-----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, Kq/mKkvNAPiplTg9Uv9sMXPqSLAZT7hR9zZKYcYhYzAjtzHec8EYvUGP1hpeE/tp FSgmGsw8JhH3tGsJcQrmnQ== 0000356050-96-000006.txt : 19961115 0000356050-96-000006.hdr.sgml : 19961115 ACCESSION NUMBER: 0000356050-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CU BANCORP CENTRAL INDEX KEY: 0000356050 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 953657045 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: 96661207 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 34 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, 1996 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, 1996, the Registrant has 11,267,010 outstanding shares of its Common stock, no value. 1 CU Bancorp Quarter Ended September 30, 1996 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, 1996, and December 31, 1995. 12 Consolidated Statements of Income: -Three and Nine Month Periods Ended September 30, 1996, and September 30, 1995. 13 Consolidated Statements of Cash Flows: -Nine Month Periods Ended September 30, 1996 and September 30, 1995. 14 Notes to Consolidated Financial Statements 15 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 Holder 21 Item 5. Other Information 21 Item 6. Exhibits and Filings on Form 8-K 22 2 Management Discussion and Analysis Overview On August 9, 1996, the merger between CU Bancorp, the holding company for California United Bank, and Home Interstate Bancorp, the holding company for Home Bank, became final. The merger was accomplished through a tax-free exchange of stock, using the pooling method of accounting. The financial statements for the quarter ended September 30, 1996 reflect the combined operations of the two merged banks, including the substantial costs incurred associated with completing the merger. The Company reported a net loss of $5.1 million, or $.44 per share for the third quarter of 1996, compared to income of $1,710 thousand, or $.16 per share, during the same period in 1995. Income for the current quarter was reduced by non-recurring costs totaling $.62 per share related to merger activity. Net income for the quarter ended September 30, 1996 would have been $.18 per share without the non-recurring expenses discussed below. The Company recognized several large expenses during the quarter ended September 30, 1996 reflecting the costs of completing the merger activity and valuing the loan and real estate portfolios on a single consistent and conservative basis. A loan loss provision of $4.1 million, plus an additional loss of $2.6 million related to real estate owned was recorded in the quarter. This was a result of combining the valuation reserve methodologies of California United Bank and Home Bank, as well as reflecting the ongoing intent of the merged bank to manage potential problems in the portfolio aggressively and maintain conservative standards for valuation. Other large expenses for the quarter include the costs of terminating the data processing contracts for the combining banks, converting all major operating systems to a single platform, payments to employees for severance and change of control agreements and the various legal, advisory and accounting fees associated with the merger itself. Total non- recurring expenses, including the charges for loan and real estate losses, totaled $11.5 million for the quarter. After the effect of income taxes, these expenses reduced net income by $7.2 million, or $.62 per share. The Company's commitment to a conservative approach to valuing portfolios is reflected the asset quality ratios at September 30, 1996. Non performing assets decreased to $3.8 million by the end of September 1996. This compares with $9.3 million at December 31, 1995 and $11.3 million September 30, 1995. Real estate acquired through foreclosure totaled $ 1.1 million at September 30, 1996, compared with $4.9 million at December 31, 1995 and $5.6 million September 30, 1995. The Bank's allowance for loan losses as a percent of nonperforming loans was 360 % at September 30, 1996, compared with 89 % at the comparable quarter of 1995. Capital ratios continue to substantially exceed levels required for the "well capitalized" category established by bank regulators. The Total Risk-Based Capital Ratio was 13.7%, the Tier 1 Risk-Based Capital Ratio was 12.4%, and the Leverage Ratio was 9.7% at September 30, 1996, compared to 17.3%, 16.0%, and 10.8%, respectively, at year-end 1995. 