acquisition accounting adjustments
 
4.15
%
 
4.16
%
 
4.10
%
 
4.15
%
Acquisition accounting adjustments (1)
 
0.87

 
0.00

 
0.97

 
0.00

Reported net interest margin
 
5.02
%
 
4.16
%
 
5.07
%
 
4.15
%
(1)  Acquisition accounting adjustments is 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 core net interest margin for the second quarter of 2012 decreased 1 basis point to 4.15% over the second quarter of 2011. The core interest margin for the six months ended June 30, 2012, decreased 5 basis points to 4.10%, compared with the core net interest margin for the same period of 2011. The decrease was largely attributable to the decrease in the weighted average yield on loans.

The weighted average yield on loans increased to 6.53% for the second quarter of 2012 from 6.07% for the second quarter of 2011. The weighted average yield on loans increased to 6.64% for the six months ended June 30, 2012 from 6.13% for the same period of 2011. The increase in the yield is largely attributable to the accretion of discounts on loans acquired, as summarized in the following table.

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
The weighted average yield on loans, excluding the effect of acquisition accounting adjustments
 
5.59
%
 
6.07
%
 
5.60
%
 
6.13
%
Acquisition accounting adjustments (1)
 
0.94

 
0.00

 
1.04

 
0.00

Reported weighted average yield on loans
 
6.53
%
 
6.07
%
 
6.64
%
 
6.13
%
(1)  Acquisition accounting adjustments is calculated by subtracting the weighted average yield on loans, excluding effect of acquisition accounting adjustments, from reported weighted average yield on loans.

Excluding the accretion of discounts on acquired loans, the weighted average yield on loans for the second quarter of 2012 was 5.59%, down 48 basis points from the second quarter of 2011. Excluding the accretion of discounts on acquired loans, the weighted average yield on loans for the six months ended June 30, 2012 was 5.60% compared to 6.13% for the same period of 2011. The reduction in yield, excluding the effect of acquisition accounting adjustments, is primarily due the lower yielding acquired loan portfolio, and to a lesser extent, continued pricing pressures in the market place. At June 30, 2012, fixed rate loans accounted for 38% of the loan portfolio, compared with 45% at June 30, 2011, reflecting the Company's focus on variable rate business loans. The weighted average yield on the variable rate and fixed rate loan portfolios (excluding loan discount

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accretion) at June 30, 2012 was 4.60% and 6.25%, respectively, compared with 4.91% and 7.06% at June 30, 2011.

The weighted average yield on securities available for sale for the second quarter of 2012 was 2.45%, compared with 3.16% for the second quarter of 2011. The weighted average yield on securities available for sale for the six months ended June 30, 2012 was 2.58%, compared with 3.07% for the same period of 2011. The reductions were primarily attributable to the replacement of maturing securities with lower yielding investments as market interest rates declined, as well as the impact of acquisition accounting.

The weighted average cost of deposits for the second quarter of 2012 was 0.55%, an improvement of 38 basis points from 0.93% for the second quarter of 2011. The weighted average cost of deposits for the six months ended June 30, 2012 was 0.55%, compared with 0.95% for the same period of 2011. The amortization of premium on time deposits assumed from merger positively affected the weighted average cost of deposits, as summarized in the following table.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
The weighted average cost of deposits, excluding effect of acquisition accounting adjustments
 
0.63
 %
 
0.93
%
 
0.66
 %
 
0.95
%
Acquisition accounting adjustments (1)
 
(0.08
)
 
0.00

 
(0.11
)
 
0.00

Reported weighted average cost of deposits
 
0.55
 %
 
0.93
%
 
0.55
 %
 
0.95
%
(1)  Acquisition accounting adjustments is calculated by subtracting the weighted average cost of deposits, excluding effect of acquisition accounting adjustments, from reported weighted average cost of deposits.

Excluding amortization of premium on time deposits assumed from merger, the weighted average cost of deposits was 0.63% for the second quarter of 2012, compared with 0.93% for the same period of 2011 and 0.66% for the six months ended June 30, 2012, compared with 0.95% for the same period of 2011. The improvement was driven by reductions in the cost of interest-bearing demand deposits, as well as a favorable shift in the mix of deposits to higher concentrations of non-interest bearing demand deposits. Non-interest bearing demand deposits accounted for 27% of total deposits at June 30, 2012, compared with 19% at June 30, 2011.

The weighted average cost of FHLB advances for the second quarter of 2012 was 1.95%, a decrease of 128 basis points from 3.23% in the second quarter of 2011. The weighted average cost of FHLB advances for the six months ended June 30, 2012 was 1.94%, compared with 3.22% for the same period of 2011. The significant improvement was attributable to the amortization of premiums on assumed FHLB borrowings, as summarized in the following table.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
The weighted average cost on FHLB advances, excluding effect of acquisition accounting adjustments
 
3.08
 %
 
3.23
%
 
3.25
 %
 
3.22
%
Acquisition accounting adjustments
 
(1.13
)
 
0.00

 
(1.31
)
 
0.00

Reported weighted average cost on FHLB advances
 
1.95
 %
 
3.23
%
 
1.94
 %
 
3.22
%
(1)  Acquisition accounting adjustments is calculated by subtracting the weighted average cost on FHLB advances, excluding effect of acquisition accounting adjustments, from reported weighted average cost on FHLB advances.

Excluding amortization of premiums on assumed FHLB borrowings, the weighted average cost of FHLB advances decreased to 3.08% for the second quarter of 2012 from 3.23% for the same period of 2011, reflecting the addition of $105.0 million in new FHLB borrowings at a rate of 0.76%, which was substantially lower than the weighted average rate of the rest of the borrowings. The weighted average original maturity of the new borrowings was 3.67 years. In addition, a total of $65.1 million of FHLB borrowings with weighted average rates of 0.57% matured during the quarter and were paid off.

Excluding amortization of premiums on assumed FHLB borrowings, the weighted average cost of FHLB advances slightly increased to 3.25% for the six months ended June 30, 2012, compared with 3.22% for the same period of 2011. The increase was attributed to higher rates on the assumed FHLB borrowings in relation to the Company's legacy rates.


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Table of Contents

Prepayment penalty income for the second quarter of 2012 and 2011 was $198 thousand and $34 thousand, respectively. Non-accrual interest income reversed was $400 thousand and $237 thousand for the second quarter of 2012 and 2011, respectively. Excluding the effects of both non-accrual loan interest income and prepayment penalty income, the net interest margin for second quarter 2012 and 2011 would have been as 5.04% and 4.19%, respectively.

