FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
/X/ For the Quarterly Period Ended September 30, 1995, or
Transition Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________.
Commission File Number 0-11008
CU BANCORP
(Exact name of registrant as specified in its charter)
California 95-3657044
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
818-907-9122
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of September 30, 1995, the Registrant has 4,587,330 outstanding shares of its
Common stock, no par value.
<PAGE> 1
CU Bancorp
Quarter Ended September 30, 1995
Table of Contents - Form 10-Q
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Page
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Part I. Financial Information
Item 1. Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operation. 3
Consolidated Statements of Financial Condition:
-September 30, 1995, and December 31, 1994. 13
Consolidated Statements of Income:
-Three and Nine Month Periods Ended September 30, 1995, and
September 30, 1994. 14
Consolidated Statements of Cash Flows:
-Nine Month Periods Ended September 30, 1995, and
September 30, 1994. 15
Notes to Consolidated Financial Statements 16
Signatures 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Filings on Form 8-K 25
</TABLE>
<PAGE> 2
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
The Company earned $704 thousand, or $.15 per share, during the third quarter of
1995, compared to $671 thousand, or $0.14 per share, during the same period in
1994. Approximately 53% of the earnings in the third quarter of 1994 were
attributable to a gain on the sale of mortgage servicing rights. Since then,
the earnings of the core commercial bank have grown steadily as the reliance on
mortgage related income has declined. For the quarter ended September 30, 1995,
there were no earnings related to sales of mortgage servicing.
The Bank's asset quality ratios continue to be exceptionally strong. At
September 30, 1995, nonperforming assets were $509 thousand, compared with $285
thousand in the second quarter of 1995. The Bank did not have any real estate
acquired through foreclosure at September 30, 1995, December 31, 1994 or
September 30, 1994. The Bank's allowance for loan losses as a percent of both
nonperforming loans and nonperforming assets at the end of the third quarter of
1995 was 1357%, compared to third quarter 1994 levels of 6611%.
Capital ratios are strong, substantially exceeding levels required to be in the
"well capitalized" category established by bank regulators. The Total Risk-
Based Capital Ratio was 16.12%, the Tier 1 Risk-Based Capital Ratio was 14.85%,
and the Leverage Ratio was 10.46% at September 30, 1995, compared to 15.4%,
14.12%, and 10.44%, respectively, at year-end 1994. Regulatory requirements for
Total Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum
of 8%, 4%, and 3%, respectively, and for classification as well capitalized,
10%, 6%, and 5%, respectively.
The Bank's strong capital and asset quality position have positioned the Bank
for continued growth of its core business of providing relationship based
services to middle market customers and are resources for its acquisition
strategy. During the nine months ended September 30, 1995, the Bank generated
approximately $105 million in new loan commitments, compared with about $88
million for the comparable period of 1994.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
The Bank's loan portfolio at September 30, 1995 has maintained the high
standards of credit quality that have been established as the commercial loan
portfolio has been built over the past three years. Non performing assets have
been virtually eliminated and exposures to real estate have been greatly reduced
to consist primarily of loans secured by real estate made to the Bank's core
middle market customers.
Total loans at September 30, 1995 increased by $6 million during the quarter,
and $9 million year to date. Portfolio growth in the second and third quarter of
1995 were partially offset by the decline of $6 million in the first quarter of
1995. Loan paydowns for the first quarter were unusually high, as a number of
project related loans in the Entertainment division combined with normal payoffs
and seasonality in the commercial portfolio. Loan levels at September 30, 1995
were $24 million above the September 30, 1994 level, reflected the ongoing
success in producing new commercial relationships.
<PAGE> 3
<TABLE>
<CAPTION>
TABLE 1 LOAN PORTFOLIO COMPOSITION
Amounts in thousands of dollars September 30, December 31, September 30,
1995 1994 1994
<S> <C> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $155,487 84% $142,885 82% $ 131,823 83%
Real Estate Loans:
Commercial 23,493 13 26,528 15 23,050 14
Mortgages 4,607 3 4,773 3 4,919 3
Construction 0 0 416 0 18 0
Total loans net of unearned fees $183,587 100% $174,602 100% $159,810 100%
</TABLE>
<TABLE>
<CAPTION>
TABLE 1A LOAN PORTFOLIO MATURITIES
(in Millions) Remaining Maturity
Within After One but After
One Within Five Five
Year Years Years Total
<S> <C> <C> <C> <C>
Commercial & Industrial Loans $111,131 $39,427 $4,929 $155,487
Real Estate - Commercial & Mortgage 6,715 18,136 3,249 28,100
Total loans $117,846 57,563 8,178 $183,587
Loans due after one year with
predetermined interest rates 3,987 1,752
Loans due after one year with
floating or adjustable rates 53,576 6,426
$57,563 $8,178
</TABLE>
Table 1a above summarizes the maturities of the loan portfolio based upon the
contractual terms of the loans. The Bank does not automatically rollover any
loans at maturity. Maturing loans must go through the Bank's normal credit
approval process in order to roll a loan over to a new maturity date.
The Bank lending effort is focused on business lending to middle market
customers. Current credit policy now permits commercial real estate lending
generally only as part of a complete commercial banking relationship with a
middle market customer. Commercial real estate loans are secured by first or
second liens on office buildings and other structures. The loans are secured by
real estate that had appraisals in excess of loan amounts at origination.
Monitoring and controlling the Bank's allowance for loan losses is a continuous
process. All loans are assigned a risk grade, as defined by credit policies, at
origination and are monitored to identify changing circumstances that could
modify their inherent risks. These classifications are one of the criteria
considered in determining the adequacy of the allowance for loan losses.
