FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
/X/ For the Quarterly Period Ended June 30, 1995, or
Transition Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________.
Commission File Number 0-11008
CU BANCORP
(Exact name of registrant as specified in its charter)
California 95-3657044
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
818-907-9122
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of June 30, 1995, the Registrant has 4,587,330 outstanding shares of its
Common stock, no par value.
<PAGE> 1
CU Bancorp
Quarter Ended June 30, 1995
Table of Contents - Form 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operation. 3
Consolidated Statements of Financial Condition:
-June 30, 1995, and December 31, 1994. 13
Consolidated Statements of Income:
-Three and Six Month Periods Ended June 30, 1995, and
June 30, 1994. 14
Consolidated Statements of Cash Flows:
-Six Month Periods Ended June 30, 1995, and
June 30, 1994. 15
Notes to Consolidated Financial Statements 16
Signatures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Filings on Form 8-K 21
</TABLE>
<PAGE> 2
Management Discussion and Analysis
Overview
The Company earned $699 thousand, or $.15 per share, during the second quarter
of 1995, compared to $608 thousand, or $0.13 per share, during the same period
in 1994. Over 66% of the earnings in the second quarter of 1994 were
attributable to a gain on the sale of mortgage servicing rights. Since then,
the earnings of the core commercial bank have grown steadily as the reliance on
mortgage related income has declined. For the quarter ended June 30, 1995, only
about 15% of pretax earnings related to sales of mortgage servicing.
The Bank's asset quality ratios continue to be exceptionally strong. At June
30, 1995, nonperforming assets were $285 thousand, compared with $66 thousand in
the first quarter of 1995. The Bank did not have any real estate acquired
through foreclosure at June 30, 1995, December 31, 1994 or June 30, 1994. The
Bank's allowance for loan losses as a percent of both nonperforming loans and
nonperforming assets at the end of the second quarter of 1995 was 2648%,
compared to first quarter 1995 levels of 11503%. Total nonperforming assets for
the Bank have remained below $300 thousand for the past four consecutive
quarters, reflecting the Bank's ongoing emphasis on credit quality. The Bank has
enjoyed net recoveries, as recoveries exceeded chargeoffs for the first six
months of 1995 and for all of 1994.
Capital ratios are strong, substantially exceeding levels required to be in the
"well capitalized" category established by bank regulators. The Total Risk-
Based Capital Ratio was 15.85%, the Tier 1 Risk-Based Capital Ratio was 14.57%,
and the Leverage Ratio was 10.31% at June 30, 1995, compared to 15.4%, 14.12%,
and 10.44%, respectively, at year-end 1994. Regulatory requirements for Total
Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum of 8%,
4%, and 3%, respectively, and for classification as well capitalized, 10%, 6%,
and 5%, respectively.
The Bank's strong capital and asset quality position have positioned the Bank
for continued growth of its core business of providing relationship based
services to middle market customers and are resources for its acquisition
strategy. During the six months ended June 30, 1995, the Bank generated
approximately $64 million in new loan commitments, compared with about $52
million for the comparable period of 1994.
Balance Sheet Analysis
Loan Portfolio Composition and Credit Risk
The Bank's loan portfolio at June 30, 1995 has maintained the high standards of
credit quality that have been established as the commercial loan portfolio has
been built over the past three years. Non performing assets have been virtually
eliminated and exposures to real estate have been greatly reduced to consist
primarily of loans secured by real estate made to the Bank's core middle market
customers.
Total loans at June 30, 1995 increased by $9 million during the quarter,
offsetting the decline of $6 million in the first quarter of 1995. Loan
paydowns for the first quarter were unusually high, as a number of project
related loans in the Entertainment division combined with normal payoffs and
seasonality in the commercial portfolio. Loan levels at June 30, 1995 were $34
million above the June 30, 1994 level, reflected the ongoing success in
producing new commercial relationships.
<TABLE>
<CAPTION>
<PAGE> 3
Table 1 Loan Portfolio Composition
Amounts in thousands of June 30, December 31, June 30,
dollars
1995 1994 1994
<S> <C> <C> <C> <C> <C> <C>
Commercial & Industrial $147,721 83% $142,885 82% $ 112,673 79%
Loans
Real Estate Loans:
Commercial 24,870 14 26,528 15 24,856 17
Mortgages 4,777 3 4,773 3 4,875 3
Construction 0 0 416 0 846 1
Total loans net of unearned fees $177,368 100% $174,602 100% $143,250 100%
</TABLE>
At June 30, 1995, the Bank had loans totaling $108 million maturing within one
year, $58 million maturing after one but within five years, and $7 million
maturing after five years. Loans due after one year totaling $5 million had
predetermined interest rates.
