-----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, Lu2T/Xw2y3T6AWO9Rcz8gdVVBdOkuaUkT9ipgkWH/I7oWfCkr413V6Qy8jZcw8qR B4hPELwW3zpvcELIvRixfQ== 0000950148-97-001372.txt : 19970515 0000950148-97-001372.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950148-97-001372 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CU BANCORP CENTRAL INDEX KEY: 0000356050 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 953657045 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11008 FILM NUMBER: 97603381 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 1 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, 1997 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, 1997, the Registrant has 11,381,230 outstanding shares of its Common stock, no par value. 1 2 CU Bancorp Quarter Ended March 31, 1997 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, 1997, and December 31, 1996. 11 Consolidated Statements of Income: 12 -Three Month Periods Ended March 31, 1997, and March 31, 1996. Consolidated Statements of Cash Flows: -Three Month Periods Ended March 31, 1997 and March 31, 1996. 13 Notes to Consolidated Financial Statements 14 Signatures 18 Part II. Other Information Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holder 19 Item 5. Other Information 19 Item 6. Exhibits and Filings on Form 8-K 19
2 3 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW In February 1997, the Company announced that it had signed a definitive agreement to merge CU Bancorp into Pacific Century Financial Corporation (formerly Bancorp Hawaii, Inc.), the parent of Bank of Hawaii. In the merger CU Bancorp shareholders will have the right to receive $15.34 per share in cash or shares of Pacific Century Financial Corporation common stock or a combination of the two, for their shares of CU Bancorp common stock. The price is payable in a combination of Bancorp Hawaii, Inc. common stock and cash, with the stock portion being not more than 80% nor less than 60%. The purchase price is subject to adjustment under certain circumstances. On August 9, 1996, the merger between CU Bancorp, the holding company for California United Bank, and Home Interstate Bancorp, the holding company for Home Bank, became final. The merger was accomplished through a tax-free exchange of stock, using the pooling method of accounting. The Company reported a net income of $2.7 million, or $.23 per share for the first quarter of 1997, compared to $1.4 million, or $.12 per share, during the same period in 1996. The Company's commitment to a conservative approach to valuing portfolios is reflected in the asset quality ratios at March 31, 1997. Non performing assets decreased to $1.1 million by the end of March, 1997, compared with $1.9 million at December 31, 1996 and $10.2 million at March 31, 1996. There was no real estate acquired through foreclosure at March 31, 1997, compared with $500 thousand at December 31, 1996 and $5.3 million at March 31, 1996. The Bank's allowance for loan losses as a percent of nonperforming loans was 1,065% at March 31, 1997, compared with 872% at December 31, 1996 and 231% at March 31, 1996. Capital ratios continue to substantially exceed levels required for the "well capitalized" category established by bank regulators. The Total Risk-Based Capital Ratio was 17.1%, the Tier 1 Risk-Based Capital Ratio was 15.9%, and the Leverage Ratio was 10.3% at March 31, 1997, compared to 15.6%, 14.4%, and 9.7%, respectively, at year-end 1996. Regulatory requirements for Total Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum of 8%, 4%, and 3%, respectively, and for classification as well capitalized, 10%, 6%, and 5%, respectively. The Company has continued to successfully grow its core business through the production of new loan commitments to middle market commercial customers. During the first quarter of 1997, the Bank generated approximately $43 million in new loan commitments. BALANCE SHEET ANALYSIS LOAN PORTFOLIO COMPOSITION AND CREDIT RISK Total loans at March 31, 1997 decreased by $34 million compared with December 31, 1996. Loans decreased due to contractual payments and normal business activity of the commercial customers. The composition of the Bank's loan portfolio is summarized below in Table 1: TABLE 1 LOAN PORTFOLIO COMPOSITION (Amounts in thousands of dollars)
March 31, 1997 December 31,1996 March 31,1996 ------------------ ------------------- ------------------ Commercial & Industrial Loans $236,154 53% $260,143 55% $253,161 56% Real Estate Loans: Construction 16,885 4 23,597 5 23,916 5 Other 150,722 34 152,479 32 134,892 30 -------- --- -------- --- -------- --- Total Real Estate Loans 167,607 38 176,076 37 158,808 35 Consumer and Other Loans 38,462 9 40,481 8 39,547 9 -------- --- -------- --- -------- --- Total loans net of unearned fees 442,223 100% 476,700 100% $451,516 100% === === === Less: Allowance for Loan Losses 11,798 12,119 11,433 -------- -------- -------- Total Net Loans $430,425 $464,581 $440,083 ======== ======== ========
3 4 TABLE 1A LOAN PORTFOLIO MATURITIES AT MARCH 31, 1997 (Amounts in thousands of dollars)
