<PAGE> 1
As filed with the Securities and Exchange Commission on , 1995
Registration No. 33-63729
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Securities and Exchange Commission
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NUMBER ONE
TO
FORM S-4
Registration Statement Under The Securities Act of 1933
CU BANCORP
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
California 6711 95-3657044
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
of incorporation or organization) Classification Code Number)
</TABLE>
16030 Ventura Boulevard
Encino, California 91436
(818) 907-9122
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Stephen G. Carpenter
Chief Executive Officer
16030 Ventura Boulevard
Encino, California 91436
(818) 907-9122
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
WITH A COPY TO:
Anita Y. Wolman, Esq.
General Counsel
16030 Ventura Boulevard
Encino, California 91436
(818) 907-9122
Approximate date of commencement of proposed sale to public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed Proposed
Title of each class Amount maximum maximum Amount of
of securities to to be offering price aggregate registration
be registered registered(1) per share(2) offering price(2) fee
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<S> <C> <C> <C> <C>
Common Stock, no par value 837,718 $8.00 $6,701,743 $2,311
=========================================================================================================
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(1) Based on approximate number of shares to be issued 837,718.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(f) and (h).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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CU BANCORP
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM S-4
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FORM S-4 ITEM LOCATION IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside . . . . . . Cover Page of Registration Statement; This
Front Cover Page of Prospectus Cross Reference Sheet; Outside Front Cover
Page of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of . . . . . . . . . Inside Front and Outside Back Cover Pages of
Prospectus Proxy Statement/Prospectus; Available
Information; Incorporation of Certain
Documents by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information . . . . . . . . . . . . . . . . . . . . . . . . Proxy Statement/Prospectus Cover Page;
Summary
4. Terms of the Transaction . . . . . . . . . . . . . . . . . . . Proxy Statement/Prospectus Cover Page; The
Merger; Description of Bancorp Capital
Stock; Comparison of the Rights of Holders
of Bancorp Common and Corporate Stock
5. Pro Forma Financial Information . . . . . . . . . . . . . . . Summary -- Pro Forma Financial Data
6. Material Contracts with Company being Acquired . . . . . . . . Not applicable
7. Additional Information Required for Reoffering by . . . . . . . Not applicable
Persons and Parties Deemed to be Underwriters
8. Interests of Named Experts and Counsel . . . . . . . . . . . . Not applicable
9. Disclosure of Commission Position on Indemnification . . . . . Not applicable
for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants . . . . . . . . . Not applicable
11. Incorporation of Certain Information by Reference . . . . . . . Not applicable
12. Information with Respect to S-2 or S-3 Registrants . . . . . . Available Information; Incorporation of
Certain Documents by Reference
13. Incorporation of Certain Information by Reference . . . . . . . Incorporation of Certain Documents by
Reference
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i
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14. Information with Respect to Registrants Other Than . . . . . . Not applicable
S-2 or S-3 Registrants
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies . . . . . . . . . . . Not applicable
16. Information with Respect to S-2 or S-3 Companies . . . . . . Not applicable
17. Information with Respect to Companies Other Than . . . . . . . Summary; Corporate Bank; Management's
S-2 or S-3 Companies Discussion and Analysis of Financial
Condition and Results of Operations of
Corporate; Information Concerning the
Business and Properties of Corporate;
Appendix A;
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or . . . . . . . . . . . . . Proxy Statement/Prospectus Cover Page;
Authorizations are to be Solicited Summary; The Merger -- Interests of Certain
Persons in the Merger; General Information;
Dissenting Shareholders' Rights; Security
Ownership of Management; Comparison of the
Rights of Holders of Bancorp Common and
Corporate Stock; Incorporation of Certain
Documents by Reference
19. Information if Proxies, Consents or Authorizations . . . . . . Not applicable
are Not to be Solicited or in an Exchange Offer
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ii
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CORPORATE BANK
2740 NORTH GRAND AVENUE
SANTA ANA, CALIFORNIA 94105
(714) 532-8940
DRAFT TRANSMITTAL LETTER
__________, 1995
Dear Shareholder:
You are cordially invited to attend the Special Meeting of the
Shareholders of Corporate Bank, a California banking corporation ("Corporate")
to be held at the Doubletree Hotel, located at 100 S. The City Drive, Orange,
California, on ___________, _____________, 1995, at ______ p.m.
At the Special Meeting you will be asked to consider and vote upon a
proposal to ratify and confirm the Amended and Restated Agreement and Plan of
Reorganization dated as of October 11, 1995, including exhibits (the "Merger
Agreement"), by and among California United Bank, National Association, a
national banking association ("CUB"), CU Bancorp, a California corporation and
the parent holding company of CUB ("Bancorp"), and Corporate, pursuant to which
Corporate will merge with and into CUB (the "Merger"). The Merger Agreement is
reprinted as Appendix A to the enclosed Proxy Statement/Prospectus. Financial
statements for Corporate are contained in the Proxy Statement/Prospectus.
If the Merger Agreement is ratified and confirmed, upon consummation
of the Merger, each outstanding share of common stock, no par value, of
Corporate ("Corporate Stock"), other than shares as to which dissenters' rights
are exercised, will be converted into the right to receive a number of shares
of the common stock, without par value, of Bancorp ("Bancorp Common") equal to
the Conversion Ratio (as defined in the Merger Agreement) or cash or a
combination thereof.
The Board of Directors of Corporate has carefully considered the terms
and conditions of the Merger Agreement and the Merger. The Corporate Board
believes the Merger is in the best interests of Corporate and its shareholders
and unanimously recommends that you vote FOR ratification and confirmation of
the Merger Agreement. The Merger requires approval by the holders of at least
two-thirds of the outstanding Corporate Stock.
We urge you to read carefully the enclosed Notice of Special Meeting
and Proxy Statement/Prospectus, which more fully describe the terms of the
Merger Agreement and the Merger and the other business to be conducted at the
Special Meeting.
It is important that your shares be represented at the Special
Meeting, whether or not you plan to attend personally. Therefore, you are
requested to complete, sign and date the enclosed proxy card and return it as
soon as possible in the enclosed postage paid envelope so that your shares will
be represented. If you attend the Special Meeting, you may vote in person if
you wish even if you have previously returned your proxy card.
We appreciate your support.
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Allan H. Stokke Stanley J. Pawlowski C. Ellis Porter
Chairman of the Board Vice Chairman of the Board President and Chief
Executive Officer
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CORPORATE BANK
2740 NORTH GRAND AVENUE
SANTA ANA, CALIFORNIA 94105
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________, 1995
TO THE SHAREHOLDERS OF CORPORATE BANK:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of
the Board of Directors, a Special Meeting of Shareholders (the "Corporate
Meeting") of Corporate Bank, a California banking corporation ("Corporate")
will be held at the Doubletree Hotel, located at 100 S. The City Drive,
Orange, California on __________, 1995 at _____, California time, for the
following purposes all as set forth in the attached Proxy Statement/Prospectus:
1. Approval of Merger Agreement. To ratify and confirm the
Amended and Restated Agreement and Plan of Reorganization dated as of October
11, 1995 including exhibits, (the "Merger Agreement"), by and among California
United Bank, National Association, a national banking association ("CUB"), CU
Bancorp, a California corporation and the parent holding company of CUB
("Bancorp"), and Corporate pursuant to which Corporate will merge with and into
CUB (the "Merger"). Upon consummation of the Merger, each outstanding share of
common stock, no par value, of Corporate ("Corporate Stock") will be converted
into the right to receive the Purchase Price Per Share (as defined in the
Merger Agreement) which may be in the form of a number of shares of Bancorp
common stock, without par value, equal to the Conversion Ratio (determined in
the manner set forth in the Merger Agreement) or cash or a combination thereof,
subject to certain limitations set forth in the Merger Agreement. A copy of
the Merger Agreement is included in the Proxy Statement/Prospectus as Appendix
A.
2. Other Business. To transact such other business as may
properly come before the Corporate Meeting and at any and all adjournments
thereof.
Only those shareholders of record at the close of business on
___________, 1995 shall be entitled to notice of and to vote at the Corporate
Meeting.
CORPORATE BANK
C. Ellis Porter
President and Chief Executive Officer
DATED: ___________, 1995
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO SIGN
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING, YOU MAY THEN
WITHDRAW YOUR PROXY. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS
EXERCISE.
IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS,
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING.
<PAGE> 6
PROXY STATEMENT/PROSPECTUS
CU BANCORP
________ Shares
Common Stock
(without par value)
CU BANCORP CORPORATE BANK
16030 VENTURA BOULEVARD 2740 NORTH GRAND AVENUE
ENCINO, CALIFORNIA 91436 SANTA ANA, CALIFORNIA 94105
(818) 907-9122 (714) 771-5050
This Proxy Statement/Prospectus is furnished to the shareholders of
Corporate Bank, a California banking corporation ("Corporate"), in connection
with the solicitation of proxies by the Board of Directors of Corporate for the
Special Meeting of Shareholders of Corporate (the "Corporate Meeting"). The
Corporate Meeting will be held at 8 a.m., California time, on December 14, 1995
at the Doubletree Hotel, located at 100 S. The City Drive, Orange, California.
At the Corporate Meeting, the shareholders of Corporate will be asked
to vote upon a proposal to ratify and confirm the Amended and Restated
Agreement and Plan of Reorganization dated as of October 11, 1995, and
Amendment No. 1 to the Amended and Restated Agreement and Plan of
Reorganization dated as of November 10, 1995 (collectively the "Merger
Agreement"), by and among California United Bank, National Association ("CUB"),
CU Bancorp, a California corporation and the parent bank holding company of CUB
("Bancorp"), and Corporate, pursuant to which Corporate will merge with and
into CUB (the "Merger"). The Merger Agreement provides for the conversion of
each outstanding share of the Corporate common stock, no par value, into the
right to receive a number of shares of Bancorp common stock, without par value,
("Bancorp Common"), equal to the Conversion Ratio (as defined in the Merger
Agreement) or cash or a combination thereof. See "THE MERGER."
This Proxy Statement/Prospectus is first being mailed to the
shareholders of Corporate on or about November 13, 1995.
This Proxy Statement/Prospectus also constitutes the Prospectus of
Bancorp under the Securities Act of 1933, as amended ("1933 Act"), for the
public offering of the shares of Bancorp Common to be issued in the Merger.
See "DESCRIPTION OF BANCORP CAPITAL STOCK -- Bancorp Common." This Proxy
Statement/Prospectus does not cover any resales of such securities, and no
person is authorized to make any use of this Proxy Statement/Prospectus in
connection with any such resale.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR THE COMPTROLLER OF
THE CURRENCY, THE CALIFORNIA SUPERINTENDENT OF BANKS, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR THE COMPTROLLER OF THE
CURRENCY, THE CALIFORNIA SUPERINTENDENT OF BANKS,
THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
_______________
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 13, 1995
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AVAILABLE INFORMATION
Corporate is not subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance does not file reports and other information with the Federal Deposit
Insurance Corporation (the "FDIC").
Bancorp is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy and
information statements and other information filed by Bancorp can be inspected
and copied at the Commission's public reference room located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the public reference facilities
in the Commission's regional offices located at Room 1228, 75 Park Place, New
York, New York 10007 and Room 3190, 230 South Dearborn Street, Chicago,
Illinois 60604. In addition, copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
Bancorp has filed with the Commission a Registration Statement (No.
33-63729) under the 1933 Act relating to the shares of Bancorp Common to be
issued in the Merger (the "Registration Statement"). This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the Exhibits thereto, certain parts of which are
omitted in accordance with the Commission's rules and regulations. The
Registration Statement and the Exhibits thereto may be inspected and copied, at
prescribed rates, at the public reference facilities maintained by the
Commission at the addresses set forth above. All information concerning
Bancorp contained in the Proxy Statement/Prospectus has been furnished by
Bancorp and all information concerning Corporate has been furnished by
Corporate.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO
BANCORP (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT
CHARGE UPON WRITTEN OR ORAL REQUEST FROM ANITA Y. WOLMAN, ESQ., GENERAL
COUNSEL, CU BANCORP, 16030 VENTURA BOULEVARD, ENCINO, CALIFORNIA 91436,
TELEPHONE (818) 907-9122. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE MADE BY DECEMBER 9, 1995.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated
herein by reference: (i) Bancorp's Annual Report on Form 10-K and Form 10-K/A
for the year ended December 31, 1994; (ii) Bancorp's Quarterly Reports on Form
10-Q for the quarters ended March 31, 1995, June 30, and September 30, 1995;
(iii) Bancorp's Current Report on Form 8-K dated April 10, 1995 and (iv)
Bancorp's Proxy Statement dated May 23, 1995 for the 1995 Annual Meeting of
Stockholders. Bancorp's Annual Report on Form 10-K and 10-K/A for the year ended
December 31, 1994 and the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 are attached to this Proxy Statement/Prospectus as
Appendix D-1, D-2, and D-3.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Proxy
Statement/Prospectus, shall be deemed to be modified or superseded for purposes
of this Proxy Statement/Prospectus to the extent that a statement contained
herein, or in any subsequently filed document which also is incorporated or
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Proxy Statement/Prospectus, except as so modified or
superseded.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE
DOCUMENTS INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CORPORATE OR BANCORP. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF CORPORATE OR BANCORP SINCE THE DATE HEREOF OR THAT THE
INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED
BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THEREOF.
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SUMMARY
The following is a summary of certain information included elsewhere
in this Proxy Statement/Prospectus and is qualified in its entirety by
reference to that information. Shareholders are urged to review carefully the
entire Proxy Statement/Prospectus (including the Appendices and the documents
incorporated by reference).
INTRODUCTION
At the Special Meeting of Shareholders ("Corporate Meeting") of
Corporate Bank, a California banking corporation ("Corporate"), the
shareholders of Corporate will be asked to consider and vote upon a proposal to
ratify and confirm the Amended and Restated Agreement and Plan of
Reorganization dated as of October 11, 1995 (the "Merger Agreement"), by and
among California United Bank, National Association, a national banking
association ("CUB"), CU Bancorp, a California corporation and the parent bank
holding company of CUB ("Bancorp"), and Corporate, pursuant to which Corporate
will merge with and into CUB (the "Merger"). The Merger is subject to certain
conditions, including ratification and confirmation of the Merger Agreement by
the holders of two-thirds of the outstanding shares of the common stock, no par
value, of Corporate ("Corporate Stock"). If all conditions set forth in the
Merger Agreement are satisfied or waived (where permissible), the Merger will
become effective ("Effective Time") at the time specified, or at the time
mutually agreeable to CUB, Bancorp and Corporate on the date specified, in a
merger approval to be issued by the Comptroller of the Currency ("OCC") and the
California Secretary of State. A copy of the Merger Agreement is reprinted as
Appendix A to this Proxy Statement/Prospectus. See "THE MERGER."
THE CORPORATE MEETING
DATE, TIME AND PLACE. The Corporate Meeting will be held at ______,
California time, on ________, 1995 at the Doubletree Hotel, located at 100 S.
The City Drive, Orange, California.
RECORD DATE. The close of business on ____________, 1995 has been set
as the record date ("Record Date") for determining which shareholders are
entitled to receive notice of and to vote at the Corporate Meeting. On the
Record Date, there were 500,000 shares of Corporate Stock outstanding, held of
record by approximately 47 shareholders. The affirmative vote of the holders
of two-thirds of the outstanding shares of Corporate Stock is required to
ratify and confirm the Merger Agreement. See "GENERAL INFORMATION."
THE PARTIES
CU BANCORP. Bancorp is a California corporation incorporated in 1981
and is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended. As of June 30, 1995, it had total assets of $309.8
million. Bancorp's sole subsidiary is CUB which provides Bancorp's principal
source of income through dividends paid by CUB. Bancorp, through its banking
subsidiary, provides banking and financial services throughout the greater Los
Angeles metropolitan area. See "CU BANCORP."
The principal executive office of Bancorp is located at 16030 Ventura
Boulevard, Encino, California 91436, telephone number (818) 907-9122.
4
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CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION. CUB is a national
banking association founded in April 1982. As of June 30, 1995, it had
deposits of $269.4 million and total assets of $309.8 million. CUB provides a
wide range of commercial banking services to individuals and business concerns
through its five branch offices in the greater Los Angeles metropolitan area.
The principal executive office of CUB is located at 16030 Ventura
Boulevard, Encino, California 91436, telephone number (818) 907-9122.
CORPORATE BANK. Corporate was organized as a national banking
association in 1982 and converted to a California licensed banking corporation
in 1987. As of June 30, 1995, it had deposits of approximately $66 million and
assets of approximately $75 million. See "CORPORATE BANK."
The principal executive office of Corporate is located at 2740 North
Grand Avenue, Santa Ana, California 92705, telephone number (714) 771-5050.
Corporate also has one branch office in Anaheim, California.
Corporate provides banking services to individuals and business
concerns in Orange County through its two offices.
THE MERGER
BACKGROUND OF THE MERGER. Since mid 1992, when a new management team
joined the organization, CUB has viewed its geographic target market as the
general Los Angeles area and contiguous communities. Within these geographic
areas, it seeks to provide primarily commercial banking services to business
entities, professionals and high net worth individuals. CUB views this
targeted market as a series of at least five circles representing desired
service areas. These circles may be adjacent to one another, may overlap in
some fashion or may be separate. Within these circles, CUB has sought to
either acquire banks or branches or to open de novo offices. CUB has
succeeded, through de novo offices, to place at least one office in each of the
circles, resulting in its series of offices from Ventura County on the west, to
the San Fernando Valley, West Los Angeles, South Bay and San Gabriel Valley
(Industry) on the east. In moving south, the next circle encompasses inland
Orange County and surrounding areas, where Corporate is located. Thus, the
acquisition of Corporate is a logical step in CUB's strategic plan as a result
of the geographic location of Corporate in inland Orange County, which serves
areas which are adjacent to those served by CUB's existing offices in the South
Bay and San Gabriel Valley areas.
Since CUB's strategic plans were known to certain legal and investment
banking professionals, an introduction to the management of Corporate was made
by attorneys representing CUB who were familiar with certain of the management
at Corporate. During these introductory meetings, the parties discovered many
similarities to their businesses and recognized the possibilities of synergies
in a business combination.
In October of 1994, Bancorp and Corporate commenced preliminary
negotiations, culminating in the execution of an Agreement and Plan of
Reorganization 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 more fully discussed in "Recent Events Related to Corporate," the
transaction was substantially delayed, pending, in part, receipt of Corporate's
audited financial statements for the year ended December 31, 1994. During the
fourth quarter of 1994,
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the Board of Directors of Corporate elected to change accounting firms.
Corporate's accountant prior to that time, Grant Thornton LLP, had represented
Corporate since its organization in 1982, and Corporate's Board of Directors
believed it would be prudent to make a change due to the longevity of that
relationship. Corporate 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 and related concerns about the records of the Bank and the need
for further investigation. On May 10, 1995, Corporate engaged Arthur Andersen
LLP to complete the audit. The audit of the financial statements as of
December 31, 1994 was completed by Arthur Andersen LLP on June 30, 1995.
Since 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 period from January 1, 1995 to the Audit Date (the "Audit
Period") 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
net 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 as set forth in the financial statements accompanying the
Closing Audit or the Closing Report and sets forth the basis for that
disagreement in
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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 Stock Percentage"), and the amount of cash to be paid to holders of
Corporate Stock will not be more than twenty-five percent (25%) of the Purchase
Price or less than ten percent (10%) of the Purchase Price (the "Elected Cash
Percentage"). The percentage of Bancorp Common and cash shall equal one
hundred percent of the Purchase Price (collectively the "Elected Percentage").
AMENDMENT NO. 1 TO THE MERGER AGREEMENT. On November 10, 1995, the
parties entered into Amendment No. 1 to The Merger Agreement (the
"Amendment"). The Amendment provides for the Corporate Shareholders to be
given an opportunity to rescind approval of the transaction, and revote, in
the event that the sum of: (i) Corporate's Shareholders' Equity as of the
Calculation Date; plus (ii) a pro rata allocation of net income (loss) for
the Audit Period to the Applicable Period; plus (iii) the proceeds of any
sale of or recovery on the Bond Claim (collectively the "Determined Equity"),
equals less than 95% of the Corporate shareholders' equity set forth in its
September 30, 1995 Consolidated Reports of Condition and Income filed with
the FDIC on November 9, 1995. As set forth in such report, the shareholders
equity of Corporate as of September 30, 1995 was $7,058,000. If the
Determined Equity is less than $6,705,100, Corporate shareholders shall be
given an opportunity to rescind approval of the transaction, and revote,
unless Bancorp in its sole discretion determines: (i) to calculate the
Purchase Price in accordance with Section 1.1(6) of the Merger Agreement based
on a Determined Equity of not less than $6,705,000 (resulting in a minimum
Purchase Price of $6,905,000, assuming there has been no recovery on or sale
of the Bond Claim prior to the Calculation Date) or (ii) to terminate the
Merger Agreement.
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 AA's
audit report on the financial statements for 1994, 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 $11,725. Findley has provided a variety of bank
consulting services to Corporate and may render bank consulting services to
Corporate or CUB in the future. See "The Merger, Opinion of Financial
Advisor".
CORPORATE'S REASONS FOR THE MERGER AND RECOMMENDATION OF CORPORATE
BOARD. In evaluating the proposed Merger, the Board of Directors of Corporate
closely examined the banking philosophy and strategic goals of CUB and its
success in implementing its strategic plan. Corporate determined that the
long-term viability of small community banks was questionable, its ability to
compete in the current economic and regulatory environment was difficult and
Corporate might not be able to achieve desired goals and shareholder returns.
Corporate's Board of Directors decided that in light of the fact that Corporate
was operating under the constraints of regulatory orders issued by the FDIC and
a Memorandum of Understanding issued by the California State Banking
Department, was experiencing reduced profitability with a relatively high level
of problem loans, and because Corporate's earnings would be impacted negatively
for several years due to its above market rate lease for its Santa Ana
headquarters office, it was prudent to enter into discussions with CUB that
ultimately resulted in the Merger Agreement. Corporate's Board of Directors
decided Corporate and its shareholders would be best served
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by merging Corporate with another institution having highly capable management,
similar banking philosophy and growth strategies that included Orange County.
The Board of Directors of Corporate concluded that the projected earnings
potential on a per share basis of the combined institutions would exceed that
of Corporate on a stand-alone basis. Other advantages anticipated are:
increased market liquidity for holders of Corporate common stock, an
opportunity to share in the benefits of future acquisitions by CUB, a resulting
bank that will be firmly established in desirable and growing market areas, and
increased operating efficiencies through the consolidation of the two banks.
Subsequent to the change of management of Corporate and the matters more fully
discussed in "Recent Events Related to Corporate," the Board re-examined the
proposed transaction in view of the changes related primarily to these matters
and the ensuing delays in the transaction. The Board determined that the
transaction as reflected in the Amended Agreement and Plan of Reorganization
continued to be in the best interests of Corporate and its shareholders since
many of the synergies and growth opportunities continued to exist, the price of
Bancorp stock had risen steadily during the interim, and that Corporate's
earnings would be, at least temporarily, impacted by the costs related to the
recent events. Based on the foregoing and such other factors as Corporate
considered appropriate, the Board of Directors of Corporate unanimously
concluded that the Merger was in the best interests of Corporate and its
shareholders.
THE BOARD OF DIRECTORS OF CORPORATE UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF CORPORATE RATIFY AND CONFIRM THE MERGER AGREEMENT.
BANCORP'S REASONS FOR THE MERGER. Bancorp's primary reason for the
Merger is to permit CUB to acquire the retail and commercial franchise of
Corporate to increase its ability to serve its existing customers in the Orange
County area in Southern California and to facilitate growth of a customer base
in that area. In evaluating the proposed Merger, the Board of Directors of
Bancorp considered Corporate's branch banking franchise, the historical results
of Corporate's operations and the economic conditions and market opportunities
found in the local banking markets served by Corporate. These factors were
reconsidered by CUB after Corporate's change of management and discovery of the
matters more fully discussed in "Recent Events Related to Corporate" herein,
the resignation of Deloitte & Touche LLP and the resultant delay in the
transaction, as well as the impact on Corporate's earnings of costs of
attorneys, accountants and consultants related to these matters. These
considerations and the considerations of the Corporate directors, resulted in
the Amended and Restated Plan of Reorganization. In determining an appropriate
price for the transaction, CUB also considered the effect of Corporate's above
market rate long-term lease on its Santa Ana branch. Upon an acquisition of
Corporate, any purchaser is required by GAAP to record the difference between
the lease rate and fair market value over the remainder of the lease term
(approximately 13 years) as a liability for accounting purposes. The after tax
impact to CUB of recording this liability is approximately One Million Six
Hundred Thousand Dollars ($1,600,000), before taking amortization and other
accounting factors into consideration. The Merger Agreement has been approved
by the Boards of Directors of Bancorp and CUB. The Merger Agreement has also
been ratified and confirmed by the affirmative vote of the shareholder of CUB.
Approval of the Merger Agreement and the Merger by the stockholders of Bancorp
is not required. See "THE MERGER -- Bancorp's Reasons for the Merger."
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 financial statements accompanying 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
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<PAGE> 14
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
financial statement accompanying 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.
While the actual formula for determining the Purchase Price reflects
the parties' efforts to provide for a Closing Date as soon as possible after
all the regulatory approvals and other conditions are received, and will not
likely result in a simultaneous Audit Date and Calculation Date, the following
discussion assumes a simultaneous Audit Date and Calculation Date for
simplicity of illustration. If the Audit Date and Calculation Date are not
simultaneous, there would be added to Corporate's Shareholders' Equity as of the
Audit Date, a pro rata portion of the net income (loss) for the Audit Period
(not including extraordinary gains) applied to the period between the Audit
Date and the Calculation Date (as well as Bond Claim proceeds, as discussed
above).
IF THE TRANSACTION HAD CLOSED UTILIZING A CALCULATION DATE (AND AUDIT
DATE) OF JUNE 30, 1995, THE PURCHASE PRICE WOULD HAVE BEEN $7,377,000 WHICH WAS
EQUAL TO A COMBINATION OF (I) CORPORATE'S SHAREHOLDERS' EQUITY AS OF THAT DATE,
PLUS (II) THE ADDITIONAL $200,000 (IN LIEU OF A SALE OF, OR RECEIPT OF RECOVERY
ON, THE BOND CLAIM).
AT SEPTEMBER 30, 1995, CORPORATE'S SHAREHOLDERS' EQUITY AS SET FORTH
IN ITS CONSOLIDATED REPORTS OF CONDITION AND INCOME FILED WITH THE FDIC ON
NOVEMBER 9, 1995 ("9-30 CALL REPORT") WAS $7,058,000. CALL REPORTS ARE NOT
PREPARED IN ACCORDANCE WITH GAAP NOR ARE THEY REVIEWED OR AUDITED BY AN
INDEPENDENT PUBLIC ACCOUNTANT. SUCH REPORTS ARE PREPARED IN COMPLIANCE WITH
REGULATORY ACCOUNTING PRINCIPLES ("RAP") WHICH DIFFER FROM GAAP IN CERTAIN
RESPECTS. THEREFORE, CORPORATE'S SHAREHOLDERS' EQUITY AT SEPTEMBER 30, 1995 AS
SET FORTH IN THE 9-30 CALL REPORT MAY DIFFER FROM THE AMOUNT THAT WOULD BE
DETERMINED IN ACCORDANCE WITH GAAP PURSUANT TO AN AUDIT SUCH AS THE CLOSING
AUDIT. THE FOLLOWING IS PRESENTED FOR PURPOSES OF EXAMPLE ONLY, AND SHOULD NOT
BE INTERPRETED AS A DEFINITIVE DETERMINATION OF THE PURCHASE PRICE OR EXCHANGE
RATIO AS OF SEPTEMBER 30, 1995: IF THE TRANSACTION HAD CLOSED UTILIZING A
CALCULATION DATE (AND AUDIT DATE) OF SEPTEMBER 30, 1995, THE PURCHASE PRICE
WOULD HAVE BEEN $7,258,000 WHICH WAS EQUAL TO A COMBINATION OF: (i) CORPORATE'S
SHAREHOLDERS' EQUITY AS OF THAT DATE (AS SET FORTH IN THE 9-30 CALL REPORT AND
SUBJECT TO THE DISCLAIMERS SET FORTH ABOVE); PLUS (ii) THE ADDITIONAL $200,000
(IN LIEU OF A SALE OF, OR RECEIPT OF RECOVERY ON, THE BOND CLAIM.) IT IS
POSSIBLE THAT THE SHAREHOLDERS' EQUITY OF CORPORATE AS OF THE AUDIT DATE OR
THE CALCULATION DATE WILL BE LESS THAN $7,058,000 SINCE CORPORATE IS
CONTINUING TO INCUR HIGH OPERATING COSTS AND IS EXPENDING HIGH COSTS RELATING
TO THE MERGER. IF CORPORATE FOR ANY REASON SUFFERS MATERIAL LOSSES PRIOR TO
THE CLOSING DATE, THEREBY MATERIALLY REDUCING CORPORATE'S SHAREHOLDERS' EQUITY
AND THE PURCHASE PRICE, CORPORATE WOULD NONETHELESS BE OBLIGATED TO COMPLETE
THE MERGER AT THE REDUCED PRICE, WITHOUT LIMIT. NOTWITHSTANDING THE ABOVE, IF
THE DETERMINED EQUITY AS OF THE CALCULATION DATE IS LESS THAN $6,705,100 (95%
OF THE CORPORATE SHAREHOLDERS' EQUITY SET FORTH IN THE 9-30 CALL REPORT OF
$7,058,000) (A "VOTING THRESHOLD"), CORPORATE SHAREHOLDERS WILL BE GIVEN AN
OPPORTUNITY TO RESCIND THEIR PRIOR APPROVAL OF THE TRANSACTION AND VOTE AGAIN
ON THE TRANSACTION TO DETERMINE IF THEY WISH TO GO FORWARD AT SUCH PURCHASE
PRICE, UNLESS BANCORP (IN ITS SOLE DISCRETION) AGREES TO CALCULATE THE PURCHASE
PRICE BASED ON A DETERMINED EQUITY OF NOT LESS THAN $6,705,100 IN WHICH CASE
CORPORATE MUST PROCEED WITH THE TRANSACTION. IN SUCH A CASE, ASSUMING NO PRIOR
RECEIPT OF PROCEEDS ON OR SALE OF THE BOND CLAIM, THE PURCHASE PRICE WOULD BE
NOT LESS THAN $6,905,100. ALTERNATIVELY, UNDER SUCH CIRCUMSTANCES, CU BANCORP
AND CUB WOULD BE ENTITLED TO TERMINATE THE TRANSACTION DUE TO THE MATERIAL
ADVERSE CHANGE IN CORPORATE'S CONDITION.
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 (the "Elected Stock Percentage") and no more than twenty-five
percent (25%) and no less than ten percent (10%) of Corporate Stock shall be
converted into cash.
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Bancorp shall have discretion to determine the actual percentage of Bancorp
Common and cash at any time prior to the Effective Date of the Merger (the
"Elected Percentage"). (See "THE MERGER -- Terms of the Agreement --
Conversion; Allocation Procedure" and Appendix A herein.)
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 Stock 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. BECAUSE THE
CLOSING AUDIT OR THE CLOSING REPORT MAY RESULT IN ADJUSTMENTS TO CORPORATE'S
SHAREHOLDERS' EQUITY, AND BECAUSE CORPORATE IS CONTINUING TO INCUR HIGH
OPERATING COSTS AND IS EXPENDING HIGH COSTS RELATING TO THE MERGER, IT IS
POSSIBLE THAT THE SHAREHOLDERS' EQUITY OF CORPORATE UTILIZED FOR DETERMINING
THE PURCHASE PRICE MAY BE LESS THAN CORPORATE'S SHAREHOLDERS' EQUITY AS OF JUNE
30, 1995 ($7,177,000) OR ITS SHAREHOLDERS' EQUITY AS OF SEPTEMBER 30, 1995
($7,058,000) SET FORTH IN THE 9-30 CALL REPORT.
HOWEVER, IT SHOULD ALSO BE NOTED THAT THE ACTUAL MARKET VALUE OF
BANCORP COMMON IS SUBJECT TO FLUCTUATION WHILE THE VALUATION FOR PURPOSES OF
DETERMINING THE CONVERSION RATIO DOES NOT CHANGE. THEREFORE, THE VALUE OF THE
SHARES OF BANCORP COMMON THAT HOLDERS OF CORPORATE STOCK WILL RECEIVE IN THE
MERGER MAY INCREASE OR DECREASE PRIOR TO THE MERGER, ALTHOUGH THE EXCHANGE
RATIO WILL BE FIXED AT $8.00 PER SHARE. AT JUNE 30, 1995 THE ACTUAL MARKET
VALUE OF BANCORP COMMON AS LISTED ON THE NASDAQ STOCK EXCHANGE, WAS $7.00 PER
SHARE. HAD THE MERGER OCCURRED UTILIZING CALCULATION (AND AUDIT ) DATES OF
JUNE 30, 1995, THE SHAREHOLDERS OF CORPORATE WOULD HAVE RECOGNIZED SUCH LOSS.
HOWEVER, SINCE CORPORATE IS REQUIRED TO PROCEED WITH THE MERGER REGARDLESS OF
THE MARKET PRICE OF BANCORP COMMON AT THE CALCULATION DATE (UNLESS THE CHANGE
CONSTITUTES A MATERIAL ADVERSE CHANGE), THE ACTUAL MARKET VALUE OF THE BANCORP
COMMON THAT HOLDERS OF CORPORATE STOCK MAY RECEIVE IN THE MERGER MAY BE MORE
OR LESS THAN $8.00. HOWEVER, ON OCTOBER 11, 1995 WHICH WAS THE DATE OF
EXECUTION OF THE AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATON, THE
MARKET VALUE OF BANCORP COMMON WAS $8.94 PER SHARE, WHICH WAS IN EXCESS OF THE
VALUE OF BANCORP COMMON TO BE UTILIZED FOR THE PURPOSE OF COMPUTING THE
EXCHANGE RATIO AND ON NOVEMBER 8, 1995 THE CLOSING PRICE OF BANCORP COMMON WAS
$9.69. HAD THE MERGER OCCURRED UTILIZING CALCULATION (AND AUDIT) DATES OF
OCTOBER 11, 1995 OR NOVEMBER 8, 1995, THE SHAREHOLDERS OF CORPORATE WOULD HAVE
RECEIVED THE BENEFIT OF THE HIGHER PRICE, AND BANCORP WOULD BE REQUIRED TO
PROCEED WITH THE MERGER.
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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' 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.
ELECTION PROCEDURE. A Conditional Election Statement will be sent to
each Corporate Shareholder to request each Corporate Shareholder to make a
Conditional Stock Election, Conditional Cash Election, Conditional Joint
Election or No Election. For the Conditional Election Statement to be
effective, it must be properly completed and signed by the Corporate
Shareholder and received by the exchange agent of Bancorp on or before the date
set forth therein (the "Election Date"). Any Corporate Shareholder who has
submitted a Conditional Election Statement may amend or revoke the same at any
time prior to the Election Date. Any Corporate Shareholder who does not return
a Conditional Election Statement on or before the Election Date, or who
properly revokes his Conditional Election Statement but does not submit a new
statement, will be deemed to have made No Election. After the Election Date,
all such conditional elections will be irrevocable.
Notwithstanding compliance with the above-described procedure,
Corporate Shareholders who have made a Conditional Stock Election may be
required to receive a certain portion of their consideration in cash and
Corporate Shareholders who have made a Conditional Cash Election may be
required to receive a certain portion of their consideration in the form of
Bancorp Common because of the allocation procedure to be utilized to ensure
compliance with the Stock Conversion Requirement. Under the Merger Agreement,
Bancorp has until the Effective Date of the Merger to determine the Elected
Percentage. Whether and to what extent each Corporate Shareholder will
receive Bancorp Common and/or cash will be determined thereafter. The stock
certificates evidencing the Corporate Stock will be exchanged for Bancorp
Common and/or cash as soon as reasonably practicable after consummation of the
Merger as more fully described herein. (See "THE MERGER -- Terms of the
Agreement -- Election and Exchange Procedure; Allocation Procedure" herein.)
CONVERSION RATIO. Under the terms of the Merger Agreement, the
parties have agreed that the portion of the Purchase Price payable in Bancorp
Common shall be valued at $8.00 per share, notwithstanding any increase or
decrease in the value of such Bancorp Common as of the Calculation Date. Thus,
if the value of the Bancorp Common drops below $8.00 per share, Corporate's
shareholders will receive Bancorp Common and cash having a value less than
Corporate's Shareholders' Equity as of the Calculation Date, and if the value
of the Bancorp Common is more than $8.00 per share as of the Calculation Date,
Corporate's shareholders will receive value in excess of Corporate's
Shareholders' Equity as of such date. As discussed above, the market value of
the Bancorp Common at October 11, 1995, the date of execution of the Merger
Agreement, was
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$8.94, but no assurances can be given that such market value will exceed $8.00
per share as of the Calculation Date.
If the Merger had been consummated with an Audit Date and Calculation
Date of June 30, 1995 with an Elected Cash Percentage of 10%, the Conversion
Ratio would have been 1.61 and Corporate shareholders would have received 1.61
shares of Bancorp Common for each share of Corporate Stock (based upon the
500,000 shares of Corporate Stock and options to exercise 14,000 shares of
Corporate Stock then outstanding), plus cash in the amount of $1.44 per share.
At that date, the shareholders of Corporate would have received an aggregate of
$737,700 in cash (not including payment for fractional shares received) and an
aggregate of 829,913 shares of Bancorp Common or 15.32% of the Bancorp Common
then outstanding. At September 30, 1995, Corporate's Shareholders' Equity as
set forth in its 9-30 Call Report was $7,058,000. Call Reports are not
prepared in accordance with GAAP nor are they reviewed or audited by an
independent public accountant. Such reports are prepared in compliance with
regulatory accounting principles ("RAP") which differ from GAAP in certain
respects. Therefore, Corporate's Shareholders' Equity at September 30, 1995
as set forth in the 9-30 Call Report may differ from the amount that would be
determined in accordance with GAAP pursuant to an audit such as the Closing
Audit. The following is presented for purposes of example only, and should
not be interpreted as a definitive determination of the Purchase Price or
Exchange Ratio as of September 30, 1995. If the transaction had closed
utilizing a Calculation Date (and Audit Date) of September 30, 1995, with an
Elected Cash Percentage of 10%, the Conversion Ratio would have been
1.633 and Corporate Shareholders would have received 1.63 shares of Bancorp
Common for each share of Corporate Stock (based on the 500,000 shares of stock
outstanding excluding options for 14,000 shares as to which there is an
existing agreement to terminate the options for a cash payment, subject only to
FDIC nondisapproval) plus cash in the amount of $1.45 for each share of
Corporate Stock. At such date, the Corporate Shareholders would have received
an aggregate of $725,800 in cash (not including cash paid in lieu of fractional
shares) and 816,525 shares of Bancorp Common or 15.11 percent of the Bancorp
Common then outstanding. At such date, the closing price of Bancorp Common as
quoted on the Nasdaq was $ . BECAUSE THE VALUE TO BE RECEIVED BY THE
CORPORATE SHAREHOLDERS IS BASED UPON THE FLUCTUATING MARKET VALUE OF THE
BANCORP COMMON, IT IS POSSIBLE THAT THE VALUE RECEIVED BY CORPORATE'S
SHAREHOLDERS AS OF THE CLOSING DATE WILL BE MORE OR LESS THAN THE
SHAREHOLDERS' EQUITY AS OF THE AUDIT DATE OR THE CALCULATION DATE.
No fractional shares of Bancorp Common will be issued in exchange for
Corporate Stock. Bancorp will pay or cause to be paid cash in lieu of
fractional shares equal to the product of (i) the fraction of a share which
would otherwise have been issued multiplied by (ii) the Conversion Ratio. See
"THE MERGER -- Terms of the Merger."
During the time from execution of the Merger Agreement through the
Closing Date, Corporate is required to maintain adequate reserves for loan
losses and other contingencies, as required by GAAP. Corporate shall provide
CUB with information on certain proposed loans over $100,000 on a regular
basis. Each party shall provide the other with copies of all monthly reports
to the respective Boards of Directors.
OPINION OF FINANCIAL ADVISOR. Findley, as financial advisor to the
Board of Directors of Corporate, has delivered to the Corporate Board its
written opinion dated October 23, 1995, that, based upon and subject to the
assumptions and limitations set forth therein, as of the date of such opinion
the Purchase Price Per Share to be paid pursuant to the Merger Agreement and
the methodology for computing the Purchase Price Per Share as of the
Calculation Date would be fair from a financial point of view to the holders of
Corporate Stock. See "THE MERGER -- Terms of the Merger." A copy of the
opinion of Findley is reprinted as Appendix B to this Proxy
Statement/Prospectus and is incorporated herein by reference. Findley was not
requested to and did not participate in the negotiations regarding the Merger
Agreement. Corporate will pay Findley certain fees for its services in
connection with the Merger. See "THE MERGER -- Opinion of Financial
Advisor."
REGULATORY APPROVALS. Applications for prior approval of the Merger
were filed with the OCC on November 10, 1995. There can be no assurances
that the required approvals will be obtained, or as to conditions or timing of
such approvals. See "THE MERGER -- Regulatory Approval."
AGREEMENTS WITH CERTAIN SHAREHOLDERS. Pursuant to Shareholder's
Agreements dated as of October 11, 1995 ("Shareholder's Agreements"), all
directors of Corporate who are shareholders and shareholders holding more than
5% of the outstanding shares of Corporate Stock have agreed to vote certain of
the shares they own or hold in trust (representing approximately 19.05% of the
outstanding shares of Corporate Stock entitled to vote at the Meeting) in favor
of ratification and confirmation of the Merger Agreement, thereby increasing
the likelihood that the Merger Agreement will be ratified and confirmed.
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<PAGE> 18
These directors have also agreed to elect to receive not less Bancorp Common
than the Elected Stock Percentage determined by Bancorp. See "THE MERGER --
Agreements with Certain Shareholders."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. As of September 15, 1995,
the directors and executive officers(1) of Corporate owned 70,250 shares of
Corporate Stock (representing 14.05% of the outstanding shares of Corporate
Stock) and held options to purchase 17,500 shares of Corporate Stock under
Corporate's stock option plan. The option which was outstanding as of
September 15, 1995 to purchase 17,500 shares was held by Stanley J. Pawlowski.
In an agreement dated October 6, 1995, which is subject to approval by the
FDIC, Mr. Pawlowski agreed to cancel his entire option upon payment to him of
$6,898, which is the amount determined by the Board of Directors of Corporate
to be the value of the options as of that date. If the directors and executive
officers of Corporate continue to own 70,250 shares of Corporate Stock at the
Effective Time and elect to receive the combination of Bancorp Common and cash
equal to the Elected Percentage (assumed for purposes of this paragraph to be
10% cash and 90% Bancorp Common), such shares will be converted into the
number of shares of Bancorp Common called for by the Conversion Ratio. If the
Merger had been consummated with a Calculation Date of June 30, 1995, then
based upon a Conversion Ratio of 1.61, the directors and executive officers of
Corporate would have received approximately 113,426 shares of Bancorp Common
which would have constituted 2.1% of the then outstanding number of shares of
Bancorp Common.
Upon consummation of the Merger, C. Ellis Porter will be paid a bonus
of $20,000, Stanley J. Pawlowski will be paid a bonus of $20,000, and Gary R.
Strachn will be paid a bonus of $15,000. These bonuses will be paid only upon
the successful closing of the Merger and will be deducted from the
Shareholders' Equity of Corporate as of the Audit Date, thereby reducing the
Purchase Price by the amount of such payments.
As successor to the obligations of Corporate under the terms of the
Merger Agreement, CUB will have the power to indemnify Corporate's past and
present officers and directors from loss or liability arising from or relating
to the performance of their duties to the extent such indemnification is
permitted under applicable law and the bylaws of CUB. In addition, Corporate
has arranged to purchase directors' and officers' tail insurance (the "D&O
Tail"). Under the D&O Tail, the persons serving as officers and directors of
Corporate immediately prior to the Effective Time shall be covered for a period
of three years from the Effective Time with respect to acts or omissions
occurring prior to the Effective Time which were taken by such officers and
directors in their capacities as such. The D&O Tail is required to provide
substantially the same coverage as the directors' and officers insurance policy
currently maintained by Corporate. The cost of the D&O Tail is to be paid by
Corporate prior to the Effective Time of the Merger and will reduce the
Purchase Price, accordingly. See "THE MERGER -- Interests of Certain Persons
in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Although no rulings as to
the tax consequences of the Merger are being requested from the Internal
Revenue Service, it is the intention of Bancorp, CUB and Corporate that the
Merger and the related transactions constitute a reorganization within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code which results in
no federal income tax recognized by either of those entities or the
shareholders of any of those entities, with the exception that the shareholders
of Corporate may recognize taxable gain or loss based on any cash received as
payment of
__________________
(1) As used in this Proxy Statement/Prospectus, the term "executive
officer" of Corporate means President and Chief Executive Officer, C.
Ellis Porter, Chief Financial Officer, Gary R. Strachn, and its Vice
Chairman and Executive Vice President, Stanley J. Pawlowski.
13
<PAGE> 19
the Purchase Price and in lieu of receipt of shares or fractional shares of
Bancorp Common, and the shareholders of Corporate may recognize taxable gain or
loss upon the proper exercise of dissenters' rights. (See "THE MERGER --
Certain Federal Income Tax Consequences" herein.)
REGULATORY APPROVALS. The Merger must be approved in advance by the
Office of the Comptroller of the Currency ("OCC"). An application for prior
approval of the Merger was filed with the OCC on November 10, 1995. In
addition, federal law provides that the Merger may not be consummated until
at least 15 days have expired following the OCC's preliminary approval, to
provide the U.S. Attorney General with an opportunity to review any antitrust
implications of the Merger. There can be no assurances that the required
approvals will be obtained, or as to conditions or timing of such approvals.
(See "THE MERGER -- Regulatory Approvals" herein.)
TERMINATION; AMENDMENTS. The Merger Agreement may be amended or
modified and certain of the obligations, covenants, agreements or conditions
therein may be waived by Bancorp, CUB or Corporate, either before or after
approval of the shareholders of Corporate, with certain limitations. The
Merger Agreement will terminate if the Merger has not been effected by February
28, 1996. See "THE MERGER -- Termination, Amendments and Expenses."
POST MERGER
POST MERGER OPERATIONS. The Merger Agreement provides that Corporate
will obtain the resignations of all directors of Corporate to be effective as
of the Effective Time. Such persons will have no continuing positions with CUB
or Bancorp as of the Effective Time, although it is expected that at least one
member of the Corporate Board of Directors will be appointed to the CUB and/or
Bancorp Board of Directors. The Merger Agreement also requires that Corporate
will obtain the resignations of all officers of Corporate, to be effective at
the Effective Time. No less than ten (10) days prior to Effective Time, CUB
will advise Corporate of the identity of officers, if any, whose resignations
will not be required. In the Merger, the business of Corporate will be merged
into CUB and Corporate will cease to exist. The directors and officers of CUB
in office immediately prior to the Merger shall remain as the directors and
officers of CUB following the Merger.
EXCHANGE OF STOCK CERTIFICATES. As soon as practicable after the
Effective Time and after the Election Date, Bancorp will send to Corporate
shareholders of record at the Effective Time a notice and letter of transmittal
advising the shareholders of Corporate of the procedure for surrendering
certificates representing shares of Corporate Stock in exchange for
certificates representing shares of Bancorp Common and cash in lieu of Bancorp
Common and fractional shares. SHAREHOLDERS SHOULD NOT SURRENDER THEIR
CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL.
All shares of Bancorp Common issued in the Merger will be deemed
issued as of the Effective Time. The holder of a certificate representing
shares of Corporate Stock shall have no rights with respect to such shares
other than to surrender such certificates, as provided in the letter of
transmittal, in exchange for certificates representing shares of Bancorp Common
and the cash portion of the Purchase Price (and cash in lieu of fractional
shares) or, in the event such holder has dissented from the Merger, to
surrender such certificates in connection with a request to receive the value
of the shares represented by such certificates based on an appraisal. See
"DISSENTING SHAREHOLDERS' RIGHTS." Upon surrender of any certificate
representing shares of Corporate Stock to be exchanged for Bancorp Common, the
holder thereof shall be entitled to receive (i) a certificate representing the
shares of Bancorp Common to which such holder is entitled and a check in the
amount of any cash to be paid to such holder, and (ii)
14
<PAGE> 20
funds on account of dividends and other distributions paid to holders of record
of shares of Bancorp Common as of a record date after the Effective Time but
prior to surrender. See "THE MERGER -- Exchange of Stock Certificates."
