-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, FXH7DMHj1uSElSs7j54QU0ILwLZkEElopJagvaK/hxSKklVhCGkqJy8RjyYXq/3B Yf94UljRcqqqWOavUly4dQ== 0000356050-95-000004.txt : 19950517 0000356050-95-000004.hdr.sgml : 19950516 ACCESSION NUMBER: 0000356050-95-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950512 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CU BANCORP CENTRAL INDEX KEY: 0000356050 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953657044 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11008 FILM NUMBER: 95537753 BUSINESS ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 BUSINESS PHONE: 8189079122 MAIL ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 FORMER COMPANY: FORMER CONFORMED NAME: LINCOLN BANCORP DATE OF NAME CHANGE: 19900814 10-Q 1 FORM 10-Q FOR PERIOD ENDED 3/31/95 FORM 10-Q FOR PERIOD ENDED 3/31/95 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. /X/ For the Quarterly Period Ended March 31, 1995, or Transition Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________. Commission File Number 0-11008 CU BANCORP (Exact name of registrant as specified in its charter) California 95-3657044 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 818-907-9122 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address, and former fiscal year if changes 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 / / As of March 31, 1995, the Registrant has outstanding 4,587,330 shares of its Common stock, no par value. 1 CU Bancorp Quarter Ended March 31, 1995 Table of Contents - Form 10-Q Page Part I. Financial Information Item 1. Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operation. 3 Consolidated Statements of Financial Condition: -March 31, 1995, and December 31, 1994. 14 Consolidated Statements of Income: -Three Month Periods Ended March 31, 1995, and March 31, 1994. 15 Consolidated Statements of Cash Flows: -Three Month Periods Ended March 31, 1995, and March 31, 1994. 16 Notes to Consolidated Financial Statements 17 Signatures 20 Part II. Other Information Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Matters 21 Item 6. Exhibits and Filings on Form 8-K 21 2 Management Discussion and Analysis Overview The Company earned $710 thousand, or $.15 per share, during the first quarter of 1995, compared to $578 thousand, or $0.13 per share, during the same period in 1994. Over 80% of the earnings in the first quarter of 1994 were attributable to a gain on the sale of mortgage servicing rights. Since then, the earnings of the core commercial bank have grown steadily as the reliance on mortgage related income has declined. For the quarter ended March 31, 1995, only about 15% of pretax earnings related to sales of mortgage servicing. The Bank's asset quality ratios continue to be exceptionally strong. At March 31, 1995, nonperforming assets were $ 66 thousand, compared with $36 thousand in the prior quarter, and $1.1 million in the first quarter of 1994. The Bank did not have any real estate acquired through foreclosure at March 31, 1995, December 31, 1994 or March 31, 1994. The Bank's allowance for loan losses as a percent of both nonperforming loans and nonperforming assets at the end of the first quarter of 1995 was 11503 %, compared to first quarter 1994 levels of 652%. The allowance for loan losses as a percentage of nonperforming loans and assets has increased as both nonperforming categories were reduced. During the first quarter of 1995, the Bank enjoyed a net recovery as recoveries exceeded chargeoffs. Net recoveries further increase the allowance's coverage of the nonperforming loans and assets. Capital ratios are strong, substantially exceeding levels required to be in the "well capitalized" category established by bank regulators. The Total Risk- Based Capital Ratio was 16.4 %, the Tier 1 Risk-Based Capital Ratio was 15.1%, and the Leverage Ratio was 10.2% at March 31, 1995, compared to 15.4%, 14.12%, and 10.44%, respectively, at year-end 1994. Regulatory requirements for Total Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum of 8%, 4%, and 3%, respectively, and for classification as well capitalized, 10%, 6%, and 5%, respectively. The Bank's strong capital and asset quality position have positioned the Bank for continued growth of its core business of providing relationship based services to middle market customers. During the first quarter of 1995, the Bank generated approximately $31 million in new loan commitments, compared with about $20 million for the comparable period of 1994. Balance Sheet Analysis Loan Portfolio Composition and Credit Risk The Bank's loan portfolio at March 31, 1995 has maintained the high standards of credit quality that have been established as the commercial loan portfolio has been built over the past two years. Non performing assets have been virtually eliminated and exposures to real estate have been greatly reduced to consist primarily of loans secured by real estate made to the Bank's core middle market customers. Total loans at March 31, 1995 declined by $6 million from December 31, 1994, as fundings against new loan committments were offset by loan payoffs. Loan paydowns for the quarter were unusually high, as a number of project related loans in the Entertainment division combined with normal payoffs and seasonality in the commercial portfolio. Loan levels were $30 million above the March 31, 1994 level, reflected the ongoing success in booking new commercial relationships. 3