Remaining Maturity ---------------------------------------------- After One Within but Within After One Year, Five Years Five Years Total --------- ---------- ---------- -------- Commercial & Industrial Loans $148,023 $ 63,491 $24,640 $236,154 Real Estate loans 48,928 57,175 61,504 167,607 Consumer and other Loans 3,629 31,194 3,639 38,462 -------- -------- ------- -------- Total loans $200,580 $151,860 $89,783 $442,223 ======== ======== ======= ======== Loans due after one year with predetermined interest rates $ 58,873 $56,156 Loans due after one year with floating or adjustable rates 92,987 33,627 -------- ------- Total loans $151,860 $89,783 ======== =======
Table 1a above summarizes the maturities of the loan portfolio based upon the contractual terms of the loans. The Bank does not automatically rollover any loans at maturity. Maturing loans are subject to the Bank's normal credit approval process in order to establish a new maturity date. Monitoring and controlling the Bank's allowance for loan losses is a continuous process. All loans are assigned a risk grade, as defined by credit policies, at origination and are monitored to identify changing circumstances that could modify their inherent risks. These classifications are one of the criteria considered in determining the adequacy of the allowance for loan losses. The amount and composition of the allowance for loan losses is as follows: TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (Amounts in thousands of dollars)
March 31, December 31, March 31, 1997 1996 1996 ------- ------- ------- Commercial & Real Estate Loans $ 7,190 $10,536 $ 8,638 Real estate loans - Construction 0 274 740 Other 4,608 1,309 2,055 ------- ------- ------- Total Allowance for loan losses $11,798 $12,119 $11,433 ======= ======= =======
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 1997, the Bank had net charge offs of $321 thousand. This compares with $1.8 million for the first quarter of 1996. Charge offs for the current year include the impact of the Bank's aggressive and disciplined approach to credit management applied to the portfolio acquired in the Corporate Bank transaction. 4 5 Activity in the allowance, classified by type of loan, is as follows: TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSSES (Amounts in thousands of dollars)
For the Periods Ended ----------------------------------------- March 31, December 31, March 31, 1997 1996 1996 ------- ------- ------- Balance at January 1 $12,119 $10,043 $10,043 ------- ------- ------- Loans charged off: Real estate secured loans 295 2,194 1,166 Commercial loans secured and unsecured 408 4,041 619 Loans to individuals, installment and other loans 34 493 133 Credit Cards and Related Plans 33 0 23 ------- ------- ------- Total charge-offs 770 6,728 1,941 ------- ------- ------- Recoveries of loans previously charged off: Real estate secured loans 281 272 25 Commercial loans secured and unsecured 149 1,246 150 Loans to individuals, installment and other loans 19 34 3 Credit Cards and Related Plans 0 0 1 ------- ------- ------- Total recoveries of loans previously charged off 449 1,552 179 ------- ------- ------- Net charge-offs (recovery) 321 5,176 1,762 Provision for loan losses 0 4,400 300 Reserve of acquired bank 0 2,852 2,852 ------- ------- ------- Balance at end of period $11,798 $12,119 $11,433 ======= ======= ======= Net loan charge-offs (recoveries) as a percentage of average loans outstanding at the end of period .1% 1.16% .4% Allowance for possible loan losses to loans at end of period 2.67% 2.54% 2.54%
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, 1997, nonperforming loans amounted to $1.1 million compared with $1.9 million at December 31, 1996. 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, 1997, therefore, the Bank had no potential problem loans other than those disclosed in Table 4 as nonperforming loans. TABLE 4: NONPERFORMING ASSETS (Amounts in thousands of dollars)
March 31, December 31, March 31, 1997 1996 1996 ------ ------ ------- Nonaccrual loans $1,108 $1,389 $ 4,924 Loans 90 days or more past due and still accruing 0 0 26 ------ ------ ------- Total nonperforming loans 1,108 1,389 4,950 Other real estate owned 0 500 5,250 ------ ------ ------- Total nonperforming assets $1,108 $1,889 $10,200 ====== ====== ======= Allowance for loan losses as a percent of: Nonperforming loans 1,065% 872% 231% Nonperforming assets 1,065% 642% 112% Nonperforming assets as a percent of total assets 0.1% 0.2% 1.2% Nonperforming loans as a percent of total loans 0.3% 0.3% 1.1%
