-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, M/W9ggcwBicmt3iWu+lKem7zYol1WeV7B3180Y6KS19snhoQiYOhf+jqjNLRZq0w t7UixplSwFUYK2cfLynRAQ== 0000356050-95-000005.txt : 19950814 0000356050-95-000005.hdr.sgml : 19950814 ACCESSION NUMBER: 0000356050-95-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 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: 95561449 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 6/30/95 FORM 10-Q FOR PERIOD ENDED 6/30/95 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 June 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 June 30, 1995, the Registrant has 4,587,330 outstanding shares of its Common stock, no par value. 1 CU Bancorp Quarter Ended June 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: -June 30, 1995, and December 31, 1994. 13 Consolidated Statements of Income: -Three and Six Month Periods Ended June 30, 1995, and June 30, 1994. 14 Consolidated Statements of Cash Flows: -Six Month Periods Ended June 30, 1995, and June 30, 1994. 15 Notes to Consolidated Financial Statements 16 Signatures 20 Part II. Other Information Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Filings on Form 8-K 21 2 Management Discussion and Analysis Overview The Company earned $699 thousand, or $.15 per share, during the second quarter of 1995, compared to $608 thousand, or $0.13 per share, during the same period in 1994. Over 66% of the earnings in the second 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 June 30, 1995, only about 15% of pretax earnings related to sales of mortgage servicing. The Bank's asset quality ratios continue to be exceptionally strong. At June 30, 1995, nonperforming assets were $285 thousand, compared with $66 thousand in the first quarter of 1995. The Bank did not have any real estate acquired through foreclosure at June 30, 1995, December 31, 1994 or June 30, 1994. The Bank's allowance for loan losses as a percent of both nonperforming loans and nonperforming assets at the end of the second quarter of 1995 was 2648%, compared to first quarter 1995 levels of 11503%. Total nonperforming assets for the Bank have remained below $300 thousand for the past four consecutive quarters, reflecting the Bank's ongoing emphasis on credit quality. The Bank has enjoyed net recoveries, as recoveries exceeded chargeoffs for the first six months of 1995 and for all of 1994. 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 14.84%, and the Leverage Ratio was 10.34% at June 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 six months ended June 30, 1995, the Bank generated approximately $64 million in new loan commitments, compared with about $52 million for the comparable period of 1994. Balance Sheet Analysis Loan Portfolio Composition and Credit Risk The Bank's loan portfolio at June 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 June 30, 1995 increased by $9 million during the quarter, offsetting 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 June 30, 1995 were $34 million above the June 30, 1994 level, reflected the ongoing success in producing new commercial relationships. 3
Table 1 Loan Portfolio Composition Amounts in thousands of dollars June 30, December 31 June 30, 1995 1994 1994 Commercial & Industrial Loans $147,721 83% $142,885 82% $ 112,673 79% Real Estate Loans: Commercial 24,870 14 26,528 15 24,856 17 Mortgages 4,777 3 4,773 3 4,875 3 Construction 0 0 416 0 846 1 Total loans net of unearned fees $177,368 100% $174,602 100% $143,250 100%
At June 30, 1995, the Bank had loans totaling $108 million maturing within one year, $58 million maturing after one but within five years, and $7 million maturing after five years. Loans due after one year totaling $5 million had predetermined interest rates. 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. 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 June 30, December 31, June 30, 1995 1994 1994 Commercial & Industrial Loans(1) $7,046 $7,096 $5,971 Real estate loans - Mortgages 0 0 643 Real estate loans - Construction 0 0 102 Loans 7,046 7,096 6,716 Unfunded commitments and letters of credit 502 331 563 Total Allowance for loan losses $7,548 $7,427 $7,279 (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. 4 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 June 30, December 31, June 30, 1995 1994 1994 Balance at January 1 $7,427 $6,513 $6,513 Loans charged off: Real estate secured loans 0 486 361 Commercial loans secured and unsecured 196 820 501 Loans to individuals, installment and other loans 11 107 0 Total charge-offs 207 1,413 862 Recoveries of loans previously charged off: Real estate secured loans 31 586 519 Commercial loans secured and unsecured 286 1,735 1,106 Loans to individuals, installment and other loans 11 6 3 Total recoveries of loans previously charged off 328 2,327 1,628 Net charge-off (recovery) (121) (914) (766) Provision for loan losses 0 0 0 Balance at end of period $7,548 $7,427 $7,279 Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the period ended (.069)% (0.61)% (0.56)%