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 Company has continued to successfully grow its core business through the production of new loan commitments to middle market commercial customers. During the third quarter of 1996, the Bank generated approximately $ 51 million in new loan commitments and $ 125 million in new loan commitments for the nine months ended September 30, 1996. Balance Sheet Analysis Loan Portfolio Composition and Credit Risk Total loans at September 30 ,1996 increased by $ 84 million compared with December 31, 1995. Loan growth during the current year includes both the acquisition of Corporate Bank and the Bank's internally generated loan growth. Internal loan growth was strong in the commercial, real estate and construction portfolios. Growth in the commercial loan portfolio consists primarily of asset based loans to middle market commercial customers and results from the Bank's ongoing success at generating new commercial loan commitments. The composition of 3 the Bank's loan portfolio in summarized below in Table 1: Table 1 Loan Portfolio Composition
Amounts in thousands of dollars September 30, December 31, September 30, 1996 1995 1995 Commercial & Industrial Loans $262,914 54% $243,343 61% $239,768 62% Real Estate Loans: Commercial 126,121 26 90,648 23 81,523 21 Mortgages 24,912 5 9,400 2 8,621 2 Construction 31,339 7 16,933 4 15,857 4 Total Real Estate Loans 182,372 38 116,981 29 106,001 27 Other loans 40,309 8 41,525 10 42,527 11 Total loans net of unearned fees $485,595 100% $401,849 100% $388,296 100%
Table 1a Loan Portfolio Maturities (in thousands) Remaining Maturity
Within After One After One but Within Five Year Five Years Years Total Commercial & Industrial Loans $126,691 $85,446 $50,777 $262,914 Real Estate loans 105,556 49,867 26,949 182,372 Other loans 30,720 5,445 4,144 40,309 Total loans $262,967 $140,758 $81,870 $485,595 Loans due after one year with predetermined interest rates $67,769 $46,582 Loans due after one year with 72,989 35,288 floating or adjustable rates $140,758 $81,870
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 are subject to the Bank's normal credit approval process in order to establish a new maturity date. 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: Table 2 Allocation of Allowance for Loan Losses
Amounts in thousands of dollars September 30, December 31, September 30, 1996 1995 1995 Commercial & Industrial Loans(1) $11,448 $9,167 $8,438 Real estate loans - Construction Loans 532 256 1,047 Real estate loans - other 423 221 0 Installment and other loans 586 63 72 Unfunded commitments and letters of credit 561 336 496 Total Allowance for loan losses $13,550 $10,043 $10,053 (1) Including Commercial loans secured by real estate
4 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. During the third quarter of 1996, the Bank had net charge offs of $2 million, and $3.7 million for the nine months ended September 30, 1996. This compares with $ 1.2 million for the three and nine month periods ending September 30, 1995. Charge offs for the current year include the impact of the Bank's aggressive and disciplined approach to credit management applied to the portfolio acquired in the Corporate Bank transaction. 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, 1996 1995 1995 Balance at January 1 $10,043 $10,245 $10,245 Loans charged off: Real estate secured loans 1,766 1,907 1,290 Commercial loans secured and unsecured 2,542 1,247 791 Loans to individuals, installment and other loans 264 366 228 Credit cards and related plans 44 52 18 Total charge-offs 4,616 3,572 2,327 Recoveries of loans previously charged off: Real estate secured loans 235 535 517 Commercial loans secured and unsecured 610 672 542 Loans to individuals, installment and other loans 21 44 43 Credit cards and related plans 5 19 8 Total recoveries of loans previously charged 871 1,270 1,110 off Net charge-off (recovery) 3,745 2,302 1,217 Provision for loan losses 4,400 2,100 1,025 Allowance of acquired bank 2,852 0 0 Balance at end of period $13,550 $10,043 $10,053 Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the .81% .59% 32% period ended
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, 1996, nonperforming loans amounted to $ 2.7 million compared with $4.4 million at December 31, 1995. 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 September 30, 1996, therefore, the Bank had no potential problem loans other than those disclosed in Table 4 as nonperforming loans. 5 Table 4: Nonperforming Assets
Amounts in thousands of dollars September 30, December 31, September 30, 1996 1995 1995 Non accrual loans $2,705 $4,256 $5,384 Loans 90 days or more past due and still accruing 0 106 232 Total nonperforming loans 2,705 4,362 5,616 Other real estate owned 1,063 4,918 5,643 Total nonperforming assets $3,768 $9,280 $11,259 Allowance for loan losses as a percent of: Nonperforming loans 500% 230% 179% Nonperforming assets 360 108 89 Nonperforming assets as a percent of total assets .5 1.2 1.5 Nonperforming loans as a percent of total loans .5 1.1 1.4
