-----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, U6NJX9vk7QUy/4MrUlCYDcFNVM7go0gJx70wn+YSCX4AI3yuUKOv6oSzwx1zzi+a ur1RchKfaWQuGKRXyXun7g== 0000356050-96-000003.txt : 19960515 0000356050-96-000003.hdr.sgml : 19960515 ACCESSION NUMBER: 0000356050-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CU BANCORP CENTRAL INDEX KEY: 0000356050 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] 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: 96564158 BUSINESS ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 BUSINESS PHONE: 8189079122 MAIL ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 FORMER COMPANY: FORMER CONFORMED NAME: LINCOLN BANCORP DATE OF NAME CHANGE: 19900814 10-Q 1 FORM 10-Q FOR PERIOD ENDED 3/31/96 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. /X/ For the Quarterly Period Ended March 31, 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 March 31, 1996, the Registrant has 5,296,583 outstanding shares of its Common stock, no par value. 1 CU Bancorp Quarter Ended March 31, 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: -March 31, 1996, and December 31, 1995. 14 Consolidated Statements of Income: -Three Month Periods Ended March 31, 1996, and March 31, 1995. 15 Consolidated Statements of Cash Flows: -Three Month Periods Ended March 31, 1996 and March 31, 1995. 16 Notes to Consolidated Financial Statements 17 Signatures 22 Part II. Other Information Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holder 23 Item 5. Other Information 23 Item 6. Exhibits and Filings on Form 8-K 25
2 Management Discussion and Analysis Overview The Company earned $567 thousand or $.10 per share, during the first quarter of 1996, compared to $710 thousand, or $.15 per share, during the same period in 1995. Income for the current quarter was reduced by costs totaling $.05 per share related to merger activity. Net income for the quarter ended March 31, 1996 would have been $.15 per share without the direct expenses incurred in the period related to the acquisition of Corporate Bank and the proposed merger with Home Bank. This compares with $710 thousand, or $.15 per share for the comparable quarter of last year. Earnings for the first quarter of 1995 included approximately $.02 per share attributable to a sale of mortgage servicing rights. On January 12, 1996, the Bank completed the acquisition of Santa Ana based Corporate Bank. Inclusion of the Corporate Bank balances for the first time had a number of effects on the Bank's financial statements. Non performing assets increased to $3.8 million at March 31, 1996, up from $1 million at December 31, 1995 and $66 thousand at the end of the first quarter of 1995. Real estate acquired through foreclosure totaled $450 thousand at March 31, 1996, compared with zero at December 31, 1995 and March 31, 1995. The Bank's allowance for loan losses as a percent of loans was 243% at March 31, 1996, compared with 11503% at the comparable quarter of 1995. These asset quality ratios, even after the inclusion of the non performing assets from Corporate Bank's portfolio, remain strong. Capital ratios are strong, substantially exceeding levels required for the "well capitalized" category established by bank regulators. The Total Risk-Based Capital Ratio was 13.60%, the Tier 1 Risk-Based Capital Ratio was 12.33%, and the Leverage Ratio was 9.41% at March 31, 1996, compared to 16.19%, 14.92%, and 10.52%, 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 Bank's strong capital and asset quality position allows the Bank to continue to grow its core business which provides relationship based services to middle market customers and positions the Bank for its acquisition strategy. During the first quarter of 1996, the Bank generated approximately $33 million in new loan commitments, compared with about $31 million for the comparable period of 1995. In January 1996, the Bank announced the signing of an agreement to merge with Home Interstate Bancorp, the parent of Home Bank, based in the South Bay. This merger, targeted to be completed in the second or third quarter of 1996, would create a combined bank with over $800 million in assets and 22 branches. Balance Sheet Analysis Loan Portfolio Composition and Credit Risk The Bank's loan portfolio at March 31, 1996 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 are at manageable levels 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 as a secondary part of their total business relationship. Total loans at March 31 ,1996 increased by $45 million from December 31, 1995. A significant part of the change in the loan portfolio was due to the acquisition of Corporate Bank in January 1996. Approximately $43 million of the March 31, 1996 loan balances relate to loans acquired in the Corporate Bank transaction. The remaining small increase in outstandings represents new business production more than offsetting the usual seasonal declines that occur in the first quarter in the commercial portfolio. 3
Table 1 Loan Portfolio Composition Amounts in thousands of dollars March 31, December 31, March 31, 1996 1995 1995 Commercial & Industrial Loans $177,754 75% $159,768 84% $136,884 78% Real Estate Loans: Commercial 39,907 17 20,190 11 26,528 15 Mortgages 7,108 3 5,470 3 4,773 3 Construction 3,113 2 0 0 416 1 Total Real Estate Loans 50,128 22 25,660 14 31,717 19 Other loans 7,724 3 5,198 2 6,001 3 Total loans net of unearned fees $235,606 100% $190,626 100% $174,602 100%
