-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BJbBsiSOAEb93HE3p0FGKB9JlsDj60Q2ZBpmQokjjYq2u7grQ0BRHUKQP4PHk1Ur 6dJKmwi+qzTy3q8eAGa5jA== 0000356050-95-000007.txt : 19951107 0000356050-95-000007.hdr.sgml : 19951107 ACCESSION NUMBER: 0000356050-95-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951106 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: 95587487 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 9/30/95 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 September 30, 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 September 30, 1995, the Registrant has 4,587,330 outstanding shares of its Common stock, no par value. 1 CU Bancorp Quarter Ended September 30, 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: -September 30, 1995, and December 31, 1994. 13 Consolidated Statements of Income: -Three and Nine Month Periods Ended September 30, 1995, and September 30, 1994. 14 Consolidated Statements of Cash Flows: -Nine Month Periods Ended September 30, 1995, and September 30, 1994. 15 Notes to Consolidated Financial Statements 16 Signatures 21 Part II. Other Information Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Filings on Form 8-K 25
2 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW The Company earned $704 thousand, or $.15 per share, during the third quarter of 1995, compared to $671 thousand, or $0.14 per share, during the same period in 1994. Approximately 53% of the earnings in the third 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 September 30, 1995, there were no earnings related to sales of mortgage servicing. The Bank's asset quality ratios continue to be exceptionally strong. At September 30, 1995, nonperforming assets were $509 thousand, compared with $285 thousand in the second quarter of 1995. The Bank did not have any real estate acquired through foreclosure at September 30, 1995, December 31, 1994 or September 30, 1994. The Bank's allowance for loan losses as a percent of both nonperforming loans and nonperforming assets at the end of the third quarter of 1995 was 1357%, compared to third quarter 1994 levels of 6611%. 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 16.12%, the Tier 1 Risk-Based Capital Ratio was 14.85%, and the Leverage Ratio was 10.46% at September 30, 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 and are resources for its acquisition strategy. During the nine months ended September 30, 1995, the Bank generated approximately $105 million in new loan commitments, compared with about $88 million for the comparable period of 1994. BALANCE SHEET ANALYSIS LOAN PORTFOLIO COMPOSITION AND CREDIT RISK The Bank's loan portfolio at September 30, 1995 has maintained the high standards of credit quality that have been established as the commercial loan portfolio has been built over the past three 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 September 30, 1995 increased by $6 million during the quarter, and $9 million year to date. Portfolio growth in the second and third quarter of 1995 were partially offset by the decline of $6 million in the first quarter of 1995. Loan paydowns for the first 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 at September 30, 1995 were $24 million above the September 30, 1994 level, reflected the ongoing success in producing new commercial relationships. 3
TABLE 1 LOAN PORTFOLIO COMPOSITION Amounts in thousands of dollars September 30, December 31, September 30, 1995 1994 1994 Commercial & Industrial Loans $155,487 84% $142,885 82% $ 131,823 83% Real Estate Loans: Commercial 23,493 13 26,528 15 23,050 14 Mortgages 4,607 3 4,773 3 4,919 3 Construction 0 0 416 0 18 0 Total loans net of unearned fees $183,587 100% $174,602 100% $159,810 100%
TABLE 1A LOAN PORTFOLIO MATURITIES (in Millions) Remaining Maturity Within After One but After One Within Five Five Year Years Years Total Commercial & Industrial Loans $111,131 $39,427 $4,929 $155,487 Real Estate - Commercial & Mortgage 6,715 18,136 3,249 28,100 Total loans $117,846 57,563 8,178 $183,587 Loans due after one year with predetermined interest rates 3,987 1,752 Loans due after one year with floating or adjustable rates 53,576 6,426 $57,563 $8,178
Table 1a above summarizes the maturities of the loan portfolio based upon the contractual terms of the loans. The Bank does not automatically rollover any loans at maturity. Maturing loans must go through the Bank's normal credit approval process in order to roll a loan over to a new maturity date. The Bank lending effort is 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. 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. 4 The amount and composition of the allowance for loan losses is as follows:
TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES Amounts in thousands of dollars September 30, December 31, September 30, 1995 1994 1994 Commercial & Industrial Loans(1) $6,411 $7,096 $6,916 Real estate loans - Mortgages 0 0 197 Real estate loans - Construction Loans 0 0 0 6,411 7,096 7,115 Unfunded commitments and letters of credit 496 331 355 Total Allowance for loan losses $6,907 $7,427 $7,470 (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. 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 September 30, December 31, September 30, 1995 1994 1994 Balance at January 1 $7,427 $6,513 $6,513 Loans charged off: Real estate secured loans 500 486 486 Commercial loans secured and unsecured 459 820 574 Loans to individuals, installment and other loans 16 107 99 Total charge-offs 975 1,413 1,159 Recoveries of loans previously charged off: Real estate secured loans 44 586 545 Commercial loans secured and unsecured 399 1,735 1,568 Loans to individuals, installment and other loans 12 6 3 Total recoveries of loans previously charged off 455 2,327 2,116 Net charge-off (recovery) 520 (914) (957) Provision for loan losses 0 0 0 Balance at end of period $6,907 $7,427 $7,470 Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the period ended 0.28% (0.61)% (0.48)%
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 September 30, 1995, nonperforming loans amounted 5 to $509 thousand compared with $36 thousand at December 31, 1994. Potential problem loans are defined as loans as to which there are serious doubts about the ability of the borrowers to comply with present loan repayment terms. It is the policy of the Bank to place all potential problem loans on nonaccrual status. At June 30, 1995, therefore, the Bank had no potential problem loans other than those disclosed in Table 4 as nonperforming loans.