DISSENTERS' RIGHTS
If the Merger is consummated, shareholders of Corporate who dissent
therefrom would be entitled, pursuant to Section 215a of Title 12 of the United
States Code ("Section 215a") and Section 1300, et seq. of the California
Corporations Code ("Chapter 13"), to receive in cash the appraised value of the
shares held by them when the Merger is consummated. In the event the rights
granted by Section 215a and Chapter 13 are perfected by a Corporate
shareholder, the shares of Corporate Stock held by such shareholder shall not
be converted into the right to receive a number of shares of Bancorp Common
equal to the Conversion Ratio, but instead shall be converted into the right to
receive such amount as is provided in Section 215a and Chapter 13. Certain
provisions of Section 215a and Chapter 13 are reprinted as Appendix C to this
Proxy Statement/Prospectus and should be read for more complete information
concerning dissenters' rights. The information set forth below is a general
summary of dissenters' rights as they apply to Corporate shareholders, and is
qualified in its entirety by reference to Section 215a and Chapter 13.
In order to be entitled to exercise dissenters' rights, a shareholder
of Corporate must either vote against the Merger Agreement at the Corporate
Meeting or must notify Corporate in writing that he or she dissents from the
Merger Agreement at, or prior to, the Corporate Meeting.
A shareholder who does not timely surrender his or her stock
certificates and make such a request will lose his or her dissenters' rights
and be treated for purposes of conversion of shares of Corporate Stock as a
Corporate shareholder who voted to ratify and confirm the Merger Agreement at
the Meeting.
Pursuant to Chapter 13 of the California Corporations Code, the fair
market value of dissenting shares is determined as of the day before the first
announcement of the terms of the proposed Merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend that becomes effective
thereafter.
Corporate must mail to each such shareholder a notice of the approval
of the Merger by Corporate's outstanding shares. The notice must be mailed by
Corporate within 10 days after the date of such approval. The notice must be
accompanied by a copy of Sections 1300, 1301, 1302, 1303, and 1304 of the
California Corporations Code, which specify a dissenting shareholder's rights
and the initial procedure required to enforce those rights, and a copy of which
has been reprinted under Appendix C.
The notice must also be accompanied by a statement of the price
determined by Corporate to represent the fair market value of the dissenting
shares and a brief description of the procedure to be followed if the
shareholder desires to exercise rights as a dissenting shareholder. Such
statement of price constitutes an offer by Corporate to purchase any dissenting
shares at that price unless they lose their status as such.
Any shareholder who desires Corporate to purchase shares as dissenting
shares and has the right to require it to do so must make written demand upon
Corporate to purchase such shares and make payment to the shareholder in cash
of their fair market value. The demand must state the number and class of the
shares held of record by the shareholder of which purchase is demanded. It
must also contain
15
<PAGE> 21
a statement of what the shareholder claims to be the fair market value of those
shares as of the day before announcement of the proposed Merger. That
statement of fair market value constitutes an offer by the shareholder to sell
the shares at such price. The demand is effective if received by Corporate or
its transfer agent within 30 days after the date on which the notice of
approval of the Merger by Corporate's outstanding shares was mailed to the
dissenting shareholder.
Before shares that are certificated securities can qualify as
dissenting shares, the certificate representing them must be submitted for
endorsement as dissenting shares to Corporate at its principal office or at the
office of its transfer agent of Corporate. Submission must be within 30 days
after the date notice of approval of the proposed Merger by Corporate's
outstanding shares was mailed to the shareholder. Before shares that are
uncertificated securities can qualify as dissenting shares, the shareholder
must submit written notice to Corporate at its principal office or at the
office of its transfer agent of the number of shares that the shareholder
demands that Corporate purchase. Submission must be made within the time
limits specified above.
Certificates so submitted must be either (1) stamped or endorsed with
a statement that the shares represented by them are dissenting shares, or (2)
exchanged for certificates of appropriate denomination so stamped or endorsed.
On subsequent transfer of dissenting shares on the books of Corporate, the new
share certificates, initial transaction statement, and other written statements
issued to the transferees must bear a like statement that the shares are
dissenting shares and the name of the original dissenting holder of the shares.
If Corporate and a dissenting shareholder agree that shares are
dissenting shares and agree on the price of the shares, the dissenting
shareholder is entitled to the agreed price, with interest from the date of the
agreement at the legal rate payable on judgments.
Unless otherwise provided by the agreement, payment of the fair market
value of dissenting shares shall be made within 30 days after agreement on the
value of the shares or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and, in the
case of certificated securities, subject to surrender of the certificates
therefor. Making payment on dissenting shares, however, is subject to
compliance with all requirements for a distribution involving the repurchase of
shares. When Corporate is unable to comply with those requirements, a holder
of dissenting shares becomes a creditor of Corporate for the agreed value of
the shares together with interest on that amount at the legal rate payable on
judgments until it is paid. The shareholder is, however, subordinate to all
other corporate creditors in any liquidation proceedings. The debt becomes
payable when Corporate is able to comply with such requirements. At this time,
Corporate is restricted from making such distribution by application of certain
agreements with the FDIC and the Superintendent. See, "CORPORATE BANK -
Regulatory Matters", herein. A request will be made to terminate these
agreements prior to the Effective Time of the Merger, although there are no
assurances that such request will be successful.
Any agreements fixing the fair market value of any dissenting shares
as between the corporation and the holders of the dissenting shares shall be
filed with the secretary of Corporate. If Corporate denies that shares are
dissenting shares, or if Corporate and a dissenting shareholder fail to agree
on the fair market value of dissenting shares, either the shareholder or
Corporate may file a complaint in the superior court of the "proper county,"
praying the court to determine the issue. The complaint must be filed within
six months after the date on which notice of the reorganization's approval by
Corporate's outstanding shares was mailed to the shareholder. The court may
be asked to determine either or both of (1) whether the shares are dissenting
shares, and (2) the fair market value of the dissenting shares. Two or more
16
<PAGE> 22
dissenting shareholders may join as plaintiffs or be joined as defendants in
the same action and two or more such actions may be consolidated. Further, a
dissenting shareholder or Corporate may intervene in any such pending action.
On the trial of the action, the court must determine the issues. If
the status of shares as dissenting shares is in issue, the court must first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court must either determine it or appoint one or more impartial
appraisers to do so. Where litigation is instituted to test the sufficiency or
regularity of the votes of shareholders in authorizing a reorganization, any
action brought to determine whether shares are dissenting shares or the fair
market value of dissenting shares shall be suspended until final determination
of that litigation.
If the court appoints an appraiser or appraisers, they must proceed
forthwith to determine the fair market value per share of the dissenting
shares. Within the time fixed by the court, the appraisers, or a majority of
them, must file a report in the office of the clerk of the court. Upon its
filing with the clerk, on motion of any party, the report shall be submitted to
the court and considered on such evidence as the court considers relevant. If
the court finds the report reasonable, the court may confirm it.
If a majority of the appraisers appointed fail to make and file their
report within ten days from the date of their appointment or within such
further time as may be allowed by the court, or if the appraisers' report is
not confirmed by the court, the court itself shall determine the fair market
value of the dissenting shares.
COMPARISON OF THE RIGHTS OF HOLDERS OF BANCORP COMMON AND CORPORATE STOCK
There are certain differences between the laws governing the rights of
shareholders of Corporate and the rights of stockholders of Bancorp. See
"COMPARISON OF THE RIGHTS OF HOLDERS OF BANCORP COMMON AND CORPORATE STOCK."
HISTORICAL AND PRO FORMA PER SHARE DATA FOR BANCORP AND CORPORATE
The following summary of comparative per share data sets forth certain
historical information for Bancorp and Corporate, certain pro forma information
for Bancorp after giving effect to the Merger as a purchase transaction for
accounting purposes, assuming it had been in effect at the beginning of each
period presented, and equivalent pro forma information for Corporate based on
the pro forma Bancorp information. This data is based upon and should be read
in conjunction with information set forth in the financial statements and
related notes of Bancorp and Corporate, which are included or incorporated by
reference herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CORPORATE" and "FINANCIAL STATEMENTS OF CORPORATE BANK." For
additional information regarding Bancorp's results for the six months ended
June 30, 1995, see "SUMMARY -- Recent Bancorp Developments."
17
<PAGE> 23
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ----------------------------
EQUIVALENT
OF ONE SHARE
CORPORATE
PER COMMON SHARE BANCORP CORPORATE BANCORP(1) STOCK(2)
- ---------------- ------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Net Income (Loss):
1994 . . . . . . . . . . . . . . . . . . . . . $0.56 $(1.04) $ .33 $ .55
Six months ended June 30, 1995 (unaudited) . . 0.30 .16 .11 .18
Cash Dividends Declared:
1994 . . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ --
Six months ended June 30, 1995 (unaudited) . . .04 0 .04 .06
Book Value:
December 31, 1994 . . . . . . . . . . . . . . $6.66 $13.98 $6.67 $10.77
June 30, 1995 (unaudited) . . . . . . . . . . 6.87 14.35 6.90 11.14
</TABLE>
__________________
(1) The pro forma Bancorp amounts are based on combined data for Bancorp
and Corporate for the periods presented and have been prepared giving
effect, at the beginning of the respective periods, to the following
significant assumptions: the issuance of approximately 830,000 shares
(including common stock equivalents) of Bancorp Common based on an
assumed Conversion Ratio (made for purposes of this calculation only)
of 1.61. The assumed Conversion Ratio is based on a Shareholders'
Equity of $7,177,000 plus $200,000 related to the Bond Claim. This
assumption is made solely for the purpose of calculating the pro forma
data; it is not intended to be, nor should it be interpreted as, a
representation or approximation of the actual Conversion Ratio. For a
description of the manner in which the actual Conversion Ratio will be
calculated, and an updated example of calculation of the Conversion
Ratio, see "THE MERGER -- Terms of the Merger."
(2) Represents the pro forma equivalent of one share of Corporate Stock
calculated by multiplying pro forma Bancorp data by the assumed
Conversion Ratio of 1.61 shares of Bancorp Common for each share of
Corporate Stock.
COMPARATIVE STOCK PRICE INFORMATION
Bancorp Common is traded on the Nasdaq National Market System (the
"NMS"). Corporate Stock is not listed on any stock exchange nor is it listed
with the NMS and its trading activity is very limited. Between January 1, 1994
and the date of this Proxy Statement/Prospectus, the total number of shares of
Corporate Stock traded of which the management of Corporate is aware was less
than 1% of the total issued and outstanding shares of Corporate Stock.
Corporate is not aware of any dealer who makes a market in Corporate Stock.
The following table sets forth, for the periods indicated, the high and low
closing sales prices of Bancorp Common, as reported on the NMS.
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<PAGE> 24
<TABLE>
<CAPTION>
PRICE PER SHARE
-------------------------------------------
BANCORP COMMON CORPORATE STOCK (1)
------------------ -------------------
HIGH LOW
-------- -------
<S> <C> <C> <C>
1992
First Quarter . . . . . . . . . . . . . . . . . . $6.75 $5.00 $
Second Quarter . . . . . . . . . . . . . . . . . . 6.00 4.25
Third Quarter . . . . . . . . . . . . . . . . . . 5.25 3.50
Fourth Quarter . . . . . . . . . . . . . . . . . . 4.75 3.25
1993
First Quarter . . . . . . . . . . . . . . . . . . 6.25 3.38
Second Quarter . . . . . . . . . . . . . . . . . . 7.00 4.75
Third Quarter . . . . . . . . . . . . . . . . . . 6.25 5.00
Fourth Quarter . . . . . . . . . . . . . . . . . . 7.25 5.75
1994
First Quarter . . . . . . . . . . . . . . . . . . 7.50 6.50
Second Quarter . . . . . . . . . . . . . . . . . . 7.00 5.75
Third Quarter . . . . . . . . . . . . . . . . . . 7.50 6.00
Fourth Quarter . . . . . . . . . . . . . . . . . . 8.00 6.75
1995
First Quarter . . . . . . . . . . . . . . . . . . 7.50 7.13
Second Quarter . . . . . . . . . . . . . . . . . . 7.13 6.86
Third Quarter (through September 29, 1995) . . . . 8.63 8.63
</TABLE>
(1) The Corporate Stock is held by only 47 shareholders. As a result,
there has been little, if any, activity in the Corporate Stock over
long periods of time. No trades of Corporate Stock were effected in
1992 and none have been completed in 1995. One trade occurred in the
third quarter of 1993 at $15.00 per share and one trade occurred in
the third quarter of 1994 at $14.00 per share. No other trades are
known to the management of Corporate.
On March 24, 1995 (the last full trading day prior to the public
announcement that Corporate was engaged in merger discussions with Bancorp,
related to the Old Merger Agreement), the high and low sales prices for Bancorp
Common were $7.50 and $7.13, respectively. On ____________, 1995 (the last
full trading day prior to the public announcement of the amendment to the
Merger Agreement), the high and low sales prices for Bancorp Common were $_____
and $______, respectively. On July 13, 1994, (the date of the last trade of
Corporate Stock of which the management of Corporate is aware), the sale price
for Corporate Stock was $14.00 per share. On October 19, 1995, the high and
low sales prices for Bancorp common were $10.25 and $9.50, respectively.
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<PAGE> 25
CERTAIN BANCORP FINANCIAL DATA
The following table sets forth certain selected financial data for
Bancorp for each year in the five-year period ended December 31, 1994, and for
the unaudited six-month periods ended June 30, 1995, and 1994, and is qualified
in its entirety by the financial information incorporated by reference herein
and attached hereto. In the opinion of Bancorp's management, the unaudited
financial statements as of and for the six months ended June 30, 1995 and 1994
which are included in this Proxy Statement/Prospectus were prepared on the same
basis as the audited financial statements and include all adjustments (none of
which were other than normal recurring entries) necessary to present fairly the
information set forth therein. Interim financial statements are not
necessarily indicative of results for the entire year. See "AVAILABLE
INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
20
<PAGE> 26
CU BANCORP
SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- -------- -------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Summary:
Net interest income . . . . . . . . . $ 7,618 $ 6,072 $ 13,881 $ 14,431 $ 20,625 $ 25,681 $ 28,851
Other operating income . . . . . . . 1,161 3,053 5,408 26,423 21,499 10,537 6,936
Less provisions for loan losses . . . 0 0 0 450 17,090 14,267 3,650
Less other operating expenses . . . . 6,273 7,037 14,735 36,883 37,493 27,843 22,265
-------- -------- -------- -------- -------- ---------- --------
Income (loss) before income taxes . . 2,506 2,088 4,554 3,521 (12,459) (5,892) 9,872
Income taxes (benefit) . . . . . . . 1,097 902 1,980 1,423 (4,269) (2.255) 4,009
-------- -------- -------- -------- -------- ---------- --------
Net income (loss) . . . . . . . . . . 1,409 1,186 2,574 2,098 (8,190) (3,637) 5,863
======== ======== ======== ======== ======== ========== ========
Per common share:
Fully diluted income (loss) per common
and equivalent share . . . . . . . $ 0.30 $ 0.26 $ 0.56 $ 0.47 $ (1.90) $ (0.83) $ 1.27
Dividends declared . . . . . . . . . 0.04 0 0 0 0 0.15 0.225
Total assets . . . . . . . . . . . . 309,787 278,397 304,154 279,206 353,923 516,762 485,697
Total earning assets . . . . . . . . 271,628 228,353 261,328 251,559 281,723 429,480 415,602
Total deposits . . . . . . . . . . . 268,646 242,690 264,181 238,928 318,574 473,125 444,542
Stockholders' equity . . . . . . . . 31,533 28,230 29,744 26,990 24,632 32,598 36,600
Ratios:
Net interest margin . . . . . . . . . 5.67% 5.51% 5.98% 5.86% 6.07% 6.99% 7.61%
Return on average assets . . . . . . .94 .92 0.97 0.69 (1.89) (0.76) 1.31
Return on average shareholders equity 9.36 8.68 9.12 8.12 (26.06) (10.27) 16.85
Common dividend payout ratio . . . . 13.00 -- -- -- -- N/A 17.7
Regulatory risk-based capital ratio . 15.84 17.20 15.40 16.71 12.87 12.31 14.15
Regulatory capital leverage ratio . . 10.34 10.60 10.44 9.16 6.12 6.91 9.25
Allowance for loans losses to:
Period end total loans . . . . . 4.50 4.32 4.25 4.63 6.28 4.33 1.32
Nonperforming loans . . . . . . . 2,648 699 20,631 473 95 75 79
Nonperforming assets . . . . . . 2,648 699 20,631 283 95 59 79
</TABLE>
21
<PAGE> 27
RECENT BANCORP DEVELOPMENTS
Uncertainties in the economic and banking environment may affect the
market prices for the securities of banking and bank companies, such as
Bancorp, in ways which do not necessarily reflect changes in the issuer's
financial condition or performance.
Bancorp has declared and paid a cash dividend to its shareholders of
$.02 per share for each of the fourth quarter of 1994; first quarter of 1995
and second quarter of 1995. While Bancorp's dividend policy encourages profit
retention for equity growth, it also provides for cash dividends when
considered safe and sound by the Board of Directors, to reward shareholder
participation.
In November 1993, CUB sold its mortgage origination operation to
Republic Bancorp of Michigan. CUB's mortgage division had engaged in the
origination, sales and servicing of real estate secured loans, primarily on one
to four family dwellings in California. At the time of the sale, CUB retained
the mortgage servicing portfolio, which was subsequently sold in a number of
transactions. In 1995 CUB completed its sale of the final portion of the
mortgage servicing portfolio.
BANCORP LEGAL MATTERS
In the normal course of business, CUB occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, CUB believes that pending or threatened litigation involving CUB will
have no adverse material effect upon its financial condition, or results of
operations.
From 1993 to early 1995, CUB and a former officer/director of CUB were
defendants 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 "Neilsen Action"). An additional action was filed by an individual
investor and his related pension and profit sharing plans (the "Individual
Investor Action"). During 1995 a settlement was effected which released CUB
from liability related to those matters although the former officer/director
was not released. See the discussion of settlement below.
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. CUB 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
allege that false representations were made, and the investment merely
constituted a "Ponzi" scheme. Other charges relate to the CUB'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. CUB has consistently denied the 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
22
<PAGE> 28
have been prayed for with regard to any particular defendant, nor has there
been any apportioning of liability among defendants or attributable to the
various claims asserted. CUB and the named officer/director have notified
CUB's insurance carriers of the various lawsuits. At this time, CUB continues
to pay for the defense of the former officer/director and advance funds for
that purpose, although, in CUB's opinion, there is no statutory or contractual
requirement to do so (although CUB's D&O Insurance Carrier disputes that
determination).
During 1994, the court granted the CUB's motion for summary judgment
in the Individual Investor Action. An appeal of that Order was filed by the
plaintiffs. However, the plaintiff in the Individual Investor Action is a
member of the settling class, and in connection with the settlement discussed
below, that appeal was dismissed.
During early 1995 CUB entered into a settlement agreement with the
representatives of the various plaintiffs, which dismissed all of the above
referenced cases, with prejudice, against CUB, its officers and directors, with
the exception of the officer/director previously named. The settlement was
subject to appropriate court approvals which have now been received. In
connection with the settlement, CUB released its security interest in certain
disputed collateral and cash proceeds thereof, which had been a subject of
dispute in the Neilson Action, with both CUB and the representatives of
PMC/SLGH asserting the right to such collateral. All the Individual Loans were
charged off in 1993 and 1994. CUB also made a cash payment to the Plaintiffs
in connection with the settlement. In connection with the settlement, CUB
assigned its rights, if any, under various insurance policies, to the
Plaintiffs. The settlement does not resolve the claims asserted against the
officer/director. CUB is still providing a defense to its former
director/officer who retains his rights of indemnity, if any, against CUB
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.
The former officer/director has been granted summary judgment in his favor in
three of the actions and filing of such a motion in the remaining action has
been stayed pending discovery proceedings, not directly related to the claims
against the former officer/director. While CUB'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.
REGULATORY MATTERS:
From June of 1992 to November 1993, CUB operated under a formal
agreement with its principal regulator, the Office of the Comptroller of the
Currency ("OCC"). On November 2, 1993, the OCC, after completion of their
annual examination of the Bank, terminated the Formal Agreement entered into in
June 1992. In December 1993, the Federal Reserve Bank of San Francisco
terminated a Memorandum of Understanding entered into by Bancorp 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 CUB,
to improve lending operations and management of the loan portfolio. The Formal
Agreement required CUB to maintain a Tier I Risk-Weighted Capital Ratio 10.%
and a 6.0% Tier 1 Leverage Capital 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 CUB 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)
23
<PAGE> 29
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 CUB unless (a) the CUB is in compliance with its capital
program; (b) CUB is in compliance with 12 U.S.C. 55 and 60 and (c) CUB receives
the prior written approval of the OCC District Administrator); 13) develop and
implement a written liquidity, asset and liability management policy; 14)
document and support the reasonableness of any management and other fees to any
director or other party; 15) correct violations of law; and 16) provide reports
to the OCC regarding compliance.
The Memorandum of Understanding was executed in August 1992 and
required 1) a plan to improve the financial condition of Bancorp and CUB; 2)
development of a formal policy regarding the relationship of Bancorp and CUB,
with regard to dividends, inter-company transactions, tax allocation and
management or service fees; 3) a plan to assure that Bancorp has sufficient
cash to pay its expenses; 4) ensure that regulatory reporting is accurate and
submitted on a timely basis; 5) approval of the Federal Reserve Bank prior to
the payment of dividends; 6) approval of the Federal Reserve Bank prior to
Bancorp incurring any debt; and 7) quarterly reporting regarding the condition
of Bancorp and steps taken regarding the Memorandum of Understanding.
CUB AND BANCORP WERE IN COMPLIANCE WITH THE CAPITAL PORTION OF THE FORMAL
AGREEMENT AT ALL TIMES DURING THE TERM OF THE FORMAL AGREEMENT AND
SUBSEQUENTLY. IN 1995, THE OCC GAVE CUB AUTHORIZATION TO PAY CERTAIN DIVIDENDS
TO BANCORP. THERE ARE NO REGULATORY RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
BY BANCORP, OTHER THAN THOSE IMPOSED BY LAW EQUALLY ON ALL SIMILAR FINANCIAL
INSTITUTIONS. NEITHER CUB NOR BANCORP ARE CURRENTLY UNDER ANY REGULATORY ORDER
OF ANY KIND AND THERE ARE NO ENFORCEMENT OR OTHER REGULATORY PROCEEDINGS
PENDING, TO BEST OF CUB AND BANCORP'S KNOWLEDGE.
24
<PAGE> 30
CORPORATE FINANCIAL DATA
The following table sets forth certain selected financial data for
Corporate as of and for the unaudited six-month periods ended June 30, 1995 and
1994 and as of and for each of the years in the five-year period ended December
31, 1994. In the opinion of Corporate's management, the unaudited financial
statements as of and for the six months ended June 30, 1995 and 1994 which are
included in this Proxy Statement/Prospectus were prepared on the same basis as
the audited financial statements and includes all adjustments (none of which
were other than normal recurring entries) necessary to present fairly the
information set forth therein. Interim financial statements are not
necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31
------------------ ----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF INCOME DATA (1):
Interest income . . . . . . . . . . . $ 3,050 $ 3,157 $ 6,330 $ 7,383 $ 8,447 $10,248 $ 10,893
Interest expense . . . . . . . . . . . 658 639 1,336 1,620 2,276 4,266 5,000
------- ------- ------- ------- ------- ------- --------
Net interest income before provision
for loan and lease losses . . . . . 2,392 2,518 4,994 5,763 6,171 5,982 5,893
Provision (benefit) for loan and lease 178 22 1,134 865 145 (250) 361
losses . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . 325 339 637 841 831 767 644
Noninterest expense . . . . . . . . . 2,404 2,684 5,260 5,539 5,469 5,166 4,100
------- ------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes,
discontinued operations and
cumulative effect of adopting
SFAS 109 . . . . . . . . . . . . . 135 151 (763) 200 1,388 1,833 2,076
Provision (benefit) for income taxes 56 67 (244) 94 581 735 847
------- ------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations before discontinued
operations and cumulative effect
of adopting SFAS 109 . . . . . . . 79 84 (519) 106 807 1,098 1,229
Loss from discontinued operations . . -- -- -- -- -- 61 21
------- ------- ------- ------- ------- ------- --------
Income (loss) from continuing 79 84 (519) 106 807 1,037 1,208
operations . . . . . . . . . . . .
Cumulative effect of adopting SFAS 109 -- -- -- 42 -- -- --
------- ------- ------- ------- ------- ------- --------
Net income (loss) . . . . . . . . . . $ 79 $ 84 $ (519) $ 148 $ 807 $ 1,037 $ 1,208
======= ======= ======= ======= ======= ======= ========
SUMMARY BALANCE SHEET DATA (PERIOD END):
Loans and leases . . . . . . . . . . $50,299 $52,798 $51,794 $57,646 $59,666 $72,007 $ 73,239
Allowance for loan and lease losses . 1,991 1,155 1,912 1,222 998 1,099 1,460
Investment securities - taxable . . . -- -- -- 6,636 1,851 606 758
Securities available for sale - 4,431 5,880 5,951 -- -- -- --
taxable . . . . . . . . . . . . . .
Federal funds sold and time
certificates of deposit . . . . . . 13,397 15,277 3,680 13,878 16,480 10,473 15,100
Earning assets . . . . . . . . . . . . 70,118 75,110 63,337 79,382 78,995 84,185 90,557
Total assets . . . . . . . . . . . . . 75,278 82,844 70,063 85,181 90,541 92,755 102,128
Interest-bearing deposits . . . . . . 37,376 42,110 34,240 42,001 50,747 61,987 71,337
Total deposits . . . . . . . . . . . . 66,243 74,050 61,185 75,947 80,484 84,217 90,354
Stockholders' equity . . . . . . . . 7,177 7,630 6,992 7,628 7,480 6,673 8,036
</TABLE>
(Chart continued on next page)
(Footnotes continued on next page)
25
<PAGE> 31
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31
-------------------- --------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Income (loss) before discontinued
operations and cumulative effect
of adopting SFAS 109 . . . . . . . $ 0.16 $ 0.17 $ (1.04) $ 0.21 $ 1.61 $ 2.31 $ 2.73
Loss from discontinued operations . . -- -- -- -- -- (0.13) (0.05)
Cumulative effect of adopting SFAS 109 -- -- -- 0.09 -- -- --
Net income (loss) . . . . . . . . . . $ 0.16 $ 0.17 $ (1.04) $ 0.30 $ 1.61 $ 2.18 $ 2.68
======== ======== ======== ======== ======== ======== ========
Book value (2) . . . . . . . . . . . $ 14.35 $ 15.26 $ 13.98 $ 15.26 $ 14.96 $ 13.35 $ 17.82
Cash dividends paid (3) . . . . . . . $ -- $ -- $ -- $ -- $ -- $ 7.45 $ --
Weighted average shares outstanding . 500,000 500,000 500,000 500,000 500,000 475,450 450,900
SELECTED FINANCIAL RATIOS:
Return on average stockholders'
equity (4) . . . . . . . . . . . . 2.14% 2.30% (7.10)% 1.96% 11.40% 14.10% 16.25%
Return on average assets (4) . . . . . 0.22 0.21 (0.65) 0.17 0.86 1.06 1.28
Net interest spread (5). . . . . . . . 5.61 5.55 5.52 6.16 6.30 5.44 5.28
Net interest yield (6) . . . . . . . . 7.35 6.82 6.90 7.43 7.47 6.85 6.88
Primary capital to total assets . . . 12.18 10.57 12.71 10.39 9.35 8.38 9.30
Regulatory risk-based capital ratio . 14.26 15.30 14.08 13.85 12.88 11.33 11.21
Tier 1 risk-based capital . . . . . . 12.63 13.36 12.12 11.70 10.38 9.72 9.98
Regulatory capital leverage ratio . . 9.92 10.45 9.42 10.29 9.35 8.26 9.30
Nonaccrual loans to total loans . . . 6.28 9.51 4.33 7.22 -- 1.19 --
Nonperforming assets to average
total assets (7) . . . . . . . . . 6.54 8.04 6.05 9.81 4.51 4.43 0.01
Net charge-offs to average loans . . . 0.18 0.16 0.81 1.03 0.37 0.15 0.12
Average total shareholders' equity to
average total assets . . . . . . . 10.36 8.94 9.15 8.59 7.55 7.50 7.85
Total interest expense to gross
interest income . . . . . . . . . . 21.57 20.24 21.11 21.94 26.94 41.63 45.90
Loans to deposits at period end . . . 75.93 71.30 84.65 75.90 74.13 85.50 81.06
Cash dividends declared to net
earnings (3) -- -- -- -- -- 324.01 --
</TABLE>
___________________
(1) Income data for fiscal years 1992, 1991 and 1990 have not been
restated to apply the provisions of Statement of Financial Accounting
Standards No. 109.
(2) Represents common stockholders' equity divided by the number of shares
outstanding at period end without giving effect to the possible
dilutive effect of the exercise for outstanding stock options.
(3) Associated with the change in ownership of Corporate in June 1991, a
dividend was paid to the previous shareholder in the amount of
$3,360,000.
(4) The return on average stockholders' equity and average assets computed
on net earnings for all periods.
(5) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities. The net interest
spread is not computed on a tax equivalent.
(6) Represents net interest earned as a percentage of average
interest-earning assets. The net interest yield is not computed on a
tax equivalent basis.
(7) Nonperforming assets consist of nonaccrual loans, loans past due 90
days or more, restructured loans and other real estate owned.
26
<PAGE> 32
PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet as of June
30, 1995 and unaudited pro forma combined statements of income as and for the
year ended December 31, 1994 and the six months ended June 30, 1995 have been
prepared to reflect the effects on the historical results of Bancorp of the
proposed Merger of Corporate into CUB, Bancorp's principal subsidiary. The
Unaudited Pro Forma Combined Balance Sheet has been prepared as if the Merger
occurred on June 30, 1995. The unaudited proforma statement of income for the
year ended December 31, 1994 and the six month ended June 30, 1995 have been
prepared assuming the Merger occurred as of January 1, 1994 and January 1,
1995, respectively. The pro forma financial information set forth below is
unaudited and not necessarily indicative of the results that will actually
occur in the future.
Unaudited Pro Forma Combined Balance Sheet
<TABLE>
<CAPTION>
(Dollars in Thousands) June 30, 1995
-----------------------------------------------------------
ASSETS BANCORP CORPORATE COMBINED ADJUSTMENT TOTAL
-------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Cash and due from banks . $ 29,617 $ 4,944 $ 34,561(1) $ (738) $ 33,823
Federal funds sold . . . 37,000 13,100 50,100 50,100
Investment securities . . 64,808 4,431 69,239 69,239
Time certificates of
deposit . . . . . . . -- 297 297 297
Loans, net . . . . . . . 169,820 50,299 220,119 220,119
Premises and equipment . 1,170 594 1,764 1,764
Other real estate owned . -- 575 575 575
Other assets . . . . . . 7,372 1,038 8,410(2) 3,200 11,610
-------- ------- -------- ------ --------
Total assets . . . $309,787 $75,278 $385,065 $2,462 $387,527
-------- ------- -------- ------ --------
Liabilities
Demand deposits . . . . . $ 97,559 $28,867 $126,426 $ 0 $126,426
Interest bearing deposits 171,087 37,376 208,463 208,463
-------- ------- -------- ------ --------
Total deposits . . . . 268,646 66,243 334,889 0 334,889
Other liabilities . . . . 9,608 1,858 11,466(3) 3,000 14,466
-------- ------- -------- ------ --------
Total liabilities . . 278,254 68,101 346,355 3,000 349,355
Capital 31,533 7,177 38,710(4) (538) 38,172
-------- ------- -------- ------ --------
Total Liabilities &
Capital . . . . . . . $309,787 $75,278 $385,065 $2,462 $387,527
======== ======= ======== ====== ========
</TABLE>
27
<PAGE> 33
Unaudited Pro Forma Combined Statement of Income
<TABLE>
<CAPTION>
(Dollars in Thousands) SIX MONTHS ENDED JUNE 30, 1995
-----------------------------------------------------
Except Per Share Amounts BANCORP CORPORATE COMBINED ADJUSTMENT TOTAL
------- --------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Interest and fees on loans
and leases . . . . . . . . $4,674 $2,755 $7,429 $7,429
Interest on investment
securities . . . . . . . . 889 108 997 997
Interest on time certificates
of deposit . . . . . . . . -- 23 23 23
Interest on federal funds
sold . . . . . . . . . . . 514 164 678 678
------ ------ ------ ----- ------
Total interest income . . 6,077 3,050 9,127 9,127
Interest on deposits . . . . 2,209 658 2,867 2,867
------ ------ ------ ----- ------
Net interest income . . . . . 3,868 2,392 6,260 6,260
Provision for loan losses . . 0 178 178 178
------ ------ ------ ----- ------
Net revenue loan from
earning assets . . . . . . $3,868 $2,214 $6,082 $6,082
Non interest income . . . . . 541 325 866 866
Non interest expense . . . . 3,163 2,404 5,567(5) 198 5,765
------ ------ ------ ----- ------
Income before taxes . . . . . $1,246 135 $1,381 $(198) $1,183
Taxes on income . . . . . . . 547 56 603 (42) 561
------ ------ ------ ----- ------
Net income . . . . . . . . . $ 699 $ 79 $ 778 $(156) $ 622
====== ====== ====== ===== ======
Earnings Per Share $ 0.11
------
Weighted Average Shares
Outstanding (6) 5,531,000
==========
</TABLE>
Unaudited Pro Forma Combined Statement of Income
<TABLE>
<CAPTION>
(Dollars in Thousands) FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------
Except Per Share Amounts BANCORP CORPORATE COMBINED ADJUSTMENT TOTAL
------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Interest and fees on loans
and leases . . . . . . . . $14,036 $5,524 $19,560 $ 19,560
Interest on investment
securities . . . . . . . . 2,966 337 3,303 3,303
Interest on time certificates
of deposit . . . . . . . . 39 99 138 138
Interest on federal funds
sold . . . . . . . . . . . 918 370 1,288 1,288
------- ------ ------- ----- --------
Total interest income . . 17,959 6,330 24,289 24,289
Interest on deposits . . . . 4,078 1,336 5,414 5,414
------- ------ ------- ----- --------
Net interest income . . . . . 13,881 4,994 18,875 18,875
Provision for loan losses . . 0 1,134 1,134 1,134
Non interest loan income . . 5,408 637 6,045 6,045
Non interest expense . . . . 14,735 5,260 19,995(5) $ 296 202,291
------- ------ ------- ----- --------
Income before taxes . . . . . 4,554 (763) 3,791 (296) $ 3,495
Taxes on income . . . . . . . 1,980 (244) 1,736 (42) 1,694
------- ------ ------- ----- --------
Net income . . . . . . . . . $ 2,574 $ (519) $ 2,055 $(254) $ 1,801
------- ------ ------- ----- --------
Earnings Per Share $ 0.33
--------
Weighted Average Shares Outstanding (6) 5,423,000
==========
</TABLE>
__________________
28
<PAGE> 34
(1) Represents the cash proceeds to Corporate shareholders, assuming
Bancorp elects to pay ten percent of the purchase price in cash. The
purchase price calculated as if the Merger had occurred on June 30,
1995 would have been $7,377 thousand, ten percent of which would have
resulted in $738 thousand cash payment. See also, "Terms of the
Merger".
(2) Additions to other assets include $1,240 thousand of deferred taxes
and $1,960 thousand in goodwill generated by the Merger transactions.
The deferred tax asset relates to an anticipated $3 million mark to
market adjustment of Corporate's lease commitments. The goodwill
balance is the difference between the purchase price of $7,377
thousand had the Merger been completed on June 30, 1995, and the
estimated market value of Corporate's net assets at June 30, 1995.
(3) Corporate has lease commitments related to its Santa Ana office that
are in excess of estimated current market value at June 30, 1995.
Under the purchase method of accounting, a liability of approximately
$3 million would be booked at the Effective Date to record the excess
of lease commitments over the current market for rental of similar
facilities.
(4) Adjustments to total capital include the assumed issuance of
approximately 830 thousand shares of Bancorp common stock with a value
of $6,639 thousand, and the elimination of Corporate's $7,177
thousand in equity as the Corporate shares are exchanged for Bancorp
stock and cash. The amount of Bancorp stock to be issued is based on
the assumption that the purchase price at June 30, 1995 would have
been $7,377 thousand, and $738 thousand of that amount would be
distributed in cash.
(5) The only adjustments to the pro forma combined statements of income
are the assumed amortization of goodwill generated by the Merger
transaction and acquisition expenses. Goodwill of $1,960 thousand
amortized over the full year of 1994, assuming a ten year life, would
have generated $196 thousand of expense. The same goodwill amortized
over the six months ended June 30, 1995 would have generated
additional expense of $98 thousand. No adjustments have been made for
any operational synergies that may occur as a result of the Merger.
Pro forma expenses include $100 thousand of expenses related to the
Merger.
(6) Pro forma earnings per share for the year ended December 31, 1994 were
calculated based on Bancorp's 4,593 thousand weighted average shares
outstanding plus 830 thousand shares assumed to be issued in the
Merger transaction. Pro forma earnings per share for the six months
ended June 30, 1995 were calculated based on Bancorp's 4,701 thousand
weighted average shares outstanding plus 830 thousand shares assumed
to be issued in the Merger transaction. There is no difference for
this entity between fully diluted and primary earnings per share.
29
<PAGE> 35
GENERAL INFORMATION
INTRODUCTION
This Proxy Statement/Prospectus is furnished to the shareholders of
Corporate Bank, a California banking corporation ("Corporate"), in connection
with the solicitation of proxies for a Special Meeting of Shareholders of
Corporate (the "Corporate Meeting") to be held at ____, California time, on
___________, 1995, at the Doubletree Hotel, located at 100 S. The City Drive,
Orange, California. At the Corporate Meeting, shareholders of Corporate will be
asked to consider and vote upon a proposal to ratify and confirm the Amended
and Restated Agreement and Plan of Reorganization dated as of October 11, 1995,
with exhibits, ( the "Merger Agreement"), by and among California United Bank,
National Association, a national banking association ("CUB"), CU Bancorp, a
California corporation and the parent bank holding company of CUB ("Bancorp"),
and Corporate, pursuant to which Corporate will be merged with and into CUB
(the "Merger"). The Merger Agreement provides for the conversion of each
outstanding share of the common stock, no par value, of Corporate ("Corporate
Stock") into the right to receive a number of shares of the common stock, no
par value, of Bancorp ("Bancorp Common") equal to the Conversion Ratio (as
defined in the Merger Agreement) or cash or a combination thereof. See "THE
MERGER."
RECORD DATE/VOTING RIGHTS
The close of business on ____________, 1995, has been set as the
record date ("Record Date") for determining which shareholders of Corporate are
entitled to receive notice of and to vote at the Corporate Meeting. On the
Record Date, there were 500,000 shares of Corporate Stock issued and
outstanding, held of record by approximately 47 shareholders. The presence at
the Meeting, in person or by proxy, of the holders of a majority of the
outstanding shares of Corporate Stock entitled to vote is required for a
quorum.
Each holder of Corporate Stock will be entitled to one vote, in person
or by proxy, for each share of Corporate Stock standing in his or her name on
the books of Corporate as of the Record Date on any matter submitted to the
vote of the shareholders.
A majority of the outstanding shares of Corporate Stock entitled to
vote shall constitute a quorum. Abstentions will be treated as shares present
and entitled to vote for purposes of determining the presence of a quorum. The
ratification and confirmation of the Merger Agreement requires the affirmative
vote of two-thirds of the outstanding shares of Corporate Stock entitled to
vote at the Meeting. Accordingly, abstentions from voting will have the effect
of a vote "AGAINST" ratification and confirmation of the Merger Agreement. The
proposal to authorize the Board of Directors to adjourn the Meeting to further
solicit votes requires (i) the affirmative vote of a majority of the shares
represented and voting at the Meeting; and (ii) the affirmative vote of at
least a majority of the required quorum. ACCORDINGLY, ABSTENTIONS FROM VOTING
WILL HAVE NO EFFECT ON THE OUTCOME OF THE VOTE ON SUCH PROPOSAL, WITH RESPECT
TO THE FIRST TEST, BECAUSE THEY ARE NOT DEEMED TO BE VOTING, AND WILL HAVE THE
EFFECT OF A VOTE "AGAINST" SUCH PROPOSAL, WITH RESPECT TO THE SECOND TEST,
BECAUSE THEY WILL NOT CONSTITUTE AFFIRMATIVE VOTES FOR SUCH MATTERS.
If you hold your Corporate Stock in "street name" and you fail to
instruct your broker or nominee as to how to vote your Corporate Stock, your
broker or nominee may, in its discretion, vote your Corporate Stock "FOR" the
proposal authorizing the Board of Directors to adjourn the Meeting to further
solicit votes, if necessary. IF, HOWEVER, YOU FAIL TO INSTRUCT YOUR BROKER OR
NOMINEE AS TO HOW TO VOTE YOUR CORPORATE STOCK, YOUR BROKER OR NOMINEE MAY NOT
VOTE YOUR CORPORATE STOCK WITH RESPECT TO RATIFICATION AND CONFIRMATION OF THE
MERGER AGREEMENT.
30
<PAGE> 36
As of the Record Date, Corporate's directors and executive officers
(and their affiliates) owned 70,250 shares of Corporate Stock representing
approximately 14% of the outstanding shares of Corporate Stock entitled to vote
at the Meeting.
All directors of Corporate and all shareholders of Corporate who owns
5% or more of Corporate Stock have agreed to vote all of their shares
(representing approximately 20.59% of the outstanding Corporate Stock entitled
to vote at the Meeting) in favor of ratification and confirmation of the Merger
Agreement, thereby increasing the likelihood that the Merger Agreement will be
ratified and confirmed. The affirmative vote of approximately an additional
47% of the outstanding Corporate Stock will be required to ratify and confirm
the Merger Agreement. See "THE MERGER -- Agreements with Certain
Shareholders."
As of the Record Date, neither Bancorp, CUB nor any of its respective
directors or executive officers held any outstanding shares of Corporate Stock.
REVOCATION OF PROXIES/CORPORATE PROXY SOLICITATION
A Proxy for use at the Meeting is enclosed. Any shareholder who
executes and delivers such Proxy has the right to revoke it at any time before
it is exercised by filing with the Corporate Secretary of Corporate an
instrument revoking it or a duly executed Proxy bearing a later date. It may
also be revoked by attendance at the Meeting and election to vote thereat.
Subject to such revocation, all shares represented by a properly executed Proxy
received in time for the Meeting will be voted by the Proxy holders in
accordance with the instructions on the Proxy.
If no instruction is specified in respect to a matter to be acted
upon, the shares represented by the Proxy will be voted "FOR" ratification and
confirmation of the Merger Agreement. It is not anticipated that any matters
will be presented at the Meeting other than as set forth in the accompanying
Notice of the Meeting. If, however, any other matters properly are presented
at the Meeting, the Proxy will be voted in accordance with the best judgment
and in the discretion of the Proxy holders.
The expense of preparing, assembling, and mailing this Proxy
Statement/Prospectus and the material used in this solicitation of Proxies will
be borne by Corporate except that the cost of printing this Proxy
Statement/Prospectus will be borne jointly by Corporate and Bancorp. It is
contemplated that Proxies will be solicited through the mails, but officers and
regular employees of Corporate may solicit Proxies personally or by telephone,
without additional compensation therefor. Although there is no formal
agreement to do so, Corporate may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expense in forwarding
these proxy materials to their principals. In addition, Corporate may pay for
and utilize the services of individuals or companies not regularly employed by
Corporate in connection with the solicitation of Proxies if the Board of
Directors of Corporate determines that this is advisable.
PRINCIPAL SHAREHOLDERS
The Board of Directors of Corporate knows of no person who
beneficially owns more than 5% of the outstanding Corporate Stock as of the
Record Date, except for Ray Adams, 350 S. Raymond Avenue, Fullerton, CA 92631.
As of the Record Date, Mr. Adams owned 32,961 shares of Corporate Stock,
representing 6.592% of the issued and outstanding shares of Corporate Stock as
of that date.
31
<PAGE> 37
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of the Record Date, the number and
percentage of shares of Corporate's outstanding Corporate Stock beneficially
owned (1), directly or indirectly, by each of the Corporate's directors and
executive officers (2) of Corporate as a group. Management is not aware of any
arrangements which may, at a subsequent date, result in a change of control of
Corporate.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OF OWNERSHIP OF OF
BENEFICIAL OWNER COMMON STOCK CLASS
------------------------------------ ------------------- -----------------
<S> <C> <C>
Angelina Bevins 12,500 2.50%
James E. Hansen 7,200 1.44%
Raj Pal 13,050 2.61%
Stanley J. Pawlowski 12,500 2.50%
C. Ellis Porter 0 0.00%
Allan H. Stokke 12,500 2.50%
Lester T. Tjelmeland 12,500 2.50%
All Directors and Executive Officers
as a Group
(8 in the aggregate) 70,250(3) 14.05%(3)
</TABLE>
____________________
(1) Includes all shares beneficially owned, whether directly or together
with associates, and includes any shares owned, whether jointly or as
community property, with a spouse, and any stock of which beneficial
ownership may be required within days of the Record Date.
(2) The executive officers of Corporate as of December 31, 1994 were
Richard C. Brown, Stanley J. Pawlowski, Philip J. Andrews and
Elizabeth L. Peters. The executive officers of the Bank as of the
Record Date were C. Ellis Porter, Gary R. Strachn and Stanley J.
Pawlowski. Elizabeth L. Peters resigned effective March 10, 1995.
Philip J. Andrews resigned effective March 31, 1995. Richard C.
Brown's employment was terminated on May 5, 1995.
(3) The percentage of ownership assumes 500,000 outstanding shares.
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<PAGE> 38
THE MERGER
The Merger Agreement provides for the merger of Corporate with and
into CUB. The obligation of the parties to consummate the Merger is subject to
the satisfaction of certain conditions, including ratification and confirmation
of the Merger Agreement by the shareholders of Corporate. See "THE MERGER --
Conditions to the Merger" and "THE MERGER -- Regulatory Approval."
CERTAIN PROVISIONS OF THE MERGER AGREEMENT ARE SUMMARIZED BELOW. THIS
SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE COMPLETE TEXT OF THE MERGER AGREEMENT, WHICH IS REPRINTED AS
APPENDIX A TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. SHAREHOLDERS OF CORPORATE ARE URGED TO READ THE MERGER AGREEMENT
AND THE EXHIBITS THERETO IN THEIR ENTIRETY.
BACKGROUND OF THE MERGER
Since mid 1992 when a new management team joined the organization, CUB
has viewed its target geographic market as the general Los Angeles area and
contiguous communities. Within these geographic areas it seeks to provide
primarily commercial banking services to business entities, professionals and
high net worth individuals. CUB views this targeted market as a series of at
least five circles representing desired service areas. These circles may be
adjacent to one another, may overlap in some fashion or may be separate.
Within these circles, CUB has sought to either acquire banks or branches or to
open de novo offices. CUB has succeeded, through de novo offices, to place at
least one office in each of the circles, resulting in its series of offices
from Ventura County on the west, to the San Fernando Valley, West Los Angeles,
South Bay and San Gabriel Valley (Industry) on the east. In moving south, the
next circle encompasses inland Orange County and surrounding areas, where
Corporate is located. Thus, the acquisition of Corporate is a logical step in
CUB's strategic plan as a result of the geographic location of Corporate in
inland Orange County, and which serves areas which are adjacent to those served
by CUB's existing offices in the South Bay and San Gabriel Valley areas.
Since CUB's strategic plans were known to certain legal and investment
banking professionals, an introduction to the management of Corporate was made
by attorneys representing CUB who were familiar with certain of the management
at Corporate. During these introductory meetings, the parties discovered many
similarities to their businesses and recognized the possibilities of synergies
in a business combination.
In October of 1994, Bancorp and Corporate commenced preliminary
negotiations, culminating in the execution of an Agreement and Plan of
Reorganization 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
and potential claims against former management employees and related matters
more fully discussed in "Recent Events Related to Corporate," the transaction
was substantially delayed, pending, in part, receipt of Corporate's audited
financial statements for the year ended December 31, 1994. During the fourth
quarter of 1994, the Board of Directors of Corporate elected to change
accounting firms. Corporate's accountant prior to that time, Grant Thornton
LLP, had represented Corporate since its organization in 1982 and Corporate's
Board of Directors believed it would be prudent to make a change due to the
longevity of that relationship. Corporate 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 and related concerns. On May 10, 1995, Corporate engaged
Arthur Andersen LLP to complete the audit. The audit of the financial
statements as of December 31, 1994 was completed by Arthur Andersen LLP on
June 30,
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<PAGE> 39
1995. Since 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 provision 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 period from January 1, 1995 to the Audit Date (the "Audit
Period") 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
net 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. Shareholder's Equity shall 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"). The parties shall
utilize such Closing Report in combination 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 as set forth in the financial statements accompanying
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.