<PAGE> 4
The amount and composition of the allowance for loan losses is as follows:
<TABLE>
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TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Amounts in thousands of dollars September 30, December 31, September 30,
1995 1994 1994
<S> <C> <C> <C>
Commercial & Industrial Loans(1) $6,411 $7,096 $6,916
Real estate loans - Mortgages 0 0 197
Real estate loans - Construction Loans 0 0 0
6,411 7,096 7,115
Unfunded commitments and letters of credit 496 331 355
Total Allowance for loan losses $6,907 $7,427 $7,470
(1) Including Commercial loans secured by
real estate
</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, classified by type of loan, is as follows:
<TABLE>
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TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSS
Amounts in thousands of dollars For the Periods Ended
September 30, December 31, September 30,
1995 1994 1994
<S> <C> <C> <C>
Balance at January 1 $7,427 $6,513 $6,513
Loans charged off:
Real estate secured loans 500 486 486
Commercial loans secured and unsecured 459 820 574
Loans to individuals, installment and other loans 16 107 99
Total charge-offs 975 1,413 1,159
Recoveries of loans previously charged off:
Real estate secured loans 44 586 545
Commercial loans secured and unsecured 399 1,735 1,568
Loans to individuals, installment and other loans 12 6 3
Total recoveries of loans previously charged off 455 2,327 2,116
Net charge-off (recovery) 520 (914) (957)
Provision for loan losses 0 0 0
Balance at end of period $6,907 $7,427 $7,470
Net loan charge-offs (recoveries) as a percentage of
average gross loans outstanding during the period
ended 0.28% (0.61)% (0.48)%
</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 September
30, 1995, nonperforming loans amounted
<PAGE> 5
to $509 thousand compared with $36 thousand at December 31, 1994.
Potential problem loans are defined as loans as to which there are serious
doubts about the ability of the borrowers to comply with present loan repayment
terms. It is the policy of the Bank to place all potential problem loans on
nonaccrual status. At June 30, 1995, therefore, the Bank had no potential
problem loans other than those disclosed in Table 4 as nonperforming loans.
<TABLE>
<CAPTION>
Table 4: Nonperforming Assets
Amounts in thousands of dollars September 30, December 31, September 30,
1995 1994 1994
<S> <C> <C> <C>
Loans not performing $509 $36 $113
Insubstance foreclosures 0 0 0
Total nonperforming loans 509 36 113
Other real estate owned 0 0 0
Total nonperforming assets $509 $36 $113
Allowance for loan losses as a
percent of:
Nonperforming loans 1,357% 20,631% 6,611%
Nonperforming assets 1,357% 20,631% 6,611%
Nonperforming assets as a
percent of total assets 0.2% 0% 0.0%
Nonperforming loans as a percent
of total loans 0.3% 0% 0.1%
</TABLE>
Securities
The securities portfolio at September 30, 1995, totaled $73 million, compared to
$74 million at year-end 1994. The securities are all held in a Held for
Investment portfolio. There was no held for sale portfolio at September 30,
1995 or year-end 1994. This portfolio is recorded at amortized cost. It is the
Bank's intention to hold these securities to their individual maturity dates.
There have been no realized gains or losses on securities in the third quarter
of 1995 or 1994. At September 30, 1995, there were unrealized gains of $408
thousand and losses of $462 thousand in the securities portfolio.
Additional information concerning securities is provided in the footnotes to the
accompanying financial statements.
Other Real Estate Owned
There was no Other Real Estate Owned on the Bank's balance sheet at September
30, 1995, December 31, 1994, and September 30, 1994. The Bank's policy is to
carry properties acquired in foreclosure at fair value less estimated selling
costs, which is determined using recent appraisal values adjusted, if necessary,
for other market conditions. Loan balances in excess of fair value are charged
to the allowance for loan losses when the loan is reclassified to other real
estate. Subsequent declines in fair value are charged against a valuation
allowance for real estate owned, created by charging a provision to other
operating expenses. The Bank has not had any significant expenses related to
Other Real Estate Owned in 1995 or 1994.
Deposit Concentration
Due to its historic focus on real estate-related activities, the Bank developed
a concentration of deposit accounts from title insurance and escrow companies.
These deposits are generally noninterest bearing transaction accounts that
contribute to the Bank's interest margin. Noninterest expense related to these
deposits is included in other operating expense. The Bank <PAGE> 6
monitors the profitability of these accounts through an account analysis
procedure.
The Bank offers products and services allowing customers to operate with
increased efficiency. A substantial portion of the services, provided through
third party vendors, are automated data processing and accounting for trust
balances maintained on deposit at the Bank. These and other banking related
services, such as 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 September 30, 1995, was
$17 million compared to $44 million at December 31, 1994. Costs relative to
servicing the above relationships are the significant portion of the Bank's
customer data processing and messenger and courier costs. These were no
significant changes to the costs in 1995.
The Bank had $47 million in certificates of deposit larger than $100 thousand
dollars at September 30, 1995. The maturity distribution of these deposits is
relatively short term, with $35 million maturing within 3 months and the $45
million maturing within 12 months.
Liquidity and Interest Rate Sensitivity
The objective of liquidity management is to ensure the Bank's ability to meet
cash requirements. The liquidity position is managed giving consideration to
both on and off-balance sheet sources and demands for funds.
Sources of liquidity include cash and cash equivalents (net of Federal Reserve
requirements to maintain reserves against deposit liabilities), securities
eligible for pledging to secure borrowings from dealers pursuant to repurchase
agreements, loan repayments, deposits, and borrowings from a $25 million
overnight federal funds line available from a correspondent bank. Potential
significant liquidity requirements are withdrawals from noninterest bearing
demand deposits and funding of commitments to loan customers.
From time to time the Bank may experience liquidity shortfalls ranging from one
to several days. In these instances, the Bank will either purchase federal
funds, and/or sell securities under repurchase agreements. These actions are
intended to bridge mismatches between funding sources and requirements, and are
designed to maintain the minimum required balances. The Bank has had no Fed
Funds purchased or borrowings under repurchase agreements during 1994 or 1995.
During 1994 and 1995, loan growth for the bank outpaced growth of deposits from
the banks commercial customers. The Bank funded this growth, combined with the
Bank's reduced concentration in title and escrow deposits, in part with
certificates of deposit from customers from outside the Bank's normal service
area. These out of area deposits are certificates of deposit of $90,000 or
greater, that are priced competitively with similar certificates from other
financial institutions throughout the country. At September 30,1995, the Bank
had approximately $89 million of these out of area deposits, up from $55 million
at December 31, 1994.
The Bank's portfolio of large certificates of deposit (those of $100 thousand or
more), includes both deposits from its base of commercial customers and out of
area deposits. At September 30, 1995 this funding source was 17% of average
deposits, compared to 14% at December 31, 1994.
