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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1993.
OR
[ ] Transition Report 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
C U BANCORP
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(Exact name of registrant as specified in its charter)
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California 95-3657044
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
16030 Ventura Boulevard
Encino, California 91436
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (818) 907-9122
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(title of class)
Indicate by check mark whether the registrant has (1) 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 shorter periods 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 220.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1994:
$31,328,616.50
Common Stock, no par value -
The number of shares outstanding of the issuer's classes of common stock as of
February 28, 1994:
Common Stock, no par value 4,425,306 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
This document contains 65 pages.
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TABLE OF CONTENTS
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Item
Part Number Item Page
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I 1. Business 3
I 2. Properties 12
I 3. Legal Proceedings 13
I 4. Submission of Matters to a Vote 15
of Security Holders
II 5. Market for the Company's Common Stock 17
and Related Stockholder Matters
II 6. Selected Financial Data 18
II 7. Management's Discussion and Analysis 19
of Financial Condition and Results
of Operations
II 8. Financial Statements and Supplementary 31
Data
II 9. Changes in and Disagreements with 48
Accountants on Accounting and
Financial Disclosure
III 10. Directors and Executive Officers of 49
the Company
III 11. Executive Compensation 49
III 12. Security Ownership of Certain 49
Beneficial Owners and Management
III 13. Certain Relationships and Related 49
Transactions
IV 14. Exhibits, Financial Statement 50
Schedules and Reports on Form 8-K
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PART 1
Item 1. BUSINESS
General Development of Business
CU Bancorp, (the "Company) was incorporated under the laws of
the State of California on September 3, 1981. It is the parent of California
United Bank, a National Banking Association (the "Bank") which is a wholly
owned subsidiary of the Company.
DESCRIPTION OF BUSINES
Commercial Banking Business
Until November 1993, the Bank operated in two distinct
segments, commercial banking and mortgage banking. The Bank sold the
origination portion of its mortgage banking division in November 1993.
The Bank engages in the commercial banking business primarily
serving the San Fernando Valley, Beverly Hills, West Los Angeles, and the South
Bay portions of the County of Los Angeles which are generally affluent
residential and business centers. The Bank also serves the greater San Gabriel
Valley metropolitan area.
The Bank's primary focus is to engage in middle market lending
to businesses, professionals, the entertainment industry, and high net-worth
individuals. While in the past, the Bank specialized in serving the real
estate industry, the Bank is currently diversifying its portfolios and during
1993 specialized in lending to middle market businesses, much of which is
collateralized by accounts receivable and other assets. While the Bank does not
actively solicit retail or consumer banking business, it offers these services
primarily to owners, officers, and employees of its wholesale customers, and
customers of accounting and business management firms with which the Bank
regularly does business.
The Bank attracts customers and deposits by offering a
personalized approach and a high degree of service. The key to the Bank's
deposit generation is personal contacts and services rather than rate
competition. A significant portion of its business is with business customers
who conduct substantially all of their banking business with the Bank.
Either alone or in concert with correspondent banks, the Bank
offers a wide variety of credit and deposit services to its customers.
Management believes that its current and prospective customers favorably
respond to the individualized, tailored banking services that the Bank
provides. Deposit services, which the Bank offers, include personal and
business checking accounts and savings accounts, insured money market deposit
accounts, interest-bearing negotiable orders of withdrawal ("NOW") accounts,
and time certificates of deposit, along with IRA and Keogh accounts. The Bank
has not requested and does not have regulatory approval to offer trust
services; nor does it have any present intention to seek such approval.
The Bank has developed relationships with an extensive network
or correspondent banks through which it is able to offer customers and
prospective customers a wide variety of commercial and international banking
services which it is otherwise unable to offer by itself. The Bank has
successfully attracted and developed these relationships with several sizable
correspondents which have participated in providing a portion of the Bank's
customers' borrowing needs while the Bank remains the customers' bank of
record.
Continued development of a diversified commercial oriented
deposit base is the Bank's highest priority. Time and demand deposits are
actively solicited by the directors, officers, and employees of the Bank. The
executive and senior officers of the Bank have had substantial experience in
soliciting bank deposits and in serving the comprehensive banking needs of
small and mid-size businesses.
The Bank services the commercial banking business from its
head office at 16030 Ventura Boulevard, in Encino, California 91436, a suburb
of Los Angeles, and an office in West Los Angeles, located at 10880 Wilshire
Boulevard, Los Angeles California 90024, in the Westwood commercial and retail
district, with close freeway access. The Bank also maintains a South Bay
Regional Loan Production office in Gardena, California, in order to serve the
burgeoning South Bay area and a San Gabriel Valley Regional Loan Production
Office, located in City of Industry, which serves the San Gabriel Valley and
northern Orange County.
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Mortgage Banking
In November 1993, the Bank sold the mortgage origination
portion of its mortgage banking division to Republic Bancorp of Ann Arbor
Michigan. This division had been established in February of 1988. The purpose
of this division was to underwrite residential mortgages and subsequently sell
them into the secondary market. Mortgages were originated on both a servicing
retained and servicing released basis. Loans funded by this division grew to
$895.6 million in 1993. Substantially all the loans originated by this
division were presold to institutional investors or government agencies and are
only originated subject to this forward commitment. The division had loan
origination offices in Calabasas, Irvine, Costa Mesa, Pasadena, San Jose, and
Sacramento, California in addition to origination centers at other Bank
branches.
The Bank retained the mortgage servicing portfolio after the
sale of the origination operation, although it retained the purchaser to
service the loans. At December 31, 1993, the amount of mortgage loans being
serviced, after they were sold, was approximately $560 million. The Bank has
entered into an agreement with the Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation to dispose of any remaining portion of
this portfolio by the end of 1994 because, with the sale of the mortgage
origination operation, the Bank is no longer a qualified seller/servicer of
such loans. See Management's Discussion and Analysis for further amplification
on operating contributions of this division and the effect of the sale.
Entertainment Division
The Bank's entertainment division, housed in its West Los
Angeles Regional Office, is designed specifically to serve the needs of
accountants and business managers serving performing artists and other
entertainment industry related companies and individuals, while providing a
more diverse source of deposits for the Bank as a whole. At December 31, 1992
and 1993, this division had total deposits of $61 million and $34 million,
respectively.
Customers and Business Concentration
The Bank believes that there is no single customer whose loss
would have a material adverse effect on the Bank. At year end 1992, the Bank
obtained approximately 32% of its deposits from companies associated with the
real estate business, primarily title and escrow companies. However by year
end 1993, this had been reduced to 24%. While this appears to be a significant
deposit concentration, because these deposits are attributable to a large
number of companies in a diverse market (from small single family homes to
larger projects), the Bank does not believe there is a problematical
concentration in any one industry. To account for seasonal and economic
variations in this industry, the Bank has taken a number of steps to insure
liquidity. For further information regarding business concentrations in both
lending and deposit activities, see Management's Discussion and Analysis.
Competition
The Company does not conduct any business unrelated to the
business of the Bank and thus is affected by competition only in the banking
industry.
The Bank's primary commercial banking market area consists of
the San Fernando Valley, Beverly Hills, West Los Angeles, and metropolitan
areas of the City and County of Los Angeles. The Bank also serves the South
Bay, Orange County, Northern San Diego County, the San Gabriel Valley and much
of Southern California. The Bank's mortgage banking division served greater
Southern California and portions of Northern California. The banking business
in California generally, and specifically in the Bank's primary market area, is
highly competitive with respect to both loans and deposits. The business is
dominated by a relatively small number of major banks which have many offices
operating over wide geographic areas. Many of the major commercial banks offer
certain services (such as trust services, and securities brokerage) which are
not offered directly by the Bank. By virtue of the greater total
capitalization of such banks, they have substantially higher lending limits
than the Bank and substantial advertising and promotional budgets. However,
smaller independent financial institutions also represent a competitive force,
particularly as to the class of customers which the Bank typically serves.
To compete with major financial institutions, the Bank relies
upon specialized services, responsive handling of customer needs, local
promotional activity, and personal contacts by its officers, directors, and
staff, as opposed to large multi-branch banks which compete primarily by rate
and location of branches. For customers whose loan demands exceed the Bank's
lending limit, the Bank seeks to arrange for such loans on a participation
basis with correspondent banks. The Bank also assists customers requiring
services not offered by the Bank in obtaining such services from its
correspondent banks.
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In the past, an independent bank's principal competitors for
deposits and loans have been other banks (particularly major banks), savings
and loan associations, and credit unions. To a lesser extent, competition was
also provided by thrift and loans, mortgage brokerage companies, and insurance
companies. In the past several years, the trend has been for other financial
intermediaries to offer financial services traditionally offered by banks.
Other institutions, such as brokerage houses, credit card companies, and even
retail establishments, have offered new investment vehicles such as
money-market funds or cash advances on credit card accounts. This led to
increased cost of funds for most financial institutions. Even within the
banking industry, the trend has been towards offering more varied services,
such as discount brokerage, often through affiliate relationships. The
direction of federal legislation seems to favor and foster competition between
different types of financial institutions and to encourage new entrants into
the financial services market. However, it is not possible to forecast the
impact such developments will have on commercial banking in general, or on the
Bank in particular.
Economic Environment in the Bank's Market Area
The general economy in the Southern California market area,
and particularly the real estate market, are suffering from the effects of a
prolonged recession that have negatively impacted the ability of certain
borrowers of the Bank to perform their obligations to the Bank. According to
the First Interstate Bancorp Forecast 1994/1995 (the "Forecast"), Los Angeles
County continues to serve as "ground zero" for the California recession. Los
Angeles' unemployment rate remains higher than the adjusted rates for both the
state or the nation. The Forecast predicts that economic recovery "continues
to elude California's most populous county, besieged by weak demand, falling
real estate values and defense procurement cuts which have Los Angeles'
aerospace/defense related industries in full retreat. A stabilization in the
area's defense related industries and real estate market is necessary before a
full fledged recovery can begin to take hold. This is unlikely to happen until
early 1995 in Los Angeles." It is too early to predict the effect of the
January 1994 earthquake on the Los Angeles Area, although reports have
indicated that it will be the most costly natural disaster on record,
surpassing the midwest floods of 1993. It is also expected that it will have a
positive effect on the construction industry, but a negative effect on the real
estate market which may further delay the economic recovery. While the effect
of the earthquake on the Bank's customers has not had a material impact on the
Bank to date, the long term effects on the client base cannot be determined.
The financial condition of the Bank has been, and is expected
to continue to be, dependent upon overall general economic conditions and the
real estate market in Southern California. The future success of the Bank is
dependent, in large part, upon the quality of its assets. Although management
of the Bank has devoted substantial time and resources to the identification,
collection and workout of nonperforming assets, and the diversification of
portfolios, the real estate markets in Southern California and the overall
economy in this area is likely to continue to have a significant effect on the
quality of the Bank's assets in future periods and, accordingly, its financial
condition and results of operations.
REGULATION AND SUPERVISION
The following discussion of statutes and regulations is only a
summary and does not purport to be complete. This discussion is qualified in
its entirety by reference to such statutes and regulations. No assurance can
be given that such regulations will not change in the future.
The Company is subject to periodic reporting requirements of
Section 13 (d) of the Securities Exchange Act of 1934, which requires the
Company to file annual, quarterly, and other current reports as well as proxy
materials with the Securities and Exchange Commission ("the Commission").
The Company is a bank holding company within the meaning of
the Bank Holding Company Act (the "BHC" Act) and is registered as such with the
Federal Reserve Board (the "FRB"). A bank holding company is required to file
with the FRB annual reports and other information regarding its business
operations and those of its subsidiaries. It is also subject to examination by
the FRB and is required to obtain FRB approval before acquiring, directly or
indirectly, ownership or control of any voting shares of any bank if, after
such acquisition, it would directly or indirectly own or control more than 5%
of the voting stock of that bank, unless it already owns a majority of the
voting stock of that bank. The BHC Act further provides that the FRB shall not
approve any such acquisition that would result in or further the creation of a
monopoly, or the effect of which would be to substantially lessen competition,
unless the anti competitive effects of the proposed transaction are clearly
outweighed by the probable effect in meeting the convenience needs of the
community to be served.
In accordance with the BHC Act and the Change in Bank Control
Act and the promulgations thereunder, certain companies (as defined) and
persons (as defined) which control (as defined) any bank holding company are
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deemed to be a bank holding company and are therefore subject to certain filing
and other requirements imposed by the FRB. In addition, such persons may be
subject to certain reporting and other requirements imposed by the Commission
under the Securities Exchange Act of 1934.
Furthermore, under the BHC Act, a bank holding company is,
with limited exceptions, prohibited from (i) acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank or (ii) engaging in any activity other than managing or
controlling banks. With the prior approval of the FRB, however, a bank
holding company may own shares of a company engaged in activities which the FRB
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
The FRB has determined, by regulation, that certain activities
are so closely related to banking as to be a proper incident thereto within the
meaning of the BHC Act. These activities include, but are not limited to:
opening an industrial loan company, industrial bank, Morris Plan Bank, mortgage
company, finance company, credit card company, or factoring company; performing
certain data processing operations; providing investment and financial advice;
operation as a trust company in certain instances; selling traveler's checks,
U.S. Savings Bonds, and certain money orders; providing certain courier
services; providing real estate appraisals; providing management consulting
advice to non affiliated depository institutions in some instances; acting as
an insurance agent for certain types of credit related insurance; leasing
property or acting as agent, broker, or advisor for leasing property on a "full
payout basis"; acting as a consumer financial counselor, including tax planning
and return preparation; performing futures, options, and advisory services,
check guarantee services and discount brokerage activities; operating a
collection or credit bureau; or performing personal property appraisals.
Recent amendments to this list allow bank holding companies to
own savings associations, arrange commercial real estate equity financing,
engage in certain securities brokerage activities, underwrite and deal in
government obligations and money market instruments, conduct foreign exchange
advisory and transactional services, act as a futures commission merchant,
provide investment advice on financial futures and options on futures, provide
consumer financial counseling, provide tax planning and preparation, operate a
check guarantee service, operate a collection agency, and operate a credit
bureau. The Company has no present intention to engage in any of such newly
permitted activities.
The FRB has determined that certain other activities are not
so closely related to banking as to be a proper incident thereto within the
meaning of the BHC Act. Such activities include: real estate brokerage and
syndication; real estate development; property management; underwriting of life
insurance not related to credit transactions; and, with certain exceptions
previously noted, securities underwriting and equity funding. The area of
securities underwriting is under review and will likely be expanded. In the
future, the FRB may add or delete from the list of activities permissible for
bank holding companies.
Under the BHC Act, a bank holding company and its subsidiaries
are prohibited from acquiring any voting shares of or interest in all or
substantially all of the assets of any bank outside the state in which the
operations of the bank holding company's banking subsidiaries are principally
conducted, unless acquisition is specifically authorized by the law of the
state in which the bank to be acquired is located, or unless the transaction
qualifies under federal law as an "emergency interstate acquisition" of a
closed or failing bank. Acquisition of savings associations are not as
limited.
The Company is also a bank holding company within the meaning
of Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.
In January 1990, California's interstate banking law became
totally effective. The Law allows California banks and bank holding companies
to be acquired by banking organizations in other states on a "reciprocal" basis
(i.e. provided the other state's laws permit California banking organizations
to acquire banking organizations in that state on substantially the same terms
and conditions applicable to banking organizations solely within that state).
It is impossible to determine what effect, if any, the California interstate
banking law has had on the Company or on the market for the Company's Common
Stock.
A bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit, sale, or lease of property, or furnishing of services. For example,
with certain exceptions, a bank may not condition an extension of credit on a
promise by its customer to obtain other services provided by it, its holding
company, or other subsidiaries, or on a promise by its customer not to obtain
other services from a competitor. In addition, federal law imposes certain
restrictions on transactions between the Company and its subsidiaries,
including the Bank. As an affiliate of the Bank, the Company is subject, with
certain exceptions, to provisions of federal law imposing limitations on, and
requiring collateral for, extensions of credit by the Bank to its
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affiliates. Transactions with affiliates are also required to be on
substantially equivalent terms and conditions as transactions with other
similar persons or entities which are not affiliates.
The Bank is a member of the FDIC, which currently insures the
deposits of each member bank to a maximum of $100,000 per depositor. For this
protection, the Bank pays a semi-annual assessment and is subject to the rules
and regulations pertaining to deposit insurance and other matters. Pursuant to
the provisions of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), more fully discussed below, the FDIC implemented a regulation
to modify deposit insurance premiums in 1993. Under this regulation, the
amount of FDIC assessments paid by individual insured depository institutions
is based on their relative risk as measured by regulatory capital ratios and
certain other factors, Under this new system, in establishing the insurance
premium assessment of each bank, the FDIC will take into consideration the
probability that the insurance fund will incur a loss with respect to that
bank, and will charge a bank with perceived higher inherent risks a higher
insurance premium. The FDIC will also consider the different categories and
concentrations of assets and liabilities of the institution, the likely amount
of any such loss, the revenue needs of the insurance fund, and any other
factors the FDIC deems relevant. The assessment rates may not fall below the
assessment rate of 23 cents per $100 of eligible deposits if the FDIC has
outstanding borrowing from the U.S. Treasury department or the 1.25% designated
reserve ratio has not been met. No assurance can be given as to the effect of
these regulations on the future level of deposit insurance premiums.
The Bank is subject to regulation, supervision, and regular
examination by the Office of the Comptroller of the Currency (the "OCC"). The
regulations of this agency affect most aspects of the Bank's business and
prescribe permissible types of loans and investments, requirements for branch
offices, the permissible scope of the Bank's activities and impose various
other requirements. The Bank is also a member of the Federal Reserve System
and is subject to the Federal Reserve Act, as amended and certain regulations
of the FRB, including the establishment of banking reserves, check clearing
activities (Regulation CC), Truth-in-Lending (Regulation Z), and Equal Credit
Opportunity (Regulation B).
In 1992, Regulation DD was adopted by the Federal Reserve
Board, governing disclosures on deposits. It became effective during 1993, and
required substantial amendments to many of the Bank's disclosure documents at
significant cost to the Bank.
The assets of a commercial banking institution consist largely
of interest earning assets, including loans, federal funds sold, time
certificates of deposit, and investment securities. The liabilities of a
commercial banking institution consist of non-interest bearing demand deposits,
and interest bearing liabilities, including time deposits, savings accounts,
and other bank borrowings. The values and yields of these assets and rates
paid on these liabilities are sensitive to changes in prevailing market rates
of interest. The earnings and growth of the Company are largely dependent on
the Company's ability to increase the amount and net yield of its interest
earning assets which, in turn, depends upon deposit growth and the ability of
the Company to maintain a favorable differential or "spread" between the yield
on interest earning assets and the rate paid on interest bearing deposits and
other interest bearing liabilities. The FRB implements national monetary
policies (for example, to curb inflation and combat recession) by its open
market operations in United States government securities, by adjusting the
required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowing by banks
that are members of the Federal Reserve System. The actions of the FRB in
these areas influence the growth of bank loans, investments, and deposits, and
also effect interest rates charged on loans and deposits. Thus, the earnings
and growth of monetary and fiscal policies of the federal government, and the
policies of regulatory agencies, particularly the FRB. The nature and impact
of any future changes in economic conditions and government policies cannot be
predicted.
Supervision, regulation, and examination of the Bank by bank
regulatory agencies are generally intended to protect depositors and are not
intended for the protection of the Company's stockholders.
In November 1993, the Office of the Comptroller of the
Currency released the Bank from its Formal Agreement entered into in June 1992.
The Formal Agreement 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% Tier 1 capital
ratio based on adjusted total assets (leverage). 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)
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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 restricted 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. Sections 55 and
60; and (c) with the prior written approval of the OCC Regional 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.
In November 1993, the Federal Reserve Bank of San Francisco
released the Company from its August 1992, Memorandum of Understanding ("MOU")
which 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, intercompany transactions, tax
allocation and management or service fees; 3) a plan to assure that CU Bancorp
has sufficient cash to pay its expenses; 4) accurate and timely regulatory
reporting; 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.
The release of both agreements indicates that the Company has
complied with the Formal Agreement and the Memorandum of Understanding,
including improvement of asset and management quality, the development and
implementation of policies and procedures as well as reporting methodologies
and the maintenance of the required capital ratios.