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<PAGE> 40
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 Stock Percentage"). The amount of cash to be paid to holders of
Corporate Stock will not exceed twenty-five percent (25%) of the Purchase Price
or be less than ten percent (10%) of the Purchase Price (the "Elected Cash
Percentage"). The Elected Stock Percentage plus the Elected Cash Percentage
will equal one hundred percent (100%) of the Purchase Price (collectively the
"Elected Percentage").
CORPORATE'S REASONS FOR THE MERGER AND RECOMMENDATION OF CORPORATE BOARD
In evaluating the proposed Merger, the Board of Directors of Corporate
closely examined the banking philosophy and strategic goals of CUB and its
success in implementing its strategic plan. Corporate determined that the
long-term viability of small community banks was questionable, its ability to
compete in the current economic and regulatory environment was difficult and
Corporate might not be able to achieve desired goals and shareholder returns.
Corporate's Board of Directors decided that in light of the fact that Corporate
was operating under the constraints of regulatory orders issued by the FDIC and
a Memorandum of Understanding issued by the California State Banking
Department, was experiencing reduced profitability with a relatively high level
of problem loans, and because Corporate's earnings would be impacted negatively
for several years due to its above-market rate lease for its Santa Ana
headquarters office (See Note 6 of the Corporate financial statements attached
hereto) it was prudent to enter into discussions with CUB that ultimately
resulted in the Merger Agreement. Corporate's Board of Directors decided
Corporate and its shareholders would be best served by merging Corporate with
another institution having highly capable management, similar banking
philosophy and growth strategies that included Orange County. The Board of
Directors of Corporate concluded that the projected earnings potential on a per
share basis of the combined institutions would exceed that of Corporate on a
stand- alone basis. Other advantages anticipated are: increased market
liquidity for holders of Corporate common stock, an opportunity to share in the
benefits of future acquisitions by CUB, a resulting bank that will be firmly
established in desirable and growing market areas, and increased operating
efficiencies through the consolidation of the two banks. Subsequent to the
change of management of Corporate and the matters more fully discussed in
"Recent Events Related to Corporate," the Board re-examined the proposed
transaction in view of the changes related primarily to these matters and the
ensuing delays in the transaction. The Board determined that the transaction
as reflected in the Amended Agreement and Plan of Reorganization continued to
be in the best interests of Corporate and its shareholders since many of the
synergies and growth opportunities continued to exist, the price of Bancorp
stock had risen steadily during the interim, and that Corporate's earnings
would be, at least temporarily, impacted by the costs related to the recent
events. Based on the foregoing and such other factors as Corporate considered
appropriate, the Board of Directors of Corporate unanimously concluded that the
Merger was in the best interests of Corporate and its shareholders.
THE BOARD OF DIRECTORS OF CORPORATE UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF CORPORATE RATIFY AND CONFIRM THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
Corporate received an initial fairness opinion from the consulting
firm of The Findley Group ("TFG"), Anaheim, California relative to the Old
Merger Agreement, which was based on draft financial information for 1994 from
Deloitte & Touche LLP. Following receipt of AA's audit report on the
financial statements, for 1994 and after entering into the Merger Agreement,
Corporate obtained an additional fairness
35
<PAGE> 41
opinion from TFG dated October 23, 1995. That opinion was rendered at the
request of Corporate's Board of Directors by Corporate's financial advisor,
TFG. TFG has rendered to Corporate's Board of Directors its opinion that the
Purchase Price Per Share pursuant to the Merger Agreement and the Methodology
for Computing the Purchase Price Per Share as of the Calculation Date are fair
to the shareholders of Common Stock of Corporate from a financial point of
view.
THE FULL TEXT OF TFG'S WRITTEN OPINION TO CORPORATE'S BOARD OF
DIRECTORS, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND
LIMITATIONS OF THE REVIEW OF TFG, IS ATTACHED HERETO AS APPENDIX B AND IS
INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY AND IN ITS
ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT. THE FOLLOWING SUMMARY OF
TFG'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION. TFG'S OPINION IS ADDRESSED TO CORPORATE'S BOARD OF DIRECTORS ONLY AND
DOES NOT CONSITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF CORPORATE AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE AT THE CORPORATE MEETING; HOWEVER, THE FOREGOING
IS NOT INTENDED TO LIMIT RELIANCE BY SHAREHOLDERS ON TFG'S OPINION OR ANY OF
THEIR RIGHTS WITH RESPECT TO TFG'S OPINION. CORPORATE SHAREHOLDERS ARE URGED
TO READ THE FAIRNESS OPINION IN ITS ENTIRETY.
In connection with its opinion, TFG, among other things: (a) reviewed
certain publicly available financial and other data with respect to Corporate
and Bancorp, including the consolidated financial statements for recent years
and interim periods to June 30, 1995, and certain other relevant financial and
operating data relating to Corporate and Bancorp made available to TFG from
published sources and from the internal records of Corporate and Bancorp; (b)
reviewed the Merger Agreement; (c) reviewed certain historical market prices
and trading volumes of the Bancorp Common Stock on the NASDAQ; (d) compared
Corporate and Bancorp from a financial point of view with certain other
companies that TFG deemed to be relevant; (e) considered the financial terms,
to the extent publicly available, of selected recent business combinations of
companies that TFG deemed to be comparable, in whole or in part, to the Merger;
(f) reviewed and discussed with representatives of the mangement of Bancorp
certain information of a business and financial nature regarding Bancorp and
Corporate furnished to TFG by Corporate and Bancorp, including financial
forecasts and related assumptions of Corporate and Bancorp; (g) made inquiries
regarding and discussed the Merger and Merger Agreement and other matters
related thereto with Bancorp's and Corporate's counsel; and (h) performed such
other analyses and examinations as TFG deemed appropriate.
In connection with its review, TFG did not independently verify any of
the foregoing information, and relied on such information and assumed such
information was complete and accurate in all material respects. With respect
to the financial forecasts for Corporate and Bancorp provided to TFG by their
respective managements, TFG assumed for purposes of its opinion that such
forecasts were reasonably prepared on bases reflecting the best available
estimates and judgments of such managements at the time of preparation as to
the future financial performance of Corporate and Bancorp and that such
forecasts provided a reasonable basis upon which TFG could form its opinion.
TFG also assumed that there were no material changes in Corporate's or
Bancorp's assets, financial condition, results of operations, business or
prospects since the dates of the last financial statement made available to
TFG. In addition, TFG did not make an independent evaluation, appraisal or
physical inspection of the assets or individual properties of Corporate or
Bancorp and was not furnished with any such appraisals. Further, TFG's
opinion was based on economic, monetary, and general market and other
conditions existing as of the date of the opinion and on the assumption that
the Merger Agreement will be consummated in accordance with the terms thereof,
without any material amendments thereto, and without waiver by Corporate of
any of the conditions to its obligations thereunder.
In arriving at its opinion, TFG determined the fair value of the
shares of Bancorp and Corporate using three separate approaches: premium on
deposits, multiple of equity return and multiple of book value. The premium on
deposits approach is based on the approximate market value of the assets and
deposit liabilities added to (or subtracted from, if liabilities exceed assets)
each institution's shareholders' equity. The multiple of equity return
approach utilizes the prior years' equity return from operations, multiplied by
a factor derived from comparable bank acquisitions recently consummated in
California. The current multiple of equity return ratio for the acquisition of
a sound and profitable institution is approximately 12 to 14 times the equity
return. The multiple of book value approach multiplies the shareholders'
equity of an institution by a factor derived from comparable bank acquisitions
recently consummated in California. TFG determined the factor to be 1.46 for
average banks and 1.60 for sound and profitable banks.
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<PAGE> 42
Under the premium on deposits approach, TFG determined the value of
Corporate and Bancorp to be approximately $6,911,000 and $40,288,000,
respectively. A significant downward adjustment to value for Corporate was
made due to a long term over market lease for Corporate's Head Office. Based
upon information provided by management of Corporate, the current lease value
on a mark to market basis would require over a $2,000,000 downward adjustment
to Corporate's equity. TFG utilized similar premium factors for the deposits
of both Bancorp and Corporate.
Under the multiple of equity return approach, TFG made adjustment for
Corporate due to the fact that Corporate lost money in 1994. TFG utilized an
average equity return for the last three years, arriving at an adjusted equity
return of $450,000. Based upon a multiple of 12, the value for Corporate was
$5,400,000. Using a slightly higher multiple of 13 for Bancorp, due to the
fact that Bancorp is a sound and profitable financial entity, TFG determined
the value for Bancorp under this approach to be $36,200,000.
Under the multiple of book value approach, TFG determined that a
multiple closer to book value for Corporate was appropriate due to the
above market lease, current regulatory issues facing Corporate and operating
dilemmas for Corporate that will inhibit a significant equity return over the
next couple of years. This analysis equated to a value for Corporate of
$7,177,000. Under this approach, TFG determined that operation of Bancorp was
comparable to those financial institutions that have received higher multiples
of book value and utilized a multiple of 1.60 for Bancorp. This analysis and
multiple resulted in a value of Bancorp of $50,452,000.
Using these three approaches, TFG determined the fair value of
Corporate and Bancorp as of June 30, 1995 updated to September 30, 1995, based
upon the total market value of all the shares of common stock to be $7,000,000
and $44,000,000, respectively. Based upon a Conversion Ratio fixed at $8.00
per share for Bancorp Common and a partial payment of cash as per the
Merger Agreement, Corporate Shareholders are receiving consideration well in
excess of the tangible adjusted book value of Corporate after adjusting for the
Corporate Head Office lease value.
The foregoing summarizes the material portions of TFG's report, but
does not purport to be a complete description of the presentation by TFG to
Corporate's Board of Directors or of the analyses performed by TFG. The
preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. TFG believes that its analyses and the
summary set forth above must be considered as a whole and that selecting a
portion of its analyses and of the factors considered, without considering all
analyses and factors would create an incomplete view of the process underlying
the analyses set forth in its presentation to the Corporate Board of Directors.
In addition, TFG gave somewhat more weight to the selected book value multiple
analysis than it did to the premium on deposit and equity return multiple
bacause of recent increased activity in commercial bank acquisitions in
California. However, TFG did not deem any particular assumptions made in its
analyses more or less probable than any other of the assumptions.
Consequently, the ranges of valuations resulting from any particular analysis
described above should not be taken to be TFG's view of the actual value of
Corporate, Bancorp or the combined company.
In performing its analyses, TFG made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Corporate or Bancorp. The
analyses performed by TFG are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
TFG's analysis of the fairness, from a financial standpoint, of the Merger to
Corporate's shareholders and were provided to the Corporate Board of Directors
in connection with the delivery of TFG's opinion. The analyses do not purport
to be appraisals or to reflect the prices at which any securities may trade at
the present time or at any time in the future.
As described above, TFG's opinion and presentation to the Board of
Directors of Corporate were among the many factors taken into consideration by
the Corporate Board of Directors in making its determination to appprove the
Merger Agreement.
Corporate agreed to pay TFG a fee of $9,000 for TFG's initial opinion
issued in March 1995 and time and expense for updates and revisions rendered to
Corporate in connection with the transaction. Corporate has retained TFG in
the past for various consulting servies, including strategic planning and
business evaluation services. Corporate has paid TFG and its affiliates
approximately $12,025 so far in 1995 for consulting services not related to
the Merger and $11,000 for the fairness opinion.
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<PAGE> 43
BANCORP'S REASONS FOR THE MERGER
The decision of the Board of Directors of Bancorp and CUB to approve
the Merger Agreement and recommend approval of the Merger Agreement is based
upon its belief that the Merger Agreement and the proposed Merger are in the
best interests of Bancorp and CUB as well as the Bancorp shareholders. Among
the factors considered in reaching such conclusion were the earnings, cash
flows and book value of Corporate, both in the aggregate and on a per share
basis, as well as the then current capitalization of Corporate. Of particular
importance to the Boards of Bancorp and CUB was the composition and quality of
Corporate deposit liabilities and assets. Moreover the Bancorp and CUB boards
determined that the acquisition of Corporate offices in Santa Ana and Anaheim
which are centrally located in Northern Orange County, will fill the presently
existing geographical gap in this important market. Additionally, convenience
of access to bank facilities and services will be considerably enhanced for the
customers of CUB who live or work in the Orange County and adjacent areas.
CUB has determined that greater asset size is desirable in this
competitive banking market to maximize the use of its capital, managerial and
business development resources. As a result CUB has considered mergers with a
number of banks, but due to CUB's asset quality standards and plan of
preserving capital and maximizing shareholder value, many of these institutions
were not appropriate. After being introduced to certain principals of
Corporate Bank, CUB reviewed the books and records of Corporate prior to
extending any purchase offer.
In evaluating the proposed Merger, the Board of Directors of Bancorp
considered Corporate's branch banking franchise, its deposit base, the
historical results of Corporate's operations and the economic conditions and
market opportunities found in the local banking markets served by Corporate.
These factors were re-examined after Corporate's change of management and
discovery of the matters discussed in "Recent Events Related to Corporate", the
resignation of Deloitte & Touche LLP, the resultant delay in the transaction as
well as the impact on Corporate's earnings of costs of attorneys, accountants
and consultants related to these matters. The considerations and discussions
with the Corporate board, resulted in the Amended and Restated Plan of
Reorganization. Bancorp also considered that upon the acquisition CUB would be
required by GAAP to "mark to market" Corporate's above market rate, long term
Santa Ana office lease. GAAP requires CUB (or substantially any purchaser of
Corporate) to record the difference between the lease rate and fair market
value over the remainder of the lease term (approximately 13 years) as a
liability for accounting purposes. The after tax impact to CUB of recording
this liability is approximately One Million Six Hundred Thousand Dollars
($1,600,000), before taking amortization and other accounting factors into
consideration. After reviewing reports and receiving presentations by
Bancorp's officers and legal counsel, the Bancorp and CUB Boards of Directors
unanimously ratified and approved the Merger Agreement at their joint meeting
on October 11, 1995. The Merger Agreement has also been ratified and confirmed
by the affirmative vote of the sole shareholder of CUB. Approval of the Merger
Agreement and the Merger by the stockholders of Bancorp is not required.
TERMS OF THE MERGER
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
financial statements accompanying the Closing Audit or (if the Closing occurs
more than seventy-five days after 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) 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 no sale of the
Bond Claim effected, prior to the Calculation Date, $200,000. 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.
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<PAGE> 44
While the actual formula for determining the Purchase Price reflects
the parties' efforts to provide for a Closing Date as soon as possible after
all the regulatory approvals and other conditions are received, and will not
likely result in a simultaneous Audit Date and Calculation Date, the following
discussion assumes a simultaneous Audit Date and Calculation Date for
simplicity of illustration. If the Audit Date and Calculation Date are not
simultaneous, there would be added to Corporate's Shareholders' Equity as of the
Audit Date a pro rata portion of the net income (loss) for the Audit Period (not
including extraordinary gains) applied to the period between the Audit Date and
the Calculation Date (as well as the Bond Claim proceeds, as discussed above).
If the transaction had closed utilizing a Calculation Date (and Audit
Date) of June 30, 1995, the Purchase Price would have been $7,377,000 which was
equal to a combination of (i) Corporate's Shareholders' Equity as of that date,
plus (ii) the additional $200,000 (in lieu of a sale of, or receipt of recovery
on, the Bond Claim).
At September 30, 1995, Corporate's Shareholders' Equity as set forth
in its 9-30 Call Report was $7,058,000. Call Reports are not prepared in
accordance with GAAP nor are they reviewed or audited by an independent public
accountant. Such reports are prepared in compliance with regulatory
accounting principles ("RAP") which differ from GAAP in certain respects.
Therefore, Corporate's shareholders' equity at September 30, 1995 as set forth
in the 9-30 Call Report may differ from the amount that would be determined
in accordance with GAAP pursuant to an audit such as the Closing Audit.
The following is presented for purposes of example only, and should not be
interpreted as a definitive determination of the Purchase Price or Exchange
Ratio as of September 30, 1995: If the transaction had closed utilizing a
Calculation Date (and Audit Date) of September 30, 1995, the Purchase Price
would have been $7,258,000 which was equal to a combination of: (i) Corporate's
Shareholders' Equity as of that date (as set forth in the 9-30 Call Report and
subject to the disclaimers set forth above); plus (ii) the additional
$200,000 (in lieu of a sale of, or receipt of recovery on, the Bond Claim.)
IT IS POSSIBLE THAT THE SHAREHOLDERS' EQUITY OF CORPORATE AS OF THE
AUDIT DATE OR THE CALCULATION DATE WILL BE LESS THAN $7,058,000 SINCE
CORPORATE IS CONTINUING TO INCUR HIGH OPERATING COSTS AND IS EXPENDING HIGH
COSTS RELATING TO THE MERGER. IF CORPORATE FOR ANY REASON SUFFERS MATERIAL
LOSSES PRIOR TO THE CLOSING DATE, THEREBY MATERIALLY REDUCING CORPORATE'S
SHAREHOLDERS' EQUITY AND THE PURCHASE PRICE, CORPORATE WOULD NONETHELESS
BE OBLIGATED TO COMPLETE THE MERGER AT THE REDUCED PRICE, WITHOUT LIMIT.
NOTWITHSTANDING THE ABOVE, IF THE DETERMINED EQUITY AS OF THE CALCULATION
DATE IS LESS THAN $6,705,100 (95% OF THE CORPORATE SHAREHOLDERS' EQUITY
SET FORTH IN THE 9-30 CALL REPORT OF $7,058,000) (A "VOTING THRESHOLD"),
CORPORATE SHAREHOLDERS WILL BE GIVEN AN OPPORTUNITY TO RESCIND THEIR PRIOR
APPROVAL OF THE TRANSACTION AND VOTE AGAIN ON THE TRANSACTION TO DETERMINE
IF THEY WISH TO GO FORWARD AT SUCH PURCHASE PRICE, UNLESS BANCORP, IN ITS
SOLE DISCRETION, AGREES TO CALCULATE THE PURCHASE PRICE BASED ON A DETERMINED
EQUITY OF NOT LESS THAN $6,705,100 IN WHICH CASE CORPORATE MUST PROCEED WITH
THE TRANSACTION. IN SUCH A CASE, ASSUMING NO PRIOR RECEIPT OF PROCEEDS ON
OR SALE OF THE BOND CLAIM, THE PURCHASE PRICE WOULD BE NOT LESS THAN
$6,905,100. ALTERNATELY, UNDER SUCH CIRCUMSTANCES, CU BANCORP AND CUB WOULD
BE ENTITLED TO TERMINATE THE TRANSACTION DUE TO THE MATERIAL ADVERSE CHANGE
IN CORPORATE'S CONDITION.
In the Merger, each share of Corporate Stock outstanding at the
Effective Time (as defined below), 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 consisting of a number of shares
of Bancorp Common equal to the Conversion Ratio (as defined in the Merger
Agreement) or cash, or a combination thereof. 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 Stock 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 business other date as may be
mutually agreed by the parties. The Calculation Date shall not be more than
five (5) business days prior to the Closing Date, except by mutual agreement of
the parties. Corporate's Shareholders' Equity shall be as set forth in the
Closing Audit or the Closing Audit and the Closing Report.
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<PAGE> 45
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'
Blanket Bond (the "Bond") Insurance Carrier on September 29, 1995 (the "Bond
Claim"). Corporate believes that certain losses previously incurred and
reorganized 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 unlikely 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 therefore, the Purchase Price will be increased as of the
Calculation Date by $200,000.
If the Merger had been consummated with an Audit Date and Calculation
Date of June 30, 1995, the Conversion Ratio would have been approximately and
Corporate shareholders would have received approximately 1.61 shares of Bancorp
Common for each share of Corporate Stock. Bancorp Common at June 30, 1995
had a closing price of $7.00 per share as traded on the Nasdaq Stock Exchange.
On October 11, 1995, the date of execution of the Amended and Restated
Agreement and Plan of Reorganization, the closing price of Bancorp Common was
$8.94 per share. If the transaction had closed utilizing a Calculation Date
(and Audit Date) of September 30, 1995, with an Elected Cash Percentage of
10%, the Conversion Ratio would have been 1.633 and Corporate Shareholders
would have received 1.63 shares of Bancorp Common for each share of
Corporate Stock (based on the 500,000 shares of stock outstanding excluding
options for 14,000 shares as to which there is an existing agreement to
terminate the options for a cash payment, subject only to FDIC nondisapproval)
plus cash in the amount of $1.45 for each share of Corporate Stock. At such
date, the Corporate Shareholders would have received an aggregate of $725,800
in cash (not including cash paid in lieu of fractional shares) and 816,525
shares of Bancorp Common or 15.11 percent of the Bancorp Common then
outstanding. At such date, the closing price of Bancorp Common as quoted on
the Nasdaq was $ . BECAUSE THE MARKET VALUE OF BANCORP COMMON IS SUBJECT TO
FLUCTUATION, THE ACTUAL MARKET VALUE OF THE SHARES OF BANCORP COMMON THAT
HOLDERS OF CORPORATE STOCK WILL RECEIVE IN THE MERGER MAY INCREASE OR
DECREASE PRIOR TO THE MERGER. BECAUSE THE CORPORATE BOARD OF DIRECTORS MUST
PROCEED WITH THE MERGER REGARDLESS OF THE THEN MARKET PRICE OF BANCORP COMMON
STOCK (UNLESS THE CHANGE CONSTITUTES A MATERIAL ADVERSE CHANGE), THE ACTUAL
MARKET VALUE OF THE SHARES OF BANCORP COMMON THAT HOLDERS OF CORPORATE STOCK
MAY RECEIVE IN THE MERGER FOR EACH SHARE OF CORPORATE STOCK MAY BE LESS THAN
$8.00 AND THE AGGREGATE VALUE RECEIVED BY THE CORPORATE SHAREHOLDERS MAY BE
LESS THAN CORPORATE'S SHAREHOLDER EQUITY AS OF THE CALCULATION DATE.
During the time from execution of the Merger Agreement through the
Closing Date, Corporate is required to maintain adequate reserves for loan
losses and other contingencies, as required by GAAP. Corporate shall provide
CUB with information on certain proposed loans over $100,000 on a regular
basis. Each party shall provide the other with copies of all monthly reports
to the respective Boards of Directors.
CONDITIONAL STOCK ELECTION. Each Corporate Shareholder who makes a
Conditional Stock Election will be entitled to receive a certain number of
shares of Bancorp Common (the "Stock Election Conversion Shares") in exchange
for each share of Corporate Stock converted pursuant to his Conditional Stock
Election. The number of Stock Election Conversion Shares to be exchanged for
each share of Corporate Stock subject to a Conditional Stock Election will be
equal to the quotient obtained by dividing (i) the Purchase Price Per Share of
the Corporate Stock multiplied by the Elected Percentage as defined below, by
(ii) $8.00.
CONDITIONAL CASH ELECTION. Each Corporate Shareholder who makes a
Conditional Cash Election will be entitled to receive the Purchase Price Per
Share in exchange for each share of Corporate Stock converted pursuant to a
Conditional Cash Election, subject to the limitations imposed by the Stock
Conversion Requirement. (See "THE MERGER -- Terms of the Agreement --
Allocation Procedure" herein.)
CONDITIONAL JOINT ELECTION. Each Corporate Shareholder who makes a
Conditional Joint Election will receive a certain number of Stock Election
Conversion Shares for each of his shares of Corporate Stock converted pursuant
to a Conditional Stock Election and the Purchase Price Per Share for each such
share converted pursuant to a Conditional Cash Election, subject to the
limitations imposed by the Stock Conversion Requirement. (See "THE MERGER --
Terms of the Agreement -- Allocation Procedure" herein.)
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<PAGE> 46
NO ELECTION. Each Corporate Shareholder who has no preference and
accordingly makes No Election will receive either Bancorp Common Stock, cash or
a combination thereof, as determined by the allocation procedure. (See "THE
MERGER -- Terms of the Agreement -- Allocation Procedure" herein.)
ELECTION AND EXCHANGE PROCEDURE
A Conditional Election Statement will be forwarded to request each
Corporate Shareholder to make either a Conditional Stock Election, Conditional
Cash Election, Conditional Joint Election or No Election. For the Conditional
Election Statement to be effective, it must be properly completed and signed by
the Corporate Shareholder and received by the exchange agent of Bancorp (the
"Exchange Agent") on or before the date specified therein (the "Election
Date"). Any Corporate Shareholder who has submitted a Conditional Election
Statement may amend or revoke the same at or any time prior to the Election
Date. Any Corporate Shareholder who does not return a Conditional Election
Statement on or before the Election Date or who properly revokes his
Conditional Election Statement but does not submit a new statement, will be
deemed to have made No Election. After the Election Date, all conditional
elections by the Corporate Shareholders will be irrevocable.
As soon as reasonably practicable after consummation of the Merger,
the Exchange Agent will mail to each holder of record of outstanding shares of
Corporate Stock a letter of transmittal which is to be used by each Corporate
Shareholder to return to the Exchange Agent the stock certificates representing
the Corporate Stock owned by him, which certificates should be duly endorsed in
blank by such Corporate Shareholder. As soon as practicable after receiving
such certificates from a Corporate Shareholder together with the duly executed
letter of transmittal and any other items specified by the letter of
transmittal, the Exchange Agent will deliver to such Corporate Shareholder
new certificates evidencing the appropriate number of Stock Election
Conversion Shares issued pursuant to a Conditional Stock Election, together
with checks for the appropriate amount of cash pursuant to a Conditional Cash
Election and/or for payment of cash in lieu of fractional shares. All risk
of loss in the delivery of the certificates of Corporate Stock to the Exchange
Agent will be borne by the Corporate Shareholder, and title will pass only
upon proper delivery to and receipt of such stock certificates by the Exchange
Agent. No interest will be paid to the Corporate Shareholders on the cash or
the value of the Stock Election Conversion Shares into which their shares of
Corporate Stock will be converted.
If the Stock Election Conversion Shares and/or the cash, or any part
thereof, are to be delivered to a person other than the record holder of the
certificates of Corporate Stock surrendered in exchange therefor, (i) the
certificate so surrendered must be properly endorsed or accompanied by
appropriate stock powers and otherwise be in proper form for transfer, (ii) the
transfer must otherwise be proper, and (iii) the person requesting the transfer
must pay to the Exchange Agent any transfer or other taxes payable by reason of
the transfer or must establish to the satisfaction of the Exchange Agent that
such taxes have been paid or are not required to be paid.
ALLOCATION PROCEDURE
The conditional elections to be made by the Corporate Shareholders in
connection with the conversion of their shares of Corporate Stock will be
subject to the requirement that not less than seventy-five percent (75%) and
not more than ninety percent (90%) (the "Elected Stock Percentage") of the
total number of shares of Corporate Stock outstanding (including all shares
held by dissenting Corporate Shareholders) at the Effective Time of the Merger
must be converted into Bancorp Common (the "Stock Conversion Requirement") and
not more than twenty-five percent (25%) and not less than ten percent (10%) of
the total number of shares of Corporate Stock outstanding must be converted
into cash (the Elected Cash Percentage). Bancorp has discretion to determine
the actual Elected Percentage prior to the Effective Date of the Merger. To
meet the Stock Conversion Requirement, each of the shares of Corporate Stock
subject to No Election will be converted into either Bancorp Common or cash, as
necessary.
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<PAGE> 47
If the Stock Conversion Requirement has not been met after allocation
of such shares subject to No Election, a certain number of shares of Corporate
Stock subject to Conditional Cash Elections may be converted to Bancorp Common,
or a certain number of such shares subject to Conditional Stock Elections may
be converted to cash, as the case may be, on a pro rata basis, until the Stock
Conversion Requirement has been met. Thus, as a result of the allocation
procedure, a Corporate Shareholder who has made a Conditional Stock Election
with respect to one or more shares of his Corporate Stock may be required to
receive a certain portion of his consideration in cash, on a pro rata basis
with all others who have made Conditional Stock Elections, or, in the
alternative, a Corporate Shareholder who has made a Conditional Cash Election
with respect to one or more of his shares of Corporate Stock may be required to
receive a certain portion of his consideration in the form of Bancorp Common,
on a pro rata basis with all others who have made Conditional Cash Elections.
Whether and to the extent such reallocation is required is wholly dependent
upon the percentage of shares of Corporate Stock for which Conditional Stock
Elections are made and the degree of reallocation required to satisfy the Stock
Conversion Requirement.
No fractional shares of Bancorp Common will be issued in exchange for
shares of Corporate Stock. Bancorp will pay or cause to be paid cash in lieu
of fractional shares equal to the product of (i) the fraction of a share which
would otherwise have been issued multiplied by (ii) the Conversion Ratio.
EFFECTIVE TIME OF THE MERGER
The Merger shall be effective ("Effective Time") at the time
specified, or at the time mutually agreeable to CUB, Bancorp and Corporate on
the day specified, in a merger approval to be issued by the Office of the
Comptroller of the Currency ("OCC"). It is difficult to predict when the
Effective Time will occur.
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<PAGE> 48
REGULATORY APPROVALS
Federal and California law and regulations provide that certain
acquisition transactions, such as the Reorganization, may not be consummated
unless approved in advance by applicable regulatory authorities. The Merger
Agreement provides that Bancorp, Corporate and CUB shall proceed expeditiously
and cooperate fully in the procurement of any consents and approvals and in the
taking of any other action and the satisfaction of all requirements, prescribed
by law or otherwise, necessary for consummation of the Merger, including the
preparation and submission of applications required to be filed with the OCC,
the Federal Reserve Board and the SEC. Receipt of all requisite regulatory
approvals and consents is a condition precedent to the consummation of the
Merger and the Reorganization. See "THE MERGER -- Conditions to the Merger."
Applications for prior approval of the Merger were filed with the OCC
on November 10, 1995. There can be no assurances that the required approvals
will be obtained, or as to conditions or timing of such approvals.
Although neither Bancorp nor Corporate is aware of any reason why the
requisite approval of and consents to the Merger would not be granted, there
can be no assurance such approvals and consents will be obtained or that, if
obtained, such approvals and consents will not include conditions which would
be of a type that would relieve Bancorp, Corporate or CUB from their obligation
to consummate the Merger. See "THE MERGER -- Terms of the Merger Agreement";
"-- Conditions to the Merger"; and "-- Termination of the Merger."
In determining whether to approve the Merger, the OCC will consider
factors such as the financial condition of CUB, the effects of the Merger on
CUB, the effects of the Merger on competition, the financial and managerial
resources and future prospects of CUB and Corporate, as a combined entity, the
convenience and needs of the communities served by Corporate and the record of
performance of CUB under the Community Reinvestment Act. The Bank Merger Act
prohibits approval of the Merger if it would have specified anti-competitive
effects, unless the OCC finds those effects are clearly outweighed by the
probable benefits of the transaction. See "THE MERGER -- Termination,
Amendments and Expenses."
CONDITIONS TO THE MERGER
The obligations of each of the parties to consummate the Merger is
subject to the conditions, among others, that (i) the Merger Agreement be
adopted by the holders of at least two-thirds of the outstanding shares of
Corporate Stock, (ii) the Merger be approved by all applicable regulators;
(iii) not more than 5% of the shares of Corporate Stock are "dissenting shares"
as defined in Chapter 13 of the California Corporations Code; (iv) the
transactions be approved by the shareholder of CUB; (v) The applicable waiting
period under the Bank Merger Act will have expired; (vi) Bancorp Common to be
issued in exchange for Corporate Stock shall have been listed on the Nasdaq
Stock Exchange; and (vii) Bancorp will have received a letter from Corporate's
accountants dated the Proxy Date and the Closing Date regarding limited
procedures to be undertaken with respect to, among other things, the amount of
total shareholders' equity and net income of Corporate, as well as the
financial information presented in the Registration Statement and Proxy.
Bancorp may waive the closing letter given the Closing Audit.
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<PAGE> 49
The obligations of Bancorp and CUB to consummate the Merger are also
subject to fulfillment to certain other conditions, including the following:
(i) the representations and warranties of Corporate contained in the Merger
Agreement will be true and correct as of the Effective Time of the Merger and
Corporate will have performed in all material respects all covenants required
by the Merger Agreement to be performed by it on or prior to the Effective Time
of the Merger; (ii) Bancorp shall have received certain officers' certificates
and certain legal opinions; (iii) the Shareholders' Equity of Corporate as set
forth in the financial statements accompanying the Closing Audit and/or the
Closing Report shall not have been reasonably disapproved by Bancorp;
(iv) all actions have been duly taken by the Corporate Board which were
necessary to authorize the execution, delivery and performance of the Merger
Agreement by Corporate and the consummation of the transactions contemplated
thereby; (v) all required governmental approvals with respect to the
transaction contemplated by the Merger Agreement will be granted without the
imposition of conditions applicable to the Surviving Bank which Bancorp
reasonably and in good faith concludes would be materially burdensome;
(vi) as of the Closing Date there will not exist any materially adverse change
in the financial condition, results of operation, assets or prospects of
Corporate, or any damage, destruction, loss or event materially adversely
affecting the properties, business or prospects of Corporate; (vii) Corporate
will have caused the Stock Option Plan and any similar plan to be
terminated as of the Effective Time of the Merger; (viii) each of the directors
and executive officers of Corporate, with the exception of C. Ellis Porter and
Gary R. Strachn, will have entered into an Agreement Not to Compete with
Bancorp and CUB; (ix) each of the directors of Corporate who are also
shareholders and shareholders holding 5% or more of the outstanding shares of
Corporate Stock will have entered into a Shareholder Agreement with Bancorp and
CUB; and (x) each "affiliate" of Corporate, as such term is defined pursuant to
Rule 145 promulgated pursuant to the 1993 Act will have entered into an
Affiliate Agreement with Bancorp and CUB; and (xi) CUB shall have received
requested resignations of Corporate officers and/or directors. (See further
discussion of these additional agreements below.)
The obligations of Corporate to consummate the Merger are also subject
to the fulfillment of certain other conditions, including the following: (i)
the representations and warranties of Bancorp and CUB contained in the
Agreement will be true and correct as of the Effective Time of the Merger and
Bancorp and CUB will have performed in all material respects all covenants
required by the Merger Agreement to be performed by them on or prior to the
Effective Time of the Merger; (ii) Corporate will have received certain
officers' certificates; (iii) the Shareholders' Equity of Corporate set forth
in the financial statements accompanying the Closing Audit and/or the Closing
Report shall not have been reasonably disapproved by Corporate; (iv) all
actions have duly taken by the Bancorp and CUB's Boards of Directors which
were necessary to authorize the execution, delivery and performance of the
Merger Agreement by Bancorp and CUB and the consummation of the transactions
contemplated thereby; and (v) as of the Closing Date there will not exist any
material adverse change in the financial condition, results of operations,
assets or prospects of Bancorp or CUB, or any damage, destruction, loss or
event materially adversely affecting the properties, business or prospects of
Bancorp or CUB.
The Merger Agreement provided generally that, during the period from
the date of the Agreement to the Effective Time of the Merger, Corporate will,
among other things, conduct its business only in the normal and customary
manner, in accordance with ordinary business practices and will furnish or make
available certain information to Bancorp and CUB and their agents. In
addition, Corporate has agreed not to take certain actions during the period
without the prior written consent of Bancorp, including, among other actions,
the following: (i) changing its charter documents or other governing
instruments; (ii) issuing or selling any shares of Corporate securities; (iii)
disposing of any assets except in the ordinary course of business or making any
one or a series of capital expenditures in excess of $5,000 individually or
$10,000 in the aggregate; and (iv) changing any of its basic policies and
practices with respect to its
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<PAGE> 50
business operations. The Merger Agreement exempts a sale or transfer of the
Bond Claim from these limitations.
The Merger Agreement also provides that during the period Bancorp and
CUB will conduct their businesses only in the normal and customary manner and
will furnish or make available certain information to Corporate and its agents.
Bancorp has further consented not to take certain actions, without the prior
written consent of Corporate including, among other actions, the following:
(i) carry on its business except in substantially the same manner as it has
been conducted or introduce any new method of management or operation in
respect of its business and properties, except in a manner consistent with
prior practice and in the ordinary course of business; and (ii) changing its
charter documents except to restate documents and changing any of its basic
policies and practice with respect to its business operation.
Corporate Bank will be merged into CUB on the Effective Time, pursuant
to the Agreement of Merger, the full text of which is reprinted on Exhibit A to
the Merger Agreement. All of the outstanding shares of Corporate will be
converted into the right to receive shares of Bancorp Common and/or cash as
discussed above.
If these and other conditions are not satisfied or waived, the Merger
Agreement may be terminated. The Merger Agreement may also be terminated upon
the occurrence of certain other events. See "THE MERGER -- Termination,
Amendments and Expenses."
NONSOLICITATION AGREEMENT
Under the terms of the Merger Agreement, Corporate has agreed not to
solicit, encourage, consider, negotiate or agree to any inquiries or proposals
with or from any third parties with respect to, or provide information to any
third party relating to, any sale, acquisition, merger or other form of
business combination of Corporate or any of its assets (except sales of assets
in the ordinary course of business and consistent with past practice), subject
to the fiduciary obligations of the Corporate Board, and that it will promptly
notify Bancorp and CUB of the terms of any such proposal or offer.
AGREEMENTS WITH CERTAIN SHAREHOLDERS
Bancorp has entered into Shareholders' Agreements with the
shareholders of Corporate specified below, each of whom is also a director of
Corporate ("Corporate Shareholders"), pursuant to which the Corporate
Shareholders have agreed (i) to vote the number of shares of Corporate Stock
owned by the Corporate Shareholders as set forth below in favor of ratification
and confirmation of the Merger Agreement, and (ii) not to sell or otherwise
transfer any such shares of Corporate Stock or the right to vote or direct the
vote of such shares. Bancorp, CUB and the directors of Corporate have also
entered into agreements wherein the Corporate directors agree not to sell any
Bancorp Stock acquired in the transaction for a minimum period of six months
following the date of publication of combined financial statements for CUB and
Corporate. The directors of Corporate have further represented to CUB that
nothing has come to their attention to cause them to believe that the
representations and warranties of Corporate in the Merger Agreement are
inaccurate in any material manner or omit to set forth a material fact. The
Shareholder's Agreement will terminate immediately upon the earlier of the
consummation of the Merger or termination of the Merger Agreement. Additionally
each shareholder/director has agreed to elect to receive not less Bancorp
Common than the Elected Stock Percentage.
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<PAGE> 51
Each of the non-employee directors of Corporate has also entered into
an Agreement Not to Compete with Bancorp and CUB. This provides that for a
period of five years following the Effective Time of the Merger the director
will not: become a board member, employee or consultant to any financial
institution having an office or branch within Orange, Riverside, Los Angeles or
San Diego counties, and will not solicit customers of Corporate for financial
services, if such persons were customers of Corporate as of the Effective Time
of the Merger or execution of the Merger Agreement.
The Corporate Shareholders and the number of shares of Corporate Stock
such persons are entitled to vote at the Meeting which are subject to the
Shareholder's Agreements are as follows:
<TABLE>
<CAPTION>
Number of Shares Percentage of
Entitled to Corporate Stock
Vote as of as of Record
Name Record Date Date
------ ---------------- ---------------
<S> <C> <C>
Angeline Bevins . . . . . . . . . . . 12,500 2.50%
James E. Hansen . . . . . . . . . . . 7,200 1.44%
Raj Pal . . . . . . . . . . . . . . . 13,050 2.61%
Stanley J. Pawlowski . . . . . . . . 12,500 2.50%
Allan H. Stokke . . . . . . . . . . . 12,500 2.50%
Lester T. Tjemeland . . . . . . . . . 12,500 2.50%
------ ------
Total . . . . . . . . . . . 70,250 14.05%
</TABLE>
Because the Corporate Shareholders and an additional holder of more
than 5% of the Corporate Stock have agreed to vote the number of their shares
set forth above (approximately 20% of the outstanding shares of Corporate Stock
entitled to vote at the Annual Meeting) in favor of ratification and
confirmation of the Merger Agreement, the likelihood that the Merger Agreement
will be ratified and confirmed is increased. The affirmative vote of the
holders of an additional 47% of the outstanding shares of Corporate Stock
entitled to vote at the Annual Meeting will be required in order to ratify and
confirm the Merger Agreement. The full text of the Shareholder's Agreement is
reprinted as Exhibit B to the Merger Agreement attached as Appendix A to this
Proxy Statement/Prospectus.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of September 15, 1995, the directors and executive officers of
Corporate owned 70,250 shares of Corporate Stock not including shares such
persons may acquire through the exercise of vested stock options. See "THE
MERGER -- Terms of the Merger." On July 29, 1991, options were granted to
Stanley J. Pawlowski to purchase 17,500 shares of Corporate Stock for an
average exercise price per share of $14.00. Mr. Pawlowski has agreed to the
cancellation of these options in exchange for the payment of cash by Corporate
to Mr. Pawlowski in an amount of $6,898, which is the amount determined by the
Board of Directors of Corporate to be the value of the option as of that date.
Immediately after the Effective Time, the current directors and executive
officers of Corporate as a group will own less than 1% of the outstanding
shares of Bancorp Common.
Upon consummation of the Merger, C. Ellis Porter will be paid a bonus
of $20,000, Stanley J. Pawlowski will be paid a bonus of $20,000, and Gary R.
Strachn will be paid a bonus of $15,000. These bonuses will be paid only upon
the successful closing of the Merger and will be deducted from the
Shareholders' Equity of Corporate as of the Audit Date, thereby reducing the
Purchase Price by the amount of such payments.
As successor to the obligations of Corporate under the terms of the
Merger Agreement, CUB will have the power to indemnify Corporate's past and
present officers and directors from loss or liability arising from or relating
to the performance of their duties to the extent such indemnification is
permitted under applicable law and the bylaws of CUB. In addition, Corporate
has arranged to purchase directors' and officers' tail insurance (the "D&O
Tail"). Under the D&O Tail, the persons serving as officers and directors of
Corporate immediately prior to the Effective Time shall be covered for a period
of three years from the Effective Time with respect to acts or omissions
occurring prior to the Effective Time which were taken by such officers and
directors in their capacities as such. The D&O Tail is required to provide
substantially the same coverage as the directors' and officers insurance policy
currently maintained by Corporate. The cost of the D&O Tail is to be paid by
Corporate prior to the closing of the Merger and will thereby reduce the
Purchase Price by the amount of such payment.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
This is a general discussion of the material federal income tax
consequences of the Merger affecting Bancorp, Corporate, and shareholders of
Corporate. In the opinion of Arthur Andersen LLP (see Appendix D for complete
opinion), the discussion below, insofar as it relates to matters of federal tax
consequences, is an accurate summary of such matters. Arthur Andersen LLP's
opinion is based upon judgment on application of current law to the facts and
is not binding on the courts. This summary is based upon the Internal Revenue
Code of 1986, as amended (the "Code"), administrative pronouncements, judicial
decisions, and existing Treasury Regulations as of the date hereof, all of
which are subject to change, possibly with retroactive effect. Any such change
could affect the continuing validity of this summary. This summary does not,
however, discuss all aspects of federal income taxation that may be relevant
either to a particular shareholder in light of personal circumstances or to
certain types of shareholders subject to special treatment under the federal
income tax laws (for example, life insurance companies, tax-exempt
organizations, foreign investors, dealers in securities, and taxpayers subject
to the alternative minimum tax), and this summary does not discuss any aspect
of state, local, or foreign tax laws. ALL SHAREHOLDERS SHOULD THEREFORE
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM
ARISING FROM THE MERGER.
Bancorp and Corporate intend that the Merger qualify as a
reorganization within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(D) of the Code ("Reorganization"). If the Merger qualifies as a
Reorganization, the exchange of shares of Corporate Stock for shares of Bancorp
Common pursuant to the Merger will not be a taxable event except to the extent
of cash received for, in connection with the Conditional Cash Election or
fractional shares. (Cash received by dissenters who exercise dissenters' rights
will also be treated as a taxable event.) The purpose of these discussions is
to advise Corporate shareholders of the conditions that must be satisfied in
order for the exchange of stock pursuant to the Merger to qualify as a
Reorganization and to advise them of the consequences of the failure of the
Merger to qualify as a Reorganization. In addition, this discussion addresses
other federal income tax consequences related to this transaction.
Neither Bancorp nor Corporate intends to apply for a ruling from the
Internal Revenue Service ("IRS") with respect to the federal income tax
consequences of the Merger. There can be no assurance that the IRS will not
take a view contrary to those expressed herein. Corporate shareholders should
also be aware that an accountant's opinion, unlike a ruling, is not binding on
the IRS.
BASED UPON THE CONTINUING ACCURACY OF CERTAIN ASSUMPTIONS AND
REPRESENTATIONS OF THE PARTIES TO THE MERGER, it is the opinion of Arthur
Andersen LLP that the Merger will constitute a Reorganization under Section
368(a)(1)(A) and Section 368(a)(2)(D) of the Code, if carried out in the manner
set forth in the Merger Agreement, and that:
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SHAREHOLDER CONSEQUENCES
1. A shareholder whose Corporate Stock is exchanged for shares of
Bancorp Common in the Merger will not recognize any gain or loss for federal
income tax purposes as a result of that exchange, except with respect to cash
proceeds received in connection with the Conditional Cash Election and in lieu
of fractional shares;
2. To the extent that cash proceeds are received, gain will be
recognized equal to the lesser of the total cash received, or the total
inherent gain on all shares (determined by subtracting tax basis in all shares
surrendered from the fair market value of all stock plus cash received),
losses, if any, will only be recognized if no stock is received;
3. Cash proceeds received by a holder of shares of Corporate
Stock for the Conditional Cash Election or in lieu of a fractional share
interest in Bancorp Common will result in capital gain, or loss, provided that
the shares of Corporate Stock were held as capital assets at the Effective Time
of the Merger. Currently, capital gains are taxable at a maximum rate of 28
percent. There are current proposals in Congress to reduce the federal tax on
capital gains, which may be retroactive to January 1, 1995. A recent Senate
proposal provides that any reductions shall be retroactive only to October 13,
1995. It cannot be determined at this time if or when this may become law or
what the effective date will be.
4. The aggregate tax basis of the shares of Bancorp Common
received by a holder of shares of Corporate Stock pursuant to the Merger will
be the same as the aggregate tax basis of the shares of Corporate Stock
surrendered in exchange therefor, reduced by any cash received under the
Conditional Cash Election or for fractional shares and increased by any gain
recognized (as computed in #2 above);
5. The holding period of the shares of Bancorp Common received in
the Merger will include the holding period for the shares of Corporate Stock
surrendered in exchange, providing the shares of Corporate stock were held as
capital assets at the Effective Time of the Merger.
CORPORATE AND BANCORP CONSEQUENCES
1. There will be no Corporate gain or loss recognized as a result
of the Merger.
2. Tax basis and certain tax attributes, including holding
periods of assets, of Corporate will carryover to CUB.
3. There will be no taxable gain or loss to Bancorp upon the
issuance of shares to accomplish this transaction.
Arthur Andersen LLP's opinion is subject to certain assumptions and
qualifications and is based upon the accuracy of certain representations of the
parties to the Merger. Of particular importance are assumptions and
representations relating to the Merger's satisfaction of two requirements for a
Reorganization - the "continuity of interest" requirement and the "acquisition
of substantially all of the properties" requirement.
In order for the continuity of interest requirement to be met, holders
of Corporate Stock must not, pursuant to a plan or intent existing at or prior
to the Merger, dispose of so much of either (i) their
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Corporate Stock in anticipation of the Merger (including Corporate Stock
surrendered in the exercise of dissenters' rights, if any), or (ii) the Bancorp
Common to be received in the Merger (collectively the "Planned Dispositions")
such that holders of Corporate Stock, as a group, no longer have a significant
equity interest in the Corporate business being conducted after the Merger.