<TABLE>
<CAPTION>
Table 1a Loan Portfolio Maturities
(in Millions) Remaining Maturity
Within After One After
One but Within Five
Year Five Years Years Total
<S> <C> <C> <C> <C>
Commercial & Industrial Loans $104,928 $39,556 $3,237 $147,721
Real Estate - Commercial & Mortgage 7,196 18,275 4,176 29,647
Total loans $112,124 57,831 7,413 $177,368
Loans due after one year with
predetermined interest rates 2,955 1,697
Loans due after one year with
floating or adjustable rates 54,876 5,716
$57,831 $7,413
</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>
<CAPTION>
Table 2 Allocation of Allowance for Loan Losses
Amounts in thousands of dollars June 30, December 31, June 30,
1995 1994 1994
<S> <C> <C> <C>
Commercial & Industrial Loans(1) $7,046 $7,096 $5,971
Real estate loans - Mortgages 0 0 643
Real estate loans - Construction 0 0 102
Loans 7,046 7,096 6,716
Unfunded commitments and letters of credit 502 331 563
Total Allowance for loan losses $7,548 $7,427 $7,279
(1) Including Commercial loans secured by
real estate
</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>
<CAPTION>
Table 3 Analysis of the Changes in the Allowance for Loan Loss
Amounts in thousands of dollars For the Periods Ended
June 30, December 31, June 30,
1995 1994 1994
<S> <C> <C> <C>
Balance at January 1 $7,427 $6,513 $6,513
Loans charged off:
Real estate secured loans 0 486 361
Commercial loans secured and unsecured 196 820 501
Loans to individuals, installment
and other loans 11 107 0
Total charge-offs 207 1,413 862
Recoveries of loans previously
charged off:
Real estate secured loans 31 586 519
Commercial loans secured and 286 1,735 1,106
unsecured
Loans to individuals, installment 11 6 3
and other loans
Total recoveries of loans 328 2,327 1,628
previously charged off
Net charge-off (recovery) (121) (914) (766)
Provision for loan losses 0 0 0
Balance at end of period $7,548 $7,427 $7,279
Net loan charge-offs (recoveries) as
a percentage of average gross loans
outstanding during the period ended
(.069)% (0.61)% (0.56)%
</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 <PAGE> 5
are those whose interest accrual has been discontinued because the loan has
become ninety days or more past due or there exists reasonable doubt as to the
full and timely collection of principal or interest. When a loan is placed on
nonaccrual status, all interest previously accrued but uncollected is reversed
against operating results. Subsequent payments on nonaccrual loans are treated
as principal reductions. At June 30, 1995, nonperforming loans amounted to $285
thousand compared with $36 thousand at December 31, 1994.
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 June 30, December 31, June 30,
1995 1994 1994
<S> <C> <C> <C>
Loans not performing (1) $285 $36 $342
Insubstance foreclosures 0 0 700
Total nonperforming loans 285 36 1,042
Other real estate owned 0 0 0
Total nonperforming assets $285 $36 $1,042
Allowance for loan losses as a
percent of:
Nonperforming loans 2,648% 20,631% 699%
Nonperforming assets 2,648% 20,631% 699%
Nonperforming assets as a
percent of total assets .1% 0% 0.4%
Nonperforming loans as a
percent of total loans .2% 0% 0.7%
Note 1:
Loans not performing
Performing as agreed $285 $36 $118
Partial performance 0 0 99
Not performing 0 0 125
$285 $36 $342
Nonaccrual:
Loans $285 $36 $342
Troubled debt restructuring 0 0 0
</TABLE>
Securities
The securities portfolio at June 30, 1995, totaled $65 million, compared to $74
million at year-end 1994. The securities are all held in a Held for Investment
portfolio. There was no held for sale portfolio at June 30, 1995 or year-end
1994. This portfolio is recorded at amortized cost. It is the Bank's intention
to hold these securities to their individual maturity dates.
There have been no realized gains or losses on securities in the second quarter
of 1995 or 1994. At June 30, 1995, there were unrealized gains of $396
thousand and losses of $606 thousand in the securities portfolio.
Additional information concerning securities is provided in the footnotes to the
accompanying financial statements.