Securities The Securities Held to Maturity portfolio totaled $148 million at September 30, 1996, compared with $80 million at year-end 1995. Included in the Held to Maturity portfolio at September 30, 1996 is approximately $65 million in commercial paper. The Bank has invested in high quality, short term commercial paper as a diversification from Federal Funds sold. Commercial paper held is less than six months in maturity, and is rated A1/P1 by Standard and Poors. At September 30, 1996, there were unrealized losses of $676 thousand and unrealized gains of $121 thousand in the Securities Held to Maturity portfolio. The Securities Available for Sale portfolio totaled $ 88 million at September 30, 1996 compared with $127 million in investments being included in this category at December 31, 1995. The investment portfolio of the Corporate Bank, acquired in January, 1996, was classified as available for sale at the purchase date. The securities acquired in this transaction may be sold as needed to match the investment strategies and balance sheet needs of the Bank. The September 30. 1996 balance had a $67 thousand net unrealized gain, compared with a net unrealized gain of $ 1.1 million at December 31, 1995. In the first three quarters of 1996, the Bank realized a gains of $114 thousand on the sale of securities available for sale. Gains realized for the comparable period of 1995 totaled $46 thousand. Additional information concerning securities is provided in the footnotes to the accompanying financial statements. Other Real Estate Owned There was $1.1 million of Other Real Estate Owned on the Bank's balance sheet at September 30, 1996, compared with $ 4.9 million and $5.6 million at December 31, 1995 and September 30, 1995, respectively. 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 other real estate owned, created by charging a provision to other operating expenses. During the third quarter of 1996, the Bank recorded losses on real estate owned of $2.6 million, which brought year to date losses to $3.2 million. This compares with $.6 million in losses recorded for the nine months ended September 30, 1995. 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. 6 Sources of liquidity include cash and cash equivalents (net of Federal Reserve requirements to maintain reserves against deposit liabilities), investments in commercial paper, 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. Borrowings under repurchase agreements and fed funds purchased have averaged less than $1 million during 1996. Balances borrowed were primarily the result of periodic tests by the Bank of available borrowing arrangements, and securities repurchase agreements to accommodate customer needs. As a part of the process of managing current liquidity and interest rate risk in the balance sheet, the Bank maintains a portfolio of 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, 1996, the Bank had approximately $78 million of these out of area deposits, compared to $83 million at December 31, 1995. The decline in out of area deposits during 1996 has been the result of carefully managing these balances to a lower level, as the acquisition of Corporate Bank and the merger with Home Bank provided additional liquidity. The Bank's experience with raising out of area deposits for the past three years indicates that the balances are quite stable when priced to the current market. 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, 1996 this funding source was 11% of average deposits, compared to 10% at December 31, 1995. The Bank had $83 million in certificates of deposit larger than $100 thousand dollars at September 30,1996. The maturity distribution of these deposits is relatively short term, with $60 million maturing within 3 months and $82 million maturing within 12 months. Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at September 30, 1996
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 12 Months 3 Months 6 Months 9 Months 12 Months & Over Earning Assets Gross Loans $346,376 $5,313 $9,176 $10,382 $114,351 Securities 91,538 12,431 15,472 19,295 97,772 Federal funds sold & other 0 0 0 0 0 Total earning assets $437,914 $17,744 $24,648 $29,677 $212,123 Interest-bearing deposits: Now, money market, savings 251,563 Time certificates of deposit: Under $100 53,097 29,196 21,112 28,505 10,395 $100 or more 59,215 12,019 4,495 6,883 804 Total interest-bearing 363,875 41,213 25,607 35,388 11,199 liabilities Interest rate sensitivity gap 74,039 (23,469) (959) (5,711) 200,924 Cumulative interest rate 74,039 50,570 49,611 43,900 244,824 sensitivity gap Off balance sheet financial 0 0 0 0 0 instruments Net cumulative gap $74,039 $50,570 $49,611 $43,900 $244,824 Adjusted cumulative ratio of rate 1.2% 1.12% 1.12% 1.09% 1.51% sensitive assets to rate sensitive liabilities (1) (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.