Holders of Corporate Stock will generally be regarded as having a significant
equity interest as long as the Bancorp Common received in the Merger (after
taking into account Planned Dispositions), in the aggregate, represents a
substantial portion of the entire consideration received by the holders of
Corporate stock in the Merger. The IRS advance ruling guidelines require 50%
continuity of interest. That is, the holders of Corporate Stock will receive
in the Merger and will continue to hold after the Merger (after taking into
account Planned Dispositions) Bancorp Common having a value equal to at least
50% of the value of all of the outstanding shares of Corporate Stock as of the
Effective Time of the Merger. Corporate, Bancorp, and CUB have made
representations that this will be the case. The actual continuity of interest
percentages will be influenced by the percentage of cash Bancorp elects to pay
in this transaction (10%-25%), planned dispositions, the cash paid to
dissenting shareholders, and the trading value of Bancorp stock on the Closing
Date. Corporate, Bancorp, and CUB have agreed to review this requirement
immediately prior to the Closing Date to ensure that it will be met. If,
however, the continuity of interest requirement is not satisfied, the Merger
will be treated as a taxable event.
To meet the criteria of a tax-free reorganization, CUB must acquire
"substantially all" of the assets of Corporate. The acquisition of
substantially all of the assets requirement will be satisfied, according to IRS
advance ruling guidelines, if at least 90% of the fair market value of net
assets and at least 70% of the fair market value of gross assets held by
Corporate immediately prior to the Effective Time of the Merger are acquired by
CUB. Arthur Andersen LLP's opinion is based upon the continuing accuracy of
representations from Corporate, Bancorp, and CUB that the IRS advance ruling
guidelines relating to the acquisition of substantially all of the properties
requirement will be satisfied. If the acquisition of substantially all of the
properties requirement is not satisfied, the Merger will be treated as a
taxable event.
IF THE MERGER IS TREATED AS A TAXABLE EVENT, holders of Corporate
Stock whose shares are exchanged in the Merger will recognize gain or loss for
federal income tax purposes in an amount equal to the difference between the
adjusted tax basis of their shares of Corporate Stock surrendered and the fair
market value of the shares of Bancorp Common received in exchange therefor plus
any cash proceeds received for the Cash Purchase Price or in lieu of fractional
shares. The gain or loss will be capital gain or loss if the shares of
Corporate Stock are held as capital assets at the Effective Time of the Merger.
Capital Losses realized by an individual are deductible for federal income tax
purposes against capital gains for the same taxable year and against up to
$3,000 of other income ($1,500 for a married individual filing a separate
return) for the same taxable year. Any excess capital loss realized by an
individual may be carried forward to subsequent years. If the Merger is a
taxable event, a holder's aggregate basis in the shares of Bancorp Common
received in the Merger will be equal to the fair market value of such shares at
the Effective Time of the Merger, and the holding period for those shares will
not include the period during which the holder held the shares of Corporate
Stock exchanged therefor. In addition, if the Merger is a taxable event,
Corporate Bank itself may have taxable income and CUB as the successor entity
will inherit any tax liability.
Irrespective of whether or not the Merger qualifies as a
Reorganization, holders of Corporate Stock who are entitled to cash payment for
their shares pursuant to the dissenters' rights provisions of the National Bank
Act, as amended (the "National Bank Act"), and Chapter 13 of the California
Corporations Code should recognize capital gain or loss for federal income tax
purposes in an amount equal to the
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difference between the adjusted tax basis for their shares and the amount of
cash received in exchange therefor, provided that such payment is not
essentially equivalent to a dividend within the meaning of Section 302 of the
Code. The payment of cash for shares of Corporate Stock upon exercise of
dissenters' rights will generally not be essentially equivalent to a dividend,
if, as a result of such exercise the dissenting shareholder, after the
Effective Time of the Merger and after the exercise of dissenters' rights owns
(either actually or constructively within the meaning of Section 318 of the
Code) no shares of Corporate Stock or Bancorp Common.
Treasury Regulations require that every taxpayer who receives stock in
connection with the corporate reorganization must file with his or her income
tax return a statement of facts pertinent to the nonrecognition of gain or loss
upon the transaction, including (i) a statement of the basis of the stock
transferred in the transaction and (ii) a statement of the fair market value of
the stock transferred in the transaction. In addition, taxpayers are required
to maintain permanent records with respect to the foregoing information.
Corporate shareholders will be required to comply with these requirements.
Shareholders of Corporate will be required to provide their social
security numbers or their taxpayer identification numbers or, in some
circumstances, certain other information to the Exchange Agent in order to
avoid the "backup withholding" requirements that might otherwise apply, under
the Code.
The foregoing discussion of the expected federal income tax
consequences of the Merger is based on current authorities. There is no
assurance that legislative or administrative changes or court decisions may not
be forthcoming that would significantly change these expected consequences.
Any such changes may or may not be retroactive with respect to transactions
prior to the date of those changes.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
INFORMATION ONLY. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR
MORE ADVICE AS TO THE FEDERAL INCOME TAX CONSEQUENCES TO THEM ARISING FROM THE
EXCHANGE OF THEIR CORPORATE STOCK PURSUANT TO THE MERGER, AS WELL AS ADVICE AS
TO THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX
LAWS.
ACCOUNTING TREATMENT
The Merger is expected to be treated as a "purchase transaction" for
accounting and financial reporting purposes. Financial statement data and
related financial information for Bancorp for periods prior to the Effective
Time will not be restated as a result of the application. Consequently, upon
consummation of the Merger, the Surviving Bank will establish a new accounting
and reporting basis for the acquired assets which will be reflected in the
future consolidated financial statements of Bancorp.
EMPLOYEE PLANS
Pursuant to the terms of the Merger Agreement, Corporate was required
to cause the exercise or cancellation prior to the Effective Time of all
outstanding options to purchase shares of Corporate Stock under all stock
option plans maintained by Corporate. The only outstanding option to purchase
shares of Corporate Stock is held by Stanley J. Pawlowski and he has agreed to
cancel his option in exchange for a payment of $6,898. This payment will be
made upon Corporate's receipt of the FDIC's approval.
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The Merger Agreement requires Corporate to take any and all action
necessary to terminate as of or prior to the Effective Time all stock option
plans. See "THE MERGER -- Interests of Certain Persons in the Merger."
TERMINATION, AMENDMENTS AND EXPENSES
The Merger Agreement may be terminated at any time prior to the
Effective Time (i) by mutual consent of Bancorp, CUB and Corporate; (ii) by
Bancorp, CUB or Corporate if any material breach or default by the other party
is not cured within 30 days after notice thereof; (iii) by Bancorp or CUB if
any governmental or regulatory authority denies or refuses to grant the
approvals, consents or authorizations required to be obtained to consummate
transactions contemplated by the Merger Agreement or if any such approval
contains conditions which, in the reasonable opinion of Bancorp or Corporate,
are materially burdensome to its ongoing operations; (iv) by Corporate if any
governmental or regulatory authority denies or refuses to grant, the approvals,
consents or authorizations required to be obtained in order to consummate the
transactions covered and contemplated by the Merger Agreement, other than the
Merger; (v) by Bancorp or CUB at any time prior to the Effective Time if, (a)
the Corporate Board of Directors approves a transaction or Corporate executes a
letter of intent on other document, pursuant to which 5% or more of the
outstanding shares of Corporate Stock will be acquired or controlled, (b) any
person or entity or related group of persons or entities seeks to acquire 5% or
more of the outstanding shares of Corporate Stock by tender offer or otherwise,
and the Board of Corporate does not advise Corporate's shareholders that the
Board does not support such tender offer or acquisition and that it does
support the Merger, (c) if Corporate fails to notify CUB of an acquisition of
ownership or control of 5% or more of the outstanding shares of Corporate Stock
prior to the Record Date, or (d) the Merger is not approved by at least
two-thirds of the outstanding shares of Corporate Stock as of the Record Date;
or (vi) by Bancorp or CUB if schedules required to be delivered by Corporate
pursuant to the Merger Agreement disclose material contracts, liabilities or
potential liabilities not previously disclosed orally or in writing by
Corporate to CUB or fail to disclose material contracts, liabilities or
potential liabilities which come to CUB's attention in any other manner.
The Merger Agreement may be terminated by CUB in the event of any
change(s) in the financial condition, results of operations, business,
property, assets (including loan portfolio), operations, liquidity, income or
condition (financial or otherwise) or prospects of Corporate since December 31,
1994 (with the exception of those events discussed in "Recent Events Related to
Corporate" herein) which individually or in the aggregate, are materially
adverse to Corporate or in any way cause damage, destruction, loss, or
constitute an event materially and adversely affecting the properties, business
or prospects of Corporate (a "material adverse change"). For purposes of this
section only, and with regard only to matters the effect of which can be
reasonably quantified, an event, occurrence, or circumstance shall be deemed to
have occurred if the average Core Deposits for the three month period prior to
the end of the month just prior to the Closing, do not equal or exceed 85% of
the Core Deposits of Corporate at December 31, 1994. For purposes of this
provision, Core Deposits shall include non interest bearing demand deposit
accounts, interest bearing demand deposit accounts, savings accounts and money
market accounts, but shall not include Certificate of Deposits. Additionally,
for purposes of this provision, CUB shall perform a review of Corporate's loan
portfolio prior to Closing to determine if a material adverse change has
occurred in Corporate's loan portfolio. A material adverse change will have
occurred if the reserves which need to be allocated in CUB's opinion and
pursuant to its loan grading and allowance for loan and lease losses policy,
uniformly applied, exceed Corporate's allowance for loan and lease losses by
approximately 15%. CUB shall also conduct a legal audit prior to Closing to
determine if any legal matters or events constitute a material adverse change.
A material adverse change will also be deemed to have occurred
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if there is a 10% negative change in any two or more of the factors affecting
the business and prospects of Corporate, including but not limited to Core
Deposits, allowance for loan and lease losses or legal exposure.
The Merger Agreement may be terminated by Corporate, in the event of
any change(s) in the consolidated financial condition, results of operation,
business, property, assets (including loan portfolios), operations, liquidity,
income or condition (financial or otherwise) or prospects of CUB since December
31, 1994, which individually or in the aggregate are materially adverse to CUB
or cause any damage, destruction, loss, or event which has an effect of
materially and adversely affecting the properties, business or prospects of CUB
on a consolidated basis (a "material adverse change").
The Merger Agreement may be terminated by Corporate or CUB if either
reasonably disapproves the Corporate's shareholders' equity, net income or loss
as set forth in the Closing Audit or the Closing Report or the net after tax
effect of any sale or distribution of the Bond Claim as calculated by AA,
providing that the terminating party shall be required to set forth the reasons
for such disapproval in writing.
The Merger Agreement shall be terminated if any conditions specified
have not been satisfied or waived in writing by the party authorized to waive
such conditions by February 28, 1996 unless mutually extended by the parties
hereto.
CERTAIN AGREEMENTS
The Merger Agreement provides that, during the period from the date of
the Merger Agreement to the Effective Time, Corporate will conduct its affairs
in the ordinary course of business consistent with past practice and will not,
without the prior written consent of Bancorp, which will not be unreasonably
withheld, take any of the following actions: (i) amend, modify, or, except as
they may be terminated in accordance with their terms, terminate any
Understanding (as defined in the Merger Agreement) or materially default in the
performance of any of its obligations under any Understanding where such action
would have a material adverse effect on the consolidated financial condition,
results of operations or prospects of Corporate; (ii) terminate or unilaterally
fail to renew any existing insurance or bonding coverage; amend, modify,
terminate or fail to renew or preserve its business organization, material
rights, franchises, permits and licenses, or take any action which would
jeopardize the continuance of the goodwill of its customers where such action
would have a material adverse effect on the consolidated financial condition,
results of operations or prospects of Corporate; (iii) enter into any
Understanding, except (a) deposits incurred, and short-term debt securities
(obligations maturing within one year) issued, in the ordinary course of
business and consistent with prior practice, (b) commitments to make loans or
other extensions of credit in compliance with provisions below, and (c) loan
sales in the ordinary course of business, without any recourse except to a
reserve account funded by an interest rate spread otherwise payable to the
servicer of the loans sold, provided that no commitment to sell loans shall
extend beyond the Effective Time of the Merger; (iv) enter into any new leases
(regardless of dollar amount) or contracts requiring annual payments of more
than $1,000, or having a term in excess of six months or enter into any leases
or contracts requiring annual payments of more than $10,000, which are not new;
(v) make any loan or other extension of credit, or enter into any commitment to
make any loan or other extension of credit or enter into any agreement, with or
to any Corporate director, officer or employee or 5% shareholder, except in
accordance with existing practice or policy; (vi) except as required by any
existing contract, grant any general or uniform increase in the rates of pay of
employees or employee benefits or any increase in salary or employee benefits
of any officer, employee or agent or pay any bonus to any
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person; (vii) sell, transfer, mortgage, encumber or otherwise dispose of any
assets or any liabilities except in the ordinary course of business and
consistent with prior practice or as required by any existing contract or for
ordinary repairs, renewals or replacements or as contemplated by the Merger
Agreement; (viii) except pursuant to the exercise of outstanding stock options,
issue, sell, redeem or acquire for value, or agree to do so, any debt
securities or any shares of the capital stock or other ownership interests, or
securities convertible into or options, rights or warrants exercisable for such
shares or interests, of Corporate or declare, issue or pay any dividend or
other distribution of assets, whether consisting of money, Corporate Stock,
other personal property, real property or other things of value, to Corporate's
shareholders or split, subdivide combine or reclassify any shares of its stock
or other equity security; change or amend its charter documents or bylaws; (ix)
make its credit underwriting policies, standards or practices relating to the
making of loans and other extensions of credit, or commitments to make loans
and other extensions of credit, less stringent than those in effect on December
31, 1994; (x) make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which do not exceed
$5,000 individually or $10,000 in aggregate; (xi) make special or extraordinary
payments to any person or enter into any agreement which could result in such
special or extraordinary payments other than $10,000 payments to each of the
President and Chief Financial Officer of Corporate as of the Closing, or as
contemplated, or as disclosed, in the Merger Agreement; (xii) except for
transactions in the ordinary course of business, make any material investments,
by purchase of stock or securities, contributions to capital, property
transfers, purchases of any property or assets or otherwise, in any other
individual, corporation or other entity; (xiii) compromise or otherwise settle
or adjust any assertion or claim of a deficiency in taxes (or interest thereon
or penalties in connection therewith) or file any appeal from an asserted
deficiency except in a form previously approved by CUB in writing or file or
amend any federal, foreign or state tax return or report or make any tax
election or change any method or period of accounting unless required by GAAP
or applicable law; (xiv) except as contemplated in the Merger Agreement,
terminate any plan or enter into any new employment agreement or other employee
benefit arrangement, or modify any employment agreement or other employee
benefit arrangement in effect on the date of the Merger Agreement to which
Corporate is a party; or (xv) agree to take or make any commitment to take
any actions prohibited by these provisions.
POST MERGER OPERATIONS
The Merger Agreement provides that Corporate will obtain the
resignations, to be effective as of the Effective Time, of the directors and
officers of Corporate. Except as set forth below, such persons are expected to
have no continuing positions with Bancorp or CUB. Following consummation of
the Merger, it is expected that the management of CUB in office immediately
prior to the Effective Time will continue in office as the management of CUB.
However, certain officers of Corporate may also be employed by CUB, and CUB or
Bancorp may appoint such an officer to its Board of Directors.
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time, Bancorp will send a
notice and letter of transmittal to each Corporate shareholder of record at the
Effective Time, advising the shareholders of Corporate of the procedure for
surrendering certificates representing shares of Corporate Stock in exchange
for certificates representing shares of Bancorp Common, cash in exchange for
such shares and cash in lieu of fractional shares. See "THE MERGER -- Terms of
the Merger." CORPORATE STOCK CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE
TRANSMITTAL LETTER IS RECEIVED.
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All shares of Bancorp Common issued in the Merger will be deemed
issued as of the Effective Time. The holder of a certificate or certificates
representing shares of Corporate Stock issued and outstanding immediately prior
to the Effective Time will have no rights with respect to such shares other
than to surrender such certificate or certificates, as provided in the
transmittal letter, in exchange for certificates representing shares of Bancorp
Common, cash in exchange for such shares and cash in lieu of fractional shares
or, in the event such holder has dissented from the Merger, to surrender such
certificates in connection with a request to receive the value of the shares
represented by such certificates based on an appraisal. See "DISSENTING
SHAREHOLDERS' RIGHTS." Upon surrender of any certificate representing shares of
Corporate Stock, the holder thereof shall be entitled to receive (i) a
certificate representing the shares of Bancorp Common to which such holder is
entitled and a check in the amount of any cash to be paid to such holder, and
(ii) funds on account of dividends and other distributions paid to holders of
record of shares of Bancorp Common as of a record date after the Effective Time
but prior to surrender. No holder of any shares of Corporate Stock will have
any rights (including voting rights) with respect to Bancorp Common until
surrender of his or her certificate representing shares of Corporate Stock.
No interest will accrue or will be paid on cash dividends or other
distributions payable to any holder of Corporate Stock except as required in
accordance with applicable law governing dissenters' rights. Following the
Effective Time, there will be no further registration of transfers of shares of
Corporate Stock on the records of Corporate.
SALES OF BANCORP COMMON
The shares of Bancorp Common to be issued to shareholders of Corporate
in the Merger have been registered under the 1933 Act. Such shares will be
freely transferable under the 1933 Act, except for shares issued to any person
who may be deemed to be an "affiliate" of Corporate within the meaning of Rule
145 under the 1933 Act, and shares issued to Corporate directors who have
entered into Affiliate Agreements, with Bancorp and CUB. See "Interests of
Certain Persons in the Merger", herein.
NMS LISTING
Bancorp will file an application to list the shares of Bancorp Common
to be issued in the Merger on the NMS. A condition to the consummation of the
Merger is that such Bancorp Common be authorized for listing, upon notice of
issuance, on the NMS.
CU BANCORP
Bancorp is a California corporation incorporated in 1981 and is
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended. As of June 30, 1995, it had total assets of $309.8 million.
Bancorp's sole subsidiary is CUB, which had total assets of $309.8 million as
of June 30, 1995. CUB was founded in April 1982 and provides an extensive
range of commercial banking services.
CUB is a commercial bank which delivers a mix of banking products and
services to middle market businesses, the entertainment industry and high net
worth individuals. CUB offers lending, deposit, cash management, SBA and
international trade services. The Entertainment Division specializes in
meeting the banking needs of Southern California's entertainment industry,
including motion picture and television financing, record labels, talent
agencies, business managers, commercial houses and a
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variety of other related business activities. The SBA division offers
financing alternatives to businesses in CUB's market. The International Trade
Services Group offers a broad range of services to support the import/export
activities of customers. The division has direct correspondent relationships
with major overseas banks, providing business customers with a broad
international reach. The division can facilitate a wide variety of
international banking transactions, including letters of credit, short term
trade related financing, domestic and foreign collections, wire transfers,
standby commitments and government assisted programs.
In 1992, CUB and Bancorp both consented to agreements with their
primary regulators, a Formal Agreement with the OCC and a Memorandum of
Understanding with the Federal Reserve Bank of San Francisco. In June of 1992,
a new management team replaced substantially all of prior management. In
November of 1993, following the first OCC examination subsequent to new
management's implementation of internal controls and other new management
techniques, the OCC released CUB from the Formal Agreement and later that same
month the Federal Reserve Bank of San Francisco determined that Bancorp had met
all the requirements of the Memorandum of Understanding and terminated that
document. CUB's capital ratios, as of June 30, 1995, are in excess of all
minimums imposed by law and regulation and qualify to rate CUB as a "well
capitalized" bank. Following the acquisition of Corporate, CUB will retain
sufficient capital ratios to be "well capitalized." Neither CUB nor Bancorp
operate under any enforcement agreements with their respective regulators. See
"Bancorp Regulatory Matters."
Bancorp is a legal entity separate and distinct from CUB. For further
information relating to Bancorp and CUB, see documents listed under
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." There are various legal
limitations on the ability of CUB to finance or otherwise supply funds to
Bancorp. In particular, under federal banking law, a national bank, such as
CUB, may not declare a dividend that exceeds undivided profits, and the
approval of the OCC is required if the total of all dividends declared in any
calendar year exceeds such bank's net profits, as defined, for that year
combined with its retained net profits for the preceding two years. In
addition, federal law significantly limits the extent to which CUB may supply
funds to Bancorp, whether through direct extensions of credit or through
purchases of securities or assets, issuances of guarantees or the like.
Generally, any loan made by CUB to Bancorp must be secured by certain kinds and
amounts of collateral and is limited to 10% of CUB's capital and surplus (as
defined), and all loans by CUB to Bancorp are limited to 20% of CUB's capital
and surplus. CUB may extend credit to Bancorp without regard to these
restrictions to the extent such extensions of credit are secured by specific
kinds of collateral such as obligations of or guaranteed by the U.S. Government
or its agencies and certain bank deposits.
DESCRIPTION OF BANCORP CAPITAL STOCK
BANCORP COMMON
The Board of Directors of Bancorp is authorized to issue a maximum of
20,000,000 shares of Bancorp Common. As of June 30, 1995, 4,587,330 shares of
Bancorp Common were outstanding. Subject to any prior rights of any preferred
stock of Bancorp ("Bancorp Preferred Stock") then outstanding, holders of the
Bancorp Common are entitled to receive such dividends as are declared by the
Bancorp Board out of funds legally available therefor. Subject to the rights,
if any, of any Bancorp Preferred Stock, all voting rights are vested in the
holders of the Bancorp Common, each share being entitled to one vote. Subject
to any prior rights of the Bancorp Preferred Stock, in the event of
liquidation, holders of shares of Bancorp Common are entitled to receive pro
rata any assets distributable
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to stockholders in respect of shares held by them. Holders of shares of
Bancorp Common do not have any pre-emptive right to subscribe for any
additional securities which may be issued by Bancorp. The outstanding shares
of Bancorp Common are, and the shares of Bancorp Common offered hereby will be,
fully paid and non-assessable. The transfer agent and registrar for the
Bancorp Common is First Interstate Bank of California.
BANCORP PREFERRED STOCK
The Board of Directors of Bancorp has the authority, without further
stockholder action, to issue from time to time a maximum of 10,000,000 shares
of Bancorp Preferred Stock in one or more series and with such terms and at
such times and for such consideration as the Bancorp Board may determine. The
authority of the Bancorp Board includes the determination or fixing of the
following with respect to shares of such class or any series thereof: (i) the
number of shares and designation or title thereof, (ii) rights as to dividends;
(iii) whether and upon what terms, including sinking funds, the shares are to
be redeemable; (iv) whether and upon what terms the shares are to be
convertible; (v) the voting rights, if any, which shall apply, provided,
however, that in no event shall any holder of any series of the Bancorp
Preferred Stock be entitled to more than one vote for each share of Bancorp
Preferred Stock held by such holder; and (vi) the rights of the holders upon
the dissolution, or upon the distribution of assets, of Bancorp. Any shares of
Bancorp Preferred Stock which may be issued may rank prior to shares of Bancorp
Common as to payment of dividends and upon liquidation. No Bancorp Preferred
Stock is currently outstanding.
INDEMNIFICATION PROVISIONS
Article Five of Bancorp's Articles of Incorporation provides that the
liability of the directors of the corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law and that the
corporation is authorized to provide for the indemnification of agents (as
defined in Section 317 of the California General Corporation Law) of the
corporation in excess of that expressly permitted by such Section 317 for
breach of duty to the corporation and its shareholders to the fullest extent
permissible under California law, or any other applicable law.
Except with regard to those matters discussed in "Bancorp Legal
Matters" herein, there is no action or proceeding pending or, to the knowledge
of Bancorp, threatened which may result in a claim for indemnification by any
director, officer, employee or agent of Bancorp.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Bancorp pursuant to the provisions described above or otherwise, Bancorp has
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Bancorp of expenses incurred or paid by
a director, officer or controlling person of Bancorp in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the shares offered hereby, Bancorp will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
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CORPORATE BANK
GENERAL
Corporate was organized as a national banking association in 1982 and
converted to a California licensed banking corporation in 1987. Corporate's
head office and main branch is located in Santa Ana, County of Orange,
California, and it has one additional branch office in Anaheim, County of
Orange, California. As of June 30, 1995, Corporate held approximately $66
million in deposits and had total assets of approximately $75 million. Certain
financial information concerning Corporate is set forth elsewhere in this Proxy
Statement/Prospects and incorporated herein by this reference.
Corporate's business is commercial and retail banking. Corporate is
engaged in substantially all of the business operations customarily conducted
by independent commercial banks in California. Corporate's banking services
include the acceptance of checking and savings deposits, and the making of
commercial, real estate, personal, home improvements, automobile and other
installment loans and term extensions of credit. Corporate also offers
travelers' checks, notary public and other customary bank services to its
customers. Corporate is a credit card issuing bank, offering MasterCard and
Visa to both individuals and businesses. Corporate also offers auto loans and
leases.
REGULATORY MATTERS
On March 8, 1994 Corporate consented to the issuance of a Cease and
Desist Order ("First Order") by the Federal Deposit Insurance Corporation
("FDIC") under Section 8(b) of the Federal Deposit Insurance Act. The First
Order required that certain corrective measures be taken based upon concerns
raised by the FDIC as a result of the FDIC's examination of Corporate as of
August 9, 1993. Under the terms of the First Order, the following actions were
required: (i) the Board of Directors was required to increase its
participation in the affairs of Corporate, assuming responsibility for the
approval of sound policies and for the supervision of Corporate's management;
(ii) Corporate was required to have and retain qualified management; (iii) Tier
1 capital of Corporate was to be maintained at a level of at least 7% of total
assets; (iv) assets classified Loss were to be eliminated from Corporate's
books and certain reductions in classified assets were required, over a period
of one year; (v) restrictions were placed with regard to additional extensions
of credit to borrowers whose loans were classified; (vi) written lending and
collection policies were to be reviewed and revised as required; (vii)
Corporate was to perform a risk segmentation analysis with respect to any
concentrations of credit; (viii) an adequate reserve for loan losses was to be
maintained; (ix) Corporate was to formulate and implement a written plan and
comprehensive budget; (x) Corporate was required to correct any violations of
law cited by the FDIC; (xi) no cash dividends were to be paid until the
satisfaction of certain conditions; (xii) Corporate was required to adopt an
employee compensation plan after conducting a review of compensation paid to
its executive officers; (xiii) the severance provisions of an employment
contract with the Corporate's then President, Richard C. Brown, were to be
rescinded; (xiv) the shareholders were to be notified of the First Order; and
(xv) Corporate was required to file quarterly progress reports with the FDIC.
On April 12, 1994 Corporate consented to the issuance by the FDIC of a
second Order to Cease and Desist under Section 8(b) of the Federal Deposit
Insurance Act (the "Second Order") and the FDIC issued the Second Order on May
4, 1994. Under the terms of the Second Order, which was effective as of May
14, 1994, Corporate was required to (a) rescind the severance provisions of the
employment contract dated May 15, 1990 between Corporate and its former chief
executive officer, Gary M. Wrigley ("Wrigley"), and (b) rescind the Settlement
Agreements and General Releases entered into between
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Wrigley and Corporate dated January 31, 1994 and February 4, 1994
(collectively, the "Settlement Agreements"). The Second Order also requires
Corporate to obtain the FDIC's prior approval of the terms of any replacement
severance agreement with Wrigley. The terms of such a replacement agreement
were submitted by Corporate to the FDIC on June 10, 1994, but the FDIC refused
to approve the replacement severance agreement. As a result of Corporate's
rescission of the Settlement Agreement pursuant to the Second Order, Wrigley
pursued and on March 9, 1995 obtained an arbitration award against Corporate in
the amount of $132,500 plus attorneys' fees, interest and certain insurance
premiums. Since Corporate believed it had offsetting claims against Wrigley,
and because the FDIC's position was that Corporate should not pay the
arbitration award due to the Second Order, Corporate refused to pay the award.
Wrigley pursued the matter further and obtained a judgment enforcing the
arbitration award against Corporate in the amount of $167,307. After obtaining
the FDIC's consent under the Second Order, Corporate paid the full amount of
the judgment to Wrigley on August 25, 1995. Part of the damages asserted by
Corporate under its pending Bond Claim is the payment of the Wrigley judgment,
but no assurances can be given that any portion of this payment will be
recovered under the Bond Claim. Corporate believes it remains in compliance
with the terms of the Second Order.
The FDIC examined Corporate as of October 17, 1994 and cited several
violations of the First Order. As a result of that examination, the FDIC, in a
letter dated February 14, 1995, threatened the assessment of civil money
penalties against the Board of Directors pursuant to the provisions of the
Financial Institutions Regulatory and Interest Rate Control Act of 1978. The
Board responded to the notice of possible civil money penalties in a letter to
the FDIC dated March 29, 1995, which outlined the Board's plan to effect
significant management changes and improve the condition of the bank. In a
letter dated April 17, 1995, the FDIC advised the Board that civil money
penalties would not be pursued provided Corporate, in good faith, initiated
prompt efforts to comply with the First Order. Corporate now believes it is in
substantial compliance with the requirements of the First Order, based upon the
following actions:
(i) the Board has substantially increased its
participation in the affairs of Corporate, approving
numerous new policies and carefully monitoring
compliance with those policies through more active
committees and more frequent Board meetings;
(ii) on March 22, 1995, after receiving nondisapproval
from both the FDIC and the State Banking Department,
C. Ellis Porter was appointed President and Chief
Executive Officer and a director of Corporate; with
the hiring of Mr. Porter, Richard C. Brown's position
was changed to remove him from the executive
management of Corporate and his employment was later
terminated on May 5, 1995; Elizabeth L. Peters
resigned her position as Senior Vice President and
Chief Financial Officer of Corporate on March 10,
1995; Gary R. Strachn was hired as a consultant on
March 21, 1995 and, after nondisapproval by both the
FDIC and the State Banking Department, was hired as
Executive Vice President and Chief Financial Officer
on May 8, 1995; Philip J. Andrews resigned as Senior
Vice President and Senior Credit Officer as of March
31, 1995; due to the pending Merger, Corporate
elected not to replace Mr. Andrews, with Mr. Porter
presently serving as Corporate's senior lending
officer as well as chief executive officer;
(iii) Tier 1 capital has been maintained at a level of at
least 7% of total assets;
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(iv) all the assets classified loss were eliminated and
the reductions in classified assets required by the
First Order were accomplished within the time
requirements established by the First Order;
(v) Corporate has complied with all restrictions relating
to additional extensions of credit to borrowers whose
loans were previously classified;
(vi) extensive revisions were made to Corporate's lending
and collection policies;
(vii) Corporate performed the risk segmentation analysis
relating to concentrations of credit as required by
the First Order;
(viii) Corporate believes it currently maintains an adequate
reserve for loan losses, based upon a reasonable
methodology implemented to comply with all regulatory
requirements;
(ix) Corporate has implemented written plans and budgets
as required by the First Order;
(x) Corporate believes it has taken all actions it is
able to take to correct the violations of law cited
by the FDIC;
(xi) no cash dividends have been paid and none will be
paid without the prior consent of the FDIC;
(xii) Corporate prepared an employee compensation plan and
submitted the plan to the FDIC for review; that plan
has not yet been approved and is no longer applicable
due to the issues relating to compensation raised by
the defalcations of one or more past employees of
Corporate, as described in the Bond Claim;
(xiii) the severance provisions of the employment contract
which was in effect at the time of the First Order
between Corporate and Richard C. Brown were
rescinded; the employment contract itself was
subsequently terminated and Mr. Brown's employment
was terminated for cause on May 5, 1995;
(xiv) the shareholders of Corporate were notified of the
First Order in the detailed proxy statement dated
August 14, 1995; and
(xv) Corporate has filed all the quarterly reports with
the FDIC which are required under the First Order.
The State Banking Department examined Corporate as of January 5, 1994
and, based upon the weaknesses in Corporate's operations and condition as of
that date, requested Corporate to consent to the issuance of a Memorandum of
Understanding ("MOU"). Corporate consented to the issuance of the MOU on
December 13, 1994. The MOU requires Corporate to take substantially the same
corrective measures as required by the FDIC under the First Order. Corporate
believes it is in substantial compliance with the requirements of the MOU as a
result of the corrective measures outlined above.
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RECENT EVENTS RELATED TO CORPORATE
Gary M. Wrigley resigned his position as Chief Executive Officer of
Corporate on January 15, 1994. As discussed above, he subsequently took action
against Corporate to enforce the terms of his Settlement Agreement and obtained
and was paid a judgment against Corporate in the amount of $167,307.
Elizabeth L. Peters resigned her position as Senior Vice President and
Chief Financial Officer of Corporate as of March 10, 1995. Richard C. Brown's
employment was terminated by Corporate as of May 5, 1995. These changes in
management and related findings led to the resignation of Deloitte & Touche LLP
as Corporate's independent auditor for the year ended December 31, 1994.
Corporate believes it has possible claims against one or more of its former
employees arising out of their employment. On September 29, 1995 Corporate
filed a Bond Claim under its Bankers' Blanket Bond Policy, for an amount in
excess of the Bond's $1.8 million limit in an attempt to recover certain of its
claims. The claims asserted in the Bond Claim are based upon the findings of a
review of the books and records of Corporate conducted by special examiners
retained by Corporate's legal counsel which commenced in April 1995 and was
completed on July 12, 1995. While no other legal actions have been commenced
by Corporate, Corporate will retain its ability to bring legal actions, should
it so desire, for a substantial amount of time in the future and this right
will accrue to the Surviving Bank. In addition, it is expected that the issuer
of Corporate's Blanket Bond would require Corporate to assign its claims in
connection with any payment on the Bond. While Corporate incurred and
continues to incur certain costs and expenses relating to the possible claims,
to date no losses to Corporate have been discovered which have not already been
recognized in Corporate's financial statements; however, Corporate has incurred
considerable expense in investigating the claims, hiring special examiners and
auditors, hiring Arthur Andersen LLP to complete Corporate's 1994 financial
statements, and hiring special counsel to pursue the Bond Claim. These ongoing
expenses have negatively impacted, and will continue to negatively impact,
Corporate's earnings, and there can be no assurances that these expenses or any
other damages will be recovered under the Bond Claim.
RECENT FINANCIAL RESULTS OF CORPORATE
Corporate does not file reports pursuant to the Securities Exchange
Act of 1934, as amended. However, as an insured bank, Corporate is required to
file quarterly "Consolidated Reports of Condition and Income" with the FDIC and
the Superintendent ("Call Reports"). Call reports are not prepared in
accordance with GAAP nor are they reviewed or audited by an independent public
accountant. Such reports are prepared in compliance with regulatory accounting
principles ("RAP") which differ from GAAP in certain respects. Therefore,
results set forth in a call report may differ from those that would be
determined in accordance with GAAP pursuant to an audit such as the one which
will be conducted as of November 30, 1995 by AA.
Corporate's Call Report for the period ended September 30, 1995 (the
"9-30 Call Report") reports Corporate's net income (loss) for the year to date
as $(49,000), and Shareholders' Equity as $7,058,000. For the quarter ended
September 30, 1995, Corporate provided $499,000 to reserve for loan and
lease losses, charged off $214,000 and had recoveries of $4,000. Deposits
equaled $60,597,000 and total assets were $69,407,000.
DISSENTING SHAREHOLDERS' RIGHTS
If the Merger is consummated, shareholders of Corporate who dissent
therefrom would be entitled, pursuant to Section 215a of Title 12 of the United
States Code ("Section 215a") and Section 1300 et seq. of the California
Corporations Code ("Chapter 13"), to receive in cash the appraised value of the
shares held by them when the Merger is consummated. In the event the rights
granted by Section 215a and Chapter 13 are perfected by a Corporate
shareholder, the shares of Corporate Stock held by such shareholder shall not
be converted into the right to receive a number of shares of Bancorp Common
equal to the Conversion Ratio, but instead shall be converted into the right to
receive such amount as is provided in Section 215a and Chapter 13. Certain
provisions of Section 215a and Chapter 13 are reprinted as Appendix C to this
Proxy Statement/Prospectus and should be read for more complete information
concerning dissenters' rights. The information set forth below is a general
summary of dissenters' rights as they apply to Corporate shareholders, and is
qualified in its entirety by reference to Section 215a and Chapter 13.
In order to be entitled to exercise dissenters' rights, a shareholder
of Corporate must either vote against the Merger Agreement at the Meeting or
must notify Corporate in writing that he or she dissents from the Merger
Agreement at, or prior to, the Meeting.
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A shareholder who does not timely surrender his or her stock
certificates and make such a request will lose his or her dissenters' rights
and be treated for purposes of conversion of shares of Corporate Stock as a
Corporate shareholder who voted to ratify and confirm the Merger Agreement at
the Meeting.
Pursuant to Chapter 13, the fair market value of dissenting shares is
determined as of the day before the first announcement of the terms of the
proposed Merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend that becomes effective thereafter. Cash dividends declared and
paid by Corporate upon the dissenting shares after the date of approval of the
Merger Agreement and prior to payment for the shares by Corporate shall be
credited against the total amount to be paid by Corporate therefor.
Corporate must mail to each such shareholder a notice of the approval
of the Merger by Corporate's outstanding shares. The notice must be mailed by
Corporate within 10 days after the date of such approval. The notice must be
accompanied by a copy of Sections 1300, 1301, 1302, 1303, and 1304 of the
California Corporations Code, which specify a dissenting shareholder's rights
and the initial procedure required to enforce those rights, and a copy of which
has been reprinted under Appendix C.
The notice must also be accompanied by a statement of the price
determined by Corporate to represent the fair market value of the dissenting
shares and a brief description of the procedure to be followed if the
shareholder desires to exercise rights as a dissenting shareholder. Such
statement of price constitutes an offer by Corporate to purchase any dissenting
shares at that price unless they lose their status as such.
Any shareholder who desires Corporate to purchase shares as dissenting
shares and has the right to require it to do so must make written demand upon
Corporate to purchase such shares and make payment to the shareholder in cash
of their fair market value. The demand must state the number and class of the
shares held of record by the shareholder purchase of which is demanded. It
must also contain a statement of what the shareholder claims to be the fair
market value of those shares as of the day before announcement of the proposed
Merger. That statement of fair market value constitutes an offer by the
shareholder to sell the shares at such price. The demand is effective if
received by Corporate or its transfer agent within 30 days after the date on
which the notice of approval of the Merger by Corporate's outstanding shares
was mailed to the dissenting shareholder.
Before shares that are certificated securities can qualify as
dissenting shares, the certificate representing them must be submitted for
endorsement as dissenting shares to Corporate at its principal office or at the
office of its transfer agent of Corporate. Submission must be within 30 days
after the date notice of approval of the proposed Merger by Corporate's
outstanding shares was mailed to the shareholder. Before shares that are
uncertificated securities can qualify as dissenting shares, the shareholder
must submit written notice to Corporate at its principal office or at the
office of its transfer agent of the number of shares that the shareholder
demands that Corporate purchase. Submission must be made within the time
limits specified above.
Certificates so submitted must be either (1) stamped or endorsed with
a statement that the shares represented by them are dissenting shares, or (2)
exchanged for certificates of appropriate denomination so stamped or endorsed.
On subsequent transfer of dissenting shares on the books of Corporate, the new
share certificates, initial transaction statement, and other written statements
issued to the transferees must bear a like statement that the shares are
dissenting shares and the name of the original dissenting holder of the shares.
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If Corporate and a dissenting shareholder agree that shares are
dissenting shares and agree on the price of the shares, the dissenting
shareholder is entitled to the agreed price, with interest from the date of the
agreement at the legal rate payable on judgments.
Unless otherwise provided by the agreement, payment of the fair market
value of dissenting shares shall be made within 30 days after agreement on the
value of the shares or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and, in the
case of certificated securities, subject to surrender of the certificates
therefor. Making payment on dissenting shares, however, is subject to
compliance with all requirements for a distribution involving the repurchase of
shares. When Corporate is unable to comply with those requirements, a holder
of dissenting shares becomes a creditor of Corporate for the agreed value of
the shares together with interest on that amount at the legal rate payable on
judgments until it is paid. The shareholder is, however, subordinate to all
other corporate creditors in any liquidation proceedings. The debt becomes
payable when Corporate is able to comply with such requirements.
Any agreements fixing the fair market value of any dissenting shares
as between the corporation and the holders of the dissenting shares shall be
filed with the secretary of Corporate. If Corporate denies that shares are
dissenting shares, or if Corporate and a dissenting shareholder fail to agree
on the fair market value of dissenting shares, either the shareholder or
Corporate may file a complaint in the superior court of the "proper county,"
praying the court to determine the issue. The complaint must be filed within
six months after the date on which notice of the reorganization's approval by
Corporate's outstanding shares, or was mailed to the shareholder. The court
may be asked to determine either or both of (1) whether the shares are
dissenting shares, and (2) the fair market value of the dissenting shares. Two
or more dissenting shareholders may join as plaintiffs or be joined as
defendants in the same action and two or more such actions may be consolidated.
Further, a dissenting shareholder or Corporate may intervene in any such
pending action.
On the trial of the action, the court must determine the issues. If
the status of shares as dissenting shares is in issue, the court must first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court must either determine it or appoint one or more impartial
appraisers to do so. Where litigation is instituted to test the sufficiency or
regularity of the votes of shareholders in authorizing a reorganization, any
action brought to determine whether shares are dissenting shares or the fair
market value of dissenting shares shall be suspended until final determination
of that litigation.
If the court appoints an appraiser or appraisers, they must proceed
forthwith to determine the fair market value per share of the dissenting
shares. Within the time fixed by the court, the appraisers, or a majority of
them, must file a report in the office of the clerk of the court. Upon its
filing with the clerk, on motion of any party, the report shall be submitted to
the court and considered on such evidence as the court considers relevant. If
the court finds the report reasonable, the court may confirm it.
If a majority of the appraisers appointed fail to make and file their
report within ten days from the date of their appointment or within such
further time as may be allowed by the court, or if the appraisers' report is
not confirmed by the court, the court itself shall determine the fair market
value of the dissenting shares.
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COMPARISON OF THE RIGHTS OF HOLDERS OF BANCORP
COMMON AND CORPORATE STOCK
Upon consummation of the Merger, shareholders of Corporate Stock
offered hereby will receive, on a one for one basis, shares of Bancorp Common
and, in some events, cash equal to the Conversion Ratio (as defined in the
Merger Agreement). Set forth below is a summary of (i) the material features
of the Corporate Stock and the Bancorp Common; and (ii) the material
differences between the rights of the holders of Corporate Stock and the
Bancorp Common. These summaries are qualified in their entirety by reference
to the charter documents and other instruments of Corporate and Bancorp that
create the rights of the security holders.
CORPORATE STOCK
Corporate is authorized by its Articles of Incorporation, as amended,
to issue 5,000,000 shares of Corporate Stock. At September 15, 1995, 500,000
shares of Corporate Stock were issued and outstanding and no shares of serial
preferred stock were issued or outstanding. Holders of Corporate Stock are
entitled to one vote, in person or by proxy, for each share of Corporate Stock
held of record in the shareholder's name on the books of Corporate as of the
record date on any matter submitted to the vote of the shareholders, except
that in connection with the election of directors, the shares may be voted
cumulatively. Each share of Corporate Stock has the same rights, privileges
and preferences as every other share and will share equally in Corporate's net
assets upon liquidation or dissolution. The Corporate Stock has no preemptive,
conversion or redemption rights or sinking fund provisions and all the shares
offered hereby will, when issued, be fully paid. Shares of Corporate Stock are
subject to assessment by Corporate upon order of the California Superintendent
of Banks (the "Superintendent") for the purpose of correcting an impairment of
contributed capital in the manner and to the extent provided in Division 1 of
the California Financial Code. See "-- Comparison of Corporate Stock and
Bancorp Common -- Assessability."
California law prohibits a California state-chartered bank from
lending on the security of its own stock and from purchasing shares of its own
stock unless such purchase is necessary to prevent loss to Corporate on debts
previously contracted in good faith.
Shareholders are entitled to dividends when, as and if declared by
Corporate's Board of Directors out of funds legally available therefor (and
after satisfaction of the prior rights of holders of outstanding preferred
stock, if any) subject to certain restrictions on payment of dividends imposed
by the California Financial Code and other applicable regulatory limitations.
Under the terms of the First Order and the MOU, cash dividends may not be paid
by Corporate without the prior approval of the FDIC and the Superintendent.
See "-- Comparison of Corporate Stock and Bancorp Common -- Dividend
Restrictions."
Corporate serves as its own transfer agent and registrar.
BANCORP COMMON
Bancorp is authorized by its Articles of Incorporation to issue
20,000,000 shares of Bancorp Common and 10,000,000 shares of serial preferred
stock, without par value. As of June 30, 1995, 4,587,330 shares of Bancorp
Common were issued and outstanding and no shares of serial preferred stock were
issued or outstanding. Holders of Bancorp Common will be entitled to one vote,
in person or by proxy, for each share of Bancorp Common held of record in the
shareholder's name on the books of
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Bancorp as of the record date on any matter submitted to the vote of the
shareholders, except that in connection with the election of directors, the
shares may be voted cumulatively. Each share of Bancorp Common has the same
rights, privileges and preferences as every other share and will share equally
in Bancorp's net assets upon liquidation or dissolution. Bancorp Common will
have no preemptive, conversion or redemption rights or sinking fund provisions
and all of the issued and outstanding shares of Bancorp Common, when issued,
will be fully paid and nonassessable. See "-- Comparison of Corporate Stock
and Bancorp Common -- Assessability."
The Board of Directors of Bancorp, without shareholder approval, may
authorize one or more classes of serial preferred stock with preferences or
voting rights that may adversely affect the rights of holders of the Bancorp
Common. The possible effect of any issuance of serial preferred stock upon the
rights of holders of Bancorp Common is the same as that discussed above
concerning the effect on the issuance of any serial preferred stock upon the
rights of holders of Corporate Stock.
Shareholders are entitled to dividends when, as and if declared by
Bancorp's Board of Directors out of funds legally available therefor (and after
satisfaction of the prior rights of holders of outstanding preferred stock, if
any,) subject to certain restrictions on payment of dividends imposed by the
General Corporation Law of California. See "-- Comparison of Corporate Stock
and Bancorp Common -- Dividend Restrictions."
Following consummation of the Merger, the transfer agent and registrar
for the Bancorp Common will be First Interstate Bank of California.
COMPARISON OF CORPORATE STOCK AND BANCORP COMMON
ASSESSABILITY. Corporate Stock is subject to assessment pursuant to
the provisions of Division 1 of the California Financial Code. Section 662 of
Division 1 of the California Financial Code provides that when a bank's
contributed capital is "impaired" (when the retained earnings deficit is in
excess of 40% of contributed capital), the Superintendent shall order the bank
to restore its capital impairment within 60 days of the issuance of such an
order. If the contributed capital is not restored by other means, the bank's
board is required to levy and collect an assessment on its outstanding common
shares pursuant to Section 423 of the California Corporations Code. The date
the bank levies the assessment must be within 60 days after the
Superintendent's order and the resolutions levying the assessment of the common
stock must fix: (i) a date not more than 60 days after the date of the adoption
of the assessment resolution on which the assessment is payable (the "Payable
Date"); (ii) fix a date not less than 30 nor more than 60 days from the Payable
Date on which such assessment becomes delinquent if not paid (the "Delinquency
Date"); (iii) fix a date not less than 15 nor more than 60 days from the
Delinquency Date for the sale of the delinquent shares (the "Sale Date"); and
(iv) fix the hour and place of sale.
If an assessment is levied, the shareholders of the bank are required
to pay the assessment on a pro rata basis determined by the number of shares
held by each shareholder. If a shareholder has not paid the amount of the
assessment by the Delinquency Date, the shareholder may, prior to the Sale
Date, redeem his shares by paying the amount of the assessment together with a
penalty of 5% of the amount of the assessment on such shares. If a particular
shareholder fails or refuses to pay such shareholder's pro rata portion of the
assessment, the assessed shares may be sold by the bank in satisfaction of the
assessment and penalties thereon. The shareholders are not subject to personal
liability for payment of such an assessment. The bank's only remedy for the
collection of any such assessment is the sale of the shares as described above
or, in the event no such sale can be consummated, forfeiture of such shares.
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At June 30, 1995 and December 31, 1994, Corporate's retained earnings were
$3,232,000 and $3,153,000, respectively.
Bancorp Common is not assessable. Under applicable regulatory
policies, however, holding companies of federally insured financial
institutions such as CUB are required to serve as a "source of strength" for
their insured subsidiaries. As a practical matter, this may result in Bancorp
being required by regulatory order or directive to contribute additional
capital to CUB, to guarantee certain CUB obligations or to take other actions
requiring the investment of holding CUB capital or resources for CUB's benefit.