5 6 SECURITIES The Securities Held to Maturity portfolio totaled over $157 million at March 31, 1997, compared with $163 million at year-end 1996. The Securities Available for Sale portfolio totaled almost $63 million at March 31, 1997 compared with over $70 million in investments being included in this category at December 31, 1996. The March 31, 1997 balance had a $30 thousand net unrealized gain, compared with a net unrealized gain of $204 thousand at December 31, 1996. In the first quarter of 1997, the Bank realized no gain on the sale of securities available for sale. Gains realized for the comparable period of 1996 totaled $113 thousand. Additional information concerning securities is provided in the footnotes to the accompanying financial statements. OTHER REAL ESTATE OWNED There was no Other Real Estate Owned on the Bank's balance sheet at March 31, 1997, compared with $500 thousand and over $5 million at December 31, 1996 and March 31, 1996, respectively. The Bank's policy is to carry properties acquired in foreclosure at fair value less estimated selling costs, which is determined using recent appraisal values adjusted, if necessary, for other market conditions. Loan balances in excess of fair value are charged to the allowance for loan losses when the loan is reclassified to other real estate. Subsequent declines in fair value are charged against a valuation allowance for other real estate owned, created by charging a provision to other operating expenses. During the first quarter of 1997, the Bank recorded gains on other real estate owned of $631 thousand. This compares with $340 thousand in losses recorded for the three months ended March 31, 1996. 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 $40 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 had no significant borrowings under repurchase agreements and fed funds lines during the first quarter 1997 or during 1996 or 1995. Any balances borrowed were primarily the result of periodic tests by the Bank of available borrowing arrangements, and securities repurchase agreements to accommodate customer needs. As a part of the process of managing current liquidity and interest rate risk in the balance sheet, the Bank maintains a portfolio of certificates of deposit from customers from outside the Bank's normal service area. These out of area deposits are certificates of deposit of $90,000 or greater, that are priced competitively with similar certificates from other financial institutions throughout the country. At March 31, 1997, the Bank had approximately $74 million of these out of area deposits, compared to $64 million at December 31, 1996. The level in out of area deposits during 1997 has been within the expected range for the first quarter. The Bank's experience with raising out of area deposits for the past three years indicates that the balances are quite stable when priced to the current market. The Bank's portfolio of large certificates of deposit (those of $100 thousand or more), includes both deposits from its base of commercial customers and out of area deposits. At March 31, 1997 this funding source was 11% of average deposits, compared to 11% at December 31, 1996. The Bank had $80 million in certificates of deposit larger than $100 thousand dollars at March 31, 1997. The maturity distribution of these deposits is relatively short term, with $53 million maturing within 3 months and $79 million maturing within 12 months. 6 7 Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at March 31, 1997 (Amounts in thousands of dollars)
Amounts Maturing or Repricing in -------------------------------------------------------------- More Than 3 More Than 1 Months But Year But Less Than Less Than Less Than More Than 5 3 Months 12 Months 5 Years Years -------- --------- ------- ----- Earning Assets Gross Loans $313,694 $ 12,392 $ 58,873 $ 56,156 Investments 19,135 45,373 68,117 87,684 Federal funds sold & other 48,900 0 0 0 -------- -------- -------- -------- Total earning assets 381,729 57,765 126,990 143,840 -------- -------- -------- -------- Interest-bearing deposits: Savings and interest bearing demand 239,519 0 0 0 Time certificates of deposit: 0 0 0 0 Under $100 59,149 69,664 7,212 0 $100 or more 52,997 25,956 804 0 Other Borrowed money 1,000 0 0 0 -------- -------- -------- -------- Total interest-bearing liabilities 352,665 95,620 8,016 0 -------- -------- -------- -------- Interest rate sensitivity gap 29,064 (37,855) 118,974 143,840 -------- -------- -------- -------- Cumulative interest rate sensitivity gap 29,064 (8,791) 113,183 254,023 Off balance sheet financial instruments 0 0 0 0 -------- -------- -------- -------- Net cumulative gap $ 29,064 $ (8,791) $113,183 $254,023 ======== ======== ======== ======== Cumulative ratio of rate sensitive assets to rate sensitive liabilities (1) 1.08% 0.98% 1.24% 1.56% ======== ======== ======== ========
(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. 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 almost $91 million at March 31, 1997 compared to almost $89 million at year-end 1996. This increase was due to the exercise of stock options, the net income for the quarter, offset by dividends paid. The Company is guided by statutory capital requirements, which are measured with three ratios, two of which are sensitive to the risk inherent in various assets and which consider off-balance sheet activities in assessing capital adequacy. During 1997 and 1996, the Company's capital levels substantially exceeded the "well capitalized" standards, the highest classification established by bank regulators. TABLE 6 CAPITAL RATIOS