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 June 30, 1995, nonperforming loans amounted to $285 thousand compared with $36 thousand at December 31, 1994. 5
Table 4: Nonperforming Assets Amounts in thousands of dollars June 30, December 31, June 30, 1995 1994 1994 Loans not performing (1) $285 $36 $342 Insubstance foreclosures 0 0 700 Total nonperforming loans 285 36 1,042 Other real estate owned 0 0 0 Total nonperforming assets $285 $36 $1,042 Allowance for loan losses as a percent of: Nonperforming loans 2,648% 20,631% 699% Nonperforming assets 2,648% 20,631% 699% Nonperforming assets as a percent of total assets .1% 0% 0.4% Nonperforming loans as a percent of total loans .2% 0% 0.7% Note 1: Loans not performing Performing as agreed $285 $36 $118 Partial performance 0 0 99 Not performing 0 0 125 $285 $36 $342 Nonaccrual: Loans $285 $36 $342 Troubled debt restructurings 0 0 0
Securities The securities portfolio at June 30, 1995, totaled $65 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 June 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 second quarter of 1995 or 1994. At June 30, 1995, there were unrealized gains of $396 thousand and losses of $606 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 June 30, 1995, December 31, 1994, and June 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 monitors the profitability of these accounts through an account analysis procedure. 6 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 June 30, 1995, was $34 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 $37 million in certificates of deposit larger than $100 thousand dollars at June 30, 1995. The maturity distribution of these deposits is relatively short term, with $34 million maturing within 3 months and the $36 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. The Bank's historical portfolio of large certificates of deposit (those of $100 thousand or more) has not been significant relative to the total deposit base. At June 30, 1995 this funding source was 14% of average deposits, compared to 14% at December 31, 1994. This funding source has traditionally been used to manage liquidity needs within the deposit portfolio. During 1994 and 1995, loan growth for the bank outpaced growth of deposits from the banks commercial customers. The Bank funded this growth, combined with the Bank's reduced concentration in title and escrow deposits, in part with certificates of deposit from customers from outside the Bank's normal service area. These out of area deposits are certificates of deposit of $90,000 or greater, that are priced competitively with similar certificates from other financial institutions throughout the country. At June 30,1995, the Bank had approximately $83 million of these out of area deposits, up from $55 million at December 31, 1994. 7
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at June 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 $171,152 $202 $2,192 $147 $4,653 Securities 4,995 4,990 5,045 4,513 45,266 Federal funds sold & other 37,000 --- --- --- 0 Total earning assets 213,147 5,192 7,237 4,660 49,919 Interest-bearing deposits: Now and money market 52,845 --- --- --- --- Savings 8,725 --- --- --- --- Time certificates of deposit: Under $100 32,091 15,984 7,188 5,768 5,940 $100 or more 23,823 6,930 2,120 3,755 1,000 Non interest-bearing demand deposits 24,077 0 0 0 0 Total interest-bearing liabilities 141,561 22,914 9,308 9,523 6,940 Interest rate sensitivity gap 71,586 (17,722) (2,071) (4,863) 42,979 Cumulative interest rate sensitivity gap 71,586 53,864 51,793 46,930 89,909 Off balance sheet financial instruments 0 0 0 0 0 Net cumulative gap $71,586 $53,864 $51,793 $46,930 $89,909 Adjusted cumulative ratio of rate sensitive assets to rate sensitive liabilities (1) 1.51 1.33 1.30 1.26 1.47 (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 June 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. 8