Table 1a Loan Portfolio Maturities (in Millions) Remaining Maturity Within After One After One but Within Five Year Five Years Years Total Commercial & Industrial Loans $135,237 $47,139 $6,215 $188,591 Real Estate - Commercial & Mortgage 11,245 30,531 5,239 47,015 Total loans $146,482 77,670 11,454 $235,606 Loans due after one year with predetermined interest rates 21,318 3,419 Loans due after one year with floating or adjustable rates 56,352 8,035 $77,670 $11,454
Table 1a above summarizes the maturities of the loan portfolio based upon the contractual terms of the loans. The Bank does not automatically rollover any loans at maturity. Maturing loans must go through the Bank's normal credit approval process in order to roll a loan over to a new maturity date. The Bank lending effort is focused on business lending to middle market customers. Current credit policy now permits commercial real estate lending generally only as part of a complete commercial banking relationship with a middle market customer. Commercial real estate loans are secured by first or second liens on office buildings and other structures. The loans are secured by real estate that had appraisals in excess of loan amounts at origination. Monitoring and controlling the Bank's allowance for loan losses is a continuous process. All loans are assigned a risk grade, as defined by credit policies, at origination and are monitored to identify changing circumstances that could modify their inherent risks. These classifications are one of the criteria considered in determining the adequacy of the allowance for loan losses. 4
The amount and composition of the allowance for loan losses is as follows: Table 2 Allocation of Allowance for Loan Losses Amounts in thousands of dollars March 31, December 31, March 31, 1996 1995 1995 Commercial & Industrial Loans(1) $7,923 $6,594 $6,392 Real estate loans - Mortgages 0 0 277 Real estate loans - Construction Loans 222 0 5 8,145 6,594 6,674 Unfunded commitments and letters of credit 80 336 551 Total Allowance for loan losses $8,225 $6,930 $7,225 (1) Including Commercial loans secured by real estate
Adequacy of the allowance is determined using management's estimates of the risk of loss for the portfolio and individual loans. Included in the criteria used to evaluate credit risk are, wherever appropriate, the borrower's cash flow, financial condition, management capabilities, and collateral valuations, as well as industry conditions. A portion of the allowance is established to address the risk inherent in general loan categories, historic loss experience, portfolio trends, economic conditions, and other factors. Based on this assessment a provision for loan losses may be charged against earnings to maintain the adequacy of the allowance. The allocation of the allowance based upon the risks by type of loan, as shown in Table 2, implies a degree of precision that is not possible when using judgments. While the systematic approach used does consider a variety of segmentations of the portfolio, management considers the allowance a general reserve available to address risks throughout the entire loan portfolio. During the first quarter of 1996, the Bank had net charge offs of $1.6 million, compared to net recoveries of $165 thousand for the comparable period of 1995. The charge offs in 1996 are the result of applying the Bank's aggressive and disciplined approach to credit management to the portfolio acquired in the Corporate Bank transaction. 5 Activity in the allowance, classified by type of loan, is as follows:
Table 3 Analysis of the Changes in the Allowance for Loan Loss Amounts in thousands of dollars For the Periods Ended March 31, December 31, March 31, 1996 1995 1995 Balance at January 1 $6,930 $7,427 $7,427 Loans charged off: Real estate secured loans 1058 529 0 Commercial loans secured and unsecured 537 543 0 Loans to individuals, installment and other loans 115 17 4 Total charge-offs 1,710 1,089 4 Recoveries of loans previously charged off: Real estate secured loans 16 58 20 Commercial loans secured and unsecured 136 522 144 Loans to individuals, installment and other loans 1 12 5 Total recoveries of loans previously charged off 153 592 169 Net charge-off (recovery) 1,557 497 (165) Provision for loan losses 0 0 0 Allowance of acquired bank 2,852 0 0 Balance at end of period $8,225 $6,930 $7,592 Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the period ended .67% .28% (0.98)%
The Bank's policy concerning nonperforming loans is more conservative than is generally required. It defines nonperforming assets as all loans ninety days or more delinquent, loans classified nonaccrual, and foreclosed, or in substance foreclosed real estate. Nonaccrual loans are those whose interest accrual has been discontinued because the loan has become ninety days or more past due or there exists reasonable doubt as to the full and timely collection of principal or interest. When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against operating results. Subsequent payments on nonaccrual loans are treated as principal reductions. At March 31, 1996, nonperforming loans amounted to $3.4 million compared with $1.0 million at December 31, 1995. The increase in nonperforming assets, both loans and other real estate owned, is due to the acquisition of Corporate Bank. 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 March 31, 1996, therefore, the Bank had no potential problem loans other than those disclosed in Table 4 as nonperforming loans. 6
Table 4: Nonperforming Assets Amounts in thousands of dollars March 31, December 31, March 31, 1996 1995 1995 Loans not performing $3,379 $1,024 $66 Other real estate owned 450 0 0 Total nonperforming assets $3,829 $1,024 $66 Allowance for loan losses as a percent of: Nonperforming loans 243% 677% 11,503% Nonperforming assets 215% 677% 11,503% Nonperforming assets as a percent of total assets 1.0% 0.3% 0% Nonperforming loans as a percent of total loans 1.6% 0.5% 0%