Prepayment penalty income for the six months ended June 30, 2012 and 2011 was $314 thousand and $263 thousand, respectively. Non-accrual interest income reversed was $749 thousand and $337 thousand for the six months ended June 30, 2012 and 2011, respectively. Excluding the effects of both non-accrual loan interest income and prepayment penalty income, the net interest margin for the six months ended June 30, 2012 and 2011 would have been as 5.09% and 4.16%, respectively.

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:
 

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Table of Contents

 
Three months ended
June 30, 2012
 
Three months ended
June 30, 2011
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
(Dollars in thousands)
INTEREST EARNINGS ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Loans(1) (2)
$
3,847,921

 
$
62,504

 
6.53
%
 
$
2,190,436

 
$
33,150

 
6.07
%
Securities available for sale(3)
692,399

 
4,249

 
2.45
%
 
501,298

 
3,965

 
3.16
%
FRB and FHLB stock and other investments
203,935

 
160

 
0.31
%
 
132,957

 
179

 
0.54
%
Federal funds sold
19,794

 
30

 
0.59
%
 
0

 
0

 
N/A

Total interest earning assets
$
4,764,049

 
$
66,943

 
5.65
%
 
$
2,824,691

 
$
37,294

 
5.29
%
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest-bearing
$
1,184,339

 
$
1,849

 
0.63
%
 
$
710,948

 
$
1,545

 
0.87
%
Savings
187,872

 
830

 
1.78
%
 
126,238

 
729

 
2.32
%
Time deposits:
 
 
 
 
 
 
 
 
 
 
 
$100,000 or more
807,803

 
1,498

 
0.75
%
 
315,278

 
381

 
0.49
%
Other
652,937

 
1,068

 
0.66
%
 
623,361

 
2,435

 
1.57
%
Total time deposits
1,460,740

 
2,566

 
0.71
%
 
938,639

 
2,816

 
1.20
%
Total interest bearing deposits
2,832,951

 
5,245

 
0.74
%
 
1,775,825

 
5,090

 
1.15
%
FHLB advances
329,066

 
1,603

 
1.95
%
 
300,000

 
2,412

 
3.23
%
Other borrowings
47,488

 
593

 
4.95
%
 
42,624

 
461

 
4.27
%
Total interest bearing liabilities
3,209,505

 
$
7,441

 
0.93
%
 
2,118,449

 
$
7,963

 
1.51
%
Non-interest bearing demand deposits
1,021,805

 
 
 
 
 
417,377

 
 
 
 
Total funding liabilities / cost of funds
$
4,231,310

 
 
 
0.71
%
 
$
2,535,826

 
 
 
1.26
%
Net interest income/net interest spread
 
 
$
59,502

 
4.72
%
 
 
 
$
29,331

 
3.78
%
Net interest margin
 
 
 
 
5.02
%
 
 
 
 
 
4.16
%
Net interest margin, excluding the effect of non-accrual loan income (expense)(4)
 
 
 
 
5.06
%
 
 
 
 
 
4.20
%
Net interest margin, excluding the effect of non-accrual loan income (expense) and prepayment fee income(4) (5)
 
 
 
 
5.04
%
 
 
 
 
 
4.19
%
Cost of deposits:
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing demand deposits
$
1,021,805

 
$
0

 
 
 
$
417,377

 
$
0

 
 
Interest bearing deposits
2,832,951

 
5,245

 
0.74
%
 
1,775,825

 
5,090

 
1.15
%
Total deposits
$
3,854,756

 
$
5,245

 
0.55
%
 
$
2,193,202

 
$
5,090

 
0.93
%
 *    Annualized
(1)
Interest income on loans includes loan fees.
(2)
Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale.
(3)
Interest income and yields are not presented on a tax-equivalent basis.
(4)
Non-accrual interest income reversed was $400 thousand and $237 thousand for the three months ended June 30, 2012 and 2011, respectively.
(5)
Loan prepayment fee income excluded was $198 thousand and $34 thousand for the three months ended June 30, 2012 and 2011, respectively.


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Table of Contents

 
Six months ended
June 30, 2012
 
Six months ended
June 30, 2011
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate *
 
(Dollars in thousands)
INTEREST EARNINGS ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Loans(1) (2)
$
3,812,708

 
$
125,923

 
6.64
%
 
$
2,179,150

 
$
66,235

 
6.13
%
Securities available for sale(3)
709,063

 
9,158

 
2.58
%
 
513,751

 
7,895

 
3.07
%
FRB and FHLB stock and other investments
230,789

 
339

 
0.29
%
 
135,016

 
358

 
0.53
%
Federal funds sold
22,787

 
78

 
0.68
%
 
0

 
0

 
N/A

Total interest earning assets
$
4,775,347

 
$
135,498

 
5.70
%
 
$
2,827,917

 
$
74,488

 
5.31
%
INTEREST BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand, interest-bearing
$
1,208,551

 
$
3,973

 
0.66
%
 
$
695,686

 
$
3,009

 
0.87
%
Savings
191,902

 
1,752

 
1.84
%
 
126,449

 
1,439

 
2.29
%
Time deposits:
 
 
 
 
 
 
 
 
 
 
 
$100,000 or more
787,468

 
2,895

 
0.74
%
 
318,475

 
837

 
0.53
%
Other
687,979

 
2,029

 
0.59
%
 
631,907

 
4,936

 
1.58
%
Total time deposits
1,475,447

 
4,924

 
0.67
%
 
950,382

 
5,773

 
1.23
%
Total interest bearing deposits
2,875,900

 
10,649

 
0.74
%
 
1,772,517

 
10,221

 
1.16
%
FHLB advances
334,515

 
3,229

 
1.94
%
 
312,238

 
4,984

 
3.22
%
Other borrowings
48,798

 
1,260

 
5.11
%
 
48,822

 
1,069

 
4.35
%
Total interest bearing liabilities
3,259,213

 
$
15,138

 
0.93
%
 
2,133,577

 
$
16,274

 
1.54
%
Non-interest bearing demand deposits
1,003,307

 
 
 
 
 
403,234

 
 
 
 
Total funding liabilities / cost of funds
$
4,262,520

 
 
 
0.71
%
 
$
2,536,811

 
 
 
1.29
%
Net interest income/net interest spread
 
 
$
120,360

 
4.77
%
 
 
 