<PAGE> 7
<TABLE>
<CAPTION>
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at
September 30, 1995
Amounts in thousands of dollars Amounts Maturing or Repricing in
More Than 3 More Than 6 More Than 9
Months But Months But Months But
Less Than Less Than Less than
Less Than 6 Months 9 Months 12 Months 12 Months
3 Months & Over
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans $173,740 $3,387 $431 $290 5,739
Securities 4,993 5,032 4509 5,070 53,485
Federal funds sold & other 32,000 0 0 0 0
Total earning assets 210,733 8,419 4,940 5,360 59,224
Interest-bearing deposits:
Now and money market 57,192 0 0 0 0
Savings 10,751 0 0 0 0
Time certificates of deposit:
Under $100 39,785 12,430 8,526 4,429 6,164
$100 or more 35,765 3,975 4,960 601 1,300
Non interest-bearing demand deposits 12,434 -- -- -- --
Total interest-bearing liabilities 155,927 16,405 13,486 5,030 7,464
Interest rate sensitivity gap 54,806 (7,986) (8,546) 330 51,760
Cumulative interest rate sensitivity gap 54,806 46,820 38,274 38,604 90,364
Off balance sheet financial instruments 0 0 0 0 0
Net cumulative gap $54,806 $46,820 $38,274 38,604 90,364
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities (1)
1.35% 1.27% 1.21% 1.20% 1.46%
(1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios
less than 1.0 indicate a liability sensitive position. A ratio of 1.0
indicates a risk neutral position.
</TABLE>
Assets and liabilities shown on Table 5 are categorized based on contractual
maturity dates. Maturities for those accounts without contractual maturities are
estimated based on the Bank's experience with these customers. Noninterest
bearing deposits of title and escrow companies, having no contractual maturity
dates, are considered subject to more volatility than similar deposits from
commercial customers. The net cumulative gap position shown in the table above
indicates that the Bank does not have a significant exposure to interest rate
fluctuations during the next twelve months.
Capital
Total shareholders' equity was $32 million at September 30, 1995, compared to
$30 million at year-end 1994. This increase was due to earnings, plus the
exercise of stock options. The Bank is guided by statutory capital
requirements, which are measured with three ratios, two of which are sensitive
to the risk inherent in various assets and which consider off-balance sheet
activities in assessing capital adequacy. During 1995 and 1994, the Bank's
capital levels exceeded the "well capitalized" standards, the highest
classification established by bank regulators.
<TABLE>
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TABLE 7 CAPITAL RATIOS
Regulatory Standards
September 30, December 31, Well
1995 1994 Capitalized Minimum
<S> <C> <C> <C> <C>
Total Risk Based Capital 16.12% 15.40% 10.0% 8.00%
Tier 1 Risk Base Capital 14.85 14.12 6.0 4.00
Equity to Average Assets 10.46 10.44 5.0 3.00
</TABLE>
<PAGE> 8
In February of 1995, the Bank declared a dividend of $.02 per share payable
March 13, 1995 to shareholders of record February 20, 1995. The Company also
declared a dividend of $.02 per share for the quarter ended June 30, 1995,
payable September 4, 1995 to shareholders of record August 15, 1995. The
dividend payout ratio was 13% for both the three and nine month periods ending
September 30, 1995. No dividends were paid in 1994 .
The common stock of the Company is listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market Systems where it
trades under the symbol CUBN.
MARKET EXPANSION
The Bank operates as a single business segment, providing commercial banking
services in the southern California area. The Bank is committed to expanding
the market penetration of the commercial bank, including the creation of new
branches, and pursuing acquisition opportunities.
In June, 1995, the loan production office in Camarillo was converted to a full
service Ventura County Regional Office. Additionally, the Bank has relocated
its City of Industry Regional Office to new and larger quarters in the
Crossroads Business Park to better serve the business banking needs of its
customers in the greater San Gabriel Valley.
On March 27, 1995, the Company entered into an agreement to acquire Santa Ana -
based Corporate Bank in a stock transaction. This agreement was subsequently
amended on October 11, 1995. Completion of this transaction is subject to
Corporate Bank shareholder approval and regulatory approvals, which is expected
late in the fourth quarter of 1995 or early in the first quarter of 1996.
Net Interest Income and Interest Rate Risk
Net interest income is the difference between interest and fees earned on
earning assets and interest paid on funding liabilities. Net interest income was
$3.8 million and $11.4 million for the three and nine month periods ended
September 30, 1995 compared to $3.7 million and $9.8 million for the comparable
periods in 1994. The change is attributable to changes in volume and deposit
mix. The Bank's net interest income has improved with the growth of the
commercial loan portfolio from 1994 to 1995. This improvement was offset in
part by the change in deposit mix away from non interest bearing title and
escrow deposits.
<TABLE>
<CAPTION>
TABLE 8 ANALYSIS OF CHANGES IN NET INTEREST INCOME (1)
Amounts in thousands of dollars Nine months ended September 30, Nine months ended September 30,
1995 compared to 1994 1994 compared to 1993
Increases(Decreases) Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, net $2,592 $1,548 $4,140 $(3,936) $423 $(3,513)
Investments 108 585 693 826 75 901
Federal Funds Sold 397 424 821 221 132 353
Total interest income 3,097 2,557 5,654 (2,889) 630 (2,259)
Interest Expense
Interest-bearing deposits:
Demand and Savings (303) 271 (32) 70 (95) (25)
Time Certificates of deposit:
Under $100 2,225 516 2,741 (226) 27 (199)
$100 or more 849 514 1,363 (234) 62 (172)
Federal funds purchased / Repos 0 0 0 (22) (22) (43)
Other borrowings (62) (29) (91) (92) 5 (87)
Total interest expense 2,709 1,272 3,981 (503) (23) (526)
Net interest income $388 $1,285 $1,673 $(2,386) $653 $(1,773)
</TABLE>
<PAGE> 9
(1) The change in interest income or interest expense that is attributable to
both change in average balance and average rate has been allocated to the
changes due to (i) average balance and (ii) average rate in proportion to the
relationship of the absolute amounts of the changes in each.
Yields on earning assets were approximately 8.7% and 8.9% for the three and nine
months ended September 30, 1995, compared to 7.7% and 7.4% for the comparable
periods in 1994. The higher average yield on earning assets in 1995 is the
primarily the result of an increase in the prime rate from an average of 6.8% in
the first nine months of 1994 to an average of 8.9% in the first nine months of
1995.
Rates on interest bearing liabilities resulted in an average cost of funds of
5.0% in 1995, compared with 2.7% for the comparable period of 1994. In addition
to the generally higher level of interest rates in 1995, certificates of deposit
represent a higher proportion of the funding liabilities, rather than lower cost
money market or savings accounts.