Securities The Securities Held to Maturity portfolio totaled $89 million at March 31, 1996, compared with $67 million at year-end 1995. In the fourth quarter of 1995, the Bank performed a one-time reassessment of the designations of securities as held to maturity or available for sale, in accordance with a special report issued by the Financial Accounting Standards Board on the subject of investments. As a result of this assessment, $5.9 million of collateralized mortgage obligations were transferred out of the held to maturity portfolio into the available for sale portfolio. The collateralized mortgage obligations were subsequently sold in the first quarter of 1996 at a gain of $113 thousand. Also included in the Held to Maturity portfolio at March 31, 1996 is approximately $20 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 March 31, 1996, there were unrealized gains of $1 thousand and no losses in the securities held to maturity portfolio. The Securities Available for Sale portfolio totaled $5 million at March 31, 1996 with no investments being included in this category during the first quarter of 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. There was an unrealized gain of $16 thousand included in the March 31, 1996 balance, compared with an unrealized gain of $143 thousand at December 31, 1995. In the first quarter of 1996, the Bank realized a gain of $113 thousand on the sale of securities available for sale. There were no gains or losses realized in 1995. Additional information concerning securities is provided in the footnotes to the accompanying financial statements. Other Real Estate Owned There was $450 thousand of Other Real Estate Owned on the Bank's balance sheet at March 31, 1996. At December 31, 1995, and March 31, 1995 the Bank had no Other Real Estate Owned. 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. The 7 Bank has not had any significant expenses related to Other Real Estate Owned in 1996 or 1995. Deposit Concentration Prior to 1992, the Bank's focus on real estate-related activities resulted in a concentration of deposit accounts from title insurance and escrow companies. As the Bank has changed its focus to commercial lending, the amounts of title and escrow related deposits has declined for the past three years. 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. 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 deposit courier services, will be limited or charged back to the customer if the deposit relationship profitability does not meet the Bank's expectations. Noninterest bearing deposits represent nearly the entire title and escrow relationship. These balances have been reduced substantially as the Bank focused on middle market business loans. The balance at March 31, 1996 was $17 million compared to $20 million at December 31, 1995. The bank has greatly reduced their reliance on title and escrow deposits, with these relationships representing approximately 5% of deposits in the first quarter of 1996, and 7% at year end 1995. The Bank had $55 million in certificates of deposit larger than $100 thousand dollars at March 31,1996. The maturity distribution of these deposits is relatively short term, with $37 million maturing within 3 months and the $47 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), 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. The Bank has had no Fed Funds purchased or borrowings under repurchase agreements during 1995 or 1996. 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 March 31, 1996, the Bank had approximately $81 million of these out of area deposits, compared to $83 million at December 31, 1995. The Bank's experience with raising out of area deposits for the past two 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 March 31, 1996 this funding source was 17% of average deposits, compared to 17% at December 31, 1995. 8
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at March 31, 1996 Amounts in thousands of dollars Amounts Maturing or Repricing in More Than More Than More Than 3 Months 6 Months 9 Months But But But Less Than Less Than Less Than Less than 12 3 Months 6 Months 9 Months 12 Months Months & Over Earning Assets Gross Loans $204,906 $2,445 $2,945 $573 $24,737 Securities 27,409 6,018 5,397 5,082 45,577 Federal funds sold & other 22,000 99 0 0 0 Total earning assets 254,315 8,562 8,342 5,655 70,314 Interest-bearing deposits: Now and money market 81,511 Savings 11,070 Time certificates of deposit: Under $100 30,367 11,574 11,999 5,975 7,627 $100 or more 39,186 5,406 4,432 3,448 2,374 Non interest-bearing demand deposits 12,183 0 0 0 0 Total interest-bearing liabilities 174,317 16,980 16,431 9,423 10,001 Interest rate sensitivity gap 79,998 (8,418) (8,089) 3,768 60,313 Cumulative interest rate sensitivity gap 79,998 71,580 43,582 39,814 100,127 Off balance sheet financial instruments 0 0 0 0 0 Net cumulative gap $79,998 $71,580 $43,582 39,814 100,127 Adjusted cumulative ratio of rate sensitive assets to rate sensitive liabilities (1) 1.45 1.37 1.21 1.18 1.44 (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 $38 million at March 31, 1996, compared to $33 million at year-end 1995. This increase was due to the issuance of stock to acquire Corporate Bank, and earnings and 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 1996 and 1995, the Bank's capital levels substantially exceeded the "well capitalized" standards, the highest classification established by bank regulators.