$
58,214

 
3.77
%
Net interest margin
 
 
 
 
5.07
%
 
 
 
 
 
4.15
%
Net interest margin, excluding the effect of non-accrual loan income (expense)(4)
 
 
 
 
5.10
%
 
 
 
 
 
4.17
%
Net interest margin, excluding the effect of non-accrual loan income (expense) and prepayment fee income(4) (5)
 
 
 
 
5.09
%
 
 
 
 
 
4.16
%
Cost of deposits:
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing demand deposits
$
1,003,307

 
$
0

 
 
 
$
403,234

 
$
0

 
 
Interest bearing deposits
2,875,900

 
10,649

 
0.74
%
 
1,772,517

 
10,221

 
1.16
%
Total deposits
$
3,879,207

 
$
10,649

 
0.55
%
 
$
2,175,751

 
$
10,221

 
0.95
%
*    Annualized
(1)
Interest income on loans includes loan fees.
(2)
Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale.
(3)
Interest income and yields are not presented on a tax-equivalent basis.
(4)
Non-accrual interest income reversed was $749 thousand and $337 thousand for the six months ended June 30, 2012 and 2011, respectively.
(5)
Loan prepayment fee income excluded was $314 thousand and $263 thousand for the six months ended June 30, 2012 and 2011, respectively.


55

Table of Contents

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

 
Three months ended
June 30, 2012 over June 30, 2011
 
Net
Increase
(Decrease)
 
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
$
29,354

 
$
2,685

 
$
26,669

Interest on securities
284

 
(1,013
)
 
1,297

Interest on FRB and FHLB stock and other investments
(19
)
 
(94
)
 
75

Interest on federal funds sold
30

 
0

 
30

Total interest income
$
29,649

 
$
1,578

 
$
28,071

INTEREST EXPENSE:
 
 
 
 
 
Interest on demand, interest bearing
$
304

 
$
(508
)
 
$
812

Interest on savings
101

 
(197
)
 
298

Interest on time deposits
(250
)
 
(1,417
)
 
1,167

Interest on FHLB advances
(809
)
 
(1,032
)
 
223

Interest on other borrowings
132

 
77

 
55

Total interest expense
$
(522
)
 
$
(3,077
)
 
$
2,555

Net Interest Income
$
30,171

 
$
4,655

 
$
25,516


 
Six months ended
June 30, 2012 over June 30, 2011
 
Net
Increase
(Decrease)
 
 
 
 
 
Change due to
 
Rate
 
Volume
 
(Dollars in thousands)
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
$
59,688

 
$
6,182

 
$
53,506

Interest on securities
1,263

 
(1,401
)
 
2,664

Interest on FRB and FHLB stock and other investments
(19
)
 
(203
)
 
184

Interest on federal funds sold
78

 
0

 
78

Total interest income
$
61,010

 
$
4,578

 
$
56,432

INTEREST EXPENSE:
 
 
 
 
 
Interest on demand, interest bearing
$
964

 
$
(853
)
 
$
1,817

Interest on savings
313

 
(325
)
 
638

Interest on time deposits
(849
)
 
(3,247
)
 
2,398

Interest on FHLB advances
(1,755
)
 
(2,089
)
 
334

Interest on other borrowings
191

 
192

 
(1
)
Total interest expense
$
(1,136
)
 
$
(6,322
)
 
$
5,186

Net Interest Income
$
62,146

 
$
10,900

 
$
51,246


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

56

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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 second quarter of 2012 was $7.2 million, a decrease of $2.9 million, or 29%, from $10.0 million for the same period last year. The decrease is primarily due to lower charge-offs for the most recent quarters resulting in lower historical loss rates that are used to calculate general reserve requirements. Net charge-offs decreased to $4.0 million for the three months ended June 30, 2012, compared to $13.7 million for the same period last year.
The provision for loan losses for the six months ended June 30, 2012 was $9.8 million, a decrease of $5.5 million, or 36%, from $15.3 million for the same period last year. The decrease is also due to the same reasons previously discussed for the second quarter. Net charge-offs decreased to $6.2 million for the six months ended June 30, 2012, compared to $17.9 million for the same period last year.
See Note 7 of the Notes to Condensed Consolidated Financial Statements (unaudited) and Financial Condition-Loans Receivable and Allowance for Loan Losses for further discussion.
Non-interest Income
Non-interest income is primarily comprised of service fees on deposits accounts, fees received from our trade finance letters of credit operations and net gains on sales of loans and securities available for sale.
Non-interest income for the second quarter of 2012 was $10.2 million, compared to $7.7 million for the same quarter of 2011, an increase of $2.5 million, or 33%. The increase reflected operations as a combined Company, partially offset by a $1.9 million reduction in net gains on sale of SBA loans from $4.4 million for the second quarter of 2011 to $2.5 million for the second quarter of 2012.
Non-interest income for the six months ended June 30, 2012 was $21.9 million, compared to $12.2 million for the same period of 2011, an increase of $9.7 million, or 79 %. The increase was primarily attributable to the merger with Center, as discussed previously. We posted a net gain on sale of securities consisted of a Trust Preferred security, which had been marked to market in a prior period, of $816 thousand during the six months ended June 30, 2012. This compares with none in the same reporting period of 2011.
The breakdown of changes in our non-interest income by category is shown below:
 
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2012
 
2011
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Service fees on deposit accounts
$
3,269

 
$
1,413

 
$
1,856

 
131.4
 %
International service fees
1,403

 
669

 
734

 
109.7
 %
Loan servicing fees, net
810

 
418

 
392

 
93.8
 %
Wire transfer fees
775

 
348

 
427

 
122.7
 %
Other income and fees
1,354

 
557

 
797

 
143.1
 %
Net gains on sales of SBA loans
2,463

 
4,354

 
(1,891
)
 
(43.4
)%
Net gains on sales of other loans
146

 
0

 
146

 
100.0
 %
Net gains on sales and calls of securities available for sale
0

 
6

 
(6
)
 
-100.0
 %
Net valuation gains (losses) on interest rate contracts
10

 
(106
)
 
116

 
-109.4
 %
Net gains (losses) on sales of OREO
(8
)
 
25

 
(33
)
 
-132.0
 %
Total non-interest income
$
10,222

 
$
7,684

 
$
2,538

 
33.0
 %

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Table of Contents

 
Six Months Ended June 30,
 
Increase (Decrease)
 
2012
 
2011
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Service fees on deposit accounts
$
6,429