Table 1 Loan Portfolio Composition Amounts in thousands of dollars March 31, December 31, March 31, 1995 1994 1994 Commercial & Industrial Loans $138,709 82% $142,885 82% $100,527 73% Real Estate Loans: Commercial 24,539 15% 26,528 15% 27,923 20% Mortgages 4,769 3% 4,773 3% 9,166 6% Construction 413 416 1,010 1% Total loans net of unearned fees $168,430 100% $174,602 100% $138,626 100%
At March 31, 1995, the Bank had loans totaling $95 million maturing within one year, $62 million maturing after one but within five years, and $11 million maturing after five years. Loans due after one year totaling $5 million had predetermined interest rates. The real estate loans are generally collateralized by a first or second trust deed position, and have historically represented little credit risk. Lending efforts have been directed away from commercial real estate, as well as construction and multifamily lending. The Bank is now focused on business lending to middle market customers. Current credit policy now permits commercial real estate lending generally only as part of a complete commercial banking relationship with a middle market customer. Existing commercial real estate loans are secured by first or second liens on office buildings and other structures. The loans are secured by real estate that had appraisals in excess of loan amounts at origination. Monitoring and controlling the Bank's allowance for loan losses is a continuous process. All loans are assigned a risk grade, as defined by credit policies, at origination and are monitored to identify changing circumstances that could modify their inherent risks. These classifications are one of the criteria considered in determining the adequacy of the allowance for loan losses. The amount and composition of the allowance for loan losses is as follows: 4
Table 2 Allocation of Allowance for Loan Losses Amounts in thousands of dollars March 31, December 31, March 31, 1995 1994 1994 Commercial & Industrial Loans(1) $7,247 $7,096 $6,392 Real estate loans - Mortgages 0 0 277 Real estate loans - Construction 0 0 5 Loans 0 7,096 6,674 Unfunded commitments and letters of credit 345 331 551 Total Allowance for loan losses $7,592 $7,427 $7,225 (1) Including Commercial loans secured by real estate
Adequacy of the allowance is determined using management's estimates of the risk of loss for the portfolio and individual loans. Included in the criteria used to evaluate credit risk are, wherever appropriate, the borrower's cash flow, financial condition, management capabilities, and collateral valuations, as well as industry conditions. A portion of the allowance is established to address the risk inherent in general loan categories, historic loss experience, portfolio trends, economic conditions, and other factors. Based on this assessment a provision for loan losses may be charged against earnings to maintain the adequacy of the allowance. The allocation of the allowance based upon the risks by type of loan, as shown in Table 2, implies a degree of precision that is not possible when using judgments. While the systematic approach used does consider a variety of segmentations of the portfolio, management considers the allowance a general reserve available to address risks throughout the entire loan portfolio. 5
Activity in the allowance, classified by type of loan, is as follows: Table 3 Analysis of the Changes in the Allowance for Loan Loss Amounts in thousands of dollars For the Periods Ended March 31, December 31, March 31, 1995 1994 1994 Balance at January 1 $7,427 $6,513 $6,513 Loans charged off: Real estate secured loans 0 486 200 Commercial loans secured and unsecured 0 820 464 Loans to individuals, installment and other loans 4 107 0 Total charge-offs 4 1,413 664 Recoveries of loans previously charged off: Real estate secured loans 20 586 493 Commercial loans secured and unsecured 144 1,735 882 Loans to individuals, installment and other loans 5 6 0 Total recoveries of loans previously charged off 169 2,327 1,377 Net charge-off (recovery) (165) (914) (713) Provision for loan losses 0 0 0 Balance at end of period $7,592 $7,427 $7,226 Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the period ended (.098)% (0.61)% (0.52)%
The Bank's policy concerning nonperforming loans is more conservative than is generally required. It defines nonperforming assets as all loans ninety days or more delinquent, loans classified nonaccrual, and foreclosed, or in substance foreclosed real estate. Nonaccrual loans are those whose interest accrual has been discontinued because the loan has become ninety days or more past due or there exists reasonable doubt as to the full and timely collection of principal or interest. When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against operating results. Subsequent payments on nonaccrual loans are treated as principal reductions. At March 31, 1995, nonperforming loans amounted to $66 thousand compared with $36 thousand at December 31, 1994. 6
Table 4: Nonperforming Assets Amounts in thousands of dollars March 31, December 31 March 31, 1995 1994 1994 Loans not performing (1) $66 $36 $308 Insubstance foreclosures 0 0 800 Total nonperforming loans 66 36 1,108 Other real estate owned 0 0 0 Total nonperforming assets $66 $36 $1,108 Allowance for loan losses as a percent of: Nonperforming loans 11,503% 20,631% 652% Nonperforming assets 11,503% 20,631% 652% Nonperforming assets as a percent of total assets 0% 0% 0.8% Nonperforming loans as a percent of total loans 0% 0% 0.8% Note 1: Loans not performing Performing as agreed $66 $36 $271 Partial performance 0 0 0 Not performing 0 0 37 $66 $36 $308 Nonaccrual: Loans $66 $36 $308 Troubled debt restructurings 0 0 0