RESTRICTIONS ON TRANSFER OF FUNDS TO THE COMPANY BY THE BANK
The Company is a legal entity which is separate and distinct
from the Bank. Aside from raising capital, it is anticipated that the Company
may receive additional income through dividends paid by the Bank. Future cash
dividends by the Bank will depend on management's assessment of future capital
requirements, contractual restrictions, and other relevant factors.
Statutory and regulatory requirements impose restrictions on
the amount of dividends payable by and on extensions of credit from the Bank to
the Company.
The ability of the Bank to pay dividends to the Company is
subject to restrictions set forth in the National Banking Law. Pursuant to
that law, a shareholder of a national bank is entitled to receive dividends,
when and if declared by the Board of Directors, out of funds legally available.
Funds are not legally available, therefore, if the dividend would exceed the
Bank's retained profits or would impair its capital. The approval of the
Comptroller is required when the total of all cash dividends declared by a bank
in a calendar year exceeds the total of its net profits for that year combined
with its retained profits for the preceding two years. Unless a bank has
unimpaired surplus funds equal to its common stock, no dividend can be paid
until and amount equal to its undivided profits has been transferred to the
surplus fund.
Provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), will further restrict the ability of banks
to pay dividends in certain situations. In the event the bank is determined to
be "undercapitalized" as defined in FDICIA and in regulations to be promulgated
thereunder, all distributions to shareholders can be prohibited. In addition,
all banks are prohibited from making any distribution which would result in the
bank becoming undercapitalized.
Although there are no other specific regulations restricting
dividend payments by bank holding companies other than state corporation law,
the FRB has stated that it is the obligation of the bank holding companies to
maintain the financial integrity of its subsidiary banks the "source of
strength doctrine". This obligation has been incorporated as statute in
FDICIA. In the event a bank is determined to be undercapitalized, it must
submit a capital plan providing for restoration of capital to acceptable levels
to its appropriate regulator. A parent holding company is required to
guarantee performance under this capital plan, to the lesser of 5% of total
assets of the bank at the time it becomes undercapitalized, or the amount
required to restore capital to an acceptable level at the time the bank fails
to comply with the capital plan. During the period of such a guarantee, the
parent company could be prevented from making distributions to shareholders.
The effect of these provisions could be to require bank holding companies to
contribute capital to subsidiary banks when necessary, prevent the banks from
paying dividends to holding companies, to maintain the equity in the banks, and
prevent bank holding companies from paying dividends to shareholders.
In addition, bank holding companies are required to maintain
certain capital ratios (See "Additional
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Regulatory Capital Requirements"). These obligations also limit a holding
company's ability to pay dividends.
The Comptroller has the authority to prohibit a bank from
engaging in business practices which such regulators consider to be unsafe and
unsound. Depending upon the financial condition of the Bank and upon other
factors, the Comptroller could assert that the payment of dividends or other
payments by the Bank to the Company might be such an unsafe and unsound
practice. Also, if the Bank were to experience either significant loan losses
or rapid growth in loans or deposits, or some other event resulting in a
depletion or deterioration of the Bank's capital account, the Company might be
compelled by the federal regulatory authorities to invest additional capital in
the Bank in an amount necessary to return the capital account to a satisfactory
level.
In addition to regulatory consideration, future cash dividends
paid by the Bank to the Company will also depend upon the assessments by their
respective boards of directors of the future capital requirements for both
institutions and other factors.
In addition, the Bank is subject to certain restrictions
imposed by federal law on any extensions of credit to affiliates (including
parent bank holding companies), investments of stock or other securities
thereof, and the taking of such securities as capital and surplus for all
affiliates. Transactions with affiliates are only permissible if they are on
terms consistent with safe and sound banking practices, and must be on
substantially identical terms (or not less favorable to the bank) as similar
transactions with non-affiliates. A bank may not purchase a "low quality
asset" (as defined in section 23a(b)(10) of the Federal Reserve Act) from an
affiliate.
Other restrictions require that transactions with affiliates
be on substantially the same terms as would be available for non-affiliates and
applies to the transactions already described as well as to a bank's sale of
assets, payment of money, of furnishing of services to an affiliate;
transactions in which an affiliate acts as an agent or broker and transactions
with a third party, if an affiliate is a participant or has a financial
interest in the transaction.
RECENT AND PROPOSED LEGISLATION
Federal and state laws applicable to financial institutions
have undergone significant changes in recent years. In general, these changes
have expanded the ranges of activities which may be engaged by banks, thrift
institutions and credit unions. For example, federal legislation has been
responsible for phasing out of regulatory ceilings on which banks, savings and
loan associations, and credit unions may pay on deposits; authorizing interest
bearing transactional accounts and money market deposit accounts; and expanding
lending and investment powers of savings and loan associations. Generally
speaking, these laws have had an effect of altering competitive relationships
existing among financial institutions, reducing the historical distinctions
between the services offered by banks, savings and loan associations, and other
financial institutions, and increasing the cost of funds to banks and other
depository institutions.
FDICIA modifies certain provisions of the Federal Deposit
Insurance Act and makes changes to other laws affecting financial institutions
generally. FDICIA contains provisions which: (i) require that a receiver or
conservator be appointed immediately for an institution whose tangible capital
falls below certain levels; (ii) increase assessments for deposit insurance
premiums; (iii) require the FDIC to establish a risk based assessment system of
insurance premiums; (iv) require federal banking agencies to revise their risk
based capital guidelines to take into account interest rate risk concentration
of credit risk and the risk associated with non traditional activities; (v)
give the FDIC the right to examine bank affiliates and make assessments for the
cost of such examinations and (vi) limit the availability of brokered deposits.
FDICIA also allows the regulators to set compensation of
directors and officers in certain situations and to require resignation of
officers and directors. Most of the provisions of FDICIA are enforceable
through civil money penalties and other actions.
In August of 1989, the Financial Institutions Reform, Recovery
and Enforcement Act ("FIRREA") was enacted. This legislation was adopted in
order to reform the regulation and supervision of financial institutions.
Among the many major changes made by this law is a measure requiring the FDIC
to assume the responsibility for insuring the deposits of financial
institutions formerly insured by the Federal Savings and Loan Insurance
Corporation ("FSLIC"). FIRREA established two separate insurance funds to be
administered by the FDIC. Insurance premiums on deposit insurance are assessed
by the FDIC independently for the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund.
FIRREA also strengthened the FDIC's regulatory enforcement
authority in the following ways: (1) it expanded the categories of persons over
whom enforcement powers may be exercised; (2) it reduced the threshold for
9
<PAGE> 10
the imposition of civil monetary penalties, including allowing such penalties
to be imposed for an inadvertent failure to file a regulatory report in a
timely fashion; (3) it substantially increased criminal and civil monetary
penalties; (4) it added remedies, including "reimbursement" by parties
committing a wrong and orders required sales of assets; (5) it enhanced
provisions for immediate remedies; (6) it expanded the FDIC's powers to appoint
conservators and receivers; and (7) it allowed the FDIC to proceed against
"commonly controlled financial institutions" in the event that the FDIC is
required to provide assistance to a trouble financial institution.
FIRREA also gave the FDIC authority to approve changes in an
institution's management in certain circumstances; imposes new limitations in
certain investment activities and on certain deposit generating activities;
amended the BHC Act to permit the acquisition of both healthy and failing
savings and loan associations by bank holding companies; and prohibited a bank,
which does not meet the minimum capital requirements applicable to it, from
accepting brokered deposits.
Other legislative and regulatory initiatives, which could
affect the Company and banking industry in general, are pending and additional
initiatives may be proposed or introduced before the United States Congress and
other governmental bodies in future. These proposals, if enacted, may further
alter the structure, regulation, and competitive relationship among financial
institutions, and may subject the Company to increased regulation, disclosure,
and reporting requirements. In addition, the various banking regulatory
agencies may propose rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether, or in what form, any such
legislation or regulations will be enacted or the extent to which the business
of the Company would be affected thereby.
ADDITIONAL REGULATORY CAPITAL REQUIREMENTS
Risk based Capital Guidelines
The federal banking agencies have adopted regulations imposing
risk based capital requirements on all banking organizations in addition to
leverage standards. The risk based capital guidelines were designed to make
regulatory capital requirements more sensitive to the differences in the risk
profiles of individual banking organizations. The FRB adopted risk based
capital guidelines effective March 15, 1989 for bank holding companies and the
Comptroller's rules were effective at the end of 1990.
In general, the risk based capital guidelines provide detailed
definitions of which obligations will be treated as capital and, assign
different weights to various assets and off-balance sheet items depending upon
the perceived degree of credit risk to which they expose such entities. Each
bank will be required to maintain a specified minimum ratio of capital to such
risk-adjusted assets and off-balance-sheet items.
Pursuant to the FRB's risk based capital guidelines to which
the Company is subject, a bank holding company's risk based capital ratio is
calculated by dividing its qualifying total capital (the numerator of the
ratio) by its risk weighted assets (the denominator). A bank holding company's
total capital consists of the sum of two types of capital elements: core
capital elements ("Tier 1 capital" and supplementary capital elements ("Tier 2
capital", minus certain specified deductions (collectively, the "deductions"),
if any. Tier 1 capital consists of the sum of (i) common stockholders' equity
capital, (ii) qualifying perpetual preferred stock and related surplus, and
(iii) minority interests in the equity accounts of consolidated subsidiaries,
less goodwill and certain other intangible assets. At least 50% of a bank's
qualifying total capital must consist of Tier 1 capital. Tier 2 capital
consists of the sum of (a) the allowance for loan and lease losses, (b) any
additional perpetual preferred stock not included in Tier 1 capital, (c) hybrid
capital instruments, perpetual debt and mandatory convertible debt securities,
and (d) term subordinated debt and intermediate term preferred stock and
related surplus (limited to 50% of Tier 1 capital). The deductions from Tier 1
and Tier 2 capital consist of investments in banking and finance subsidiaries
that are not consolidated for regulatory capital purposes, intentional
reciprocal cross-holdings of capital securities issued by banks and other
deductions (such as other subsidiaries or investments in joint ventures) as
determined by supervisory authority.
After determination of a bank holding company's qualifying
total capital, total risk weighted assets are ascertained. Under these
guidelines, a bank holding company's balance sheet assets and credit equivalent
amounts of off-balance sheet items, such as letters of credit and outstanding
loan commitments are assigned to one of four broad risk categories, which range
from 0% for risk-free assets such as cash and certain U.S. government
securities, to 100% for relatively high-risk assets such as loans and
investments in fixed assets, premises and other real estate owned. The
aggregate dollar amount of each category is then multiplied by the risk weight
associated with that category. The resulting weighted values from each of the
categories are then added together to determine the total risk weighted assets
that compromise the denominator of the risk based capital ratio.
A bank holding company's risk based capital ratio must be at
least 8.0% (of which 4.0% must consist of
10
<PAGE> 11
Tier 1 capital) and the amount of loan loss reserves that may be included in
Tier 2 capital is limited to 1.25% of risk weighted assets. The Comptroller's
risk based capital guidelines to which the Bank is subject are substantially
similar to the FRB's with minor variations. See also Management's Discussion
and Analysis.
The Bank and the Company both currently exceed the required
minimum risk based capital ratio.
The risk based capital ratio focuses principally on broad
categories of credit risk. However, the ratio does not take into account many
other factors that can effect a bank or bank holding company's financial
condition. Those factors include overall interest rate risk exposure;
liquidity, funding, and market risks; the quality and level of earnings;
investment or loan portfolio concentrations; the quality of loans and
investments; the effectiveness of loan and investment policies; and
management's overall ability to monitor and control operating risks. In
addition to evaluating capital ratios, an overall assessment of capital
adequacy will take into account each of those other factors including, in
particular, the level and severity of problem and adversely classified assets.
For this reason, the final supervisory judgment on a bank or bank holding
company's capital adequacy may differ significantly from the conclusions that
might be drawn solely from the entity's risk based capital ratio. In light of
the foregoing, banks and bank holding companies are generally expected to
operate above the minimum risk based capital ratio. See also Management's
Discussion and Analysis - "Capital".
Leverage Ratio Guidelines
In 1990, the FRB and the OCC adopted additional capital
guidelines specifying a minimum leverage standard to be employed in addition to
and in conjunction with the risk based capital guidelines for bank holding
companies and banks. The guideline requires that each institution conform, to
a minimum Tier I capital to total assets ratio of 3%. However, most
institutions are required to maintain at least a minimum Tier I capital to
total assets ratio of 4%. As in the case of the risk based capital guidelines
the new leverage ratio consists only of supervisory minimum and those
institutions experiencing significant growth will be expected to maintain
capital above the minimum level. See also Management's Discussion and Analysis
- - "Capital".
Tiers of Capital under FDICI
In addition to adopting a risk based assessment system, FDICIA
required that the federal regulatory agencies adopt regulations defining five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Under the
regulations, a "well capitalized" institution must have a Tier 1 risk based
capital ratio of at least 6%, a combined Tier 1 and Tier 2 risk based capital
ratio of at least 10% and a leverage ratio of at least 5% and not be subject to
a capital directive order (such as the Formal Agreement). An "adequately
capitalized" institution must have a Tier 1 risk based capital ratio of at
least 4%, a combined Tier 1 and Tier 1 risk based capital ratio of at least 8 %
and a leverage ratio of at least 4% or 3% in some cases. At December 31, 1993,
the Company had a Tier 1 risk based capital ratio of 15.4%, and a leverage
ratio of 9.2%. Under the regulations, the regulators can reduce the capital
status of an institution to the next lowest tier if the institution is
determined to be in an unsafe or unsound condition, or if it receives and has
not corrected, a less that satisfactory examination rating for any of the
following: asset quality, management, earnings or liquidity. While the Bank
has not received formal notice of its current designation, it meets the
requirements to be "well capitalized".
EMPLOYEES
As of December 31, 1993, the Company had two employees, its
President and its Chief Executive Officer. At December 31, 1993, the Bank
had 94 full-time employees and 6 part-time employees. Of these employees, 11
held titles of senior vice president or above. At December 31, 1993, none of
the executive officers of the Bank served pursuant to written employment
agreements. None of the Company's or the Bank's employees are represented by a
labor union. The Company considers its relationship and the Bank's
relationship with each company's respective employees to be excellent.
11
<PAGE> 12
Item 2. PROPERTIES
The principal offices of the Company are located in a
multi-story office building located at 16030 Ventura Boulevard, Encino,
California 91364 for which it pays a monthly rental of $60,000. The lease
contains a ceiling on cost of living adjustments of 5% per year. The lease is
renewable. In 1992 the Bank leased additional space, in a multi-story office
building in Calabasas, California for the mortgage division, and maintained a
mortgage loan production office at the location at a monthly rent of $16,745.
This lease was assumed by the purchaser of the mortgage banking division in
November 1993, as were all other leases relative to the mortgage banking
division. The Bank leases the property in which its West Los Angeles branch
and offices are located from an unaffiliated party for a monthly rent of
$5,000. During 1993, the Bank terminated the lease for the upper floors at the
former Beverly Hills location for a payment of $67,000. The Bank also has
certain month to month or short term leases for loan production offices in the
South Bay and the San Gabriel Valley. Management believes that the existing
leases will provide for their space requirements for the foreseeable future.
From time to time the Bank may acquire real property through
foreclosure. See Management's Discussion and Analysis "Nonperforming Assets"
for further amplification on real property acquired in this manner.
12
<PAGE> 13
Item 3. LEGAL PROCEEDINGS
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, other than as set forth below, pending or threatened
litigation involving the Bank will have no adverse material effect upon its
financial condition, or results of operations.
The Bank is a defendant in multiple lawsuits related to the failure of
two real estate investment companies, Property Mortgage Company, Inc., ("PMC")
and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by
investors in PMC and SLGH (the "Federal Investor Action"), at least three state
court actions by groups of Investors (the "State Investor Actions"), and an
action filed by the Resolution Agent for the combined and reorganized
bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action
was filed by an individual investor and his related pension and profit sharing
plans (the "Individual Investor Action").
Other defendants in these multiple actions and in related actions
include financial institutions, title companies, professionals, business
entities and individuals, including the principals of PMC and SLGH. The Bank
was a depositary bank for PMC, SLGH and related companies and was a lender to
certain principals of PMC. The Bank denies any participation in the sale of
the interests which are the principal gravamen of the complaints.
Plaintiffs allege that PMC/SLGH was or purported to be engaged in the
business of raising money from investors by the sale and issuance of interests
in promissory notes secured by trust deed and real property notes secured, or
purported to be secured, by real property. Plaintiffs allege that false
representations were made, and the investment merely constituted a "Ponzi"
scheme. Other charges relate to the Bank's conduct with regard to the
depositary accounts, the lending relationship with the principals and certain
collateral taken in conjunction with these loans. The lawsuits allege inter
alia violations of federal and state securities laws, fraud, negligence, breach
of fiduciary duty, and conversion as well as conspiracy and aiding and abetting
counts with regard to these violations. The Bank denies the allegations of
wrongdoing.
Damages in excess of $100 million have been alleged, and compensatory
and punitive damages have been sought generally against all defendants,
although no specific damages have been prayed for with regard to the Bank, nor
has there been any apportioning of liability among defendants or attributable
to the various claims asserted. A former officer and director of the Bank has
also been named as a defendant.
Despite the complexity of the case and the length of time the actions
have been on file, very little discovery has been taken. The Federal Investor
and the Neilson Actions are proceeding slowly. The Federal Court in that case
denied the plaintiff's request for class certification for litigation purposes
but granted such certification for settlement purposes, at least as to one
unrelated defendant. As a result of the denial of the class action status, the
plaintiffs filed the State Investor Actions in the Los Angeles County Superior
Court. The Neilson Action remains in the United States District Court for the
Central District of California.
During 1993, the Bank filed a motion to dismiss racketeering ("RICO")
claims in the Federal Investor Action, originally stated, which motion was
granted.
In early 1994, the Bank's motion for a summary judgment in the
Individual Investor Action was granted, thereby dismissing the case as to the
Bank, subject to appeals of that decision. That case primarily included
allegations regarding the Bank's aiding and abetting the sale of securities by
PMC and SLGH and state securities claims with regard thereto. It did not make
claims with regard to the Bank's depositary or lending relationships with PMC,
SLGH or the principal thereof. No officer or director of the Bank was named in
that case.
The Bank and its former officer have filed claims with insurance
carriers for coverage regarding the remaining litigation. The attorneys for
the Investor and Neilson Actions have made a settlement demand on the Bank and
its former officer for payment of full policy limits by certain insurance
carriers.
On the basis of the current pleadings, no carriers have accepted or
acknowledged coverage, but are continuing to monitor the cases. It is
anticipated that further pleadings and supplemental presentations will clarify
the plaintiffs' claims and the applicability of insurance coverage. The Bank
believes that should insurance be available to its officers and directors, that
the applicable deductible will be between $500,000 and $1,000,000, and that the
maximum coverage available will be $10,000,000. The applicable policies are
reimbursement policies and do not provide any defense or legal fees coverage at
this time. Notwithstanding this, one of the insurers has indicated its
intention to take over (and assume the cost of) the defense of the
director/officer named in the litigation, subject to a reservation of rights,
and subject to a statement that it is not obligated to do so.
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<PAGE> 14
Based on the limited discovery to date, the Bank is not aware of any
factual basis for the plaintiffs' allegations of intentional wrongdoing by the
Bank or its former officer. The Bank officers involved in the subject matter
deny these allegations. The Bank believes that the litigation is an attempt to
recover from solvent defendants and their insurers for the alleged wrongdoing
of the PMC/SLGH entities.
Settlement negotiations are ongoing among all the parties to the
lawsuits. In the event of a failure of these negotiations, the Bank intends to
vigorously contest the charges, and believes it has meritorious legal and
factual defenses assertable in connection with the same.
14
<PAGE> 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Two matters were submitted during the fourth quarter of the
fiscal year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
The Annual Meeting of Shareholders of the Company for 1993 was held on December
17, 1993.
The first item was the election of directors of the Company.