 
$
2,910

 
$
3,519

 
120.9
%
International service fees
2,627

 
1,239

 
1,388

 
112.0
%
Loan servicing fees, net
2,147

 
881

 
1,266

 
143.7
%
Wire transfer fees
1,516

 
670

 
846

 
126.3
%
Other income and fees
2,694

 
1,064

 
1,630

 
153.2
%
Net gains on sales of SBA loans
5,426

 
5,514

 
(88
)
 
(1.6
%)
Net gains on sales of other loans
146

 
0

 
146

 
100.0
%
Net gains on sales and calls of securities available for sale
816

 
6

 
810

 
(100.0
%)
Net valuation gains (losses) on interest rate contracts
13

 
(117
)
 
130

 
(111.1
%)
Net gains (losses) on sales of OREO
53

 
27

 
26

 
96.3
%
Total non-interest income
$
21,867

 
$
12,194

 
$
9,673

 
79.3
%


Non-interest Expense
Non-interest expense for the second quarter of 2012 was $31.1 million, an increase of $14.2 million, or 84%, from $16.9 million for the same period of last year. The significant increase reflected the combined operations of BBCN in 2012 compared with the pre-merger totals for 2011. Salaries and benefits expense increased $7.0 million, or 92%, to $14.7 million for the second quarter of 2012, compared to $7.6 million for the same period of 2011. The increase was due to an increase in the number of full-time equivalent (FTE) employees, which increased to 653 at June 30, 2012 from 369 at June 30, 2011. The FTEs as of June 30, 2011 on a pro forma basis was 682. The adjusted number of FTEs as of the merger closing date of November 30, 2011 was 690. Notwithstanding a slight decrease in FTEs from March 31, 2012 of 661, salaries and benefits expense increased modestly, reflecting annual salary increases, as well as higher vacation and bonus accruals. Occupancy expense for the second quarter of 2012 rose 73% to $4.2 million from $2.4 million for the same period of 2011, primarily reflecting the combined number of branches post-merger. The FDIC assessment for the second quarter of 2012 amounted to $51 thousand, compared with $877 thousand for the second quarter of 2011. The significant decline is attributed to the recognition of a $686 thousand assessment rate reduction for fourth quarter of 2011 as a result of an upgrade of the Company's risk category. We noted that the FDIC assessment is primarily based on assets and expects it will be approximately $1.0 million for the third quarter of 2012. Other non-interest expense for the second quarter of 2012 included a $461 thousand loss incurred on the early retirement of a $10.0 million Trust Preferred security, bearing a 10.18% interest rate.
Non-interest expense for the six months ended June 30, 2012 was $61.5 million, an increase of $27.9 million, or 83%, from $33.6 million for the same period of last year. The increase largely reflected the combined operations of new BBCN. Salaries and benefits expense increased $14.0 million, or 94%, to $28.7 million for the the six months ended June 30, 2012, compared to $14.8 million for the same period of 2011. The increase was due to an increase in the FTE employees, as previously discussed for the second quarter.


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The breakdown of changes in non-interest expense by category is shown below:
 
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2012
 
2011
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Salaries and employee benefits
$
14,658

 
$
7,625

 
$
7,033

 
92.2
 %
Occupancy
4,232

 
2,445

 
1,787

 
73.1
 %
Furniture and equipment
1,468

 
934

 
534

 
57.2
 %
Advertising and marketing
1,525

 
594

 
931

 
156.7
 %
Data processing and communications
1,573

 
923

 
650

 
70.4
 %
Professional fees
1,069

 
769

 
300

 
39.0
 %
FDIC assessment
51

 
877

 
(826
)
 
-94.2
 %
Credit related expenses
2,290

 
1,004

 
1,286

 
128.1
 %
Merge and integration expenses
1,348

 
381

 
967

 
253.8
 %
Other
2,863

 
1,334

 
1,529

 
114.6
 %
Total non-interest expense
$
31,077

 
$
16,886

 
$
14,191

 
84.0
 %

 
Six Months Ended June 30,
 
Increase (Decrease)
 
2012
 
2011
 
Amount
 
Percent (%)
 
(Dollars in thousands)
Salaries and employee benefits
$
28,737

 
$
14,779

 
$
13,958

 
94.4
 %
Occupancy
7,878

 
4,882

 
2,996

 
61.4
 %
Furniture and equipment
2,686

 
1,869

 
817

 
43.7
 %
Advertising and marketing
2,983

 
1,173

 
1,810

 
154.3
 %
Data processing and communications
3,184

 
1,906

 
1,278

 
67.1
 %
Professional fees
1,682

 
1,478

 
204

 
13.8
 %
FDIC assessment
1,088

 
2,166

 
(1,078
)
 
-49.8
 %
Credit related expenses
4,470

 
1,748

 
2,722

 
155.7
 %
Merge and integration expenses
3,121

 
892

 
2,229

 
249.9
 %
Other
5,683

 
2,688

 
2,995

 
111.4
 %
Total non-interest expense
$
61,512

 
$
33,581

 
$
27,931

 
83.2
 %

Provision for Income Taxes
Income tax expense was $12.1 million and $3.8 million for the second quarter ended June 30, 2012 and 2011, respectively. The effective income tax rate for the quarters ended June 30, 2012 and 2011 was 38.5% and 37.3%, respectively. Income tax expense was $27.6 million and $8.5 million for the six months ended June 30, 2012 and 2011, respectively. The effective income tax rate for the six months ended June 30, 2012 and 2011 was 39.0% and 39.3%.


Financial Condition
At June 30, 2012, our total assets were $5.05 billion, a decrease of $117 million from $5.17 billion at December 31, 2011. As discussed previously, the decrease in total assets was due to the decrease in Cash and cash equivalent from $300.1 million at December 31, 2011 to $179.6 million at June 30, 2012 to redeem $122 million of Series A and Series B Preferred Stock issued under the U.S. Treasury's TARP Capital Purchase Program on June 27, 2012.
Investment Securities Portfolio
As of June 30, 2012, we had $666.9 million in available-for-sale securities, compared to $740.9 million of such securities at December 31, 2011. The net unrealized gain on the available-for-sale securities at June 30, 2012 was $14.8 million, compared to a net unrealized gain on such securities of $15.2 million at December 31, 2011. During the six months ended June 30, 2012, $15.5 million in securities were purchased, $83.5 million in mortgage related securities were paid down, and $1.1 million in securities were either called or matured. We sold a $1.0 million corporate Trust Preferred security acquired in the merger, and recognized a gain of $0.8 million. No securities were sold during the same period of last year. The weighted

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average duration (the weighted average of the times of the present values of all the cash flows) of the available-for-sale securities was 3.38 years and 3.54 years at June 30, 2012 and December 31, 2011, respectively. The weighted average life (the weighted average of the times of the principal repayments) of the available-for-sale securities was 3.70 years and 3.91 years at June 30, 2012 and December 31, 2011, respectively.
Loan Portfolio
As of June 30, 2012, gross loans outstanding, net of deferred loan fees and costs and excluding loans held for sale, was $3.87 billion, an increase of $135.7 million from $3.74 billion at December 31, 2011. Total loan originations during the six months ended June 30, 2012 were $409.1 million, including SBA loan originations of $101.7 million, compared to $204.2 million during the same period of 2011.