Other Real Estate Owned
There was no Other Real Estate Owned on the Bank's balance sheet at June 30,
1995, December 31, 1994, and June 30, 1994. The Bank's policy is to carry
properties acquired in foreclosure at fair value less estimated selling costs,
which is determined using recent appraisal values <PAGE> 6
adjusted, if necessary, for other market conditions. Loan balances in excess of
fair value are charged to the allowance for loan losses when the loan is
reclassified to other real estate. Subsequent declines in fair value are
charged against a valuation allowance for real estate owned, created by
charging a provision to other operating expenses. The Bank has not had any
significant expenses related to Other Real Estate Owned in 1995 or 1994.
Deposit Concentration
Due to its historic focus on real estate-related activities, the Bank developed
a concentration of deposit accounts from title insurance and escrow companies.
These deposits are generally noninterest bearing transaction accounts that
contribute to the Bank's interest margin. Noninterest expense related to these
deposits is included in other operating expense. The Bank monitors the
profitability of these accounts through an account analysis procedure.
The Bank offers products and services allowing customers to operate with
increased efficiency. A substantial portion of the services, provided through
third party vendors, are automated data processing and accounting for trust
balances maintained on deposit at the Bank. These and other banking related
services, such as messenger and deposit courier services, will be limited or
charged back to the customer if the deposit relationship profitability does not
meet the Bank's expectations.
Noninterest bearing deposits represent nearly the entire title and escrow
relationship. These balances have been reduced substantially as the Bank
focused on middle market business loans. The balance at June 30, 1995, was $34
million compared to $44 million at December 31, 1994. Costs relative to
servicing the above relationships are the significant portion of the Bank's
customer data processing and messenger and courier costs. These were no
significant changes to the costs in 1995.
The Bank had $37 million in certificates of deposit larger than $100 thousand
dollars at June 30, 1995. The maturity distribution of these deposits is
relatively short term, with $34 million maturing within 3 months and the $36
million maturing within 12 months.
Liquidity and Interest Rate Sensitivity
The objective of liquidity management is to ensure the Bank's ability to meet
cash requirements. The liquidity position is managed giving consideration to
both on and off-balance sheet sources and demands for funds.
Sources of liquidity include cash and cash equivalents (net of Federal Reserve
requirements to maintain reserves against deposit liabilities), securities
eligible for pledging to secure borrowings from dealers pursuant to repurchase
agreements, loan repayments, deposits, and borrowings from a $25 million
overnight federal funds line available from a correspondent bank. Potential
significant liquidity requirements are withdrawals from noninterest bearing
demand deposits and funding of commitments to loan customers.
From time to time the Bank may experience liquidity shortfalls ranging from one
to several days. In these instances, the Bank will either purchase federal
funds, and/or sell securities under repurchase agreements. These actions are
intended to bridge mismatches between funding sources and requirements, and are
designed to maintain the minimum required balances. The Bank has had no Fed
Funds purchased or borrowings under repurchase agreements during 1994 or 1995.
The Bank's historical portfolio of large certificates of deposit (those of $100
thousand or more) has not been significant relative to the total deposit base.
At June 30, 1995 this funding source was 14% of average deposits, compared to
14% at December 31, 1994. This funding source has traditionally been used to
manage liquidity needs within the deposit portfolio.
During 1994 and 1995, loan growth for the bank outpaced growth of deposits from
the banks commercial customers. The Bank funded this growth, combined with the
Bank's reduced
<PAGE> 7
concentration in title and escrow deposits, in part with certificates of deposit
from customers from outside the Bank's normal service area. These out of area
deposits are certificates of deposit of $90,000 or greater, that are priced
competitively with similar certificates from other financial institutions
throughout the country. At June 30,1995, the Bank had approximately $83
million of these out of area deposits, up from $55 million at December 31, 1994.
<TABLE>
<CAPTION>
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at
June 30, 1995
Amounts in thousands of dollars Amounts Maturing or Repricing in
More Than More Than More Than
3 Months 6 Months 9 Months
But But 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 $17,0174 $202 $2,192 $147 $4,653
Securities 4,994 4,990 7,061 2,497 45,266
Federal funds sold & other 37,000 --- --- --- 0
Total earning assets 212,168 5,192 9,253 2,644 49,919
Interest-bearing deposits:
Now and money market 53,646 --- --- --- ---
Savings 9,310 --- --- --- ---
Time certificates of deposit:
Under $100 36,167 15,984 7,188 5,768 5,940
$100 or more 23,393 6,930 2,120 3,755 1,000
Non interest-bearing demand deposits 24,077 0 0 0 0
Total interest-bearing liabilities 146,593 22,914 9,308 9,523 6,940
Interest rate sensitivity gap 65,575 (17,722) (55) (6,879) 42,979
Cumulative interest rate sensitivity gap 65,575 47,853 47,798 40,919 83,898
Off balance sheet financial instruments 0 0 0 0 0
Net cumulative gap $65,575 $47,853 $47,798 $40,919 $83,898
Adjusted cumulative ratio of rate
sensitive assets to rate sensitive 1.45 1.28 1.27 1.22 1.43
liabilities (1)
</TABLE>
(1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios
less than 1.0 indicate a liability sensitive position. A ratio of 1.0
indicates a risk neutral position.