7 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 $86 million at September 30, 1996, compared to $84 million at year-end 1995. This increase was due to the issuance of stock to acquire Corporate Bank and the exercise of stock options, offset by the net loss for the year and dividends paid. The Company 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 1996 and 1995, the Company's capital levels substantially exceeded the "well capitalized" standards, the highest classification established by bank regulators. Table 7 Capital Ratios
Regulatory Standards September 30, December 31, Well 1996 1995 Capitalized Minimum Total Risk Based Capital 13.7% 17.3% 10.0% 8.00% Tier 1 Risk Based Capital 12.4 16.0 6.0 4.00 Equity to Average Assets 9.7 10.8 5.0 3.00
The Company declared an increase in the quarterly dividend to $.0625 per share payable November 25, 1996 to shareholders of record November 6, 1996. The Company declared and paid cash dividends totaling of $.045 for the quarter ended September 30, 1996, and $.13 per share for the nine months ended September 30, 1996. Dividends paid for the comparable periods of 1995 were $.042 and $.12, respectively. The dividend payout ratio was a negative 30% for the nine month period ended September 30, 1996, compared with 27% for the comparable period of 1995. 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 and Acquisitions The Bank is committed to expanding the market penetration of the commercial bank, including the creation of new branches and pursuing acquisition opportunities. In January, 1996, the Company completed the acquisition of Santa Ana based Corporate Bank. This acquisition brought two Orange County branches to the Bank, representing an important geographic expansion. During 1995, the Bank converted its former loan production offices in Ventura County, the San Gabriel Valley and the South Bay to full service banking offices in improved facilities. These moves expanded the Bank's branch system to seven full service locations serving the greater Los Angeles area. Additionally, during the second quarter of 1996, the Bank started two new business units to serve its customer base. The Investment Services Group and the Private Banking group were formed to meet the growing financial services needs of the customers. In February 1996, the Bank conusmmated a deposit purchase agreement with Southern California Bank in which the Bank purchased the deposits of Southern California Bank's Signal Hill office. The deposits purchased in the transaction totaled $1,656 thousand. 8 On August 9, 1996, the merger between CU Bancorp, parent of California United Bank, and Home Interstate Bancorp, parent of Home Bank, was completed. With the completion of this merger, the Bank is now the eleventh largest independent bank headquartered in Southern California, with twenty two branches in Westwood, the San Gabriel and San Fernando valleys, the South Bay, and Ventura and Orange counties. 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 $ 11.4 million for the quarter ended September 30, 1996 compared to $9.8 million for the same period in 1995. The increased margin in 1996 is primarily due to the increased volumes of loans and deposits, due to both the acquisition of Corporate Bank, and the commercial loan growth generated over the past year. Net interest income for the nine months ended September 30, 1996 increased to $33.5 million, from $29.8 million for the comparable period of 1995. 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, 1996 compared to 1995 1995 compared to 1994 Increases(Decreases) Volume Rate Total Volume Rate Total Interest Income Loans, net $6,422 $(1,216) $5,206 $3,134 $3,129 $6,263 Investments (94) (118) (212) 608 1,025 1,633 Federal Funds Sold (16) (198) (214) (74) 611 537 Total interest income 6,312 (1,532) 4,780 3,668 4,765 8,433 Interest Expense Interest-bearing deposits: Demand and Savings 396 (119) 277 (371) 213 (158) Time Certificates of deposit: Under $100 912 (18) 894 818 758 1,576 $100 or more 154 (290) (136) 1,758 1,557 3,315 Federal funds purchased / Repos (8) (8) 8 14 22 Other borrowings 53 52 105 (62) (29) (91) Total interest expense 1,507 (375) 1,132 2,151 2,513 4,664 Net interest income $4,805 $(1,157) $3,648 $1,517 $2,252 $3,769 (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 8.8% for the nine months ended September 30, 1996, compared to 8.8% yield for the same period of 1995. The decrease in the prime rate from an average of 8.8% to an average of 8.3% in 1996 was offset by an increasing percentage of assets being held in loans. Rates on interest bearing liabilities resulted in an average cost of funds of 3.7% for the nine months ended September 30, 1996, compared with 3.8% for the comparable period of 1995. The decline in rates on certificates of deposit reflected the lower interest rate environment in 1996. Expressing net interest income as a percent of average earning assets is referred to as margin. Margin was 6.3% for the year to date in 1996, compared to 6.3 % for the same period in 1995. The Bank's margin is strong because it has funded itself with a significant amount of noninterest bearing deposits. The deposit portfolio of Corporate Bank, which is included in the first quarter 1996 totals, was similar in composition to the Bank's deposits, resulting in very little change in the Bank's margin. 9 Table 9 Average Balance Sheets and Analysis of Net Interest Income