The following table summarizes our loan portfolio by amount and percentage of gross loans in each major loan category at the dates indicated:
 
 
June 30, 2012
 
December 31, 2011
 
Amount
 
Percent
 
Amount
 
Percent
 
 
 
(In thousands)
 
 
Loan portfolio composition
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Residential
$
1,931

 
0
%
 
$
2,043

 
0
%
Commercial & industrial
2,717,924

 
70
%
 
2,631,880

 
70
%
Construction
43,365

 
1
%
 
44,756

 
1
%
Total real estate loans
2,763,220

 
71
%
 
2,678,679

 
73
%
Commercial business
877,405

 
23
%
 
849,576

 
23
%
Trade finance
175,638

 
5
%
 
146,684

 
4
%
Consumer and other
60,732

 
2
%
 
66,631

 
2
%
Total loans outstanding
3,876,995

 
100
%
 
3,741,570

 
100
%
Less: deferred loan fees
(2,457
)
 
 
 
(2,744
)
 
 
Gross loans receivable
3,874,538

 
 
 
3,738,826

 
 
Less: allowance for loan losses
(65,505
)
 
 
 
(61,952
)
 
 
Loans receivable, net
$
3,809,033

 
 
 
$
3,676,874

 
 

SBA loans, consisting principally of the unguaranteed portion, are included in commercial business loans and commercial and industrial real estate loans. SBA loans included in commercial business loans were $74.0 million at June 30, 2012 and $81.6 million at December 31, 2011. SBA loans included in commercial and industrial real estate loans were $145.8 million at June 30, 2012 and $152.5 million at December 31, 2011.
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:
 
 
June 30, 2012
 
December 31, 2011
 
(Dollars in thousands)
Loan commitments
$
554,256

 
$
458,096

Standby letters of credit
37,097

 
29,028

Other commercial letters of credit
60,484

 
49,457

 
$
651,837

 
$
536,581


Nonperforming Assets
Nonperforming assets, which include non-accrual loans, loans past due 90 days or more and accruing, restructured loans,

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and other real estate owned, were $90.2 million at June 30, 2012, compared to $73.8 million at December 31, 2011. The increase in the dollar amount of non-performing loans primarily reflects three commercial real estate (CRE) loans, aggregating $9.9 million, which were placed on non-accrual status and three loans, two CRE and one C&I, totaling $5.4 million, which were restructured. The ratio of nonperforming assets to gross loans plus OREO was 2.32% and 1.97% at June 30, 2012 and December 31, 2011, respectively.
The following table summarizes the composition of our nonperforming assets as of the dates indicated.
 
 
June 30, 2012
 
December 31, 2011
 
(Dollars in thousands)
Nonaccrual loans
$
39,730

 
$
31,212

Delinquent loans 90 days or more on accrual status
20,701

 
16,169

Accruing restructured loans
23,082

 
18,775

Total Nonperforming Loans
83,513

 
66,156

Other real estate owned
6,712

 
7,625

Total Nonperforming Assets
$
90,225

 
$
73,781

Nonperforming loans to total gross loans, excluding loans held for sale
2.16
%
 
1.77
%
Nonperforming assets to gross loans plus OREO
2.32
%
 
1.97
%
Nonperforming assets to total assets
1.79
%
 
1.43
%
Allowance for loan losses to non-performing loans (excludes delinquent loans 90 days or more on accrual status)
104.29
%
 
123.94
%
Allowance for loan losses to non-performing assets
72.60
%
 
83.97
%
 
Allowance for Loan Losses
The allowance for loan losses was $65.5 million at June 30, 2012, compared to $62.0 million at December 31, 2011. We recorded a provision for loan losses of $9.8 million during the six months ended June 30, 2012, compared to $15.3 million for the same period of 2011. The allowance for loan losses was 1.69% of gross loans at June 30, 2012 and 1.66% of gross loans at December 31, 2011. Impaired loans as defined by FASB ASC 310-10-35, “Accounting by Creditors for Impairment of a Loan,” totaled $91.4 million and $82.0 million as of June 30, 2012 and December 31, 2011, respectively, with specific allowances of $13.2 million and $18.0 million, respectively. The $9.3 million increase in impaired loans from December 31, 2011 to June 30, 2012 was due primarily to inflow of acquired loans being placed on non-accrual status.
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
 
June 30, 2012
 
December 31, 2011
 
Amount of allowance for loan losses
 
Percent of loans to total loans
 
Amount of allowance for loan losses
 
Percent of loans to total loans
 
(Dollars in thousands)
Loan Type
 
 
 
 
 
 
 
Real estate - Residential
$
9

 
0
%
 
$
9

 
0
%
Real estate - Commercial
38,994

 
70
%
 
38,307

 
70
%
Real estate - Construction
521

 
1
%
 
724

 
1
%
Commercial business
21,273

 
23
%
 
20,681

 
23
%
Trade finance
3,504

 
4
%
 
1,786

 
4
%
Consumer and other
1,204

 
2
%
 
445

 
2
%
Total
$
65,505

 
100
%
 
$
61,952

 
100
%

For a better understanding of the changes in the ALLL, the loan portfolio has been segmented for disclosures purposes between loans, which are accounted for under the amortized cost method (referred to as "legacy" loans) and loans acquired from Center (referred to as "acquired" loans). The acquired loans were further segregated between Credit Impaired Loans

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(ASC 310-30, Loans Acquired with the Credit Deterioration) and performing loans (pass graded loans acquired from Center in the merger). The activity in the ALLL for the three and six months ended June 30, 2012 is as follows:


 
 
 
 
Acquired Loans (2)
 
 
For three months
 
Legacy Loans (1)
 
Credit Impaired Loans
 
Performing Loans
 
Total
 
 
(Dollars in thousands)
Balance, beginning of period
 
$
60,233

 
$
814

 
$
1,262

 
$
62,309

Provision for loan losses
 
5,148

 
1,100

 
934

 
7,182

Loans charged off
 
(4,346
)
 
0

 
(1,263
)
 
(5,609
)
Recoveries of charged offs
 
1,361

 
0

 
262

 
1,623

Balance, end of period
 
$
62,396

 
$
1,914

 
$
1,195

 
$
65,505

 
 
 
 
 
 
 
 
 
Gross loans, net of deferred loan fees and costs
 
$
2,763,869

 
164,959

 
945,710

 
$
3,874,538

Loss coverage ratio
 
2.26
%
 
1.16
%
 
0.13
%
 
1.69
%

 
 
 
 
Acquired Loans (2)
 
 
For six months
 
Legacy Loans (1)
 
Credit Impaired Loans
 
Performing Loans
 
Total
 
 
(Dollars in thousands)
Balance, beginning of period
 
$
61,952

 
$
0

 
$
0

 
$
61,952

Provision for loan losses
 
5,984

 
1,914

 
1,884

 
9,782

Loans charged off
 
(7,643
)
 
0

 
(1,349
)
 
(8,992
)
Recoveries of charged offs
 
2,103

 
0

 
660

 
2,763

Balance, end of period
 
$
62,396

 
$
1,914

 
$
1,195

 
$
65,505

 
 
 
 
 
 
 
 
 
(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.

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:
 

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Six Months Ended June 30,
 
2012
 
2011
 
(Dollars in thousands)
LOANS
 
 
 
Average gross loans receivable, including loans held for sale (net of deferred fees)
$
3,812,708

 
$
2,167,739

Total gross loans receivables, excluding loans held for sale at end of year (net of deferred fees)
$
3,874,538

 
$
2,202,446

ALLOWANCE:
 
 
 
Balance-beginning of period
$
61,952

 
$
62,320

Less: Loan charge-offs:
 
 
 
Residential real estate
0

 
0

Commercial & industrial real estate
(4,285
)
 
(12,580
)
Construction
0

 
(3,254
)
Commercial business loans
(3,533
)
 
(4,544
)
Trade finance
(300
)
 
0

Consumer and other loans
(874
)
 
(123
)
Total loans charged off
(8,992
)
 
(20,501
)
Plus: Loan recoveries
 
 
 
Commercial & industrial real estate
1,283

 
745

Commercial business loans
997

 
1,616

Trade Finance
60

 
0

Consumer and other loans
423

 
207

Total loans recoveries
2,763

 
2,568

Net loan charge-offs
(6,229
)
 
(17,933
)
Provision for loan losses
9,782

 
15,309

Balance-end of period
$
65,505

 
$
59,696

Net loan charge-offs to average gross loans, including loans held for sale (net of deferred fees) *
0.33
%
 
1.65
%
Allowance for loan losses to gross loans at end of period
1.69
%
 
2.71
%
Net loan charge-offs to beginning allowance *
20.11
%
 
57.55
%
Net loan charge-offs to provision for loan losses
63.68
%
 
117.14
%
* Annualized
 
 
 
We believe the allowance for loan losses as of June 30, 2012 is adequate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that actual losses will not exceed the estimated amounts.
Deposits and Other Borrowings
Deposits. Deposits are our primary source of funds used in our lending and investment activities. At June 30, 2012, our deposits had decreased by $58 million, or 1%, to $3.88 billion from $3.94 billion at December 31, 2011. Retail deposits totaled $3.48 billion at June 30, 2012, a decrease of $83 million from $3.56 billion at December 31, 2011. Interest-bearing demand deposits, including money market and Super Now accounts, totaled $1.33 billion at June 30, 2012, a decrease of $109 million from $1.44 billion at December 31, 2011. The decrease reflected the deposit mix shift to non-interest bearing deposits, which increased to $1.06 billion at June 30, 2012, from $984 million at December 31, 2011.
At June 30, 2012, 27.4% of total deposits were non-interest bearing demand deposits, 38.4% were time deposits and 34.2% were interest bearing demand and savings deposits. By comparison, at December 31, 2011, 25.0% of total deposits were non-interest bearing demand deposits, 38.6% were time deposits, and 36.4% were interest bearing demand and saving deposits.
At June 30, 2012, we had $105.2 million in brokered deposits and $300.0 million in California State Treasurer deposits, compared to $80.7 million and $300.0 million of such deposits at December 31, 2011, respectively. The California State Treasurer deposits had three-month maturities with a weighted average interest rate of 0.14% at June 30, 2012 and were collateralized with securities with a carrying value of $326.6 million. The weighted average interest rate for brokered deposits was 0.35% at June 30, 2012.
The following is a schedule of CD maturities as of June 30, 2012:

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Maturity Schedule of Time Deposits
($ in thousands)
 
 
 