Table 7 Capital Ratios Regulatory Standards June 30, December 31, Well 1995 1994 Capitalized Minimum Total Risk Based Capital 15.84% 15.40% 10.0% 8.00% Tier 1 Risk Base Capital 14.57% 14.12 6.0 4.00 Leveraged Capital 10.34% 10.44 5.0 3.00
In February of 1995, the Bank declared a dividend of $.02 per share payable March 13, 1995 to shareholders of record February 20, 1995. 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. 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 . 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 for the second quarter of 1995 was $3.9 million, compared to $3.3 million for the same period in 1994. The change is attributable to changes in volume and deposit mix. The Bank's net interest income has improved with the growth of the commercial loan portfolio from 1994 to 1995. This improvement was offset in part by the change in deposit mix away from non interest bearing title and escrow deposits. 9
Table 8 Analysis of Changes in Net Interest Income (1) Amounts in thousands of dollars Six months ended June 30, Six months ended June 30, 1995 compared to 1994 1994 compared to 1993 Increases(Decreases) Volume Rate Total Volume Rate Total Interest Income Loans, net $1,559 $1,180 $2,739 $(2,795) $52 $(2,743) Investments 49 420 469 460 (24) 436 Federal Funds Sold 215 261 476 203 31 234 Total interest income 1,823 1,861 3,684 (2,132) 59 (2,073) Interest Expense Interest-bearing deposits: Demand and Savings (127) 217 90 (14) (71) (85) Time Certificates of deposit: Under $100 848 256 1,104 (85) 0 (85) $100 or more 333 255 588 (204) 12 (192) Federal funds purchased / Repos 0 0 0 (43) (43) (86) Other borrowings (58) (38) (96) (58) 6 (52) Total interest expense 996 690 1,686 (404) (96) (500) Net interest income $827 $1,171 $1,998 $(1,728) $155 $(1,573) (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 8.9% in the first six months of 1995, compared to a 7.05% yield for the same period in 1994. The higher average yield on earning assets in 1995 is the primarily the result of an increase in the prime rate from an average of 6.5% in the first half of 1994 to an average of 8.9% in the first half 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 for 1995 was 5.7%, compared to 5.5% for the same period in 1994. The Bank's margin is strong because it has funded itself with a significant amount of noninterest bearing deposits. The higher margin in 1995 is largely due to the higher general level of interest rates. 10
Table 9 Average Balance Sheets and Analysis of Net Interest Income Six months ended Six months ended Amounts in thousands of dollars June 30, 1995 June 30, 1994 Interest Annual Interest Annual Income or Yield or Income or Yield or Balance Expense Rate Balance Expense Rate Interest Earning Assets Loans, Net $164,298 $9,087 11.06% $130,601 $6,043 9.25% Investments 69,500 1,804 5.19 65,755 1,290 3.92 Certificates of Deposit in other banks 96 2 4.17 1,377 32 4.65 Federal Funds Sold 34,796 1,016 5.84 22,594 399 3.53 Total Earning Assets 268,690 11,909 8.86 220,327 7,764 7.05 Non Earning Assets Cash & Due From Banks 24,151 28,762 Other Assets 8,141 8,009 Total Assets $300,982 $257,098 Interest-bearing Liabilities Demand and savings 64,278 939 2.92 $75,228 879 2.34 Time Certificates of Deposits Less Than $100 66,071 2,076 6.28 19,260 349 3.62 More Than $100 38,197 1,172 6.14 17,318 276 3.19 Total interest-bearing 168,546 4,187 4.97 111,806 1,504 2.69 Noninterest-bearing Deposits 92,499 109,787 Total Deposits 261,045 4,187 3.21 221,593 1,504 1.36 Other Borrowings 3,801 104 5.47 5,476 188 6.87 Total Funding Liabilities 264,846 4,291 3.24 227,069 1,692 1.49 Other Liabilities 5,915 2,812 Shareholders' Equity 30,221 27,217 Total Liabilities and Shareholders' Equity $300,982 $257,098 Net Interest Income $7,618 5.67% $6,072 5.51% Shareholders' Equity to Total Assets 10.04% 10.59%
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 $186 thousand on the sale of mortgage servicing in the quarter ended June 30, 1995, representing final settlement payments received related to open issues on servicing sales from prior quarters. The trends and composition of other operating income are shown in the following table.