The preliminary tally was:
<TABLE>
<CAPTION>
Broker Other
Name of Candidate Votes Cast For Votes Withheld Unvoted Unvoted Total
- ----------------- -------------- -------------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Stephen Carpenter 3,472,295 111,595 160,448 262,356 4,006,694
Richard Close 3,617,257 111,595 160,448 262,356 4,151,656
Paul Glass 3,303,254 111,595 160,448 262,356 3,837,653
Jon Goodman 3,129,539 111,595 160,448 262,356 3,663,938
David Nathanson 3,458,584 111,595 160,448 262,356 3,992,983
Ronald Parker 4,608,696 111,595 160,448 262,356 5,143,095
David Rainer 1,854,054 111,595 160,448 262,356 2,388,453
Kenneth Bernstein 3,700,998 n/a n/a n/a n/a
</TABLE>
The preceding was the preliminary vote count. Prior to the close of the
voting, Ronald Parker resigned as a director and declined to stand for
renomination. As a result there were seven candidates for seven director seats,
and each of the following was elected as a director of the corporation:
Stephen Carpenter
Richard Close
Paul Glass
Jon Goodman
David Nathanson
David Rainer
Kenneth Bernstein
The second item was the request for approval of adoption of the 1993 CU Bancorp
Employee Stock Option Plan:
Shares Considered Present and Eligible to Vote on This Matter: 3,158,497
<TABLE>
<CAPTION>
Broker Other
Votes Cast For Votes Against Abstentions Unvoted Unvoted
- -------------- ------------- ----------- ------- -------
<S> <C> <C> <C> <C>
2,378,275 651,957 128,265 991,357 262,456
</TABLE>
The 1993 Stock Option Plan was approved by the requisite majority of those
shares eligible to vote on this matter.
15
<PAGE> 16
Item 4(A). EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are brief summaries of the background and
business experience of each of the executive officers of the Company and the
Bank as of December 31, 1993:
<TABLE>
<CAPTION>
Position With Position With Years
Name Age the Company the Bank in Job
- ---- --- ----------- -------- ------
<S> <C> <C> <C> <C>
Stephen G. Carpenter 53 President/CEO President/CEO(1) 1.5
David I. Rainer 37 None Executive V.P.(2) 1.5
Chief Operating
Officer
Patrick Hartman 45 Chief Financial Senior V.P./ 1.2
Officer Chief Financial
Officer
Anne Williams 36 None Chief Credit Officer .5
</TABLE>
(1) Subsequent to year end, was named Chairman of the Board and Chief
Executive Officer.
(2) Subsequent to year end, was named President and Chief Operating
Officer
Set forth below are brief summaries of the background and business experience,
of the executive officers of the Company.
STEPHEN G. CARPENTER joined the Company in 1992 from Security Pacific
National Bank where he was Vice Chairman in charge of middle market lending
from July 1989 to June 1992. Mr. Carpenter was previously employed at Wells
Fargo Bank from July 1980 to July 1989, where he was an Executive Vice
President.
DAVID I. RAINER was appointed Executive Vice president of the Bank in
June 1992 and assumed the position of Chief Operating Office in late 1992.
From July 1989 to June 1992, Mr. Rainer was employed by Bank of America, where
he held the position of Senior Vice President. From March 1989 to July 1989,
Mr. Rainer was a Senior Vice President at Faucet & Company, where he co-managed
a stock and bond portfolio. From July 1982 to March 1989, Mr. Rainer was
employed at Wells Fargo Bank, where he held the positions of Vice President and
Manager.
PATRICK HARTMAN has been employed by the Bank since November, 1992.
Prior to assuming his present positions he was Senior Vice President/ Chief
Financial Officer for Cenfed Bank for a period during 1992. Mr. Hartman held
the post of Senior Vice President/ Chief Financial Officer of Community Bank,
Pasadena, California, for thirteen years.
ANNE WILLIAMS joined the Bank in 1992 as Senior Loan Officer. She
was named to the position of Chief Credit Officer in July 1993. Prior to that
time she spent five years at Bank of America/Security Pacific National Bank,
where she was a credit administrator in asset based lending, for middle market
in the Los Angeles area. Ms. Williams was trained at Chase Manhattan Bank in
New York, and was a commercial lender at Societe Generale in Los Angeles and
Boston Five Cents Savings Bank where she managed the corporate lending group.
16
<PAGE> 17
PART II
Item 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
See Management's Discussion and Analysis "Capital"
Holders of Company's Common Stock
As of the close of business on December 31, 1993 there were
452 record holders of the Company's issued and outstanding Common Stock.
Dividends
Under national banking laws the Bank may not pay dividends
from its capital. All dividends must be paid out of net profits then on hand,
after deducting expenses, including losses and bad debts. In addition, the
payment of dividends out of net profits is further limited in that the Bank is
prohibited from declaring a dividend on its shares of common stock until the
surplus fund equals the amount of capital stock, or, if the surplus fund does
not equal the amount of capital stock, until there has been transferred to the
surplus fund not less than one-tenth of the bank's net profits for the
preceding half-year in the case of quarterly or semi-annual dividends, or not
less than one-tenth of its net profits for the preceding two consecutive
half-year periods in the case of annual dividends.
The approval of the Comptroller of the Currency is required if
the total of all dividends declared by the Bank in any calendar year exceeds
the total of its net profits for that year combined with its net profits for
the two preceding years, less any required transfers to surplus or to a fund
for the retirement of any preferred stock.
The Company has generally followed a policy of retaining
earnings for the purpose of increasing the net worth of the Company in order to
support asset growth. Accordingly, prior to 1990, the Company had not paid any
cash dividends. Holders of the Common Stock are entitled to receive dividends
as and when declared by the Board of Directors out of funds legally available
therefor under the laws of the State of California. The Company declared a 20
% stock dividend in 1989, 5% stock dividends in 1988, 1987, and 1986, a 2 for
1 stock split in 1984 and a 6 for 5 split effected in the form of a stock
dividend in 1985. All per share amounts throughout this Form 10-K are adjusted
to give effect to these share dividends and splits.
17
<PAGE> 18
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<S> <C>
Selected Financial Data CU Bancorp and Subsidiary
</TABLE>
<TABLE>
<CAPTION>
Dollar amounts in thousands, except per share data As of the years ended December 31,
----------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Consolidated Balance Sheet
Total securities $ 88,034 $ 84,724 $ 59,533 $ 37,755 $ 58,331
Net loans 134,148 193,643 273,126 308,346 261,032
Total earning assets 251,559 281,723 429,480 415,602 306,362
Total assets 279,206 353,923 516,762 485,697 523,896
Total deposits 238,928 318,574 473,125 444,542 480,913
Total shareholders' equity 26,990 24,632 32,598 36,600 31,260
Regulatory risk based capital ratio 16.71% 12.87% 12.31% 14.15% 12.31%
Regulatory capital leverage ratio 9.16% 6.12% 6.91% 9.25% 7.64%
Allowance for loan losses to:
Period end total loans 4.63% 6.28% 4.33% 1.32% 1.20%
Nonperforming loans 473% 95% 75% 79% 53%
Nonperforming assets 283% 95% 59% 79% 53%
Consolidated Operating Results
Net interest income $14,431 $20,625 $25,681 $28,851 $25,122
Other operating income 26,423 21,499 10,537 6,936 4,248
Provision for loan losses 450 17,090 14,267 3,650 1,500
Operating expenses 36,883 37,493 27,843 22,265 17,634
Net income (loss) 2,098 (8,190) (3,637) 5,863 6,251
Fully diluted income/(loss) per
common & equivalent share $ 0.47 $ (1.90) $ (0.83) $ 1.27 $ 1.37
Net interest margin 5.86% 6.07% 6.99% 7.61% 8.18%
Return on average shareholders' equity 8.12% (26.06)% (10.27)% 16.85% 22.65%
Return on average assets 0.69% (1.89)% (0.76)% 1.31% 1.68%
Cash dividends per common share - - $ 0.150 $ 0.225 -
</TABLE>
18
<PAGE> 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
It has been a year of rebuilding and redirection for the Bank. The Bank has
addressed the issues of asset quality, regulatory relations, and strategic
focus to become a strong commercial bank serving middle market businesses, the
entertainment industry, and high net worth individuals.
By year-end, the Bank had built a balance sheet characterized by strong asset
quality and abundant reserves. The improved performance and balance sheet
brought about the termination of regulatory agreements the Bank had operated
under since mid-1992. This positioned the Bank to aggressively compete in
southern California's substantial middle market.
The Bank's seasoned commercial lenders generated significant new loan
commitments in 1993, and established the Bank as a premier middle market
relationship bank in southern California. During 1993, over $100 million of new
commercial loan commitments were generated, predominantly to business customers
with annual revenues over $5 million. This new business development
demonstrates the Bank's ability to meet the needs of middle market companies
for relationship-based banking services. This momentum is expected to continue
as the team remains focused on production and expansion in 1994.
The Company earned $2.1 million, or $0.47 per share, in 1993, as the result of
four consecutive quarters of increased profits. This compares to an $8.2
million loss, or $1.90 per share loss, in 1992 that was due primarily to the
impact of the recessionary economy on the Commercial Banking Group, and the
actions taken by management to strengthen the balance sheet. Current earnings
reflect the long-term benefits of these decisive steps as well as the continued
success in building the Bank's core commercial business.
The Bank's credit quality has improved significantly since June 1992.
Nonperforming assets (NPA) have been virtually eliminated and strong reserves
have been maintained. Asset quality position, as shown in Graph 1:
Nonperforming Assets, illustrates an element of the Company's strength. At June
30, 1992, Nonperforming Loans (NPL) were $6.5 million and nonperforming assets
were under $10.0 million. At December 31, 1993, nonperforming loans were under
$1.4 million and nonperforming assets were $2.3 million.
Since December 31, 1992, nonperforming loans decreased almost $12.3 million, or
90%, and nonperforming assets decreased over $11.3 million, or 83%. This
decrease resulted from a combination of refinancing with others, payoffs, and
chargeoffs. The allowance for loan losses was 473% of nonperforming loans and
283% of nonperforming assets at December 31, 1993, substantially higher than
the December 31, 1992, levels of 95% and 95%, respectively. This trend is
shown in Graph 2: Ratio of Allowance for Loan Losses to Nonperforming Assets.
At December 31, 1993, $378 thousand of loans classified nonperforming are
performing within defined terms. The other $1.0 million included in
nonperforming loans is an in substance foreclosure that has been written down
to its fair value.
19
<PAGE> 20
Graph 1: Nonperforming Assets
[GRAPH 1]
Graph 1 Data: Nonperforming Assets
<TABLE>
<CAPTION>
December 31, March 31, June 30, September 30, December 31,
1992 1993 1993 1993 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Loans $13,630 $ 6,602 $6,530 $1,065 $1,378
Nonperforming Assets 13,630 11,034 9,988 4,034 2,298
</TABLE>
The allowance for loan losses as a percentage of nonperforming loans and assets
has increased as both nonperforming categories were reduced. During the fourth
quarter of 1993, the Bank enjoyed a net recovery as recoveries exceeded
chargeoffs. This is expected to continue in the first quarter of 1994. Net
recoveries further increase the allowance's coverage of the nonperforming loans
and assets.
Graph 2: Ratio of Allowance for Loan Losses to Nonperforming Assets
[GRAPH 2]
20
<PAGE> 21
Graph 2 Data: Allowance for Loan Losses to Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
------------
1990 1991 1992 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance to:
Nonperforming Loans 103% 82% 95% 473%
Nonperforming Assets 79% 59% 95% 283%
</TABLE>
Capital ratios are strong, substantially exceeding levels required to be in the
"well capitalized" category established by bank regulators. The Total Risk
Based Capital Ratio was 16.7%, the Tier 1 Risk Based Capital Ratio was 15.4%,
and the Leverage Ratio was 9.2% at December 31, 1993, compared to 12.9%, 11.5%,
and 6.1%, respectively, at year-end 1992. 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.
Graph 3: Total Risk Based Capital Ratios
[GRAPH 3]
Graph 3 Data: Total Risk Based Capital Ratios
<TABLE>
<CAPTION>
December 31,
------------
1990 1991 1992 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Risk Based Capital Ratio 14.15% 12.31% 12.87% 16.71%
</TABLE>
The Company's relationships with its regulators have now normalized. The
Company was notified on November 3, 1993, that the Office of the Comptroller of
the Currency ("OCC"), the Bank's primary regulator, terminated the Formal
Agreement under which the Bank had operated since June 1992. This decision
followed the completion of the OCC's annual examination of the Bank in October
1993. The Federal Reserve Bank of San Francisco ("Fed") notified the Company
on November 29, 1993, that the requirements of the Memorandum of Understanding
were satisfied and, therefore, that agreement was terminated.
Another significant strategic objective was reached in the fourth quarter of
1993 with the sale of the Bank's mortgage origination operation. The loan
production offices and certain other assets of the mortgage origination
operation were sold. The Bank retained the warehouse inventory and the mortgage
servicing portfolio, and will continue to originate mortgage loans that fit
within its revised business strategy of relationship banking.
This sale was important for three reasons. First, the regulatory environment
for mortgage banking activities of banks has become increasingly more
difficult, particularly for smaller banks. The smaller the operation, the
harder it is to achieve the appropriate market mix.
The second issue faced had to do with product mix. More than eighty percent of
production has come from refinancing, not new mortgages. We feel that should
rates increase even slightly, production volume would drop accordingly. This
would make it more difficult to generate consistent profits.
The third reason to sell the mortgage origination network was that the expenses
were quite high. Complementing this was a decline in profit margins as
competition intensified. In the end, it was in the shareholders' best interest
to sell the mortgage origination network and concentrate effort and capital on
middle market commercial relationship banking.
The successful results in 1993 concerning asset quality, regulatory relations,
growth of middle market lending and strategic focus make expansion and growth
possible in 1994. Two new loan production offices have been opened in
21
<PAGE> 22
January 1994. These offices will allow expanded market penetration and
commercial portfolio diversification.
The commercial lending team produced over $100 million of new commercial
relationships during 1993. Collections and payoffs offset this new production.
During 1993, over $45 million was collected on loans the Bank felt presented
unacceptable risks. These two offsetting results shrank the commercial loan
portfolio during 1993 while quality dramatically improved. During 1994,
collection of such loans will continue but at a much slower pace because the
portfolio is now significantly smaller. It is therefore expected that 1994
production will produce net growth in the commercial loan portfolio and have a
positive impact on net interest income.
Commercial portfolio growth will further leverage the Bank's capacity. That
capacity was used to improve asset quality and regulatory relations in 1993 and
now will be focused on new commercial relationship development in 1994.
Resulting growth will be funded by liquidity made available when the mortgage
origination operation was sold. Presently, this liquidity is invested in
securities. Reinvestment in commercial loans will improve net interest income.
Growth will increase total assets and capital leverage only after the current
liquidity has been redeployed from investments to commercial loans. Leverage of
liquidity, cost structure, and capital are high priorities for 1994 because of
the positive impact this has on the Bank's performance and shareholder value.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
Loan portfolio quality has been a focal point of management's attention since
June 1992. As a result, considerable improvements have been made. Credit
policies have been established to promote quality production. Further, target
markets have been redefined to emphasize middle market commercial lending and
reduce real estate concentrations.
The Bank's focus on middle market lending, in its infancy at year-end 1992,
gained momentum in 1993. While total loans decreased from year-end 1992 to
year-end 1993, the reduction is the net impact of three changes. The Bank
produced over $100 million in loan commitments to new middle market
relationships during 1993. Offsetting this, the sale of the mortgage
origination operation and the continued reduction of the commercial real estate
portfolio produced a net decrease in total loans. During the year, over $45
million was collected from assets targeted for collection or refinance outside
the Bank. Net growth of the commercial loan portfolio is expected in 1994 as
collections of targeted loans slow because of the substantially smaller
portfolio being addressed.
Table 1 Loan Portfolio Composition
<TABLE>
<CAPTION>
Amounts in thousands of dollars December 31,
-------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $120,513 $118,575 $163,472 $187,031 $167,385
Real Estate Loans:
Held for Sale 10,426 40,167 40,350 24,156 13,611
Mortgages 8,496 40,311 52,259 81,593 69,730
Construction 1,226 2,392 14,368 2,743 909
Other Loans 0 1,184 3,044 3,175 1,200
-------- -------- -------- -------- --------
Loans 140,661 202,629 273,493 298,698 252,835
Term federal funds sold 0 4,000 12,000 15,000 12,000
-------- -------- -------- -------- --------
Total loans net of unearned fees $140,661 $206,629 $285,493 $313,698 $264,835
======== ======== ======== ======== ========
</TABLE>
The Bank's credit policy limits concentrations of loans in any industry or
collateral. Efforts to reduce any remaining concentrations continue.
Historically, the Bank's real estate loans secured by single family residences
were principally mortgages held for sale that were originated by the Mortgage
Banking Operation. These were sold to investors through firm commitments,
generally in less than 90 days. The loans amounted to $10.4 million, or 7.4%
of the December 31, 1993, loan portfolio, compared to $40.2 million at December
31, 1992. This part of the loan portfolio historically presents almost no
credit risk. The mortgage origination operation sale eliminated this loan
concentration. The remainder of real estate loans are generally collateralized
by a first or second trust deed position.
Lending efforts have been directed away from commercial real estate, as well as
construction and multifamily lending. The Bank is now 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. Existing commercial real
estate loans, 19.2% of the loan portfolio, or $27 million at year-end 1993,
compared to $40 million at year-end 1992, 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.
22
<PAGE> 23
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
<TABLE>
<CAPTION>
Amounts in thousands of dollars December 31,
------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $5,699 $11,597 $11,147 $3,986 $3,108
Real estate loans - Held for Sale 67 368 90 60 38
Real estate loans - Mortgages 225 249 28 21 12
Real estate loans - Construction 10 62 100 37 0
Other loans 0 19 0 0 0
------ ------- ------- ------ ------
Loans 6,001 12,295 11,365 4,104 3,158
Unfunded commitments and letters of
credit 12 691 1,002 24 0
------ ------- ------- ------ ------
Total Allowance for loan losses $6,513 $12,986 $12,367 $4,128 $3,158
====== ======= ======= ====== ======
</TABLE>
Adequacy of the allowance is determined using management's estimates of the
risk of loss for the portfolio and individual loans. Included in the criteria
used to evaluate credit risk are, wherever appropriate, the borrower's cash
flow, financial condition, management capabilities, and collateral valuations,
as well as industry conditions. A portion of the allowance is established to
address the risk inherent in general loan categories, historic loss experience,
portfolio trends, economic conditions, and other factors. Based on this
assessment a provision for loan losses may be charged against earnings to
maintain the adequacy of the allowance. The allocation of the allowance based
upon the risks by type of loan, as shown in Table 2, implies a degree of
precision that is not possible when using judgments. While the systematic
approach used does consider a variety of segmentations of the portfolio,
management considers the allowance a general reserve available to address risks
throughout the entire loan portfolio.
Activity in the allowance during the last 5 years, classified by type of loan,
is as follows:
Table 3 Analysis of the Changes in the Allowance for Loan Loss
<TABLE>
<CAPTION>
Amounts in thousands of dollars For the years ended December 31,
--------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at January 1 $12,986 $12,367 $ 4,128 $3,158 $3,141
------- ------- ------- ------ ------
Loans charged off:
Real estate secured loans 3,266 4,425 1,220 1,858
Commercial loans secured and unsecured 6,582 12,562 5,422 640 1,563
Loans to individuals, installment and
other loans 901 813 258 321
------- ------- ------- ------ ------
Total charge-offs 10,749 17,800 6,900 2,819 1,563
------- ------- ------- ------ ------
Recoveries of loans previously charged off:
Real estate secured loans 393 249 15 42
Commercial loans secured and unsecured 3,189 1,001 819 97 80
Loans to individuals, installment and other
loans 244 79 38 - -
------- ------- ------- ------ ------
Total recoveries of loans previously
charged off 3,826 1,329 872 139 80
------- ------- ------- ------ ------
Net charge-offs 6,923 16,471 6,028 2,680 1,483
Provision for loan losses 450 17,090 14,267 3,650 1,500
------- ------- ------- ------ ------
Balance at December 31 $ 6,513 $12,986 $12,367 $4,128 $3,158
======= ======= ======= ====== ======
Net loan charge-offs as a percentage of average
gross loans outstanding during the year ended
December 31 3.49% 7.24% 2.36% 0.98% 0.66%
---- ---- ---- ---- ----
</TABLE>
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 December 31, 1993, nonperforming loans amounted to $1.4
million, down 90% from $13.6 million at December 31, 1992. This reduction was
caused by the combination of charge-offs and refinancing outside the Bank.