DIVIDEND RESTRICTIONS. Since Corporate is a state-chartered bank, its
ability to pay dividends or make distributions to its shareholders is subject
to restrictions set forth in the California Financial Code. The California
Financial Code provides that neither a bank nor any majority-owned subsidiary
of a bank may make a distribution to its shareholders in an amount which
exceeds the lesser of (i) the bank's retained earnings; or (ii) the bank's net
income for its last three fiscal years, less the amount of any distributions
made by the bank or by any majority-owned subsidiary of the bank to the
shareholders of the bank during such period. However, a bank or a
majority-owned subsidiary of a bank may, with the prior approval of the
Superintendent, make a distribution to the shareholders of the bank in an
amount not exceeding the greatest of (i) its retained earnings; (ii) its net
income for its last fiscal year; or (iii) its net income for its current fiscal
year. In the event that the Superintendent determines that the stockholders'
equity of a bank is inadequate or that the making of a distribution by a bank
would be unsafe or unsound, the Superintendent may order the bank to refrain
from making a proposed distribution.
The ability of Bancorp to pay cash dividends is limited by the
provisions of Section 500 of the California Corporations Code, which prohibits
the payment of dividends unless (i) the retained earnings of the corporation
immediately prior to the distribution exceeds the amount of the distribution;
(ii) the assets of the corporation exceed 1-1/4 times its liabilities; or (iii)
the current assets of the corporation exceed its current liabilities, but if
the average pre-tax net earnings of the corporation before interest expense for
the two years preceding the distribution was less than the average interest
expense of the corporation for those years, the current assets of the
corporation must exceed 1-1/4 times its current liabilities.
DISSENTERS' RIGHTS. Pursuant to the General Corporation Law of
California, holders of Bancorp Common would be entitled, subject to the
provisions of Chapter 13, to dissenters' rights in connection with any
transaction which constitutes a reorganization (as defined in Section 181 of
the California Corporations Code). However, pursuant to the California
Financial Code, shareholders of Corporate Stock are not entitled to dissenters'
rights in connection with any transaction between two banking institutions
which constitutes a reorganization (as defined in Section 181 of the California
Corporations Code) where Corporate is the corporation surviving such
transaction, even if dissenters' rights were otherwise available pursuant to
Chapter 13. Pursuant to the foregoing, dissenters' rights will apply to the
Merger. See "Dissenters Rights."
DIVISION OF BOARD INTO CLASSES AND ELIMINATION OF CUMULATIVE VOTING.
Under the California Corporations Code, a "listed corporation" (which includes
a corporation with outstanding securities designated as qualified for trading
as a national market system security on the National Association of Securities
Dealers Automatic Quotation System, if the corporation has at least 800
holders of its equity securities as of the record date of the corporation's
most recent annual meeting of shareholders, such as Bancorp) may adopt
provisions to divide its board of directors into two or three classes to serve
for terms
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of two or three years respectively. While Corporate was not eligible to adopt
these provisions, Bancorp is eligible, but has not adopted the provisions at
the present time.
By the same provision under the California Corporations Code, a listed
corporation such as Bancorp may also adopt provisions to eliminate cumulative
voting in the election of directors (which the California Corporations Code
grants to shareholders, i.e., providing each shareholder with the right to vote
the number of shares owned by him or her for as many persons as there are
directors to be elected, or to cumulate such shares and give one candidate as
many votes as the number of directors multiplied by the number of his or her
shares, shall equal, or to distribute them on the same principle among as many
candidates as he or she shall see fit). While Corporate was not eligible to
adopt these provisions, Bancorp is eligible, but has not adopted the provisions
at the present time.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CORPORATE
The following analysis of Corporate's financial condition and results
of operations should be read in conjunction with the financial statements and
the notes related thereto presented elsewhere in this Proxy
Statement/Prospectus. See "FINANCIAL STATEMENTS OF CORPORATE" herein.
FINANCIAL CONDITION
GENERAL. As of June 30, 1995, total assets increased $5.2 million or
7.4% to $75.3 million from $70.1 million at December 31, 1994. Total net
loans declined by $1.5 million or 2.9% to $50.3 million as compared to $51.8
million as of December 31, 1994. The decrease can be attributed to a softening
in loan demand for new loans and the repayment of existing loans. Securities
available for sale declined by $1.5 million or 25% to $4.4 million when
compared to the $5.9 million in those securities at year-end 1994. This is the
result of maturing investments which were not renewed for liquidity purposes.
Corporate sold $13.1 million in federal funds at June 30, 1995 compared to $1.5
million as of December 31, 1994. The increase in deposits noted below plus all
maturing time certificates and securities available for sale were reinvested in
federal funds sold.
Total assets of Corporate decreased by 17.7%, or $15.1 million to
$70.1 million at December 31, 1994 from $85.2 million at December 31, 1993.
The net decrease was due to changes in loans and federal funds sold. Total
net loans decreased by 10.1% or $5.8 million to $51.8 million from $57.6 in
1993, due primarily to loans being paid down and the decreasing demand.
Securities declined by $.7 million or 10.3% to $6.0 million when compared to
$6.6 million at year-end 1993. This decline is the result of the maturity and
sale of securities. Federal funds sold at December 31, 1994 were $1.5 million,
a decrease of $9.9 million or 86.8% when compared to $11.4 million in federal
funds sold on December 31, 1993. This decrease is directly attributable to the
decrease in deposits noted below.
As of June 30, 1995, total liabilities increased by $5.0 million or
7.9% to $68.1 million when compared to $63.1 million at year-end 1994. This
increase can be attributed to the increase in interest- bearing deposits. Time
certificates of deposit of $100,000 or more increased by $1.9 million or 62% to
$4.9 million at June 30, 1995 as compared to $3.0 million at year-end 1994.
Savings, money market and now accounts decreased by $3.2 million or 11.2% to
$25.3 million on June 30, 1995 as compared to $28.5 million at December 31,
1994.
Total liabilities declined $14.5 million or 18.6% to $63.1 million as
of December 31, 1994 from $77.6 million at December 31, 1993. This decrease
was primarily attributable to a reduction in total deposits. As of December
31, 1994, deposits were reduced by $14.7 million or 19.4% to $61.2 million when
compared to $75.9 million at year-end 1993. The largest decline was in
non-interest-bearing demand deposits which decreased by $7.0 million or 20.6%
to $26.9 million at December 31, 1994 compared to $33.9 million at December 31,
1993.
Total stockholders' equity at June 30, 1995 increased by 2.6% or $.2
million to $7.2 million when compared to $7.0 million at year-end 1994. The
ratio of stockholders' equity to total assets was 9.5% and the ratio of primary
capital (total stockholders' equity and the allowance for loan and lease
losses) to total assets was 12.2% at June 30, 1995. This increase can be
attributed to earnings, $0.08 million and a decrease of $0.11 million in
unrealized loss on securities available for sale.
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<PAGE> 73
Total stockholders' equity at December 31, 1994 decreased by $0.6
million or 8.3% to $6.9 million when compared to $7.6 million at year-end 1993.
The ratio of stockholders' equity to total assets was 9.9% and the ratio of
primary capital to total assets was 12.7% at the end of 1994 as compared to
8.9% and 10.4%, respectively, at December 1993. The decrease from December 31,
1993 to December 31, 1994 can be attributed to operating losses at December 31,
1994, of $.519 million and $.117 million in unrealized losses on securities
available for sale.
The general financial condition of Corporate and the changes in the
general condition must be reviewed in the context of an institution that has
undergone negative publicity because of the issuance of the First Order
effective March 25, 1994 and further, as a result of the First Order, has
changed all of senior management in the first half of 1995. While the economy
in California, and Orange County in particular, has contributed to the decline
in overall bank deposits, the adverse publicity and change in management has
also had a contributory effect on the decline in deposits.
LOANS. At June 30, 1995, loans had decreased by $1.5 million or 2.9%
to $50.3 million, when compared to $51.8 million at December 31, 1994. This
reduction can be attributed to the repayment of existing loans and a softening
economy resulting in a decrease in loan demand. Loans decreased by $5.8
million or 10.1% to $51.8 million at December 31, 1994 when compared to $57.6
million at December 31, 1993. At year-end 1994, loans were 73.9% of total
assets compared to 67.6% at year-end 1993. The percent of total average loans
to total average deposits was 86.5%, 77.1% and 79.7% for periods ending June
30, 1995, December 31, 1994 and December 31, 1993, respectively.
Real estate loans are those loans secured by real estate for business
or consumer purposes. These loans are made on property generally within
Corporate's service area. Corporate requires a loan-to-market value ratio of
not more than 80% on residential property and not more than 75% on commercial
or industrial property. The particular loan-to-market value ratio depends on
the use of the property, whether the property is owner occupied and the zoning
of the property. At June 30, 1995, real estate loans increased by $0.9 million
or 5.6% to $16.9 million when compared to year-end 1994. Real estate loans
increased by $4.1 million or 33.0% to $16.0 million at December 31, 1994 as
compared to December 31, 1993. Due to declining home values experienced in the
Orange County market during the past few years, homeowner's are opting to
improve their property rather than sell at a loss. The demand for home equity
loans has remained stable as homeowners sought to use their equity as
collateral for investments. Corporate does not make real estate loans for
speculative purposes.
Corporate is subject to the fluctuations in the residential and
commercial real estate markets. General economic conditions, specifically
interest rates and continuing recessionary conditions in Orange County, could
have a significant impact on Corporate's real estate portfolio. Corporate has
made and will continue its policy on making real estate, home improvement and
home equity loans for no longer than five years and construction loans for no
more than one year. Loans secured by real estate for commercial and industrial
purposes will generally be written for periods up to five years. These loans
will ideally be tied to Corporate's prime lending rate.
Corporate seeks to minimize the effects of changing interest rates on
its commercial loan portfolios by keeping maturities short. Emphasis is placed
on maintaining a rate sensitive position within Corporate's policy guidelines
to minimize risk and a negative impact on Corporate's earnings. A risk in
short-term maturities could arise if the economy changes dramatically, thereby
causing a large number of maturing loans to have an adverse impact upon
Corporate's financial condition. For example, if interest rates were to
increase, sources used to pay off such loans, such as refinancing, may not be
available or
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<PAGE> 74
difficult to obtain. To limit the effect of interest rates, Corporate requires
a loan-to-value ratio not to generally exceed 75%. The ratio will depend upon
the project, its nature, any special costs and the borrower's history.
Corporate significantly reduced its construction lending activities in
1994 as the real estate market continued its decline. The increase in
construction lending in 1995 is the residue of loans approved in prior years.
At June 30, 1995, construction loans increased by $376,000 or 14.4% to $2.9
million as compared to year-end 1994. Construction loans decreased by $897,000
or 25.6% to $2.6 million at December 31,1994 from $3.5 million at December 31,
1993.
Commercial loans are made primarily to professionals and companies
with sales from $1 million to $5 million. At June 30, 1995, commercial loans
declined by $446,000 or 2.7% to $15.8 million from the $16.2 million at
year-end 1994. Loan demand continued to decline as the result of the weak
economy. Commercial loans increased by $630,000 or 4.0% to $16.2 million at
year-end 1994 as compared to $15.6 million at year-end 1993.
Corporate believes that this declining or flat loan demand is a result
of a generally weak economy and a more conservative approach taken by Corporate
in underwriting these types of loans.
Corporate offers both new and used direct automobile financing.
Automobile loan terms vary widely depending on the term and the amount of the
loan, the value of the automobile and the creditworthiness of the borrower.
Automobile loan terms typically range from three to five years. Loans may be
made for up to 80% of the purchase price (including tax and license) and for no
more than 100% of the wholesale value for used automobiles. Corporate
contracts with a third party to monitor automobile insurance coverage of each
vehicle. Corporate does not engage in indirect automobile financing which
involves the purchase of loans from automobile dealers and other third party
services.
At June 30, 1995, loans made to individuals for household, family and
other consumer expenditures decreased by $1.5 million or 9.9% to $14.0 million
from year-end 1994. The decreased loan demand reflects the popularity of home
equity lines of credit and the ability of borrowers to deduct interest
expenses. Loans to individuals for household, family and other consumer
expenditures decreased by $7.3 million or 32.0% to $15.6 million at December
31, 1994 from $22.9 million at December 31, 1993. This decrease is
attributable to the overall economic conditions of Orange County.
In an ordinary course of business, Corporate has granted loans to
certain directors and officers of the Bank. In the opinion of management,
these loans were made on substantially the same terms, including interest rates
and collateral requirements, as those prevailing at the same time for
comparable transactions with other customers and did not involve more than the
normal risk of collectability or present any other unfavorable features. All
loans to insiders are submitted at the Director's Loan Committee Meeting and
approved by the Corporate Board. The outstanding balances of such loans in the
aggregate was $1.27 million at June 30, 1995 and $1.33 million December 31,
1994, and $1.7 million at December 31, 1993.
Corporate had letters of credit outstanding aggregating $344,000,
$421,000 and $440,000 as of June 30, 1995, December 31, 1994, and December 31,
1993, respectively.
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<PAGE> 75
The following table sets forth the amount of total loans outstanding
in each category at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
--------------------- ------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial . . . . . . . . . . . . . . . $ 15,832 $ 13,962 $ 16,278 $ 15,648 $ 16,396 $ 17,722 $ 17,774
Real estate - construction . . . . . . . 2,976 3,625 2,600 3,497 6,212 14,919 12,649
Real estate - other . . . . . . . . . . . 16,937 13,616 16,040 11,873 12,427 14,518 19,789
Installment . . . . . . . . . . . . . . . 14,042 18,694 15,591 22,946 19,298 19,534 17,665
Direct lease financing, net . . . . . . . 2,587 4,195 3,328 5,074 6,556 6,702 7,206
-------- -------- -------- -------- -------- -------- --------
Total gross loans and leases 52,374 54,092 53,837 59,038 60,889 73,395 75,083
Less: Unearned fees, discount . . . . . (84) (139) (131) (170) (225) (289) (384)
Less: Allowance for loan & lease losses (1,991) (1,155) (1,912) (1,222) (998) (1,099) (1,460)
-------- -------- -------- -------- -------- -------- --------
Loans and leases, net . . . . . . . $ 50,299 $ 52,798 $ 51,794 $ 57,646 $ 59,666 $ 72,007 $ 73,239
======== ======== ======== ======== ======== ======== ========
</TABLE>
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which was amended by SFAS No. 118 in October 1994.
Under the provisions of these standards, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Creditors are required to measure impairment of a loan based
on the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. These standards are effective for fiscal years beginning after
December 15, 1994. Corporate adopted these standards on January 1, 1995; they
did not have a material impact on the financial statements of Corporate.
As permitted by these standards, Corporate excludes from their
calculations smaller balance, homogenous loans such as consumer installment
loans and lines of credit, and direct finance leases. In determining whether a
loan is impaired or not, Corporate applies its normal loan review procedures in
making that judgment as more fully explained under the next section "--
Allowance for Loan and Lease Losses." Loans for which an insignificant delay,
i.e., 45 days past due, or insignificant shortfall in amount of payments is
anticipated, but Corporate expects to collect all amounts due, are not
considered for impairment. Corporate measures impairment on a loan-by-loan
basis using either the present value of expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the collateral if
the loan is collateral dependent.
Accrual of interest on loans and leases is discontinued when
management believes, after considering economic and business conditions, and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful; whereas, loans are considered impaired when
it is probable that Corporate will be unable to collect all amounts due,
including principal and interest, according to the contractual terms of the
loan agreement. Interest income is subsequently recognized on nonaccrual loans
only to the extent cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments is no
longer doubtful, in which case the credit is returned to accrual status.
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<PAGE> 76
Corporate's charge-off policy for loans, including impaired loans, is
explained at "-- Allowance for Loan and Lease Losses" below. At June 30, 1995,
Corporate had $4,439,000 in impaired loans and a related loss allowance of
$830,000. Of the $4,439,000 of impaired loans, $148,000 was measured using the
present value method and $4,291,000 was measured using the fair value of
collateral.
NONPERFORMING ASSETS. Corporate considers a loan to be a
nonperforming asset when any one of the following events occurs: (a) any
installment of principal or interest is 90 days past due; (b) the timely
collection of interest or principal becomes uncertain; (c) the loan is
classified as "doubtful" by bank examiners; or (d) a portion of its principal
balance has been charged-off. Corporate's policy is to classify loans which
are 90 days past due as nonaccrual loans unless management determines that the
loan is adequately collateralized and in the process of collection or other
circumstances exist which would justify the treatment of the loan as fully
collectible. None of the loans that have been classified by regulatory
examiners as "loss," "doubtful," "substandard," or "special mention" have been
excluded from the amounts disclosed as nonaccrual, restructured or potential
problem loans.
The following table provides information with respect to the
components of Corporate's nonperforming assets at the dates indicated (dollars
in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------ --------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans (1):
Commercial . . . . . . . . . . . . . . . . . . . . $ 237 $ 1,412 $ 400 $ 486 $ -- $ 40 $ --
Real estate . . . . . . . . . . . . . . . . . . . 2,924 3,452 1,843 3,645 -- 795 --
Installment . . . . . . . . . . . . . . . . . . . -- 157 -- 33 -- 24 --
Lease financing receivables . . . . . . . . . . . -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . 3,161 5,021 2,243 4,164 -- 859 --
Loans 90 days or more past due and still accruing (2):
Commercial . . . . . . . . . . . . . . . . . . . . 46 62 -- -- 43 515 --
Real Estate . . . . . . . . . . . . . . . . . . . -- -- -- 1,956 63 713 --
Installment . . . . . . . . . . . . . . . . . . . 1 -- -- -- -- -- --
Lease financing receivables . . . . . . . . . . . -- -- -- -- -- 19 9
------- ------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . 47 62 -- 1,956 106 1,247 9
Restructured loans:
Commercial . . . . . . . . . . . . . . . . . . . . -- 225 81 -- 244 -- --
Real Estate . . . . . . . . . . . . . . . . . . . 886 952 898 988 -- -- --
Installment . . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- --
Direct lease financing . . . . . . . . . . . . . . -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . 886 1,177 979 988 244 -- --
Other real estate owned . . . . . . . . . . . . . . . 575 310 1,611 1,514 3,873 2,238 --
------- ------- ------- ------- ------- ------- -------
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------ --------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total nonperforming assets . . . . . . . . . . . . . $ 4,669 $ 6,570 $ 4,833 $ 8,622 $ 4,223 $ 4,344 $ 9
======= ======= ======= ======= ======= ======= =======
Nonperforming assets as a percentage
of total loans . . . . . . . . . . . . . . . . . . 8.93% 12.18% 9.00% 14.65% 6.96% 5.94% 0.01%
======= ======= ======= ======= ======= ======= =======
</TABLE>
__________________
(1) During these periods, there was no interest income related to these
loans included in net earnings. Interest income of approximately
$339,000 and $292,000, respectively, would have been recorded during
the periods ended June 30, 1995 and 1994. For the years ended
December 31, 1994, 1993 and 1992, interest income of $364,000,
$145,000 and $170,000 would have been recorded if these loans had been
paid in accordance with their original terms and had been outstanding
throughout the applicable period then ended or, if not outstanding
throughout the applicable period then ended, since origination.
(2) During the periods ended June 30, 1995 and 1994, approximately
$192,000 and $219,000, respectively, of interest income related to
these loans was included in net income. During the fiscal year ended
December 31, 1994, approximately $77,600 of interest income related to
these loans was included in net income.
The increase in the level of nonperforming assets from December 31,
1992 to December 31, 1993, both in the aggregate and as a percentage of total
loans, is attributable to the prolonged recession, including its effect on the
real estate industry, in Southern California. The level of nonperforming
assets began decreasing in 1994 and into 1995 through a combination of
improving borrower condition, loan charge-offs and foreclosure.
The recessionary economic conditions and declining real estate values
in Southern California continue to adversely affect the Corporate's borrowers
as evidenced by the level of nonperforming assets. Although the Southern
California economy has shown signs of improvement, management cannot predict
whether or when general economic conditions in Corporate's market area will
improve. Nonperforming assets are monitored on a regular basis by the Special
Assets Department. In addition, the Executive Loan Committee, which includes
members of senior management, review these assets on a monthly basis as does
Corporate's Board of Directors. Further, these assets are reviewed by third-
party auditors as well as by the banking regulators during their periodic
examinations.
Corporate is actively managing its other real estate owned ("OREO")
while attempting to expeditiously dispose of the properties as evidenced by the
decrease in OREO at June 30, 1995 and 1994 as compared to December 31, 1994 and
1993, respectively, noted in the above table.
During 1994 all of the December 31, 1993 OREO of $1.5 million was sold
and $1.8 million was added, of which $0.2 million was sold during 1994. Of the
balance at December 31, 1994 of $1.6 million, $1.0 million was sold, leaving a
balance of $0.6 million at June 30, 1995.
ALLOWANCE FOR LOAN AND LEASE LOSSES. Corporate has restructured
credit administration and developed and adopted new or revised policies,
procedures and systems that are designed to improve credit origination and
documentation, real estate appraisals, review and classification processes, and
to enhance asset/liability management. Corporate has strengthened its Special
Assets Department, charged with the disposition and resolution of nonperforming
and classified assets. These changes are designed to enhance the collection
process and accelerate the resolution of problem loans. Management has also
implemented stricter loan renewal policies calling for increased borrower
equity, lower loan to value, etc.
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<PAGE> 78
and more effective and efficient loan monitoring and evaluation, resulting in
expeditious risk rating and loan classification.
Corporate's program is based on a risk rating system. The risk rating
system has five classifications: Pass, Special Mention, Substandard, Doubtful
and Loss. Pass loans are considered quality credits with no defined
weaknesses. Special Mention loans are generally quality credits, but warrant
some monitoring based on facts and circumstances. Substandard loans have one
or more defined weaknesses and are characterized by the distinct possibility
that Corporate will sustain some loss if the deficiencies are not corrected.
Doubtful loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. A loan classified as "Loss" is considered
uncollectible and of such little value that the continuance as an asset of the
institution is not warranted.
Generally, the loan officers are responsible for all loans classified
as Pass, while the Special Assets Department is responsible for all
nonperforming assets and the classified loans. All loans classified as "Pass"
are reviewed and evaluated at least quarterly; whereas, all assets classified
as "Special Mention" or worse are reviewed and evaluated at least monthly.
Additionally, the Executive Loan Committee reviews all new loans and all loan
renewals. Responsibility for evaluating and assigning and/or changing risk
ratings resides with the loan officers; however, all ratings, particularly
rating changes, are reviewed by members of loan and special assets management
and the President. This system is intended to permit management to detect
potential problem loans on a timely basis, so that they may work with customers
to minimize or avoid loss to Corporate and provide sufficient loan loss
allowance to absorb losses when they occur.
Corporate's policy as it relates to recognizing losses and charging
bad debts to the allowance is determined by the secured position of the related
loan. Unsecured loans are generally charged to the allowance for possible loan
losses when they become 90 days or more past due and management believes that
it is probable that the loan will not be collected. Secured loans are
evaluated by analyzing the customers' ability to pay and the underlying current
collateral values. Secured loans are intentionally classified as doubtful or
loss and charged-off when management concludes that the value of the underlying
collateral is impaired and that the borrower is unable to repay the loan.
The allowance is based on estimates and ultimate losses may vary from
the current estimates. These estimates are reviewed monthly in connection with
aforementioned risk rating system and as adjustments become necessary, they are
reported against earnings in the periods in which they become known. The
allowance is increased by provisions charged to operating expense and reduced
by net charge-offs. Corporate's current provision for loan losses reflects
monthly evaluation by management of the known risks in the portfolio and risks
inherent in the present general economic outlook. These results reflect
management's continuing concerted efforts at reducing potential losses and
monitoring and controlling problem loans. In light of the present economic
conditions and ongoing risks in Corporate's market area, management has
implemented stricter underwriting and renewal policies calling for increased
borrower equity and lower loan to value ratios to ensure continued quality of
its loan portfolio. Accordingly, management believes that the current level of
the allowance is adequate.
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<PAGE> 79
The allowance for loan and lease losses is based upon management's
estimates and ultimate losses may differ from current estimates. As of
December 31, 1994, Corporate had allocated $695,000 to potential problem loans
that totaled approximately $4.0 million. The balance in the allowance of $1.2
million was allocated to a general loan reserve. The increase during the
fourth quarter of 1994 was the result of the recognition of deterioration in
several credits. The continuing evaluation of the loan and lease portfolio and
assessment of current economic conditions will dictate future funding levels.
Management believes that the allowance for loan lease losses was adequate at
June 30, 1995. As of June 30, 1995, Corporate had allocated approximately $1.2
million to potential problem loans that totaled approximately $5.4 million.
The balance of the allowance of $800,000 is allocated to a general reserve.
The difference in specific allocations from December 31, 1994 to June 30, 1995
is primarily attributed to several loans aggregating approximately $1.9 million
including two loans aggregating approximately $1.0 million which deteriorated
to substandard status during the second quarter of 1995.
Consumer loans generally involve more risk as to collectability than
other types of loans because of the type and nature of the collateral and in
many cases the lack of collateral. The risk in each consumer loan increases as
the inability of the borrower to make timely payments increases. These
payments are dependent upon the borrower's continuing financial stability, and
these are more likely to be adversely affected by job loss, divorce, bankruptcy
or by adverse economic conditions.
Commercial lending entails significant additional risks as compared to
consumer lending. Commercial loans typically involve larger loan balances
concentrated with single borrowers or groups of borrowers. In Orange County,
the risk of having a large concentration of loans in a particular industry has
been diffused because of the wide diversity of industry and business. There
are professional corporations, financial institutions, medical groups,
attorneys and accountants, real estate developers and construction firms as
well as industrial businesses within the Bank's delineated service area. As a
result, the Bank has been able to avoid significant concentration in any one
industry or group. The payment experience on commercial loans is typically
dependent on adequate cash flow and thus to a greater extent may be subject to
adverse conditions in the economy generally or adverse conditions in a specific
industry.
Management has a reporting system that monitors past due loans and has
adopted policies to pursue creditor's rights in order to preserve Corporate's
position. In addition, Management has a policy of requesting and reviewing
annual financial statements from its commercial loan customers and periodically
reviews the existence of collateral and its value. As indicated by the table
below, commercial loans have been the largest category of loans charged-off in
the past five years. As evidenced by the table below, loan charge-offs, net of
recoveries, for all categories of loans for the past three years have been
$444,000, $641,000, and $246,000 in 1994, 1993, and 1992, respectively. For
the six months ended June 30, 1995, Corporate charge-offs exceed recoveries by
$99,000. For the same period in 1994 charge-offs were $89,000 and there were
no recoveries.
Management believes that the allowance for loan and lease losses was
adequate at June 30, 1995, but will make additional adjustments as it may
determine through the continuing evaluation of the loan portfolio and
assessment of current economic conditions. Management's current provisions for
loan and lease loss reserve anticipates gross charge-offs for the fiscal year
ending December 31, 1995 as follows:
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<PAGE> 80
<TABLE>
<S> <C>
Commercial and industrial loans . . . . . $379,000
Real estate . . . . . . . . . . . . . . . 35,000
Installment . . . . . . . . . . . . . . . 36,000
Direct lease financing . . . . . . . . . 0
</TABLE>
The foregoing is an estimate only and ultimate charge-offs may vary
from this current estimate.
The following table summarizes, for the periods indicated, loan
balances at the end of each period and daily averages during the period;
changes in the allowance for loan and lease losses arising from loans
charged-off, recoveries on loans previously charged-off, and additions to the
allowance which have been charged to operating expense; and certain ratios to
the allowance for loan and lease losses (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31
---------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES:
Average loans during period . . . . . . $53,673 $57,410 $54,559 $62,132 $65,876 $73,903 $74,397
Loans at end of period . . . . . . . . . 52,290 53,953 53,706 58,868 60,664 73,106 74,699
------- ------- ------- ------- ------- ------- -------
ALLOWANCE FOR LOAN AND LEASE LOSSES:
Balance at beginning of period . . . . . . 1,912 1,222 1,222 998 1,099 1,460 1,185
Charge-offs:
Commercial . . . . . . . . . . . . . . . 75 26 375 217 138 100 65
Real estate . . . . . . . . . . . . . . -- -- 19 289 -- -- --
Installment . . . . . . . . . . . . . . 5 25 31 70 112 4 18
All other (including overdrafts) . . . . 21 38 59 65 7 25 15
------- ------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . 101 89 484 641 257 129 98
Recoveries on loans and leases previously
charged-off:
Commercial . . . . . . . . . . . . . . . 2 -- 21 -- -- 18 12
Real estate . . . . . . . . . . . . . . -- -- 19 -- -- -- --
Installment . . . . . . . . . . . . . . -- -- -- -- 11 -- --
All other (including overdrafts) . . . . -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . 2 -- 40 -- 11 18 12
Net loan charge-offs . . . . . . . . . . . 99 89 444 641 246 111 86
Provision charged to operating expense . . 178 22 1,134 865 145 (250) 361
------- ------- ------- ------- ------- ------- -------
Balance at end of period . . . . . . . . . $ 1,991 $ 1,155 $ 1,912 $ 1,222 $ 998 $ 1,099 $ 1,460
======= ======= ======= ======= ======= ======= =======
</TABLE>
75
<PAGE> 81
<TABLE>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31
---------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
RATIOS:
Net loan charge-offs to average loans . . . 0.18% 0.16% 0.81% 1.03% 0.37% 0.15% 0.12%
Allowance for loan & lease losses to loans
at end of period . . . . . . . . . . . . 3.81 2.14 3.56 2.08 1.65 1.50 1.95
Net loan charge-offs to allowance for loan
& lease losses . . . . . . . . . . . . . 4.97 7.71 23.22 52.45 24.65 10.10 5.89
Net loan charge-offs to provision charged
to operating expense . . . . . . . . . . 55.62 404.54 39.15 74.10 169.66 (44.40) 23.82
Allowance for loan and lease losses to
nonperforming assets . . . . . . . . . . 42.64 17.58 39.55 14.17 23.63 25.30 1622.22
</TABLE>
76
<PAGE> 82
The following table provides information with respect to Corporate's
classified loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
JUNE 30, 1995 1994 1993 1992
------------- -------- --------- ---------
<S> <C> <C> <C> <C>
Special mention . $ 2,708 $ 2,677 $ 2,339 $ 2,749
Substandard . . . 6,788 4,915 7,928 2,617
Doubtful . . . . 438 318 0 0
Loss . . . . . . 161 0 151 27
--------- -------- --------- ---------
Total . . . . . . $ 10,095 $ 7,910 $ 10,418 $ 5,393
========= ======== ========= =========
</TABLE>
The increases in the allowance for possible loan and lease losses,
provisions for loan and lease losses and charge-offs during 1994, 1993 and 1992
correlate with the recessionary economic conditions and declining real estate
market in Southern California. These increases reflect management's response
to the risk of loss associated with the increases in delinquencies, classified
and nonperforming loans that have resulted from the troubled economic
conditions and real estate market confronting Corporate's borrowers.
Management considers nonperforming, classified and delinquent loans when
evaluating the allowance for possible loan and lease losses. Classified loans
at June 30, 1995 increased from December 31, 1994 primarily because several
loans aggregating approximately $1.9 million, including two loans aggregating
approximately $1.0 million, deteriorated to substandard status in the second
quarter of 1995, reflecting the continuing recessionary economic conditions and
deterioration in the real estate market in Southern California. Classified
loans at December 31, 1994 decreased from December 31, 1993 due primarily to
$2.2 million of the substandard loans at December 31, 1993 going into other
real estate owned in 1994, $400,000 of such classified loans getting charged
off in 1994, $1.3 million of such classified loans paid off in 1994 and
$400,000 of these loans were upgraded to a "pass" classification.
Approximately $1.8 million of additional loans were classified in 1994.
Classified loans at December 31, 1993 increased significantly from December 31,
1992 due to the recessionary economic conditions and acute deterioration in the
real estate market in Southern California during 1993.
These factors have resulted in an increase in the allowance for
possible loan and lease losses of approximately $79,000 from $1,912,000 at
December 31, 1994 to $1,991,000 at June 30, 1995 and an increase of $690,000
from $1,222,000 at December 31, 1993 to $1,912,000 at December 31, 1994.
Management utilizes its best judgment in providing for possible loan
and lease losses and establishing the allowance for possible loan and lease
losses. However, the allowance is an estimate which is inherently uncertain
and depends on the outcome of future events. Southern California has
experienced and is expected to continue to experience, adverse conditions and a
declining real estate market. These conditions have adversely affected certain
borrowers' ability to repay loans. A continuation of these conditions or a
further decline in the local economy could result in further deterioration in
the quality of the loan portfolio and the levels of nonperforming loans and
charge-offs, which would require increased provisions for loan losses and would
adversely effect the financial condition and results of operations of
Corporate.
77
<PAGE> 83
The following is an allocation of the allowance for possible loan and
lease losses as to amount and percent of loan per category for the dates
indicated. Corporate has no foreign loans. Installment loans include various
types of revolving credit.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
JUNE 30, 1995 1994 1993
- ------------------------ ----------------------------- ----------------------------- -----------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
BALANCE AT END OF PERIOD CATEGORY TO CATEGORY TO CATEGORY TO
APPLICABLE TO: AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
- ------------------------ ---------- ----------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial . . . . . . . $ 234 11.75% $ 263 13.76% $ 198 16.20%
Real Estate-Construction 466 23.41 240 12.55 212 17.35
Real Estate-Conventional 533 26.77 183 9.57 165 13.50
Installment . . . . . . 16 0.80 9 0.47 15 1.23
Unallocated . . . . . . 742 37.27 1,217 63.65 632 51.72
-------- ------ -------- ------ -------- ------
$ 1,991 100.00% $ 1,912 100.00% $ 1,222 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The allowance for possible loan losses should not be interpreted as an
indication that charge-offs will occur in these amounts or proportions, or that
the allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories, since even on the above basis
there is an unallocated portion of the allowance and the total reserve is a
general reserve applicable to the entire portfolio.
INVESTMENT PORTFOLIO. Corporate's investment portfolio is used
primarily for investment income and secondarily for liquidity purposes. All
securities for the investment portfolio are investment grade quality and will
include, but not be limited to, U.S. Treasuries, obligations of U.S. government
agencies, obligations of state and political subdivisions and collateralized
mortgage obligations.
78
<PAGE> 84
The table below summarizes the amortized cost and approximate market
values of Corporate's securities as of the dates indicated. As of January 1,
1994 Corporate adopted Statement of Financial Accounting Standards (SFAS) No.
115 and classified all the investment securities as securities available for
sale (dollars in thousands).
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------
1995 1994
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury notes . . . $ 1,499 $ 1,495 $ 2,503 $ 2,469
U.S. Government Mortgage-
Backed Securities . . . 1,953 1,952 2,527 2,446
FHLB Step Bonds . . . . . 999 984 999 965
------- ------- ------- -------
Total securities available
for sale . . . . . . . . . . 4,451 4,431 6,029 5,880
INVESTMENT SECURITIES:
U.S. Treasury notes . . . -- -- -- --
U.S. Government Mortgage-
Backed Securities . . . -- -- -- --
FHLB Step Bonds . . . . . -- -- -- --
------- ------- ------- -------
Total investment securities . -- -- -- --
Total available for sale and
investment securities . . $ 4,451 $ 4,431 $ 6,029 $ 5,880
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992
-------------------- --------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury notes . . . $ 2,496 $ 2,467 $ -- $ -- $ -- $ --
U.S. Government Mortgage-
Backed Securities . . . 2,667 2,553 -- -- -- --
FHLB Step Bonds . . . . . 999 931 -- -- -- --
------- ------- ------- ------- ------- -------
Total securities available
for sale . . . . . . . . . . 6,162 5,951 -- $ -- -- --
INVESTMENT SECURITIES:
U.S. Treasury notes . . . -- -- 2,506 2,501 1,014 1,003
U.S. Government Mortgage-
Backed Securities . . . -- -- 3,130 $ 3,114 837 860
FHLB Step Bonds . . . . . -- -- 1,000 $ 998 -- --
------- ------- ------- ------- ------- -------
Total investment securities . -- -- 6,636 6,613 1,851 1,863
Total available for sale and
investment securities . . $ 6,162 $ 5,951 $ 6,636 $ 6,613 $ 1,851 $ 1,863
======= ======= ======= ======= ======= =======
</TABLE>
The decline from December 31, 1994 to June 30, 1995 is attributable to
securities maturing and being reinvested in federal funds sold for liquidity
purposes rather than being reinvested in securities.
The following table summarizes the maturities of Corporate's available
for sale portfolio and their weighted average yields at June 30, 1995 (dollars
in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995
----------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN FIVE WITHIN TEN
ONE YEAR YEARS YEARS
------------------- ------------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury notes . . . $ 1,499 4.30% $ -- --% -- 3.9%
U.S. Government Mortgage-
Backed Securities . . . -- -- 1,966 3.90 -- --
FHLB Step Bonds . . . . . -- -- 811 4.10 -- --
------- ---- ------- ---- ------- ---
Total investment securities . $ 1,499 4.30% $ 2,777 3.96% $ -- --%
======= ==== ======= ==== ======= ===
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
-----------------------------------------
AFTER TEN
YEARS TOTAL
------------------- -------------------
AMOUNT YIELD AMOUNT YIELD
--------- ------- --------- -------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury notes . . . $ -- --% $ 1,499 4.30%
U.S. Government Mortgage-
Backed Securities . . . 175 8.00 2,141 8.00
FHLB Step Bonds . . . . . -- -- 811 3.96
------- ---- -------- ----
Total investment securities . $ 175 8.00% $ 4,451 6.02%
======= ==== ======== ====
</TABLE>
79
<PAGE> 85
DEPOSITS. Deposits increased by $5.0 million or 8.3% from December
31, 1994 when compared to June 30, 1995. The primary reason for this increase
was a deliberate move by Corporate's management to alleviate possible liquidity
problems as a result of a complete change in senior management and the adverse
publicity of the First Order. Corporate joined the National CD Network and
raised $4.2 million in certificates of deposit under $100,000 and $.6 million
in certificates of deposit over $100,000, during the month of April 1995. All
the certificates were issued for one year with rates ranging from 6.65% to
6.75%. The one year treasury during the same time period ranged in yield from
6.12% to 6.27%. The purchasers of the certificates were out of state financial
institutions. In addition non-interest-bearing demand deposits increased $1.9
million or 7% at June 30, 1995 up from December 31, 1994. Savings, money
market and now account decreased $3.2 million or 11.3% during the same time
period. This runoff is attributable partially to the change in management and
the First Order and partially to the economic condition in Orange County.
Deposits at December 31, 1994 were down $14.7 million or 19.4% from
December 31, 1993. All categories of deposits declined from year to year.
Non-interest-bearing demand deposits decreased $7.0 million or 20.6% from
December 31, 1993. This decline was due in part to the overall economic
condition of Orange County and part to the adverse publicity Corporate received
in connection with the First Order.
Noninterest-bearing deposits as a percent of total deposits were
43.57%, 44.04% and 44.70% at June 30, 1995, December 31, 1994 and December 31,
1993, respectively. The average rates paid for deposits at June 30, 1995,
December 31, 1994 and December 31, 1993 were 1.95%, 1.66% and 1.91%,
respectively.
80
<PAGE> 86
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------------------------- --------------------------------------------------
1995 1994 1994 1993 1992
------------------ ------------------ ------------------ ------------------ --------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE
-------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits . . . . . . . $ 28,384 $ 30,913 $ 30,382 $ 30,866 $ 26,896
Savings deposits . . . . . . . . 5,969 2.75% 8,603 2.70% 8,119 2.71% 7,915 3.04% 6,857
Money market accounts . . . . . . 8,850 3.48% 9,083 2.95% 9,682 2.98% 10,461 3.15% 10.250
NOW accounts . . . . . . . . . . 9,942 2.96% 13,559 2.70% 13,201 2.75% 15,257 2.97% 13,938
Time certificates under $100,000 4,646 4.74% 2,951 3.32% 2,769 2.94% 4,359 3.62% 10,688
Time certificates over $100,000 4,260 5.21% 7,228 3.18% 6,569 3.32% 9,125 3.35% 15,426
-------- ---- -------- ---- -------- ---- -------- ---- --------
Total deposits . . . . . . . . $ 62,051 1.95% $ 72,337 1.65% $ 70,722 1.66% $ 77,983 1.91% $ 84,055
======== ======== ======== ======== ========
</TABLE>
The scheduled maturity of Corporate's time deposits in denominations
of $100,000 or greater as of June 30, 1995 were as follows (dollars in
thousands):
<TABLE>
<S> <C>
DEPOSITS MATURING IN JUNE 30, 1995
-------------------- -------------
Three months or less . . . . . . . . . . . . . . . . . . . . $ 603
Over three months through six months . . . . . . . . . . . . 837
Over six months through twelve months . . . . . . . . . . . . 3,54
Over twelve months . . . . . . . . . . . . . . . . . . . . . 0
------
Total . . . . . . . . . . . . . . . . . . . $4,985
======
</TABLE>
RESULTS OF OPERATIONS
NET EARNINGS. Net earnings for the six months ended June 30, 1995
decreased by $5,000 or 5.95% when compared to the same period in 1994. Net
earnings for the year ended December 31, 1994 decreased by $667,000 or 450.6%
over the net earnings for 1993 and the 1993 net earnings decreased by $659,000
or 81.6% over the results for 1992. Earnings per share were $(1.04), $.30, and
$1.61 for the years 1994, 1993, and 1992, respectively. Shareholder return on
beginning capital was (6.8)% in 1994, 1.98% in 1993, and 12.09% in 1992.
NET INTEREST. Net interest income, which constitutes the principal
source of income for Corporate, is the amount by which interest earned on
assets exceeds the interest paid on deposits and other borrowed funds. Changes
in net interest income from period to period result from increases or decreases
in the average balances (volume) of interest-earning assets and
interest-bearing liabilities, increases or decreases in the average rates
earned and paid on such assets and liabilities, Corporate's ability to manage
its earning asset portfolio and the availability of particular sources of
funds.
During the first six months of 1995, net interest income decreased by
$126,000 or 5.0% when compared to the same period in 1994. Even though the six
months ended June 30, 1995 was in a higher interest rate environment, average
earning assets were yielding 9.37% or 82 basis points over the same period in
1994, average earning assets decreased $8.7 million resulting in interest
income decreasing $107,000. The interest expense was $19,000 or 2.9% higher in
1995 as a result of higher interest rates being paid on deposits.
81
<PAGE> 87
For the years ended December 31, 1994, 1993 and 1992 net interest
income was $4.9 million, $5.7 million and $6.1 million, respectively. This
decreasing trend is primarily due to the decreased average earning assets at
December 31, 1994, 1993 and 1992 of $72.4, $77.5 and $82.6, respectively.
The following table shows Corporate's average balances of assets,
liabilities and stockholders' equity; the amount of interest income or interest
expense; and the average yield or rate for each category of interest-earning
assets and interest-bearing liabilities, the net interest spread and net
interest yield for the periods indicated (dollars in thousands):
82
<PAGE> 88
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
1995 1994
------------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Net Loans(1)(2):
Commercial . . . . . . . . . . . $ 16,239 $ 828 10.20% $ 14,901 $ 724 9.72%
Installment . . . . . . . . . . 14,542 837 11.51% 21,365 1,203 11.26%
Real Estate . . . . . . . . . . 16,459 760 9.24% 11,765 463 7.87%
Construction . . . . . . . . . . 3,446 159 9.23% 4,753 187 7.87%
Direct lease financing, net . . 2,986 171 11.45% 4,627 275 11.89%
Securities available for sale . 5,038 108 4.29% 6,342 125 3.94%
Time certificates of deposit . . 925 23 4.97% 2,500 47 3.76%
Federal funds sold . . . . . . . 5,448 164 6.02% 7,557 133 3.52%
------------ ---------- --------- ---------
Total earning assets . . . . . . . 65,083 3,050 9.37% 73,810 3,157 8.55%
Noninterest-earning assets:
Cash and due from banks . . . . . 5,132 6,122
Accrued interest receivable . . . . 342 389
Other real estate owned . . . . . . 1,186 1,377
Bank premises and equipment, net 647 827
Other assets . . . . . . . . . . . 593 233
------------ ---------
Total noninterest-earning assets 7,900 8,948
------------ ---------
Less allowance for credit losses . . (1,640) (1,092)
------------ ---------
Total assets . . . . . . . . . . $ 71,343 $ 81,666
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits . . . . . . . . . $ 5,969 $ 82 2.75% $ 8,603 $ 116 2.7%
Money market accounts . . . . . . 8,851 154 3.48% 9,083 134 2.9%
NOW accounts . . . . . . . . . . . 9,942 147 2.96% 13,559 183 2.7%
Time certificates under $100,000 4,646 110 4.74% 2,951 49 3.3%
Time certificates of $100,000
and over . . . . . . . . . . . . 4,260 111 5.21% 7,228 115 3.1%
Subordinated capital notes and
other . . . . . . . . . . . . . 1,273 54 8.48% 1,102 42 7.6%
------------ ---------- --------- ---------
Total interest-bearing liabilities . . 34,941 658 3.77% 42,526 639 3.01%
------------ ---------- --------- ---------
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . 28,384 30,913
Accrued interest payable . . . . . 107 85
Other liabilities . . . . . . . . 601 283
Total noninterest-bearing
liabilities . . . . . . . . . 29,092 31,281
------------ ---------
Stockholders' Equity . . . . . . . . . 7,310 7,859
Total liabilities and
stockholders' equity . . . . $ 71,343 $ 81,666
============ =========
Net interest income . . . . . . . . $ 2,392 $ 2,518
========== =========
Net interest spread . . . . . . . . 5.61% 5.55%
===== =====
Net interest yield . . . . . . . . 7.35% 6.82%
===== =====
</TABLE>
__________________
(1) Loan fees have been included in the calculation of interest income.
Loan fees were approximately $73,000, and $68,000 for the six months
ended June 30, 1995 and 1994, respectively.
(2) Net of unamortized deferred fees and discounts. Nonaccrual loans have
been included for the purposes of this table.
83
<PAGE> 89
The following table shows Corporate's average balances of assets,
liabilities and stockholders' equity, the amount of interest income or interest
expense, the average yield or rate for each category of interest-earning assets
and interest-bearing liabilities, and the net interest spread and net interest
yield for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993
------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Net Loans(1)(2):
Commercial . . . . . . . . . . . . . $14,356 $1,460 10.17% $15,463 $1,645 10.64%
Installment . . . . . . . . . . . 19,305 2,157 11.17% 24,097 2,820 11.70%
Real estate . . . . . . . . . . . 12,722 1,080 8.49% 9,821 937 9.54%
Construction . . . . . . . . . . . . 3,902 331 8.48% 6,650 635 9.55%
Direct lease financing, net . . . . 4,273 496 11.61% 6,100 766 12.56%
Securities available for sale . . . . 6,251 337 5.39% -- -- --
Investment securities . . . . . . . . -- -- -- 3,191 229 7.18%
Time certificates of deposit . . . . . 2,475 99 4.00% 3,238 90 2.78%
Federal funds sold . . . . . . . . . . 9,078 370 4.08% 8,962 261 2.91%
------- ------ ------- ------
Total earning assets . . . . . . . . 72,362 6,330 8.75% 77,522 7,383 9.52%
Noninterest-earning assets:
Cash and due from banks . . . . . . . 5,841 7,327
Accrued interest receivable . . . . . 359 423
Other real estate owned . . . . . . . 1,422 2,366
Bank premises and equipment
net . . . . . . . . . . . . . . . 783 989
Other assets . . . . . . . . . . . . . 227 316
------- -------
Total noninterest-earning assets . . . 8,632 11,421
------- -------
Less allowance for credit losses . . . . (1,085) (1,012)
------- -------
Total assets . . . . . . . . . . . $79,909 $87,931
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits . . . . . . . . . . . $ 8,119 $ 220 2.71% $ 7,915 $ 241 3.04%
Money market accounts . . . . . . . . 9,682 289 2.98% 10,461 329 3.15%
NOW accounts . . . . . . . . . . . . . 13,201 363 2.75% 15,257 453 2.97%
Time certificates under
$100,000 . . . . . . . . . . . . . 2,769 81 2.93% 4,359 158 3.62%
Time certificates of $100,000
and over . . . . . . . . . . . . . 6,569 218 3.32% 9,125 306 3.35%
Subordinated capital notes
and other . . . . . . . . . . . . . 1,080 165 15.28% 1,000 133 13.30%
------- ------ ------- ------
Total interest-bearing
liabilities . . . . . . . . . . . 41,420 1,336 3.23% 48,117 1,620 3.37%
------ ------
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . . 30,382 30,866
Accrued interest payable . . . . . . . 82 106
Other liabilities . . . . . . . . . . 220 1,088
------- -------
Total noninterest-bearing
liabilities . . . . . . . . . . 30,684 32,060
Stockholders' Equity . . . . . . . . . . 7,805 7,754
------- -------
Total liabilities and
stockholders' equity . . . . . . $79,909 $87,931
======= =======
Net interest income . . . . . . . . . . . $4,994 $5,763
====== ======
Net interest spread . . . . . . . . . . . 5.52% 6.16%
==== ====
Net interest yield . . . . . . . . . . . 6.90% 7.43%
==== ====
</TABLE>
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
----------------------------------
1992
----------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
--------- -------- --------
<S> <C> <C> <C>
ASSETS
Earning assets:
Net Loans(1)(2):
Commercial . . . . . . . . . . . . $17,411 $1,949 11.19%
Installment . . . . . . . . . . . 22,446 2,778 12.38%
Real estate . . . . . . . . . . . 9,170 1,047 11.42%
Construction . . . . . . . . . . . 10,203 1,165 11.42%
Direct lease financing, net . . . 6,646 850 12.79%
Securities available for sale . . . -- -- --
Investment securities . . . . . . . 972 92 9.47%
Time certificates of deposit . . . . 3,195 144 4.51%
Federal funds sold . . . . . . . . . 12,534 422 3.37%
------- ------
Total earning assets . . . . . . . 82,577 8,447 10.23%
Noninterest-earning assets:
Cash and due from banks . . . . . . 8,176
Accrued interest receivable . . . . 555
Other real estate owned . . . . . . 1,986
Bank premises and equipment
net . . . . . . . . . . . . . . 1,114
Other assets . . . . . . . . . . . . 369
-------
Total noninterest-earning assets . . 12,200
-------
Less allowance for credit losses . . . (1,075)
-------
Total assets . . . . . . . . . . $93,702
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits . . . . . . . . . . $ 6,857 $ 255 3.72%
Money market accounts . . . . . . . 10,251 324 3.16%
NOW accounts . . . . . . . . . . . . 13,938 465 3.34%
Time certificates under
$100,000 . . . . . . . . . . . . 10,688 488 4.57%
Time certificates of $100,000
and over . . . . . . . . . . . . 15,426 670 4.34%
Subordinated capital notes
and other . . . . . . . . . . . . 744 74 9.95%
------- ------
Total interest-bearing
liabilities . . . . . . . . . . 57,904 2,276 3.93%
------
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . 26,896
Accrued interest payable . . . . . . 154
Other liabilities . . . . . . . . . 1,714
-------
Total noninterest-bearing
liabilities . . . . . . . . . 28,764
Stockholders' Equity . . . . . . . . . 7,034
-------
Total liabilities and
stockholders' equity . . . . . 93,702
=======
Net interest income . . . . . . . . . . $6,171
======
Net interest spread . . . . . . . . . . 6.30%
====
Net interest yield . . . . . . . . . . 7.47%
====
</TABLE>
___________________
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $137,000, $235,000 and $391,000 for the years
ended December 31, 1994, 1993 and 1992, respectively.