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin was 5.39% and 5.62% for the three and nine months
ended September 30, 1995, compared to 6.18% and 5.81% for the same periods in
1994. The Bank's margin is strong because it has funded itself with a
significant amount of noninterest bearing deposits. Margin in 1995 is somewhat
lower than 1994 due to the lower level of non interest bearing title and escrow
deposits in the current year.
<TABLE>
<CAPTION>
Table 9 Average Balance Sheets and Analysis of Net Interest Income
Nine months ended Nine months ended
Amounts in thousands of dollars September 30, 1995 September 30, 1994
Interest Annual Interest Annual
Income or Yield or Rate Income or Yield or Rate
Balance Expense Balance Expense
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans, Net $167,981 $13,800 10.95% $134.840 $9,660 9.55%
Investments 69,912 2,796 5.33 65,382 2,059 4.20
Certificates of Deposit
in other banks 64 2 4.17 1,312 46 4.67
Federal Funds Sold 33,841 1,477 5.82 22,804 656 3.84
Total Earning Assets 271,798 18,075 8.87 224,338 12,421 7.38
Non Earning Assets
Cash & Due From Banks 22,859 29,306
Other Assets 7,062 7,825
Total Assets $301,719 $261,469
Interest-bearing Liabilities
Demand and savings $65,239 1,395 2.85 $80,937 1,427 2.35
Time Certificates of Deposits
Less Than $100 68,578 3,250 6.32 17,829 509 3.81
More Than $100 39,627 1,820 6.12 17,535 457 3.47
Fed Funds Purchased/Repos 0 0 0.00 0 0 0.00
Total interest-bearing 173,444 6,465 4.97 116,301 2,393 2.74
Noninterest-bearing Deposits 88,649 109,506
Total Deposits 262,093 6,465 3.29 225,807 2,393 1.41
Other Borrowings 3,797 163 5.72 5,184 254 6.53
Total Funding Liabilities 265,890 6,628 3.32 230,991 2,647 1.53
Other Liabilities 5,366 2,878
Shareholders' Equity 30,463 27,600
Total Liabilities and Shareholders'
Equity $301,719 $261,469
Net Interest Income 5.81%
Income $11,447 5.62% $9,774
Shareholders' Equity to
Total Assets 10.10% 10.56%
</TABLE>
<PAGE> 10
OTHER OPERATING INCOME
A significant portion of other operating income in 1994 was earned as mortgage
servicing rights were sold. The Bank reported a gain of $383 thousand on the
sale of mortgage servicing in the six months ended June 30, 1995, representing
final settlement payments received related to open issues on servicing sales
from prior quarters. No further gains were recognized in the quarter ended
September 30, 1995. The trends and composition of other operating income are
shown in the following table.
<PAGE> 11
<TABLE>
<CAPTION>
TABLE 10A OTHER OPERATING INCOME
Amounts in thousands of dollars
For three months ended
September 30, September 30,
1995 1994
<S> <C> <C>
Gain on sale of SBA Loans $43 $29
Service income 0 247
Documentation fees 32 29
Other service fees and charges 299 242
Gain on sale of real estate owned 139 494
Gain on sale of mortgage servicing
portfolio 0 625
Total $513 $1,666
</TABLE>
<TABLE>
<CAPTION>
TABLE 10B OTHER OPERATING INCOME
Amounts in thousands of dollars
For nine months ended
September 30, September 30,
1995 1994
<S> <C> <C>
Gain on sale of SBA Loans $194 $29
Fees on loans sold 0 15
Premium on sales of mortgage loans 0 83
Service income 0 961
Documentation fees 78 73
Other service fees and charges 880 790
Gain on sale of real estate owned 139 585
Gain on sale of mortgage servicing portfolio 383 2,183
Total $1,674 $4,719
</TABLE>
OPERATING EXPENSE
Total operating expenses for the bank were $3.1 million and $9.4 million for the
three and nine months ended September 30, 1995 , compared to $3.6 million and
$10.6 million for the same period in 1994. The quarter ended September 30, 1995
reflected lower expenses, in part because of a reduction in FDIC insurance
premiums paid, from $.23 to $.04 per $100 of deposits. The current level of
operating expense is deemed to be adequate and will be leveraged further as the
core middle market business is expanded.
PROVISION FOR LOAN LOSSES
The Bank has made no provision for loan losses in 1995 or 1994. No loan loss
provision has been deemed necessary for 1995 and 1994, due to the declining
levels of nonperforming assets, net recoveries received, and the strong reserve
position.
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.
<PAGE> 12
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
Amounts in thousands of dollars September 30, December 31,
1995 1994
<S> <C> <C>
Assets
Cash and due from banks $20,905 $35,397
Federal funds sold 32,000 20,000
Total cash and cash equivalents 52,905 55,397
Investment securities (Market value of $73,034 and $71,423 at September
30, 1995 and December 31, 1994, respectively) 73,088 74,153
Loans, (Net of allowance for loan losses of $6,907 and $7,427 at
September 30, 1995, and December 31, 1994, respectively) 176,680 167,175
Premises and equipment, net 1,196 996
Other real estate owned, net 0 0
Accrued interest receivable and other assets 7,149 6,433
Total Assets $311,018 $304,154
Liabilities and Shareholders' equity
Deposits:
Demand deposits $84,913 $112,034
Savings deposits 67,943 67,896
Time deposits under $100 71,335 47,836
Time deposits of $100 or more 46,602 36,415
Total deposits 270,793 264,181
Accrued interest payable and other liabilities 8,080 10,229
Total liabilities 278,873 274,410
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1995 or 1994 --- ---
Common stock, no par value:
Authorized - 20,000,000 shares
Issued and outstanding - 4,587,330 in 1995, and 4,437,312 in 1994.