23
<PAGE> 24
Table 4: Nonperforming Assets
<TABLE>
<CAPTION>
Amounts in thousands of dollars December 31,
------------------------------------------------------------------
1993 1992 1991 1990 1989
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Loans not performing(1) $ 378 $ 8,978 $14,955 $4,000 $6,008
Insubstance foreclosures 1,000 4,652 1,512 1,224 0
------ ------- ------- ------ ------
Total nonperforming loans 1,378 13,630 16,467 5,224 6,008
Other real estate owned 920 0 4,564 0 0
------ ------- ------- ------ ------
Total nonperforming assets $2,298 $13,630 $21,031 $5,224 $6,008
====== ======= ======= ====== ======
Allowance for loan losses as a percent of:
Nonperforming loans 473% 95% 75% 79% 53%
Nonperforming assets 283% 95% 59% 79% 53%
Nonperforming assets as a percent
of total assets 0.8% 2.7% 4.1% 1.1% 1.1%
Nonperforming loans as a percent
of total loans 1.0% 6.6% 5.8% 1.7% 2.3%
Note 1:
Loans not performing
Performing as agreed $ 9 $2,895 $ 4,783
Partial performance 369 1,075 1,531
Not performing 0 5,008 6,369
------ ------- -------
$378 $8,978 $12,683
------ ------- -------
Nonaccrual:
Loans $378 $7,728 $11,357 $1,486 $2,604
Troubled debt restructurings 0 1,250 1,326 818 1,102
Past due ninety or more days (a,b):
Loans 0 0 2,272 1,696 2,302
- ---------
(a) Past due with respect to principal and/or interest and continuing to
accrue interest.
(b) In 1989, $118 of the past due loans were troubled debt restructurings.
</TABLE>
SECURITIES
The securities portfolio at December 31, 1993, totaled $88.0 million, compared
to $84.7 million at year-end 1992. This portfolio is separated into two
categories, held for investment and held for sale.
There was no held for sale portfolio at year-end 1993. At year end 1992, the
held for sale portfolio amounted to $41.7 million. These securities were sold
in January 1993 to create liquidity needed for loan growth and deposit
restructuring. This portfolio is maintained to manage liquidity and may be
traded accordingly. Prior to December 31, 1993, held for sale securities were
valued at the lower of cost or market. With the adoption of new accounting
procedures at that date, securities available for sale will be recorded at fair
value with changes reported as adjustments to capital.
The held for investment portfolio was $88.0 million at year-end 1993, compared
to $43.0 million at year-end 1992. This portfolio is recorded at amortized
cost. It is the Bank's intention to hold these securities to their individual
maturity dates.
Gains of $77 thousand were realized in 1993, compared to $755 thousand during
1992. At December 31, 1993, there were unrealized gains of $114 thousand and
losses of $259 thousand in the securities portfolio.
Additional information concerning securities is provided in Note 3 to the
accompanying financial statements.
OTHER REAL ESTATE OWNED
Other Real Estate Owned at December 31, 1993, consisted of seven properties
acquired in foreclosure. Only two of these properties are carried with any book
value on the balance sheet, the others have been written off. The carrying
values of these properties are at fair value, 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 will be charged against an allowance for real estate owned losses
created by charging a provision to other operating expenses.
The total book value of Other Real Estate Owned was $920 thousand at December
31, 1993. Expenses related to Other Real Estate Owned were $234 thousand during
1993, compared to $2.7 million in 1992.
DEPOSIT CONCENTRATION
Due to its historic focus on real estate related activities, the Bank developed
a concentration of deposit accounts from title insurance and escrow companies.
These deposits are generally noninterest bearing transaction accounts that
contribute to the Bank's interest margin. Noninterest expense related to these
deposits is included in other operating
24
<PAGE> 25
expense. The Bank monitors the profitability of these accounts through an
account analysis procedure.
The Bank is able to attract these deposits because it has developed products
and services allowing customers to operate with increased efficiency. A
substantial portion of the services, provided through third party vendors, are
automated data processing and accounting for trust balances maintained on
deposit at the Bank. These and other banking related services, such as
messenger and deposit courier services, will be limited or charged back to the
customer if the deposit relationship profitability does not meet the Bank's
expectations.
Noninterest bearing deposits represent nearly the entire title and escrow
relationship. These balances have been reduced substantially as the Bank
focused on middle market business loans. The balance at December 31, 1993, was
$58.1 million, compared to $104.5 million at December 31, 1992. Costs relative
to servicing the above relationships are the significant portion of the Bank's
customer data processing and messenger and courier costs. Part of the decrease
in these expenses is related to lower general market interest rates, but the
majority is due to the reduced amount of this deposit concentration.
Table 5 Real Estate Escrow and Title Insurance Company Deposits
<TABLE>
<CAPTION>
Average Balance
Year Ended 12 months ended
Amounts in thousands of dollars 12/31/93 12/31/93
---------- ---------------
Percent of Percent of
Total Percent Total Percent
Amount Deposits of Class Amount Deposits of Class
------- -------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1993 Balances
Noninterest bearing demand deposits $ 58,133 24% 46% $68,188 26% 50%
Interest-bearing demand & savings deposits 810 1% 1% 2,050 1% 2%
-------- -- -- -------- -- --
Total deposit concentration $ 58,943 25% $ 70,238 26%
======== == ======== ==
1992 Balances $104,459 32% $173,563 45%
======== == ======== ==
</TABLE>
The Bank had $19.3 million in certificates of deposit larger than $100 thousand
dollars at December 31, 1993. The maturity distribution of these deposits is
relatively short term, with $3.3 million maturing within 3 months and the
balance maturing within 12 months.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the Bank's ability to meet
cash requirements. The liquidity position is managed giving consideration to
both on and off-balance sheet sources and demands for funds.
Sources of liquidity include cash and cash equivalents (net of Federal Reserve
requirements to maintain reserves against deposit liabilities), securities
eligible for pledging to secure borrowings from dealers pursuant to repurchase
agreements, loan repayments, deposits, and borrowings from a $20 million
overnight federal funds line available from a correspondent bank. Potential
significant liquidity requirements are withdrawals from noninterest bearing
demand deposits and funding under commitments to loan customers.
During 1993, the Bank maintained a $20 million line of credit with a major
purchaser of the mortgage loans originated by the mortgage origination
operation. This warehouse line was terminated in conjunction with the sale of
that operation.
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. Liquidity volatility was
significantly reduced by the sale of the mortgage origination operation which
created volatility with production volume fluctuations.
The Bank's historical portfolio of large certificates of deposit (those of $100
thousand or more) has not been significant relative to the total deposit base.
At December 31, 1993 this funding source was 7.3% of average deposits, compared
to 10.0% at December 31, 1992. This funding source has traditionally been used
to manage liquidity needs within the deposit portfolio.
25
<PAGE> 26
Table 6 Interest Rate Maturities of Earning Assets and Funding Liabilities at
December 31, 1993
<TABLE>
<CAPTION>
Amounts in thousands of dollars Amounts Maturing or Repricing in
--------------------------------
More Than 3 More Than 6 More Than 9
Months But Months But Months But
Less Than Less Than Less Than Less than 12 Months
3 Months 6 Months 9 Months 12 Months & Over
-------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans (1) $134,279 $ 1,388 $ 358 $ 52 $ 4,584
Securities 28,817 11,134 4,089 3,424 40,570
Federal funds sold & other 28,000 0 0 0 0
-------- ------- ------- ------- --------
Total earning assets 191,096 12,522 4,447 3,476 45,154
-------- ------- ------- ------- --------
Interest-bearing deposits:
Now and money market 57,252 0 0 0 0
Savings 8,962 0 0 0 0
Time certificates of deposit:
Under $100 14,913 4,604 5,146 1,661 1,429
$100 or more 13,021 2,925 2,633 592 125
Non interest-bearing demand deposits 41,760 0 0 0 0
-------- ------- ------- ------- --------
Total interest-bearing liabilities 135,908 7,529 7,779 2,253 1,554
-------- ------- ------- ------- --------
Interest rate sensitivity gap 55,188 4,993 (3,332) 1,223 43,600
-------- ------- ------- ------- --------
Cumulative interest rate sensitivity gap 55,188 60,181 56,849 58,072 101,672
Off balance sheet financial instruments 750 750 750 0 0
-------- ------- ------- ------- --------
Net cumulative gap $ 55,938 $60,931 $57,599 $58,072 $101,672
======== ======= ======= ======= ========
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities (2) 1.41% 1.42% 1.38% 1.38% 1.66%
---- ---- ---- ---- ----
(1) Included in loans are mortgages in the process of being sold.
(2) 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 risk neutral position.
</TABLE>
Assets and liabilities shown on Table 6 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 $27.0 million at December 31, 1993, compared to
$24.6 million at year-end 1992. The increase during 1993 was due to earnings,
plus exercise of stock options. Capital adequacy is 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.
Since the termination of the regulatory agreements, the Bank is guided by
statutory capital requirements. During 1993, the Bank's capital levels exceeded
the "well capitalized" standards, the highest classification established by
bank regulators.
Table 7 Capital Ratios
<TABLE>
<CAPTION>
Regulatory Standards
--------------------
December 31, December 31, Well
1993 1992 Minimum Capitalized
---- ---- ------- -----------
<S> <C> <C> <C> <C>
Total Risk Based Capital 16.7% 12.9% 8.0% 10.0%
Tier 1 Risk Based Capital 15.4 11.5 4.0 6.0
Leveraged Capital 9.2 6.1 3.0 5.0
</TABLE>
No dividends were paid in 1993 or 1992. This was consistent with the conditions
agreed to in the formal agreements with regulators, addressed later in the
Regulatory Matters portion of this discussion.
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.
26
<PAGE> 27
Table 8 Stock Prices - Unaudited
<TABLE>
<CAPTION>
1993 1992
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $6.25 $3.38 $6.75 $5.00
Second Quarter 7.00 4.75 6.00 4.25
Third Quarter 6.25 5.00 5.25 3.50
Fourth Quarter 7.25 5.75 4.75 3.25
</TABLE>
EARNINGS BY LINE OF BUSINESS
Table 9 shows the pre-tax operating contributions by the Commercial Banking and
Mortgage Banking divisions. It should be noted that the bank will continue to
make new real estate loans which fit within its revised business strategy, but
Mortgage Banking will no longer be regarded as a separate line of business.
Table 9 Pre-tax operating contribution by line of business
<TABLE>
<CAPTION>
Amounts in thousands of dollars
1993 1992 1991
---- ---- ----
Commercial Mortgage Consoli- Commercial Mortgage Consoli- Commercial Mortgage Consoli-
Banking Banking dated Banking Banking dated Banking Banking dated
------- ------- ------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $13,844 $ 587 $14,431 $ 18,888 $ 1,737 $ 20,625 $25,012 $ 669 $25,681
Provisions for loan
losses 200 250 450 15,843 1,247 17,090 14,230 37 14,267
------- ------- ------- -------- ------ -------- ------- ------ -------
13,644 337 13,981 3,045 490 3,535 10,782 632 11,414
Noninterest revenue 1,032 23,908 24,940 1,865 19,634 21,499 1,478 9,059 10,537
------- ------- ------- -------- ------- -------- ------- ------ -------
Total revenues 14,676 24,245 38,921 4,910 20,124 25,034 12,260 9,691 21,951
------- ------- ------- -------- ------- -------- ------- ------ -------
Salaries and
related benefits 6,151 4,869 11,020 7,998 4,649 12,647 6,203 2,426 8,629
Other operating
expenses 7,738 17,678 25,416 12,910 11,936 24,846 13,997 5,217 19,214
------- ------- ------- -------- ------- -------- ------- ------ -------
Total operating
expenses 13,889 22,547 36,436 20,908 16,585 37,493 20,200 7,643 27,843
------- ------- ------- -------- ------- -------- ------- ------ -------
Operating income $ 787 $ 1,698 $ 2,485 $(15,998) $ 3,539 $(12,459) $(7,940) $2,048 $(5,892)
Gain on sale
of mortgage
origination operation 1,483
Reserve for branch
relocation (447)
------- ------- ------- -------- ------- -------- ------- ------ -------
Pre-tax income $ 787 $ 1,698 $ 3,521 $(15,998) $ 3,539 $(12,459) $(7,940) $2,048 $(5,892)
======= ======= ======= ======== ======= ======== ======= ====== =======
(i) Inter-divisional transactions have been eliminated at the
division level.
</TABLE>
The Bank changed its strategic direction during the second half of 1992 when
the new management team committed its focus to southern California's middle
market commercial business. Historically, it had concentrated on commercial
real estate and related businesses. The portfolios of loans and deposits that
resulted from past operations have been substantially replaced by new middle
market commercial customer relationships.
Steps taken to facilitate the expansion and market penetration of the
commercial bank include the creation of loan production offices, establishment
of a Small Business Administration ("SBA") loan production group, and
development of an international trade services group.
Loan production offices have been established in two strategic locations in
southern California. These will serve the San Gabriel Valley area and the South
Bay area. The offices are staffed with seasoned commercial lenders whose
primary focus is business development. Such offices are cost effective
approaches to business development and allow the Bank access to wider market
exposure. While these offices are primarily staffed with existing personnel,
when appropriate, key people with specific market knowledge and experience have
been hired.
The Bank has established a group of lenders to focus on the production of
commercial loans that can be participated with the SBA. These loans are
subject to the same credit quality policies and procedures as all commercial
loan production. Fees generated from the sale of the guaranteed portion of the
loans will be an important new source of noninterest income.
Another new product was added with the creation of an international trade
services group. Many of the Bank's existing commercial customers and prospects
are involved in import and/or export. This product line includes letters of
credit, foreign exchange, and foreign collections, and is another important
element in the total banking relationship offered to our business customers.
27
<PAGE> 28
The Mortgage Banking Operation grew during 1993, as lower interest rates
motivated many individuals to refinance their home mortgages. Volume of
mortgage loan originations was $895.6 million through November 10, 1993, when
the origination operation was sold, compared to $880.0 million in 1992.
Operating expenses increased in 1993 compared to 1992. This resulted from
efforts to take advantage of refinance demand and expand retail loan
production.
NET INTEREST INCOME AND INTEREST RATE RISK
Net interest income is the difference between interest and fees earned on
earning assets and interest paid on funding liabilities. Net interest income
for 1993 was $14.4 million, compared to $20.6 million in 1992. The change is
primarily attributable to changes in volume. As a result of efforts to deal
with credit quality issues and refocus the Bank on middle market business
customers, loans outside target markets have been motivated to leave the Bank.
Initially this has an adverse affect on net interest margin but subsequent
growth of the middle market loan portfolio replaces these assets and provides a
more reliable and valuable source of interest margin.
Table 10 Analysis of Changes in Net Interest Income (1)
<TABLE>
<CAPTION>
Amounts in thousands of dollars Year ended December 31, Year ended December 31,
1993 compared to 1992 1992 compared to 1991
----------------------- ---------------------
Increases (Decreases) Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, net $(3,871) $(1,210) $(5,081) $(4,759) $(3,784) $(8,543)
Investments (1,623) (549) (2,172) 1,101 (1,120) (19)
Federal Funds Sold (326) (118) (444) (148) (619) (767)
------- ------- ------- ------- ------- -------
Total interest income (5,820) (1,877) (7,697) (3,806) (5,523) (9,329)
------- ------- ------- ------- ------- -------
Interest Expense
Interest-bearing deposits:
Demand (196) (492) (688) (251) (1,086) (1,337)
Savings (138) (99) (237) 1 (299) (298)
Time Certificates of deposit:
Under $100 522 (50) 472 (108) (355) (463)
$100 or more (478) (193) (671) (711) (1,342) (2,053)
Federal funds purchased/Repos (40) (23) (63) 61 (52) 9
Other borrowings (123) (193) (316) (12) (119) (131)
------- ------- ------- ------- ------- -------
Total interest expense (453) (1,050) (1,503) (1,020) (3,253) (4,273)
------- ------- ------- ------- ------- -------
Net interest income $(5,367) $ (827) $(6,194) $(2,786) $(2,270) $(5,056)
======= ======= ======= ======= ======= =======
(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.
</TABLE>
Yields on earning assets remained at nearly 7.6% in 1993, compared to a 7.8%
yield for 1992. Market interest rates in 1993 were slightly lower than 1992.
Prime rates nationwide averaged 6.0% in 1993, compared to 6.3% in 1992. The
Bank's margins were improved due to reduced levels of nonperforming loans
which were $1.4 million at December 31, 1993, down from $13.6 million at
December 31, 1992. Through October 8, 1993, net interest income continued to
benefit from an interest rate swap agreement. Rates on interest-bearing
liabilities moved lower in 1993, resulting in an average cost of funds of 3.0%,
compared to 3.4% for 1992.
Shrinkage in the Bank's earning asset and funding liability portfolios
contributed to the reduction in net interest income. Average loans during 1993
decreased $44.2 million from $233.2 million in 1992. As previously discussed,
this resulted from management's efforts to improve the quality of the loan
portfolio and redirect production to middle market commercial loans. Earning
assets averaged $246.5 million in 1993, down $92.9 million from $339.4 million
in 1992.
Following the sale of the mortgage origination operation, the Bank's funded
warehouse inventory was sold in the normal course of business. The liquidation
of this mortgage loan portfolio is being used to increase the Bank's
investment portfolio and liquidity position. This liquidity will fund the
expected growth of the Bank's core commercial loan portfolio. While this
transition will have a temporary adverse impact on net interest margin, it
facilitates the commercial loan growth planned for 1994.
28
<PAGE> 29
Table 11 Average Balance Sheets and Analysis of Net Interest Income
<TABLE>
<CAPTION>
Amounts in thousands of dollars 1993 1992 1991
---- ---- ----
Interest Interest Interest
Income or Yield or Income or Yield or Income or Yield or
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- ------- ---- -------- ------- ---- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans, Net $188,967 $16,487 8.72% $233,203 $21,568 9.25% $284,457 $30,111 10.59%
Investments 37,534 1,558 4.15 76,161 3,667 4.81 49,463 3,363 6.80
Certificates of Deposit
in other banks 4,102 123 3.00 3,135 186 5.93 7,192 509 7.08
Federal Funds Sold 15,927 454 2.85 26,862 898 3.34 31,307 1,665 5.32
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total Earning Assets 246,530 18,622 7.55 339,361 26,319 7.76 372,419 35,648 9.57
Non Earning Assets
Cash & Due From Banks 41,243 74,999 91,957
Other Assets 15,645 18,613 19,219
-------- -------- --------
Total Assets $303,418 $432,973 $483,595
======== ======== ========
Interest-bearing Liabilities
Demand $ 64,179 1,594 2.48 $ 70,702 2,282 3.23 $ 78,474 3,619 4.61
Savings 12,741 315 2.47 17,787 552 3.10 17,748 850 4.79
Time Certificates of Deposits
Less Than $100 26,577 979 3.68 12,529 507 4.05 15,188 970 6.39
More Than $100 24,737 784 3.17 39,085 1,455 3.72 58,211 3,508 6.03
Fed Funds Purchased/Repos 2,712 79 2.91 4,011 142 3.54 2,292 133 5.80
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total Interest-bearing Liabilities 130,946 3,751 2.86 144,114 4,938 3.43 171,913 9,080 5.28
Noninterest-bearing Deposits 137,485 -- -- 244,543 -- -- 261,155 -- --
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total Deposits 268,431 3,751 1.40 388,657 4,938 1.27 433,068 9,080 2.10
Other Borrowings 6,964 440 6.32 8,644 756 8.75 8,768 887 10.12
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total Funding Liabilities 275,395 4,191 1.52 397,301 5,694 1.43 441,836 9,967 2.26
Other Liabilities 2,175 4,328 6,360
Shareholders' Equity 25,848 31,344 35,399
-------- -------- --------
Total Liabilities and
Shareholders' Equity $303,418 $432,973 $483,595
======== ======== ========
Net Interest Income $14,431 5.85% $20,625 6.08% $25,681 6.90%
======= ==== ======= ==== ======= ====
Shareholders' Equity to
Total Assets 8.52% 7.24% 7.32%
---- ---- ----
</TABLE>
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin for 1993 was 5.85%, compared to 6.08% for 1992.