Table 7 Capital Ratios Regulatory Standards March 31, December 31, Well 1996 1995 Capitalized Minimum Total Risk Based Capital 13.60% 16.19% 10.0% 8.00% Tier 1 Risk Base Capital 12.33 14.92 6.0 4.00 Equity to Average Assets 9.41 10.52 5.0 3.00
9 The Company declared and paid cash dividends totaling of $.02 per share in the first quarter of 1996. The Company paid cash dividends totaling $.02, for each of the four quarters of 1995. Subsequent to the end of the first quarter of 1996, the Company declared a dividend of $.03 per share, payable June 10, 1996 to shareholders of record May 10, 1996. The dividend payout ratio was 20% for the first quarter of 1996, compared with 13% 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 March, 1995, the Company entered into an agreement to acquire Santa Ana based Corporate Bank. The agreement was subsequently amended in October 1995 and the transaction was completed on January 12, 1996 for stock and cash. This acquisition brings 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. See footnote I to the financial statements. On January 10, 1996, the Bank announced an agreement to merge with Home Interstate Bancorp, parent of Home Bank, based in the South Bay. The merger with Home Bank is expected to be completed in mid - 1996, and will create a Bank with 22 branches and over $800 million in assets. 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 $4.8 million for the quarter ended March 31, 1996 compared to $ 3.8 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. The change in 1995 is attributable to changes in volume and deposit mix. The Bank's net interest income 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, and the increase in certificates of deposit. 10
Table 8 Analysis of Changes in Net Interest Income (1) Amounts in thousands of dollars Three months ended March 31, Three months ended March 31, 1996 compared to 1995 1995 compared to 1994 Increases(Decreases) Volume Rate Total Volume Rate Total Interest Income Loans, net $1,504 $307 $1,197 $751 $830 $1,581 Investments 235 70 305 5 254 260 Federal Funds Sold 78 (62) 16 162 192 354 Total interest income 1,817 (299) 1,518 918 1,276 2,195 Interest Expense Interest-bearing deposits: Demand and Savings 199 (102) 97 (37) 100 63 Time Certificates of deposit: Under $100 194 (44) 150 539 200 759 $100 or more 231 (51) 180 236 203 439 Federal funds purchased / Repos 0 0 0 0 0 0 Other borrowings 16 8 24 (42) (22) (64) Total interest expense 640 (189) 451 696 501 1,197 Net interest income $1,177 $(110) $1,067 $222 $775 $998 (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 8.5 % for the first quarter of 1996, compared to 8.7% yield for the same period of 1995. The lower average yield on earning assets in 1995 is the result of both a decrease in the prime rate from an average of 8.8% to an average of 8.3% in 1996, and an increasing percentage of assets being held in loans. Rates on interest bearing liabilities resulted in an average cost of funds of 3.0 % for the first quarter of 1996, compared with 3.2% 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 5.6 % for the first quarter of 1996, compared to 5.6% 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. 11
Table 9 Average Balance Sheets and Analysis of Net Interest Income Three months ended Three months ended Amounts in thousands of dollars March 31, 1996 March 31, 1995 Interest Annual Interest Annual Income Yield Income Yield Balance or or Rate Balance or or Expense Expense Rate Interest Earning Assets Loans, Net $218,873 $5,610 10.25% $160,816 $4,413 10.98% Investments 88,452 1,222 5.53 71,129 915 5.15 Certificates of Deposit in other banks 99 1 4.04 149 3 6.71 Federal Funds Sold 40,233 517 5.14 34,489 501 5.81 Total Earning Assets 347,657 7,350 8.46 266,583 5,832 8.75 Non Earning Assets Cash & Due From Banks 23,947 23,985 Other Assets 10,932 8,397 Total Assets $382,536 $298,965 Interest-bearing Liabilities Demand and savings 95,002 566 2.38 $63,740 469 2.94 Time Certificates of Deposits Less Than $100 76,743 1,123 5.85 63,599 973 6.12 More Than $100 54,951 762 5.55 38,545 582 6.04 Fed Funds Purchased/Repos 0 0 0.00 0 0 0.00 Total interest-bearing 226,696 2,451 4.32 165,884 2,024 4.88 Noninterest-bearing Deposits 109,157 92,797 Total Deposits 335,853 2,451 2.92 258,681 2,024 3.13 Other Borrowings 4,760 82 6.89 3,798 58 6.11 Total Funding Liabilities 339,613 2,533 2.97 262,479 2,082 3.17 Other Liabilities 10,058 6,630 Shareholders' Equity 32,865 29,859 Total Liabilities and Shareholders' Equity $382536 $298,968 Net Interest Income $4,817 5.54% $3,750 5.63% Shareholders' Equity to Total Assets 8.59% 9.99%