Regulatory Standards ----------------------------- March 31, December 31, Well 1997 1996 Capitalized Minimum ---- ---- ----------- ------- Total Risk Based Capital 17.11% 15.6% 10.0% 8.0% Tier 1 Risk Based Capital 15.86 14.4 6.0 4.0 Equity to Average Assets 10.25 9.7 5.0 4.0
The Company declared a quarterly dividend of $.07 per share payable May 30, 1997 to shareholders of record May 10, 1997. The Company declared and paid cash dividends totaling of $.07 for the quarter ended March 31, 1997. Dividends paid for the comparable periods of 1996 were $0.04. The dividend payout ratio was 30% for the first quarter 1997, compared with 32% for the comparable period of 1996. 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. 7 8 MARKET EXPANSION AND ACQUISITIONS The Company is committed to expanding the market penetration of the Bank, including the creation of new branches and pursuing acquisition opportunities. In January, 1996, the Company completed the acquisition of Santa Ana based Corporate Bank. This acquisition brought two Orange County branches to the Bank, representing an important geographic expansion. During 1995, the Bank converted its former loan production offices in Ventura County, the San Gabriel Valley and the South Bay to full service banking offices in improved facilities. These moves expanded the Bank's branch system to seven full service locations serving the greater Los Angeles area. Additionally, during the second quarter of 1996, the Bank started two new business units to serve its customer base. The Investment Services Group and the Private Banking group were formed to meet the growing financial services needs of the customers. In February 1996, the Bank consummated a deposit purchase agreement with Southern California Bank in which the Bank purchased the deposits of Southern California Bank's Signal Hill office. The deposits purchased in the transaction totaled $1.7 million. On August 9, 1996, the merger between CU Bancorp, parent of California United Bank, and Home Interstate Bancorp, parent of Home Bank, was completed. With the completion of this merger, the Bank is now the eleventh largest independent bank headquartered in Southern California, with twenty one branches in Westwood, the San Gabriel and San Fernando valleys, the South Bay, and Ventura and Orange counties. NET INTEREST INCOME AND INTEREST RATE RISK Net interest income is the difference between interest and fees earned on earning assets and interest paid on funding liabilities. Net interest income was $10.8 million for the quarter ended March 31, 1997 compared to $10.7 million for the same period in 1996. The increased margin in 1997 is primarily due to improved mix of earning assets with loans outstanding increasing by almost $18 million and investments increasing almost $6 million. This was offset in part by the generally decreasing market rates for earning assets and interest bearing deposit accounts. 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, Increases(Decreases) 1997 compared to 1996 1996 compared to 1995 --------------------------------- ------------------------------------- Volume Rate Total Volume Rate Total ------ ----- ----- ------ ----- ------- Interest Income Loans, net $ 461 $(468) $ (27) $ 1,761 $(260) $ 1,501 Investments 86 128 214 (182) (30) (212) Federal Funds Sold (306) (14) (320) 243 (66) 177 ----- ----- ----- ------- ----- ------- Total interest income 241 (374) (133) 1,823 (357) 1,466 ----- ----- ----- ------- ----- ------- Interest Expense Interest-bearing deposits: Demand & Savings (9) (36) (45) 122 (55) 67 Time Certificates of deposit: Less than $100 (191) (44) (235) 106 121 227 More Than $100 89 (18) 71 301 (16) 285 Federal Funds Purchased/Repos 0 (1) (1) (9) (1) (10) Other borrowings (12) 10 (2) 16 8 24 ----- ----- ----- ------- ----- ------- Total interest expense (123) (89) (212) 536 57 593 ----- ----- ----- ------- ----- ------- Net interest income $ 364 $(285) $ 79 $ 1,287 $(414) $ 873 ===== ===== ===== ======= ===== =======
(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 three months ended 1997, compared to 8.6% yield for the same period of 1996. The slight decrease in the prime rate from an average of 8.34% during the first quarter of 1996 to an average of 8.27% in the first quarter of 1997 was offset by an increasing percentage of assets being held in loans. Rates on interest bearing liabilities resulted in an average cost of funds of 3.6% for the three months ended 1997, compared with 3.7% for the comparable period of 1996. The decline in rates on certificates of deposit reflected the lower interest rate environment in 1997. 8 9 Expressing net interest income as a percent of average earning assets is referred to as margin. Margin was 6.1% for the year to date in 1997, compared to 6.1% for the same period in 1996. 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. TABLE 9 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (Amounts in thousands of dollars)