Securities The securities portfolio at March 31, 1995, totaled $68 million, compared to $74 million at year-end 1994. The securities are all held in a Held for Investment portfolio. There was no held for sale portfolio at March 31, 1995 or year-end 1994. This portfolio is recorded at amortized cost. It is the Bank's intention to hold these securities to their individual maturity dates. There have been no realized gains or losses on securities in the first quarter of 1995 or 1994. At March 31, 1995, there were unrealized gains of $5 thousand and losses of $1.2 million in the securities portfolio. Additional information concerning securities is provided in the footnotes to the accompanying financial statements. Other Real Estate Owned There was no Other Real Estate Owned on the Bank's balance sheet at March 31, 1995, December 31, 1994, and March 31, 1994. The Bank's policy is to carry properties acquired in foreclosure at fair value less estimated selling costs, which is determined using recent appraisal values adjusted, if necessary, for other market conditions. Loan balances in excess of fair value are charged to the allowance for loan losses when the loan is reclassified to other real estate. Subsequent declines in fair value are charged against an allowance for real estate owned losses created by charging a provision to other operating expenses. The Bank has not had any significant expenses related to Other Real Estate Owned in 1995 or 1994. Deposit Concentration Due to its historic focus on real estate-related activities, the Bank developed a concentration of deposit accounts from title insurance and escrow companies. These deposits are generally noninterest bearing transaction accounts that contribute to the Bank's interest margin. Noninterest expense related to these deposits is included in other operating expense. The Bank monitors the profitability of these accounts through an account analysis procedure. 7 The Bank offers products and services allowing customers to operate with increased efficiency. A substantial portion of the services, provided through third party vendors, are automated data processing and accounting for trust balances maintained on deposit at the Bank. These and other banking related services, such as messenger and deposit courier services, will be limited or charged back to the customer if the deposit relationship profitability does not meet the Bank's expectations. Noninterest bearing deposits represent nearly the entire title and escrow relationship. These balances have been reduced substantially as the Bank focused on middle market business loans. The balance at March 31, 1995, was $35 compared to $44 million at December 31, 1994. Costs relative to servicing the above relationships are the significant portion of the Bank's customer data processing and messenger and courier costs. These were no significant changes to the costs in 1995. The Bank had $39 million in certificates of deposit larger than $100 thousand dollars at March 31, 1995. The maturity distribution of these deposits is relatively short term, with $24 million maturing within 3 months and the balance maturing within 12 months. Liquidity and Interest Rate Sensitivity The objective of liquidity management is to ensure the Bank's ability to meet cash requirements. The liquidity position is managed giving consideration to both on and off-balance sheet sources and demands for funds. Sources of liquidity include cash and cash equivalents (net of Federal Reserve requirements to maintain reserves against deposit liabilities), securities eligible for pledging to secure borrowings from dealers pursuant to repurchase agreements, loan repayments, deposits, and borrowings from a $25 million overnight federal funds line available from a correspondent bank. Potential significant liquidity requirements are withdrawals from noninterest bearing demand deposits and funding of commitments to loan customers. From time to time the Bank may experience liquidity shortfalls ranging from one to several days. In these instances, the Bank will either purchase federal funds, and/or sell securities under repurchase agreements. These actions are intended to bridge mismatches between funding sources and requirements, and are designed to maintain the minimum required balances. The Bank has had no Fed Funds purchased or borrowings under repurchase agreements during 1994 or 1995. The Bank's historical portfolio of large certificates of deposit (those of $100 thousand or more) has not been significant relative to the total deposit base. At March 31, 1995 this funding source was 15% of average deposits, compared to 14% at December 31, 1994. This funding source has traditionally been used to manage liquidity needs within the deposit portfolio. During 1994 and 1995, loan growth for the bank outpaced growth of deposits from the banks commercial customers. The Bank funded this growth, combined with the Bank's reduced concentration in title and escrow deposits, in part with certificates of deposit from customers from outside the Bank's normal service area. These out of area deposits are generally certificates of deposit of $90,000 or greater, that are priced competitively with similar certificates from other financial institutions throughout the country. At March 31,1995, the Bank had approximately $81 million of these out of area deposits, up from $55 million at December 31, 1994.