 
Weighted Average
Quarter Ending
Balance
 
Interest Rate
September 30, 2012
$
579,259

 
0.53
%
December 31, 2012
306,344

 
1.12
%
March 31, 2013
250,683

 
1.22
%
June 30, 2013
228,969

 
0.97
%
Total one year or less
1,365,255

 
0.86
%
Over one year
126,996

 
1.27
%
Total time deposits
$
1,492,251

 
0.90
%

Other Borrowings. Advances may be obtained from the FHLB as an alternative source of funds. Advances from the FHLB are typically secured by a pledge of commercial real estate loans and/or securities with a market value at least equal to the outstanding advances plus our investment in FHLB stock.
At June 30, 2012, we had $371.1 million of FHLB advances with average remaining maturities of 1.8 years, compared to $344.4 million with average remaining maturities of 1.3 years at December 31, 2011. The weighted average rate, including the acquisition accounting adjustments was 1.77% and 1.93% at June 30, 2012 and at December 31, 2011, respectively.
During the second quarter of 2012, we retired a $10.0 million Trust Preferred Security (Nara Bancorp Capital Trust I), beating a 10.18% interest rate. At June 30, 2012 , five wholly-owned subsidiary grantor trusts ("Trusts") established by us had issued $46 million of pooled trust preferred securities (“Trust Preferred Securities”). The Trust Preferred Securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures for the securities. The Trusts used the net proceeds from their respective offerings to purchase a like amount of subordinated debentures (the “Debentures”) issued by us. The Debentures are the sole assets of the trusts. Our obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by us of the obligations of the trusts. The Trust Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. We have the right to redeem the Debentures in whole (but not in part) on or after specific dates, at redemption prices specified in the indentures plus any accrued but unpaid interest to the redemption date.
Off-Balance-Sheet Activities and Contractual Obligations
We routinely engage in activities that involve, to varying degrees, elements of risk that are not reflected, in whole or in part, in the consolidated financial statements. These activities are part of our normal course of business and include traditional off-balance-sheet credit-related financial instruments, interest rate swap contracts, operating leases and long-term debt.
Traditional off-balance-sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities could require us to make cash payments to third parties if certain specified future events occur. The contractual amounts represent the extent of our exposure in these off-balance-sheet activities. However, since certain off-balance-sheet commitments, particularly standby letters of credit, are expected to expire or be only partially used, the total amount of commitments does not necessarily represent future cash requirements. These activities are necessary to meet the financing needs of our customers.
We enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. We also purchase interest rate caps to protect against increases in market interest rates. We utilize interest rate swap contracts and interest rate caps to help manage the risk of changing interest rates.
We do not anticipate that our current off-balance-sheet activities will have a material impact on our future results of operations or our financial condition. Further information regarding our financial instruments with off-balance-sheet risk can be found in Item 3 “Quantitative and Qualitative Disclosures about Market Risk”.
Our leased banking facilities and equipment are leased under non-cancelable operating leases under which we must make monthly payments over periods up to 20 years.
Stockholders’ Equity and Regulatory Capital
Historically, our primary source of capital has been the retention of earnings, net of dividend payments to shareholders. We seek to maintain capital at a level sufficient to assure our stockholders, our customers, and our regulators that our company and our bank subsidiary are financially sound. For this purpose, we perform ongoing assessments of our components of capital as

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well as projected sources and uses of capital in conjunction with projected increases in assets and levels of risks.
Total stockholders’ equity was $715.5 million at June 30, 2012 compared to $795.9 million at December 31, 2011. The decrease was primarily due to the redemption of $122 million of Series A and Series B Preferred Stock issued under the U.S. Treasury's TARP Capital Purchase Program ("TARP") on June 27, 2012, as discussed previously. The overall decrease was offset by the net income to common stockholders of $37.7 million for the six months ended June 30, 2012. Our ratio of tangible common equity to tangible assets was 12.49% at June 30, 2012, compared to 11.42% at December 31, 2011. The increase was attributable to the increase in common stockholders' equity.
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 June 30, 2012, our Tier I capital, defined as stockholders’ equity less intangible assets, plus proceeds from the trust preferred securities (subject to limitations), was $649.3 million, compared to $733.3 million at December 31, 2011, representing an increase of $84 million, or 11%. The decrease was primarily due to the redemption of $122 million of TARP on June 27, 2012. At June 30, 2012, the total capital to risk-weighted assets ratio was 16.80% and the Tier I capital to risk-weighted assets ratio was 15.54%. The Tier I leverage capital ratio was 12.97%.
As of June 30, 2012 and December 31, 2011, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage capital ratios as set forth in the table below.
 
 
As of June 30, 2012 (Dollars in thousands)
 
Actual
 
To Be Well-Capitalized
 
Excess
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
BBCN Bancorp, Inc
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital to total assets
$
649,292

 
13.0
%
 
N/A

 
N/A

 


 


Tier 1 risk-based capital ratio
$
649,292

 
15.5
%
 
N/A

 
N/A

 


 


Total risk-based capital ratio
$
701,835

 
16.8
%
 
N/A

 
N/A

 


 


BBCN Bank
 
 
 
 
 
 
 
 
 
 
 
Tier I capital to total assets
$
625,409

 
12.5
%
 
$
250,355

 
5.0
%
 
$
375,054

 
7.5
%
Tier 1 risk-based capital ratio
$
625,409

 
15.0
%
 
$
250,479

 
6.0
%
 
$
374,930

 
9.0
%
Total risk-based capital ratio
$
677,914

 
16.2
%
 
$
417,465

 
10.0
%
 
$
260,449

 
6.2
%
 
As of December 31, 2011 (Dollars in thousands)
 
Actual
 
To Be Well-Capitalized
 
Excess
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
BBCN Bancorp, Inc
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital to total assets
$
733,319

 
19.8
%
 
N/A

 
N/A

 


 


Tier 1 risk-based capital ratio
$
733,319

 
18.2
%
 
N/A

 
N/A

 


 


Total risk-based capital ratio
$
784,054

 
19.4
%
 
N/A

 
N/A

 


 


BBCN Bank
 
 
 
 
 
 
 
 
 
 
 