Three months ended Three months ended March 31, 1997 March 31, 1996 ---------------------------------- ----------------------------------- Interest Annual Interest Annual Income or Yield or Income or Yield or Balance Expense Rate Balance Expense Rate ------- ------- --------- --------- ---------- --------- Interest Earning Assets Loans, Net (1) $445,210 $11,242 10.10% $427,367 $11,269 10.55% Investments (2) 228,486 3,374 5.91% 222,528 3,160 5.68% Certificates of Deposit in other banks 99 1 4.04% 99 1 4.04% Federal Funds Sold 30,452 383 5.03% 54,780 703 5.13% -------- ------- ----- -------- ------- ----- Total Earning Assets 704,247 15,000 8.52% 704,774 15,133 8.59% Non Earning Assets Cash & Due From Banks 62,447 65,603 Other Assets 43,904 38,809 -------- -------- Total Assets $810,598 $809,186 ======== ======== Interest-bearing Liabilities Demand & Savings $249,146 $1,371 2.20% $250,743 $1,416 2.26% Time Certificates of Deposits Less Than $100 127,535 1,662 5.21% 142,089 1,897 5.34% More Than $100 80,375 1,070 5.33% 73,730 999 5.42% Fed Funds Purchased/Repos 0 0 0% 76 1 5.26% -------- ------- ----- --------- ------- ----- Total interest-bearing Liabilities 457,056 4,103 3.59% 466,638 4,313 3.70% Non interest-bearing Deposits 251,305 0 0% 241,101 0 0% Other Borrowing & Capital Notes 4,083 80 7.84% 4,760 82 6.89% -------- ------- ----- -------- ------- ----- Total Funding Liabilities 712,444 4,183 2.35% 712,499 4,395 2.47% Other Liabilities 8,468 12,015 Shareholders' Equity 89,686 84,672 -------- -------- Total Liabilities and Shareholders' Equity $810,598 $809,186 ======== ======== Net Interest Income $10,817 6.14% $10,738 6.09% ======= ===== ======= ===== Shareholders' Equity to Total Assets 11.06% 10.46% ======== ========
(1) Non-accrual Loans are included in average loan balances, and loan fees earned have been included in interest income on loans. (2) Tax exempt securities do not materially affect reported yields. OTHER OPERATING INCOME Total non interest income was $2.9 million for the three month period ended March 31, 1997, and $1.9 million for the comparable period of 1996. Service charges and other fees have decreased in 1997, due to accommodations made to customers during the recent product conversion process. These decreases in 1997 are offset by gains on the sale of other real estate in the first quarter of 1997 of $625 thousand and settlement of a claim under the blanket bond of Corporate Bank (acquired in January 1996) of $438 thousand and gain on the sale of a branch location of $392 thousand. Operating income for the first quarter of 1997 includes no gain on the sale of available for sale securities. This compared with a gain of $113 thousand for the first quarter of 1996. OPERATING EXPENSE Total operating expenses for the Bank were $ 9.3 million for the quarter ended March 31,1997, compared to $9.8 million for the same period in 1996. A charge of $350 thousand was included in the first quarter 1997 for operating losses resulting from the conversion of deposit accounts which was completed in the first quarter of 1997. 9 10 PROVISION FOR LOAN LOSSES The Bank has made no provision for loan losses in the first quarter of 1997. In the similar period of 1996, the Bank provided $300 thousand in the first quarter. LEGAL AND REGULATORY MATTERS In the normal course of business, the Bank occasionally becomes party to litigation. In the opinion of management, the Bank believes that pending or threatened litigation involving the Bank will have no material adverse effect on its financial condition or results of operations. As a registered bank holding company, and a California state chartered bank, the Company and the Bank are subject to supervision and regulation by the Federal Reserve Board, the Superintendent of Banks of the State of California and the Federal Deposit Insurance Corporation, among others. Regulatory issues have not had a significant impact on the Bank's operations for the past three years, apart from the normal ongoing process of monitoring compliance with relevant federal and state law. Management remains committed to maintaining a positive and proactive relationship with its primary regulators. 10 11 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION CU BANCORP AND SUBSIDIARY
MARCH 31, DECEMBER 31, Amounts in thousands of dollars, except share data 1997 1996 -------- -------- ASSETS Cash and due from banks $ 82,694 $ 81,443 Federal funds sold 48,900 24,000 -------- -------- Total cash and cash equivalents 131,594 105,443 Securities held to maturity (Market value of $155,012 and $162,175 at March 31, 1997 and 157,422 163,002 December 31, 1996, respectively) Securities available for sale, at market value 62,887 70,242 -------- -------- Total Securities 220,309 233,244 Loans, (Net of allowance for loan losses of $11,798 and $12,119 at March 31, 1997 and December 31, 1996, respectively) 430,425 464,581 Premises and equipment, net 17,535 17,784 Other real estate owned, net 0 500 Accrued interest receivable and other assets 19,736 22,658 -------- -------- Total Assets $819,599 $844,210 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, non-interest bearing $258,421 $275,126 Savings and interest bearing demand 239,520 253,180 Time deposits under $100 135,624 127,861 Time deposits of $100 or more 79,757 81,193 -------- -------- Total deposits 713,322 737,360 Accrued interest payable and other liabilities 15,670 18,337 -------- -------- Total liabilities 728,992 755,697 -------- -------- Shareholders' equity: Preferred stock, no par value: Authorized -- 10,000,000 shares No shares issued or outstanding in 1997 or 1996 --- --- Common stock, no par value: Authorized - 24,000,000 shares Issued and outstanding -11,381,230 in 1997, and 11,341,690 in 1996 76,066 75,790 Retained earnings 14,521 12,600 Unrealized gain on securities available for sale, net of taxes 20 123 -------- -------- Total Shareholders' equity 90,607 88,513 -------- -------- Total liabilities and shareholders' equity $819,599 $844,210 ======== ========
The accompanying notes are an integral part of these consolidated statements. 11 12 CONSOLIDATED STATEMENTS OF INCOME CU BANCORP AND SUBSIDIARY
FOR THE THREE MONTHS ENDED MARCH 31, Amounts in thousands of dollars, except per share data 1997 1996 ------- ------- REVENUE FROM EARNING ASSETS: Interest and fees on loans $11,242 $11,269 Interest on investment securities 3,374 3,161 Interest on time deposits with other financial institutions 1 0 Interest on federal funds sold 383 703 ------- ------- Total revenue from earning assets 15,000 15,133 ------- ------- COST OF FUNDS: Interest on savings and interest bearing demand 1,371 1,416 Interest on time deposits under $100 1,070 1,795 Interest on time deposits of $100 or more 1,662 1,101 Interest on federal funds purchased & securities sold under agreements to repurchase and other borrowings 80 83 ------- ------- Total cost of funds 4,183 4,395 ------- ------- Net revenue from earning assets before provision for loan losses 10,817 10,738 PROVISION FOR LOAN LOSSES 0 300 ------- ------- Net revenue from earning assets 10,817 10,438 ------- ------- OTHER OPERATING REVENUE: Service charges and other fees 1,338 1,545 Gain on sale of other real estate owned 631 0 Gain (loss) on sale of investment securities 0 113 Other revenue 993 275 ------- ------- Total other operating revenue 2,962 1,933 ------- ------- OTHER OPERATING EXPENSES: Salaries and related benefits 4,873 4,788 Occupancy expense, net 1,907 682 Other operating expenses 3,545 4,387 ------- ------- Total other operating expenses 9,325 9,857 ------- ------- Income before provision for income taxes 4,454 2,514 Provision for income taxes 1,737 1,097 ------- ------- NET INCOME $ 2,717 $ 1,417 ======= ======= EARNINGS PER COMMON AND EQUIVALENT SHARE $ 0.23 $ 0.12 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 12 13 CONSOLIDATED STATEMENTS OF CASH FLOWS CU BANCORP AND SUBSIDIARY
Amounts in thousands of dollars FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,717 $ 1,417 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 465 314 Provision for losses on loans 0 300 Provision (benefit) of deferred taxes 0 654 Loss (gain) on sale of investment securities, net 0 (113) (Increase)/decrease in accrued interest receivable and other assets 2,922 (1,368) Increase/(decrease) in accrued interest payable and other liabilities (2,602) (813) Amortization of deferred loan fees and costs (488) (251) Amortization of deferred compensation 0 9 Net (gain) loss on sale of premises, furniture and equipment (392) (3) Net (gain) loss on sale of other real estate owned (631) 340 Net amortization of (discount)/premium on investment securities 251 160 --------- --------- Total adjustments (475) (762) --------- --------- Net cash provided by operating activities 2,242 655 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investment securities sold or matured 12,515 63,358 Purchase of investment securities 0 (78,676) Purchase of business 0 18,316 Proceeds from sale of other real estate owned 1,131 0 Proceeds from sale of premises, furniture and equipment 666 3 Purchases of premises and equipment, net (490) (449) Net (increase)/decrease in loans 34,644 (3,041) --------- --------- Net cash provided (used) by investing activities 48,466 (489) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase/(decrease) in demand , savings and interest bearing deposits (30,365) (2,443) Net increase/(decrease) in time certificates of deposit 6,327 (2,625) Net increase/ (decrease) in securities sold under agreements to repurchase 0 0 Proceeds from exercise of stock options and director warrants 276 231 Restricted stock retired Cash dividend paid or declared (795) (452) --------- --------- Net cash provided (used) by financing activities (24,557) (5,289) --------- --------- Net increase (decrease) in cash and cash equivalents 26,151 (5,123) Cash and cash equivalents at beginning of year 105,443 114,273 --------- --------- Cash and cash equivalents at end of period $ 131,594 $ 109,150 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year: Interest $ 4,128 $ 4,489 Taxes 900 2 Supplemental disclosure of noncash investing activities: Loans transferred to OREO 0 672