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at March 31, 1995 8 Amounts in thousands of dollars Amounts Maturing or Repricing in More Than More Than More Than 9 3 Months 6 Months Months But Less Than But But Less than 12 3 Months Less Than Less Than 12 Months Months 6 Months 9 Months & Over Earning Assets Gross Loans $159,587 $2,121 $229 $92 $6,564 Securities 3,001 1,989 7,982 5,057 49,957 Federal funds sold & other 53,200 ----- ----- ----- ----- Total earning assets 215,788 4,110 8,211 5,149 56,521 Interest-bearing deposits: Now and money market 56,798 Savings 8,163 Time certificates of deposit: Under $100 26,723 18,596 6,804 14,400 3,030 $100 or more 24,333 7,298 2,440 3,409 1,100 Non interest-bearing demand deposits 35,280 0 0 0 0 Total interest-bearing liabilities 151,297 25,894 9,244 17,809 4,130 Interest rate sensitivity gap 64,491 (21,784) (1,033) (12,660) 52,391 Cumulative interest rate sensitivity gap 64,491 42,707 41,674 29,014 81,405 Off balance sheet financial instruments 0 0 0 0 0 Net cumulative gap 64,491 42,707 41,674 29,014 81,405 Adjusted cumulative ratio of rate sensitive assets to rate sensitive liabilities (1) 1.43 1.24 1.22 1.14 1.39 (1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios less than 1.0 indicate a liability sensitive position. A ratio of 1.0 indicates a risk neutral position.
Assets and liabilities shown on Table 5 are categorized based on contractual maturity dates. Maturities for those accounts without contractual maturities are estimated based on the Bank's experience with these customers. Noninterest bearing deposits of title and escrow companies, having no contractual maturity dates, are considered subject to more volatility than similar deposits from commercial customers. The net cumulative gap position shown in the table above indicates that the Bank does not have a significant exposure to interest rate fluctuations during the next twelve months. 9 Capital Total shareholders' equity was $31 million at March 31, 1995, compared to $30 million at year-end 1993. This increase was due to earnings, plus the exercise of stock options. The Bank is guided by statutory capital requirements, which are measured with three ratios, two of which are sensitive to the risk inherent in various assets and which consider off-balance sheet activities in assessing capital adequacy. During 1995 and 1994, the Bank's capital levels exceeded the "well capitalized" standards, the highest classification established by bank regulators.
Table 7 Capital Ratios Regulatory Standards March 31, December 31, Well 1995 1994 Capitalized Minimum Total Risk Based Capital 16.38% 15.40% 10.0% 8.00% Tier 1 Risk Base Capital 15.10 14.12 6.0 4.00 Leveraged Capital 10.24 10.44 5.0 3.00
In February of 1995, the Bank declared a dividend of $.02 per share payable March 13, 1995 to shareholders of record February 20, 1995. No dividends were paid in 1994 . The common stock of the Company is listed on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market Systems where it trades under the symbol CUBN. Market Expansion The Bank operates as a single business segment, providing commercial banking services in the southern California area. The Bank is committed to expanding the market penetration of the commercial bank, including the creation of new branches, and pursuing acquisition opportunities. Branches have been established in three strategic locations in Southern California. In January, 1994, two branches were opened to serve the San Gabriel Valley and the South Bay areas. The offices are staffed with seasoned commercial lenders whose primary focus is business development. Such offices are cost effective approaches to business development and allow the Bank access to wider market exposure. While these offices are primarily staffed with existing personnel, when appropriate, key people with specific market knowledge and experience have been hired. In October, 1994, the Bank opened a loan production office in Camarillo, California, as its regional center for Ventura County. The Camarillo office is expected to be converted to a branch in 1995. On March 27, 1995, the Company entered into an agreement to acquire Santa Ana - based Corporate Bank in a stock transaction. Completion of this transaction is subject to Corporate Bank shareholder approval and regulatory approvals. Net Interest Income and Interest Rate Risk Net interest income is the difference between interest and fees earned on earning assets and interest paid on funding liabilities. Net interest income for the first quarter of 1995 was $3.8 million, compared to $2.8 million for the same period in 1994. The change is attributable to changes in volume and deposit mix. The Bank's net interest income has improved with the growth of the commercial loan portfolio from 1994 to 1995. This improvement was offset in part by the change in deposit mix away from non interest bearing title and escrow deposits. 10
Table 8 Analysis of Changes in Net Interest Income (1) Amounts in thousands of dollars Three months ended Three months ended March 31, March 31, 1995 compared to 1994 1994 compared to 1993 Increases(Decreases) Volume Rate Total Volume Rate Total Interest Income Loans, net $751 $830 $1,581 $(1,244) $(235) $(1,479) Investments 5 254 260 265 (116) 149 Federal Funds Sold 162 192 354 93 8 101 Total interest income 918 1,276 2,195 (886) (343) (1,229) Interest Expense Interest-bearing deposits: Demand and Savings (37) 100 63 (58) (47) (105) Time Certificates of deposit: Under $100 539 220 759 50 2 52 $100 or more 236 203 439 (75) 18 (57) Federal funds purchased / Repos 0 0 0 (14) (14) (27) Other borrowings (42) (22) (64) (35) 5 30 Total interest expense 696 501 1,197 (132) (36) (137) Net interest income $222 $775 $998 $(754) $(307) $(1,092) (1) The change in interest income or interest expense that is attributable to both change in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of the changes in each.