Table 4: Nonperforming Assets Amounts in thousands of dollars September 30, December 31, September 30, 1995 1994 1994 Loans not performing $509 $36 $113 Insubstance foreclosures 0 0 0 Total nonperforming loans 509 36 113 Other real estate owned 0 0 0 Total nonperforming assets $509 $36 $113 Allowance for loan losses as a percent of: Nonperforming loans 1,357% 20,631% 6,611% Nonperforming assets 1,357% 20,631% 6,611% Nonperforming assets as a percent of total assets 0.2% 0% 0.0% Nonperforming loans as a percent of total loans 0.3% 0% 0.1%
Securities The securities portfolio at September 30, 1995, totaled $73 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 September 30, 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 third quarter of 1995 or 1994. At September 30, 1995, there were unrealized gains of $408 thousand and losses of $462 thousand 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 September 30, 1995, December 31, 1994, and September 30, 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 a valuation allowance for real estate owned, 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 6 monitors the profitability of these accounts through an account analysis procedure. 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 September 30, 1995, was $17 million 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 $47 million in certificates of deposit larger than $100 thousand dollars at September 30, 1995. The maturity distribution of these deposits is relatively short term, with $35 million maturing within 3 months and the $45 million 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. 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 certificates of deposit of $90,000 or greater, that are priced competitively with similar certificates from other financial institutions throughout the country. At September 30,1995, the Bank had approximately $89 million of these out of area deposits, up from $55 million at December 31, 1994. The Bank's portfolio of large certificates of deposit (those of $100 thousand or more), includes both deposits from its base of commercial customers and out of area deposits. At September 30, 1995 this funding source was 17% of average deposits, compared to 14% at December 31, 1994. 7
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at September 30, 1995 Amounts in thousands of dollars Amounts Maturing or Repricing in More Than 3 More Than 6 More Than 9 Months But Months But Months But Less Than Less Than Less than Less Than 6 Months 9 Months 12 Months 12 Months 3 Months & Over Earning Assets Gross Loans $173,740 $3,387 $431 $290 5,739 Securities 4,993 5,032 4509 5,070 53,485 Federal funds sold & other 32,000 0 0 0 0 Total earning assets 210,733 8,419 4,940 5,360 59,224 Interest-bearing deposits: Now and money market 57,192 0 0 0 0 Savings 10,751 0 0 0 0 Time certificates of deposit: Under $100 39,785 12,430 8,526 4,429 6,164 $100 or more 35,765 3,975 4,960 601 1,300 Non interest-bearing demand deposits 12,434 -- -- -- -- Total interest-bearing liabilities 155,927 16,405 13,486 5,030 7,464 Interest rate sensitivity gap 54,806 (7,986) (8,546) 330 51,760 Cumulative interest rate sensitivity gap 54,806 46,820 38,274 38,604 90,364 Off balance sheet financial instruments 0 0 0 0 0 Net cumulative gap $54,806 $46,820 $38,274 38,604 90,364 Adjusted cumulative ratio of rate sensitive assets to rate sensitive liabilities (1) 1.35% 1.27% 1.21% 1.20% 1.46% (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. Capital Total shareholders' equity was $32 million at September 30, 1995, compared to $30 million at year-end 1994. 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 September 30, December 31, Well 1995 1994 Capitalized Minimum Total Risk Based Capital 16.12% 15.40% 10.0% 8.00% Tier 1 Risk Base Capital 14.85 14.12 6.0 4.00 Equity to Average Assets 10.46 10.44 5.0 3.00
8 In February of 1995, the Bank declared a dividend of $.02 per share payable March 13, 1995 to shareholders of record February 20, 1995. The Company also declared a dividend of $.02 per share for the quarter ended June 30, 1995, payable September 4, 1995 to shareholders of record August 15, 1995. The dividend payout ratio was 13% for both the three and nine month periods ending September 30, 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. In June, 1995, the loan production office in Camarillo was converted to a full service Ventura County Regional Office. Additionally, the Bank has relocated its City of Industry Regional Office to new and larger quarters in the Crossroads Business Park to better serve the business banking needs of its customers in the greater San Gabriel Valley. On March 27, 1995, the Company entered into an agreement to acquire Santa Ana - based Corporate Bank in a stock transaction. This agreement was subsequently amended on October 11, 1995. Completion of this transaction is subject to Corporate Bank shareholder approval and regulatory approvals, which is expected late in the fourth quarter of 1995 or early in the first quarter of 1996. 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 was $3.8 million and $11.4 million for the three and nine month periods ended September 30, 1995 compared to $3.7 million and $9.8 million for the comparable periods 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.