The accompanying notes are an integral part of these consolidated statements 13 14 Notes to Consolidated Financial Statements March 31, 1997 UNAUDITED Note A. BASIS OF PRESENTATION The accounting and reporting policies of CU Bancorp ("the Company") and its wholly owned subsidiary, California United Bank, (the "Bank"), are prepared in accordance with generally accepted accounting principles used in the banking industry. All material inter company balances have been eliminated and all material interim period adjustments which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations, and cash flow have been made. All interim period adjustments that have been made have been of a normal and recurring nature. Note B. EARNINGS PER SHARE Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented, except when the effect of the latter would be anti-dilutive. Weighted average shares outstanding for the three month period ended March 31, 1997 was 11,820,667, compared with 11,440,139 for the comparable period of 1996. NOTE C. SECURITIES The Bank has the intent and ability to hold its Securities Held to Maturity until maturity. Accordingly, these securities are carried at cost, adjusted for amortization of premiums and accretion of discounts on a straight-line basis, which approximates the effective interest method. Gains and losses recognized on the sale of investment securities are based upon the adjusted cost and determined using the specific identification method. The Bank has $63 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. The following tables set forth the book value and market value, of investment securities at March 31,1997. A summary of Securities Held to Maturity at March 31, 1997 is as follows:
HELD TO MATURITY GROSS GROSS (AMOUNTS IN THOUSANDS OF DOLLARS) BOOK UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE ----- ----- ------ ----- U.S. Treasury securities $ 67,790 $ 41 $ 614 $ 67,217 U.S. Government Agency Securities 80,151 0 1,712 78,439 Obligations of state and political subdivisions 8,930 4 124 8,810 Corporate Securities 551 0 4 547 -------- -------- -------- -------- Total portfolio $157,422 $ 45 $ 2,454 $155,012 ======== ======== ======== ========
A summary of Securities Available for Sale for March 31, 1997 is as follows:
AVAILABLE FOR SALE GROSS GROSS (AMOUNTS IN THOUSANDS OF DOLLARS) AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----- ----- ------ ----- U.S. Treasury securities $ 33,781 $ 83 $ 14 $ 33,850 U.S. Agency securities 15,433 94 78 15,449 Corporate Bonds 9,218 14 51 9,181 Equity Securities 380 53 3 435 Federal Reserve stock 1,151 0 0 1,151 Municipal securities 2,889 1 69 2,821 -------- -------- -------- -------- Total portfolio $ 61,852 $ 245 $ 215 $ 62,887 ======== ======== ======== ========
At March 31, 1997, investment securities with a book value of $ 44 million were pledged to secure court deposits and for other purposes as required or permitted by law. 14 15 Note D. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is also computed using the straight-line method over the shorter of the useful life of the improvement or the term of the lease. Note E. OTHER REAL ESTATE OWNED Real estate owned, acquired either through foreclosure or deed in lieu of foreclosure, is recorded at the lower of the loan balance or estimated fair market value. When acquired, any excess of the loan balance over the estimated fair value is charged to the allowance for loan losses. Subsequent write-downs, if any, are charged to operation expenses in the periods that they become known. There was no other real estate owned as of March 31, 1997. There was $500 thousand and about $5 million of other real estate owned as of December 31, 1996 and March 31, 1996, respectively. Note F. 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 G. LOANS Loans are carried at face amount, less payments collected, allowance for loan losses, and unamortized deferred fees. Interest on loans is accrued monthly on a simple interest basis. The general policy of the Bank is to discontinue the accrual of interest and transfer loans to nonaccrual (cash basis) status where reasonable doubt exists with respect to the timely collection of such interest. Payments on nonaccrual loans are accounted for using a cost recovery method. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can reasonably be anticipated. Management considers current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. The allowance is based on estimates and ultimate losses may differ from current estimates. These estimates are reviewed periodically and as adjustments become necessary, they are charged to earnings in the period in which they become known. The allowance is increased by provisions charged to operating expenses, increased for recoveries of loans previously charged-off, and reduced by charge-offs. The Bank adopted Statement of Financial Standards (SFAS) 114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," as of January 1, 1995. SFAS 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. When the measure of the impaired loan is less than the recorded balance of the