Other Operating Income The Bank reported a gain of $197 thousand in the first quarter 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 March 31, 1996. Operating income for the first quarter of 1996 includes a gain of $113 thousand on the sale of available for sale securities. 12 The trends and composition of other operating income are shown in the following table.
Table 10 Other operating income Amounts in thousands of dollars For three months ended March 31, 1996 March 31, 1995 Gain on sale of SBA Loans $8 $100 Documentation fees 28 19 Other service fees and charges 483 304 Gain on sale of securities 113 Gain on sale of mortgage servicing portfolio 0 197 Total $632 $620
Operating Expense Total operating expenses for the Bank were $4.4 million for the quarter ended March 31, 1996 , compared to $3.1 million for the same period in 1995. Included in the first quarter 1996 totals is $330 thousand of direct expenses related to the Corporate Bank acquisition and the planned merger with Home Bank. These expenses include severance payments, investment banker fees and expenses of integrating Corporate Bank's operations. Because a portion of the acquisition costs are not tax deductible, the after tax effect of these expenses is approximately $260 thousand, or $.05 per share. Other increases in operating expenses relate to the additional staff and facilities acquired in the Corporate Bank transaction. Provision for Loan Losses The Bank has made no provision for loan losses in 1996 or 1995. No loan loss provision has been deemed necessary , due to the low levels of nonperforming assets, and the strong reserve position. The relationship between the level and trend of the allowance for loan losses and nonperforming assets, combined with the results of the ongoing review of credit quality, determine the level of provisions. Legal and Regulatory Matters In June 1992, the Bank entered into an agreement with the Office of the Comptroller of the Currency (OCC), the Bank's primary federal regulator, which required the implementation of certain policies and procedures for the operation of the bank to improve lending operations and management of the loan portfolio. In November 1993, after completion of its annual examination, the OCC released the Bank from the Formal Agreement. Following this, the Federal Reserve Bank of San Francisco ("Fed") notified the Company on November 29, 1993, that the Memorandum of Understanding, which it had signed, was terminated because the requirements of the agreement were satisfied. 13
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary March 31, December 31, Amounts in thousands of dollars, except share data 1996 1995 Assets Cash and due from banks $30,883 $28,376 Federal funds sold 22,000 32,500 Total cash and cash equivalents 52,883 60,876 Securities held to maturity (Market value of $84,561 and $67,114 at March 84,560 66,735 31, 1996 and December 31, 1995, respectively) Securities available for sale, at market value 4,923 6,345 Total Securities 89,483 73,080 Loans, (Net of allowance for loan losses of $8,225 and $6,930 at March 31, 1996 and December 31, 1995, respectively) 227,381 183,696 Premises and equipment, net 1,512 1,111 Other real estate owned 450 0 Accrued interest receivable and other assets 11,962 6,546 Total Assets $383,671 $325,309 Liabilities and Shareholders' equity Deposits: Demand, non-interest bearing $119,026 $94,099 Savings and interest bearing demand 92,581 74,413 Time deposits under $100 67,542 70,866 Time deposits of $100 or more 54,846 45,132 Total deposits 333,995 284,510 Accrued interest payable and other liabilities 11,495 7,793 Total liabilities 345,491 292,303 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 - 5,296,583 in 1996, and 4,636,462 in 1995 32,148 27,264 Retained earnings 6,317 5,841 Unrealized gain on securities available for sale, net of taxes 9 83 Unearned Compensation (294) (182) Total Shareholders' equity 38,180 33,006 Total liabilities and shareholders' equity $383,671 $325,309 The accompanying notes are an integral part of these consolidated statements.