TABLE 8 ANALYSIS OF CHANGES IN NET INTEREST INCOME (1) Amounts in thousands of dollars Nine months ended September 30, Nine months ended September 30, 1995 compared to 1994 1994 compared to 1993 Increases(Decreases) Volume Rate Total Volume Rate Total Interest Income Loans, net $2,592 $1,548 $4,140 $(3,936) $423 $(3,513) Investments 108 585 693 826 75 901 Federal Funds Sold 397 424 821 221 132 353 Total interest income 3,097 2,557 5,654 (2,889) 630 (2,259) Interest Expense Interest-bearing deposits: Demand and Savings (303) 271 (32) 70 (95) (25) Time Certificates of deposit: Under $100 2,225 516 2,741 (226) 27 (199) $100 or more 849 514 1,363 (234) 62 (172) Federal funds purchased / Repos 0 0 0 (22) (22) (43) Other borrowings (62) (29) (91) (92) 5 (87) Total interest expense 2,709 1,272 3,981 (503) (23) (526) Net interest income $388 $1,285 $1,673 $(2,386) $653 $(1,773)
9 (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% and 8.9% for the three and nine months ended September 30, 1995, compared to 7.7% and 7.4% for the comparable periods 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 6.8% in the first nine months of 1994 to an average of 8.9% in the first nine months of 1995. Rates on interest bearing liabilities resulted in an average cost of funds of 5.0% 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 was 5.39% and 5.62% for the three and nine months ended September 30, 1995, compared to 6.18% and 5.81% for the same periods in 1994. The Bank's margin is strong because it has funded itself with a significant amount of noninterest bearing deposits. Margin in 1995 is somewhat lower than 1994 due to the lower level of non interest bearing title and escrow deposits in the current year.
Table 9 Average Balance Sheets and Analysis of Net Interest Income Nine months ended Nine months ended Amounts in thousands of dollars September 30, 1995 September 30, 1994 Interest Annual Interest Annual Income or Yield or Rate Income or Yield or Rate Balance Expense Balance Expense Interest Earning Assets Loans, Net $167,981 $13,800 10.95% $134.840 $9,660 9.55% Investments 69,912 2,796 5.33 65,382 2,059 4.20 Certificates of Deposit in other banks 64 2 4.17 1,312 46 4.67 Federal Funds Sold 33,841 1,477 5.82 22,804 656 3.84 Total Earning Assets 271,798 18,075 8.87 224,338 12,421 7.38 Non Earning Assets Cash & Due From Banks 22,859 29,306 Other Assets 7,062 7,825 Total Assets $301,719 $261,469 Interest-bearing Liabilities Demand and savings $65,239 1,395 2.85 $80,937 1,427 2.35 Time Certificates of Deposits Less Than $100 68,578 3,250 6.32 17,829 509 3.81 More Than $100 39,627 1,820 6.12 17,535 457 3.47 Fed Funds Purchased/Repos 0 0 0.00 0 0 0.00 Total interest-bearing 173,444 6,465 4.97 116,301 2,393 2.74 Noninterest-bearing Deposits 88,649 109,506 Total Deposits 262,093 6,465 3.29 225,807 2,393 1.41 Other Borrowings 3,797 163 5.72 5,184 254 6.53 Total Funding Liabilities 265,890 6,628 3.32 230,991 2,647 1.53 Other Liabilities 5,366 2,878 Shareholders' Equity 30,463 27,600 Total Liabilities and Shareholders' Equity $301,719 $261,469 Net Interest Income 5.81% Income $11,447 5.62% $9,774 Shareholders' Equity to Total Assets 10.10% 10.56%
10 OTHER OPERATING INCOME A significant portion of other operating income in 1994 was earned as mortgage servicing rights were sold. The Bank reported a gain of $383 thousand on the sale of mortgage servicing in the six months ended June 30, 1995, representing final settlement payments received related to open issues on servicing sales from prior quarters. No further gains were recognized in the quarter ended September 30, 1995. The trends and composition of other operating income are shown in the following table. 11
TABLE 10A OTHER OPERATING INCOME Amounts in thousands of dollars For three months ended September 30, September 30, 1995 1994 Gain on sale of SBA Loans $43 $29 Service income 0 247 Documentation fees 32 29 Other service fees and charges 299 242 Gain on sale of real estate owned 139 494 Gain on sale of mortgage servicing portfolio 0 625 Total $513 $1,666
TABLE 10B OTHER OPERATING INCOME Amounts in thousands of dollars For nine months ended September 30, September 30, 1995 1994 Gain on sale of SBA Loans $194 $29 Fees on loans sold 0 15 Premium on sales of mortgage loans 0 83 Service income 0 961 Documentation fees 78 73 Other service fees and charges 880 790 Gain on sale of real estate owned 139 585 Gain on sale of mortgage servicing portfolio 383 2,183 Total $1,674 $4,719