Yields on earning assets were approximately 8.7% in the first quarter of 1995, compared to a 6.5% yield for the same period in 1994. The higher average yield on earning assets in 1995 is the primarily the result of an increase in the prime rate from an average of 6% in the first quarter of 1994 to an average of 8.8% in the first quarter of 1995. Rates on interest bearing liabilities resulted in an average cost of funds of 4.9% in 1995, compared with 2.7% for the comparable period of 1994. In addition to the generally higher level of interest rates in 1995, certificates of deposit represent a higher proportion of the funding liabilities, rather than lower cost money market or savings accounts. Expressing net interest income as a percent of average earning assets is referred to as margin. Margin for 1995 was 5.6%, compared to 5.0% for the same period in 1994. The Bank's margin is strong because it has funded itself with a significant amount of noninterest bearing deposits. The higher margin in 1995 is largely due to the higher general level of interest rates. 11
Table 9 Average Balance Sheets and Analysis of Net Interest Income Three months ended Three months ended Amounts in thousands of dollars March 31, 1995 March 31, 1994 Interest Annual Interest Annual Income or Yield or Income or Yield Balance Expense Rate Balance Expense or Rate Interest Earning Assets Loans, Net $160,816 $4,413 10.98% $130,117 $2,832 8.71% Investments 71,129 915 5.15 69,316 642 3.70 Certificates of Deposit in other banks 149 3 6.71 1,377 16 4.65 Federal Funds Sold 34,489 501 5.81 19,439 147 3.02 Total Earning Assets 266,583 5,832 8.75 220,249 3,647 6.61 Non Earning Assets Cash & Due From Banks 23,985 25,229 Other Assets 8,397 7,769 Total Assets $298,965 $253,247 Interest-bearing Liabilities Demand and savings $63,740 469 2.94 $69,832 406 2.32 Time Certificates of Deposits Less Than $100 63,599 973 6.12 23,657 214 3.62 More Than $100 38,545 582 6.04 18,375 143 3.11 Total interest-bearing 165,884 2,024 4.88 111,864 763 2.73 Noninterest-bearing Deposits 92,797 105,668 Total Deposits 258,681 2,024 3.13 217,532 763 1.40 Other Borrowings 3,798 58 6.11 6,335 122 7.70 Total Funding Liabilities 262,479 2,082 3.17 223,867 885 1.58 Other Liabilities 6,630 2,538 Shareholders' Equity 29,859 26,842 Total Liabilities and Shareholders' Equity $298,968 $253,247 Net Interest Income $3,750 5.63% $2,752 5.00% Shareholders' Equity to Total Assets 9.99% 10.60%
Other Operating Income A significant portion of other operating income in 1994 was earned as mortgage servicing rights were sold. After the $197 gain from the sale of servicing rights in 1995, the Bank no longer has a portfolio of mortgage servicing rights available for sale. The trends and composition of other operating income are shown in the following table. 12
Table 10 Other operating income Amounts in thousands of dollars For three months ended ended March 31, March 31, 1995 1994 Gain on sale of SBA Loans $100 $8 Premium on sales of mortgage loans 68 Service income 466 Documentation fees 22 Other service fees and charges 323 339 Gain on sale of mortgage servicing portfolio 197 838 Total $620 $1,741
Operating Expense Total operating expenses for the bank were $1.5 million in the first quarter of 1995, compared to $1.9 million for the same period in 1994. Refocusing productive resources toward commercial banking activities and eliminating historic inefficiencies allowed this reduction. The current level of operating expense is deemed to be adequate and will be leveraged further as the core middle market business is expanded. Provision for Loan Losses The Bank has made no provision for loan losses in 1995 or 1994. No loan loss provision has been deemed necessary for 1995 and 1994, due to the declining levels of nonperforming assets, net recoveries received, and the strong reserve position. 13
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary Amounts in thousands of dollars March 31, December 31, 1995 1994 Assets Cash and due from banks $26,944 $35,397 Federal funds sold 53,000 20,000 Total cash and cash equivalents 79,944 55,397 Time deposits with other financial institutions 200 0 Investment securities (Market value of $66,776 and $71,423 at March 31, 1995 and December 31, 1994, respectively) 67,985 74,153 Loans, (Net of allowance for loan losses of $7,592 and $7,427 at March 31, 1995, and December 31, 1994, respectively) 161,001 167,175 Premises and equipment, net 1,000 996 Other real estate owned, net 0 0 Accrued interest receivable and other assets 6,697 6,433 Total Assets $316,827 $304,154 Liabilities and Shareholders' equity Deposits: Demand deposits $104,185 $112,034 Savings deposits 64,962 67,896 Time deposits under $100 69,553 47,896 Time deposits of $100 or more 38,579 36,415 Total deposits 277,279 264,181 Accrued interest payable and other liabilities 8,622 10,229 Total liabilities 285,901 274,410 Shareholders' equity: Preferred stock, no par value: Authorized -- 10,000,000 shares No shares issued or outstanding in 1995 or 1994 ---- Common stock, no par value: Authorized - 20,000,000 shares Issued and outstanding - 4,587,330 in 1995, and 4,437,312 in 1994. 26,992 26,430 Retained earnings 3,934 3,314 Total Shareholders' equity 30,926 29,744 Total Liabilities and Shareholders' equity $316,827 $304,154 The accompanying notes are an integral part of these consolidated financial statements.