Table 10A Other operating income Amounts in thousands of dollars For three months ended June 30, June 30, 1995 1994 Gain on sale of SBA Loans $51 Fees on loans sold 0 $15 Premium on sales of mortgage loans 0 15 Service income 0 249 Documentation fees 10 22 Other service fees and charges 294 291 Gain on sale of mortgage servicing portfolio 186 720 Total $541 $1,312
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Table 10B Other operating income Amounts in thousands of dollars For six months ended June 30, June 30, 1995 1994 Gain on sale of SBA Loans $151 Fees on loans sold 0 $15 Premium on sales of mortgage loans 0 83 Service income 0 714 Documentation fees 46 44 Other service fees and charges 581 639 Gain on sale of mortgage servicing portfolio 383 1,558 Total $1,161 $3,053
Operating Expense Total operating expenses for the bank were $3.2 million and $6.3 million for the three and six months ended June 30, 1995 , compared to $3.6 million and $7.0 million for the same period in 1994. Refocusing productive resources toward commercial banking activities and eliminating historic inefficiencies allowed this reduction. The current level of operating expense is deemed to be adequate and will be leveraged further as the core middle market business is expanded. Provision for Loan Losses The Bank has made no provision for loan losses in 1995 or 1994. No loan loss provision has been deemed necessary for 1995 and 1994, due to the declining levels of nonperforming assets, net recoveries received, and the strong reserve position. 12
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary Amounts in thousands of dollars June 30, December 31, 1995 1994 Assets Cash and due from banks $29,617 $35,397 Federal funds sold 37,000 20,000 Total cash and cash equivalents 66,617 55,397 Investment securities (Market value of $64,598 and $71,423 at June 30, 1995 and December 31, 1994, respectively) 64,808 74,153 Loans, (Net of allowance for loan losses of $7,548 and $7,427 at June 30, 1995, and December 31, 1994, respectively) 169,820 167,175 Premises and equipment, net 1,170 996 Other real estate owned, net 0 0 Accrued interest receivable and other assets 7,372 6,433 Total Assets $309,787 $304,154 Liabilities and Shareholders' equity Deposits: Demand deposits $97,559 $112,034 Savings deposits 62,842 67,896 Time deposits under $100 71,047 47,836 Time deposits of $100 or more 37,198 36,415 Total deposits 268,646 264,181 Accrued interest payable and other liabilities 9,608 10,229 Total liabilities 278,254 274,410 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 4,541 3,314 Total Shareholders' equity 31,533 29,744 Total Liabilities and Shareholders' equity $309,787 $304,154 The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Income CU Bancorp and Subsidiary Amounts in thousands of dollars, except per share data For the three months For the six months ended June 30, ended June 30, 1995 1994 1995 1994 Revenue from earning assets: Interest and fees on loans $4,674 $3,211 $9,087 $6,043 Interest on taxable investment securities 879 647 1,779 1,288 Interest on tax exempt investment securities 10 1 25 2 Interest on time deposits with other financial institutions 0 16 2 32 Interest on federal funds sold 514 252 1,016 399 Total revenue from earning assets 6,077 4,127 11,909 7,764 Cost of funds: Interest on interest-bearing demand deposits 404 417 803 778 Interest on savings deposits 66 56 136 101 Interest on time deposits under $100 1,103 135 2,076 349 Interest on time deposits of $100 or more 590 133 1,172 276 Interest on other borrowings 46 66 104 188 Total cost of funds 2,209 807 4,291 1,692 Net revenue from earning assets before provision for loan losses 3,868 3,320 7,618 6,072 Provision for loan losses 0 0 0 0 Net revenue from earning assets 3,868 3,320 7,618 6,072 Other operating revenue: Servicing Income - mortgage loans sold 0 249 0 714 Other fees & charges - commercial 355 301 838 530 Premium on sales of mortgage loans 0 30 0 98 Other fees and charges - mortgage 0 12 0 153 Gain on sale of mortgage servicing portfolio 186 720 323 1,558 Total other operating revenue 541 1,312 1,161 3,053 Other operating expenses: Salaries and related benefits 1,673 1,536 3,325 3,079 Selling expenses - mortgage loans 0 120 0 246 Other operating expenses 1,490 1,896 2,948 3,712 Total operating expenses 3,163 3,552 6,273 7,037 Income before provision for income taxes 1,246 1,080 2,506 2,088 Provision for income taxes 547 472 1,097 902 Net income $699 $608 $1,409 $1,186 Earnings per share $0.15 $0.13 $0.30 $0.26 The accompanying notes are an integral part of these consolidated financial statements.