Nine months ended Nine months ended Amounts in thousands of dollars September 30, 1996 September 30, 1995 Interest Annual Interest Annual Income or Yield or Income or Yield or Balance Expense Rate Balance Expense Rate Interest Earning Assets Loans, Net $451,467 $35,849 10.59% $371,070 $30,643 11.01% Investments 213,896 9,049 5.64 216,207 9,266 5.71 Certificates of Deposit in other banks 201 8 5.30 93 3 4.30 Federal Funds Sold 41,479 1,609 5.17 41,854 1,823 5.81 Total Earning Assets 707,043 46,515 8.77 629,224 41,735 8.86 Non Earning Assets Cash & Due From Banks 70,735 61,870 Other Assets 39,264 35,193 Total Assets $817,042 $726,287 Interest-bearing Liabilities Demand and savings $246,687 $4,226 2.28% $223,719 $3,949 2.35% Time Certificates of Deposits Less Than $100 75,239 3,206 5.68 136,635 2,312 5.73 More Than $100 140,553 5,325 5.05 53,833 5,461 5.33 Fed Funds Purchased/Repos 420 19 6.03 592 27 6.08 Total interest-bearing 462,899 12,776 3.68 414,779 11,749 3.78 Noninterest-bearing Deposits 248,349 221,697 Total Deposits 711,248 12,776 2.40 636,476 11,749 2.46 Other Borrowings 4,878 238 7.33 3,797 163 5.72 Total Funding Liabilities 716,126 13,044 2.43 640,273 11,912 2.48 Other Liabilities 10,284 7,870 Shareholders' Equity 90,632 78,144 Total Liabilities and $817,042 $726,287 Shareholders' Equity Net Interest Income $33,471 6.31% $29,823, 6.32% Shareholders' Equity to Total 11.09% 10,76% Assets
Other Operating Income Total non interest income was $1.7 million and $5.6 million for the three and nine month periods ended September 30, 1996, and $1.8 million and $5.6 million for the comparable periods of 1995. Service charges and other fees have increased in 1996, reflecting the acquisition of Corporate Bank and growth in the deposit portfolios. These increases in 1996 offset gains on sales of servicing and other real estate owned that occurred in 1995. The Bank reported no gains on sale of servicing during 1996. The Bank reported a gain of $383 thousand in the first nine months of 1995 on the sale of mortgage servicing rights, representing final settlement payments received related to open issues on servicing sales from prior quarters. No servicing sales have been made in 1996, and no further servicing rights are owned at September 30, 1996. Gains on the sale of real estate owned totaled $139 thousand for the three and nine month periods ended September 30, 1995, with no net gains being recorded in 1996. Operating income for the first quarter of 1996 includes a gain of $114 thousand on the sale of available for sale securities. This compared with a gain of $46 thousand for the nine months ended September 30, 1995. No securities gains were realized in the current quarter of 1996. Operating Expense Total operating expenses for the Bank were $ 17.0 million for the quarter ended September 30, 1996 , compared to $ 8.6 million for the same period in 1995. Included in the current quarter's totals is $ 7.5 million in non-recurring expenses that arose due to the completion of the merger between Home Interstate Bancorp and CU Bancorp. Severance and compensation payments due to the change in control totaled $1.2 million for the quarter. Reserves for losses on other real estate owned were $2.6 million, reflecting the combined Bank's intent 10 to aggressively manage and conservatively value all real estate owned. An additional $3.7 million in other operating expense were incurred in the current quarter for direct merger expenses and costs of systems conversions. Excluding the effect of the non-recurring expenses discussed above, total operating expenses for the three and nine month periods ending September 30, 1996 would have been $9.5 million and $29.1 million, respectively. The increase from $8.6 million and $26.6 million for the three and nine month periods ended September 30, 1995 relate primarily to the additional staff and facilities acquired in the Corporate Bank transaction. Provision for Loan Losses The Bank has made a provision for loan losses of $4.1 million in the third quarter of 1996, for a total of $4.4 million for the year. In 1995, the Bank had provided $100 thousand in the third quarter, and $1.0 million for the nine months year to date. The increased provision in 1996 was the result