14
Consolidated Statements of Income CU Bancorp and Subsidiary Amounts in thousands of dollars, except per share data For the three months ended March 31, 1995 1994 Revenue from earning assets: Interest and fees on loans $4,413 $2,831 Interest on taxable investment securities 900 641 Interest on tax exempt investment securities 15 1 Interest on time deposits with other financial 3 16 institutions Interest on federal funds sold 501 147 Total revenue from earning assets 5,832 3,636 Cost of funds: Interest on interest-bearing demand deposits 399 361 Interest on savings deposits 70 45 Interest on time deposits under $100 973 214 Interest on time deposits of $100 or more 582 143 Interest on other borrowings 58 122 Total cost of funds 2,082 885 Net revenue from earning assets before provision for loan losses 3,750 2,752 Provision for loan losses 0 0 Net revenue from earning assets 3,750 2,752 Other operating revenue: 3,750 2,752 Servicing Income - mortgage loans sold 0 466 Other fees & charges - commercial 423 229 Premium on sales of mortgage loans 0 68 Other fees and charges - mortgage 0 140 Gain on sale of mortgage servicing portfolio 197 838 Total other operating revenue 620 1,741 Other operating expenses: Salaries and related benefits 1,652 1,543 Selling expenses - mortgage loans 0 126 Other operating expenses 1,458 1,816 Total operating expenses 3,110 3,485 Income before provision for income taxes 1,260 1,008 Provision for income taxes 550 430 Net income $710 $578 Earnings per share $0.15 $0.13 The accompanying notes are an integral part of these consolidated financial statements.
15
CU BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS OF DOLLARS) For the three months ended March 31, 1995 1994 Increase(decrease) in cash and cash equivalents: Cash flows from operating activities Net income/(loss) $710 $578 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 120 106 Amortization of real estate mortgage servicing rights 0 15 Benefit of deferred taxes 298 139 Increase/(decrease) in other assets (374) 1,741 Increase/(decrease) in other liabilities (1,809) (5,270) (Increase)/decrease in accrued interest receivable (188) (723) Increase/(decrease) in deferred loan fees 81 70 Increase/(decrease) in accrued interest payable 202 (12) Net amortization of (discount)/premium on investment securities 145 306 Total Adjustments (1,525) (3,628) Net cash provided by operating activities (815) (3,050) Cash flows from investing activities Proceeds from investment securities sold or matured 6,023 18,886 Purchase of investment securities 0 0 Net decrease in time deposits with other financial institutions (200) 0 Net (Increase/(decrease) in loans 6,093 4,243 Purchases of premises and equipment, net (124) (54) Net cash provided by investing activities 11,792 23,075 Cash Flows from financing activities Net increase/(decrease) in demand and savings deposits (10,783) 1,408 Net increase/(decrease/ in time certificates of deposits 23,881 (13,416) Proceeds from exercise of stock options and director warrants 562 54 Cash dividend paid (90) 0 Net cash provided by financing activities 13,570 (11,954) Net increase (decrease) in cash and cash equivalents 24,547 8,071 Cash and cash equivalents at beginning of year 55,397 46,440 Cash and cash equivalents at end of year $79,944 $54,511 Supplemental disclosure of cash flow information Cash paid during the year: Interest $1,880 $897 Taxes 1,500 0 Supplemental disclosure of noncash investing activities: Loans transferred to OREO 0 0 The accompanying notes are an integral part of these consolidated financial statements.