The Bank's margin is strong because it has funded itself with a significant
amount of noninterest bearing deposits.
Through October 8, 1993, the Bank continued to benefit from an interest rate
swap agreement entered into October 8, 1991, which had a notional value of $100
million. Under this arrangement, the Bank received a fixed rate of 8.18% and
paid interest at prime rate, which was 6.0% during 1993. The income earned from
the interest rate swap agreement was $1.7 million in 1993, compared to $1.9
million in 1992.
OTHER OPERATING INCOME
The majority of other operating income was earned as the Mortgage Banking
Operation originated and sold mortgage loans. The trends and composition of
other operating income are shown in the following table.
29
<PAGE> 30
Table 12 Other operating income
<TABLE>
<CAPTION>
Amounts in thousands of dollars 1993 1992 1991
---- ---- ----
Commercial Mortgage Commercial Mortgage Commercial Mortgage
Banking Banking Consolidated Banking Banking Consolidated Banking Banking Consolidated
---------- -------- ------------ ---------- -------- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Processing fees $ 1,143 $ 1,143 $ 1,137 $ 1,137 $ 465 $ 465
Capitalization of
excess servicing
rights 207 207 821 821 626 626
Fees on loans sold 1,182 1,182 3,336 3,336 2,119 2,119
Premium on sales of
mortgage loans 18,022 18,022 11,346 11,346 4,085 4,085
Service income 2,129 2,129 1,812 1,812 1,436 1,436
Documentation fees $ 104 826 930 $ 111 914 1,025 211 211
Other service fees
and charges 851 399 1,250 904 363 1,267 $1,112 151 1,263
Securities & other
nonoperating gains 77 1,483 1,560 755 0 755 332 0 332
------ ------- ------- ------ ------- ------- ------ ------ -------
Total $1,032 $25,391 $26,423 $1,770 $19,729 $21,499 $1,444 $9,093 $10,537
====== ======= ======= ====== ======= ======= ====== ====== =======
</TABLE>
The Mortgage Banking Operation earned fee income on loans originated, and gains
as loans were sold to permanent investors. Loans for which servicing was
retained are conventional mortgages under approximately $200 thousand which
were sold to the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and other institutional investors. The servicing
portfolio was retained by the Bank when the mortgage origination operation was
sold.
Excess servicing rights were capitalized, and related gains recognized, based
on the present value of the servicing cash flows discounted over a period of
seven years. When loan prepayments occur within this period, the remaining
capitalized cost associated with the loan is written off.
The servicing rights were retained by the bank following sale of the mortgage
origination operation. This portfolio will produce noninterest income during
1994. The Bank has entered into an agreement with the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation to dispose of any
remaining portion of this portfolio by the end of 1994 because, with the sale
of the mortgage origination operation, the Bank is no longer a qualified
seller/servicer of such loans.
OPERATING EXPENSE
Total operating expense for the commercial bank was $13.9 million in 1993,
compared to $20.9 million in 1992, a reduction of $7.0 million, or 34%, during
1993. Refocusing productive resources toward commercial banking activities and
eliminating historic inefficiencies allowed this reduction. The current level
of operating expense is deemed to be adequate and will be leveraged further as
the core middle market business is expanded.
Expenses for the Mortgage Banking Operation increased by $6.0 million to $22.5
million in 1993, compared to $16.6 million in 1992. Selling expense was $12.2
million in 1993, up from $8.1 million in 1992. These expenses are affected by
interest rate fluctuations. Premium on sales of mortgage loans included in
other operating income is directly related to these expenses and subject to the
same factors and conditions. The premium on sales of mortgage loans was $18.0
million in 1993, up from $11.3 million in 1992.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses was $450 thousand in 1993, compared to
over $17 million during 1992. This change in provision was made possible by
the significant reduction of nonperforming loans during 1993. 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. Improvement in these factors has allowed a
lower provision.
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.
30
<PAGE> 31
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Report of Independent Public Accountants dated 32
January 18, 1994;
2. Consolidated Statements of Financial Condition as 33
of December 31, 1993 and 1992;
3. Consolidated Statements of Income for the Years Ended December 34
31, 1993, 1992 and 1991;
4. Consolidated Statements of Changes in Shareholders' Equity for 35
the Years Ended December 31, 1993, 1992, and 1991;
5. Consolidated Statements of Cash Flows for the Years Ended 36
December 31, 1993, 1992 and 1991;
6. Notes to Consolidated Financial Statements-- 37
December 31, 1993.
</TABLE>
31
<PAGE> 32
Report of Independent Public Accountants
To the Shareholders and the Board of Directors of CU Bancorp and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of CU Bancorp (a California corporation) and Subsidiary (the Company) as of
December 31, 1993 and 1992, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial condition of CU
Bancorp and Subsidiary as of December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As more fully discussed in footnote 13, the Bank is a defendant in
multiple lawsuits which claim substantial damages, the eventual outcome of
which is not presently determinable. Accordingly, no provision has been made
in the accompanying financial statements for any liability that may result from
this litigation.
ARTHUR ANDERSEN & CO.
Los Angeles, California
January 18, 1994
32
<PAGE> 33
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
</TABLE>
<TABLE>
<CAPTION>
Amounts in thousands of dollars December 31,
------------
1993 1992
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,440 $ 55,989
Federal funds sold 28,000 -
-------- --------
Total cash and cash equivalents 46,440 55,989
Time deposits with other financial institutions 1,377 3,356
Investment securities (Market value of $87,889 and $42,727
in 1993 and 1992, respectively) 88,034 43,018
Securities held for sale (Market value of $41,723 in 1992) - 41,706
Loans, (Net of allowance for loan losses of $6,513 and
$12,986 at December 31, 1993 and 1992, respectively) 134,148 193,643
Premises and equipment, net 924 2,035
Other real estate owned, net 920 0
Accrued interest receivable and other assets 7,363 14,176
-------- --------
Total Assets $279,206 $353,923
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $125,665 $198,878
Savings deposits 66,214 74,849
Time deposits under $100 27,753 16,031
Time deposits of $100 or more 19,296 28,816
-------- --------
Total deposits 238,928 318,574
Accrued interest payable and other liabilities 13,288 10,717
-------- --------
Total liabilities 252,216 329,291
-------- --------
Commitments and contingencies (Notes 6 and 10) - -
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1993 or 1992 - -
Common stock, no par value:
Authorized - 20,000,000 shares
Issued and outstanding - 4,424,306 in 1993
and 4,366,850 in 1992 26,250 25,990
Retained earnings (deficit) 740 (1,358)
-------- --------
Total Shareholders' equity 26,990 24,632
-------- --------
Total Liabilities and Shareholders' equity $279,206 $353,923
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C>
Consolidated Statements of Income CU Bancorp and Subsidiary
</TABLE>
<TABLE>
<CAPTION>
Amounts in thousands of dollars, except per share data For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Revenue from earning assets:
Interest and fees on loans $14,761 $ 19,641 $29,657
Benefits of interest rate hedge transactions 1,726 1,927 454
Interest on taxable investment securities 1,525 3,624 3,256
Interest on tax exempt investment securities 33 43 106
Interest on time deposits with other financial institutions 123 186 510
Interest on federal funds sold 454 898 1,665
------- -------- -------
Total revenue from earning assets 18,622 26,319 35,648
------- -------- -------
Cost of funds:
Interest on interest-bearing demand deposits 1,594 2,282 3,619
Interest on savings deposits 315 552 850
Interest on time deposits under $100 979 507 970
Interest on time deposits of $100 or more 784 1,455 3,508
Interest on federal funds purchased & securities sold under
agreements to repurchase 79 142 133
Interest on other borrowings 440 756 887
------- -------- -------
Total cost of funds 4,191 5,694 9,967
------- -------- -------
Net revenue from earning assets before provision for
loan losses 14,431 20,625 25,681
Provision for loan losses 450 17,090 14,267
------- -------- -------
Net revenue from earning assets 13,981 3,535 11,414
------- -------- -------
Other operating revenue:
Capitalization of excess servicing rights 207 821 626
Servicing income - mortgage loans sold 2,129 1,812 1,436
Other fees & charges - commercial 955 1,015 1,422
Fees on loans sold 1,182 3,336 2,119
Premium on sales of mortgage loans 18,022 11,346 4,085
Other fees and charges - mortgage 2,368 2,414 827
Gain on sale of mortgage origination operation 1,483 - -
Gain on sale of investment securities (before taxes of $11,
$250, and $9, in 1993, 1992 and 1991, respectively) 28 617 22
Gain on sale of securities held for sale (before taxes of $20
and $56 in 1993 and 1992, respectively) 49 138 -
------- -------- -------
Total other operating revenue 26,423 21,499 10,537
------- -------- -------
Other operating expenses:
Salaries and related benefits 11,020 12,647 8,629
Selling expenses - mortgage loans 12,193 8,088 2,939
Other operating expenses 13,670 16,758 16,275
------- -------- -------
Total operating expenses 36,883 37,493 27,843
------- -------- -------
Income (loss) before provision for (benefit from)income taxes 3,521 (12,459) (5,892)
Provision for (benefit from) income taxes 1,423 (4,269) (2,255)
------- -------- -------
Net income (loss) $ 2,098 $ (8,190) $(3,637)
======= ======== =======
Earnings (loss)per share $ 0.47 $ (1.90) $ (0.83)
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
Consolidated Statements of Changes in Shareholders' Equity CU Bancorp and Subsidiary
</TABLE>
<TABLE>
<CAPTION>
Amounts in thousands of dollars Common Stock
------------ Retained
Number of Shares Amount Earnings/(deficit) Total
---------------- ------ ------------------ -----
<S> <C> <C> <C> <C>
Balance at December 31, 1990 4,255,484 $25,749 $10,852 $36,601
Cash dividend at $0.15 per share - - (383) (383)
Exercise of stock options 13,041 70 - 70
Exercise of director warrants 15,006 63 - 63
Cancellation of director warrants - (1) - (1)
Premium paid on cancellation of
director warrants - (115) - (115)
Net loss for the year - - (3,637) (3,637)
--------- ------- ------ -------
Balance at December 31, 1991 4,283,531 25,766 6,832 32,598
Exercise of stock options 83,319 224 - 224
Net loss for the year - - (8,190) (8,190)
--------- ------- ------ -------
Balance at December 31, 1992 4,366,850 25,990 (1,358) 24,632
Exercise of stock options 57,456 260 - 260
Net income for the year - - 2,098 2,098
--------- ------- ------- -------
Balance at December 31, 1993 4,424,306 $26,250 $ 740 $26,990
========= ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
Consolidated Statement of Cash Flows CU Bancorp and Subsidiary
</TABLE>
<TABLE>
<CAPTION>
Amounts in thousands of dollars For the years ended December 31,
------------------------------------------
Increase (decrease) in cash and cash equivalents 1993 1992 1991
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income/(loss) $ 2,098 $ (8,190) $ (3,637)
-------- --------- --------
Adjustments to reconcile net income/(loss)to net cash provided by
operating activities:
Provision for depreciation and amortization 821 772 668
Amortization of real estate mortgage servicing rights 983 1,504 1,003
for losses on loans and other real estate owned 450 17,090 16,433
Provision/(Benefit) of deferred taxes 1,510 (2,854) (3,255)
Gain on sale of investment securities, net (77) (755) (22)
(Increase)/decrease in other assets 2,628 2,452 (3,036)
Increase/(decrease) in other liabilities 2,582 (160) 39
Decrease in accrued interest receivable 494 742 208
Increase/(decrease) in deferred loan fees 48 (12) (190)
Capitalization of excess mortgage servicing rights (207) (821) (626)
(Decrease) in accrued interest payable (11) (161) (107)
Net amortization of (discount)/premium on securities 48 34 (722)
Accrued benefits from interest rate hedge transactions 485 (343) (142)
-------- --------- --------
Total adjustments 9,754 17,488 10,251
-------- --------- --------
Net cash provided by operating activities 11,852 9,298 6,614
-------- --------- --------
Cash flows from investing activities
Proceeds from investment securities sold or matured 78,545 93,986 46,502
Purchase of investment securities (81,826) (118,740) (76,953)
Net decrease in time deposits with other financial institutions 1,979 2,143 3,917
Net decrease in loans 58,997 67,886 14,159
Sales/(Purchases) of premises and equipment, net 290 (919) (644)
-------- --------- --------
Net cash provided by/(used in) investing activities 57,985 44,356 (13,019)
-------- --------- --------
Cash flows from financing activities
Net increase/(decrease) in demand and savings deposits (81,848) (141,077) 31,531
Net increase/(decrease) in time certificates of deposit 2,202 (13,473) (2,980)
Proceeds from exercise of stock options and director warrants 260 224 133
Cancellation of warrants previously issued -- -- (115)
Cash dividend paid -- -- (641)
-------- --------- --------
Net cash provided (used) by financing activities (79,386) (154,326) 27,928
-------- --------- --------
Net increase (decrease) in cash and cash equivalents (9,549) (100,672) 21,523
Cash and cash equivalents at beginning of year 55,989 156,661 135,138
-------- --------- --------
Cash and cash equivalents at end of year $ 46,440 $ 55,989 $156,661
======== ========= ========
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest $ 4,179 $ 5,525 $ 9,220
Taxes -- 836 2,695
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 1,503 2,577 4,852
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
36
<PAGE> 37
Notes to Consolidated Financial Statements
CU Bancorp and Subsidiary
December 31, 1993
(Amounts in thousands unless otherwise specified)
1. Summary of significant accounting policies -
CU Bancorp, a bank holding company (the Company), is a California corporation.
The accounting and reporting policies of the Company and its subsidiary conform
with generally accepted accounting principles and general practice within the
banking industry. The following comments describe the more significant of those
policies.
(a) Principles of consolidation -
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, California United Bank N.A. (the
Bank), a national banking association. All significant transactions and
accounts between the Company and the Bank have been eliminated in the
consolidated financial statements.
(b) Securities portfolio -
The Bank's securities portfolio consists of Held for Investment and Held For
Sale. Securities are segregated in accordance with management's intention
regarding their retention. In May 1993, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS 115
requires that an entity classify and account for its investments in equity
securities that have readily determinable fair values and for all of its
investments in debt securities as either trading, available for sale, or held
to maturity, and report these investments at fair value or amortized cost as
stipulated by SFAS 115. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 1993. Complying with SFAS
115 in 1993 had no material impact on the financial position or results of
operations of the Bank.
The Bank has the intent and ability to hold Investment Securities until
maturity. Securities in this classification are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a straight-line basis.
This approach approximates the effective interest method. Gains and losses
recognized on the sale of Held for Investment securities are based upon the
adjusted cost and determined using the specific identification method.
Held For Sale securities consist of those which management has the willingness
to sell under certain conditions. These securities are carried at current
market value with unrealized gains or losses recognized as a tax affected
adjustment to capital in the statements of financial condition and in the
statements of shareholders' equity. At December 31, 1993, there were no
Securities Held for Sale.
(c) Loans --
Loans are carried at face amount, less payments collected, the allowance for
loan losses, and net 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 when 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.
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for Impairment
of a Loan." SFAS 114 addresses the accounting by creditors for impairment of
certain loans. It is applicable to all homogeneous loans that are collectively
evaluated for impairment, and may impact how the Bank is currently reporting
the loans and the loan loss reserves. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1994.
Management plans to adopt SFAS 114 in the first quarter of 1995. Management
does not expect that adoption of this statement will have a material impact on
the financial position or results of operations of the Bank.
37
<PAGE> 38
(d) Mortgage Banking Division --
The bank's real estate Mortgage Banking Division became operational in 1988.
The mortgage origination operation was sold November 10, 1993. The Bank
retained the warehouse inventory and the mortgage servicing portfolio, and will
continue to originate mortgage loans that fit within its revised business
strategy of relationship based commercial banking. Until all warehouse
inventory is sold the Bank will carry the first trust deed loans generated and
held for sale by this operation at the lower of aggregate cost or market. As of
December 31, 1993 and 1992, cost approximated market value.
During 1993, 1992, and 1991, the Bank capitalized $207, $821, and $626,
respectively, in connection with the right to service real estate mortgage
loans originated in that operation. This excess servicing asset, included in
other assets, was initially capitalized at its discounted present value and
amortized over a period of five to seven years. When prepayments of loans
serviced occur, any remaining servicing asset associated with the loan is
charged to operations in the year of occurrence. Amortization for 1993, 1992,
and 1991, was $983, $1,504, and $1,003, respectively.
(e) Premises and equipment --
Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful life of the asset. Amortization is computed on the
straight-line method over the useful life of leasehold improvements or the
remaining term of the lease, whichever is shorter.
(f) Other real estate owned --
Other real estate owned, acquired through direct foreclosure or deed in lieu of
foreclosure, is carried at the lower of cost or estimated fair value. When a
property is acquired, any excess of the loan balance over market or the
estimated fair value is charged to the allowance for loan losses. Subsequent
write-downs, if any, are included in other operating expenses in the period in
which they become known. Gains or losses on sales are recorded in conformity
with standards which apply to accounting for sales of real estate. Other real
estate owned, net of reserves, amounted to $920 at December 31, 1993. The bank
owned no properties classified as Other Real Estate Owned as of December 31,
1992.
In substance foreclosure ("ISF") assets are included in loans and are carried
at the lower of cost or estimated fair value. When a property is classified
ISF, any excess of the loan balance over market or the estimated fair value is
charged to the allowance for loan losses. Expenses related to these assets are
included in other operating expenses in the period in which they are incurred.
In substance foreclosures were $1,000 at December 31, 1993 down 79% from $4,652
at December 31, 1992.
(g) Interest rate swap and floor agreements --
From time to time, the Bank may enter into interest rate swap or floor
agreements in the management of its interest rate exposure. Net interest
settlements on interest rate swap and floor agreements are accrued as an
adjustment to interest income or expense.
(h) Income taxes --
As discussed in Note 8, effective January 1, 1993, the Bank adopted SFAS 109,
"Accounting for Income Taxes." Under SFAS 109, deferred tax assets or
liabilities are computed based on the difference between the financial
statement and income basis of assets and liabilities using the enacted marginal
tax rate. Deferred income tax expenses or credits are based on the changes in
the asset or liability from period to period. Prior to January 1, 1993, the
deferred income tax expenses or credits were recorded to reflect the tax
consequences of timing differences between the recording of income and expenses
for financial reporting purposes and for purposes of filing federal income tax
returns at income tax rates in effect when the difference arose.
(i) Earnings per share (amounts in whole numbers) --
Earnings per share are computed based on the weighted average number of shares
and common stock equivalents outstanding during each year (4,489,861 in 1993,
4,317,913 in 1992, and 4,348,856 in 1991). Common stock equivalents include the
number of shares issuable on the exercise of outstanding options and warrants
reduced by the number of shares that could have been purchased with the
proceeds from the exercise of the options and warrants plus any tax benefits,
based on the average price of common stock.
(j) Statement of cash flows--
The Company presents its cash flows using the indirect method and reports
certain cash receipts and payments arising from customer loans and deposits,
and deposits placed with other financial institutions on a net basis.
Generally, federal funds are sold for one-day periods.
38
<PAGE> 39
(k) Post-retirement benefits--
The Company provides no post-retirement benefits. Accordingly, the accounting
prescribed by SFAS 106 "Accounting for Post-Retirement Benefits" has no effect
on the Company's consolidated financial statements.
(l) Reclassifications --
Certain prior year amounts have been reclassified to conform with the 1993
presentation.
2. Average Federal Reserve balances --
The average cash reserve balances required to be maintained at the Federal
Reserve Bank were approximately $8.7 million and $16.4 million for the years
ended December 31, 1993 and 1992, respectively.