OPERATING EXPENSE Total operating expenses for the bank were $3.1 million and $9.4 million for the three and nine months ended September 30, 1995 , compared to $3.6 million and $10.6 million for the same period in 1994. The quarter ended September 30, 1995 reflected lower expenses, in part because of a reduction in FDIC insurance premiums paid, from $.23 to $.04 per $100 of deposits. 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. LEGAL AND REGULATORY MATTERS In June 1992, the Bank entered into an agreement with the Office of the Comptroller of the Currency (OCC), the Bank's primary federal regulator, which required the implementation of certain policies and procedures for the operation of the bank to improve lending operations and management of the loan portfolio. In November 1993, after completion of its annual examination, the OCC released the Bank from the Formal Agreement. Following this, the Federal Reserve Bank of San Francisco ("Fed") notified the Company on November 29, 1993, that the Memorandum of Understanding, which it had signed, was terminated because the requirements of the agreement were satisfied. 12
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary Amounts in thousands of dollars September 30, December 31, 1995 1994 Assets Cash and due from banks $20,905 $35,397 Federal funds sold 32,000 20,000 Total cash and cash equivalents 52,905 55,397 Investment securities (Market value of $73,034 and $71,423 at September 30, 1995 and December 31, 1994, respectively) 73,088 74,153 Loans, (Net of allowance for loan losses of $6,907 and $7,427 at September 30, 1995, and December 31, 1994, respectively) 176,680 167,175 Premises and equipment, net 1,196 996 Other real estate owned, net 0 0 Accrued interest receivable and other assets 7,149 6,433 Total Assets $311,018 $304,154 Liabilities and Shareholders' equity Deposits: Demand deposits $84,913 $112,034 Savings deposits 67,943 67,896 Time deposits under $100 71,335 47,836 Time deposits of $100 or more 46,602 36,415 Total deposits 270,793 264,181 Accrued interest payable and other liabilities 8,080 10,229 Total liabilities 278,873 274,410 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 5,153 3,314 Total Shareholders' equity 32,145 29,744 Total Liabilities and Shareholders' equity $311,018 $304,154 The accompanying notes are an integral part of these consolidated financial statements.
13
CONSOLIDATED STATEMENTS OF INCOME CU BANCORP AND SUBSIDIARY Amounts in thousands of dollars, except per share data For the three months For the nine months ended September 30, ended September 30, 1995 1994 1995 1994 Revenue from earning assets: Interest and fees on loans $4,713 $3,617 $13,800 $9,660 Interest on taxable investment securities 980 761 2,759 2,049 Interest on tax exempt investment securities 12 8 37 10 Interest on time deposits with other financial institutions 0 14 2 46 Interest on federal funds sold 461 257 1,477 656 Total revenue from earning assets 6,166 4,657 18,075 12,421 Cost of funds: Interest on interest-bearing demand deposits 391 481 1,194 1,259 Interest on savings deposits 65 67 201 168 Interest on time deposits under $100 1,174 160 3,250 509 Interest on time deposits of $100 or more 648 181 1,820 457 Interest on other borrowings 59 66 163 254 Total cost of funds 2,337 955 6,628 2,647 Net revenue from earning assets before provision for loan losses 3,829 3,703 11,447 9,774 Provision for loan losses 0 0 0 0 Net revenue from earning assets 3,829 3,703 11,447 9,774 Other operating revenue: Servicing Income - mortgage loans sold 0 247 0 961 Other fees & charges - commercial 374 296 1,152 735 Fees on loans sold 0 0 0 15 Premium on sales of mortgage loans 0 0 0 83 Other fees and charges - mortgage 0 4 0 157 Gain on sale of mortgage servicing portfolio 0 625 383 2,183 Gain on sale of real estate owned 139 494 139 585 Total other operating revenue 513 1,666 1,674 4,719 Other operating expenses: Salaries and related benefits 1,722 1,599 5,047 4,678 Selling expenses - mortgage loans 0 87 0 333 Restructuring Charge 0 600 0 600 Other operating expenses 1,366 1,898 4,314 5,610 Total operating expenses 3,088 4,184 9,361 11,221 Income before provision for income taxes 1,254 1,184 3,760 3,272 Provision for income taxes 550 513 1,647 1,415 Net income $704 $671 $2,113 $1,857 Earnings per share $0.15 $0.14 $0.44 $0.40 The accompanying notes are an integral part of these consolidated financial statements.