16 Notes to Consolidated Financial Statements March 31, 1995 UNAUDITED Note A. BASIS OF PRESENTATION The accounting and reporting policies of CU Bancorp ("the Company") and its wholly owned subsidiary, California United Bank, N.A. ("the Bank"), are prepared in accordance with generally accepted accounting principles used in the banking industry. All material inter company balances have been eliminated and all material interim period adjustments which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations, and cash flow have been made. Note B. EARNINGS PER SHARE Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented, except when the effect of the latter would be anti-dilutive. NOTE C. SECURITIES The Bank has the intent and ability to hold its investment securities until maturity. Accordingly, investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts on a straight-line basis, which approximates the effective interest method. Gains and losses recognized on the sale of investment securities are based upon the adjusted cost and determined using the specific identification method. The Bank has no securities classified as "held for sale", indicating the willingness to sell these securities under certain conditions. These securities would be carried at current market value with unrealized gains or losses not recognized as current income but reported as an increase or decrease to capital in the statements of financial condition and in the statements of shareholders' equity. The following tables set forth the book value and market value, of investment securities at March 31, 1995.
Gross Gross Book Unrealized Unrealized Market (Thousands of dollars) Value Gains Losses Value U.S. Treasury Securities $60,996 $(1,188) $59,807 Mortgage-backed securities 81 81 U.S. Government Agency Securities 5,726 (27) 5,698 State and Municipal Securities 750 $5 756 Federal Reserve Bank Stock 433 0 0 433 Total $67,986 $5 $(1,215) $66,775
At March 31, 1995, investment securities with a book value of $25.9 million were pledged to secure U.S. District Court deposits and for other purposes as required or permitted by law. Note D. AVERAGE FEDERAL RESERVE BALANCES 17 The average cash reserve required to be maintained at the Federal Reserve Bank was approximately $3 million, $6 million, and $6 million for the periods ending March 31, 1995 and December 31 and March 31, 1994, respectively. Note E. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is also computed using the straight-line method over the shorter of the useful life of the improvement or the term of the lease. Note F. OTHER REAL ESTATE OWNED Real estate owned, acquired either through foreclosure or deed in lieu of foreclosure, is recorded at the lower of the loan balance or estimated fair market value. When acquired, any excess of the loan balance over the estimated fair value is charged to the allowance for loan losses. Subsequent write-downs, if any, are charged to operation expenses in the periods that they become known. There was no other real estate owned as of March 31, 1995, December 31 or March 31, 1994. Note G. INCOME TAXES Effective January 1, 1993, the Bank implemented the provisions of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The implementation had no significant impact on the financial condition or operations of the Bank. SFAS No. 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Note H. LOANS Loans are carried at face amount, less payments collected, allowance for loan losses, and unamortized deferred fees. Interest on loans is accrued monthly on a simple interest basis. The general policy of the Bank is to discontinue the accrual of interest and transfer loans to nonaccrual (cash basis) status where reasonable doubt exists with respect to the timely collectibility of such interest. Payments on nonaccrual loans are accounted for using a cost recovery method. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can reasonably be anticipated. Management considers current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. The allowance is based on estimates and ultimate losses may differ from current estimates. These estimates are reviewed periodically and as adjustments become necessary, they are charged to earnings in the period in which they become known. The allowance is increased by provisions charged to operating expenses, increased for recoveries of loans previously charged-off, and reduced by charge-offs. The Bank adopted Statement of Financial Standards (SFAS) 114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," as of January 1, 1995. SFAS 114 requires that impaired loans be 18 measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. When the measure of the impaired loan is less than the recorded balance of the loan, the impairment is recorded through a valuation allowance included in the allowance for loan losses. The Bank had previously measured the allowance for loan losses using methods similar to the prescribed in SFAS 114. As a result, no additional provision was required by the adoption of this pronouncement. At March 31, 1995, the Bank had $66 thousand in impaired loans, against which a loss allowance of $45 thousand has been provided. All impaired loans are included in nonaccrual status, and as such no interest income is recognized. For the first quarter of 1995, the Bank had an average investment in impaired loans of approximately $50 thousand. Note I. RECLASSIFICATIONS Certain items have been reclassified in the prior period financial statements presented herein, in order to conform to classifications followed for March 31, 1995. Note J. LEGAL MATTERS In the normal course of business the Bank occasionally becomes a party to litigation. In the opinion of management, based upon consultation with legal counsel, the Bank believes that pending or threatened litigation involving the Bank will have no adverse material effect upon its financial condition, or results of operations. The Bank is a defendant in multiple lawsuits related to the failure of two real estate investment companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by investors in PMC and SLGH (the "Federal Investor Action"), at least