3. Securities portfolio --
A summary of the securities portfolio at December 31, 1993 and 1992, is as
follows:
<TABLE>
<CAPTION>
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1993
U.S. Treasury securities $57,822 $80 $(259) $57,643
U.S. Government agency securities 29,029 -- -- 29,029
State and municipal bonds 750 34 -- 784
Federal Reserve Bank stock 433 -- -- 433
------- ---- ----- -------
Total investment portfolio $88,034 $114 $(259) $87,889
======= ==== ===== =======
1992
U.S. Treasury securities $16,355 $118 -- $16,473
U.S. Government agency securities 25,464 24 (450) 25,038
State and municipal bonds 750 4 -- 754
Mortgage-backed securities 16 13 -- 29
Federal Reserve Bank stock 433 -- -- 433
------- ---- ----- -------
Total investment portfolio $43,018 $159 $(450) $42,727
======= ==== ===== =======
</TABLE>
Securities with a book value of $27,093 and $20,171 were pledged as of December
31, 1993 and 1992, respectively, to secure court deposits and for other
purposes as required or permitted by law. Included in interest income in 1993,
1992, and 1991, is $33, $43, and $106, respectively, of interest from
tax-exempt securities.
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.
The book and market value of Held for Investment securities as of December 31,
1993, by maturity, are shown below.
<TABLE> Weighted
<CAPTION> Book Average Market
Value Rate Value
----- -------- ------
<S> <C> <C> <C>
Due in one year or less $46,051 3.5% $46,094
Due after one through five years 40,801 4.2 40,578
Due after five years 1,182 7.1 1,217
------- --- -------
$88,034 3.9% $87,889
======= === =======
</TABLE>
39
<PAGE> 40
At December 31, 1993, there were no Held For Sale securities. A summary of
Held For Sale securities as of December 31, 1992, is shown below. These
securities had gross unrealized gains of $47 and gross unrealized losses of $30.
<TABLE>
<CAPTION> Book Market
Value Value
----- ------
<S> <C> <C>
Due in one year or less $27,682 $27,680
Due after one through five years 14,024 14,043
------ ------
Securities Held for sale $41,706 $41,723
======= =======
</TABLE>
Proceeds from the sales, calls and maturities of debt securities during 1993,
1992, and 1991 were $78,545, $93,986, and $46,502, respectively. Gains of $77,
$755, and $22 were realized on those sales. There were no realized losses on
sales in 1993, 1992, and 1991.
4. Loans --
The loan portfolio, net of unamortized deferred fees of $492 at December 31,
1993, and $444 at December 31, 1992, consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1993 1992
---- ----
<S> <C> <C>
Commercial and industrial loans $120,513 $118,575
Real estate loans -- held for sale 10,426 40,167
Real estate loans -- mortgages 8,496 40,311
Real estate loans -- construction 1,226 2,392
Other loans 0 1,184
-------- --------
140,661 202,629
Less - Allowance for loan losses (6,513) (12,986)
-------- --------
134,148 189,643
Term Federal funds sold 0 4,000
-------- --------
Net loans $134,148 $193,643
======== ========
</TABLE>
Total non-performing loans were $1,378 and $13,630 at December 31, 1993 and
1992, respectively. This includes nonaccrual in substance foreclosures of
$1,000 and $4,652, at December 31, 1993 and 1992, respectively. Interest
income, which would have been recognized had nonaccrual loans and insubstance
foreclosures been current, amounted to $469, $780, and $590, in 1993, 1992,
and 1991, respectively.
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $12,986 $12,367 $ 4,128
Loans charged off (10,749) (17,800) (6,900)
Recoveries on loans previously charged off 3,826 1,329 872
Provision for loan losses 450 17,090 14,267
------- ------- -------
Balance, end of period $ 6,513 $12,986 $12,367
======= ======= =======
</TABLE>
5. Loans to related parties --
An analysis of the activity with respect to aggregate loan balances for loans
to related parties (directors and their affiliates) is as follows:
<TABLE>
<CAPTION>
Balances at New Loans and Balances at
December 31, 1993 Additions Repayments December 31, 1992
----------------- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Directors -
Direct $0 $0 $0 $1,784
Indirect 0 0 0 1,732
-- -- -- ------
Total $0 $0 $0 $3,516
== == == ======
</TABLE>
All related party loans were current as to principal and interest payments as
of December 31, 1993. In management's opinion, these loans were made in the
ordinary course of business at prevailing rates and terms. There were no loans
to executive officers at December 31, 1993 and 1992, or at any time during the
years then ended.
In addition to the amounts noted above, at December 31, 1992, the Bank had
charged off loans, and a letter of credit totaling $1,300 and $650,
respectively, to a former director and another party.
During 1992 and 1993, the Bank initiated legal actions to recover these amounts
on which the obligors are a former director and another unaffiliated person.
In addition, the Bank sued certain former officers and directors of the Bank in
connection with this matter. While the Bank is continuing to pursue the
unaffiliated party, it has entered into a settlement
40
<PAGE> 41
of the litigation with the former director and officers which resulted in
recovery of $766 thousand (some of which will be applied to legal costs in
collection and to accrued interest) during 1993. Another $325 thousand is
expected during the first quarter of 1994. In addition, the settlement
included potential long term payments of up to an additional $500 thousand
subject to offset for certain payments. While this long term payment is
secured by certain collateral, because an unrelated financial institution holds
a trust deed and has commenced foreclosure proceedings on the underlying
property, the Bank considers this to be unsecured and there is no assurance
that the full amount will actually be recovered.
6. Premises and equipment --
Book value of premises and equipment are as following.
<TABLE>
<CAPTION>
December 31,
------------------
1993 1992
------ ------
<S> <C> <C>
Furniture, fixtures and equipment $3,382 $4,171
Leasehold improvements 608 1,051
------ ------
Cost 3,990 5,222
Less - accumulated depreciation and amortization 3,066 3,187
------ ------
Net Book Value $ 924 $2,035
====== ======
</TABLE>
The amounts of depreciation included in other operating expenses and
amortization included in occupancy expense were $821 in 1993, $772 in 1992,
$668 in 1991, and are based on estimated asset lives of 3 to 10 years for
furniture, fixtures, and equipment, and the lease term for leasehold
improvements.
The Bank leases facilities under renewable operating leases. Rental expense for
premises included in occupancy expenses were $1,133 in 1993, $1,011 in 1992,
and $857 in 1991. As of December 31, 1993, the approximate future lease payable
under the lease commitments is as follows.
<TABLE>
<CAPTION>
Year ended December 31, --
<S> <C>
1994 $1,101
1995 820
1996 736
1997 720
1998 720
Thereafter 901
------
$4,998
======
</TABLE>
7. Disclosures about Fair Value of Financial Instruments
Financial instruments are defined as cash, evidence of an ownership interest in
an entity or a contract that both imposes contractual obligations and rights to
exchange cash, and/or other financial instruments on the parties to the
transaction.
For cash and cash equivalents, floating rate loans and deposits with no
contractual maturity date, the carrying value is considered a reasonable
estimate of fair value. Where active and liquid markets exist, fair value
indications per individual trading unit can be obtained. A modeling tool which
calculated discounted cash flows was used to estimate fair value for other
financial instruments. The model used discount rates that included current
market rates adjusted for approximated credit risk, operating costs and
interest rate risk inherent in the instruments. The net book value and fair
value of financial instruments as of December 31, 1993, and 1992, were as
follows:
<TABLE>
<CAPTION>
Balances as of December 31, 1993 Balances as of December 31, 1992
-------------------------------- --------------------------------
Book Value, Estimated Book Value, Estimated
Net Fair Value Net Fair Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Cash & Due From Banks $ 18,440 $ 18,440 $ 55,989 $ 55,989
Federal Funds Sold 28,000 28,000 -- --
Securities 88,034 87,889 84,724 84,450
Loans 134,148 143,402 193,643 205,770
Deposit Liabilities 238,928 238,928 318,574 318,574
Other Borrowed Money 6,698 6,698 8,648 8,648
Off Balance Sheet Items -- -- -- 1,705
Core Deposit Intangible -- 10,200 -- 11,708
</TABLE>
Estimations of fair value of financial instruments are subject to significant
estimate because active and liquid markets do not exist for a majority of them.
The estimates pertain to financial conditions, risk characteristics, expected
future losses, and market interest levels, among other factors, and if changed
could have a significant impact on them. The resulting presentations of
estimated fair value is not necessarily indicative of the value realizable in
an actual exchange of financial instruments.
41
<PAGE> 42
8. Income taxes -
The Bank changed its method of accounting for income taxes on January 1, 1993,
and adopted SFAS 109, "Accounting for Income Taxes." SFAS 109 requires an asset
and liability approach for financial accounting and reporting for income taxes,
and changes the criteria for the recognition and measurement of deferred tax
assets and liabilities, including net operating loss carryforwards.
The effect on the Bank of adopting SFAS 109 was the recognition of a deferred
tax asset, which was offset by deferred tax liabilities and a valuation
allowance, with no resulting change to the financial position of the Bank. As
of December 31, the temporary differences which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
1993
------------
<S> <C>
Allowance for loan losses $2,742
Deferred loan fees 221
Depreciation 83
Other expense accruals 646
State loss carryforward 395
Amortization of mortgage servicing asset 0
State tax expense (428)
Other 4
Valuation allowance (1,132)
------
Net deferred tax asset $2,531
======
</TABLE>
The provisions (benefits) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Current
Federal $ (89) $(1,415) $ 817
State 2 -- 183
------ ------- -------
(87) (1,415) 1,000
------ ------- -------
Deferred -
Federal 1,268 (2,750) (2,758)
State 242 (104) (497)
------ ------- -------
1,510 (2,854) (3,255)
------ ------- -------
$1,423 $(4,269) $(2,255)
====== ======= =======
</TABLE>
The provisions (benefits) for income taxes varied from the Federal statutory
rate of 34% for 1993, 1992, and 1991, for the following reasons:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Provisions (benefit) for income at $1,198 34.0% $(4,236) (34.0)% $(2,003) (34.0)%
statutory rate
Interest on state and municipal bonds
and other tax exempt transactions (25) (0.7) (15) (0.1) (38) (0.7)
State franchise taxes, net of federal
income tax benefit 256 7.3 (103) (0.9) (208) (3.5)
Other, net (6) (0.2) 85 0.7 (6) --
------ ---- ------- ----- ------- -----
$1,423 40.4% $(4,269) (34.3)% $(2,255) (38.2)%
====== ==== ======= ===== ======= =====
</TABLE>
At December 31, 1992, the Company had a California Franchise Tax carryforward
of $256, with an estimated additional $3.3 million California operating loss
carryforward being generated in 1993. These carryforwards expire in the years
1997 and 1998. The Company had current tax receivable balances totaling $565
and $4,194 as of December 31, 1993 and 1992, respectively, which are included
in other assets.
The valuation allowance for deferred tax assets is recorded to reduce the
deferred tax assets to the amounts that are more likely than not to be
realized. State loss carryforwards and deferred tax assets that might require
multiple years income in order to be realized are included in this allowance.
9. Shareholders' Equity (number of shares in whole numbers) -
The Company has three employee stock option plans. The plans authorize the
issuance of up to 400,075, 350,000, and 180,000 shares of common stock, and
expire in 1993, 1995, and 2003, respectively. Options are granted at a price
not less than the fair market value of the stock at the date of grant. Options
under these plans expire up to ten years after the date of grant. The options
granted under the 1983 plan are incentive stock options, as defined in the
Internal Revenue
42
<PAGE> 43
Code. The options granted under the 1985 plan can be either incentive stock
options or non-qualified options. There is a $100 thousand limitation on the
value of the stock covered by incentive stock options which may be granted or
become exercisable in any calendar year. Any options in excess of this amount
must be non-qualified options.
In 1987, a special stock option plan was approved that is limited to directors
of the Company and provides for the issuance of 120,960 shares of common stock.
The plan expires in 1997. Options granted under the plan are non-qualified
stock options. Each of the directors of the Company, at the time the special
stock option plan was approved, received stock options to purchase 15,120
shares at $5.78 per share, which was in excess of the then prevailing market
price. In 1993, 12,096 non-qualified stock options under the special stock
option plan were exercised at a price of $5.79 per share. Options expire 10
years after the date of grant. During 1992, 30,240 shares expired.
The following information is presented concerning the stock option plans as of
December 31, 1993:
<TABLE>
<CAPTION>
Number of Shares
Shares Subject to Range of Exercise Exercisable
----------------- ----------------- ----------
Option Prices
------ ------
<S> <C> <C> <C>
Plan Expiring May 10, 1993
Non-qualified stock options 0 $5.00 - $13.13 9,806
Plan Expiring October 22, 1995
Non-qualified stock options 261,516 $4.41 - $15.63 39,106
Plan Expiring December 17, 2003
Non-qualified stock options 180,000 --- ---
Special Stock Option:
Non-qualified stock options 45,360 $5.78 45,360
</TABLE>
During 1993, no incentive stock options under the 1983 plan were exercised and
45,360 non-qualified stock options under the 1985 plan were exercised at prices
ranging between $3.64 and $4.46 per share.
All shares subject to option under the 1985 plan were granted from 1987 to
1993, and those granted under the special stock option plan were granted in
1987.
In 1984, certain members of the Board of Directors were granted warrants to
purchase up to 360,067 shares of common stock at $4.17 per share, primarily for
guaranteeing a capital note issued by the Company. These warrants became
exercisable when the capital note was paid off in 1987, therefore all
outstanding warrants are currently exercisable.
The stock options and warrants have been retroactively adjusted to reflect
stock splits and stock dividends.
10. Financial instruments with off-balance sheet risk and commitments and
contingencies --
The consolidated statements of financial condition do not reflect various
commitments relating to financial instruments which are used in the normal
course of business. Management does not anticipate that the settlement of these
financial instruments will have a material adverse effect on the Bank's
financial position. These instruments include commitments to extend credit,
standby and commercial letters of credit, and interest rate floor and swap
agreements.
These financial instruments carry various degrees of credit and market risk.
Credit risk is defined as the possibility that a loss may occur from the
failure of another party to perform according to the terms of the contract.
Market risk is the possibility that future changes in market prices may make a
financial instrument less valuable.
The Bank primarily grants commercial and real estate loan commitments to
customers in the greater Los Angeles area. The contractual amounts of
commitments to extend credit and standby and commercial letters of credit
represent the amount of credit risk. Since many of the commitments and letters
of credit are expected to expire without being drawn, the contractual amounts
do not necessarily represent future cash requirements. For interest rate floor
and swap agreements, the notional amounts do not represent exposure to credit
loss.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank evaluates the
creditworthiness of each customer. The amount of collateral obtained, if deemed
necessary by the Bank upon the extension of credit, is based upon management's
evaluation. Collateral held varies, but may include securities, accounts
receivable, inventory, personal property, equipment, and income-producing
commercial or residential property.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets.
Interest rate swaps and floors may be created to hedge certain assets and
liabilities of the Bank. These transactions
43
<PAGE> 44
involve either an exchange of fixed or floating rate payment obligations on an
underlying notional amount. In the case of a rate floor, there is a guaranteed
payment of a rate differential on a notional amount, should a specific market
rate fall below a specific agreed upon level. Credit risk related to interest
rate swaps is limited to the interest receivable from the counterparty less the
interest owed that party or, in the case of rate floors, to interest receivable
on the differential between the specific rate contracted in the floor agreement
and actual rates in effect at various settlement dates. Market risk fluctuates
with interest rates.
The following is a summary of various financial instruments with off-balance
sheet risk at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
Amounts in millions of dollars 1993 1992
---- ----
<S> <C> <C>
Standby letters of credit $ 3 $ 8
Loan commitments -- 6
Undisbursed loans 48 36
Interest rate floor agreements 1 1
Interest rate swap agreements* 0 100
*Notional amounts
</TABLE>
On January 24, 1991, the Bank entered into a $100 million rate swap agreement
with a correspondent in order to hedge its net interest sensitive asset
position from anticipated rate declines. Terms of the agreement called for the
Bank to receive 9.50% from January 24, 1991, through June 29, 1991, and 9.06%
through June 30, 1992. In exchange, the Bank was required to pay the average
daily prime rate. Settlement commenced June 30, 1991, with quarterly
settlements thereafter. During 1991, benefits amounting to $313 were realized.
This amount is included in interest income. In July 1991, anticipating a
reversal of further interest rate decline, the Bank's management decided to
unwind the swap, thereby receiving a premium of $310. This unwind premium is
included in other operating revenues.
In response to continued economic declines and anticipating further rate
declines, the Bank entered into a second rate swap agreement effective October
8, 1991, for another $100 million. Terms of this second agreement were that the
Bank would receive a fixed rate of 8.18% over two years in exchange for paying
the average prime rate. Accrued benefits from this transaction amounted to
$1,726, $1,927 and $141 in 1993, 1992, and 1991, respectively, and are included
in interest income. At December 31, 1992, and 1991, the market values of this
instrument were $ 1.7 million and $1.9 million, respectively, net of accrued
interest. Amounts due the Bank or counterparty were settled quarterly. This
agreement expired on October 8, 1993.
On January 20, 1991, the Bank established a revolving line of credit with an
investor in the amount of $20 million. This credit facility was established to
counter potential liquidity shortfalls between the time mortgage loans are
funded and sold to third parties. Advances on the facility carried a rate of
interest equal to the weekly average closing Federal funds rate plus 122 basis
points and are collateralized by the Bank's mortgage loans held for resale.
For maintaining this facility, the Bank was charged a fee of 1/4 of 1% per
annum on the unused portion. This revolving credit expired unused during 1991.
In the normal course of business, the Company occasionally becomes a party to
litigation. See footnote 13.
11. Other operating expenses --
Other operating expenses included the following:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Promotional expenses $ 393 $ 494 $ 448
Data processing for customers 920 3,030 4,407
Director and advisory fees 146 233 340
Legal fees 1,370 1,065 909
Messenger services 583 746 800
Other data processing fees 455 468 441
Regulatory assessments 946 1,011 957
Expenses for other real estate owned 234 2,737 2,522
Amortization of mortgage servicing rights 983 1,504 1,003
Occupancy expense 1,333 1,447 1,231
Reserve for branch relocation 447 -- --
Other 5,860 4,023 3,217
------- ------- -------
Total operating expenses $13,670 $16,758 $16,275
======= ======= =======
</TABLE>
44
<PAGE> 45
During the fourth quarter of 1993, the Bank relocated its Beverly Hills office
to more cost effective space in West Los Angeles. Expenses of $447 were
recorded in 1993 to provide for the move and the remaining leasehold expenses
on the old location.
12. Condensed financial information of CU Bancorp --
At December 31, 1993 and 1992, the Condensed Unconsolidated Balance Sheets of
the Company are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1993 1992
---- ----
<S> <C> <C>
Balance Sheets
Cash $ 343 $ 165
Prepaid expenses 0 14
Investment in California United Bank N.A. 26,720 24,453
------- -------
Total assets $27,063 $24,632
======= =======
Other liabilities $ 73 $ 0
Shareholders' equity 26,990 24,632
------- -------
Total liabilities and shareholders' equity $27,063 $24,632
======= =======
</TABLE>
For the years ended December 31, 1993, 1992, and 1991, the Condensed
Unconsolidated Statements of Income of the Company are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Statements of Income
Equity in earnings/(loss) of the Bank $2,265 $(7,986) $(3,401)
Operating expenses 167 204 236
------ ------- -------
Net income/(loss) $2,098 $(8,190) $(3,637)
====== ======= =======
</TABLE>
For the years ended December 31, 1993, 1992, and 1991, the Condensed
Unconsolidated Statements of Cash Flows are as follows:
<TABLE>
<CAPTION>
Statement of Cash Flows For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Net income/(loss) $ 2,098 $(8,190) $(3,637)
Adjustments to reconcile net income/(loss) to net cash
provided by operations:
Equity in earnings of subsidiaries (2,265) 7,986 3,401
Other 85 26 (131)
------- ------- -------
Net cash provided by operating activities (82) (178) (367)
Dividends received from subsidiary -- -- 920
Dividends paid -- -- (643)
Proceeds from exercise of stock options and
director warrants 260 223 134
------- ------- -------
Net increase/(decrease) in cash and cash equivalents 178 45 44
Cash and cash equivalents - beginning of the year 165 120 76
------- ------- -------
Cash and cash equivalents at end of year $ 343 $ 165 $ 120
======= ======= =======
</TABLE>
Under National banking law, the Bank is limited in its ability to declare
dividends to the Company to the total of its net income for the year, combined
with its retained net income for the preceding two years less any required
transfers to surplus. The effect of this law is to preclude the bank from
declaring any dividends at December 31, 1993 and 1992. Dividends paid by the
Bank during 1991 amounted to $920. No dividends were declared in 1993 or 1992,
consistent with the Bank's supervisory agreements.