14
CU BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS OF DOLLARS) For the nine months ended September 30, 1995 1994 Increase(decrease) in cash and cash equivalents: Cash flows from operating activities Net income/(loss) $2,113 $1,857 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 397 349 Amortization of real estate mortgage servicing rights 0 15 Provision for losses on loans and other real estate owned 0 0 Benefit of deferred taxes 690 (90) Gain on sale of investment securities, net 0 0 Increase/(decrease) in other assets (871) 2,087 Increase/(decrease) in other liabilities (2,555) (4,386) (Increase)/decrease in accrued interest receivable (535) (970) Increase/(decrease) in deferred loan fees 9 181 Increase/(decrease) in accrued interest payable 406 (24) Net amortization of (discount)/premium on investment securities 447 813 Total Adjustments (2,012) (2,025) Net cash provided by operating activities 101 (168) Cash flows from investing activities Proceeds from investment securities sold or matured 14,785 52,861 Purchase of investment securities (14,167) (30,091) Net decrease in time deposits with other financial institutions 0 0 Net (Increase/(decrease) in loans (9,514) (18,373) Purchases of premises and equipment, net (597) (204) Net cash provided by investing activities (9,493) 4,193 Cash Flows from financing activities Net increase/(decrease) in demand and savings deposits (27,074) 9,846 Net increase/(decrease/ in time certificates of deposits 33,686 (5,261) Proceeds from exercise of stock options and director warrants 562 179 Cash dividend paid (274) 0 Net cash provided by financing activities 6,900 4,764 Net increase (decrease) in cash and cash equivalents (2,492) 8,789 Cash and cash equivalents at beginning of year 55,397 46,440 Cash and cash equivalents at end of period $52,905 $55,229 Supplemental disclosure of cash flow information Cash paid during the year: Interest $5,622 $1,716 Taxes 900 1,502 Supplemental disclosure of noncash investing activities: Loans transferred to OREO 0 0 The accompanying notes are an integral part of these consolidated financial statements.
15 Notes to Consolidated Financial Statements September 30, 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. All interim period adjustments that have been made have been of a normal and recurring nature. 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. Weighted average shares outstanding for the three and nine month periods ended September 30, 1995 were 4,786,000 and 4,773,000, compared with 4,643,000 and 4,575,000 for the comparable periods of 1994. 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 September, 1995.
Gross Gross Book Unrealized Unrealized Market (Thousands of dollars) Value Gains Losses Value U.S. Treasury Securities $66,860 $295 $(462) $66,693 Mortgage-backed securities 41 41 U.S. Government Agency Securities 5,755 113 5,868 State and Municipal Securities 0 0 Federal Reserve Bank Stock 432 0 0 432 Total $73,088 $408 $(462) $73,034
At September 30, 1995, investment securities with a book value of $27.9 million were pledged to secure U.S. District Court deposits and for other purposes as required or permitted by law. 16 Note D. AVERAGE FEDERAL RESERVE BALANCES The average cash reserve required to be maintained at the Federal Reserve Bank was approximately $2.5 million, $6 million, and $5.9 million for the periods ending September 30, 1995 and December 31 and September 30, 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 September 30, 1995, December 31 or September 30, 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. 17 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 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. The Bank considers all loans where reasonable doubt exists as to the payment of interest or principal to be impaired loans. All loans that are ninety days or more past due are automatically included in this category. An impaired loan will be charged off when the Bank determines that repayment of principal has become unlikely or subject to a lengthy collection process. All loans that are six months or more past due and not well secured or in the process of collection are charged off. At September 30, 1995, the Bank had $509 thousand in impaired loans, against which a loss allowance of $149 thousand has been provided. The recorded investment in all impaired loans has been calculated based on the present value of expected cash flows discounted at the loan's effective interest rate. All impaired loans are included in nonaccrual status, and as such no interest income is recognized. For the third quarter of 1995, the Bank had an average investment in impaired loans of approximately $397 thousand. The average investment in impaired loans for the nine months ended September 30, 1995 was approximately $210 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 September 30, 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. Until third quarter 1995, the Bank was 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, consisted 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 alleged 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 alleged that false representations were made, and the investment merely constituted a "Ponzi" scheme. Other charges related 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 alleged inter alia violations of federal and state securities laws, fraud, negligence, breach of fiduciary duty, and conversion as well as 18 conspiracy and aiding and abetting counts with regard to these violations. The Bank denied all allegations of wrongdoing. Damages in excess of $100 million were alleged, and compensatory and punitive damages were sought generally against all defendants, although