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CU BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS OF DOLLARS) For the six months ended June 30, 1995 1994 Increase(decrease) in cash and cash equivalents: Cash flows from operating activities Net income/(loss) $1,409 $1,186 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 250 251 Amortization of real estate mortgage servicing rights 0 15 Benefit of deferred taxes 137 139 Increase/(decrease) in other assets (723) 1,547 Increase/(decrease) in other liabilities (1,028) (5,759) (Increase)/decrease in accrued interest receivable (353) (172) Increase/(decrease) in deferred loan fees (67) 84 Increase/(decrease) in accrued interest payable 407 (52) Net amortization of (discount)/premium on investment 288 592 securities Total Adjustments (1,089) (3,355) Net cash provided by operating activities 320 (2,169) Cash flows from investing activities Proceeds from investment securities sold or matured 9,057 49,851 Purchase of investment securities 0 (20,414) Net decrease in time deposits with other financial 0 0 institutions Net (Increase/(decrease) in loans (2,578) (1,907) Purchases of premises and equipment, net (424) (117) Net cash provided by investing activities 6,055 27,413 Cash Flows from financing activities Net increase/(decrease) in demand and savings deposits (19,429) 21,157 Net increase/(decrease/ in time certificates of deposits 23,894 (17,395) Proceeds from exercise of stock options and director warrants 562 54 Cash dividend paid (182) 0 Net cash provided by financing activities 4,845 3,816 Net increase (decrease) in cash and cash equivalents 11,220 29,060 Cash and cash equivalents at beginning of year 55,397 46,440 Cash and cash equivalents at end of year $66,617 $75,500 Supplemental disclosure of cash flow information Cash paid during the year: Interest $1,860 $850 Taxes 900 1,002 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 June 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. Note B. EARNINGS PER SHARE Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented, except when the effect of the latter would be anti-dilutive. NOTE C. SECURITIES The Bank has the intent and ability to hold its investment securities until maturity. Accordingly, investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts on a straight-line basis, which approximates the effective interest method. Gains and losses recognized on the sale of investment securities are based upon the adjusted cost and determined using the specific identification method. The Bank has no securities classified as "held for sale", indicating the willingness to sell these securities under certain conditions. These securities would be carried at current market value with unrealized gains or losses not recognized as current income but reported as an increase or decrease to capital in the statements of financial condition and in the statements of shareholders' equity. The following tables set forth the book value and market value, of investment securities at June 30, 1995.