Assets and liabilities shown on Table 5 are categorized based on contractual
maturity dates. Maturities for those accounts without contractual maturities are
estimated based on the Bank's experience with these customers. Noninterest
bearing deposits of title and escrow companies, having no contractual maturity
dates, are considered subject to more volatility than similar deposits from
commercial customers. The net cumulative gap position shown in the table above
indicates that the Bank does not have a significant exposure to interest rate
fluctuations during the next twelve months.
Capital
Total shareholders' equity was $32 million at June 30, 1995, compared to $30
million at year-end 1994. This increase was due to earnings, plus the exercise
of stock options. The Bank is guided by statutory capital requirements, which
are measured with three ratios, two of which are
<PAGE> 8
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>
<CAPTION>
Table 7 Capital Ratios
Regulatory Standards
June 30, December 31, Well
1995 1994 Capitalized Minimum
<S> <C> <C> <C> <C>
Total Risk Based Capital 15.85% 15.40% 10.0% 8.00%
Tier 1 Risk Based Capital 14.57 14.12 6.0 4.00
Equity to Average Assets 10.31 10.44 5.0 3.00
</TABLE>
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 six month periods ending
June 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 . Completion of this transaction is
subject to Corporate Bank shareholder approval and regulatory approvals, which
is expected late in the fourth quarter of 1995 or early in the first quarter of
1996.
Net Interest Income and Interest Rate Risk
Net interest income is the difference between interest and fees earned on
earning assets and interest paid on funding liabilities. Net interest income for
the second quarter of 1995 was $3.9 million, compared to $3.3 million for the
same period in 1994. The change is attributable to changes in volume and
deposit mix. The Bank's net interest income has improved with the growth of the
commercial loan portfolio from 1994 to 1995. This improvement was offset in
part by the change in deposit mix away from non interest bearing title and
escrow deposits.
<TABLE>
<CAPTION>
Table 8 Analysis of Changes in Net Interest Income (1)
Amounts in thousands of Six months ended June 30, Six months ended June 30,
dollars 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 $1,559 $1,180 $2,739 $(2,795) $52 $(2,743)
Investments 49 420 469 460 (24) 436
Federal Funds Sold 215 261 476 203 31 234
Total interest income 1,823 1,861 3,684 (2,132) 59 (2,073)
Interest Expense
Interest-bearing deposits:
Demand and Savings (127) 217 90 (14) (71) (85)
Time Certificates of Deposits:
Under $100 848 256 1,104 (85) 0 (85)
$100 or more 333 255 588 (204) 12 (192)
Federal funds purchased /Repos 0 0 0 (43) (43) (86)
Other borrowings (58) (38) (96) (58) 6 (52)
Total interest expense 996 690 1,686 (404) (96) (500)
Net interest income $827 $1,171 $1,998 $(1,728) $155 $(1,573)
</TABLE>
(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.
<PAGE> 9
Yields on earning assets were approximately 8.9% in the first six months of
1995, compared to a 7.05% yield for the same period in 1994. The higher average
yield on earning assets in 1995 is the primarily the result of an increase in
the prime rate from an average of 6.5% in the first half of 1994 to an average
of 8.9% in the first half of 1995.
Rates on interest bearing liabilities resulted in an average cost of funds of
5.0% in 1995, compared with 2.7% for the comparable period of 1994. In addition
to the generally higher level of interest rates in 1995, certificates of deposit
represent a higher proportion of the funding liabilities, rather than lower cost
money market or savings accounts.
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin for 1995 was 5.7%, compared to 5.5% for the same
period in 1994. The Bank's margin is strong because it has funded itself with a
significant amount of noninterest bearing deposits. The higher margin in 1995
is largely due to the higher general level of interest rates.