no specific damages were prayed for with regard to the Bank. A former officer and director of the Bank was also been named as a defendant. The Bank has entered into a settlement agreement with the representatives of the various plaintiffs, which has now been consummated, with the dismissal of all of the above referenced cases, with prejudice, against the Bank, its officers and directors, with the exception of the officer/director previously named pending. Court approval of these settlements has been received. In connection with the settlement, the Bank released 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 had 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. The Bank also made a cash payment to the Plaintiffs in connection with the settlement. The effect of this settlement on CU Bancorp or the Bank's financial statements was immaterial. In connection with the settlement the Bank assigned its rights, if any, under various insurance policies, to the Plaintiffs. The settlement does not resolve the claims asserted against the officer/director. 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 Formal Agreement required the Bank to maintain a Tier 1 Risk Weighted Capital ratio of 10.5% and a 6.0% Tier 1 Leverage Ratio. The Formal Agreement mandated the adoption of a written program to essentially reduce criticized assets, maintain adequate loan loss reserves and improve bank administration, real estate appraisal, asset review management and liquidity policies, and restricted the payment of dividends. The agreement specifically required the Bank to: 1) create a compliance committee; 2) have a competent chief executive officer and senior loan officer, satisfactory to the OCC, at all times; 3) develop a plan for supervision of management; 4) create and implement policies and procedures for loan administration; 5) create a written loan policy; 6) develop and implement an asset review program; 7) develop and implement a written program for the maintenance of an adequate Allowance for Loan and Lease Losses, and review the adequacy of the Allowance; 8) eliminate criticized assets; 9) develop and implement a written real estate appraisal policy; 10) obtain and improve procedures regarding credit and collateral documentation; 11) develop a strategic plan; 12) develop a capital program to maintain adequate capital (this provision also restricts the payment of dividends by the Bank unless (a) the Bank is in compliance with its capital program; (b) the Bank is in compliance with 12 U.S.C. 55 and 60 and (c) the Bank receives the prior written approval of the OCC District Administrator); 13) develop and 19 implement a written liquidity, asset and liability management policy; 14) document and support the reasonableness of any management and other fees to any director or other party; 15) correct violations of law; and 16) provide reports to the OCC regarding compliance. The Memorandum of Understanding was executed in August 1992 and required 1) a plan to improve the financial condition of CU Bancorp and the Bank; 2) development of a formal policy regarding the relationship of CU Bancorp and the Bank, with regard to dividends, inter-company transactions, tax allocation and management or service fees; 3) a plan to assure that CU Bancorp has sufficient cash to pay its expenses; 4) ensure that regulatory reporting is accurate and submitted on a timely basis; 5) prior approval of the Federal Reserve Bank prior to the payment of dividends; 6) prior approval of the Federal Reserve Bank prior to CU Bancorp incurring any debt and 7) quarterly reporting regarding the condition of the Company and steps taken regarding the Memorandum of Understanding. 20 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 November 6, 1995 By:___________________ Patrick Hartman Chief Financial Officer 21 Part II - Other Information Item 1. Legal Proceedings Please refer to Note K , on page 19 above, for a complete discussion of legal and 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 Matters On March 27, 1995, CU Bancorp and the Bank entered into an agreement with Corporate Bank, Santa Ana California, providing for the acquisition of Corporate Bank by CU Bancorp by means of a merger of Corporate Bank into the Bank, with the consideration to be CU Bancorp Common Stock. That Agreement and Plan of Reorganization was executed on March 27, 1995 (the "Old Merger Agreement"). As a result of events subsequent to execution of the Old Merger Agreement, including but not limited to changes in management of Corporate, financial results of Corporate, potential claims against former Corporate management employees and related matters, the transaction was substantially delayed, pending, in part, receipt of Corporate's audited financial statements for the year ended December 31, 1994. Corporate had engaged Deloitte & Touche LLP to replace Grant Thornton LLP for the Bank's December 31, 1994 audit. Deloitte & Touche LLP began the work necessary for the year-end audit, but resigned as of April 21, 1995 before completing the audit, due to the discovery of possible employee defalcations, the condition of the books and records of Corporate Bank and related concerns. On May 10, 1995, Corporate engaged Arthur Andersen LLP to complete the audit. Final financial statements as of December 31, 1994 were completed on June 30, 1995. Subsequent to that date, additional negotiations took place among the officers and counsel for Bancorp and Corporate as well as consultations with Bancorp's and Corporate's accountants and other experts. Both parties perceived the need for amendments to the Old Merger Agreement, as the result of the events noted above, and the impossibility of complying with certain