14
Consolidated Statements of Income CU Bancorp and Subsidiary For the three months ended March 31, Amounts in thousands of dollars, except per share data 1996 1995 Revenue from earning assets: Interest and fees on loans $5,610 $4,413 Interest on taxable investment securities 1,223 900 Interest on tax exempt securities 0 15 Interest on time deposits with other financial institutions 0 3 Interest on federal funds sold 517 501 Total revenue from earning assets 7,350 5,832 Cost of funds: Interest on savings and interest bearing demand 566 469 Interest on time deposits under $100 1,021 973 Interest on time deposits of $100 or more 864 582 Interest on other borrowings 61 58 Interest on subordinated notes 21 0 Total cost of funds 2,533 2,082 Net revenue from earning assets before provision for loan losses 4,817 3,750 Provision for loan losses 0 0 Net revenue from earning assets 4,817 3,750 Other operating revenue: Other fees and charges 519 423 Gain on sale of mortgage servicing portfolio 0 197 Gain on sale of securities available for sale (before taxes of $47 in 1996) 113 0 Total other operating revenue 632 620 Other operating expenses: Salaries and related benefits 2,490 1,652 Acquisition related expenses 330 0 Other operating expenses 1,629 1,458 Total operating expenses 4,449 3,110 Income before provision for income taxes 1,000 1,260 Provision for income taxes 433 550 Net income $567 $710 Earnings per common and equivalent share $0.10 $0.15 The accompanying notes are an integral part of these consolidated financial statements.
15
Consolidated Statements of Cash Flows CU Bancorp and Subsidiary Amounts in thousands of dollars For the Quarter ended March 31, 1996 1995 Cash flows from operating activities Net income $567 $710 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 98 120 Amortization of goodwill 38 0 Amortization of deferred compensation 9 0 Net amortization of (discount)/premium on investment securities (184) 145 Provision for losses on loans and other real estate owned 0 0 Provision (benefit) of deferred taxes 654 298 Gain on sale of investment securities, net (113) 0 (Increase)/decrease in other assets (1,196) (374) Increase/(decrease) in other liabilities (1,032) (1,809) (Increase)/decrease in accrued interest receivable (358) (188) Increase/(decrease) in deferred loan fees 49 81 Increase/(decrease) in accrued interest payable (110) 202 Accrued benefits from interest rate hedge transactions 0 0 Total adjustments (2,145) (1,525) Net cash provided by operating activities (1,578) (815) Cash flows from investing activities Proceeds from investment securities sold or matured 49,835 6,023 Purchase of investment securities (61,875) 0 Net decrease in time deposits with other financial institutions 0 (200) Purchase of business 18,316 0 Net (increase)/decrease in loans 1,773 6,093 Purchases of premises and equipment, net (165) (124) Net cash provided (used in) by investing activities 7,884 11,792 Cash flows from financing activities Net increase/(decrease) in demand and savings deposits (8,570) (10,783) Net increase/(decrease) in time certificates of deposit (5,736) 23,881 Proceeds from exercise of stock options and director warrants 0 562 Cash dividend paid (92) (90) Net cash provided (used) by financing activities (14,398) 13,570 Net increase (decrease) in cash and cash equivalents (8,092) 24,547 Cash and cash equivalents at beginning of year 60,876 55,397 Cash and cash equivalents at end of year $52,784 $79,944 Supplemental disclosure of cash flow information Cash paid during the year: Interest $2,643 $1,880 Taxes 0 1,500 Supplemental disclosure of noncash investing activities: Loans transferred to OREO 450 0 The accompanying notes are an integral part of these consolidated statements
16 Notes to Consolidated Financial Statements March 31, 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, N.A. ("the Bank"), are prepared in accordance with generally accepted accounting principles used in the banking industry. All material inter company balances have been eliminated and all material interim period adjustments which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations, and cash flow have been made. All interim period adjustments that have been made have been of a normal and recurring nature. Note B. EARNINGS PER SHARE Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented, except when the effect of the latter would be anti-dilutive. Weighted average shares outstanding for the three month period ended March 31, 1996 were 5,481,705, compared with 4,700,688 for the comparable period of 1995. 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 $5 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 financial condition and in the statements of shareholders' equity. 17 The following tables set forth the book value and market value, of investment securities at March 31, 1996.