of combining the valuation reserve methodologies of California United Bank and Home Bank, as well as reflecting the ongoing intent of the merged bank to manage potential problems in the portfolio aggressively and maintain conservative standards for valuation. Legal and Regulatory Matters In the normal course of business, the Bank occasionally becomes party to litigation. In the opinion of management, the Bank believes that pending or threatened litigation involving the Bank will have no material adverse effect on its financial condition or results of operations. As a registered bank holding company, and a California state chartered bank, the Company and the Bank are subject to supervision and regulation by the Federal Reserve Board, the Superintendent of Banks of the State of California and the Federal Deposit Insurance Corporation, among others. Regulatory issues have not had a significant impact on the Bank's operations for the past three years, apart from the normal ongoing process of monitoring compliance with relevant federal and state law. Management remains committed to maintaining a positive and proactive relationship with its primary regulators. 11 Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
September 30, December 31, Amounts in thousands of dollars, except share data 1996 1995 Assets Cash and due from banks $84,329 $67,173 Federal funds sold 0 47,100 Total cash and cash equivalents 84,329 114,273 Securities held to maturity (Market value of $147,742 and $80,293 at 148,317 79,866 September 30, 1996 and December 31, 1995, respectively) Securities available for sale, at market value 88,191 127,100 Total Securities 236,508 206,966 Loans, (Net of allowance for loan losses of $13,550 and $10,043 at September 30, 1996 and December 31, 1995, respectively) 472,047 391,806 Premises and equipment, net 16,558 15,476 Other real estate owned 1,063 4,918 Accrued interest receivable and other assets 24,821 15,661 Total Assets $835,326 $749,100 Liabilities and Shareholders' equity Deposits: Demand, non-interest bearing $253,905 $226,307 Savings and interest bearing demand 251,563 227,304 Time deposits under $100 142,304 135,693 Time deposits of $100 or more 83,414 63,237 Total deposits 731,186 653,541 Accrued interest payable and other liabilities 17,922 11,137 Total liabilities 749,108 664,678 Commitments and contingencies Shareholders' equity: Preferred stock, no par value: Authorized -- 10,000,000 shares No shares issued or outstanding in 1996 or 1995 --- --- Common stock, no par value: Authorized - 24,000,000 shares Issued and outstanding - 11,267,010 in 1996, and 10,592,125 in 1995 75,347 70,123 Retained earnings 10,830 13,818 Unrealized gain on securities available for sale, net of taxes 41 663 Unearned Compensation 0 (182) Total Shareholders' equity 86,218 84,422 Total liabilities and shareholders' equity $835,326 $749,100 The accompanying notes are an integral part of these consolidated statements.
12 Consolidated Statements of Income CU Bancorp and Subsidiary
For the three months ended For the nine months September 30, ended September 30, Amounts in thousands of dollars, except per share 1996 1995 1996 1995 data Revenue from earning assets: Interest and fees on loans $12,107 $10,309 $35,849 $30,643 Interest on investment securities 3,235 2,902 9,057 9,269 Interest on federal funds sold 588 720 1,609 1,823 Total revenue from earning assets 15,899 13,931 46,515 41,735 Cost of funds: Interest on savings and interest bearing demand 1,460 1,317 4,226 3,949 Interest on time deposits under $100 1,874 1,943 5,325 5,461 Interest on time deposits of $100 or more 1,046 840 3,206 2,312 Interest on other borrowings 80 60 287 190 Total cost of funds 4,460 4,160 13,044 11,912 Net revenue from earning assets before 11,439 9,771 33,471 29,823 provision for loan losses Provision for loan losses 4,050 100 4,400 1,025 Net revenue from earning assets 7,389 9,671 29,071 28,798 Other operating revenue: Service charges and other fees 1,303 1,025 3,975 3,017 Gain on sale of mortgage servicing portfolio 0 0 383 Gain on other real estate owned 139 0 139 Gain on sale of securities available for sale (before taxes of $47 in 1996 and $19 in 1995) 0 4 114 46 Other operating revenue 445 651 1,532 1,984 Total other operating revenue 1,748 1,819 5,621 5,569 Other operating expenses: Salaries and related benefits 5,905 4,347 15,614 13,063 Occupancy expense 2,233 763 4,934 2,272 Other operating expenses 8,842 3,511 16,088 11,288 Total operating expenses 16,980 8,621 36,636 26,623 Income before provision for income taxes (7,843) 2,869 (1,944) 7,744 Provision for income taxes (2,725) 1,159 (177) 3.036 Net income $(5,118) $1,710 $(1,767) $4,708 Earnings per common and equivalent share $(.44) $0.16 $(.15) $0.44 The accompanying notes are an integral part of these consolidated financial statements.