<TABLE>
<CAPTION>
Table 9 Average Balance Sheets and Analysis of Net Interest Income
Six months ended Six months ended
Amounts in thousands of June 30, 1995 June 30, 1994
dollars
Interest Annual Interest Annual
Income or Yield or Income or Yield or
Balance Expense Rate Balance Expense Rate
Interest Earning Assets
<S> <C> <C> <C> <C> <C> <C>
Loans, Net $164,298 $9,087 11.06% $130,601 $6,043 9.25%
Investments 69,500 1,804 5.19 65,755 1,290 3.92
Certificates of Deposit
in other banks 96 2 4.17 1,377 32 4.65
Federal Funds Sold 34,796 1,016 5.84 22,594 399 3.53
Total Earning Assets 268,690 11,909 8.86 220,327 7,764 7.05
Non Earning Assets
Cash & Due From Banks 24,151 28,762
Other Assets 8,141 8,009
Total Assets $300,982 $257,098
Interest-bearing Liabilities
Demand and savings 64,278 939 2.92 $75,228 879 2.34
Time Certificates of Deposits
Less Than $100 66,071 2,076 6.28 19,260 349 3.62
More Than $100 38,197 1,172 6.14 17,318 276 3.19
Total interest-bearing 168,546 4,187 4.97 111,806 1,504 2.69
Noninterest-bearing Deposits 92,499 109,787
Total Deposits 261,045 4,187 3.21 221,593 1,504 1.36
Other Borrowings 3,801 104 5.47 5,476 188 6.87
Total Funding Liabilities 264,846 4,291 3.24 227,069 1,692 1.49
Other Liabilities 5,915 2,812
Shareholders' Equity 30,221 27,217
Total Liabilities and
Shareholders' Equity $300,982 $257,098
Net Interest Income $7,618 5.67% $6,072 5.51%
Shareholders' Equity to
Total Assets 10.04% 10.59%
</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 $186 thousand on the
sale of mortgage servicing in the quarter ended June 30, 1995, representing
final settlement payments received related to open issues on servicing sales
from prior quarters. The trends and composition of other operating income are
shown in the following table.
<PAGE> 11
<TABLE>
<CAPTION>
Table 10A Other operating income
Amounts in thousands of dollars
For three months ended
June 30, 1995 June 30, 1994
<S> <C> <C>
Gain on sale of SBA Loans $51
Fees on loans sold 0 $15
Premium on sales of mortgage loans 0 15
Service income 0 249
Documentation fees 10 22
Other service fees and charges 294 291
Gain on sale of mortgage
servicing portfolio 186 720
Total $541 $1,312
</TABLE>
<TABLE>
<CAPTION>
Table 10B Other operating income
Amounts in thousands of dollars
For six months ended
June 30, 1995 June 30, 1994
<S> <C> <C>
Gain on sale of SBA Loans $151
Fees on loans sold 0 $15
Premium on sales of mortgage loans 0 83
Service income 0 714
Documentation fees 46 44
Other service fees and charges 581 639
Gain on sale of mortgage
servicing portfolio 383 1,558
Total $1,161 $3,053
</TABLE>
Operating Expense
Total operating expenses for the bank were $3.2 million and $6.3 million for the
three and six months ended June 30, 1995 , compared to $3.6 million and $7.0
million for the same period in 1994. Refocusing productive resources toward
commercial banking activities and eliminating historic inefficiencies allowed
this reduction. The current level of operating expense is deemed to be adequate
and will be leveraged further as the core middle market business is expanded.
Provision for Loan Losses
The Bank has made no provision for loan losses in 1995 or 1994. No loan loss
provision has been deemed necessary for 1995 and 1994, due to the declining
levels of nonperforming assets, net recoveries received, and the strong reserve
position.