26,992 26,430
Retained earnings 5,153 3,314
Total Shareholders' equity 32,145 29,744
Total Liabilities and Shareholders' equity $311,018 $304,154
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME CU BANCORP AND
SUBSIDIARY
Amounts in thousands of dollars, except per share data For the three months For the nine months
ended September 30, ended September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenue from earning assets:
Interest and fees on loans $4,713 $3,617 $13,800 $9,660
Interest on taxable investment securities 980 761 2,759 2,049
Interest on tax exempt investment securities 12 8 37 10
Interest on time deposits with other financial institutions
0 14 2 46
Interest on federal funds sold 461 257 1,477 656
Total revenue from earning assets 6,166 4,657 18,075 12,421
Cost of funds:
Interest on interest-bearing demand deposits 391 481 1,194 1,259
Interest on savings deposits 65 67 201 168
Interest on time deposits under $100 1,174 160 3,250 509
Interest on time deposits of $100 or more 648 181 1,820 457
Interest on other borrowings 59 66 163 254
Total cost of funds 2,337 955 6,628 2,647
Net revenue from earning assets before provision for
loan losses 3,829 3,703 11,447 9,774
Provision for loan losses 0 0 0 0
Net revenue from earning assets 3,829 3,703 11,447 9,774
Other operating revenue:
Servicing Income - mortgage loans sold 0 247 0 961
Other fees & charges - commercial 374 296 1,152 735
Fees on loans sold 0 0 0 15
Premium on sales of mortgage loans 0 0 0 83
Other fees and charges - mortgage 0 4 0 157
Gain on sale of mortgage servicing portfolio 0 625 383 2,183
Gain on sale of real estate owned 139 494 139 585
Total other operating revenue 513 1,666 1,674 4,719
Other operating expenses:
Salaries and related benefits 1,722 1,599 5,047 4,678
Selling expenses - mortgage loans 0 87 0 333
Restructuring Charge 0 600 0 600
Other operating expenses 1,366 1,898 4,314 5,610
Total operating expenses 3,088 4,184 9,361 11,221
Income before provision for income taxes 1,254 1,184 3,760 3,272
Provision for income taxes 550 513 1,647 1,415
Net income $704 $671 $2,113 $1,857
Earnings per share $0.15 $0.14 $0.44 $0.40
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
CU BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF DOLLARS)
For the nine months
ended September 30,
1995 1994
<S> <C> <C>
Increase(decrease) in cash and cash equivalents:
Cash flows from operating activities
Net income/(loss) $2,113 $1,857
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for depreciation and amortization 397 349
Amortization of real estate mortgage servicing rights 0 15
Provision for losses on loans and other real estate owned 0 0
Benefit of deferred taxes 690 (90)
Gain on sale of investment securities, net 0 0
Increase/(decrease) in other assets (871) 2,087
Increase/(decrease) in other liabilities (2,555) (4,386)
(Increase)/decrease in accrued interest receivable (535) (970)
Increase/(decrease) in deferred loan fees 9 181
Increase/(decrease) in accrued interest payable 406 (24)
Net amortization of (discount)/premium on investment securities 447 813
Total Adjustments (2,012) (2,025)
Net cash provided by operating activities 101 (168)
Cash flows from investing activities
Proceeds from investment securities sold or matured 14,785 52,861
Purchase of investment securities (14,167) (30,091)
Net decrease in time deposits with other financial institutions 0 0
Net (Increase/(decrease) in loans (9,514) (18,373)
Purchases of premises and equipment, net (597) (204)
Net cash provided by investing activities (9,493) 4,193
Cash Flows from financing activities
Net increase/(decrease) in demand and savings deposits (27,074) 9,846
Net increase/(decrease/ in time certificates of deposits 33,686 (5,261)
Proceeds from exercise of stock options and director warrants 562 179
Cash dividend paid (274) 0
Net cash provided by financing activities 6,900 4,764
Net increase (decrease) in cash and cash equivalents (2,492) 8,789
Cash and cash equivalents at beginning of year 55,397 46,440
Cash and cash equivalents at end of period $52,905 $55,229
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest $5,622 $1,716
Taxes 900 1,502
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 0 0
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE> 15
Notes to Consolidated Financial Statements
September 30, 1995
UNAUDITED
Note A. BASIS OF PRESENTATION
The accounting and reporting policies of CU Bancorp ("the Company") and its
wholly owned subsidiary, California United Bank, N.A. ("the Bank"), are prepared
in accordance with generally accepted accounting principles used in the banking
industry. All material inter company balances have been eliminated and all
material interim period adjustments which, in the opinion of management, are
necessary for a fair presentation of financial condition, results of operations,
and cash flow have been made. All interim period adjustments that have been
made have been of a normal and recurring nature.
Note B. EARNINGS PER SHARE
Net income per share is computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods
presented, except when the effect of the latter would be anti-dilutive.
Weighted average shares outstanding for the three and nine month periods ended
September 30, 1995 were 4,786,000 and 4,773,000, compared with 4,643,000 and
4,575,000 for the comparable periods of 1994.
NOTE C. SECURITIES
The Bank has the intent and ability to hold its investment securities until
maturity. Accordingly, investment securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a straight-line basis,
which approximates the effective interest method. Gains and losses recognized on
the sale of investment securities are based upon the adjusted cost and
determined using the specific identification method.
The Bank has no securities classified as "held for sale", indicating the
willingness to sell these securities under certain conditions. These securities
would be carried at current market value with unrealized gains or losses not
recognized as current income but reported as an increase or decrease to capital
in the statements of financial condition and in the statements of shareholders'
equity.
The following tables set forth the book value and market value, of investment
securities at September, 1995.
<TABLE>
<CAPTION>
Gross Gross
Book Unrealized Unrealized Market
(Thousands of dollars) Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Securities $66,860 $295 $(462) $66,693
Mortgage-backed securities 41 41
U.S. Government Agency Securities 5,755 113 5,868
State and Municipal Securities 0 0
Federal Reserve Bank Stock 432 0 0 432
Total $73,088 $408 $(462) $73,034
</TABLE>
At September 30, 1995, investment securities with a book value of $27.9 million
were pledged to secure U.S. District Court deposits and for other purposes as
required or permitted by law.
<PAGE> 16
Note D. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve required to be maintained at the Federal Reserve Bank
was approximately $2.5 million, $6 million, and $5.9 million for the periods
ending September 30, 1995 and December 31 and September 30, 1994, respectively.
Note E. PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold improvements is
also computed using the straight-line method over the shorter of the useful life
of the improvement or the term of the lease.
Note F. OTHER REAL ESTATE OWNED
Real estate owned, acquired either through foreclosure or deed in lieu of
foreclosure, is recorded at the lower of the loan balance or estimated fair
market value. When acquired, any excess of the loan balance over the estimated
fair value is charged to the allowance for loan losses. Subsequent write-downs,
if any, are charged to operation expenses in the periods that they become known.
There was no other real estate owned as of September 30, 1995, December 31 or
September 30, 1994.