13 Consolidated Statements of Cash Flows CU Bancorp and Subsidiary
Amounts in thousands of dollars For the nine months ended September 30, 1996 1995 Cash flows from operating activities Net income $(1,767) $4,708 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 1,060 1,073 Provision for losses on loans 4,400 1,025 Provision (benefit) of deferred taxes (526) 690 Goodwill amortization 494 342 (Increase)/decrease in other assets (4,685) (7,913) Increase/(decrease) in other liabilities 1,774 (2,555) (Increase)/decrease in accrued interest receivable 844 978 Amortization of deferred loan fees and costs (951) (637) Amortization of deferred compensation 185 0 Net gain on sale of securities (114) (46) Net (gain) loss on sale of premises, furniture and 0 26 equipment Net gain loss on real estate owned 783 564 Increase/(decrease) in accrued interest payable 166 344 Net amortization of (discount)/premium on investment 1,444 1,610 securities Total adjustments 4,874 (4,499) Net cash provided by operating activities 3,107 209 Cash flows from investing activities Proceeds from investment securities sold or matured 22,417 64,677 Purchase of investment securities (49,771) (23,793) Purchase of business 18,316 0 Proceeds from sale of real estate owned 2,779 2,668 Proceeds from sale of premises, furniture and 0 11 equipment Net (increase)/decrease in loans (38,183) (15,626) Purchases of premises and equipment, net (1,799) (2,288) Net cash provided (used in) by investing activities (46,241) 25,649 Cash flows from financing activities Net increase/(decrease) in demand and savings deposits (808) (47,168) Net increase/(decrease) in time certificates of 14,662 33,303 deposit Net increase/ (decrease) in securities sold under (100) agreements to repurchase Proceeds from exercise of stock options and director 458 601 warrants Cash dividend paid (1,221) (1,567) Net cash provided (used) by financing activities 13,091 (14,931 Net increase (decrease) in cash and cash equivalents (30,043) 10,927 Cash and cash equivalents at beginning of year 114,273 104,393 Cash and cash equivalents at end of year $84,230 $115,320 Supplemental disclosure of cash flow information Cash paid during the year: Interest $12,878 $11,568 Taxes 2,635 2,845 Supplemental disclosure of noncash investing activities: Loans transferred to OREO 890 6,700 The accompanying notes are an integral part of these consolidated statements
14 Notes to Consolidated Financial Statements September 30, 1996 UNAUDITED Note A. BASIS OF PRESENTATION The accounting and reporting policies of CU Bancorp ("the Company") and its wholly owned subsidiary, California United Bank, ("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 month and nine month periods ended September 30, 1996 were 11,587,703 and 11,524,060, compared with 10,669,361 and 10,656,361 for the comparable periods of 1995. NOTE C. SECURITIES The Bank has the intent and ability to hold its Securities Held to Maturity until maturity. Accordingly, these 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 $ 88 million in securities classified as "Available for sale", indicating the willingness to sell these securities under certain conditions. These securities are 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 15 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 30, 1996. A summary of Securities Held to Maturity at September 30, 1996 is as follows:
Held To Maturity Gross Gross Book Unrealized Unrealized Market Value Gains Losses Value U.S. Treasury securities $67,999 $114 $505 $67,608 Commercial Paper 64,717 0 0 64,717 U.S. Government Agency Securities 8,267 2 70 8,199 Corporate Bonds 551 3 548 Municipal Securities 6,783 5 98 6,690 Total portfolio $148,317 $121 $676 $147,762
A summary of Securities Available for Sale for September 30, 1996 is as follows:
Available For Sale Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasury securities $50,507 $ 198 $ 220 $50,705 U.S. Agency securities 19,017 40 109 18,948 Corporate Bonds 13,480 32 70 13,442 Federal Reserve stock 1,151 1 1,151 Municipal securities 3,969 44 68 3,945 Total portfolio $88,124 $ 336 $ 269 $88,191
At September 30, 1996, investment securities with a book value of $ 55 million were pledged to secure court deposits and for other purposes as required or permitted by law. Note D. 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 E. 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 $ 1.1 million of other real estate owned as of September 30, 1996. There was $5.6 and $ 4.9 million of other real estate owned as of September 30, 1995 and December 31, 1995. Note F. INCOME TAXES Effective January 1, 1993, the Bank implemented the provisions of Financial Accounting Standards (SFAS) No. 16 109, "Accounting for Income Taxes." 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 G. 