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 June 30, December 31,
1995 1994
<S> <C> <C>
Assets
Cash and due from banks $29,617 $35,397
Federal funds sold 37,000 20,000
Total cash and cash equivalents 66,617 55,397
Investment securities (Market value of $64,598 and
$71,423 at June 30, 1995 and December 31, 1994, 64,808 74,153
respectively)
Loans, (Net of allowance for loan losses of $7,548 and
$7,427 at June 30, 1995, and December 31, 1994, 169,820 167,175
respectively)
Premises and equipment, net 1,170 996
Other real estate owned, net 0 0
Accrued interest receivable and other assets 7,372 6,433
Total Assets $309,787 $304,154
Liabilities and Shareholders' equity
Deposits:
Demand deposits $97,559 $112,034
Savings deposits 62,842 67,896
Time deposits under $100 71,047 47,836
Time deposits of $100 or more 37,198 36,415
Total deposits 268,646 264,181
Accrued interest payable and other liabilities 9,608 10,229
Total liabilities 278,254 274,410
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1995 or 1994 --- ---
Common stock, no par value:
Authorized - 20,000,000 shares
Issued and outstanding - 4,587,330 in 1995, and
4,437,312 in 1994. 26,992 26,430
Retained earnings 4,541 3,314
Total Shareholders' equity 31,533 29,744
Total Liabilities and Shareholders' equity $309,787 $304,154
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 13
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Income CU Bancorp and
Subsidiary
Amounts in thousands of dollars, except per For the three months For the six months
share data ended June 30, ended June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenue from earning assets:
Interest and fees on loans $4,674 $3,211 $9,087 $6,043
Interest on taxable investment securities 879 647 1,779 1,288
Interest on tax exempt investment securities 10 1 25 2
Interest on time deposits with other
financial institutions 0 16 2 32
Interest on federal funds sold 514 252 1,016 399
Total revenue from earning assets 6,077 4,127 11,909 7,764
Cost of funds:
Interest on interest-bearing demand deposits 404 417 803 778
Interest on savings deposits 66 56 136 101
Interest on time deposits under $100 1,103 135 2,076 349
Interest on time deposits of $100 or more 590 133 1,172 276
Interest on other borrowings 46 66 104 188
Total cost of funds 2,209 807 4,291 1,692
Net revenue from earning assets before
provision for loan losses 3,868 3,320 7,618 6,072
Provision for loan losses 0 0 0 0
Net revenue from earning assets 3,868 3,320 7,618 6,072
Other operating revenue:
Servicing Income - mortgage loans sold 0 249 0 714
Other fees & charges - commercial 355 301 838 530
Premium on sales of mortgage loans 0 30 0 98
Other fees and charges - mortgage 0 12 0 153
Gain on sale of mortgage servicing portfolio 186 720 323 1,558
Total other operating revenue 541 1,312 1,161 3,053
Other operating expenses:
Salaries and related benefits 1,673 1,536 3,325 3,079
Selling expenses - mortgage loans 0 120 0 246
Other operating expenses 1,490 1,896 2,948 3,712
Total operating expenses 3,163 3,552 6,273 7,037
Income before provision for income taxes 1,246 1,080 2,506 2,088
Provision for income taxes 547 472 1,097 902
Net income $699 $608 $1,409 $1,186
Earnings per share $0.15 $0.13 $0.30 $0.26
The accompanying notes are an integral
part of these consolidated financial
statements.
<PAGE> 14
CU BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF DOLLARS)
For the six
months
ended June 30,
1995 1994
<S> <C> <C>
Increase(decrease) in cash and cash equivalents:
Cash flows from operating activities
Net income/(loss) $1,409 $1,186
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation and amortization 250 251
Amortization of real estate mortgage servicing rights 0 15
Benefit of deferred taxes 137 139
Increase/(decrease) in other assets (723) 1,547
Increase/(decrease) in other liabilities (1,028) (5,759)
(Increase)/decrease in accrued interest receivable (353) (172)
Increase/(decrease) in deferred loan fees (67) 84
Increase/(decrease) in accrued interest payable 407 (52)
Net amortization of (discount)/premium on
investment securities 288 592
Total Adjustments (1,089) (3,355)
Net cash provided by operating activities 320 (2,169)
Cash flows from investing activities
Proceeds from investment securities sold or matured 9,057 49,851
Purchase of investment securities 0 (20,414)
Net decrease in time deposits with other financial institutions 0 0
Net (Increase/(decrease) in loans (2,578) (1,907)
Purchases of premises and equipment, net (424) (117)
Net cash provided by investing activites 6,055 27,413
Cash Flows from financing activities
Net increase/(decrease) in demand and savings deposits (19,429) 21,157
Net increase/(decrease/ in time certificates of deposits 23,894 (17,395)
Proceeds from exercise of stock options and director warrants 562 54
Cash dividend paid (182) 0
Net cash provided by financing activities 4,845 3,816
Net increase (decrease) in cash and cash equivalents 11,220 29,060
Cash and cash equivalents at beginning of year 55,397 46,440
Cash and cash equivalents at end of year $66,617 $75,500
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest $1,860 $850
Taxes 900 1,002
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 0 0
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 15
Notes to Consolidated Financial Statements
June 30, 1995
UNAUDITED
Note A. BASIS OF PRESENTATION
The accounting and reporting policies of CU Bancorp ("the Company") and its
wholly owned subsidiary, California United Bank, N.A. ("the Bank"), are prepared
in accordance with generally accepted accounting principles used in the banking
industry. All material inter company balances have been eliminated and all
material interim period adjustments which, in the opinion of management, are
necessary for a fair presentation of financial condition, results of operations,
and cash flow have been made. 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.