13. 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, other than as set forth below, pending or threatened litigation
involving the Bank will have no adverse material effect upon its financial
condition, or results of operations.
The Bank is a defendant in multiple lawsuits related to the failure of two real
estate investment companies, Property Mortgage Company, Inc., ("PMC") and
S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by investors
in PMC and SLGH (the "Federal Investor Action"), at least three state court
actions by groups of Investors (the "State Investor Actions"), and an action
filed by the Resolution Agent for the combined and reorganized bankruptcy
estate of PMC and SLGH (the "Neilson" Action). An additional action was filed
by an individual investor and his related pension and profit sharing plans (the
"Individual Investor Action").
45
<PAGE> 46
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
depositary bank for PMC, SLGH and related companies and was a lender to certain
principals of PMC. The Bank denies any participation in the sale of the
interests which are the principal gravamen of the complaints.
Plaintiffs allege that PMC/SLGH was or purported to be engaged in the business
of raising money from investors by the sale and issuance of interests in
promissory notes secured by trust deed and real property notes secured, or
purported to be secured, by real property. Plaintiffs allege that false
representations were made, and the investment merely constituted a "Ponzi"
scheme. Other charges relate to the Bank's conduct with regard to the
depositary accounts, the lending relationship with the principals and certain
collateral taken in conjunction with these loans. The lawsuits allege inter
alia violations of federal and state securities laws, fraud, negligence, breach
of fiduciary duty, and conversion as well as conspiracy and aiding and abetting
counts with regard to these violations. The Bank denies the allegations of
wrongdoing.
Damages in excess of $100 million have been alleged, and compensatory and
punitive damages have been sought generally against all defendants, although no
specific damages have been prayed for with regard to the Bank, nor has there
been any apportioning of liability among defendants or attributable to the
various claims asserted. A former officer and director of the Bank has also
been named as a defendant.
Despite the complexity of the case and the length of time the actions have been
on file, very little discovery has been taken. The Federal Investor and the
Neilson Actions are proceeding slowly. The Federal Court in that case denied
the plaintiff's request for class certification for litigation purposes but
granted such certification for settlement purposes, at least as to one
unrelated defendant. As a result of the denial of the class action status, the
plaintiffs filed the State Investor Actions in the Los Angeles County Superior
Court. The Neilson Action remains in the United States District Court for the
Central District of California.
During 1993, the Bank filed a motion to dismiss racketeering ("RICO") claims in
the Federal Investor Action, originally stated, which motion was granted.
In early 1994, the Bank's motion for a summary judgment in the Individual
Investor Action was granted, thereby dismissing the case as to the Bank,
subject to appeals of that decision. That case primarily included allegations
regarding the Bank's aiding and abetting the sale of securities by PMC and SLGH
and state securities claims with regard thereto. It did not make claims with
regard to the Bank's depositary or lending relationships with PMC, SLGH or the
principal thereof. No officer or director of the Bank was named in that case.
The Bank and its former officer have filed claims with insurance carriers for
coverage regarding the remaining litigation. The attorneys for the Investor
and Neilson Actions have made a settlement demand on the Bank and its former
officer for payment of full policy limits by certain insurance carriers.
On the basis of the current pleadings, no carriers have accepted or
acknowledged coverage, but are continuing to monitor the cases. It is
anticipated that further pleadings and supplemental presentations will clarify
the plaintiffs' claims and the applicability of insurance coverage. The Bank
believes that should insurance be available to its officers and directors, that
the applicable deductible will be between $500,000 and $1,000,000, and that the
maximum coverage available will be $10,000,000. The applicable policies are
reimbursement policies and do not provide any defense or legal fees coverage at
this time. Notwithstanding this, one of the insurers has indicated its
intention to take over (and assume the cost of) the defense of the
director/officer named in the litigation, subject to a reservation of rights,
and subject to a statement that it is not obligated to do so.
Based on the limited discovery to date, the Bank is not aware of any factual
basis for the plaintiffs' allegations of intentional wrongdoing by the Bank or
its former officer. The Bank officers involved in the subject matter deny
these allegations. The Bank believes that the litigation is an attempt to
recover from solvent defendants and their insurers for the alleged wrongdoing
of the PMC/SLGH entities.
Settlement negotiations are ongoing among all the parties to the lawsuits. In
the event of a failure of these negotiations, the Bank intends to vigorously
contest the charges, and believes it has meritorious legal and factual defenses
assertable in connection with the same.
46
<PAGE> 47
14. 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. Section 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.
47
<PAGE> 48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
NONE.
48
<PAGE> 49
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Except as hereinafter noted, the information concerning
directors and executive officers of the Company will be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year. For
information concerning the executive officers of the Company, see Item 4 (A)
"EXECUTIVE OFFICERS OF THE COMPANY".
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation will be filed
pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain
beneficial owners and management will be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED MATTERS
Information concerning certain relationships and related
matters will be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year.
49
<PAGE> 50
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
10. Material Contracts Page
----
10.1 CU Bancorp 1993 Employee Stock Option Plan 54
10.2 CU Bancorp 1993 Employee Stock Option Plan/ Incentive Stock
Option Agreement 60
10.3 CU Bancorp 1993 Employee Stock Option Plan/ Non Qualified
Stock Option Agreement 63
21. Subsidiaries of the Registrant 66
</TABLE>
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1994 C U BANCORP
By STEPHEN G. CARPENTER
---------------------------------------
Stephen G. Carpenter
President and Chief
Executive Officer
By PATRICK HARTMAN
---------------------------------------
Patrick Hartman
Chief Financial Officer
51
<PAGE> 52
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
KENNETH BERNSTEIN
- ----------------------------- Director March 30, 1994
Kenneth Bernstein
STEPHEN G. CARPENTER
- ------------------------------ Director, March 30, 1994
Stephen G. Carpenter President/
Chief Executive
Officer
RICHARD CLOSE
- ------------------------------ Director March 30, 1994
Richard H. Close Secretary
PAUL W. GLASS
- ------------------------------ Director March 30, 1994
Paul W. Glass
M. DAVID NATHANSON
- ------------------------------ Director March 30, 1994
M. David Nathanson
RONALD S. PARKER
- ------------------------------ Director March 30, 1994
Ronald S. Parker
DAVID I. RAINER
- ------------------------------ Director March 30, 1994
David I. Rainer
</TABLE>
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15 (d) of the Act by Registrant Which Have Not Registered Securities Pursuant
to Section 12 of the Act.
The proxy statement with respect to the annual meeting of the
shareholders shall be furnished to shareholder subsequent to the filing of this
Form 10-K and shall also be furnished to the Securities and Exchange
Commission.
52
<PAGE> 53
INDEX TO EXHIBITS
-----------------
10. Material Contracts Page
----
10.1 CU Bancorp 1993 Employee Stock Option Plan 54
10.2 CU Bancorp 1993 Employee Stock Option Plan/Incentive
Stock Option Agreement 60
10.3 CU Bancorp 1993 Employee Stock Option Plan/Non Qualified
Stock Option Agreement 63
21. Subsidiaries of the Registrant 66
53
<PAGE> 1
CU BANCORP
1993 EMPLOYEE STOCK OPTION PLAN
Adopted October 27, 1993
Approved by the Shareholders on December 17, 1993
1. PURPOSE.
(a) The purpose of the CU Bancorp 1993 Employee
Stock Option Plan (the "1993 Employee Plan") is to strengthen CU Bancorp (the
"Company") by providing to employees (the "Employees") of the Company or its
subsidiaries added incentives for high levels of performance and to encourage
stock ownership in the Company. The 1993 Employee Plan seeks to accomplish
these goals by providing a means whereby the Employees may be given an
opportunity to purchase by way of option common stock of the Company.
(b) The Company, by means of the 1993 Employee
Plan, seeks to secure and retain the services of such Employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its subsidiaries.
(c) The Company intends that the options issued
under the 1993 Employee Plan shall, in the discretion of the Committee (as
defined in paragraph 2(a)), be either incentive stock options as that term is
used in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") or any successor thereto ("incentive stock options"), or options which
do not qualify as incentive stock options ("non-qualified stock options"). All
options shall be separately designated as incentive stock options or
non-qualified stock options at the time of grant, and a separate certificate or
certificates shall be issued for shares purchased on the exercise of each type
of option.
2. ADMINISTRATION.
(a) The 1993 Employee Plan shall be administered
by the committee (the "Committee") designated by the Board of Directors of the
Company (the "Board"), which shall be composed of not fewer than two (2)
members of the Board. All of the members of the Committee shall be
"disinterested persons" as provided in Rule 16b-3(c)(2)(i) promulgated pursuant
to the Securities Exchange Act of 1934, as amended (the "1934 Act"). The
Committee shall have, in connection with the administration of the 1993
Employee Plan, the powers set forth in subparagraph 2(b), subject, however, to
such resolutions, not inconsistent with the provisions of the 1993 Employee
Plan, as may be adopted from time to time by the Board. Any action of the
Committee with respect to administration of the 1993 Employee Plan shall be
taken pursuant to a majority vote or to the unanimous written consent of its
members.
(b) The Committee shall have the power, subject
to, and within the limitations of, the express provisions of the 1993 Employee
Plan:
(i) To determine from time to time which of
the persons eligible under the 1993 Employee Plan shall be granted an option;
when and how the option shall be granted; whether the option will be an
incentive stock option or a non-qualified stock option; the provisions of each
option granted (which need not be identical), including, without limitation,
the term of the option; the duration of and purposes of leaves of absence which
may be granted to participants without constituting a termination of their
employment for purposes of the 1993 Employee Plan; and the number of shares for
which an option shall be granted to each such person.
(ii) To determine any conditions or
restrictions imposed on stock acquired pursuant to the exercise of an option
(including, but not limited to, repurchase rights, forfeture restrictions and
restrictions on transferability).
(iii) To construe and interpret the 1993
Employee Plan and the options granted under it, to construe and interpret any
conditions or restrictions imposed on stock acquired pursuant to the exercise
of an option, to define the terms used herein, and to establish, amend and
revoke rules and regulations for its administration. The Committee, in the
exercise of this power, may correct any defect, omission or inconsistency in
the 1993 Employee Plan or in any option agreement in a manner and to the extent
it shall deem necessary or expedient to make the 1993 Employee Plan fully
effective.
54
<PAGE> 2
(iv) To cancel, at any time and from time to
time, with the consent of the affected optionee or optionees, any or all
outstanding options granted under the 1993 Employee Plan and the grant and
substitution therefor of new options under the 1993 Employee Plan (subject to
limitations hereof) covering the same or different number of shares of stock at
an option price per share in all events not less than the fair market value on
the new grant date.
(v) Generally, to exercise such powers and
to perform such acts as it deems necessary or expedient to promote the best
interests of the Company.
(c) The Committee shall comply with the
provisions of Rule 16b-3 promulgated pursuant to the 1934 Act, as in effect
from time to time, to the extent applicable to the 1993 Employee Plan.
(d) The determinations of the Committee on
matters referred to in this paragraph 2 shall be final and conclusive.
3. SHARES SUBJECT TO THE 1993 EMPLOYEE PLAN.
Subject to the provisions of paragraph 9 relating to
adjustments upon changes in stock, the stock that may be offered pursuant to
options granted under the 1993 Employee Plan shall not exceed the aggregate of
400,000 shares of the Company's common stock. If any option granted under the
1993 Employee Plan shall for any reason expire, be canceled or otherwise
terminate without having been exercised in full, the stock not purchased under
such option shall again become available for the 1993 Employee Plan.
4. ELIGIBILITY.
(a) All Employees of the Company or its
subsidiaries shall be eligible to receive incentive and/or non-qualified stock
options, at the discretion of the Committee.
(b) The Company may issue incentive stock options
provided that the aggregate fair market value (determined at the time the
incentive stock option is granted) of the stock with respect to which incentive
stock options are exercisable for the first time by the optionee during any
calendar year (under all incentive stock option plans of the Company) shall not
exceed One Hundred Thousand Dollars ($100,000). Should it be determined that
any incentive stock option granted pursuant to the 1993 Employee Plan exceeds
such maximum, such incentive stock option shall be considered to be a
non-qualified option and not to qualify for treatment as an incentive stock
option under Section 422 of the Code to the extent, but only to the extent, of
such excess.
5. OPTION PROVISIONS.
Each option shall be in such form and shall contain such terms
and conditions as the Committee shall deem appropriate. The provisions of
separate options need not be identical, but each option shall include (through
incorporation of provisions hereof by reference in the option or otherwise) the
substance of each of the following provisions:
(a) Each option granted and all rights or
obligations thereunder by its terms shall expire on such date as the Committee
may determine as set forth in such stock option agreement, but not later than
ten (10) years from the date the option was granted and shall be subject to
earlier termination as provided elsewhere in the 1993 Employee Plan.
Notwithstanding the foregoing, any incentive stock option granted to an
optionee who owns (or is deemed to own pursuant to Section 424(d) of the Code)
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any of its affiliates shall expire
not later than five (5) years from the date of grant. For purposes of the 1993
Employee Plan, the date of grant of an option shall be the date on which the
Committee takes final action approving the award of the option, notwithstanding
the date the optionee accepts the option, the date of execution of the option
agreement, or any other date with respect to such option.
(b) None of the options will be exercisable
during the first 12 months from the date of the grant. Each option shall
become exercisable in the following four cumulative annual installments: 25%
on the first anniversary date of the grant; an additional 25% on the second
anniversary date of the grant; an additional 25% on the third anniversary date
of the grant; and the last 25% on the fourth anniversary date of the grant.
From time to time during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to that period,
and/or with respect to some or all of the shares allotted to any prior period
as to which the option was not fully
55
<PAGE> 3
exercised. During the remainder of the term of the option (if its term extends
beyond the end of the installment periods), the option may be exercised from
time to time with respect to any shares then remaining subject to the option.
The provisions of this subparagraph 5(b) are subject to any option provisions
governing the minimum number of shares as to which an option may be exercised.
(c) The exercise price of each option shall be
not less than one hundred percent (100%) of the fair market value of the stock
subject to the option on the date the option is granted; provided, however,
that the purchase price of common stock subject to an incentive stock option
may not be less than one hundred ten percent (110%) of such fair market value
(without regard to any restriction other than a restriction which, by its
terms, will never lapse) where the optionee owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company. The
fair market value of such stock shall be determined by the Committee in
accordance with any reasonable valuation method, including the valuation method
described in Treasury Regulation Section 20.2031-2.
(d) The purchase price of stock acquired pursuant
to an option shall be paid at the time the option is exercised in cash or check
payable to the order of the Company in an amount equal to the option price for
the shares being purchased, in whole shares of stock of the Company owned by
the optionee having a fair market value on the exercise date (determined by the
Committee in accordance with any reasonable evaluation method, including the
evaluation method described in Treasury Regulation Section 20.2031-2) equal to
the option price for the shares being purchased, or a combination of stock and
cash or check payable to the order of the Company, equal in the aggregate to
the option price for the shares being purchased. Payments of stock shall be
made by delivery of stock certificates properly endorsed for transfer in
negotiable form. If other than the optionee, the person or persons exercising
the option shall be required to furnish the Company appropriate documentation
that such person or persons have the full legal right and power to exercise the
option on behalf of and for the optionee.
(e) An option by its terms may only be
transferred by will or by the laws of descent and distribution upon the death
of the optionee, shall not be transferable during the optionee's lifetime, and
shall be exercisable during the lifetime of the person to whom the option is
granted only by such person.
(f) The Company may require any optionee, or any
person to whom an option is transferred under subparagraph 5(e), as a condition
of exercising any such option, to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. The requirement of providing written
assurances, and any assurances given pursuant to the requirement, shall be
inoperative if (i) the shares to be issued upon the exercise of the option are
then registered or qualified under the then applicable federal or state
securities laws, or (ii) a determination is made by counsel for the Company that
such written assurances are not required in the circumstances under the then
applicable federal or state securities laws.
(g) If an optionee ceases to be employed by the
Company or its subsidiaries, then such optionee's option shall terminate
three (3) months thereafter, and during such three (3) month period, such option
shall be exercisable only as to those shares with respect to which
installments, if any, had accrued as of the date on which the optionee ceased
to be employed by the Company or its subsidiaries, unless:
(i) Such termination is due to such person's
permanent and total disability, within the meaning of Section 22(e)(3) of the
Code, in which case the stock option agreement may, but need not, provide that
it may be exercised at any time within one (1) year following such termination
of employment, and provided further that if such optionee dies during such
specified period following such termination of employment, then the stock
option agreement may, but need not, provide that such option may be exercised
at any specified time up to one (1) year following the death of the optionee by
the person or persons to whom the optionee's rights under such option pass by
will or by the laws of descent and distribution, but only to the extent that
the optionee was entitled to exercise said option immediately prior to the
termination of the optionee's employment;
(ii) The optionee dies while in the employ
of the Company or its subsidiaries (which shall constitute termination of
employment), or within not more than three (3) months after termination of such
employment, in which case the option may, but need not, provide that it may be
exercised at any time within one (1) year following the death of the optionee
by the person or persons to whom the optionee's rights under such option pass
by will or by the laws of descent and distribution, but only to the extent that
the optionee was entitled to exercise said option immediately prior to the
termination of optionee's employment;
56
<PAGE> 4
(iii) The option by its terms specifies
either (a) that it shall terminate sooner than three (3) months after
termination of the optionee's employment, or (b) that in the case of
non-qualified stock options it may be exercised more than three (3) months
after termination of the optionee's employment, but only to the extent that the
optionee was entitled to exercise said option immediately prior to the
termination of optionee's employment; or
(iv) The optionee's employment is terminated
for cause, whereupon the option terminates immediately unless such termination
is waived by the Committee. Termination for cause shall include termination
for malfeasance or gross misfeasance in the performance of duties, or
conviction of illegal activity in connection therewith, conviction for a
felony, or any conduct detrimental to the interests of the Company or any of
its subsidiaries, and the determination of the Committee with respect thereto
shall be final and conclusive.
This subparagraph 5(g) shall not be construed to extend the
term of any option or to permit anyone to exercise the option after expiration
of its term, nor shall it be construed to increase the number of shares as to
which any option is exercisable from the amount exercisable on the date of
termination of the optionee's employment.
(h) Options may be exercised by ten (10) days
written notice delivered to the Company stating the number of shares with
respect to which the option is being exercised together with payment for such
shares. Not less than ten (10) shares may be purchased at any one time unless
the number purchased is the total number of shares which may be purchased under
the option.
(i) Any option granted hereunder shall provide as
determined by the Committee for appropriate arrangements for the satisfaction
by the Company or its subsidiaries and the optionee of all federal, state,
local or other income, excise or employment taxes or tax withholding
requirements applicable to the exercise of the option or the later disposition
of the shares of stock thereby acquired. Such arrangements shall include,
without limitation, the right of the Company or any subsidiary thereof to
deduct or withhold in the form of cash or, if permitted by law, shares of stock
from any transfer or payment to an optionee or, if permitted by law, to receive
transfers of shares of stock or other property from the optionee, in such
amount or amounts deemed required or appropriate by the Committee in its
discretion. Any shares of stock issued pursuant to the exercise of an option
and transferred by the optionee to the Company for purposes of satisfying any
withholding obligation shall not again be available for purposes of the Plan.
6. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under
the 1993 Employee Plan, the Company shall keep available at all times the
number of shares of stock required to satisfy such options.
(b) The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the 1993 Employee Plan
or the Company such authority as may be required to issue and sell shares of
stock upon exercise of the options granted under the 1993 Employee Plan;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act of 1933, as amended, either the 1993 Employee
Plan, any option granted under the 1993 Employee Plan or any stock issued or
issuable pursuant to any such option or grant. If the Company is unable to
obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale of
stock under the 1993 Employee Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon grant or upon exercise of
such options unless and until such authority is obtained.