Note G. INCOME TAXES
Effective January 1, 1993, the Bank implemented the provisions of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
implementation had no significant impact on the financial condition or
operations of the Bank. SFAS No. 109 utilizes the liability method and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of the enacted tax laws.
Note H. LOANS
Loans are carried at face amount, less payments collected, allowance for loan
losses, and unamortized deferred fees. Interest on loans is accrued monthly on a
simple interest basis. The general policy of the Bank is to discontinue the
accrual of interest and transfer loans to nonaccrual (cash basis) status where
reasonable doubt exists with respect to the timely collectibility of such
interest. Payments on nonaccrual loans are accounted for using a cost recovery
method.
Loan origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can reasonably be anticipated. Management considers
current economic conditions, historical loan loss experience, and other factors
in determining the adequacy of the allowance. The allowance is based on
estimates and ultimate losses may differ from current estimates. These estimates
are reviewed periodically and as adjustments become necessary, they are charged
to earnings in the period in which they become known. The allowance is increased
by provisions charged to operating expenses, increased for recoveries of loans
previously charged-off, and reduced by charge-offs.
<PAGE> 17
The Bank adopted Statement of Financial Standards (SFAS) 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," as of January 1, 1995.
SFAS 114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
When the measure of the impaired loan is less than the recorded balance of the
loan, the impairment is recorded through a valuation allowance included in the
allowance for loan losses. The Bank had previously measured the allowance for
loan losses using methods similar to the prescribed in SFAS 114. As a result,
no additional provision was required by the adoption of this pronouncement.
The Bank considers all loans where reasonable doubt exists as to the payment of
interest or principal to be impaired loans. All loans that are ninety days or
more past due are automatically included in this category. An impaired loan
will be charged off when the Bank determines that repayment of principal has
become unlikely or subject to a lengthy collection process. All loans that are
six months or more past due and not well secured or in the process of collection
are charged off.
At September 30, 1995, the Bank had $509 thousand in impaired loans, against
which a loss allowance of $149 thousand has been provided. The recorded
investment in all impaired loans has been calculated based on the present value
of expected cash flows discounted at the loan's effective interest rate. All
impaired loans are included in nonaccrual status, and as such no interest income
is recognized. For the third quarter of 1995, the Bank had an average
investment in impaired loans of approximately $397 thousand. The average
investment in impaired loans for the nine months ended September 30, 1995 was
approximately $210 thousand.
Note I. RECLASSIFICATIONS
Certain items have been reclassified in the prior period financial statements
presented herein, in order to conform to classifications followed for September
30, 1995.
Note J. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, the Bank believes that pending or threatened litigation involving the
Bank will have no adverse material effect upon its financial condition, or
results of operations. Until third quarter 1995, the Bank was a defendant in
multiple lawsuits related to the failure of two real estate investment
companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH").
The lawsuits, consisted of a federal action by investors in PMC and SLGH (the
"Federal Investor Action"), at least three state court actions by groups of
Investors (the "State Investor Actions"), and an action filed by the Resolution
Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the
"Neilson" Action). An additional action was filed by an individual investor and
his related pension and profit sharing plans (the "Individual Investor Action").
Other defendants in these multiple actions and in related actions include
financial institutions, title companies, professionals, business entities and
individuals, including the principals of PMC and SLGH. The Bank was a
depository bank for PMC, SLGH and related companies and was a lender to certain
principals of PMC and SLGH ("Individual Loans"). Plaintiffs alleged that
PMC/SLGH was or purported to be engaged in the business of raising money from
investors by the sale and issuance of interests in loans evidenced by promissory
notes secured by real property. Plaintiffs alleged that false representations
were made, and the investment merely constituted a "Ponzi" scheme. Other
charges related to the Bank's conduct with regard to the depository accounts,
the lending relationship with the principals and certain collateral taken ,
pledged by PMC and SLGH in conjunction with the Individual Loans. The lawsuits
alleged inter alia violations of federal and state securities laws, fraud,
negligence, breach of fiduciary duty, and conversion as well as <PAGE> 18
conspiracy and aiding and abetting counts with regard to these violations. The
Bank denied all allegations of wrongdoing. Damages in excess of $100 million
were alleged, and compensatory and punitive damages were sought generally
against all defendants, although no specific damages were prayed for with regard
to the Bank. A former officer and director of the Bank was also been named as a
defendant.
The Bank has entered into a settlement agreement with the representatives of the
various plaintiffs, which has now been consummated, with the dismissal of all of
the above referenced cases, with prejudice, against the Bank, its officers and
directors, with the exception of the officer/director previously named pending.
Court approval of these settlements has been received. In connection with the
settlement, the Bank released its security interest in certain disputed
collateral and cash proceeds thereof, which the Bank received from PMC, SLGH, or
the principals, in connection with the Individual Loans. This collateral had
been a subject of dispute in the Neilson Action, with both the Bank and the
representatives of PMC/SLGH asserting the right to such collateral. All the
Individual Loans have been charged off. The Bank also made a cash payment to
the Plaintiffs in connection with the settlement. The effect of this settlement
on CU Bancorp or the Bank's financial statements was immaterial. In connection
with the settlement the Bank assigned its rights, if any, under various
insurance policies, to the Plaintiffs. The settlement does not resolve the
claims asserted against the officer/director. The Bank is still providing a
defense to its former director/officer who continues as a defendant and who
retains his rights of indemnity, if any, against the Bank arising out of his
status as a former employee. At this time the only viable claims which remain
against the former director/employee are claims of negligence in connection with
certain depository relationships with PMC/SLGH. While the Bank's Director and
Officer Liability Insurer has not acknowledged coverage of any potential
judgment or cost of defense, the Insurer is on notice of the action and has
participated in various aspects of the case.
Note K. REGULATORY MATTERS
On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"),
after completion of their annual examination of the Bank, terminated the Formal
Agreement entered into in June, 1992. In December 1993, the Fed terminated the
Memo of Understanding entered into in August, 1992.
The Formal Agreement had been entered into in June 1992 and required the
implementation of certain policies and procedures for the operation of the Bank
to improve lending operations and management of the loan portfolio. The Formal
Agreement required the Bank to maintain a Tier 1 Risk Weighted Capital ratio of
10.5% and a 6.0% Tier 1 Leverage Ratio. The Formal Agreement mandated the
adoption of a written program to essentially reduce criticized assets, maintain
adequate loan loss reserves and improve bank administration, real estate
appraisal, asset review management and liquidity policies, and restricted the
payment of dividends.