Gross Gross Book Unrealized Unrealized Market (Thousands of dollars) Value Gains Losses Value U.S. Treasury Securities $57,851 $242 $(606) $57,487 Mortgage-backed securities 49 49 U.S. Government Agency Securities 5,726 150 5,876 State and Municipal Securities 750 4 754 Federal Reserve Bank Stock 432 0 0 432 Total $64,808 $396 $(606) $64,598
At June 30, 1995, investment securities with a book value of $22.9 million were pledged to secure U.S. District Court deposits and for other purposes as required or permitted by law. Note D. AVERAGE FEDERAL RESERVE BALANCES 16 The average cash reserve required to be maintained at the Federal Reserve Bank was approximately $3.1 million, $6 million, and $5.8 million for the periods ending June 30, 1995 and December 31 and June 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 June 30, 1995, December 31 or June 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. 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 17 measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. When the measure of the impaired loan is less than the recorded balance of the loan, the impairment is recorded through a valuation allowance included in the allowance for loan losses. The Bank had previously measured the allowance for loan losses using methods similar to the prescribed in SFAS 114. As a result, no additional provision was required by the adoption of this pronouncement. At June 30, 1995, the Bank had $285 thousand in impaired loans, against which a loss allowance of $119 thousand has been provided. All impaired loans are included in nonaccrual status, and as such no interest income is recognized. For the second quarter of 1995, the Bank had an average investment in impaired loans of approximately $129 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 June 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. The Bank is a defendant in multiple lawsuits related to the failure of two real estate investment companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by investors in PMC and SLGH (the "Federal Investor Action"), at least three state court actions by groups of Investors (the "State Investor Actions"), and an action filed by the Resolution Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action was filed by an individual investor and his related pension and profit sharing plans (the "Individual Investor Action"). Other defendants in these multiple actions and in related actions include financial institutions, title companies, professionals, business entities and individuals, including the principals of PMC and SLGH. The Bank was a depository bank for PMC, SLGH and related companies and was a lender to certain principals of PMC and SLGH ("Individual Loans"). Plaintiffs allege that PMC/SLGH was or purported to be engaged in the business of raising money from investors by the sale and issuance of interests in loans evidenced by promissory notes secured by real property. Plaintiffs allege that false representations were made, and the investment merely constituted a "Ponzi" scheme. Other charges relate to the Bank's conduct with regard to the depository accounts, the lending relationship with the principals and certain collateral taken , pledged by PMC and SLGH in conjunction with the Individual Loans. The lawsuits allege inter alia violations of federal and state securities laws, fraud, negligence, breach of fiduciary duty, and conversion as well as conspiracy and aiding and abetting counts with regard to these violations. The Bank denies the allegations of wrongdoing. Damages in excess of $100 million have been alleged, and compensatory and punitive damages have been sought generally against all defendants, although no specific damages have been prayed for with regard to the Bank, nor has there been any apportioning of liability among defendants or attributable to the various claims asserted. A former officer and director of the Bank has also been named as a defendant. The Bank and the named officer/director have notified the Bank's insurance carriers of the various lawsuits. During 1994, the Court granted the Bank's motion for summary judgment in the Individual Investor Action. An appeal of that Order was filed by the plaintiffs. The plaintiff in the Individual Investor Action will be a member of the settling class and in connection with the settlement discussed below, that appeal will be dismissed. The Bank has entered into a settlement agreement with the representatives of the various plaintiffs, which 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 was been received. In connection with the settlement, the Bank released its security interest in certain disputed collateral and 18 cash proceeds thereof, which the Bank received from PMC, SLGH, or the principals, in connection with the Individual Loans. This collateral has been a subject of dispute in the Neilson Action, with both the Bank and the representatives of PMC/SLGH asserting the right to such collateral. All the Individual Loans have been charged off, previously. The Bank also made a cash payment to the Plaintiffs in connection with the settlement. 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. 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 July , 1995 By:___________________ Patrick Hartman Chief Financial Officer Part II - Other Information Item 1. Legal Proceedings Please refer to Note J , on page 21 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, the Company entered into an agreement to acquire Corporate Bank, through a merger of Corporate Bank into the Company's subsidiary California United Bank, National Association. The consideration for the transaction was the Company's common stock. On May 10, 1995, Corporate Bank announced that the schedule for completion of the transaction had been delayed, as a result of a change of outside auditors by Corporate Bank, and also announced changes in management at Corporate Bank. Item 6. Exhibits and Filings on Form 8-K (a) Exhibits: (10) Material Contracts (NONE) (b) Reports on Form 8-K: In a report filed on Form 8-K dated April 7, 1995, the Company reported the signing of a definitive agreement to acquire Corporate Bank. 20 EX-27 2
9 1,000 6-MOS DEC-31-1995 JUN-30-1995 29617 0 37000 0 0 64808 64598 177368 7548 309787 268646 0 9608 0 26992 0 0 4541 309787 9087 2822 0 11909 4187 4291 7618 0 0 6273 2506 1409 0 0 1409 .30 .30 5.67 285 0 0 2048 7427 207 328 7548 7548 0 0
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