three state court actions by groups of Investors (the "State Investor Actions"), and an action filed by the Resolution Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action was filed by an individual investor and his related pension and profit sharing plans (the "Individual Investor Action"). Other defendants in these multiple actions and in related actions include financial institutions, title companies, professionals, business entities and individuals, including the principals of PMC and SLGH. The Bank was a depository bank for PMC, SLGH and related companies and was a lender to certain principals of PMC and SLGH ("Individual Loans"). Plaintiffs allege that PMC/SLGH was or purported to be engaged in the business of raising money from investors by the sale and issuance of interests in loans evidenced by promissory notes secured by real property. Plaintiffs allege that false representations were made, and the investment merely constituted a "Ponzi" scheme. Other charges relate to the Bank's conduct with regard to the depository accounts, the lending relationship with the principals and certain collateral taken , pledged by PMC and SLGH in conjunction with the Individual Loans. The lawsuits allege inter alia violations of federal and state securities laws, fraud, negligence, breach of fiduciary duty, and conversion as well as conspiracy and aiding and abetting counts with regard to these violations. The Bank denies the allegations of wrongdoing. 20 Damages in excess of $100 million have been alleged, and compensatory and punitive damages have been sought generally against all defendants, although no specific damages have been prayed for with regard to the Bank, nor has there been any apportioning of liability among defendants or attributable to the various claims asserted. A former officer and director of the Bank has also been named as a defendant. The Bank and the named officer/director have notified the Bank's insurance carriers of the various lawsuits. During 1994, the Court granted the Bank's motion for summary judgment in the Individual Investor Action. An appeal of that Order was filed by the plaintiffs. The plaintiff in the Individual Investor Action will be a member of the settling class and in connection with the settlement discussed below, that appeal will be dismissed. The Bank has entered into a settlement agreement with the representatives of the various plaintiffs, which, when consummated, will dismiss all of the above referenced cases, with prejudice, against the Bank, its officers and directors, with the exception of the officer/director previously named. Court approval of these settlements has been received. In connection with the settlement, the Bank will release its security interest in certain disputed collateral and cash proceeds thereof, which the Bank received from PMC, SLGH, or the principals, in connection with the Individual Loans. This collateral has been a subject of dispute in the Neilson Action, with both the Bank and the representatives of PMC/SLGH asserting the right to such collateral. All the Individual Loans have been charged off, previously. The Bank will also make a cash payment to the Plaintiffs in connection with the settlement. In connection with the settlement the Bank will assign its rights, if any, under various insurance policies, to the Plaintiffs. The settlement does not resolve the claims asserted against the officer/director. The settlement has been approved by the Federal District Court and the Federal Bankruptcy Court. The Bank is still providing a defense to its former director/officer who continues as a defendant and who retains his rights of indemnity, if any, against the Bank arising out of his status as a former employee. At this time the only viable claims which remain against the former director/employee are claims of negligence in connection with certain depository relationships with PMC/SLGH. While the Bank's Director and Officer Liability Insurer has not acknowledged coverage of any potential judgment or cost of defense, the Insurer is on notice of the action and has participated in various aspects of the case. Note K. REGULATORY MATTERS On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"), after completion of their annual examination of the Bank, terminated the Formal Agreement entered into in June, 1992. In December 1993, the Fed terminated the Memo of Understanding entered into in August, 1992. The Formal Agreement had been entered into in June 1992 and required the implementation of certain policies and procedures for the operation of the Bank to improve lending operations and management of the loan portfolio. The Memorandum of Understanding was executed in August 1992. 21 SIGNATURES Pursuant to the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CU BANCORP May 12, 1995 By:___________________ Patrick Hartman Chief Financial Officer Part II - Other Information Item 1. Legal Proceedings Please refer to Notes J and K, on pages 21 and 23 above, for a complete discussion of both legal and regulatory matters. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Mattters On March 27, 1995, the Company entered into an agreeement to acquire Corporate Bank, through a merger of Corporate Bank into the Company's subsidiary California United Bank, National Association. The consideration for the transaction was the Company's common stock. On May 12, 1995, Corporate Bank announced that the schedule for completion of the transaction had been delayed, as a result of a change of outside auditors by Corporate Bank, and also announced changes in management at Corporate Bank. Item 6. Exhibits and Filings on Form 8-K (a) Exhibits: (10) Material Contracts (NONE) (b) Reports on Form 8-K: In a report filed on Form 8-K dated April 7, 1995, the Company reported the signing of a definitive agreement to acquire Corporate Bank. 22 EX-27 2
9 3-MOS DEC-31-1995 MAR-31-1995 26,944 0 53,000 0 0 67,985 66,776 168,593 7,592 316,827 277,279 0 8,622 0 26,992 0 0 3,934 316,827 4,413 1,419 0 5,832 2,024 2,082 3,750 0 0 3,110 1,260 710 0 0 710 .15 .15 5.63 66 0 2,485 0 7,427 4 169 7,592 7,592 0 0
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