loan, the impairment is recorded through a valuation allowance included in the allowance for loan losses. The Bank had previously measured the allowance for loan losses using methods similar to the prescribed in SFAS 114. As a result, no additional provision was required by the adoption of this pronouncement. The Bank considers all loans where reasonable doubt exists as to the payment of interest or principal to be impaired loans. All loans that are ninety days or more past due are automatically included in this category. An impaired loan will be charged off when the Bank determines that repayment of principal has become unlikely or subject to a lengthy collection process. All loans that are six months or more past due and not well secured or in the process of collection are charged off. 15 16 At March 31, 1997, the Bank had $1.1 million in impaired loans, against which a loss allowance of $151 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 1997 the Bank had an average investment in impaired loans of approximately $1.3 million. Note H. Mergers and Acquisitions On August 9, 1996, Home Interstate Bancorp, the holding company of Home Bank, was merged into CU Bancorp, the holding company of California United Bank. Each share of Home Interstate Stock was converted into 1.409 shares of CU Bancorp stock. Simultaneously with the merger of the two holding companies, California United Bank was merged into Home Bank, with the surviving Bank being renamed California United Bank. The merger of the two holding companies was accomplished in an all stock transaction, except for the effect of fractional shares, and has been accounted for using the pooling-of-interests method. A total of 5,955,000 shares of CU Bancorp stock were issued in this transaction. Using the pooling-of-interests method of accounting, the assets, liabilities, equity and results of operations for all prior periods have been restated to include CU Bancorp and Home Interstate Bancorp as if they had been combined from the beginning of the earliest period presented. There were no intercompany eliminations or adjustments for accounting changes that were required in presenting the combined history for the two companies. On January 12, 1996, the Company completed the acquisition of Corporate Bank, a Santa Ana, California based commercial bank. The acquisition was accounted for as a purchase. The Company issued 649 thousand shares of common stock, and paid $1.7 million in cash, for a total purchase price of $6.5 million. The acquired operations of Corporate Bank have been included in the Statement of Income from the acquisition date of January 12, 1996. The Company's income for the first nine months of 1996 would not have been materially different if the combination had been completed as of January 1, 1996. The fair value of assets acquired from Corporate Bank was $72.7 million, with liabilities assumed of $68.6 million. Cash and cash equivalents acquired, net of cash paid, totaled $20 million. Goodwill of $2.4 million generated by the purchase transaction is being amortized on a straight line basis over a ten year period. Note I. RECLASSIFICATIONS Certain items have been reclassified in the prior period financial statements presented herein, in order to conform to classifications followed for March 31, 1997. 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. Note K. MERGER WITH PACIFIC CENTURY FINANCIAL CORPORATION In February 1997, the Company announced that it had signed a definitive agreement to merge CU Bancorp into Pacific Century Financial Corporation (formerly Bancorp Hawaii, Inc.), the parent of Bank of Hawaii. In the merger CU Bancorp shareholders will have the right to receive $15.34 per share in cash or shares of Pacific Century Financial Corporation common stock or a combination of the two, for their shares of CU Bancorp common stock. The price is payable in a combination of Bancorp Hawaii, Inc. common stock and cash, with the stock portion being not more than 80% nor less than 60%. The purchase price is subject to adjustment under certain circumstances. 16 17 SIGNATURES Pursuant to the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CU BANCORP May 12, 1997 By:_______________________________ Patrick Hartman Chief Financial Officer 17 18 Part II - Other Information Item 1. Legal Proceedings Please refer to Note J , on page 18 above, for a discussion of legal and matters. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Matters 18 19 Item 6. Exhibits and Filings on Form 8-K (a) Exhibits: (10) Material Contracts (b) Reports on Form 8-K: Form 8-K, Item 2, Acquisition or Disposition of Assets, was filed August 23, 1996 concerning the merger between CU Bancorp and Home Interstate Bancorp. 19 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 82,595 99 48,900 0 62,887 157,422 155,012 442,223 11,798 819,599 713,322 1,000 14,670 0 0 0 76,066 14,541 819,599 11,242 3,374 384 15,000 4,103 4,183 10,817 0 0 9,325 4,454 4,454 0 0 2,717 .23 .23 2.13 1,108 0 0 0 12,119 770 449 11,798 11,798 0 4,608
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