NOTE C. SECURITIES
The Bank has the intent and ability to hold its investment securities until
maturity. Accordingly, investment securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a straight-line basis,
which approximates the effective interest method. Gains and losses recognized on
the sale of investment securities are based upon the adjusted cost and
determined using the specific identification method.
The Bank has no securities classified as "held for sale", indicating the
willingness to sell these securities under certain conditions. These securities
would be carried at current market value with unrealized gains or losses not
recognized as current income but reported as an increase or decrease to capital
in the statements of financial condition and in the statements of shareholders'
equity.
The following tables set forth the book value and market value, of investment
securities at June 30, 1995.
Gross Gross
Book Unrealized Unrealized Market
(Thousands of dollars) Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Securities $57,851 $242 $(606) $57,487
Mortgage-backed securities 49 49
U.S. Government Agency Securities 5,726 150 5,876
State and Municipal Securities 750 4 754
Federal Reserve Bank 432 0 0 432
Total $64,808 $ 396 $(606) 64,598 246
</TABLE>
<PAGE> 16
Note D. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve required to be maintained at the Federal Reserve Bank
was approximately $3.1 million, $6 million, and $5.8 million for the periods
ending June 30, 1995 and December 31 and June 30, 1994, respectively.
Note E. PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold improvements is
also computed using the straight-line method over the shorter of the useful life
of the improvement or the term of the lease.
Note F. OTHER REAL ESTATE OWNED
Real estate owned, acquired either through foreclosure or deed in lieu of
foreclosure, is recorded at the lower of the loan balance or estimated fair
market value. When acquired, any excess of the loan balance over the estimated
fair value is charged to the allowance for loan losses. Subsequent write-downs,
if any, are charged to operation expenses in the periods that they become known.
There was no other real estate owned as of June 30, 1995, December 31 or June
30, 1994.
Note G. INCOME TAXES
Effective January 1, 1993, the Bank implemented the provisions of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
implementation had no significant impact on the financial condition or
operations of the Bank. SFAS No. 109 utilizes the liability method and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of the enacted tax laws.
Note H. LOANS
Loans are carried at face amount, less payments collected, allowance for loan
losses, and unamortized deferred fees. Interest on loans is accrued monthly on a
simple interest basis. The general policy of the Bank is to discontinue the
accrual of interest and transfer loans to nonaccrual (cash basis) status where
reasonable doubt exists with respect to the timely collectibility of such
interest. Payments on nonaccrual loans are accounted for using a cost recovery
method.
Loan origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can reasonably be anticipated. Management considers
current economic conditions, historical loan loss experience, and other factors
in determining the adequacy of the allowance. The allowance is based on
estimates and ultimate losses may differ from current estimates. These estimates
are reviewed periodically and as adjustments become necessary, they are charged
to earnings in the period in which they become known. The allowance is increased
by provisions charged to operating expenses, increased for recoveries of loans
previously charged-off, and reduced by charge-offs.
The Bank adopted Statement of Financial Standards (SFAS) 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for
Impairment of a Loan-Income <PAGE> 17
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 June 30, 1995, the Bank had $285 thousand in impaired loans, against which a
loss allowance of $119 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 second quarter of 1995, the Bank had an average investment in impaired
loans of approximately $129 thousand. The average investment in impaired loans
for the six months ended June 30, 1995 was approximately $80 thousand.
Note I. RECLASSIFICATIONS
Certain items have been reclassified in the prior period financial statements
presented herein, in order to conform to classifications followed for June 30,
1995.