(2) Net of unamortized deferred fees and discounts. Nonaccrual loans have
been included for the purposes of this table.
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<PAGE> 90
The following table sets forth the dollar amount of changes in interest
earned and paid for each major category of interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes
in average balances (volume) or changes in average interest rates. The
variances attributable to both balance and rate changes have been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1995 VS. 1994 1994 VS. 1993
-------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
-------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Earning assets - Interest income:
Net loans and leases:
Commercial and industrial . . . . . . . . $ 130,073 $(25,857) $ 104,216 $(117,877) $ (67,369) $ (185,246)
Installment . . . . . . . . . . . . . . . (768,645) 401,899 (366,746) (560,648) (102,232) (662,880)
Real estate . . . . . . . . . . . . . . . 369,639 (72,559) 297,080 276,807 (134,744) 142,063
Construction . . . . . . . . . . . . . . (102,933) 74,970 (27,963) (262,252) (41,328) (303,580)
Direct lease financing . . . . . . . . . (195,111) 91,235 (103,876) (229,360) (40,497) (269,857)
Federal funds sold . . . . . . . . . . . . . (74,376) 105,068 30,692 3,363 105,703 109,066
Time certificates of deposit . . . . . . . . (59,041) 35,114 (23,927) (21,169) 29,839 8,670
Securities available for sale/investment
securities . . . . . . . . . . . . . . . (51,576) 34,392 (17,184) 219,629 (111,273) 108,356
--------- -------- --------- --------- --------- ----------
Total . . . . . . . . . . . . . . . (751,970) 644,262 (107,708) (691,507) (361,901) (1,053,408)
Deposits and borrowed funds -
Interest expense:
Savings deposits . . . . . . . . . . . . (71,205) 36,404 (34,801) 6,182 (26,498) (20,316)
Money market accounts . . . . . . . . . . (6,860) 27,015 20,155 (24,527) (15,330) (39,857)
NOW accounts . . . . . . . . . . . . . . (97,658) 61,782 (35,876) (61,001) (29,285) (90,286)
Time certificates under $100,000 . . . . 56,296 4,592 60,888 (57,654) (19,059) (76,713)
Time certificates of $100,000 and over . (94,284) 90,694 (3,590) (85,723) (2,245) (87,968)
Subordinated Capital notes and other . . 13,156 (1,555) 11,601 10,694 20,786 31,480
--------- -------- --------- --------- --------- ----------
Total . . . . . . . . . . . . . . . (200,555) 218,932 18,377 (212,029) (71,631) (283,660)
Change in net interest income . . . . . . . . . $(551,415) $425,330 $(126,085) $(479,478) $(290,270) $ (769,748)
========= ======== ========= ========= ========= ===========
</TABLE>
______________________
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $73,000 and $68,000 for the six months ended June
30, 1995 and 1994, respectively, and were approximately $137,000,
$235,000, and $391,000 for the years ended December 31, 1994, 1993 and
1992, respectively.
(2) Net of unamortized deferred fees and lease loans have been included for
the purposes of this table.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993 VS. 1992
-------------------------
INCREASE (DECREASE)
DUE TO CHANGES IN
-------------------------
VOLUME RATE
---------- -----------
<S> <C> <C>
Earning assets - Interest income:
Net loans and leases:
Commercial and industrial . . . . . . . . . . . . . . $(217,963) $ (85,135)
Installment . . . . . . . . . . . . . . . . . . . . . 204,270 (162,259)
Real estate . . . . . . . . . . . . . . . . . . . . . 74,367 (184,407)
Construction . . . . . . . . . . . . . . . . . . . . (405,789) (124,865)
Direct lease financing . . . . . . . . . . . . . . . (69,852) (14,749)
Federal funds sold . . . . . . . . . . . . . . . . . . . (120,212) (40,811)
Time certificates of deposit . . . . . . . . . . . . . . 1,928 (55,835)
Securities available for sale/investment securities . . 211,025 (74,447)
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . (322,226) (742,508)
Deposits and borrowed funds -
Interest expense:
Savings deposits . . . . . . . . . . . . . . . . . . 39,317 (53,480)
Money market accounts . . . . . . . . . . . . . . . . 6,655 (969)
NOW accounts . . . . . . . . . . . . . . . . . . . . 43,988 (56,144)
Time certificates under $100,000 . . . . . . . . . . (289,164) (41,092)
Time certificates of $100,000 and over . . . . . . . (273,790) (90,474)
Subordinated Capital notes and other . . . . . . . . 25,427 33,875
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . (447,567) (208,284)
Change in net interest income . . . . . . . . . . . . . . . $ 125,341 $(534,224)
========= =========
</TABLE>
______________________
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $73,000 and $68,000 for the six months ended June
30, 1995 and 1994, respectively, and were approximately $137,000,
$235,000, and $391,000 for the years ended December 31, 1994, 1993 and
1992, respectively.
(2) Net of unamortized deferred fees and lease loans have been included for
the purposes of this table.
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<PAGE> 91
PROVISION FOR LOAN AND LEASE LOSSES. Corporate's provision for loan
and lease losses corresponds directly to the level of allowance that Corporate
deems sufficient to offset potential loan and lease losses. The balance in the
allowance for loan and lease losses reflects the amount which, in Corporate's
judgment, is adequate to provide for potential loan and lease losses based upon
a detailed monthly evaluation of the loan portfolio. The analysis includes an
evaluation of trends in the loan portfolio volume, maturity and composition,
the results of an independent study, off-balance sheet risks, delinquencies and
nonaccruals, economic conditions, and historical loss experience. As a result
of the analyses made for the six months ended June 30, 1995, and the years
ended December 31, 1994, 1993 and 1992, the provision for these periods were
$178,000, $1,134,000, $865,000 and $145,000, respectively. The $178,000
provision at June 30, 1995 was $156,000 greater than the same period for 1994,
which was $22,000.
NONINTEREST INCOME. For the six months ended June 30,1995, noninterest
income decreased $14,000 or 4.1% when compared to the same period in 1994.
Service charges and fees decreased $63,000 or 20.1% for the same period
primarily as a result of runoff in noninterest-bearing demand deposits and
savings, money market and NOW accounts. Other operating revenues increased
$49,000 or 188.5% due to increased gains realized on the sale of OREO
properties during the six months ended June 30, 1995.
Noninterest income for the years ended December 31, 1994, 1993 and
1992 of $637,000, $841,000 and $831,000, respectively, reflect the decreased
service charges and fees collected as a result of decreasing deposit base in
those years.
NONINTEREST EXPENSE. In the first six months of 1995, noninterest
expense was lower by $280,000 or 10.4% when compared to the six months ended
1994. This is primarily a result of Corporate's reduction of OREO and the
holding costs associated with those properties and OREO write-downs.
In 1994 noninterest expense decreased $279,000 or 5.0% from 1993.
Salaries and employee benefits decreased $628,000 or 27.6%; however, other
general and administrative expense increased $366,000 during the same period.
The salary and employee benefits reduction was obtained primarily through the
elimination of the leasing department and the construction loan department and
a formal restructuring of salaries. The increase in other general and
administrative expense was due to increased professional and legal fees
incurred relative to the First and Second Order and litigating problem assets.
Noninterest expense for the years ended December 31, 1994, 1993 and 1992 were
$5.3 million, $5.5 million and $5.4 million, respectively.
86
<PAGE> 92
INCOME TAXES. Corporate's provision for income taxes of $56,000 for
the six months ended June 30, 1995 was $11,000 or 16.4% lower than the same
period in 1994. The increase is attributable to the decrease in earnings
between the periods.
In 1994, Corporate realized a tax benefit of $244,000 due to the
pretax loss of $763,000. This benefit will be realized in the form of a refund
of loss carryback that result in refunds of previously paid taxes and the
future utilization of deferred tax assets. Income tax expense for the years
ended December 31, 1993 and 1992 of $94,000 and $581,000 paralleled the change
in pretax income.
On January 1, 1993 Corporate adopted SFAS No. 109, "Accounting for
Income Taxes." The effect of this change was to increase income for 1993 by
$42,000 or $.09 per share. The financial statements for 1992 were not restated
and the cumulative effect of this change of $42,000 is shown as a one-time
credit to income in the 1993 statement of operations.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT. Corporate's liquidity
position is a reflection of its ability to provide funds to meet customer
credit needs, to accommodate possible outflows in deposits, to provide funds
for day-to-day operations, and to take advantage of interest rate market
opportunities. Funding of loan requests, providing for liability outflows, and
management of interest rate risk require continuous analysis in order to match
the maturities of categories of loans and investments with the maturity of
deposits and bank-related borrowings. Bank liquidity is thus normally
considered in terms of the nature and mix of the banking institution's sources
and uses of funds. Asset liquidity is provided by cash, certificates of
deposit with other financial institutions, federal funds sold, maturing
investments, and loan maturities and repayments. Liquid assets (consisting of
cash, time deposits, federal funds sold and securities available for sale)
represented 21.2% and 28.8% of Corporate's total assets as December 31, 1994
and 1993, respectively. Liquidity management also includes the management of
unfunded commitments to make loans and undisbursed amounts under lines of
credit. At December 31, 1994 these commitments totaled $8.2 million, including
$1.0 million of undisbursed loan funds. Outstanding commitments for standby
letters of credit amounted to $421,000.
At June 30, 1995, commitments to make loans totaled $8.6 million which
represents a 5.4% increase over the total at December 31, 1994. Outstanding
commitments for standby letters of credit decreased 18.2% over the same period
to $344,000 at June 30, 1995.
As shown in the Statements of Cash Flows, during the first six months
of 1995, the largest source of funds was from a combination of loans and
leases, time certificates of deposit and securities available for sale,
maturing and rolling into cash and cash equivalents along with the addition of
funds raised from the operation of the out of the area money desk. Corporate
continues to closely monitor its time certificates of deposit of $ 100,000 or
more. Corporate adheres to its policy of not accepting any brokered deposits.
In order to meet liquidity needs on a temporary basis (less than two
weeks), Corporate has established a line of credit with its major correspondent
bank in the amount of $3 million. There were no borrowings during 1993 and
1994. The average balance of such borrowing for the six months ended June 30,
1995 was $16,600.
Asset/Liability management involves minimizing the impact of interest
rate changes on Corporate's earnings though the management of the amount,
composition, and repricing periods of rate-sensitive assets
87
<PAGE> 93
and rate-sensitive liabilities. Emphasis is placed on maintaining a rate
sensitivity position within Corporate's policy guidelines to avoid wide swings
in spreads and to minimize risk due to changes in interest rates.
The following table shows the amounts of real estate loans, commercial
and industrial loans, and installment loans outstanding as of June 30, 1995,
which, based on remaining scheduled repayments of principal, were due within
one year, after one but within five years, and in more than five years (dollars
in thousands).
<TABLE>
<CAPTION>
MATURING
-----------------------------------------------------------
AFTER ONE BUT
WITHIN ONE WITHIN FIVE MORE THAN
YEAR YEARS FIVE YEARS TOTAL
-------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial and industrial . . . . . . . . $ 5,856 $ 3,358 $ 1,893 $ 11,107
Real Estate . . . . . . . . . . . . . . . 8,733 15,424 358 24,515
Installment . . . . . . . . . . . . . . . 1,591 12,490 0 14,081
Lease financing receivables . . . . . . . 695 1,892 0 2,587
-------------- ------------- ---------- ----------
Total . . . . . . . . . . . . . $ 16,875 $ 33,164 $ 2,251 $ 52,290
============== ============= ========== ==========
</TABLE>
The following table sets forth the sensitivity of the amounts due
after one year to changes in interest rates (dollars in thousands):
<TABLE>
<CAPTION>
MATURING
------------------------------------------------
AFTER ONE BUT MORE THAN
WITHIN FIVE YEARS FIVE YEARS TOTAL
----------------- ------------- ----------
<S> <C> <C> <C>
Loans:
With fixed-rate interest . . . . . . . $ 28,725 $ 2,251 $ 30,976
With floating-rate interest . . . . . 4,439 0 4,439
---------------- ------------- ----------
Total . . . . . . . . . . . . $ 33,164 $ 2,251 $ 35,415
================ ============= ==========
</TABLE>
The following table sets forth rate sensitivity of Corporate's
interest-earning assets and interest-bearing liabilities as of June 30, 1995,
the interest rate sensitivity gap (i.e., interest rate-sensitive assets less
interest rate-sensitive liabilities), the cumulative interest rate sensitivity
gap, the interest rate sensitivity gap ratio (interest rate-sensitive assets
divided by interest rate-sensitive liabilities) and the cumulative interest
rate sensitivity gap ratio. For the purposes of the following table, an asset
or liability is considered rate sensitive within a specified period when it
matures or can be repriced within such period in accordance with its
contractual terms (dollars in thousands):
88
<PAGE> 94
<TABLE>
<CAPTION>
AFTER THREE AFTER SIX AFTER ONE
WITHIN MONTHS BUT MONTHS BUT YEAR BUT AFTER
THREE WITHIN SIX WITHIN ONE WITHIN FIVE
MONTHS MONTHS YEAR FIVE YEARS YEARS TOTAL
---------- ----------- ----------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans . . . . . . . . . . . . . . . . . $ 17,323 $ 2,182 $ 3, 837 $ 26,696 $ 2,252 $ 52,290
Available for sale securities . . . . . -- 1,495 -- 2,759 177 4,431
Interest bearing deposits . . . . . . . 99 198 -- -- -- 297
Federal funds sold . . . . . . . . . . 13,100 -- -- -- -- 13,100
---------- ----------- ----------- ----------- ------- --------
Total . . . . . . . . . . . . . . . $ 30,522 $ 3,875 $ 3,837 $ 29,455 $ 2,429 $ 70,118
========== =========== =========== =========== ======= ========
INTEREST-BEARING LIABILITIES:
Money market accounts . . . . . . . . . $ 10,968 $ -- $ -- $ -- $ -- $ 10,968
NOW accounts . . . . . . . . . . . . . 8,963 -- -- -- -- 8,963
Savings deposits . . . . . . . . . . . 5,338 -- -- -- -- 5,338
Time deposits of
$100,000 or more . . . . . . . . . . 2,087 403 2,495 -- -- 4,985
Other time deposits . . . . . . . . . . 1,265 552 5,132 173 -- 7,122
Subordinated capital notes . . . . . . -- -- 1,000 -- -- 1,000
---------- ----------- ----------- ----------- ------- --------
Total . . . . . . . . . . $ 28,621 $ 955 $ 8,627 $ 173 $ -- $ 38,376
========== =========== =========== =========== ======== ========
Interest rate sensitivity gap . . . . . $ 1,901 $ 2,920 $ (4,790) $ 29,282 $ 2,429 $ 31,742
Cumulative interest rate sensitivity gap 1,901 4,821 31 29,313 31,742 --
Interest rate sensitivity gap ratio . . 1.07 4.06 0.44 170.26 -- 1.83
Cumulative interest rate
sensitivity gap ratio . . . . . . . . 1.07 0.86 1.00 .57 0.55 --
</TABLE>
The foregoing table does not necessarily indicate the impact of
general interest rate movements on Corporate's net interest yield, because the
repricing of various categories of assets and liabilities is discretionary and
is subject to competition and other pressures. As a result, various assets and
liabilities indicated as repricing within the same period may in fact price at
different times and at different rate levels.
As of June 30, 1995, Corporate was marginally asset sensitive for all
periods presented. Asset sensitive means that rate-sensitive assets exceed
rate-sensitive liabilities. This position will result in better earnings in an
increasing rate environment because the assets will reprice quicker than the
liabilities. Corporate continues to monitor its asset/liability position and
continues to modify its product mix to help mitigate the changes in interest
rates and inflation.
CAPITAL RESOURCES. On March 8, 1994, Corporate consented to the First
Order issued by the FDIC which had an effective date of March 25, 1994. The
First Order requires Corporate to, among other things, maintain Tier 1 capital
levels equal to at least 7.0% of total assets, as defined. Additionally,
Corporate is prohibited from declaring or paying any dividends without prior
approval of the FDIC. No dividends have been declared or paid pursuant to the
First Order. See "CORPORATE BANK -- Regulatory Matters."
The following table sets forth the minimum capital ratio required by
FDIC regulations, the First Order and the State Order and Corporate's actual
capital ratios as of June 30, 1995, December 31, 1994 and December 31, 1993.
89
<PAGE> 95
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
----------- -----------------
REQUIRED 1995 1994 1993
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Tier 1 risk-based capital . . . . . . . . 4.00% 12.56% 12.12% 11.70%
Total risk-based capital . . . . . . . . 8.00% 14.19% 14.08% 13.85%
Leverage capital ratio (1) . . . . . . . 4.00% 9.90% 9.42% 10.29%
First Order . . . . . . . . . . . . . . . 7.00% 9.90% 9.42% 10.29%
State Order (2) . . . . . . . . . . . . . 7.00% 9.90% 9.42% 10.29%
</TABLE>
_________
(1) Tier 1 capital to total average assets.
(2) Tangible shareholders equity to tangible assets.
EFFECTS OF INFLATION. Inflation affects Corporate principally through
its effects of Corporate's noninterest expenses, such as salaries, wages and
occupancy expenses. In addition, inflation has a broad impact on market rates
of interest, and increasing market rates of interest generally have the effect
of increasing Corporate's net interest spread and net interest income, while
decreasing market rates generally have the opposite effect. Inflation,
however, does have a considerable indirect impact on banking including, among
other things, increasing the level of loan demand as it becomes necessary for
producers and consumers to acquire additional funds in order to maintain the
same levels of consumption, inventories and new investments. In addition,
inflation may have impacts on the ability of Corporate to collect loans from
their borrowers.
In general, the overall impact of inflation on a financial institution
differs greatly from that exerted on other types of enterprises because the
assets and liabilities of financial institutions consist largely of monetary
items.
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF CORPORATE
GENERAL
The deposits of Corporate are insured under the Federal Deposits
Insurance Act up to the applicable limits, thereof, and Corporate is not a
member of the Federal Reserve System. Corporate has no parent company,
subsidiaries or other affiliates. At June 30, 1995, Corporate had
approximately $75 million in assets, $50 million in net loans and $62 million
in deposits.
BANKING SERVICES
Corporate is engaged in substantially all of the business operations
customarily conducted by independent commercial banks in California.
Corporate's banking services include the acceptance of checking and savings
deposits, and the making of commercial, real estate, personal, home
improvement, automobile, financing (including loans and leases) and other
installment loans and term extensions of credit. Corporate also offers
travelers' checks, notary public and other customary bank services to its
customers. Corporate is a credit card issuing bank, offering MasterCard and
Visa to both individuals and businesses.
Corporate's deposits are attracted primarily from individuals and
small and medium-sized, business-related sources. Corporate also attracts
deposits from the City of Anaheim, as a local agency
90
<PAGE> 96
deposit. In connection with this municipal deposits, Corporate is required to
pledge securities to secure such deposits, except for the first $100,000 of
such deposits which are insured by the FDIC.
As of June 30, 1995, Corporate had approximately 2,800 deposit
accounts, representing approximately 1,700 noninterest-bearing (demand)
accounts with balances totaling approximately $29 million for an average
balance per account of approximately $10,357; 800 savings, interest-bearing
demand and money market accounts with balances totaling approximately $25
million for an average balance per account of approximately $31,250; and 225
time certificates of deposit accounts with balances totaling approximately $12
million, for an average balance per account of approximately $53,333.
The areas in which Corporate has divided virtually all of its lending
activities are (i) commercial loans; (ii) installment loans; and (iii) real
estate loans. As of June 30, 1995 these three categories accounted for
approximately 30.2%, 26.8% and 32.3%, respectively, of Corporate's gross loan
portfolio.
The principal source of Corporate's revenues are (i) interest and fees
on loans; (ii) service charges on deposits, commissions and fees; (iii) direct
lease financing; and (iv) federal funds sold. For the six months ended June
30, 1995 these sources comprised 76.5%, 7.4%, 5.1% and 4.9%, respectively, of
Corporate's total operating income.
Corporate has not engaged in any material research activities relating
to the development of new services or the improvement of existing bank services
since 1992 in preparation of the Anaheim Branch.
There has been no significant change in the types of services offered
by Corporate since its inception, except in connection with new types of
accounts allowed by statute or regulation in recent years. Corporate has no
present plans regarding "a new line of business" requiring the investment of a
material amount of total assets.
Corporate's general market area is central Orange County. Corporate's
delineated community is as follows: Santa Ana, Orange, Villa Park, Tustin,
Anaheim and Fullerton. Within these communities, Corporate offers the full
range of banking products and services typically offered by independent
community banks.
Corporate holds no patents, licenses (other than licenses obtained
from bank regulatory authorities), franchises or concessions.
COMPETITION
There are currently 21 independent banks in Orange County in addition
to four major banks. Of the 21 independents four others are currently in the
process of being merged or acquired. Competition in the independent bank
market place is driven by "quality service." The major banks, because of their
sheer size and staffing movements, are not able to effectively compete. In
addition, as the independent banks in the county continue to consolidate and
merge, competition is further decreased. Nevertheless, competition for new
business is significant. Corporate's biggest competitors are Eldorado Bank,
National Bank of Southern California and Southern California Bank.
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<PAGE> 97
EMPLOYEES
As of June 30, 1995, Corporate had a total of 37 full-time employees
and no part-time employees. The management of Corporate believes that its
employee relations are satisfactory.
PROPERTIES
Corporate currently has two full-service banking offices. The
principal office of Corporate is located 2740 North Grand Avenue, Santa Ana,
California and consists of approximately 16,000 square feet of office space.
Corporate maintains a branch office at 100 West Lincoln Avenue, Anaheim,
California, which consists of approximately 5,800 square feet of office space.
Corporate leases the facilities from unrelated parties under noncancellable
operating leases with terms ranging from 5 to 25 years. Both facility leases
contain escalation clauses.
The principal office lease is a 25-year noncancellable operating lease
agreement for the first floor which commenced in 1982 and extends to the year
2007, and a 17-year noncancellable operating lease agreement for the second
floor, which commenced in 1988 and extends to the year 2005. In the case of
the first floor, the annual increases are at 6.50% per year. Annual rent
increases for the second floor are based on the Consumer Price Index. This
results in future minimum lease payments aggregating more than $6,000,000.
Corporate utilizes approximately 25% or 1,750 square feet of the second floor
and is actively marketing the excess space. See, "Background of the
Transaction".
LEGAL PROCEEDINGS
Various legal proceedings are pending by and against Corporate which
are the result of normal banking business. In the opinion of management and
Corporate's legal counsel, the disposition of all litigation presently pending
will not have a material effect on Corporate's financial condition or results
of operations. Also, see "Corporate Bank-Regulatory Matters."
MARKET PRICE OF AND DIVIDENDS ON CORPORATE STOCK AND RELATED SHAREHOLDER
MATTERS
Corporate Stock is privately owned by 47 investors. Transactions in
Corporate Stock have been infrequent and the prices paid have not been
announced.
No dividends have been declared or paid since Corporate was purchased
by its current shareholders.
As of September 15, 1995 there were 47 shareholders of record of
Corporate Stock.
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<PAGE> 98
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
During the fourth quarter of 1994, the Board of Directors of Corporate
elected to change accounting firms. Corporate's accountant at that time, Grant
Thornton LLP, had represented Corporate since its organization in 1982 and
Corporate's Board of Directors believed it would be prudent to make a change
due to the longevity of that relationship. Corporate 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 1994 year-end audit, but
resigned before completing the audit, due to the discovery of apparent employee
defalcations. Corporate then engaged Arthur Andersen LLP to complete the
audit, which was completed on June 30, 1995.
Grant Thornton LLP was dismissed by Corporate on or about July 31,
1994. Deloitte & Touche LLP resigned as of April 21, 1995. Grant Thornton
LLP's reports on Corporate's financial statements for 1993 and 1992 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified
or modified as to uncertainty, audit scope or accounting principles. Deloitte
& Touche LLP never completed a report on Corporate's financial statements for
1994. The decision to dismiss Grant Thornton LLP was made by the Board of
Directors of Corporate based upon the recommendation of the Audit Committee of
the Board. At the time of such dismissal, there were no disagreements with
Grant Thornton LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. Upon the
resignation of Deloitte & Touche LLP, following the discovery of certain
defalcations by former officers of Corporate, Corporate agreed with the
conclusion of Deloitte & Touche LLP that there were apparent problems with the
internal controls necessary for Corporate to develop reliable financial
statements, that information had come to the attention of Deloitte & Touche LLP
(the apparent defalcations of former officers of Corporate) that led Deloitte &
Touche LLP to no longer be able to rely on management's representations, and
that Corporate needed to expand significantly the scope of its audit for 1994.
At the time of Deloitte & Touche LLP's resignation, Corporate agreed that
further investigation might materially impact the fairness or reliability of
previously issued audit reports and the 1994 financial statements. Deloitte &
Touche LLP elected not to proceed under the circumstances presented. Arthur
Andersen LLP was engaged by Corporate on May 10, 1995 to conduct an expanded
audit for 1994 and to coordinate its efforts with Grant Thornton LLP to resolve
any questions relating to Corporate's 1993 and 1992 financial statements. As
of June 30, 1995, Arthur Andersen LLP had completed its expanded audit
procedures.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowings and the interest rate received by Corporate on loans
extended to its customers and securities held in Corporate's portfolio comprise
the major portion of Corporate's earnings. These rates are highly sensitive to
many factors that are beyond the control of Corporate. Accordingly, the
earnings and growth of Corporate are subject to the influence of domestic and
foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
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institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other
financial institutions are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
For example, legislation was recently introduced in Congress that would repeal
the current statutory restrictions on affiliations between commercial banks and
securities firms. Under the proposed legislation, bank holding companies would
be allowed to control both a commercial bank and a securities affiliate, which
could engage in the full range of investment banking activities, including
corporate underwriting. The likelihood of any major legislative changes and
the impact such changes might have on Corporate are impossible to predict. See
"-- Supervision and Regulation."
SUPERVISION AND REGULATION
Banks are extensively regulated under both federal and state law. Set
forth below is a summary description of certain laws which relate to the
regulation of Corporate. The description does not purport to be complete and
is qualified in its entirety by reference to the applicable laws and
regulations.
GENERAL
Corporate, as a California state-chartered bank, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks ("Superintendent") and the FDIC. If, as a result of an
examination of a bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or
other aspects of the bank's operations are unsatisfactory or that the bank or
its management is violating or has violated any law or regulation, various
remedies are available to the FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital, to
restrict the growth of the bank, to assess civil monetary penalties, to remove
officers and directors and ultimately to terminate a bank's deposit insurance,
which for a California state-chartered bank would result in a revocation of
the bank's charter. The Superintendent has many of the same remedial powers.
The deposits of Corporate are insured by the FDIC in the manner and to
the extent provided by law. For this protection, Corporate pays a semiannual
statutory assessment. See "-- Premiums for Deposit Insurance."
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of Corporate. State and
federal statutes and regulations relate to many aspects of Corporate's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements. Further, Corporate is
required to maintain certain levels of capital. See "-- Capital Standards."
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CAPITAL STANDARDS
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off-balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high
credit risk, such as business loans.
A bank's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The FDIC measures
risk-adjusted assets, which includes off-balance sheet items, against both
total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier
2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common
stock, retained earnings, noncumulative perpetual preferred stock (cumulative
perpetual preferred stock for bank holding companies) and minority interests in
certain subsidiaries, less most intangible assets. Tier 2 capital may consist
of a limited amount of the allowance for possible loan and lease losses,
cumulative preferred stock, long-term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain
other requirements and limitations of the FDIC. The FDIC requires a minimum
ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum
ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3%. For all banks not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum,
or 4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the FDIC has the discretion to
set individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed
would be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal has only recently been issued,
Corporate currently is unable to predict the impact of the proposal on
Corporate if the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and
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who fail to adequately manage these risks, will be required to set aside
capital in excess of the regulatory minimums. The federal banking agencies
have not imposed any quantitative assessment for determining when these risks
are significant, but have identified these issues as important factors they
will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the sum
of (a) assets classified loss; (b) 50 percent of assets classified doubtful;
(c) 15 percent of assets classified substandard; and (d) estimated credit
losses on other assets over the upcoming 12 months.
Federally supervised banks are currently required to report deferred
tax assets in accordance with SFAS No. 109. The federal banking agencies
recently issued final rules governing banks and bank holding companies, which
became effective April 1, 1995, limiting the amount of deferred tax assets that
are allowable in computing an institution's regulatory capital. The standard
has been in effect on an interim basis since March 1993. Deferred tax assets
that can be realized for taxes paid in prior carryback years and from future
reversals of existing taxable temporary differences are generally not limited.
Deferred tax assets that can only be realized through future taxable earnings
are limited for regulatory capital purposes to the lesser of (i) the amount
that can be realized within one year of the quarter-end report date, or (ii)
10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit
would be excluded from Tier 1 Capital and total assets and regulatory capital
calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of Corporate to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the
capital ratios for Corporate, compared to its minimum regulatory capital
requirements as of June 30, 1995.
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------------------------------
MINIMUM
CAPITAL MINIMUM CAPITAL RATIO
AMOUNT RATIO AMOUNT AMOUNT REQUIREMENT
------- ------------ ------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Leverage ratio . . . . . . $ 7,188 9.90% $ 2,846 4.0%
Tier 1 risk-based ratio . . $ 7,188 12.56% $ 2,289 4.0%
Total risk-based ratio . . $ 8,119 14.19% $ 4,579 8.0%
</TABLE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its
capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
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In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal
law. An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
---------------- ----------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
---------------- ------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
---------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The federal banking
agencies, however, may not treat an institution as "critically
undercapitalized" unless its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot
accept a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i)
a forced sale of voting shares
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to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be
prohibited from engaging in any material transaction other than in the ordinary
course of business without prior regulatory approval and could not, with
certain exceptions, make any payment of principal or interest on its
subordinated debt beginning 60 days after becoming critically undercapitalized.
Most importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation,
fees and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at
insured depository
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institutions before capital becomes impaired. If an institution fails to comply
with a safety and soundness standard, the appropriate federal banking agency
may require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate lending. The
regulations require insured depository institutions to adopt written policies
establishing standards, consistent with such guidelines, for extensions of
credit secured by real estate. The policies must address loan portfolio
management, underwriting standards and loan to value limits that do not exceed
the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A
state-licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related transactions" must
now comply with the agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing or refinancing of
real property, and the use of real property or interests in real property as
security for a loan or investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United
States Treasury; up to 90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any borrowings not repaid
by asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate
on deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required
by FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may
not be less than the amount that would be raised if the assessment rate for all
BIF members were .023% of deposits. The FDIC believes that the designated
reserve ratio was achieved on June 30, 1995, subject to verification expected
to be completed in September of this year. Accordingly, on August 8, 1995, the
FDIC issued final regulations adopting an assessment rate schedule for BIF
members of 4 to 31 basis points that will become effective the first day of the
month after the month in which the designated reserve ratio is achieved.
Under the risk-based assessment system, a BIF member institution such
as Corporate is categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
categories based on supervisory evaluations by its primary federal
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regulator (in Corporate's case, the FDIC). The three supervisory categories
are: financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and poses
a substantial probability of loss (Group C). The capital ratios used by the
FDIC to define well capitalized, adequately capitalized and undercapitalized
are the same in the FDIC's prompt corrective action regulations. The BIF
assessment rates are summarized below; assessment figures are expressed in
terms of cents per $100 in deposits.
Assessment Rates Effective Through the First Half of 1995
<TABLE>
<CAPTION>
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized . . . . . . . . . . . . . . . . 23 26 29
Adequately Capitalized . . . . . . . . . . . . . 26 29 30
Undercapitalized . . . . . . . . . . . . . . . . 29 30 31
</TABLE>
At June 30, 1995, Corporate was adequately capitalized (Group
B).
Assessment Rates to be Effective beginning the Second Half of 1995
<TABLE>
<CAPTION>
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized . . . . . . . . . . . . . . . . 4 7 21
Adequately Capitalized . . . . . . . . . . . . . 7 14 28
Undercapitalized . . . . . . . . . . . . . . . . 14 28 31
</TABLE>
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a
bank holding company that is adequately capitalized and managed may obtain
regulatory approval to acquire an existing bank located in another state
without regard to state law. A bank holding company would not be permitted to
make such an acquisition if, upon consummation, it would control (a) more than
10% of the total amount of deposits of insured depository institutions in the
United States or (b) 30% or more of the deposits in the state in which the bank
is located. A state may limit the percentage of total deposits that may be
held in that state by any one bank or bank holding company if application of
such limitation does not discriminate against out-of-state banks. An
out-of-state bank holding company may not acquire a state bank in existence for
less than a minimum length of time that may be prescribed by state law except
that a state may not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the
laws of that
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state, subject to the same requirements and conditions as for a merger
transaction. Effective October 2, 1995, California adopted legislation which
"opts California into" the Interstate Act. However, the California Legislation
restricts out of state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only by
way of purchases of whole banks.
The Interstate Act is likely to increase competition in Corporate's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on Corporate's operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two stages. The first stage allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Corporate is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. The FDIC has rated Corporate
"Satisfactory" in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final regulations
which change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending. The
policy statement describes the three methods that federal agencies will use to
prove discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
In February 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The
standards, which were issued in the form of guidelines rather than regulations,
relate to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance
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plan may result in enforcement proceedings. Additional standards on earnings
and classified assets are expected to be issued in the near future.
ADJOURNMENT OF MEETING
In the event sufficient votes in favor of any proposal to be voted on
by Corporate shareholders are not received by the time scheduled for the
Meeting, Corporate Board of Directors intends to recommend that the Meeting be
adjourned to permit such further solicitation of proxies. A resolution will be
proposed at the Meeting authorizing the Corporate's Board of Directors, in its
discretion, to adjourn the Meeting for the purpose of further soliciting
proxies to obtain a sufficient number of votes in favor of each proposal to be
voted on by Corporate shareholders at the Meeting.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL
SHAREHOLDER PROPOSALS
Under certain circumstances, shareholders are entitled to present
proposals at shareholder meetings. In the event the Merger does not occur, any
such proposal to be included in the Proxy Statement for Corporate's 1996
Meeting of Shareholders must be submitted by a shareholder on or before _____,
1996, in a form that complies with applicable regulations.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the shares of
Bancorp Common will be passed upon for Bancorp by Anita Y. Wolman, Esq.,
General Counsel for Bancorp, and for Corporate by Knecht & Hansen a partnership
including professional corporations.
EXPERTS
CU BANCORP. The audited financial statements and schedules
incorporated by reference in this Proxy Statement/Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
CORPORATE BANK. The financial statements of Corporate as of December
31, 1994 and for the year ended December 31, 1994 included in this Proxy
Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The financial statements of Corporate for the year ended December 31,
1993 and for each of the years in the two year period ended December 31, 1993
included in the Proxy Statement/Prospectus have been so included in reliance on
the report of Grant Thornton, independent certified public accountants, given
on the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
The Board of Directors of Corporate does not know of any matters to be
presented at the Meeting other than those set forth above. However, if other
matters come before the Meeting, it is the intention of the persons named in
the accompanying Proxy to vote said Proxy in accordance with the
recommendations of the Corporate Board on such matters and discretionary
authority to do so is included in the Proxy.
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FINANCIAL STATEMENTS OF CORPORATE BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Public Accountants
Arthur Andersen LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Grant Thornton LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Financial Statements
Balance Sheets as of June 30, 1995 (unaudited) and December 31, 1994 and 1993 . . . . . . . . . . 107
Statements of Operations for the Six Months Ended June 30, 1995 and 1994 (unaudited) and the
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . 109
Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 1995 (unaudited)
and the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . 110
Statements of Cash Flows for the Six Months Ended June 30, 1995 and 1994 (unaudited) and the
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . 111
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
</TABLE>
104
<PAGE> 110
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of Corporate Bank:
We have audited the accompanying balance sheet of Corporate Bank (a
California corporation) as of December 31, 1994 and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
As discussed in Note 6, the Bank leases its corporate and main branch
facilities from an unrelated party under a 25-year noncancellable operating
lease agreement for the first floor which extends to the year 2007, and a
17-year noncancellable operating lease agreement for the second floor which
extends to the year 2005. Both leases contain escalation clauses which are
based on an annual fixed increase for the first floor lease and the Consumer
Price Index rate for the second floor lease, resulting in future minimum lease
payments aggregating approximately $6,770,000. The rents on these leases
exceed current prevailing market rates for comparable facilities.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Corporate Bank as
of December 31, 1994, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
As explained in Note 1 to the financial statements, during 1994, the
Bank changed its method of accounting for certain investments in debt and
equity securities.
ARTHUR ANDERSEN, LLP
Orange County, California
June 30, 1995
105
<PAGE> 111
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Corporate Bank
We have audited the accompanying balance sheet of Corporate Bank as of
December 31, 1993, and the related statements of operations, stockholders'
equity and cash flows for each of the years in the two year period ended
December 31, 1993. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Corporate Bank as of December
31, 1993, and the results of its operations and its cash flows for each of the
years in the two year period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Note 1F, the Bank changed its method of accounting for income
taxes.
GRANT THORNTON LLP
Irvine, California
February 9, 1994, except for the
second paragraph of Note 14,
as to which the date
is March 25, 1994
106
<PAGE> 112
CORPORATE BANK
BALANCE SHEETS - JUNE 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994 AND 1993
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- ---------------------------------
1995 1994 1993
-------------- -------------- -----------------
(unaudited)
<S> <C> <C> <C>
Cash and Due from Banks . . . . . . . . $ 4,944,000 $ 5,219,000 $ 4,036,000
Federal Funds Sold . . . . . . . . . . 13,100,000 1,500,000 11,400,000
-------------- -------------- -----------------
Total Cash and Cash Equivalents . . . . 18,044,000 6,719,000 15,436,000
Time Certificates of Deposit . . . . . 297,000 2,180,000 2,478,000
Investment Securities . . . . . . . . . -- -- 6,636,000
Securities Available for Sale . . . . . 4,431,000 5,951,000 --
Loans and Leases . . . . . . . . . . . 52,290,000 53,706,000 58,868,000
Allowance for Loan and Lease Losses . . (1,991,000) (1,912,000) (1,222,000)
-------------- -------------- -----------------
Loans and Leases, net . . . . . . . . . 50,299,000 51,794,000 57,646,000
Accrued Interest Receivable . . . . . . 358,000 398,000 408,000
Other Real Estate Owned . . . . . . . . 575,000 1,611,000 1,514,000
Bank Premises and Equipment, net . . . 594,000 670,000 869,000
Other Assets . . . . . . . . . . . . . 680,000 740,000 194,000
-------------- -------------- -----------------
$ 75,278,000 $ 70,063,000 $ 85,181,000
============== ============== =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
107
<PAGE> 113
CORPORATE BANK
BALANCE SHEETS - JUNE 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994 AND 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1995 1994 1993
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
DEPOSITS
Noninterest-bearing demand deposits . . . . . $28,867,000 $26,945,000 $33,946,000
Savings, money market, NOW . . . . . . . . . . 25,269,000 28,486,000 31,589,000
Time certificates under $100,000 . . . . . . . 7,122,000 2,674,000 3,155,000
Time certificates of $100,000 and over . . . . 4,985,000 3,080,000 7,257,000
----------- ----------- -----------
Total Deposits . . . . . . . . . . . . . . . 66,243,000 61,185,000 75,947,000
----------- ----------- -----------
ACCRUED INTEREST PAYABLE . . . . . . . . . . . . . . . 105,000 46,000 47,000
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . 753,000 840,000 559,000
SUBORDINATED CAPITAL NOTES . . . . . . . . . . . . . . 1,000,000 1,000,000 1,000,000
----------- ----------- -----------
Total Liabilities . . . . . . . . . . . . . . 68,101,000 63,071,000 77,553,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES -- -- --
STOCKHOLDERS' EQUITY
Capital stock - no par value; 5,000,000 shares
authorized; 500,000 shares issued and
outstanding . . . . . . . . . . . . . . . . . 3,956,000 3,956,000 3,956,000
Retained earnings . . . . . . . . . . . . . . 3,232,000 3,153,000 3,672,000
Unrealized loss on securities available for
sale, net of deferred taxes . . . . . . . . . (11,000) (117,000) --
----------- ----------- -----------
7,177,000 6,992,000 7,628,000
----------- ----------- -----------
$75,278,000 $70,063,000 $85,181,000
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
108
<PAGE> 114
CORPORATE BANK
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1995 1994 1994 1993 1992
---------- ----------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees . . . . . . $2,584,000 $2,577,000 $5,028,000 $6,037,000 $6,939,000
Direct lease financing . . . . . . 171,000 275,000 496,000 766,000 850,000
Securities . . . . . . . . . . . . 108,000 125,000 337,000 229,000 92,000
Federal funds sold . . . . . . . . 164,000 133,000 370,000 261,000 422,000
Time certificates of deposit . . . 23,000 47,000 99,000 90,000 144,000
---------- ---------- ---------- ---------- ----------
Total Interest Income . . . . . . 3,050,000 3,157,000 6,330,000 7,383,000 8,447,000
---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE:
Savings, money market, NOW . . . . 383,000 433,000 872,000 1,023,000 1,044,000
Time certificates under $100,000 . 110,000 49,000 81,000 158,000 488,000
Time certificates of $100,000
and over . . . . . . . . . . . 111,000 115,000 218,000 306,000 670,000
Subordinated capital notes
and other . . . . . . . . . . 54,000 42,000 165,000 133,000 74,000
---------- ---------- ---------- ---------- ----------
Total Interest Expense . . . . . . 658,000 639,000 1,336,000 1,620,000 2,276,000
---------- ---------- ---------- ---------- ----------
Net Interest Income . . . . . . . 2,392,000 2,518,000 4,994,000 5,763,000 6,171,000
---------- ---------- ---------- ---------- ----------
PROVISION FOR LOAN AND LEASE LOSSES . 178,000 22,000 1,134,000 865,000 145,000
---------- ---------- ---------- ---------- ----------
Net Interest Income after
Provision for Loan and Lease
Losses . . . . . . . . . . . . 2,214,000 2,496,000 3,860,000 4,898,000 6,026,000
---------- ---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges and fees . . . . . 250,000 313,000 534,000 694,000 736,000
Securities gains (losses), net . . -- -- -- 16,000 --
Other operating revenue . . . . . 75,000 26,000 103,000 131,000 95,000
---------- ---------- ---------- ---------- ----------
Noninterest Income . . . . . . . . 325,000 339,000 637,000 841,000 831,000
---------- ---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits . . 878,000 834,000 1,647,000 2,275,000 2,855,000
Occupancy . . . . . . . . . . . . 376,000 359,000 767,000 689,000 720,000
Other real estate owned . . . . . 90,000 429,000 714,000 809,000 123,000
Other general and administrative . 1,060,000 1,062,000 2,132,000 1,766,000 1,771,000
---------- ---------- ---------- ---------- ----------
Noninterest Expense . . . . . . . 2,404,000 2,684,000 5,260,000 5,539,000 5,469,000
---------- ---------- ---------- ---------- ----------
Income (Loss) before Provision
(Benefit) for Income Taxes and
Cumulative Effect of a Change
in Accounting Principle . . . 135,000 151,000 (763,000) 200,000 1,388,000
PROVISION (BENEFIT) FOR INCOME TAXES. 56,000 67,000 (244,000) 94,000 581,000
---------- ---------- ---------- ---------- ----------
Income (Loss) before Cumulative
Effect of a Change in
Accounting Principle . . . . . . 79,000 84,000 (519,000) 106,000 807,000
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING FOR INCOME TAXES . . . -- -- -- 42,000 --
---------- ---------- ---------- ---------- ----------
Net income (Loss) . . . . . . . . $ 79,000 $ 84,000 $ (519,000) $ 148,000 $ 807,000
========== ========== ========== ========== ==========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary Earnings Per Share
Income (Loss) Before
Cumulative Effect . . . . . . . $ 0.16 $ 0.17 $ (1.04) $ .21 $ 1.61
Cumulative Effect . . . . . . . . -- -- -- .09 --
Net Income (Loss) . . . . . . . . $ 0.16 $ 0.17 $ (1.04) $ .30 $ 1.61
</TABLE>
The accompanying notes are an integral part of these statements.