The agreement specifically required the Bank to: 1) create a compliance
committee; 2) have a competent chief executive officer and senior loan officer,
satisfactory to the OCC, at all times; 3) develop a plan for supervision of
management; 4) create and implement policies and procedures for loan
administration; 5) create a written loan policy; 6) develop and implement an
asset review program; 7) develop and implement a written program for the
maintenance of an adequate Allowance for Loan and Lease Losses, and review the
adequacy of the Allowance; 8) eliminate criticized assets; 9) develop and
implement a written real estate appraisal policy; 10) obtain and improve
procedures regarding credit and collateral documentation; 11) develop a
strategic plan; 12) develop a capital program to maintain adequate capital (this
provision also restricts the payment of dividends by the Bank unless (a) the
Bank is in compliance with its capital program; (b) the Bank is in compliance
with 12 U.S.C. 55 and 60 and (c) the Bank receives the prior written approval
of the OCC District Administrator); 13) develop and
<PAGE> 19
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.
<PAGE> 20
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CU BANCORP
November 6, 1995
By:___________________
Patrick Hartman
Chief Financial Officer
<PAGE> 21
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Note K , on page 19 above, for a complete discussion of
legal and matters.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Matters
On March 27, 1995, CU Bancorp and the Bank entered into an agreement with
Corporate Bank, Santa Ana California, providing for the acquisition of Corporate
Bank by CU Bancorp by means of a merger of Corporate Bank into the Bank, with
the consideration to be CU Bancorp Common Stock. That Agreement and Plan of
Reorganization was executed on March 27, 1995 (the "Old Merger Agreement"). As
a result of events subsequent to execution of the Old Merger Agreement,
including but not limited to changes in management of Corporate, financial
results of Corporate, potential claims against former Corporate management
employees and related matters, the transaction was substantially delayed,
pending, in part, receipt of Corporate's audited financial statements for the
year ended December 31, 1994. Corporate had engaged Deloitte & Touche LLP to
replace Grant Thornton LLP for the Bank's December 31, 1994 audit. Deloitte &
Touche LLP began the work necessary for the year-end audit, but resigned as of
April 21, 1995 before completing the audit, due to the discovery of possible
employee defalcations, the condition of the books and records of Corporate Bank
and related concerns. On May 10, 1995, Corporate engaged Arthur Andersen LLP to
complete the audit. Final financial statements as of December 31, 1994 were
completed on June 30, 1995. Subsequent to that date, additional negotiations
took place among the officers and counsel for Bancorp and Corporate as well as
consultations with Bancorp's and Corporate's accountants and other experts.
Both parties perceived the need for amendments to the Old Merger Agreement, as
the result of the events noted above, and the impossibility of complying with
certain provisions of the Old Merger Agreement, including time frames and
deadlines contained therein.
On October 11, 1995 the parties entered into an Amended and Restated Plan of
Reorganization (the "Merger Agreement"). The Old Merger Agreement and the
Merger Agreement are different in the following principal areas:
1) Purchase Price. The Purchase Price in the Old Merger Agreement was a fixed
price of $7,800,000 plus or minus net income/loss for the period from January 1,
1995 to the Calculation Date (approximately ten (10) days prior to the Closing
Date, as defined therein). The Merger Agreement now provides for a Purchase
Price equal to Shareholders' Equity of Corporate as of November 30, 1995 (or
such later date as the parties may agree upon) (the "Audit Date") plus or minus
(as the case may be) an amount equal to: 1) the pro rata Corporate net
income/loss for the <PAGE> 22
period from January 1, 1995 to the Audit Date applied to the period from the
Audit Date to the Calculation Date (excluding the effect of extraordinary gains
such as a recovery or sale of the Bond Claim, as defined below) and plus, 2)
either (i) any net recovery on, or proceeds of the sale of, the Bond Claim prior
to the Calculation Date (see, "Recent Events Related to Corporate", herein), or
(ii) if there is no recovery under the Bond Claim and no sale of the Bond Claim
prior to the Calculation Date, $200,000. The Shareholders' Equity of Corporate
as of the Audit Date will be determined by the parties pursuant to audited
financial statements prepared in accordance with generally accepted accounting
principles, consistently applied ("GAAP") accompanied by the unqualified
opinion of Corporate's independent public accountants, Arthur Andersen LLP
("AA") (the "Closing Audit")
In the Old Merger Agreement, the Purchase Price was subject to adjustment upon
CUB's determination of necessary augmentation to Corporate's loan loss reserve,
utilizing CUB standards. The Merger Agreement now provides that all financial
analysis for purposes of determining the Purchase Price will be made by the
parties based upon the Closing Audit or the Closing Audit and the Closing
Report, as defined below. In addition, the parties will utilize analysis by AA
for purposes of determining the net after tax effect of a recovery on or a sale
of the Bond Claim pursuant to GAAP, in the event there is such a recovery or
sale prior to the Calculation Date. If the Closing Date is more than seventy-
five (75) days subsequent to the Audit Date, AA shall conduct a review of the
Corporate financial statements pursuant to AICPA standards and render a written
report thereon (the "Closing Report"). In such event, the parties shall utilize
such Closing Report, together with the Closing Audit, to make a final
determination of the Purchase Price. No party has the ability to force an
adjustment in the Purchase Price, but each party has the option of termination
of the Merger Agreement if it reasonably disagrees with the Shareholders' Equity
set forth in the Closing Audit or the Closing Report and sets forth the basis
for that disagreement in writing. Since the Old Merger Agreement was executed
prior to Corporate's discovery of events related to the Bond Claim, it was
silent as to the Bond Claim.
2) Exchange Ratio. The Old Merger Agreement provided that Bancorp Common
would be valued at $7.32 for purposes of the Exchange Ratio. As a result of the
significant time delays engendered by Corporate's internal matters, the
valuation of Bancorp Common was amended to $8.00 to more closely reflect the
Bancorp Common market value in October 1995. If should be noted that the value
of Bancorp stock on October 11, 1995, which was the date of execution of the
Merger Agreement, was higher than $8.00, however the parties in arms-length
negotiations determined that the $8.00 price was appropriate.