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 collection 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 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, 1996, the Bank had $ 2.7 million in impaired loans, against which a loss allowance of $850 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 1996 and the nine months ended September 30, 1996, the Bank had an average investment in impaired loans of approximately $3.5 million. Note H. Mergers and Acquisitions On August 9, 1996, Home Interstate Bancorp, the holding company of Home Bank, was merged into CU Bancorp, the holding company of California United Bank. Each share of Home Interstate Stock was converted into 1.409 shares of CU Bancorp stock. Simultaneously with the merger of the two holding companies, California United Bank was merged into Home Bank, with the surviving Bank being renamed California United Bank. The merger of the two holding companies was accomplished in an all stock transaction, except for the effect of fractional shares, and has been accounted for using the pooling-of-interests method. A total of 5,955,000 shares of CU Bancorp stock were issued in this transaction. 17 Using the pooling-of-interests method of accounting, the assets, liabilities, equity and results of operations for all prior periods have been restated to include CU Bancorp and Home Interstate Bancorp as if they had been combined from the beginning of the earliest period presented. There were no intercompany eliminations or adjustments for accounting changes that were required in presenting the combined history for the two companies. Revenues and earnings of the two separate companies, relating to prior to the merger date of August 9, 1996, that are included in the combined income statements are as follows:
CU Bancorp Home Interstate Bancorp Six months ended June 30, 1996: Net interest income $9,762 $12,270 Net income 1,360 1,991 Nine months ended September 30, 1995 Net interest income $11,447 $18,376 Net income 2,113 2,595
On January 12, 1996, the Company completed the acquisition of Corporate Bank, a Santa Ana, California based commercial bank. The acquisition was accounted for as a purchase. The Company issued 649 thousand shares of common stock, and paid $1.7 million in cash, for a total purchase price of $6.5 million. The acquired operations of Corporate Bank have been included in the Statement of Income from the acquisition date of January 12, 1996. The Company's income for the first nine months of 1996 would not have been materially different if the combination had been completed as of January 1, 1996. The pro forma results of operations for the nine months of 1995, had the acquisition been completed on January 1, 1995, would have been as follows: Net interest income $33,375 Income before provision for income taxes 7,499 Net income 4,488 Earnings per common and equivalent share $ .40 The fair value of assets acquired from Corporate Bank was $72.7 million, with liabilities assumed of $68.6 million. Cash and cash equivalents acquired, net of cash paid, totaled $20 million. Goodwill of $2.4 million generated by the purchase transaction is being amortized on a straight line basis over a ten year period. 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, 1996. 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 18 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 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 settled with the representatives of the various plaintiffs, 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. 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 t0 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. 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. As of May 10, 1996, the Bank and the Insurer orally agreed that the Insurer would assume all future costs of defense of the former director/employee, and would repay the Bank $75,000 for certain of the prior costs expended. The agreement has not yet been finalized due to the pendancy of a global resolution of all matters relative to these plaintiffs and defendants. Such a settlement is subject to a number of contingencies and approvals. 19 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 13, 1996 By:___________________ Patrick Hartman Chief Financial Officer 20 Part II - Other Information Item 1. Legal Proceedings Please refer to Note J , on page 18 above, for a 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 21 Item 6. Exhibits and Filings on Form 8-K (a) Exhibits: (10) Material Contracts (b) Reports on Form 8-K: Form 8-K, Item 2, Acquisition or Disposition of Assets, was filed August 23, 1996 concerning the merger between CU Bancorp and Home Interstate Bancorp. 22 EX-27 2
9 1000 9-MOS DEC-31-1996 SEP-30-1996 84329 0 0 0 88191 148317 147762 485595 13550 835326 731186 0 17922 0 0 0 75347 10871 835326 35849 10660 0 46515 12757 13044 33471 4400 114 36636 (1944) (1767) 0 0 (1767) (.15) (.15) 6.31 2705 0 1027 0 10043 4616 871 13550 13550 0 0
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