Tier I capital to total assets
$
670,855

 
18.1
%
 
$
185,048

 
5.0
%
 
$
485,807

 
13.1
%
Tier 1 risk-based capital ratio
$
670,855

 
16.6
%
 
$
242,168

 
6.0
%
 
$
428,687

 
10.6
%
Total risk-based capital ratio
$
721,551

 
17.9
%
 
$
403,613

 
10.0
%
 
$
317,938

 
7.9
%

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

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ongoing repayment of borrowings.
Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and borrowings from the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank Discount Window. These funding sources are augmented by payments of principal and interest on loans and securities, proceeds from sale of loans and the liquidation or sale of securities from our available for sale portfolio. Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses.
At June 30, 2012, our total borrowing capacity from the Federal Home Loan Bank of San Francisco was $1.2 billion, of which $838 million was unused and available to borrow. At June 30, 2012, our total borrowing capacity from the Federal Reserve Bank was $339 million, of which $339 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 $519.1 million at June 30, 2012 compared to $689.8 million at December 31, 2011. Cash and cash equivalents, including federal funds sold were $179.6 million at June 30, 2012 compared to $300.1 million at December 31, 2011. We believe our liquidity sources to be stable and adequate to meet our day-to-day cash flow requirements.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The objective of our asset and liability management activities is to improve our earnings by adjusting the type and mix of assets and liabilities to effectively address changing conditions and risks. Through overall management of our balance sheet and by controlling various risks, we seek to optimize our financial returns within safe and sound parameters. Our operating strategies for attaining this objective include managing net interest margin through appropriate risk/return pricing of assets and liabilities and emphasizing growth in retail deposits, as a percentage of interest-bearing liabilities, to reduce our cost of funds. We also seek to improve earnings by controlling non-interest expense, and enhancing non-interest income. We also use risk management instruments to modify interest rate characteristics of certain assets and liabilities to hedge against our exposure to interest rate fluctuations with the objective of, reducing the effects these fluctuations might have on associated cash flows or values. Finally, we perform internal analysis to measure, evaluate and monitor risk.
Interest Rate Risk
Interest rate risk is the most significant market risk impacting us. Interest rate risk occurs when interest rate sensitive assets and liabilities do not reprice simultaneously and in equal volume. A key objective of asset and liability management is to manage interest rate risk associated with changing asset and liability cash flows and values of our assets and liabilities and market interest rate movements. The management of interest rate risk is governed by policies reviewed and approved annually by the Board of Directors. Our Board delegates responsibility for interest rate risk management to the Asset Liability Committee of the Board ("ALCO") and to the Asset and Liability Management Committee (“ALM”), which is composed of Nara Bank’s senior executives and other designated officers.
Market risk is the risk of adverse impacts on our future earnings, the fair values of our assets and liabilities, or our future cash flows that may result from changes in the price of a financial instrument. The fundamental objective of our ALM is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our ALM meets regularly to monitor interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of our assets and liabilities, and our investment activities. It also directs changes in the composition of our assets and liabilities . Our strategy has been to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Furthermore, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind. We consider the anticipated effects of these factors when implementing our interest rate risk management objectives.
Interest Rate Sensitivity
We monitor interest rate risk through the use of a simulation model that provides us with the ability to simulate our net interest income. In order to measure, at June 30, 2012, the sensitivity of our forecasted net interest income to changing interest rates, both rising and falling interest rate scenarios were projected and compared to base market interest rate forecasts. One application of our simulation model measures the impact of market interest rate changes on the net present value of estimated cash flows from our assets and liabilities, defined as our market value of equity. This analysis assesses the changes in market values of interest rate sensitive financial instruments that would occur in response to immediate and parallel changes in market interest rates.
The impacts on our net interest income and market value of equity exposed to immediate and parallel hypothetical changes

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in market interest rates as projected by the model we use for this purpose are illustrated in the following table.
 
 
June 30, 2012
 
December 31, 2011
Simulated
Estimated Net
Interest Income
Sensitivity
 
Market Value
Of Equity
Volatility
 
Estimated Net
Interest Income
Sensitivity
 
Market Value
Of Equity
Volatility
Rate Changes
 
 
 
 + 200 basis points
3.69
 %
 
(1.24
)%
 
5.46
%
 
(4.61
)%
 + 100 basis points
(0.26
)%
 
0.21
 %
 
2.91
%
 
(1.84
)%
 - 100 basis points
(1.87
)%
 
(0.90
)%
 
0.77
%
 
4.57
 %
 - 200 basis points
(7.15
)%
 
3.75
 %
 
0.83
%
 
8.58
 %

The results obtained from using the simulation model are somewhat uncertain as the model does not take into account other impacts or changes and the effect they could have on Company’s business or changes in business strategy the Company might make in reaction to changes in the interest rate environment.
 
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 June 30, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2012 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
    
BBCN has received communications from the Small Business Administration ("SBA") asserting that the SBA is entitled to receive from BBCN a portion of the amounts to be paid to BBCN by the FDIC in respect of SBA loans that are covered by the FDIC loss share agreements. The amounts claimed by the SBA with respect to covered SBA loans are based on the SBA's guarantee percentage of the individual covered loans referred to in the communications. An aggregate of $55 million of SBA loans were subject to the loss share agreements at inception. BBCN disagrees with the SBA's position. The discussions with the SBA regarding this matter are at an early stage and BBCN is not presently able to determine the probable outcome.
Item 1A.
Risk Factors
There were no material changes from risk factors previously disclosed in our 2011 Annual Report on Form 10-K.
 

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
 
Item 3.
Defaults Upon Senior Securities
None
 
Item 4.
Mine Safety Disclosures
 
None

Item 5.
Other Information
None
 
Item 6.
Exhibits
See “Index to Exhibits”.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BBCN BANCORP, INC.
 
 
 
 
 
Date:
August 9, 2012
/s/ Alvin D. Kang
 
 
 
Alvin D. Kang
 
 
 
President and Chief Executive Officer
 
 
 
 
 
Date:
August 9, 2012
 
 
 
 
 
 
 
 
/s/ Philip E. Guldeman
 
 
 
Philip E. Guldeman
 
 
 
Executive Vice President and Chief Financial Officer
 

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INDEX TO EXHIBITS
 
Exhibit Number
 
Description
 
 
 
3.1
 
Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on June 5, 2000 (incorporated herein by reference to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission (“SEC”) on November 16, 2000)
 
 
 
3.2
 
Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on May 31, 2002 (incorporated herein by reference to the Registration Statement on Form S-8 Exhibit 3.3 filed with the SEC on February 5, 2003)
 
 
 
3.3
 
Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on June 1, 2004 (incorporated herein by reference to the Registration Statement on Form 10-Q Exhibit 3.1.1 filed with the SEC on November 8, 2004)
 
 
 
3.4
 
Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on November 2, 2005 (incorporated herein by reference to the Registration Statement on DEF14 A, Appendix B filed with the SEC on September 6, 2005)
 
 
 
3.5
 
Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on July 20, 2007 (incorporated herein by reference to the Registration Statement on DEF14 A, Appendix C filed with the SEC on April 19, 2007)
 
 
 
3.6
 
Certificate of Merger, filed with the Delaware Secretary of State on November 30, 2011 (incorporated herein by reference to the Registration Statement on Form 10-Q Exhibit 3.6 filed with SEC on May 10, 2012)

 
 
 
3.7
 
Amended and Restated Bylaws of BBCN Bancorp, Inc. (incorporated herein by reference to Current Report on Form 8-K Exhibit 5.1 filed with the SEC on February 1, 2012, SEC file number 000-50245)
 
 
 
10.1
 
Amendment No. 2 to Agreement and Plan of Merger, dated as of July 6, 2011, between Nara Bancorp, Inc. and Center Financial Corporation (incorporated herein by reference to the Current Report on Form 8-K, Exhibit 2.1, filed with the SEC on July 7, 2011)

 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*
 
 
 
101.INS**
 
XBRL Instance Document
 
 
 
101.SCH**
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
__________________________________
*
Filed herewith
**
Furnished herewith


70