109
<PAGE> 115
CORPORATE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ UNREALIZED LOSS ON
SECURITIES AVAILABLE TOTAL
RETAINED FOR SALE, NET OF STOCKHOLDERS'
SHARES AMOUNT EARNINGS DEFERRED TAXES EQUITY
-------- ----------- ---------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 . . . . . 500,000 $3,956,000 $2,717,000 $ -- $6,673,000
Net Income . . . . . . . . . . . . -- -- 807,000 -- 807,000
------- ---------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1992 . . . . . 500,000 3,956,000 3,524,000 -- 7,480,000
Net Income . . . . . . . . . . . . -- -- 148,000 -- 148,000
------- ---------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1993 . . . . . 500,000 3,956,000 3,672,000 -- 7,628,000
Net Loss . . . . . . . . . . . . . -- -- (519,000) -- (519,000)
Change in unrealized loss on
securities available for sale, net
of deferred taxes . . . . . . . . -- -- -- (117,000) (117,000)
------- ---------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1994 . . . . . 500,000 3,956,000 3,153,000 (117,000) 6,992,000
------- ---------- ---------- --------- ----------
Net income for the period
(unaudited) . . . . . . . . . . . -- -- 79,000 -- 79,000
Change in unrealized loss on
securities available for sale, net
of deferred taxes (unaudited) . . -- -- -- 106,000 106,000
------- ---------- ---------- --------- ----------
BALANCE, JUNE 30, 1995
(Unaudited) . . . . . . . . . . . 500,000 $3,956,000 $3,232,000 $ (11,000) $7,177,000
======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
110
<PAGE> 116
CORPORATE BANK
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------------------
1995 1994 1994 1993 1992
--------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) . . . . . . . . . . . . . $ 79,000 $ 84,000 $ (519,000) $ 148,000 $ 807,000
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided by Operating
Activities:
Depreciation and amortization . . . . . . . 108,000 110,000 213,000 240,000 237,000
Deferred income tax provision (benefit) . . (86,000) 67,000 (202,000) (248,000) (259,000)
Provision for possible loan and lease
losses . . . . . . . . . . . . . . . . . . . 178,000 22,000 1,134,000 865,000 145,000
Gain on sale of investments . . . . . . . . -- -- -- (16,000) --
(Gain) loss on sale and write-down of
OREO . . . . . . . . . . . . . . . . . . . . (64,000) 367,000 492,000 163,000 58,000
Premium amortization and discount
accretion, net . . . . . . . . . . . . . . . 26,000 43,000 68,000 48,000 10,000
Amortization of deferred loan fees . . . . . (74,000) (68,000) (137,000) (235,000) (391,000)
Gain on sale of premises and equipment -- -- (9,000) -- --
Decrease in accrued interest receivable . . 40,000 62,000 10,000 16,000 180,000
Decrease (increase) in other assets . . . . 60,000 (54,000) (248,000) 165,000 267,000
Increase (decrease) in accrued interest
payable . . . . . . . . . . . . . . . . . . 59,000 1,000 (1,000) (23,000) (75,000)
Increase (decrease) in other liabilities . . (87,000) (443,000) 282,000 (700,000) 46,000
---------- ---------- ------------ ----------- -----------
Net Cash Provided by Operating
Activities . . . . . . . . . . . . . . . 239,000 191,000 1,083,000 423,000 1,025,000
---------- ---------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale . -- -- (981,000) -- --
Proceeds from sale/maturity of securities
available for sale . . . . . . . . . . . . . 1,501,000 564,000 500,000 -- --
Principal repayments received on securities
available for sale . . . . . . . . . . . . . 185,000 -- 887,000 -- --
Proceeds from sale/maturity of investment
securities . . . . . . . . . . . . . . . . . -- -- -- 1,244,000 270,000
Purchases of investment securities . . . . . -- -- -- (6,061,000) --
Net (increase) decrease in time
certificates of deposit . . . . . . . . . . 1,883,000 1,000 298,000 2,002,000 (3,022,000)
Net decrease in loans and direct lease
financing . . . . . . . . . . . . . . . . . 1,391,000 4,894,000 3,240,000 2,811,000 9,844,000
Purchase of premises and equipment . . . . . (32,000) (22,000) (40,000) (15,000) (715,000)
Proceeds from sale of premises and
equipment . . . . . . . . . . . . . . . . . -- 6,000 34,000 10,000 --
Proceeds from sale of OREO . . . . . . . . . 1,100,000 837,000 1,024,000 775,000 1,040,000
---------- ---------- ------------ ----------- -----------
Net Cash Provided by Investing
Activities . . . . . . . . . . . . . . . . . 6,028,000 6,280,000 4,962,000 766,000 7,417,000
---------- ---------- ------------ ----------- -----------
</TABLE>
111
<PAGE> 117
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------------------
1995 1994 1994 1993 1992
--------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-
bearing demand deposits . . . . . . . . . . 1,922,000 (2,006,000) (7,000,000) 4,209,000 7,507,000
Net increase (decrease) in savings, money
market and NOW deposits . . . . . . . . . . (3,217,000) 838,000 (3,102,000) (1,146,000) 5,505,000
Net increase (decrease) in time
certificates under $100,000 . . . . . . . . 4,448,000 (337,000) (482,000) (4,602,000) (10,126,000)
Net increase (decrease) in time
certificatesof $100,000 and over . . . . . . 1,905,000 (392,000) (4,178,000) (2,998,000) (6,619,000)
Proceeds from subordinated capital notes . . -- -- -- -- 1,000,000
----------- ----------- ------------ ----------- -----------
Net Cash Provided by (Used In) Financing
Activities . . . . . . . . . . . . . . . . . 5,058,000 (1,897,000) (14,762,000) (4,537,000) (2,733,000)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . 11,325,000 4,574,000 (8,717,000) (3,348,000) 5,709,000
CASH AND CASH EQUIVALENTS,
beginning of year . . . . . . . . . . . . . 6,719,000 15,436,000 15,436,000 18,784,000 13,075,000
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year . . . . . . . . . . . . . . . . $18,044,000 $20,010,000 $ 6,719,000 $15,436,000 $18,784,000
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid . . . . . . . . . . . . . . . $ 599,000 $ 638,000 $ 1,258,000 $ 1,643,000 $ 2,352,000
=========== =========== ============ =========== ===========
Income taxes . . . . . . . . . . . . . . . . -- 284,000 302,000 347,000 788,000
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
Real estate acquired in settlement of loans $ -- $ -- $ 2,215,000 $ 279,000 $ 2,743,000
=========== =========== ============ =========== ===========
Loans to facilitate sale of OREO . . . . . . -- 1,700,000 601,000 1,700,000 --
=========== =========== ============ =========== ===========
Net unrealized loss on securities available
for sale, net of deferred taxes . . . . . . $ 11,000 $ 82,000 $ 117,000 $ -- $ --
=========== =========== ============ =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
112
<PAGE> 118
CORPORATE BANK
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Bank (Corporate) is a state chartered financial institution.
Corporate primarily accepts deposits from and makes loans to individuals and
businesses in Orange County and Los Angeles County, California.
In March 1995, Corporate agreed to sell its stock for approximately
$7.8 million (subject to certain adjustments as defined in the agreement) to
California United Bancorp, a California corporation and parent of California
United Bank, National Association. Corporate anticipates this sale to be
completed in late 1995 or early 1996.
The accounting and reporting policies of Corporate are in accordance
with generally accepted accounting principles and prevailing practices within
the banking industry. The following are descriptions of the more significant
of those accounting and reporting policies:
A. Investment Securities
Corporate adopted Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities, as
of January 1, 1994. SFAS No. 115 requires the classification of investments in
debt and equity securities into three categories: held to maturity, trading,
and available for sale. Debt securities that Corporate has the positive intent
and ability to hold to maturity are classified as held to maturity securities
and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Debt and equity securities not
classified as either held to maturity securities or trading securities are
classified as available for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity, net of deferred taxes. As of January 1,
1994, Corporate classified all of its investment securities as securities
available for sale. Adoption of this standard as of January 1, 1994 did not
have a material impact on the financial statements. The securities may be held
for indefinite periods of time and may be sold in response to changes in
interest rates and/or other economic conditions. Unrealized gains or losses
are calculated based on amortized cost as described below. Unrealized gains or
losses, net of deferred taxes, are recorded as a separate component of
shareholders' equity. Prior to adopting SFAS No. 115, investment securities
were carried at amortized cost.
Corporate's calculation of cost is increased by accretion of discounts
and decreased by amortization of premiums, of which both are computed on a
method which approximates the effective interest method. Such amortization and
accretion are reflected in interest on securities. Realized gains or losses
recognized on the sales of securities are based upon the amortized cost and
computed on the specific identification method and are classified in
noninterest income.
113
<PAGE> 119
B. Loans and Leases
Loans and leases are stated at the amount of unpaid principal, reduced
by an allowance for loan and lease losses and deferred net loan origination
fees. Interest on loans is recognized over the terms of the loans and is
calculated on principal amounts outstanding. Loan origination fees, offset by
certain direct loan origination costs, are deferred and recognized over the
contractual life of the loan as a yield adjustment. As unearned revenue, the
net unrecognized fees and costs are reported as reductions of the loan balance.
Corporate purchases and leases automobiles and equipment to its
customers. These leases are accounted for under the financing method.
Accordingly, direct lease financing reflects the outstanding balance under
lease contracts, including residual values. The related unearned income is
deferred and amortized to income so as to produce a level rate of return on the
unrecovered investment.
Accrual of interest on loans and leases is discontinued when
management believes, after considering economic and business conditions, and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is no
longer doubtful, in which case the credit is returned to accrual status.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which was amended by SFAS No. 118 in October 1994.
Under the provisions of these standards, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Creditors are required to measure impairment of a loan based
on the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. These standards are effective for fiscal years beginning after
December 15, 1994. Corporate adopted these standards on January 1, 1995; they
did not have a material impact on the financial statements of Corporate. At
June 30, 1995, Corporate had $4,439,000 (unaudited) in impaired loans and a
related loss allowance of $830,000 (unaudited). Interest income is recognized
for impaired loans in accordance with the above mentioned policies.
C. Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained at a level
considered adequate to provide for losses that can be reasonably anticipated.
Management makes periodic credit reviews of the loan and lease portfolio and
considers current economic conditions, historical loan loss experience,
assessments of future potential problem credits and other factors in
determining the adequacy of the allowance. The allowance is based on estimates
and ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs.
114
<PAGE> 120
D. Premises and Equipment
Corporate's premises and equipment are stated at cost less accumulated
depreciation and amortization, which is charged to expense on a straight-line
basis over the estimated useful lives of the assets or, in the case of
leasehold improvements, over the life of the leases, whichever is shorter.
Maintenance and repairs are charged directly to expense as incurred.
Improvements to premises and equipment which extend the useful lives of the
assets are capitalized. Gains and losses resulting from the disposal of
premises and equipment are included in current operations. Rates of
depreciation are based on the following depreciable lives: furniture, five to
seven years; equipment, three to five years; and leasehold improvements,
fifteen years or the lease term.
E. Other Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is
carried at the lower of the recorded investment in the property or its fair
value, less estimated carrying costs and costs of disposition. At the time of
foreclosure, the value of the underlying loan is written down to the fair value
of the real estate to be acquired by a charge to the allowance for loan and
lease losses, if necessary. Any subsequent write-downs are charged to
noninterest expenses. Operating expenses of such properties, net of related
income and gains or losses on their disposition, are recorded in noninterest
expenses.
F. Income Taxes
On January 1, 1993, Corporate adopted SFAS No. 109, "Accounting for
Income Taxes," which supersedes SFAS No. 96 of the same title and Accounting
Principles Board Opinion (APB) No. 11. The effect of this change was to
increase income for 1993 by $42,000 ($.09 per share). The financial statements
for 1992 were not restated, and the cumulative effect of the change of $42,000
is shown as a one-time credit to income in the 1993 statement of operations.
SFAS No. 109 requires an asset and liability approach in accounting for income
taxes payable or refundable at the date of the financial statements as a result
of all events that have been recognized in the financial statements and as
measured by the provisions of enacted tax laws. Additionally, SFAS No. 109
requires that deferred tax assets be evaluated and a valuation allowance be
established if it is "more likely than not" that all or a portion of the
deferred tax asset will not be realized. In 1992, Corporate accounted for
income taxes in accordance with APB No. 11.
G. Earnings per Common and Common Equivalent Share
Earnings per share are computed on the basis of the weighted average
number of shares of common stock outstanding during the period. If all stock
options were exercised, they would not have a material dilutive effect and,
therefore, have been excluded from the computation. The weighted average
number of shares used to compute earnings per share was 500,000 for the six
months ended June 30, 1995 and 1994 (unaudited) and for the years ended
December 31, 1994, 1993, and 1992, respectively.
H. Reclassification
Certain amounts have been reclassified in the prior years to conform
to the current year presentation.
115
<PAGE> 121
I. Basis of Presentation
The unaudited financial statements as of and for the six months ended
June 30, 1995 and 1994, reflect, in the opinion of management, all adjustments,
consisting of normal entries, necessary for presentation on a basis consistent
with that of the audited financial statements. The results for the six months
ended June 30, 1995 are not necessarily indicative of results to be expected
for the full fiscal year.
2. CASH AND DUE FROM BANKS
Corporate is required to maintain reserve balances with the Federal
Reserve Bank. The average amount of these reserve balances for the six months
ended June 30, 1995 and the years ended December 31, 1994 and 1993 was $900,000
(unaudited), $1,049,000 and $972,000, respectively.
3. SECURITIES
The amortized cost and fair values of securities available for sale
are as follows at June 30, 1995:
<TABLE>
<CAPTION>
JUNE 30, 1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . $1,499,000 $ -- $ (4,000) $1,495,000
U.S. Government Mortgage-Backed Securities . . . . . . . . 1,953,000 -- (1,000) 1,952,000
FHLB Step Bonds . . . . . . . . . . . . . . . . . . . . . 999,000 -- (15,000) 984,000
---------- ---------- --------- ----------
$4,451,000 $ -- $ (20,000) $4,431,000
========== ========== ========= ==========
</TABLE>
The amortized cost and fair values of securities available for sale
are as follows at December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . $2,496,000 $ -- $ (29,000) $2,467,000
U.S. Government Mortgage-Backed Securities . . . . . . . . 2,667,000 -- (114,000) 2,553,000
FHLB Step Bonds . . . . . . . . . . . . . . . . . . . . . 999,000 -- (68,000) 931,000
---------- ---------- --------- ----------
$6,162,000 $ -- $(211,000) $5,951,000
========== ========== ========= ==========
</TABLE>
116
<PAGE> 122
The amortized cost and fair values of investment securities are as
follows at December 31, 1993:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Notes . . . . . . . . . . . . . $2,506,000 $ 1,000 $ (6,000) $2,501,000
U.S. Government Mortgage-Backed Securities . . 3,130,000 4,000 (20,000) 3,114,000
FHLB Step Bonds . . . . . . . . . . . . . . . 1,000,000 -- (2,000) 998,000
---------- -------- -------- ----------
$6,636,000 $ 5,000 $(28,000) $6,613,000
========== ======== ======== ==========
</TABLE>
The amortized cost and fair values of securities available for sale at
June 30, 1995 by contractual maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(unaudited)
<S> <C> <C>
Due in one year or less . . . . . . . . . . . . . . . . . $1,499,000 $1,495,000
Due after one year through five years . . . . . . . . . . 2,777,000 2,759,000
Due after ten years . . . . . . . . . . . . . . . . . . . 175,000 177,000
---------- ----------
$4,451,000 $4,431,000
========== ==========
</TABLE>
The amortized cost and fair values of securities available for sale at
December 31, 1994, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less . . . . . . . . . . . . . . . . . $2,993,000 $2,965,000
Due after one year through five years . . . . . . . . . . 2,978,000 2,798,000
Due after ten years . . . . . . . . . . . . . . . . . . . 191,000 188,000
---------- ----------
$6,162,000 $5,951,000
========== ==========
</TABLE>
The FHLB step bonds rise in rates on a predetermined schedule with a
call feature at par retained by the issuing agency. No other imbedded options
apply to these investments. At December 31, 1994, the FHLB step bonds have
contractual maturities of between one and five years; however, actual
maturities may differ from contractual maturities to the extent that borrowers
have the right to call or repay obligations with or without call or repayment
penalties. No assumptions can be made whether the securities will be called.
Bonds with estimated fair values of $474,000 became callable in 1994 and
$457,000 will become callable in 1995.
117
<PAGE> 123
Investment securities with an amortized cost of $675,000 (unaudited),
$686,000 and $778,000 at June 30, 1995, and December 31, 1994 and 1993,
respectively, were pledged to secure public deposits and for other purposes as
required or permitted by law. The estimated fair values of pledged securities
were $675,000 (unaudited), $663,000 and $779,000 at June 30, 1995, and December
31, 1994 and 1993, respectively.
There were no sales of securities during the six months ended June 30,
1995 and 1994 (unaudited) and the years ended December 31, 1994 and 1993.
Proceeds from the sale of securities during the year ended December 31, 1993
were approximately $296,000. Gross gains of approximately $16,000 were
realized on those sales.
4. LOANS AND LEASES, NET
The loan and lease portfolio consisted of the following at June 30,
1995 and December 31, 1994 and 1993:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- -----------------------------------
1995 1994 1993
-------------- -------------- ----------------
(unaudited)
<S> <C> <C> <C>
Commercial . . . . . . . . . . . . . . . . $ 15,832,000 $ 16,278,000 $ 15,648,000
Installment . . . . . . . . . . . . . . . . 14,042,000 15,591,000 22,946,000
Real estate . . . . . . . . . . . . . . . . 16,937,000 16,040,000 11,873,000
Construction . . . . . . . . . . . . . . . 2,976,000 2,600,000 3,497,000
-------------- -------------- ----------------
49,787,000 50,509,000 53,964,000
Direct lease financing, net . . . . . . . . 2,587,000 3,328,000 5,074,000
-------------- -------------- ----------------
52,374,000 53,837,000 59,038,000
Less: Deferred loan origination fees . . . (84,000) (131,000) (170,000)
-------------- -------------- ----------------
52,290,000 53,706,000 58,868,000
Less: Allowance for loan and lease losses (1,991,000) (1,912,000) (1,222,000)
-------------- -------------- ----------------
Loans and Leases, net . . . . . . . . . . . $ 50,299,000 $ 51,794,000 $ 57,646,000
============== ============== ================
</TABLE>
The net investment in direct financing leases at June 30, 1995, and
December 31, 1994 and 1993 consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- ---------------------------------
1995 1994 1993
-------------- -------------- ----------------
(unaudited)
<S> <C> <C> <C>
Lease payments receivable . . . . . . . . . $ 1,272,000 $ 1,704,000 $ 3,170,000
Estimated residual values . . . . . . . . . 1,688,000 2,123,000 2,915,000
-------------- ------------- ----------------
$ 2,960,000 $ 3,827,000 $ 6,085,000
Unearned income . . . . . . . . . . . . . . (373,000) (499,000) (1,011,000)
-------------- ------------- ----------------
$ 2,587,000 $ 3,328,000 $ 5,074,000
============== ============= ================
</TABLE>
118
<PAGE> 124
At December 31, 1994, future minimum lease payments receivable under
direct lease financing are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending:
1995 . . . . . . . . . . . . . . . . . . $ 768,000
1996 . . . . . . . . . . . . . . . . . . 523,000
1997 . . . . . . . . . . . . . . . . . . 266,000
1998 . . . . . . . . . . . . . . . . . . 147,000
----------------
$ 1,704,000
================
</TABLE>
Nonaccruing loans totaled approximately $3,161,000 (unaudited),
$2,243,000 and $4,164,000 at June 30, 1995, and December 31, 1994 and 1993,
respectively. Interest income that would have been recognized on nonaccrual
loans if they had performed in accordance with the terms of the loans was
approximately $339,000 (unaudited), $364,000, $145,000 and $170,000 for the six
months ended June 30, 1995, and for the years ended December 31, 1994, 1993 and
1992, respectively. At December 31, 1994 and 1993, Corporate had no loans past
due 90 days or more in interest or principal and still accruing interest. At
June 30, 1995, $47,000 (unaudited) in loans were past due 90 days and still
accruing interest.
The activity in the allowance for loan and lease losses is summarized
as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- ----------------------------------------------------
1995 1994 1993 1992
-------------- -------------- ----------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period . . $ 1,912,000 $ 1,222,000 $ 998,000 $ 1,099,000
Provision . . . . . . . . . . . . . 178,000 1,134,000 865,000 145,000
Recoveries . . . . . . . . . . . . 2,000 40,000 -- 11,000
Charge-offs . . . . . . . . . . . . (101,000) (484,000) (641,000) (257,000)
-------------- -------------- ----------------- ----------------
Balance at end of period . . . . . $ 1,991,000 $ 1,912,000 $ 1,222,000 $ 998,000
============== ============== ================= ================
</TABLE>
The majority of Corporate's commercial and installment loan portfolio is
with customers located throughout its primary market area of Orange County and
Los Angeles County, California. Corporate grants commercial and installment
loans to borrowers in a number of different industries.
119
<PAGE> 125
Corporate's real estate and construction loan portfolio consists primarily
of loans on real estate located in Orange County and Los Angeles County. These
areas have recently experienced adverse economic conditions, including
declining real estate values. These factors have adversely affected borrowers'
ability to repay. Although management believes the level of its allowance for
loan and lease losses and the carrying value of its other real estate owned as
of June 30, 1995 is appropriate, continued depressed economics in these areas
may result in losses that cannot be reasonably predicted at this time. In
addition, various regulatory agencies as an integral part of their examination
process periodically review Corporate's allowance for loan and lease losses.
Such agencies may require Corporate to recognize additions to the allowance
based on judgments different from those of management.
As part of its normal banking activities, Corporate has extended credit to
certain directors and officers and the companies with which they are associated
(related parties). All related party loans were current as to principal and
interest as of June 30, 1995 (unaudited), and December 31, 1994 and 1993. In
management's opinion, these loans were made in the ordinary course of business
at prevailing rates and terms. An analysis of the activity involving related
parties (Officers, Directors and their affiliates) is as follows:
<TABLE>
<CAPTION>
BALANCE AT NEW LOANS BALANCE AT
DECEMBER 31, 1993 AND ADDITIONS REPAYMENTS DECEMBER 31, 1994
----------------- ------------- ---------- -----------------
<S> <C> <C> <C>
$1,695,000 -- $369,000 $1,326,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT NEW LOANS BALANCE AT
DECEMBER 31, 1994 AND ADDITIONS REPAYMENTS JUNE 30, 1995
----------------- ------------- ---------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
$1,326,000 -- $52,000 $1,274,000
</TABLE>
5. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- --------------------------------
1995 1994 1993
----------- ------------- ----------------
(unaudited)
<S> <C> <C> <C>
Furniture, fixtures and equipment . . . . . $ 1,082,000 $ 1,061,000 $ 1,121,000
Leasehold Improvements . . . . . . . . . . 908,000 908,000 903,000
-------------- ------------- ---------------
1,990,000 1,969,000 2,024,000
Less: Accumulated depreciation and
amortization . . . . . . . . . . . . . . (1,396,000) (1,299,000) (1,155,000)
-------------- ------------- ---------------
Total $ 594,000 $ 670,000 $ 869,000
============== ============= ================
</TABLE>
The amount of depreciation and amortization related to occupancy
expenses was $108,000 (unaudited), $213,000, $240,000, and $237,000 for the six
months ended June 30, 1995 and the years ended December 31, 1994, 1993, and
1992, respectively.
120
<PAGE> 126
6. NONCANCELABLE OPERATING LEASES
Corporate leases its corporate and main branch facilities from an
unrelated party under a 25-year noncancellable operating lease agreement for
the first floor which commenced in 1982 and extends to the year 2007, and a
17-year noncancellable operating lease agreement for the second floor which
commenced in 1988 and extends to the year 2005. Both leases contain escalation
clauses. In the case of the first floor lease, annual rent increases are fixed
at specific amounts through 1988, and at 6 1/2 percent per year thereafter.
Annual rent increases for the second floor lease are based on the Consumer
Price Index. This results in future minimum lease payments aggregating
approximately $6,770,000. The rents on these leases exceed current prevailing
market rates for comparable facilities.
Corporate also leases a building for its other branch and other
equipment under noncancellable operating leases with terms ranging from five to
thirteen years.
At December 31, 1994, future minimum lease commitments under all
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
LEASE
COMMITMENTS
----------------
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . $ 463,000
1996 . . . . . . . . . . . . . . . . . . . 484,000
1997 . . . . . . . . . . . . . . . . . . . 502,000
1998 . . . . . . . . . . . . . . . . . . . 530,000
1999 . . . . . . . . . . . . . . . . . . . 550,000
Succeeding years . . . . . . . . . . . . . 5,174,000
----------------
Total $ 7,703,000
================
</TABLE>
Corporate incurred total rent expense of $244,000 (unaudited), $526,000,
$414,000 and $402,000 during the six months ended June 30, 1995, and the years
ended December 31, 1994, 1993 and 1992, respectively.
7. DEPOSITS
At June 30, 1995 and December 31, 1994, five customers had balances
totaling approximately $11,249,000 (unaudited) and $6,384,000 or 17 percent
(unaudited) and 10 percent of total deposits, respectively.
8. INCOME TAXES
The current and deferred amounts of the provisions (benefit) for income
taxes for the six months ended June 30, 1995, and the years ended December 31,
1994, 1993, and 1992, consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED JUNE 30, ----------------------------------------------------
1995 1994 1993 1992
-------------- -------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
Current:
Federal . . . . . . . . . . $ 117,000 $ (42,000) $ 239,000 $ 595,000
State . . . . . . . . . . . 37,000 -- 103,000 245,000
-------------- -------------- ---------------- ----------------
154,000 (42,000) 342,000 840,000
Deferred:
Federal . . . . . . . . . . (68,000) (197,000) (177,000) (170,000)
State . . . . . . . . . . . (30,000) (5,000) (71,000) (89,000)
-------------- -------------- ---------------- ----------------
(98,000) (202,000) (248,000) (259,000)
-------------- -------------- ---------------- ----------------
$ 56,000 $ (244,000) $ 94,000 $ 581,000
============== ============== ================ ================
</TABLE>
121
<PAGE> 127
A federal and state income tax receivable, net, of $305,000 at December
31, 1994, is included in other assets. Accrued federal and state income taxes
payable of $40,000 at December 31, 1993 is included in other liabilities.
Deferred taxes arise from temporary differences between income reported
for financial reporting purposes and that reported for income tax purposes.
The tax effects of the principal temporary differences resulting in deferred
taxes were:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- -------------------------------------------
1995 1994 1993 1992
------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Depreciation, including direct lease financing,
for tax purposes in excess of book . . . . . $ 75,000 $ 329,000 $ 683,000 $ 700,000
Direct lease financing revenue for tax purposes
in excess of book . . . . . . . . . . . . . (103,000) (457,000) (984,000) (892,000)
Provision for loan and lease losses . . . . . . (33,000) (270,000) (99,000) 42,000
Other real estate owned . . . . . . . . . . . . (13,000) 120,000 (241,000) --
State franchise tax . . . . . . . . . . . . . . (24,000) 81,000 48,000 20,000
Deferred compensation . . . . . . . . . . . . . -- (5,000) 345,000 (126,000)
Other . . . . . . . . . . . . . . . . . . . . . -- -- -- (3,000)
------------- ------------- ------------- -------------
$ (98,000) $ (202,000) $ (248,000) $ (259,000)
============= ============= ============= =============
</TABLE>
Total tax expense differs from the amount computed using the federal
statutory rate as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------------------------
1995 1994 1993 1992
----------------------- ------------------------ -------------------- --------
PERCENT OF PERCENT OF PERCENT OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME AMOUNT
------- ------------ --------- ---------- ------- ------------ ------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax expense at federal statutory rate . . . $46,000 34.0% $(259,000) (34.0)% $68,000 34.0% $472,000
State income tax, net of federal
tax benefit . . . . . . . . . . . . . . 10,000 7.0 3,000 0.4 15,000 7.5 97,000
Officer life insurance and meals and
entertainment . . . . . . . . . . . . . -- -- 12,000 1.6 9,000 4.5 12,000
Other . . . . . . . . . . . . . . . . . . . -- -- -- -- 2,000 1.0 --
------- ---- --------- ------ ------- ---- --------
Total . . . . . . . . . . . . . . . . . $56,000 41.0% $(244,000) (32.0)% $94,000 47.0% $581,000
======= ==== ========= ====== ======= ==== ========
</TABLE>
122
<PAGE> 128
At June 30, 1995 and December 31, 1994 and 1993, the components of the net
deferred tax asset (liability) which are included in other assets or other
liabilities on the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
--------- -----------------------
1995 1994 1993
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Assets:
Allowance for loan and lease losses . . . . . $ 667,000 $ 634,000 $ 364,000
Other real estate owned . . . . . . . . . . . 134,000 121,000 241,000
Other employee benefits . . . . . . . . . . . 66,000 66,000 61,000
Depreciation of nonleased assets . . . . . . . 65,000 52,000 36,000
State franchise taxes . . . . . . . . . . . . 3,000 -- 60,000
--------- --------- ---------
873,000 762,000
Less: Valuation Allowance . . . . . . . . . 935,000 -- --
--------- --------- ---------
935,000 873,000 762,000
Liabilities:
State taxes . . . . . . . . . . . . . . . . -- (21,000) --
Direct Financing lease revenues, net of
depreciation . . . . . . . . . . . . . . . (721,000) (736,000) (848,000)
--------- --------- ---------
(721,000) (757,000) (848,000)
--------- --------- ---------
214,000 116,000 (86,000)
Unrealized losses on securities available for 10,000 94,000 --
sale . . . . . . . . . . . . . . . . . . . .
--------- --------- ---------
$ 224,000 $ 210,000 $ (86,000)
========= ========= =========
</TABLE>
The Internal Revenue Service is presently conducting an examination of
Corporate for all tax filings related to the 1993 tax year. The outcome of
such examination and any related liabilities, if any, cannot presently be
determined.
9. SUBORDINATED NOTES
Corporate issued $1,000,000 of 8 1/2 percent fixed rate nonconvertible
subordinated capital notes (the "Notes") on April 24, 1992. Interest is
payable quarterly in January, April, July and October. The Notes mature in
June 1997. The notes are subordinated to the claims of creditors and
depositors of Corporate.
10. EMPLOYEE BENEFIT PLAN
As part of its employee benefit package, Corporate sponsors a defined
contribution retirement plan (the Plan) which meets the requirements of Section
401(k) of the Internal Revenue Code and covers substantially all employees who
elect to participate (participants). Corporate's contributions represent a
discretionary amount determined each year by Corporate and a matching
contribution based on participant contributions. All employees with at least
six months of service and who are at least twenty and one-half years of age are
eligible to participate in the Plan. Employee contributions vest according to
the number
123
<PAGE> 129
of years of service that employee has with Corporate. All employee
contributions are fully vested. Plan assets consist principally of mutual
funds at December 31, 1994. During the six months ended June 30, 1995, and the
years ended December 31, 1994, 1993 and 1992, Corporate contributed $9,000
(unaudited), $23,000, $36,000 and $37,000 to the Plan, respectively.
11. STOCK APPRECIATION DEFERRED COMPENSATION PLAN
In 1992, Corporate revised its Stock Appreciation Equivalent Agreement
to an unfunded Executive Deferral Plan. The Plan provides that two key
executives may be granted additional compensation measured by the appreciation
or decrease in the book value of common stock of Corporate. In accordance with
this Agreement, the executives may elect to defer this compensation and earn
interest which is based upon the appreciation of Corporate's stock. Earnings
are charged for the aggregate appreciation during this period. In August 1993,
the Directors elected to discontinue the plan and paid the executives their
respective deferred portion.
12. STOCK OPTION PLAN
In 1991, Corporate adopted a stock option plan for officers and
employees. The options, for which there are 92,500 shares of common stock
reserved, may be either incentive stock options or nonqualified stock options.
Corporate may issue incentive stock options provided that the aggregate fair
market value of the stock exercisable for the first time shall not exceed
$100,000 in any one year per grantee.
The purchase price of stock may not be less than 100 percent of the
fair market value of such stock at the time such option is granted provided
however, that the purchase price of the stock subject to incentive stock option
may not be less than 110 percent of the fair market value when the optionee
owns more than 10 percent of outstanding voting shares. Options will expire on
such dates as Corporate's Board of Directors may determine, but not later than
10 years from date of grant.
Activity for the six months ended June 30, 1995 and for the years
ended December 31, 1994, 1993 and 1992 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------------------------------
SIX MONTH PERIOD
ENDED JUNE 30, OPTION PRICE
1995 YEARS ENDED DECEMBER 31, PER SHARE
---------------- ------------------------------------ ------------
(UNAUDITED) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period 57,500 92,500 92,500 92,500 $14.00
Granted . . . . . . . . . . . . . . -- -- -- -- $14.00
Canceled . . . . . . . . . . . . . 40,000 35,000 -- -- $14.00
Exercised . . . . . . . . . . . . . -- -- -- -- $14.00
------ ------ ------ ------
Outstanding at end of period . . . 17,500 57,500 92,500 92,500 $14.00
====== ====== ====== ======
Option exercisable at end of period 14,000 34,500 37,000 18,500
====== ====== ====== ======
</TABLE>
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Pursuant to the terms of the Merger Agreement discussed in Note 1,
Corporate is required to cause the exercise or cancellation of all outstanding
stock options to purchase share of corporate stock under all Stock Option Plans
prior to the effective date of the Merger.
13. OTHER GENERAL AND ADMINISTRATIVE EXPENSES
The following is a breakdown of other general and administrative
expenses for the six months ended June 30, 1995 and 1994, and the years ended
December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------- --------------------------------------
1995 1994 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Equipment expense . . . . . . . . . $ 97,000 $ 101,000 $ 184,000 $ 196,000 $ 195,000
Professional fees . . . . . . . . . 458,000 414,000 932,000 518,000 442,000
Office supplies, postage and
telephone . . . . . . . . . . . 59,000 63,000 124,000 121,000 231,000
Insurance . . . . . . . . . . . . . 117,000 132,000 275,000 283,000 318,000
Other . . . . . . . . . . . . . . . 329,000 352,000 617,000 648,000 585,000
---------- ---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . $1,060,000 $1,062,000 $2,132,000 $1,766,000 $1,771,000
========== ========== ========== ========== ==========
</TABLE>
14. REGULATORY MATTERS
Banks are required to maintain minimum regulatory capital ratios of
total capital to risk-based capital of 8 percent; Tier 1 (core) risk-based
capital of 4 percent; and Tier 1 (core) capital to average total adjusted
assets of 4 percent. At December 31, 1994, Corporate's ratios for total
risk-based capital, Tier 1 (core) risk-based capital, and Tier 1 (core) capital
to average total adjusted assets were 14.08 percent, 12.12 percent and 9.42
percent, respectively. At June 30, 1995, Corporate's ratios for total
risk-based capital, Tier 1 (core) risk-based capital, and Tier 1 (core) capital
to average total adjusted assets were 14.26 percent (unaudited), 12.63 percent
(unaudited) and 9.92 percent (unaudited), respectively.
On March 8, 1994, Corporate consented to a Cease and Desist Order
(Order) with an effective date of March 25, 1994, issued by the Federal Deposit
Insurance Corporation (FDIC). The Order requires Corporate to, among other
things, maintain Tier 1 capital levels equal to at least 7.0 percent of total
assets, as defined; reduce the amount of classified assets within specific time
frames; adopt several new policies and revise existing policies relating to
lending and collection; maintain an adequate allowance for loan and lease
losses; retain qualified management personnel; increase the level of Board of
Director's supervision and participation in Corporate's activities; adopt an
employee compensation plan after reviewing the adequacy of Corporate's
executive officer's compensation level; and comply with applicable laws and
regulations. Additionally, Corporate is prohibited from declaring or paying
any dividends without prior approval of the FDIC.
Corporate also consented to another Cease and Desist Order with the
FDIC effective May 14, 1994, which required the rescission of an employment
contract with the former chief executive officer of Corporate and the cessation
of any payments under such contract. Corporate was also required to rescind a
settlement agreement entered into with this former officer resulting from a
binding award of arbitration and to cease making payments pursuant to such
agreement to the former officer and his legal counsel. Management believes
Corporate is in compliance with such Cease and Desist Order at December 31,
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<PAGE> 131
1994. After further consultation with and approval from the FDIC, Corporate
made a payment of $167,000 (unaudited) in August 1995 as called for by the
binding award of arbitration.
Corporate also entered into a Memorandum of Understanding (Memorandum)
dated December 13, 1994 with the California State Banking Department (SBD).
The Memorandum's requirements are substantially the same as those included in
the Order.
On November 29, 1994, the FDIC advised management and the Board of
Directors that Corporate is not in compliance with certain requirements of the
Order and may have violated certain laws and regulations. Corporate may be
subject to regulatory sanctions due to the failure to comply with the
requirements of the Order and Memorandum. Any actions, penalties or additional
liabilities that may arise from the resolution of these matters with the FDIC
or other government agencies cannot presently be determined. However,
Corporate does not believe that the steps necessary to comply with the Order
and Memorandum will materially impact the financial condition or operations of
Corporate.
15. COMMITMENTS AND CONTINGENCIES
In order to meet the financing needs of its customers in the normal
course of business, Corporate is a party to financial instruments with
off-balance sheet risk. These financial instruments include commitments to
extend credit and standby letters of credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Standby letters of credit are conditional commitments issued by
Corporate to guarantee the performance of a customer to a third party.
Corporate does not enter into any interest rate swaps or caps, or forward or
future contracts.
The nature of the off-balance sheet risk inherent in these instruments
is the possibility of accounting losses resulting from (1) the failure of
another party to perform according to the terms of a contract that would cause
a draw on a standby letter of credit, or (2) changes in market rates of
interest for those few commitments and undisbursed loans which have fixed rates
of interest. To minimize this risk, Corporate uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. The decision as to whether collateral should be required is based
on the circumstances of each specific commitment or conditional obligation.
To varying degrees, these instruments involve elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial position. Corporate's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. At June 30, 1995, and December 31,
1994 and 1993, Corporate had unfunded commitments to extend credit of
approximately $7,219,000 (unaudited), $8,207,160 and $8,393,000 and obligations
under standby letters of credit of approximately $343,000 (unaudited), $421,000
and $440,000, respectively.
Various legal proceedings are pending against Corporate which are the
result of normal banking business. In the opinion of management and
Corporate's legal counsel, the disposition of all litigation pending will not
have a material effect on Corporate's financial condition or results of
operations.
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16. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter, Corporate recorded adjustments that
decreased 1994 net income before tax by approximately $876,000. These
adjustments were primarily comprised of write-downs of other real estate owned
and an increase to the provision for loan and lease losses. The asset
write-downs and the additional provision for loan and lease losses resulted
from changes in estimates based on the current and expected future economic
environment Corporate operates in and its results on real estate values.
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<PAGE> 133
Appendix A
AMENDED AND RESTATED
AGREEMENT
AND
PLAN OF REORGANIZATION
By and Among
CU BANCORP;
CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION;
and
CORPORATE BANK
OCTOBER 11, 1995
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AGREEMENT AND PLAN OF REORGANIZATION
This Amended and Restated Agreement and Plan of Reorganization
("Agreement") is made and entered into as of October 11, 1995 by and among CU
Bancorp, a California corporation ("Bancorp"); California United Bank, National
Association, a national banking association and a wholly-owned subsidiary of
Bancorp ("CUB"); and Corporate Bank, a California state chartered bank
("CorpBank"), replacing, amending and restating that certain Agreement and Plan
of Reorganization dated as of March 27, 1995 by and among the same parties.
RECITALS
This Agreement provides for the acquisition of CorpBank by Bancorp by
means of a merger ("Merger") of CorpBank with and into CUB, all in accordance
with the terms of this Agreement and an agreement of merger to be entered into
by and among Bancorp, CorpBank and CUB substantially in the form of Exhibit A
hereto ("Agreement of Merger"). The parties hereto have previously entered into
an Agreement and Plan of Reorganization dated March 27, 1995, which is hereby
replaced, amended and restated in its entirety by the following.
In consideration of the mutual covenants, agreements and representations
contained herein, the parties hereto agree as follows:
1. THE MERGER AND RELATED MATTERS
1.1 The Merger. The Merger shall become effective upon the filing of the
Agreement of Merger with the Office of the Comptroller of the Currency ("OCC")
and the Secretary of State of the State of California, in accordance with the
provisions of the National Banking Act, the California Corporations Code and the
California Financial Code. The date and time of the filing with the OCC is
referred to herein as the "Effective Time of the Merger." At the Effective Time
of the Merger the following transactions will be deemed to have occurred
simultaneously:
(a) Merger of CorpBank Into CUB. CorpBank shall be merged with and into
CUB (the "Bank Merger"), and the separate corporate existence of CorpBank shall
cease. CUB as the entity surviving the Merger is sometimes referred to herein as
the "Surviving Association."
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(b) Purchase Price / Conversion of Shares. At the Effective Time of the
Merger:
(i) Purchase Price. The Purchase Price shall be equal to
CorpBank's Shareholders' Equity, (as defined in Subsection (v) below) as of
November 30, 1995 (the "Audit Date"), plus or minus, as the case may be, an
amount equal to the pro rata net income or net loss from operations for the
eleven month period prior to the Audit Date (the "Audit Period") (which pro rata
net income shall not include extraordinary gains which for purposes of this
measurement shall include, but not be limited to, any recovery from the Bond
Claim, as defined below) for the period from the Audit Date to the Calculation
Date (the "Applicable Period"). There shall be added to the Purchase Price the
amount of any net recovery under the Bond Claim during the Applicable Period
(after taxes, expenses and retention), all as determined by Arthur Andersen LLP
("AA") as set forth below. To the extent that the Closing Date is scheduled at a
time which is more than seventy-five (75) days after the Audit Date, AA shall
conduct an additional review of the period from November 30, 1995 through the
month end prior to such Closing Date, and any adjustments to Corporate's
internally prepared financial statements for such period which are required by
AA as a result thereof, shall be included in the Purchase Price as if they
occurred prior to the Audit Date.
(ii) Subject to Sections 1.2, 1.4 and clause (iv) of this Section
1.1 (b), each outstanding share of CorpBank Stock (as defined in Section 3.2)
will be converted into the right to receive: (A) a number of shares of Bancorp
common stock, without par value ("Bancorp Common"), equal to the "Conversion
Ratio" plus an amount of cash set forth below. The Conversion Ratio shall be a
fraction of which the numerator shall be not less than seventy five percent
(75%) and not more than ninety percent (90%) (hereinafter referred to as the
"Elected Stock Percentage") of the Purchase Price Per Share and the denominator
("Denominator") shall be $8.00 ("Bancorp Stock Value"); and (B) cash in an
amount equal to not more than twenty-five percent (25%) and not less than ten
percent (10%) (hereinafter referred to as the "Elected Cash Percentage") of the
Purchase Price Per Share.
(iii) Purchase Price Per Share shall be a fraction of which the
numerator is the Purchase Price and the Denominator is the number of outstanding
shares of CorpBank on the Calculation Date on a fully diluted basis. Dissenting
Shares, as defined in Section 1.4 below, shall be considered outstanding in
calculating the number of outstanding shares on the Calculation Date.
(iv) The Elected Stock Percentage shall be not less than
seventy-five percent (75%) and not more than ninety percent (90%) and the
Elected Cash
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<PAGE> 136
Percentage shall not be less than ten percent (10%) and not more than twenty
five percent (25%). The Elected Stock Percentage plus the Elected Cash
Percentage shall equal one hundred percent (100%), and shall both be determined
by Bancorp, in its sole discretion, no later than the Closing Date. The
Elected Stock Percentage and the Elected Cash Percentage shall collectively be
referred to herein as the "Elected Percentage".
(v) Except as specifically set forth in this Agreement to the
contrary, Shareholders' Equity shall be defined pursuant to Generally Accepted
Accounting Principles, consistently applied ("GAAP") as set forth in CorpBank's
audited financial statements as of the Audit Date. Arthur Andersen, LLP ("AA")
shall perform an audit of the CorpBank financial statements and results of
operations for the Audit Period (or such later date as the parties shall agree
to, in writing) and as of the Audit Date. The examination shall be accompanied
by AA's unqualified opinion as to the financial statements. The determination of
AA as to CorpBank's shareholders' equity, net income (loss) (which shall for the
purposes set forth herein include all expenses and legal fees of the transaction
contemplated herein, (including, due inquiry into expenses which can be
ascertained, whether or not yet billed) and the net after tax effect of any sale
or recovery of the "Bond Claim" as defined below (whether or not it occurs prior
to the Audit Date or during the Applicable Period) shall be binding on both
parties, subject to Section 8.1 herein. To the extent that the Closing Date is
scheduled at a time which is more than seventy-five (75) days after November 30,
1995, an additional review shall be conducted by AA and the determination of AA
as to appropriate adjustments to CorpBank's internally prepared financial
statements as a result of such review shall be binding on both parties, subject
to Section 8.1 herein.
(vi) Audits
(A) The audit to be conducted by AA shall include a review of
the loan and lease portfolio with the scope equal to: all loans in principal
amount in excess of $10,000 classified: doubtful, substandard or "especially
mentioned" (or a similar rating); non accrual loans and loans past due 30 days
or more, in principal amount in excess of $25,000; all loans in excess of
$100,000; all construction loans; all REO; and such sampling of other loans such
that 65% of the aggregate principal dollar amount of the total loan and lease
portfolio should be reviewed.
(B) In addition, CorpBank shall cause Buccola and Associates
to conduct a review of the loan and lease portfolio of similar scope to that
required in Subsection (vi)(A) above, as of October 12, 1995 (to be completed by
November 30, 1995). To the extent the Closing is scheduled to take place more
than forty-five (45) days after November 30, 1995, Buccola and Associates shall
be required to update their review to the extent of all new credits, all credits
which in the interim
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<PAGE> 137
are reclassified or which are 60 days or more delinquent and such other matters
as may be agreed to among the parties.
(vii) The Calculation Date shall be the last business day of the
week preceding the Closing Date or such other date as may be mutually agreed
upon. The Calculation Date shall not be more than five (5) business days prior
to the Closing Date, except pursuant to the mutual agreement of the parties
hereto.
(c) Exception for Shares Held by Bancorp or CorpBank. Each share of
CorpBank Stock which immediately prior to the Effective Time of the Merger is
owned by CorpBank or Bancorp or their wholly-owned subsidiaries (other than
shares held in a fiduciary capacity) shall, at the Effective Time of the Merger,
be canceled and retired and cease to exist, without the payment of any
consideration therefor or any conversion thereof into Bancorp Common. For
purposes of this Agreement, a Bank shall be deemed wholly-owned by CorpBank or
Bancorp if all of such Bank's stock is owned directly by CorpBank or Bancorp (as
applicable) or indirectly through one or more other wholly-owned subsidiaries.
(d) Effect on CorpBank Stock Options. In accordance with Section 5.12
and prior to the Closing Date (as defined in Section 2.1), CorpBank shall make
arrangements satisfactory to Bancorp and CUB for the exercise, surrender or
cancellation of all outstanding options to purchase CorpBank Stock, such
cancellation to become effective at the Effective Time of the Merger. Any
exercise of options must take place prior to the Calculation Date.
(e) Effect on CorpBank Fixed Rate, Non-Convertible 8.5% Subordinated
Capital Notes Maturing June 30, 1997. In accordance with the provisions of the
capital notes (the "Capital Notes"), CUB will assume the Capital Notes.
1.2 No Fractional Shares. No fractional shares of Bancorp Stock shall be
issued. Bancorp will pay or cause to be paid cash in lieu of fractional shares
of Bancorp Stock which would otherwise be issuable pursuant to Section 1.1.
1.3 Conversion of CorpBank Stock / Exchange of Certificates.
(a) Election Procedures. Subject to the terms of this Agreement, each
record holder of shares of CorpBank Stock will have the right to specify such
holder's election to have his shares of CorpBank Stock converted into Bancorp
Common or cash, or to specify that such holder has no election, in accordance
with the following procedures:
(i) Not later than the Closing Date, a form of letter of
transmittal
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<PAGE> 138
and election statement providing for such a specification of election and for
the tender to the Exchange Agent (as defined in Section 1.3 (c) herein) of the
related share certificates (an "Election Statement") will be mailed to the
holders of record of CorpBank Stock as of a date determined by Bancorp and
CorpBank. CorpBank will also provide forms of the Election Statement to all
persons who become holders of record of CorpBank Stock during the period
between such record date and the Election Deadline (as defined in subsection
(iv) below) and will make such forms available at its executive offices and
such other places as Bancorp and CorpBank deem appropriate.
(ii) Any record holder of CorpBank Stock may specify, in an
Election Statement meeting the requirements of this SubArticle that, as to all
shares of CorpBank Stock covered by such Election Statement:
(A) All such shares shall be converted to Bancorp Common
("Stock Election Shares");
(B) All shares shall be converted to cash ("Cash Election
Shares"); or
(C) A designated portion of such shares shall be converted
to cash as Cash Election Shares and a portion of such shares shall be converted
to Bancorp Common as Stock Election Shares; or
(D) The shareholder has no preference and accordingly makes
no election.
(iii) Any record holder of CorpBank Stock who is holding such
shares for a beneficial owner, or as a nominee for one or more beneficial
owners, may submit an Election Statement on behalf of any such beneficial
owners. Any beneficial owner of CorpBank Stock on whose behalf a record owner of
CorpBank Stock has submitted an Election Statement in accordance with this
SubArticle, will be considered a separate holder of CorpBank Stock for purposes
of this Agreement.
(iv) An Election Statement will be effective only if a properly
completed and signed copy thereof accompanied by stock certificates for the
shares of CorpBank Stock which such Election Statement covers, shall have been
actually received by the Exchange Agent no later than 5:00 P.M., Pacific Time,
on the business day mutually selected by Bancorp and CorpBank (such time and day
being herein referred to as the "Election Deadline"). If no such day is mutually
agree to, the Election Deadline shall be the date fifteen (15) days following
the mailing of the form of letter of transmittal and election statement to the
CorpBank shareholders. An Election Statement which meets the requirements of
this provision is hereinafter referred to as an "Effective Election Statement."
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<PAGE> 139
(v) Shares of CorpBank Stock as to which a record holder makes
no election pursuant to an Effective Election Statement, or as to which no
Effective Election Statement is filed, are hereinafter referred to as "No
Election Shares".