3) Form of Payment. The Old Merger Agreement provided that the sole
consideration to be paid by Bancorp for the Corporate Stock would be Bancorp
Common (except as to fractional shares). The Merger Agreement now provides for
a combination of Bancorp Common and cash as more fully explained in "Merger
Terms" herein. The amount of Bancorp Common which will be issued to holders of
Corporate Stock will not be less than seventy five percent (75%) of the Purchase
Price or more than ninety percent (90%) of the Purchase Price (the "Elected
Percentage").
Corporate Fairness Opinion.. Corporate received an initial fairness opinion
on the Old Merger Agreement, from the consulting firm of The Findley Group
("Findley"), Anaheim, California, which was based on draft financial information
for 1994 from Deloitte & Touche LLP. Following receipt of the actual financial
statements for 1994, completed by AA, and the execution of the Amended and
Restated Agreement and Plan of Reorganization, Corporate obtained an additional
fairness opinion from Findley. The co-director and sole shareholder of Findley,
Gary Steven Findley, is a registered investment advisor with the Commission and
with the California Department of Corporations. Findley is a banking consultant
firm with extensive experience in providing consulting services in acquisitions,
mergers and changes in control of banks in the State of California, and in
providing fairness and stock valuation opinions in California independent bank
transactions involving purchases, sales and exchanges, and mergers and
acquisitions. For the services described herein, Corporate has paid Findley
$11,000. Findley has provided a variety of bank consulting services to
Corporate and may render bank <PAGE> 23
consulting services to Corporate or CUB in the future.
Merger Terms. Upon consummation of the Merger, Corporate will be merged with
and into CUB, the separate corporate existence of Corporate will cease, and the
outstanding shares of Corporate Stock will be converted into the right to
receive the Purchase Price in Bancorp Common and cash. The Purchase Price will
be an amount equal to Corporate's Shareholders' Equity as set forth in the
Closing Audit or (depending on the timeframe of the Calculation Date) the
Closing Audit and the Closing Report, plus or minus (as the case may be) an
amount equal to a pro rata portion of Corporate's net income/loss for the Audit
Period (excluding the effect of extraordinary events which will not be factored
into such application) applied to the period between the Audit Date and the
Calculation Date and plus either: (i) any net recovery on or net proceeds of a
sale of the Bond Claim received prior to the Calculation Date; or (ii) if no
such recovery is received or there is no sale of the Bond Claim prior to the
Calculation Date, $200,000. All financial analysis for purposes of determining
the Purchase Price will be made by the parties based upon the Closing Audit or
the Closing Audit and the Closing Report. In addition, the parties will utilize
analysis by AA for purposes of determining the net after tax effect of a
recovery on or a sale of the Bond Claim, pursuant to GAAP, in the event there is
such a recovery or sale prior to the Calculation Date.
In the Merger, each share of Corporate Stock outstanding at the Effective Time
(as defined in the Merger Agreement) ("Effective Time"), except shares directly
or indirectly owned by Bancorp or Corporate (other than in a fiduciary capacity)
and any shares held by shareholders of Corporate dissenting from the Merger,
will be converted into the right to receive the Purchase Price Per Share (as
defined in the Merger Agreement and as discussed below), which may be in the
form of either Bancorp Common Stock or cash, or some combination thereof.
Accordingly, each Corporate Shareholder will have the option of conditionally
electing to convert each of his shares of Corporate Stock into either Bancorp
Common (the "Conditional Stock Election") or cash (the "Conditional Cash
Election"), subject to certain limitations as more fully set forth herein. A
Corporate Shareholder may also elect to have his shares converted into a
combination of cash and Bancorp Common (the "Conditional Joint Election"). A
Corporate Shareholder may also elect that he has no preference as to which type
of consideration he will receive in exchange for his Corporate Stock ("No
Election"). All of the conditional elections are subject to the requirement
that no less than seventy-five percent (75%) and no more than ninety percent
(90%) of all of the outstanding shares of Corporate Stock (including all
Dissenting Shares, as defined below) shall be converted into Bancorp Common
Stock and no more than twenty-five percent (25%) and no less than ten percent
(10%) of Corporate Stock shall be converted into cash ("Stock Conversion
Requirement"). Bancorp shall have discretion to determine the actual percentage
of Bancorp Common and cash (the "Elected Percentage").
The Conversion Ratio will be equal to a fraction, of which the numerator shall
be the Purchase Price Per Share (as defined in the Merger Agreement, and as
discussed below) multiplied by the Elected Percentage and the denominator shall
be $8.00. The Purchase Price Per Share shall be calculated by dividing the
Purchase Price by the number of outstanding shares of Corporate (on a fully
diluted basis) on the Effective Date of the Merger.
The Calculation Date (as defined in the Merger Agreement) shall be the last
business day of the week preceding the Closing Date (as defined in the Merger
Agreement) ("Closing Date") or such other date as may be mutually agreed by the
parties. The Calculation Date shall not be more than 5 business days prior to
the Closing Date, except by mutual agreement of the parties.
Corporate's Shareholders' Equity will be determined by reference to the
Closing Audit or the Closing Audit and the Closing Report.
Corporate Bond Claim and Effect on Purchase Price. Corporate has indicated
that it believes it has certain claims against one or more former employees for
matters relating to their employment. Corporate filed a notice of claim and a
formal Proof of Loss with its Bankers' <PAGE> 24
Blanket Bond (the "Bond") Insurance Carrier on September 29, 1995 (the "Bond
Claim"). Corporate believes that certain losses previously incurred and
recognized by Corporate are covered by the Bond Claim and could thereby be
reimbursed. In the event that a recovery on the Bond Claim is received prior to
the Calculation Date, the net effect of the recovery will be added to
Shareholders' Equity and will thereby increase the Purchase Price. In the
event that Corporate determines that it is not likely that Corporate will be
able to effect recovery on the Bond Claim before the Calculation Date, then
Corporate may sell the Bond Claim, in which case the Purchase Price would be
increased by the amount of the increase in Shareholders' Equity resulting from
the sale of the Bond Claim. If Corporate neither receives a recovery from the
insurance carrier pursuant to the Bond Claim nor sells the Bond Claim, the Bond
Claim shall belong to the Surviving Bank upon consummation of the Merger, and,
in consideration therefor, the Purchase Price will be increased as of the
Calculation Date by $200,000.
Item 6. Exhibits and Filings on Form 8-K
(a) Exhibits:
(10) Material Contracts (NONE)
(b) Reports on Form 8-K: In a report filed on Form 8-K dated April 7, 1995,
the Company reported the signing of a definitive agreement to
acquire Corporate Bank.
<PAGE> 25
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