provisions of the Old Merger Agreement, including time frames and deadlines contained therein. On October 11, 1995 the parties entered into an Amended and Restated Plan of Reorganization (the "Merger Agreement"). The Old Merger Agreement and the Merger Agreement are different in the following principal areas: 1) Purchase Price. The Purchase Price in the Old Merger Agreement was a fixed price of $7,800,000 plus or minus net income/loss for the period from January 1, 1995 to the Calculation Date (approximately ten (10) days prior to the Closing Date, as defined therein). The Merger Agreement now provides for a Purchase Price equal to Shareholders' Equity of Corporate as of November 30, 1995 (or such later date as the parties may agree upon) (the "Audit Date") plus or minus (as the case may be) an amount equal to: 1) the pro rata Corporate net income/loss for the 22 period from January 1, 1995 to the Audit Date applied to the period from the Audit Date to the Calculation Date (excluding the effect of extraordinary gains such as a recovery or sale of the Bond Claim, as defined below) and plus, 2) either (i) any net recovery on, or proceeds of the sale of, the Bond Claim prior to the Calculation Date (see, "Recent Events Related to Corporate", herein), or (ii) if there is no recovery under the Bond Claim and no sale of the Bond Claim prior to the Calculation Date, $200,000. The Shareholders' Equity of Corporate as of the Audit Date will be determined by the parties pursuant to audited financial statements prepared in accordance with generally accepted accounting principles, consistently applied ("GAAP") accompanied by the unqualified opinion of Corporate's independent public accountants, Arthur Andersen LLP ("AA") (the "Closing Audit") In the Old Merger Agreement, the Purchase Price was subject to adjustment upon CUB's determination of necessary augmentation to Corporate's loan loss reserve, utilizing CUB standards. The Merger Agreement now provides that all financial analysis for purposes of determining the Purchase Price will be made by the parties based upon the Closing Audit or the Closing Audit and the Closing Report, as defined below. In addition, the parties will utilize analysis by AA for purposes of determining the net after tax effect of a recovery on or a sale of the Bond Claim pursuant to GAAP, in the event there is such a recovery or sale prior to the Calculation Date. If the Closing Date is more than seventy- five (75) days subsequent to the Audit Date, AA shall conduct a review of the Corporate financial statements pursuant to AICPA standards and render a written report thereon (the "Closing Report"). In such event, the parties shall utilize such Closing Report, together with the Closing Audit, to make a final determination of the Purchase Price. No party has the ability to force an adjustment in the Purchase Price, but each party has the option of termination of the Merger Agreement if it reasonably disagrees with the Shareholders' Equity set forth in the Closing Audit or the Closing Report and sets forth the basis for that disagreement in writing. Since the Old Merger Agreement was executed prior to Corporate's discovery of events related to the Bond Claim, it was silent as to the Bond Claim. 2) Exchange Ratio. The Old Merger Agreement provided that Bancorp Common would be valued at $7.32 for purposes of the Exchange Ratio. As a result of the significant time delays engendered by Corporate's internal matters, the valuation of Bancorp Common was amended to $8.00 to more closely reflect the Bancorp Common market value in October 1995. If should be noted that the value of Bancorp stock on October 11, 1995, which was the date of execution of the Merger Agreement, was higher than $8.00, however the parties in arms-length negotiations determined that the $8.00 price was appropriate. 3) Form of Payment. The Old Merger Agreement provided that the sole consideration to be paid by Bancorp for the Corporate Stock would be Bancorp Common (except as to fractional shares). The Merger Agreement now provides for a combination of Bancorp Common and cash as more fully explained in "Merger Terms" herein. The amount of Bancorp Common which will be issued to holders of Corporate Stock will not be less than seventy five percent (75%) of the Purchase Price or more than ninety percent (90%) of the Purchase Price (the "Elected Percentage"). Corporate Fairness Opinion.. Corporate received an initial fairness opinion on the Old Merger Agreement, from the consulting firm of The Findley Group ("Findley"), Anaheim, California, which was based on draft financial information for 1994 from Deloitte & Touche LLP. Following receipt of the actual financial statements for 1994, completed by AA, and the execution of the Amended and Restated Agreement and Plan of Reorganization, Corporate obtained an additional fairness opinion from Findley. The co-director and sole shareholder of Findley, Gary Steven Findley, is a registered investment advisor with the Commission and with the California Department of Corporations. Findley is a banking consultant firm with extensive experience in providing consulting services in acquisitions, mergers and changes in control of banks in the State of California, and in providing fairness and stock valuation opinions in California independent bank transactions involving purchases, sales and exchanges, and mergers and acquisitions. For the services described herein, Corporate has paid Findley $11,000. Findley has provided a variety of bank consulting services to Corporate and may render bank 23 consulting services to Corporate or CUB in the future. Merger Terms. Upon consummation of the Merger, Corporate will be merged with and into CUB, the