Note J. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, the Bank believes that pending or threatened litigation involving the
Bank will have no adverse material effect upon its financial condition, or
results of operations. The Bank is a defendant in multiple lawsuits related to
the failure of two real estate investment companies, Property Mortgage Company,
Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal
action by investors in PMC and SLGH (the "Federal Investor Action"), at least
three state court actions by groups of Investors (the "State Investor Actions"),
and an action filed by the Resolution Agent for the combined and reorganized
bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action
was filed by an individual investor and his related pension and profit sharing
plans (the "Individual Investor Action"). Other defendants in these multiple
actions and in related actions include financial institutions, title companies,
professionals, business entities and individuals, including the principals of
PMC and SLGH. The Bank was a depository bank for PMC, SLGH and related
companies and was a lender to certain principals of PMC and SLGH ("Individual
Loans"). Plaintiffs allege that PMC/SLGH was or purported to be engaged in the
business of raising money from investors by the sale and issuance of interests
in loans evidenced by promissory notes secured by real property. Plaintiffs
allege that false representations were made, and the investment merely
constituted a "Ponzi" scheme. Other charges relate to the Bank's conduct with
regard to the depository accounts, the lending relationship with the principals
and certain collateral taken , pledged by PMC and SLGH in conjunction with the
Individual Loans. The lawsuits allege inter alia violations of federal and state
securities laws, fraud, negligence, breach of fiduciary duty, and conversion as
well as conspiracy and aiding and abetting counts with regard to these
violations. The Bank denies the allegations of wrongdoing. Damages in excess
of $100 million have been alleged, and compensatory and punitive damages have
been sought generally against all defendants, although no specific damages have
been prayed for with regard to the Bank, nor has there been any apportioning of
liability among defendants or attributable to <PAGE> 18
the various claims asserted. A former officer and director of the Bank has also
been named as a defendant. The Bank and the named officer/director have
notified the Bank's insurance carriers of the various lawsuits. During 1994,
the Court granted the Bank's motion for summary judgment in the Individual
Investor Action. An appeal of that Order was filed by the plaintiffs. The
plaintiff in the Individual Investor Action will be a member of the settling
class and in connection with the settlement discussed below, that appeal will be
dismissed. The Bank has entered into a settlement agreement with the
representatives of the various plaintiffs, which has now been consummated, with
the dismissal of all of the above referenced cases, with prejudice, against the
Bank, its officers and directors, with the exception of the officer/director
previously named pending. Court approval of these settlements was been
received. In connection with the settlement, the Bank released its security
interest in certain disputed collateral and cash proceeds thereof, which the
Bank received from PMC, SLGH, or the principals, in connection with the
Individual Loans. This collateral has been a subject of dispute in the Neilson
Action, with both the Bank and the representatives of PMC/SLGH asserting the
right to such collateral. All the Individual Loans have been charged off,
previously. The Bank also made a cash payment to the Plaintiffs in connection
with the settlement. The effect on the financial statements of this settlement
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 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 <PAGE> 19
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
September 15, 1995
By:___________________
Patrick Hartman
Chief Financial Officer
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Note J , on page 21 above, for a complete discussion of
legal and matters.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Matters
On March 27, 1995, the Company entered into an agreement to acquire Corporate
Bank, through a merger of Corporate Bank into the Company's subsidiary
California United Bank, National Association. The consideration for the
transaction was the Company's common stock. On May 10, 1995, Corporate Bank
announced that the schedule for completion of the transaction had been delayed,
as a result of a change of outside auditors by Corporate Bank, and also
announced changes in management at Corporate Bank.
Item 6. Exhibits and Filings on Form 8-K
(a) Exhibits:
(10) Material Contracts (NONE)
(b) Reports on Form 8-K: In a report filed on Form 8-K dated April 7, 1995,
the
Company reported the signing of a definitive agreement to acquire
Corporate
Bank.
<PAGE> 21
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31- 1995
<PERIOD-END> JUN-30-1995
<CASH> 29617
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 37000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 64808
<INVESTMENTS-MARKET> 64598
<LOANS> 177368
<ALLOWANCE> 7548
<TOTAL-ASSETS> 309787
<DEPOSITS> 268646
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9608
<LONG-TERM> 0
<COMMON> 26992
0
0
<OTHER-SE> 4541
<TOTAL-LIABILITIES-AND-EQUITY> 309787
<INTEREST-LOAN> 9087
<INTEREST-INVEST> 2822
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11909
<INTEREST-DEPOSIT> 4187
<INTEREST-EXPENSE> 4291
<INTEREST-INCOME-NET> 7618
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6273
<INCOME-PRETAX> 2506
<INCOME-PRE-EXTRAORDINARY> 1409
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1409
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 5.67
<LOANS-NON> 285
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2048
<ALLOWANCE-OPEN> 7427
<CHARGE-OFFS> 207
<RECOVERIES> 328
<ALLOWANCE-CLOSE> 7548
<ALLOWANCE-DOMESTIC> 7548
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