(c) The Company shall indemnify and hold harmless
the members of the Committee in any action brought against any member in
connection with the administration of the 1993 Employee Plan to the maximum
extent permitted by then applicable law, except in the case of willful
misconduct or gross misfeasance by such member in connection with the 1993
Employee Plan and its administration.
7. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted
under the 1993 Employee Plan shall constitute general funds of the Company.
57
<PAGE> 5
8. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an
option is transferred under subparagraph 5(e) shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares
subject to such option unless and until such person has satisfied all
requirements for exercise of the option pursuant to its terms.
(b) Nothing contained in the 1993 Employee Plan,
or in any option granted pursuant to the 1993 Employee Plan, shall obligate the
Company or any of its subsidiaries to employ any employee for any period or
interfere in any way with the right of the Company or any of its subsidiaries
to reduce the compensation of any employee.
9. ADJUSTMENTS UPON CHANGES IN STOCK.
If the outstanding shares of the stock of the Company are
increased, decreased, or changed into, or exchanged for a different number or
kind of shares or securities of the Company, without receipt of consideration
by the Company, through reorganization, merger, recapitalization,
reclassification, stock split, stock dividend, stock consolidation, or
otherwise, an appropriate and proportionate adjustment shall be made in the
number and kind of shares as to which options may be granted. A corresponding
adjustment changing the number or kind of shares and the exercise price per
share allocated to unexercised options, or portions thereof, which shall have
been granted prior to any such change shall likewise be made. Any such
adjustment, however, in an outstanding option shall be made without change in
the total price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share subject to the option.
Adjustments under this section shall be made by the Committee whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final and conclusive. No fractional shares of stock shall be issued
under the 1993 Employee Plan on account of any such adjustment.
10. TERMINATING EVENTS.
Not less than thirty (30) days prior to the dissolution or
liquidation of the Company, or a reorganization, merger, or consolidation of
the Company with one or more corporations as a result of which the Company will
not be the surviving or resulting corporation, or a sale of substantially all
the assets of the Company to another person, or a reverse merger in which the
Company is the surviving corporation but the shares of the Company's stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property (a "Terminating Event"), the Committee shall notify
each optionee of the pendency of the Terminating Event. Upon delivery of said
notice, any option granted prior to the Terminating Event shall be,
notwithstanding the provisions of paragraph 5 hereof, exercisable in full and
not only as to those shares with respect to which installments, if any, have
then accrued, subject, however, to earlier expiration or termination as
provided elsewhere in the 1993 Employee Plan. Upon the date thirty (30) days
after delivery of said notice, any option or portion thereof not exercised
shall terminate, and upon the effective date of the Terminating Event, the 1993
Employee Plan shall terminate, unless provision is made in connection with the
Terminating Event for assumption of options theretofore granted, or
substitution for such options of new options covering stock of a successor
employer corporation, or a parent or subsidiary corporation thereof, solely at
the option of such successor corporation or parent or subsidiary corporation,
with appropriate adjustments as to number and kind of shares and prices.
11. AMENDMENT OF THE 1993 EMPLOYEE PLAN.
(a) The Committee, at any time, and from time to
time, may amend the 1993 Employee Plan. However, except as provided in
paragraph 9 relating to adjustments upon changes in stock, no amendment shall
be effective unless approved by the affirmative vote of a majority of the
shares of the Company present, or represented, and entitled to vote at a duly
held meeting at which a quorum is present or by the written consent of the
holders of a majority of the outstanding shares of the Company entitled to
vote, where the amendment will:
(i) Materially increase the number of shares
reserved for options under the 1993 Employee Plan;
(ii) Materially modify the requirements as to
eligibility for participation in the 1993 Employee Plan; or
(iii) Materially increase the benefits accruing to
participants under the 1993 Employee Plan;
provided, however, that approval at a meeting or by written consent need not be
obtained or may be obtained by a lesser
58
<PAGE> 6
degree of shareholder approval if the Committee determines, in its discretion
after consultation with the Company's legal counsel, that such approval is not
required under, or such lesser degree of shareholder approval will comply with,
all applicable laws, including Rule 16b-3 promulgated pursuant to the 1934 Act,
and will not adversely affect the qualification of the 1993 Employee Plan under
Section 422A of the Code. It is expressly contemplated that the Committee, in
its sole discretion, may amend the 1993 Employee Plan in any respect the
Committee deems necessary or advisable to provide optionees with the maximum
benefits provided or to be provided under the provisions of the Code and the
regulations promulgated thereunder relating to incentive stock options and/or
to bring the 1993 Employee Plan and/or options granted under it into compliance
therewith.
(b) Rights and obligations under any option
granted pursuant to the 1993 Employee Plan, while the 1993 Employee Plan is in
effect, shall not be altered or impaired by suspension or termination of the
1993 Employee Plan, except with the consent of the person to whom the stock or
option was granted.
12. TERMINATION OR SUSPENSION OF THE 1993 EMPLOYEE PLAN.
(a) The Committee may suspend or terminate the
1993 Employee Plan at any time. Unless sooner terminated, the 1993 Employee
Plan shall terminate ten years from the Effective Date (as defined in paragraph
13) of the 1993 Employee Plan. No options may be granted under the 1993
Employee Plan while the 1993 Employee Plan is suspended or after it is
terminated.
(b) Rights and obligations under any option
granted pursuant to the 1993 Employee Plan, while the 1993 Employee Plan is in
effect, shall not be altered or impaired by suspension or termination of the
1993 Employee Plan, except with the consent of the person to whom the stock or
option was granted.
13. EFFECTIVE DATE OF PLAN.
The 1993 Employee Plan shall become effective on October 27,
1993 (the "Effective Date") but no options granted under the 1993 Employee Plan
shall be exercised unless and until the 1993 Employee Plan has been approved by
the affirmative vote of a majority of the outstanding shares of the Company
present, or represented, and entitled to vote at a duly held meeting at which a
quorum is present or by the written consent of the holders of a majority of the
outstanding shares of the Company entitled to vote, and, if required, an
appropriate permit has been issued by the appropriate state securities
authorities and approval has been obtained from the appropriate federal or
state and/or federal regulatory authorities.
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<PAGE> 1
CU BANCORP
INCENTIVE STOCK OPTION
(EMPLOYEE)
_________________________, Optionee:
CU Bancorp (the "Company"), pursuant to its 1993 Employee
Stock Option Plan (the "1993 Employee Plan"), has this day granted to you, the
optionee named above, an option to purchase shares of the common stock of the
Company ("Common Stock"). This option is intended to qualify as an "incentive
stock option" within the meaning of Section 422 of the Internal Revenue Code of
1986 as amended (the "Code").
The details of your option are as follows:
1. The total number of shares subject to this option is
_________________________ (_____). None of the options will be exercisable
during the first 12 months from the date of the grant. Each option shall
become exercisable in the following four cumulative annual installments: 25%
on the first anniversary date of the grant; an additional 25% on the second
anniversary date of the grant; an additional 25% on the third anniversary date
of the grant; and the last 25% on the fourth anniversary date of the grant.
From time to time during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to that period,
and/or with respect to some or all of the shares allotted to any prior period
as to which the option was not fully exercised. During the remainder of the
term of the option (if its term extends beyond the end of the installment
periods), the option may be exercised from time to time with respect to any
shares then remaining subject to the option.
2. (a) The exercise price of this option is
_________________________ ($__________) per share, which is not less than the
fair market value of the Common Stock on the date of grant of this option,
except that, if you own stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company, then such
exercise price is not less than one hundred ten percent (110%) of the fair
market value of the Common Stock on the date of grant of this option.
(b) The exercise price per share shall be paid
upon exercise of all or any part of each installment which has become
exercisable by you in cash or check payable to the order of the Company, in
whole shares of stock of the Company owned by the Optionee having a fair market
value on the exercise date equal to the option price for the shares being
purchased, or a combination of stock and cash or check payable to the order of
the Company, equal in the aggregate to the option price for the shares being
purchased.
3. The minimum number of shares with respect to which
this option may be exercised at any one time is ten (10) except as to an
installment subject to exercise, as set forth in paragraph 1, which amounts to
fewer than ten (10) shares, in which case, as to the exercise of that
installment, the number of shares in such installment shall be the minimum
number of shares.
4. The Company may require any optionee, or any person
to whom an option is transferred under paragraph 7, as a condition of
exercising the option, to give written assurances satisfactory to the Company
stating that such person is acquiring the stock subject to the option for such
person's own account and not with any present intention of selling or otherwise
distributing the stock; provided, however, that the requirement of providing
such written assurances, and any assurances given pursuant to the requirement,
shall be inoperative if (i) the shares issuable upon exercise of this option
are then registered or qualified under the then applicable federal or state
securities laws, or (ii) a determination is made by counsel for the Company
that such assurances are not required in the circumstances under the then
applicable federal or state securities laws.
5. The term of this option commences on the date hereof
and, unless sooner terminated as set forth below or in the 1993 Employee Plan,
terminates on the date which is __________ (___) years from the date of the
grant as defined in the 1993 Employee Plan. This option shall terminate prior
to the expiration of its term as follows: three (3) months after the
termination of your employment with the Company, and its subsidiaries for any
reason, unless (a) such termination of employment is due to your permanent and
total disability (within the meaning of Section 22(e)(3) of the Code), in which
case the option shall terminate on the earlier of (i) the date which is
__________ (_____) years from the date of the grant as defined in the 1993
Employee Plan or (ii) the later of (A) the date which is one (1) year after
such termination of employment or (B) in the event you die during the period
specified in (A) following such termination of employment, one (1) year
following the date of your death; (b) such termination of employment is due to
your death, in
60
<PAGE> 2
which case the option shall terminate on the earlier of the date which is
__________ (______) years from the date of the grant as defined in the 1993
Employee Plan or the date which is one (1) year after your death; or (c)
termination of employment is for cause (as defined in the 1993 Employee Plan)
whereupon this option terminates immediately unless such termination is waived
by the Company. However, in any and all circumstances, this option may be
exercised following termination of employment only as to that number of shares
as to which it was exercisable on the date of termination of employment under
the provisions of paragraph 1 of this option.
6. This option may be exercised, to the extent specified
above, by delivering ten (10) days written notice of exercise together with the
exercise price to the Secretary of the Company, or to such other person as the
Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to paragraph 4.
7. This option is not transferable, except by will or by
the laws of descent and distribution, and is exercisable during your life only
by you.
8. Any notices provided for in this option or the 1993
Employee Plan shall be given in writing and shall be deemed effectively given
upon receipt or, in the case of notices delivered by the Company to you, five
(5) days after deposit in the United States mail, postage prepaid, addressed to
you at the address specified below or at such other address as you hereafter
designate by written notice to the Company.
9. This option is subject to all the provisions of the
1993 Employee Plan, a copy of which is attached hereto, and its provisions are
hereby made a part of this option, including without limitation, the provisions
of paragraph 5 of the 1993 Employee Plan relating to option provisions, and is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the 1993 Employee
Plan. In the event of any conflict between the provisions of this option and
those of the 1993 Employee Plan, the provisions of the 1993 Employee Plan shall
control.
10. The Company is not providing you with advice,
warranties, or representations regarding any of the legal or tax effects to you
with respect to this grant. You are encouraged to seek legal and tax advice
from your own legal and tax advisers as soon as possible.
11. By accepting this grant and the shares of Common
Stock covered thereby and by signing this instrument, you acknowledge that you
are familiar with the terms of the grant and the 1993 Employee Plan, that you
have been encouraged by the Company to discuss the grant and the 1993 Employee
Plan with your own legal and tax advisers, and that you agree to be bound by
the terms of the grant and the 1993 Employee Plan.
12. Optionee acknowledges that federal and state income
and payroll tax may apply upon exercise of this option or upon the disposition
of shares acquired pursuant to the exercise of this option. If the Company
determines, in its sole discretion, that withholding is required, Optionee
agrees that such withholding may be accomplished with respect to the cash
compensation (if any) due the Optionee from the Company. If withholding
pursuant to the foregoing sentence is insufficient (in the sole judgment of the
Company) to satisfy the full withholding obligation, Optionee agrees that at
the election of the Company either: (a) Optionee will pay over to the Company
the amount of cash or, if acceptable to the Company, property with a value
necessary to satisfy such remaining withholding obligation on the date the
option is exercised or at a time thereafter specified in writing by the
Company; or (b) the Company may withhold an amount of optioned shares equal in
value (as of the date of option exercise) to the amount of the remaining
withholding obligation. Upon due notice from Optionee, the Company may satisfy
the entire withholding obligation by withholding shares as provided in (b)
above in lieu of withholding from the Optionee's cash compensation.
Dated this ____ day of _______________, 19__.
Very truly yours,
CU Bancorp
By_________________________________
Duly authorized on behalf of
the Board of Directors
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<PAGE> 3
The undersigned:
(a) Acknowledges receipt of the foregoing option
and understands that all rights and liabilities with respect to this option are
set forth in the option and the 1993 Employee Plan; and
(b) Acknowledges that as of the date of grant of
this option, it sets forth the entire understanding between the undersigned
optionee and the Company and its affiliates regarding the acquisition of stock
in the Company and supersedes all prior oral and written agreements on that
subject.
___________________________________
Optionee
Address: ___________________________________
___________________________________
Attachments:
CU Bancorp 1993 Employee Stock Option Plan
62
<PAGE> 1
CU BANCORP
NON-QUALIFIED STOCK OPTION
(EMPLOYEE)
________________________, Optionee:
CU Bancorp (the "Company"), pursuant to its 1993 Employee
Stock Option Plan (the "1993 Employee Plan"), has this day granted to you, the
optionee named above, an option to purchase shares of the common stock of the
Company ("Common Stock"). This option is not intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
The details of your option are as follows:
1. The total number of shares subject to this option is
___________________ (____). None of the options will be exercisable during the
first 12 months from the date of the grant. Each option shall become
exercisable in the following four cumulative annual installments: 25% on the
first anniversary date of the grant; an additional 25% on the second
anniversary date of the grant; an additional 25% on the third anniversary date
of the grant; and the last 25% on the fourth anniversary date of the grant.
From time to time during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to that period,
and/or with respect to some or all of the shares allotted to any prior period
as to which the option was not fully exercised. During the remainder of the
term of the option (if its term extends beyond the end of the installment
periods), the option may be exercised from time to time with respect to any
shares then remaining subject to the option.
2. (a) The exercise price of this option is
___________________________ ($____________) per share, which is not less than
the fair market value of the Common Stock on the date of the grant of this
option.
(b) The exercise price per share shall be paid
upon exercise of all or any part of each installment which has become
exercisable by you at the time the option is exercised in cash or check payable
to the order of the Company, in whole shares of stock of the Company owned by
the Optionee having a fair market value on the exercise date equal to the
option price for the shares being purchased, or a combination of stock and cash
or check payable to the order of the Company, equal in the aggregate to the
option price for the shares being purchased.
3. The minimum number of shares with respect to which
this option may be exercised at any one time is ten (10) except as to an
installment subject to exercise, as set forth in paragraph 1, which amounts to
fewer than ten (10) shares, in which case, as to the exercise of that
installment, the number of shares in such installment shall be the minimum
number of shares.
4. The Company may require any optionee, or any person
to whom an option is transferred under paragraph 7, as a condition of
exercising the option, to give written assurances satisfactory to the Company
stating that such person is acquiring the stock subject to the option for such
person's own account and not with any present intention of selling or otherwise
distributing the stock; provided, however, that the requirement of providing
such written assurances, and any assurances given pursuant to the requirement,
shall be inoperative if (i) the shares issuable upon exercise of this option
are then registered or qualified under the then applicable federal or state
securities laws, or (ii) a determination is made by counsel for the Company
that such assurances are not required in the circumstances under the then
applicable federal or state securities laws.
5. The term of this option commences on the date hereof
and, unless sooner terminated as set forth below or in the 1993 Employee Plan,
terminates on the date which is __________ (___) years from the date of the
grant as defined in the 1993 Employee Plan. This option shall terminate prior
to the expiration of its term as follows: three (3) months after the
termination of your employment with the Company and its subsidiaries for any
reason, unless (a) such termination of employment is due to your permanent and
total disability (within the meaning of Section 22(e)(3) of the Code), in which
case the option shall terminate on the earlier of (i) the date which is _______
(____) years from the date of the grant as defined in the 1993 Employee Plan or
(ii) the later of (A) the date which is one (1) year after such termination of
employment or (B) in the event you die during the period specified in (A)
following such termination of employment, one (1) year following the date of
your death; (b) such termination of employment is due to your death, in which
case the option shall terminate on the earlier of the date which is _______
(____) years from the date of the grant as defined in the 1993 Employee Plan
or the date which is one (1) year after your death; or (c) such termination of
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<PAGE> 2
employment is for cause (as defined in the 1993 Employee Plan) whereupon this
option terminates immediately unless such option termination is waived by the
Company. However, in any and all circumstances, this option may be exercised
following termination of employment only as to that number of shares as to
which it was exercisable on the date of termination of employment under the
provisions of paragraph 1 of this option.
6. This option may be exercised, to the extent specified
above, by delivering ten (10) days' written notice of exercise together with
the exercise price to the Secretary of the Company, or to such other person as
the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to paragraph 4.
7. This option is not transferable, except by will or by
the laws of descent and distribution, and is exercisable during your life only
by you.
8. Any notices provided for in this option or the 1993
Employee Plan shall be given in writing and shall be deemed effectively given
upon receipt or, in the case of notices delivered by the Company to you, five
(5) days after deposit in the United States mail, postage prepaid, addressed to
you at the address specified below or at such other address as you hereafter
designate by written notice to the Company.
9. This option is subject to all the provisions of the
1993 Employee Plan, a copy of which is attached hereto, and its provisions are
hereby made a part of this option, including without limitation, the provisions
of paragraph 5 of the 1993 Employee Plan relating to option provisions, and is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the 1993 Employee
Plan. In the event of any conflict between the provisions of this option and
those of the 1993 Employee Plan, the provisions of the 1993 Employee Plan shall
control.
10. The Company is not providing you with advice,
warranties, or representations regarding any of the legal or tax effects to you
with respect to this grant. You are encouraged to seek legal and tax advice
from your own legal and tax advisers as soon as possible.
11. By accepting this grant and the shares of Common
Stock covered thereby, and by signing this instrument, you acknowledge that you
are familiar with the terms of the grant and the 1993 Employee Plan, that you
have been encouraged by the Company to discuss the grant and the 1993 Employee
Plan with your own legal and tax advisers, and that you agree to be bound by
the terms of the grant and the 1993 Employee Plan.
12. Optionee acknowledges that federal and state income
and payroll tax may apply upon exercise of this option. Optionee agrees that
such withholding may be accomplished with respect to the cash compensation (if
any) due the optionee from the Company. If withholding pursuant to the
foregoing sentence is insufficient (in the sole judgment of the Company) to
satisfy the full withholding obligation, optionee agrees that at the election
of the Company either: (a) optionee will pay over to the Company the amount of
cash or, if acceptable to the Company, property with a value necessary to
satisfy such remaining withholding obligation on the date the option is
exercised or at a time thereafter specified in writing by the Company; or (b)
the Company may withhold an amount of optioned shares equal in value (as of the
date of option exercise) to the amount of the remaining withholding obligation.
Upon due notice from Optionee, the Company may satisfy the entire withholding
obligation by withholding shares as provided in (b) above in lieu of
withholding from the Optionee's cash contribution.
Dated this _____ day of __________________, 19__.
Very truly yours,
CU Bancorp
By_________________________________
Duly authorized on behalf of
the Board of Directors
64
<PAGE> 3
The undersigned:
(a) Acknowledges receipt of the foregoing option
and understands that all rights and liabilities with respect to this option are
set forth in the option and the 1993 Employee Plan; and
(b) Acknowledges that as of the date of grant of
this option, it sets forth the entire understanding between the undersigned
optionee and the Company regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject.
_________________________________
Optionee
Address: _________________________________
_________________________________
Attachments:
CU Bancorp 1993 Employee Stock Option Plan
65
<PAGE> 1
Exhibit 21. Subsidiaries of the Registrant
100% Owned:
California United Bank, National Association
a national banking association
66