separate corporate existence of Corporate will cease, and the outstanding shares of Corporate Stock will be converted into the right to receive the Purchase Price in Bancorp Common and cash. The Purchase Price will be an amount equal to Corporate's Shareholders' Equity as set forth in the Closing Audit or (depending on the timeframe of the Calculation Date) the Closing Audit and the Closing Report, plus or minus (as the case may be) an amount equal to a pro rata portion of Corporate's net income/loss for the Audit Period (excluding the effect of extraordinary events which will not be factored into such application) applied to the period between the Audit Date and the Calculation Date and plus either: (i) any net recovery on or net proceeds of a sale of the Bond Claim received prior to the Calculation Date; or (ii) if no such recovery is received or there is no sale of the Bond Claim prior to the Calculation Date, $200,000. All financial analysis for purposes of determining the Purchase Price will be made by the parties based upon the Closing Audit or the Closing Audit and the Closing Report. In addition, the parties will utilize analysis by AA for purposes of determining the net after tax effect of a recovery on or a sale of the Bond Claim, pursuant to GAAP, in the event there is such a recovery or sale prior to the Calculation Date. In the Merger, each share of Corporate Stock outstanding at the Effective Time (as defined in the Merger Agreement) ("Effective Time"), except shares directly or indirectly owned by Bancorp or Corporate (other than in a fiduciary capacity) and any shares held by shareholders of Corporate dissenting from the Merger, will be converted into the right to receive the Purchase Price Per Share (as defined in the Merger Agreement and as discussed below), which may be in the form of either Bancorp Common Stock or cash, or some combination thereof. Accordingly, each Corporate Shareholder will have the option of conditionally electing to convert each of his shares of Corporate Stock into either Bancorp Common (the "Conditional Stock Election") or cash (the "Conditional Cash Election"), subject to certain limitations as more fully set forth herein. A Corporate Shareholder may also elect to have his shares converted into a combination of cash and Bancorp Common (the "Conditional Joint Election"). A Corporate Shareholder may also elect that he has no preference as to which type of consideration he will receive in exchange for his Corporate Stock ("No Election"). All of the conditional elections are subject to the requirement that no less than seventy-five percent (75%) and no more than ninety percent (90%) of all of the outstanding shares of Corporate Stock (including all Dissenting Shares, as defined below) shall be converted into Bancorp Common Stock and no more than twenty-five percent (25%) and no less than ten percent (10%) of Corporate Stock shall be converted into cash ("Stock Conversion Requirement"). Bancorp shall have discretion to determine the actual percentage of Bancorp Common and cash (the "Elected Percentage"). The Conversion Ratio will be equal to a fraction, of which the numerator shall be the Purchase Price Per Share (as defined in the Merger Agreement, and as discussed below) multiplied by the Elected Percentage and the denominator shall be $8.00. The Purchase Price Per Share shall be calculated by dividing the Purchase Price by the number of outstanding shares of Corporate (on a fully diluted basis) on the Effective Date of the Merger. The Calculation Date (as defined in the Merger Agreement) shall be the last business day of the week preceding the Closing Date (as defined in the Merger Agreement) ("Closing Date") or such other date as may be mutually agreed by the parties. The Calculation Date shall not be more than 5 business days prior to the Closing Date, except by mutual agreement of the parties. Corporate's Shareholders' Equity will be determined by reference to the Closing Audit or the Closing Audit and the Closing Report. Corporate Bond Claim and Effect on Purchase Price. Corporate has indicated that it believes it has certain claims against one or more former employees for matters relating to their employment. Corporate filed a notice of claim and a formal Proof of Loss with its Bankers' 24 Blanket Bond (the "Bond") Insurance Carrier on September 29, 1995 (the "Bond Claim"). Corporate believes that certain losses previously incurred and recognized by Corporate are covered by the Bond Claim and could thereby be reimbursed. In the event that a recovery on the Bond Claim is received prior to the Calculation Date, the net effect of the recovery will be added to Shareholders' Equity and will thereby increase the Purchase Price. In the event that Corporate determines that it is not likely that Corporate will be able to effect recovery on the Bond Claim before the Calculation Date, then Corporate may sell the Bond Claim, in which case the Purchase Price would be increased by the amount of the increase in Shareholders' Equity resulting from the sale of the Bond Claim. If Corporate neither receives a recovery from the insurance carrier pursuant to the Bond Claim nor sells the Bond Claim, the Bond Claim shall belong to the Surviving Bank upon consummation of the Merger, and, in consideration therefor, the Purchase Price will be increased as of the Calculation Date by $200,000. 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. 25 EX-27 2
9 1,000 9-MOS DEC-31-1995 SEP-30-1995 20905 0 32000 0 0 73088 73034 183587 6907 311018 270793 0 8080 0 26992 0 0 5153 311018 13800 4275 0 18075 6465 6628 11447 0 0 9361 3760 2113 0 0 2113 .44 .44 5.62 509 0 0 654 7427 975 520 6907 6907 0 0
-----END PRIVACY-ENHANCED MESSAGE-----