A summary of Securities Held to Maturity at March 31, 1996 is as follows: Held To Maturity Gross Gross Book Unrealized Unrealized Market Value Gains Losses Value U.S. Treasury securities $64,630 $1 -- $64,631 Commercial Paper 19,909 -- -- 19,909 U.S. Government Agency Securities 21 -- -- 21 Total investment portfolio $84,560 $1 $0 $84,561
A summary of Securities Available for Sale for March 31, 1996 is as follows:
Available For Sale Book Gross Gross Market Value Unrealized Unrealized Value Gains Losses U.S. Treasury securities $1,482 $14 $1,496 U.S. Agency securities 1,000 2 -- 1,002 Mortgage backed securities 1,583 0 1,582 Federal Reserve stock 433 0 433 Redevelopment bonds 410 0 410 $4,908 $16 $0 $4,923
At March 31, 1996, investment securities with a book value of $28,558 were pledged to secure court deposits and for other purposes as required or permitted by law. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Note D. AVERAGE FEDERAL RESERVE BALANCES The average cash reserve required to be maintained at the Federal Reserve Bank was approximately $4.5 million, $2.8 million, and $3 million for the periods ending March 31, 1996, and December 31 and March 31, 1995, 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. 18 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 $450 of other real estate owned as of March 31, 1996. There was no other real estate owned as of March 31, 1995, or December 31, 1995. Note G. INCOME TAXES Effective January 1, 1993, the Bank implemented the provisions of Financial Accounting Standards (SFAS) No. 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 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 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 March 31, 1996, the Bank had $3.8 million in impaired loans, against which a loss allowance of $590 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 first quarter of 1996, the Bank had an average investment in impaired loans of approximately $4.1 million. Note I. Acquisitions On January 12, 1996, the Company completed the acquisition of Corporate Bank, a Santa Ana, California based commercial bank. The 19 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 quarter 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 first quarter of 1995, had the acquisition been completed on January 1, 1995, would have been as follows: Net interest income $7,025 Income before provision for income taxes 1,309 Net income 713 Earnings per common and equivalent share $ .13
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 J. RECLASSIFICATIONS Certain items have been reclassified in the prior period financial statements presented herein, in order to conform to classifications followed for September 30, 1995. Note K. LEGAL MATTERS In the normal course of business the Bank occasionally becomes a party to litigation. In the opinion of management, based upon consultation with legal counsel, the Bank believes that pending or threatened litigation involving the Bank will have no adverse material effect upon its financial condition, or results of operations. Until third quarter 1995, the Bank was a defendant in multiple lawsuits related to the failure of two real estate investment companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consisted of a federal action by investors in PMC and SLGH (the "Federal Investor Action"), at least three state court actions by groups of Investors (the "State Investor Actions"), and an action filed by the Resolution Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action was filed by an individual investor and his related pension and profit sharing plans (the "Individual Investor Action"). Other defendants in these multiple actions and in related actions include financial institutions, title companies, professionals, business entities and individuals, including the principals of PMC and SLGH. The Bank was a depository bank for PMC, SLGH and related companies and was a lender to certain principals of PMC and SLGH ("Individual Loans"). Plaintiffs alleged that PMC/SLGH was or purported to be engaged in the business of raising money from investors by the sale and issuance of interests in loans evidenced by promissory notes secured by real property. Plaintiffs alleged that false representations were made, and the investment merely constituted a "Ponzi" scheme. Other charges related to the Bank's conduct with regard to the depository accounts, the lending relationship with the principals and certain collateral taken , pledged by PMC and SLGH in conjunction with the Individual Loans. The lawsuits alleged inter alia violations of federal and state securities laws, fraud, negligence, breach of fiduciary duty, and conversion as well as conspiracy and aiding and abetting counts with regard to these violations. The Bank denied all allegations of wrongdoing. Damages in excess of $100 million were alleged, and compensatory and punitive damages were sought generally against all defendants, although no specific damages were prayed for with regard to the Bank. A former officer and director of the Bank was also been named as a defendant. The Bank has entered into a settlement agreement with the representatives of the various plaintiffs, which has now been consummated, with the dismissal of all of the above referenced cases, with prejudice, against the Bank, its officers and directors, with the exception of the officer/director previously named pending. Court approval of these settlements has been received. In connection with the settlement, the Bank released its security interest in certain disputed collateral and cash proceeds thereof, which the Bank received from PMC, SLGH, or the principals, in connection with the Individual Loans. This collateral had been a subject of dispute in the Neilson Action, with both the Bank and the representatives of PMC/SLGH asserting the right to such collateral. All the Individual Loans have been charged off. The Bank also made a cash payment to the Plaintiffs in connection with the settlement. The effect of this settlement on CU Bancorp or the Bank's financial statements was immaterial. In connection with the settlement the Bank assigned its rights, if any, under various insurance policies, to the Plaintiffs. The settlement does not resolve the claims asserted against the officer/director. The Bank is still providing a defense to its former director/officer who continues as a defendant and who retains his rights of indemnity, if any, against the Bank arising out of his status as a former employee. At this time the only viable claims which remain against the former director/employee are claims of negligence in connection with certain depository relationships with 20 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. 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. Also during May 1996, the Bank was informed that an oral agreement for global resolution of these matters had been reached. However such a settlement is subject to a number of contingencies and approvals. Note L. REGULATORY MATTERS On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"), after completion of their annual examination of the Bank, terminated the Formal Agreement entered into in June, 1992. In December 1993, the Fed terminated the Memo of Understanding entered into in August, 1992. The Formal Agreement had been entered into in June 1992 and required the implementation of certain policies and procedures for the operation of the Bank to improve lending operations and management of the loan portfolio. The Formal Agreement required the Bank to maintain a Tier 1 Risk Weighted Capital ratio of 10.5% and a 6.0% Tier 1 Leverage Ratio. The Formal Agreement mandated the adoption of a written program to essentially reduce criticized assets, maintain adequate loan loss reserves and improve bank administration, real estate appraisal, asset review management and liquidity policies, and restricted the payment of dividends. The agreement specifically required the Bank to: 1) create a compliance committee; 2) have a competent chief executive officer and senior loan officer, satisfactory to the OCC, at all times; 3) develop a plan for supervision of management; 4) create and implement policies and procedures for loan administration; 5) create a written loan policy; 6) develop and implement an asset review program; 7) develop and implement a written program for the maintenance of an adequate Allowance for Loan and Lease Losses, and review the adequacy of the Allowance; 8) eliminate criticized assets; 9) develop and implement a written real estate appraisal policy; 10) obtain and improve procedures regarding credit and collateral documentation; 11) develop a strategic plan; 12) develop a capital program to maintain adequate capital (this provision also restricts the payment of dividends by the Bank unless (a) the Bank is in compliance with its capital program; (b) the Bank is in compliance with 12 U.S.C. 55 and 60 and (c) the Bank receives the prior written approval of the OCC District Administrator); 13) develop and implement a written liquidity, asset and liability management policy; 14) document and support the reasonableness of any management and other fees to any director or other party; 15) correct violations of law; and 16) provide reports to the OCC regarding compliance. The Memorandum of Understanding was executed in August 1992 and required 1) a plan to improve the financial condition of CU Bancorp and the Bank; 2) development of a formal policy regarding the relationship of CU Bancorp and the Bank, with regard to dividends, inter-company transactions, tax allocation and management or service fees; 3) a plan to assure that CU Bancorp has sufficient cash to pay its expenses; 4) ensure that regulatory reporting is accurate and submitted on a timely basis; 5) prior approval of the Federal Reserve Bank prior to the payment of dividends; 6) prior approval of the Federal Reserve Bank prior to CU Bancorp incurring any debt and 7) quarterly reporting regarding the condition of the Company and steps taken regarding the Memorandum of Understanding. 21 SIGNATURES Pursuant to the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CU BANCORP May 14, 1996 By:___________________ Patrick Hartman Chief Financial Officer Part II - Other Information Item 1. Legal Proceedings Please refer to Note K , on page 19 above, for a complete discussion of legal and matters. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Matters 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 March 27, 1996, the Company reported the completion of the acquisition of Corporate Bank. 22 EX-27 2
9 1,000 3-MOS DEC-31-1996 MAR-31-1996 30784 99 22000 0 4923 84560 89484 235606 8225 383671 333995 0 11495 0 0 0 32148 6317 383671 5610 1740 0 7350 2451 2533 4817 0 113 4449 1000 567 0 0 567 .10 .10 5.54 3379 0 2459 0 6930 1710 153 8225 8225 0 0
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