(vi) Any record holder of CorpBank Stock who has submitted an
Effective Election Statement may at any time until the Election Deadline amend
such Election Statement if the Exchange Agent actually receives, no later than
the Election Deadline, a later-dated, properly completed and signed, amended
Effective Election Statement.
(vii) Any record holder of CorpBank Stock may at any time prior to
the Election Deadline revoke his Election Statement and withdraw certificates
for shares of CorpBank Stock deposited therewith by written notice actually
received by the Exchange Agent no later than the Election Deadline. Any notice
of withdrawal shall be effective only if it is executed and specifies the record
holder of the shares to be withdrawn and the serial numbers shown on the
certificates representing the shares to be withdrawn. All Election Statements
shall automatically be revoked if the Merger is abandoned for any reason,
whereupon the certificates (or guarantees of delivery, as the case may be) for
the shares of CorpBank Stock to which each Election Statement relates shall be
promptly returned to the person submitting the same. The stock transfer books of
CorpBank will be closed and no share transfers will be permitted after the
Election Deadline unless the Merger is subsequently abandoned by the parties.
(viii) Bancorp and CorpBank will have the right to make rules, not
inconsistent with the terms of this Agreement, governing the form, terms and
contents of Election Statements, the validity and effectiveness of Election
Statements and the manner and extent to which they are to be taken into account
in making the determination prescribed by Section 1.3 (b) herein, the issuance
and delivery of certificates evidencing Bancorp's Common and cash into which
shares of CorpBank Stock are converted in the Merger pursuant to SubArticles
1.1(b) (ii) and (iv) and the payment for fractional interests as prescribed by
Section 1.2 herein.
(b) Allocation Procedures. The allocation among holders of CorpBank
Stock of Bancorp Common or cash pursuant to this Section 1.3 shall be effected
as follows:
(i) Not less than the Elected Percentage of the CorpBank Shares
issued and outstanding at the Effective Time of the Merger (including dissenting
Shares) will be converted into Bancorp Common (the "Stock Conversion Number").
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<PAGE> 140
(ii) If less than the Elected Percentage of CorpBank Stock issued
and outstanding at the Effective Time of the Merger (including Dissenting
Shares) are Stock Election Shares, allocation of Bancorp Common and cash will be
made as follows:
(A) First, all Stock Election Shares shall be converted into
Bancorp Common;
(B) Second, the Exchange Agent shall convert all No Election
Shares to Stock Election Shares ("Additional Stock Election Shares") in the
event that the aggregate No Election Shares so converted, when added to shares
converted into Bancorp Common pursuant to clause (ii) (A) above, are equal to or
less than the Stock Conversion Number;
(C) Third, in the event that conversion of all No Election
Shares to Additional Stock Election Shares pursuant to clause (ii) (B) would
result in the issuance of a number of shares of Bancorp Common, when added to
the shares of Bancorp Common to be issued in respect of the Stock Election
Shares, in excess of the Stock Conversion Number, the number of No Election
Shares converted to Additional Stock Election Shares shall be reduced so that
the aggregate number of shares of Bancorp Common to be issued as a result of the
Merger does not exceed the Stock Conversion Number; and the aggregate Additional
Stock Election Shares created upon the conversion of No Election Shares shall
then be allocated pro rata to each holder of No Election Shares in the
proportion the total No Election Shares of such holder bears to the total number
of No Election Shares of all shareholders;
(D) Fourth, in the event that conversion of all No Election
Shares to Additional Stock Election Shares pursuant to clause (ii) (B) would
result in the issuance of a number of shares of Bancorp Common to be issued in
respect of the Stock Election, which is less than the Stock Conversion Number,
in addition to all No Election Shares, the Exchange Agent shall convert an
aggregate number of Cash Election Shares to Additional Stock Election Shares,
such that the aggregate number of Stock Election Shares and all Additional Stock
Election Shares shall equal the Stock Conversion Number; and the aggregate
Additional Stock Election Shares to be created upon the conversion of Cash
Election Shares shall then be allocated pro rata to each holder of Cash Election
Shares in the proportion that the total Cash Election Shares of such holder bear
to the total number of Cash Election Shares of all shareholders; and
(E) Fifth, after the allocation in clauses (ii) (A) through
(D) have been made, all remaining shares of CorpBank Stock shall be converted
into cash.
(iii) If more than the Elected Percentage of the total number of
shares of CorpBank Stock issued and outstanding at the Effective Time of the
Merger (including Dissenting Shares) are Stock Election Shares, allocation of
Bancorp Common and cash will be made as follows:
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<PAGE> 141
(A) First, all Cash Election Shares and No Election Shares
shall be converted into cash;
(B) Second, the Exchange Agent shall convert an aggregate
number of Stock Election Shares to Cash Election Shares ("Additional Cash
Shares") so that the aggregate number of shares to be converted into cash as a
result of the Merger equals the total number of shares of CorpBank Stock
immediately prior to the Effective Time of the Merger minus the Stock Conversion
Number; and the aggregate Additional Cash Election Shares created upon
conversion of Stock Election Shares shall then be allocated pro rata to each
holder of Stock Election Shares in the proportion that the total Stock Election
Shares of such holder have to the total number of Stock Election Shares of all
shareholders; and
(C) Any Stock Election Shares not converted to Additional
Cash Election Shares pursuant to clause (iii) (B) above shall be converted into
Bancorp Common.
(c) Exchange Procedures.
(i) On or before the Effective Time of the Merger, Bancorp will
(i) promptly deliver to a financial institution designated by it to serve as
exchange agent (the "Exchange Agent") certificates, registered in the name of
the Exchange Agent in its capacity as exchange agent, representing the Bancorp
Common issuable in the Merger and cause the Exchange Agent to distribute shares
of Bancorp Common in accordance with this Section 1.3, (ii) provide to the
Exchange Agent on a timely basis funds necessary to pay cash payable pursuant to
Section 1.1 and any cash payable in lieu of fractional shares of Bancorp Common
as provided in Section 1.2 and cause the Exchange Agent to distribute such funds
in accordance with paragraph (a) of this Section 1.3 and (iii) cause the
Exchange Agent to distribute funds on account of dividends and other
distributions in accordance with paragraph (b) of this Section 1.3.
(ii) Bancorp and the Exchange Agent shall agree that the Exchange
Agent shall, with respect to any matter on which the holders of record of
Bancorp Common determined as of a record date after the day on which the
Effective Time of the Merger occurred shall be entitled to vote or consent, (A)
request instructions from the holders of record immediately prior to the
Effective Time of the Merger of certificates which immediately prior to the
Effective Time of the Merger represented shares of CorpBank Stock and which have
not yet been surrendered to the Exchange Agent in exchange for Bancorp Common as
to how or whether to vote or consent with respect to the shares of Bancorp
Common to which such holders are entitled and which are then held by the
Exchange Agent and (B) vote or express consent in writing with respect to any
shares of Bancorp
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<PAGE> 142
Common held by it from time to time hereunder only in accordance with such
instructions. Bancorp and the Exchange Agent shall further agree that the
Exchange Agent shall receive and hold all dividends and other distributions
paid with respect to such shares for the account of the persons entitled
thereto.
(iii) As soon as practicable after the Election Deadline, the
Exchange Agent will implement the procedures set forth in Section 1.3(b) and
send written notice to each record holder of certificates representing shares of
CorpBank Stock converted pursuant to Section 1.3(b) of the results thereof.
(iv) Upon surrender for cancellation to the Exchange Agent
(either prior to the Election Deadline or otherwise duly surrendered after the
Election Deadline) of one or more certificates for shares of CorpBank Stock
("Old Certificates"), accompanied by a duly executed letter of transmittal in
proper form, the Exchange Agent shall, promptly after the Effective Time of the
Merger, in the case of Old Certificates surrendered prior to the Election
Deadline, and as promptly as practical in the case of Old Certificates
surrendered after the Election Deadline, deliver to each holder of such
surrendered Old Certificates new certificates representing the appropriate
number of shares of Bancorp Common ("New Certificates") or checks for the
appropriate amount of cash, as applicable, together with checks for payment of
cash in lieu of fractional interests to be issued in respect of the Old
Certificates. No holder of any Old Certificate shall have any rights as a holder
of Bancorp Common until such Old Certificate is surrendered for exchange as
provided herein. The holder of an Old Certificate(s) shall have no rights with
respect to such shares other than to surrender such certificate or certificates
pursuant to this Section 1.3 or to perfect the right of appraisal which such
holder may have pursuant to Section 1300 et. seq. of the California Corporations
Code ("Section 1300") and 12 U.S.C. Section 215a ("Section 215a").
(v) Unless and until any Old Certificate shall have been
surrendered and exchanged as herein provided for New Certificates, each
outstanding Old Certificate shall represent, on and after the Effective Time of
the Merger, the right to receive the shares of Bancorp Common and/or the cash
into which the shares of CorpBank Stock shown thereon have been converted. No
dividend or other distribution payable to the holders of record of Bancorp
Common as of any time subsequent to the Effective Time of the Merger shall be
paid to the holder of any Old Certificate prior to such exchange, but upon such
surrender of any Old Certificate there shall be paid to the record holder of the
Old Certificate, the amount of dividends or other distributions which
theretofore became payable with respect to the number of shares of Bancorp Stock
represented by the certificate or certificates so issued in exchange.
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(vi) No transfer taxes shall be payable by any shareholder in
respect of the issuance of Certificates for Bancorp Common, except that if any
certificates for Bancorp Common is to be issued in a name other than that in
which the CorpBank Certificate surrendered shall have been registered, it shall
be a condition of such issuance that the that the person requesting such
issuance shall properly endorse the certificate or certificates and shall pay to
Bancorp any transfer taxes payable by reason thereof, or any prior transfer of
such surrendered certificate or establish to the satisfaction of Bancorp that
such taxes have been paid or are not payable.
(vii) Notwithstanding anything to the contrary set forth herein,
if the holder of CorpBank Stock shall be unable to surrender his certificates
because such certificates have been lost or destroyed, such holder may deliver
in lieu thereof an indemnity bond in form and substance and with surety
satisfactory to Bancorp.
1.4 Dissenting Shares. Notwithstanding anything to the contrary contained in
this Agreement, shares of CorpBank Stock which are issued and outstanding
immediately prior to the Effective Time of the Merger and which are held by
shareholders who have not voted such shares in favor of adoption and approval of
this Agreement and the Agreement to Merge and have properly exercised their
dissenters' rights under Section 1300 and Section 215a ("Dissenting Shares")
shall not be converted into or be exchangeable for the right to receive shares
of Bancorp Stock and cash or cash in lieu of fractional shares provided for in
Section 1.2 herein, but shall be entitled to receive such consideration as shall
be determined pursuant to Section 1300 and 215a; provided, however, that if any
holder of such shares shall have failed to perfect or shall have effectively
withdrawn or lost the holder's right to dissent and receive payment under
Section 1300 and 215a, such holder's shares shall thereupon be deemed to have
been converted into and to have become exchangeable for, at the Effective Time
of the Merger, the right to receive shares of Bancorp Common and cash and cash
in lieu of fractional shares pursuant to Section 1.2 herein, without any
interest thereon. No payment for Dissenting Shares may be made prior to the
Calculation Date.
1.5 Effect of the Merger. By virtue of the Merger and at the Effective Time
of the Merger, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of CorpBank shall be vested in
and be held and enjoyed by the Surviving Association, without further act or
deed, and all the estates and interests of every kind of CorpBank, including all
debts due to it, shall be as effectively the property of the Surviving
Association as they were of CorpBank, and the title to any real estate vested by
deed or otherwise in CorpBank shall not revert or be in any way impaired by
reason of the Merger; and all rights of creditors and liens upon any property of
CorpBank shall be preserved unimpaired
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and all debts, liabilities and duties of CorpBank shall be debts, liabilities
and duties of the Surviving Association and may be enforced against it to the
same extent as if such debts, liabilities and duties had been incurred or
contracted by it, and none of such debts, liabilities or duties shall be
expanded, increased, broadened or enlarged by reason of the Merger.
1.6 Name of Surviving Association. The name of the Surviving Association
shall be "California United Bank, National Association".
1.7 Articles of Association and Bylaws of Surviving Association. The
Articles of Association and Bylaws of CUB as in effect immediately prior to the
Effective Time of the Merger shall continue to be the Articles of Association
and Bylaws of the Surviving Association.
1.8 Directors and Officers of Surviving Association. The directors of CUB
immediately prior to the Effective Time of the Merger shall be the directors of
the Surviving Association until their successors have been chosen and qualified
in accordance with the Certificate of Incorporation and Bylaws of the Surviving
Association. The officers of CUB immediately prior to the Effective Time of the
Merger shall be the officers of the Surviving Association until they resign or
are replaced or terminated by the Board of Directors of the Surviving
Association or otherwise in accordance with the Surviving Association's Articles
of Association or Bylaws.
1.9 Special Agreements. Pursuant to Section 6.2(i), not later than five (5)
business days after the Execution Date, as a condition subsequent to Bancorp and
CUB entering into this Agreement and as a material inducement for Bancorp and
CUB to enter into this Agreement, all directors of CorpBank, and all
Shareholders of CorpBank holding more than 5% of the outstanding shares of
CorpBank Stock (the "Shareholders") shall each enter into separate agreements
with Bancorp and CUB substantially in the form attached hereto as Exhibit B
pursuant to which each of the Shareholders shall agree to vote or cause to be
voted all such shares of CorpBank Stock with respect to which each such
Shareholder has voting power on the date hereof or hereafter to approve the
transactions contemplated hereby and all requisite matters related thereto and
pursuant to which each of the Shareholders shall make certain representations
and warranties to Bancorp and CUB. Additionally, each director of CorpBank shall
agree not to sell Bancorp stock received pursuant to the transactions
contemplated in the Agreement for a period of two full calendar quarters,
following the quarter in which the Effective Date occurs. Further each director
of CorpBank shall agree to either (i) designate his shares as Stock Election
Shares or (ii) designate his shares as part Stock Election Shares and Cash
Election Shares in no less than the proportion the Elected Stock
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Percentage bears to the Elected Cash Percentage.
1.10 Adjustment to Shareholders' Equity /Bond Claim / Additional Payment.
(a) Bond Claim. CorpBank filed a Bond Claim approximately September 29,
1995 to demand reimbursement under its Bankers' Blanket Bond Policy (Carrier -
Chubb and Policy Number 81193606-H) for losses incurred in connection with the
actions of former officers as detailed in that certain report and exhibits
prepared by The Audit Group and dated July 12, 1995 and supplemented in a letter
from CorpBank's counsel (the "Bond Claim").
(b) In the event a recovery under the Bond Claim is received prior to
the Calculation Date, the balance, net of taxes, costs, expenses and retention,
shall be treated as required by GAAP, as if such recovery occurred prior to the
Audit Date. AA shall prepare a calculation of Shareholders' Equity including the
effect of the Bond Claim recovery, if any. For purposes of this provision, a
recovery shall have been deemed to occur in the event the Carrier makes a
payment or payments to CorpBank or CorpBank receives consideration from some
third party for the assignment and sale of the Bond Claim. This provision shall
be deemed to provide a waiver from provisions below restricting CorpBank's
ability to sell assets other than in the ordinary course of business, for the
sale of the Bond Claim in any manner deemed prudent and appropriate by CorpBank,
and in accordance with such principals of law and regulation as may be
applicable thereto.
(c) Additional Payment. In the event that there is no recovery from the
Bond Claim prior to the Calculation Date, the Purchase Price shall be increased
by $200,000.
(d) Sale to third party. In the event of an assignment and sale of the
Bond Claim to a third party, whether or not related to CorpBank or an affiliate
of CorpBank, CorpBank shall provide CUB and Bancorp with the following:
(i) The assignment and sale is in accordance and compliance with
all provisions of applicable law, including but not limited to the California
Financial Code and California Corporations Code;
(ii) CorpBank has received the non disapproval of all necessary
governmental or regulatory agencies, including but not limited to California
Superintendent of Banks and the Federal Deposit Insurance Corporation, if
required;
(iii) CUB shall have received an opinion of counsel to CorpBank as
to compliance with subsections (i) and (ii) above.
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(e) Indemnity. In the event of a sale and assignment of the Bond Claim,
CUB and Bancorp shall be indemnified and held harmless by the Purchaser, against
any damage, costs, expenses, actions, claims or other matter relative to the
Bond Claim. Such indemnity shall include reimbursement for costs and expenses,
including outside legal fees incurred in connection with any claim against CUB
or Bancorp in connection with the Bond Claim or requests for documents,
testimony or other action on the part of CUB or Bancorp.
1.11 Other Agreements
(a) All prior agreements between Bancorp and CUB on the one hand and
Corporate and / or its affiliates (as "affiliates" are defined under Federal
Securities Laws and Regulations, including but not limited to the Securities and
Exchange Act of 1934, as amended) are hereby terminated in their entirety,
except to the extent that confirmations in the form of Exhibit 1.11 herein, as
applicable are received from affiliates within five (5) days of execution of
this Amended and Restated Agreement and Plan of Reorganization.
(b) All parties intend that this transaction qualify as a tax-free
reorganization under Internal Revenue Code Section 368(a)(1)(A) and
368(a)(2)(D), (the forward triangular merger provision), and corresponding state
provisions. AA will review all tests for qualification as a tax-free
reorganization immediately prior to the Closing Date. If, based on the review of
these tests, the parties to the Agreement believe there is a significant risk of
the transaction disqualifying as a tax-free reorganization, the parties will
amend the Agreement to reduce such risks.
2. THE CLOSING
2.1 Closing Date; Transactions Contemplated by this Agreement.
(a) Date of Closing. Consummation of the transactions contemplated by
this Agreement ("Closing") shall, unless another date or place is agreed in
writing by the parties hereto, take place at the offices of CUB, 16030 Ventura
Boulevard, Encino, California 91436, on the first Friday following the business
week in which the following occurred: the last to occur of (i) the receipt of
all approvals and consents and expiration of all waiting periods specified in
Sections 6.1(a) and (c) hereof and (ii) satisfaction of the conditions precedent
set forth in Section 6.2(t) or written waiver of such conditions by Bancorp and
CUB in their sole discretion (the "Closing Date").
(b) Transactions Contemplated. The transactions contemplated by this
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Agreement include, without limitation, the Bank Merger (as defined in Section
1.1 (a).
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2.2 Execution of Agreement of Merger. Prior to the Closing Date, and as
soon as practicable after adoption and approval of this Agreement by the
shareholders of CorpBank and the shareholder of CUB, the Agreement of Merger (as
amended, if necessary, to conform to any requirements of any regulatory
authority having authority over the Merger) shall be executed by Bancorp, CUB
and CorpBank. On the Closing Date, the Agreement of Merger, together with all
requisite certificates, shall be duly filed with the OCC in accordance with
applicable laws and regulations and with the California Secretary of State.
2.3 Documents to be Delivered. At the Closing, the parties shall deliver,
or cause to be delivered, such documents or certificates as may be necessary, in
the reasonable opinion of counsel for any of the parties, to effectuate the
transactions called for in this Agreement. If, at any time after the Effective
Time of the Merger, Bancorp or the Surviving Association or its successors or
assigns shall determine that any further conveyance, assignment or other
documents or any further action is necessary or desirable to further effectuate
the transactions set forth herein or contemplated hereby, the officers and
directors of the parties hereto shall execute and deliver, or cause to be
executed and delivered, all such documents as may be reasonably required to
effectuate such transactions.
3. REPRESENTATIONS AND WARRANTIES OF CORPBANK AND CORPBANK SUBSIDIARIES
CorpBank and CorpBank Subsidiaries (as defined in Section 3.3) represent and
warrant to Bancorp and CUB as follows (exceptions to the representations and
warranties set forth below and reflected in a Schedule shall be clearly labeled
to identify the Schedule to which they apply and shall only be necessary at
inception of the Agreement to the extent that the schedules as of August 1, 1995
previously provided shall require updating, thereafter schedules shall be
updated as required herein):
3.1 Organization, Standing and Power. CorpBank is a California corporation,
duly chartered as a California state chartered bank, duly organized, validly
existing and in good standing under the laws of the state of California.
CorpBank has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as presently
conducted. CorpBank is duly qualified and in good standing as a foreign
corporation, and is authorized to do business, in all states or other
jurisdictions (all of which are listed in Schedule 3.1(a)) in which such
qualification or authorization is necessary, and there has not been any claim by
any other state or jurisdiction to the effect that CorpBank is required to
qualify or otherwise be authorized to do business as a foreign corporation
therein. Schedule 3.1(b) contains true and correct copies of CorpBank's Articles
of
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Incorporation and Bylaws, as amended and in effect as of the date hereof.
3.2 Capitalization. As of the date of this Agreement, the authorized
capitalization of CorpBank consists solely of Five Million (5,000,000) shares of
common stock, without par value ("CorpBank Stock"), of which Five Hundred
Thousand (500,000) shares are issued and outstanding and One Million Dollars
($1,000,000) in principal amount of capital notes due June 30, 1997 ("Capital
Notes"). All outstanding shares of capital stock of CorpBank are duly authorized
and validly issued and are fully paid and nonassessable except, as provided for
in Section 662 of the California Financial Code. The capital notes are validly
issued and are held by eleven (11) holders. Except for stock options covering
not more than 92,500 shares of CorpBank Stock granted pursuant to CorpBank's
1991 Employee Stock Option Plan, there are no outstanding options, warrants,
commitments, agreements or other rights in or with respect to the unissued
shares of CorpBank Stock, CorpBank Preferred Stock, or stock of any CorpBank
Subsidiary or any other securities convertible into CorpBank Stock, CorpBank
Preferred Stock, or stock of any CorpBank Subsidiary. 92,500 shares of CorpBank
Stock are reserved for exercise of outstanding stock options under the 1991
Employee Stock Option Plan. Schedule 3.2(b) sets forth the name of each holder
of a CorpBank Stock option, the number of shares of CorpBank Stock covered by
each such holder's option, the exercise price per share and the expiration date
of each such holder's option. Immediately prior to the Effective Time of the
Merger, all issued and outstanding CorpBank Stock will have been either
outstanding on the date of this Agreement, or issued upon exercise of stock
options outstanding pursuant to the 1991 Employee Stock Option Plan.
3.3 Subsidiaries. CorpBank does not own, directly or indirectly (except as
pledgee pursuant to loans which are not in default), any equity position or
other voting interest in any corporation, partnership, joint venture or other
entity, except as set forth on Schedule 3.3. Schedule 3.3 correctly lists each
Subsidiary of CorpBank (individually "CorpBank Subsidiary" or collectively
"CorpBank Subsidiaries"). Each CorpBank Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation as stated in Schedule 3.3 and has the corporate
power and authority to carry on its business as it is now conducted and to own,
lease and operate its properties. Each CorpBank Subsidiary is duly qualified and
in good standing as a foreign corporation, and is authorized to do business, in
all states or other jurisdictions (all of which are listed in Schedule 3.3) in
which such qualification or authorization is necessary, and there has not been
any claim by any other state or jurisdiction to the effect that an CorpBank
Subsidiary is required to qualify or otherwise be authorized to do business as a
foreign corporation therein. Except as set forth in Schedule 3.3, CorpBank owns
of record and beneficially 100% of each class of the
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outstanding capital stock of each CorpBank Subsidiary free and clear of any
lien, encumbrance or security interest and of any adverse claim of any kind.
3.4 Corporate Bank. CorpBank is authorized by the California Superintendent
of Banks (the "Superintendent") to conduct a general banking business. CorpBank
is not a member of the Federal Reserve System. CorpBank's deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC") in the manner and to the
full extent provided by law.
3.5 Reports and Financial Statements. CorpBank has previously furnished to
CUB true and complete copies of its (i) Annual Report to Shareholders for the
years ended December 31, 1994, 1993 and 1992, (ii) Quarterly Call Reports for
the calendar quarters ended March 31, and June 30, 1995 (iii) proxy statements
relating to all meetings of shareholders (whether special or annual) during
1995, 1994, 1993 and 1992, and (iv) all other reports, registration statements
or filings made by CorpBank with the Superintendent, the FDIC or the Securities
and Exchange Commission ("SEC") since January 1, 1992 (collectively the
"CorpBank Filings"). As of their respective dates, the CorpBank Filings and any
other materials distributed to shareholders, including but not limited to proxy
statements for annual shareholder meetings in 1992, 1993, 1994, and 1995, were
in compliance, in all material respects, with the requirements of their
respective forms and were true and complete in all material respects and did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. CorpBank
has also furnished to CUB its audited consolidated financial statements for the
years ended December 31, 1992 and 1993, certified by Grant Thornton ("GT"). The
audited consolidated financial statements of CorpBank provided to CUB or to be
provided in the future and the unaudited consolidated interim financial
statements previously furnished to CUB or included in the CorpBank Filings
(collectively the "CorpBank Financial Statements") were (or will be) prepared in
accordance with generally accepted accounting principles applied on a consistent
basis ("GAAP") and except as disclosed in the CorpBank Financial Statements or
the notes thereto and present fairly the consolidated financial position of
CorpBank and the CorpBank Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flow for the periods then
ended, subject, in the case of the unaudited consolidated interim financial
statements, to normal recurring adjustments. Neither the financial statements
referred to above nor any report (including, without limitation, annual reports
to shareholders, prospectus or definitive proxy statement), or any amendment or
supplement thereto, filed, or to be filed, prior to the Effective Time of the
Merger with the Superintendent, FDIC, OCC, or SEC by or on behalf of CorpBank
contains (or will contain when furnished or filed) any untrue statement
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of a material fact or omits (or will omit when furnished or filed) to state a
material fact necessary in order to make the statements contained therein not
misleading.
3.6 CorpBank's and CorpBank Subsidiaries' Authority. The execution and
delivery by CorpBank and CorpBank Subsidiaries of this Agreement and the
Agreement of Merger and, subject to the requisite approval of the shareholders
of CorpBank, the consummation of the transactions contemplated hereunder or
thereunder have been duly and validly authorized by all necessary corporate
action on the part of CorpBank and CorpBank Subsidiaries, and this Agreement is,
and the Agreement of Merger will be upon due certification, execution,
acknowledgment and filing thereof in accordance with applicable law, a valid and
binding obligation of CorpBank and CorpBank Subsidiaries, enforceable in
accordance with their terms, except as the enforceability hereof or thereof may
be limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally and by general equitable principles. Except as
set forth in Schedule 3.6, neither the execution and delivery by CorpBank and
CorpBank Subsidiaries of this Agreement or the Agreement of Merger, nor the
consummation of the transactions contemplated herein or therein, nor compliance
by CorpBank and CorpBank Subsidiaries with the provisions hereof or thereof,
will (i) conflict with or result in a breach of any provision of their
respective Articles of Incorporation or Bylaws; (ii) constitute a breach of, or
result in a default (or give rise to any rights of termination, cancellation or
acceleration, or any right to acquire any securities or assets) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement or other instrument or obligation to which
CorpBank or any CorpBank Subsidiary is a party, or by which CorpBank or any
CorpBank Subsidiary or any of their respective properties or assets are bound,
except where such breach or default would not have a material adverse effect on
the consolidated financial condition, results of operations or prospects of
CorpBank; (iii) constitute a breach of, or result in a default (or give rise to
any rights of termination, acceleration or cancellation, or any right to acquire
any securities or assets) under any material agreement to which CorpBank or any
CorpBank Subsidiary or any of their respective properties or assets are bound;
or (iv) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to CorpBank or any CorpBank Subsidiary. No consent or approval of,
notice to or filing with any governmental authority having jurisdiction over any
aspect of the business or assets of CorpBank or any CorpBank Subsidiary, and
except as set forth in Schedule 3.6 no consent or approval of or notice to or
filing with any other person or entity, is required in connection with the
execution and delivery by CorpBank and CorpBank Subsidiaries of this Agreement
or the Agreement of Merger or the consummation by CorpBank and CorpBank
Subsidiaries of the transactions contemplated hereunder or thereunder, except
approval of the Merger by the
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shareholders of CorpBank, and such approvals as may be required by the OCC
pursuant to Sections 215a and 1828(c) of Title 12 of the United States Code or
any successor statutes ("Merger Statutes") or the Superintendent pursuant to
California Financial Code Section 2071 or otherwise with respect to the Merger,
or other applicable law; and the declaration by the SEC and state securities
law regulatory authorities that the Registration Statement (as defined in
Section 5.11) is effective and that Bancorp Stock to be issued in connection
with the Merger is qualified under applicable state securities laws.
3.7 Insurance. Except as set forth in Schedule 3.7, CorpBank and the
CorpBank Subsidiaries have, and at all times within five years of the date of
this Agreement have had, in full force and effect policies of insurance and
bonds (including, without limitation, bankers' blanket bond, fidelity coverage,
director and officer liability, fire, third party liability, use and occupancy)
with respect to their respective assets and businesses and against casualties
and contingencies which in the judgment of CorpBank and the CorpBank
Subsidiaries are adequate and appropriate to cover their respective assets and
businesses and are in amounts and coverages customarily provided for by similar
institutions. Set forth in Schedule 3.7 is a schedule of all policies of
insurance and bonds (other than title or credit insurance) carried and owned by
CorpBank and the CorpBank Subsidiaries, showing the name of the insurance or
bonding company, a summary of the coverage, the amounts, the deductible feature,
the annual premiums and the expiration dates. If any such policy or bond is
changed, terminated or modified following the date of this Agreement, such
termination, change or modification shall be promptly disclosed to Bancorp and
CUB in writing. Neither CorpBank nor any CorpBank Subsidiary is in default under
any such policy of insurance or bond such that it could be canceled and all
material claims thereunder have been filed in timely fashion. CorpBank and each
CorpBank Subsidiary have filed claims with or given notice of claim to their
respective insurers or bonding companies with respect to all material matters
and occurrences for which they believe they have coverage.
3.8 Proxy Statement. The Proxy Statement required pursuant to Section 5.11
and any other documents to be filed with the Superintendent, OCC, FDIC, the SEC
or any regulatory authority in connection with the transactions contemplated by
this Agreement with respect to all information set forth therein relating to
CorpBank and the CorpBank Subsidiaries, the Merger and in respect to this
Agreement and the Agreement of Merger will, at the respective times such
documents are filed or become effective, and with respect to the Proxy
Statement, at the time of mailing to shareholders, and at the time of the
shareholders' meeting:
(a) comply in all material respects with the provisions of all
applicable
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regulations issued by the SEC or the OCC pursuant to the Securities Exchange
Act of 1934, as amended ("1934 Act"), and all other applicable laws and
regulations; and
(b) not contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact or omit any material fact necessary in order to make the
statements therein not false or misleading or necessary to correct any statement
in any earlier communication with respect to the solicitation of a proxy for the
same meeting or subject matter which have become false or misleading.
3.9 Books and Records.
(a) The minute books of CorpBank and the CorpBank Subsidiaries contain
(i) true, accurate and complete records of all meetings and actions taken by the
respective Boards of Directors, Board committees and shareholders of CorpBank
and the CorpBank Subsidiaries and (ii) true and complete copies of their
respective charter documents and bylaws and all amendments thereto. The books
and records of CorpBank and the CorpBank Subsidiaries accurately reflect in all
material aspects their respective businesses and affairs.
(b) CorpBank and each of the CorpBank Subsidiaries have records which
accurately and validly reflect, in all material respects, their respective
transactions and accounting controls sufficient to insure that such transactions
are (i) in all material respects, executed in accordance with management's
general or specific authorization, and (ii) recorded in conformity with GAAP;
such records, to the extent they contain important information pertaining to
CorpBank or any CorpBank Subsidiary which is not easily and readily available
elsewhere, have been duplicated, and such duplicates are stored safely and
securely pursuant to procedures and techniques reasonably adequate for companies
of the sizes of CorpBank and the CorpBank Subsidiaries and in the respective
businesses in which CorpBank and the CorpBank Subsidiaries are engaged; and the
data processing equipment, data transmission equipment, related peripheral
equipment and software used by CorpBank and the CorpBank Subsidiaries in the
operations of their respective businesses (including any disaster recovery
facility) to generate and retrieve such records are reasonably adequate for
companies of the sizes of CorpBank and the CorpBank Subsidiaries and in the
respective businesses in which CorpBank and the CorpBank Subsidiaries are
engaged.
3.10 Title to Assets. CorpBank and the CorpBank Subsidiaries have good and
marketable title to all material properties and assets, other than real
property, owned or purported to be owned by CorpBank and CorpBank Subsidiaries
free
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and clear of all mortgages, liens, encumbrances, pledges or charges of any kind
or nature, except for (i) liens for current taxes not yet due and payable; (ii)
liens incurred in the ordinary course of business and which do not materially
impair the business of CorpBank or any CorpBank Subsidiary or materially
detract from the usefulness of the properties subject thereto; or (iii) such
liens as are disclosed in the CorpBank Financial Statements of December 31,
1994 or in Schedule 3.10.
3.11 Real Estate.
(a) Schedule 3.11(a) contains a list of all real property, including
leaseholds, owned by CorpBank and CorpBank Subsidiaries. True, correct and
complete copies of all such leases are included in Schedule 3.11(a). Schedule
3.11(b) contains, among other things, an accurate summary of all material
commitments which CorpBank or any CorpBank Subsidiary has to improve real estate
owned by it. Schedule 3.11(c) contains a list of other real estate owned
("OREO") by CorpBank and CorpBank Subsidiaries. CorpBank and CorpBank
Subsidiaries have good and marketable title to all the real property and valid
leasehold interests in the leaseholds described in Schedules 3.11(a), (b) and
(c), free and clear of all mortgages, covenants, conditions, restrictions,
easements, liens, security interests, charges, claims, assessments and
encumbrances, except for (i) rights of lessors, co-lessees or sublessees in such
matters which are reflected in the leases; (ii) current taxes not yet due and
payable; (iii) such as are described in any title policies delivered pursuant to
this Section 3.11; (iv) such imperfections of title and encumbrances, if any, as
do not in the aggregate materially and adversely detract from the value of or
materially and adversely interfere with the present use of such property; and
(v) as described in Schedule 3.11(d). True, correct and complete copies of title
policies for properties described in Schedules 3.11(a) and (c) as owned by
CorpBank or any CorpBank Subsidiary are included therein. To the best knowledge
of CorpBank and CorpBank Subsidiaries, the activities of CorpBank and CorpBank
Subsidiaries with respect to all real property and leaseholds owned by any of
them for use in connection with their respective operations are in all material
respects permitted and authorized by applicable zoning laws, ordinances and
regulations and all laws and regulations of any governmental department or
agency relative to environmental matters affecting such properties, except as
otherwise disclosed in Schedule 3.11(e). CorpBank and CorpBank Subsidiaries
enjoy peaceful and undisturbed possession under all material leases to which
they are parties, and all of such leases are valid and in full force and effect.
Except as set forth in Schedule 3.11 (g) neither CorpBank or any CorpBank
Subsidiary are engaged in real estate development or in any business other than
commercial banking, and have not been so engaged since August 1, 1991.
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(b) Except as set forth in Schedule 3.11(f), there has not been any
generation, use, handling, transportation, treatment, storage, release or
disposal of any Hazardous Substance in connection with the conduct of the
business of CorpBank or any CorpBank Subsidiary that has or might result in any
liability under any Environmental Law and there has never been a use of any of
the real property owned by CorpBank or any CorpBank Subsidiary, that has or
might result in any liability under any Environmental Law; no underground
storage tanks or surface impoundments are on or in the real property owned by
CorpBank or any CorpBank Subsidiary; and no asbestos or polychlorinated
biphenyls are contained or located on any of the real property owned by CorpBank
or any Corp Bank Subsidiary.
The term "Hazardous Substances" as used herein shall mean (i)
substances that are defined or listed in, or otherwise classified pursuant to,
or the use or disposal of which are regulated by, any Environmental Law as
"hazardous substances," "hazardous materials," "hazardous wastes," "toxic
substances," or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity;" (ii) oil, petroleum or petroleum derived from substances and drilling
fluids, produced waters, and other wastes associated with the exploration,
development, or production of crude oil, natural gas, or geothermal resources;
(iii) any flammable substances or explosives, any radioactive materials, any
hazardous wastes or substances, any toxic wastes or substances or any other
materials or pollutants which pose a hazard to any property or to Persons on or
about such property; and (iv) asbestos in any form or electrical equipment which
contains any oil or dielectric fluid containing levels of polychlorinated
biphenyls in excess of 50 parts per million.
The term "Environmental Law" as used herein shall mean any federal,
state, provincial or local statute, law, ordinance, rule, regulation, order,
consent, decree, judicial or administrative decision or directive of the United
States or other jurisdiction whether now existing or as hereinafter promulgated,
issued or enacted relating to: (A) pollution or protection of the environment,
including natural resources; (B) exposure of persons, including employees, to
Hazardous Substances or other products, materials or chemicals; (C) protection
of the public health or welfare from the effects of products, by-products,
wastes, emissions, discharges or releases of chemical or other substances from
industrial or commercial activities; or (D) regulation of the manufacture, use
or introduction into commerce of substances, including, without limitation,
their manufacture, formulation, packaging, labeling, distribution,
transportation, handling, storage and disposal. For the purposes of this
definition the term "Environmental Law" shall include, without limiting the
foregoing, the following statutes, as amended from time to time: (1) the Clean
Air Act, as amended, 42 U.S.C. Section 7401 et seq.; (2) the Federal Water
Pollution
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Control Act, as amended, 33 U.S.C. Section 1251 et seq.; (3) the Resource
Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et
seq., (4) the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended (including the Superfund Amendments and Reauthorization
Act of 1986), 42 U.S.C. Section 2601 et seq.; (5) the Toxic Substances Control
Act, as amended, 15 U.S.C. Section 2601 et seq.; (6) the Occupational Safety
and Health Act, as amended, 29 U.S.C. Section 651; (7) the Emergency Planning
and Community Right-To-Know Act of 1986, 42 U.S.C. Section 1101 et seq.; (8)
the Mine Safety and Health Act of 1977, as amended, 30 U.S.C. Section 801 et
seq.; (9) the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; and (10)
all comparable state and local laws, laws of other jurisdictions or orders and
regulations including, but not limited to, the Carpenter-Presley-Tanner
Hazardous Substance Account Act, Cal. Health & Safety Code Section 25300 et
seq.
3.12 Legal Proceedings; Agreements with Banking Authorities.
(a) Except as set forth on Schedule 3.12(a), there is no private or
governmental suit, claim, action, arbitration or proceeding pending, nor any
private or governmental suit, claim, action, arbitration or proceeding to
CorpBank's or any CorpBank Subsidiary's knowledge threatened, nor does CorpBank
or any CorpBank Subsidiary know of any facts or circumstances which would form a
basis for any such suit, claim, action, arbitration or proceeding against
CorpBank or any CorpBank Subsidiary or against any of their respective
directors, officers or employees relating to the performance of their duties in
such capacities or against or affecting any properties of CorpBank or any
CorpBank Subsidiary. Also, except as provided on Schedule 3.12(a), there are no
judgments, decrees, stipulations or orders against CorpBank or any CorpBank
Subsidiary enjoining it or any of its respective directors, officers or
employees in respect of, or the effect of which is to prohibit, any business
practice or the acquisition of any property or the conduct of business in any
area. Schedule 3.12(b) contains summary reports of CorpBank's and CorpBank
Subsidiaries' attorneys on all pending litigation to which CorpBank or any
CorpBank Subsidiary is a party and which names CorpBank or any CorpBank
Subsidiary as a defendant or cross-defendant. Schedule 3.12(c) contains a true,
correct and complete list of all pending litigation in which CorpBank or any
CorpBank Subsidiary is a named party.
(b) Except as set forth on Schedule 3.12(d), neither CorpBank nor any
CorpBank Subsidiary is a party to any agreement or memorandum of understanding
with any federal, state or foreign governmental or regulatory authority charged
with the supervision or regulation of banks or bank holding companies or engaged
in the insurance of bank deposits that restricts the conduct of its business, or
in any manner relates to its capital adequacy, its credit or investment policies
or its management.
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3.13 Taxes. Except as set forth on Schedule 3.13, (i) all federal income tax
returns, all state tax returns, and all real and personal property, sales, use
and other tax returns and reports that are required by law to be filed by or on
behalf of CorpBank or any CorpBank Subsidiary have been duly prepared and filed;
(ii) all taxes shown to be due and payable by CorpBank or any CorpBank
Subsidiary on those returns, or which are otherwise due and payable, whether
disputed or not, have been paid or the liability therefor is reflected in the
CorpBank Financial Statements; (iii) CorpBank and CorpBank Subsidiaries have
paid or deposited all taxes, tax penalties or interest owed by them or which
they are obligated to withhold and deposit from amounts paid to any employee,
creditor, depositor or third party; and (iv) CorpBank and CorpBank Subsidiaries
have complied with all reporting requirements of the Internal Revenue Code of
1986 or its predecessor statutes as applicable (the "Code") including, but not
limited to, obtaining taxpayer identification numbers. The current status of any
audits of those returns by the Internal Revenue Service or other applicable
agencies is as set forth in Schedule 3.13. There are no agreements by CorpBank
or any CorpBank Subsidiary waiving a statute of limitations or extending the
time for assessment or payment of any taxes payable by any of them.
3.14 Compliance with Laws and Regulations.
(a) Except as set forth on Schedule 3.14, neither CorpBank nor any
CorpBank Subsidiary is in default under or in breach of any law, ordinance,
rule, regulation, order, judgment or decree applicable to it promulgated by any
governmental agency having authority over it, where such default or breach would
have the lesser of: (I)a material adverse effect on the consolidated financial
condition, results of operations, business or prospects of CorpBank; or (ii) a
$15,000 cost or penalty.
(b) CorpBank and each of the CorpBank Subsidiaries have conducted their
businesses in accordance with all applicable federal, foreign, state and local
laws, regulations and orders including, without limitation, disclosure, usury,
equal credit opportunity, truth in lending, equal employment, fair credit
reporting, antitrust, licensing and other laws, regulations and orders, and the
forms, procedures and practices used by CorpBank and each of the CorpBank
Subsidiaries are in compliance with such laws, regulations and orders except for
such violations or non-compliance as will not have a material adverse effect on
the consolidated financial condition, results of operations, business or
prospects of CorpBank.
3.15 Performance of Obligations. Except as set forth on Schedule 3.15,
CorpBank and CorpBank Subsidiaries have performed in all respects all of the
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obligations required to be performed by them to date and are not in default
under or in breach of any term or provision of any covenant, contract, lease,
indenture or any other covenant to which CorpBank or any CorpBank Subsidiary is
a party or is subject or is otherwise bound, and no event has occurred which,
with the giving of notice or the passage of time or both, would constitute such
default or breach, where such default or breach would have a material adverse
effect on the consolidated financial condition, results of operations, business
or prospects of CorpBank. No party with whom CorpBank or any CorpBank
Subsidiary has an agreement which is material to the consolidated financial
condition, results of operations or prospects of CorpBank is in default
thereunder, except for certain loans made by the Bank which have been
identified to Bancorp and CUB.
3.16 Employees. Except as set forth in Schedule 3.16(a), there are no
understandings for the employment of any officer or employee of CorpBank or any
CorpBank Subsidiary which are not terminable by CorpBank or any CorpBank
Subsidiary without liability on not more than 30 days' notice. Except as set
forth in Schedule 3.16(b), there are no material controversies pending or
threatened between (i) CorpBank or any CorpBank Subsidiary and (ii) any of their
respective current or former employees. Except as disclosed in the CorpBank
Financial Statements at December 31, 1993 or 1994 or on Schedule 3.16(c), all
material sums due for employee compensation and benefits (including vacation and
sick leave ) have been duly and adequately paid or provided for and all deferred
compensation obligations are fully funded. Neither CorpBank nor any CorpBank
Subsidiary is a party to any collective bargaining agreement with respect to any
of their respective employees or any labor organization to which their employees
or any of them belong. Except as set forth on Schedule 3.16(c), no director,
officer or employee of CorpBank or any CorpBank Subsidiary is entitled to
receive any payment of any amount under any existing employment agreement,
severance plan or other benefit plan as a result of the consummation of any
transaction contemplated by this Agreement.
3.17 Brokers and Finders. Neither CorpBank nor any CorpBank Subsidiary is a
party to any agreement with any investment banker, broker or finder relating to
the transactions contemplated hereby, and neither the execution of this
Agreement nor the consummation of the transactions provided for or contemplated
herein will result in any liability to any such investment banker, broker or
finder. CorpBank agrees to indemnify and hold Bancorp and CUB harmless from and
against any and all claims, liabilities or obligations with respect to any fees,
commissions or expenses asserted by any person on the basis of any act,
statement, agreement or commitment alleged to have been made by CorpBank or any
CorpBank Subsidiaries or affiliates relating to the employment of any such
investment broker, broker or finder relating to the execution of this Agreement
or the consummation
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of the transactions contemplated hereby.
3.18 Material Contracts. Except as set forth on Schedule 3.18 or excepted
below, neither CorpBank nor any CorpBank Subsidiary is a party to any material
contract, agreement, understanding, commitment or offer, whether written or
oral, which may become a binding obligation if accepted by another person
(collectively referred to as an "Understanding") including the following:
(a) Any loan, letter of credit, pledge, security agreement, lease
(excluding leases of real property listed on Schedule 3.11(a)), guarantee,
commitment or subordination agreement or other similar or related type of
Understanding as to which CorpBank or any CorpBank Subsidiary is a debtor,
pledgor, lessee or obligor;
(b) Any Understanding dealing with advertising, brokerage, licensing,
dealership, representative or agency relationships providing for an aggregate
annual payment in excess of $5,000;
(c) Any profit-sharing, group insurance, bonus, deferred compensation,
stock option, severance pay, pension, retirement or other employee benefit plan;
(d) Any written correspondent banking contracts;
(e) Any Understanding (other than this Agreement) for the sale of their
respective assets other than in the ordinary course of business or for the grant
of any preferential right to purchase any of their respective assets, properties
or rights, or any Understanding which requires the consent of any third party to
the transfer and assignment of any assets, properties or rights;
(f) Any Understanding which provides for an annual payment in excess of
$5,000 in the aggregate to purchase, sell or provide services, materials,
supplies, merchandise, facilities or equipment and which is not terminable
without penalty on not more than 30 days' notice;
(g) Any Understanding for any one capital expenditure or series of
capital expenditures which is in excess of $5,000 individually or $10,000 in the
aggregate;
(h) Any Understanding to make, renew or extend the term of a loan (not
fully disbursed or funded as of DECEMBER 31, 1994) to any person or to any
affiliate of such person, which undisbursed or unfunded amounts, when aggregated
with all outstanding indebtedness of such person or any affiliate of such person
to
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CorpBank or any CorpBank Subsidiary, would exceed $25,000. The term "person" as
used herein and throughout this Agreement shall mean any individual,
corporation, association, partnership, joint venture or other entity or any
government or governmental department or agency. The term "affiliate of" or a
person "affiliated with" a specific person as used herein and throughout this
Agreement shall mean a person that directly or indirectly through one or more
intermediaries controls or is controlled by or under common control with the
persons specified;
(i) Any Understanding of any kind, except for deposit relationships,
with any director or officer of CorpBank or any CorpBank Subsidiary or with any
affiliate or any member of the immediate family of any such director or officer.
Such understandings shall include, but not be limited to, any director or
officer indemnification agreements. The term "immediate family" as used herein
and throughout this Agreement shall mean a person's spouse, parents, in-laws,
children and siblings;
(j) Any Understanding which would be terminable other than by CorpBank
or any CorpBank Subsidiary as a result of the consummation of the transactions
contemplated by this Agreement;
(k) Any contract of participation with any other bank in any loan
entered into by CorpBank or any CorpBank Subsidiary subsequent to December 31,
1994 in excess of $100,000 or any sales of assets of CorpBank or any CorpBank
Subsidiary with recourse of any kind to CorpBank or any CorpBank Subsidiary
except the sale of mortgage loans, servicing rights, repurchase or reverse
repurchase agreements, securities or other financial transactions in the
ordinary course of business;
(l) Any Understanding of any kind that binds CorpBank or any CorpBank
Subsidiary and contains a covenant not to compete or restricts in any other
manner the ability of CorpBank to engage in or conduct any activity; or
(m) Any Understanding not otherwise disclosed or excepted pursuant to
this Section 3.18 which is material to the consolidated financial condition,
results of operations, assets or business of CorpBank.
True and correct copies of all documents relating to the foregoing
Understandings are attached as Schedule 3.18.
3.19 Absence of Certain Changes. Except as set forth on Schedule 3.19, since
JUNE 30, 1995 the businesses of CorpBank and CorpBank Subsidiaries have been
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conducted diligently and only in the ordinary course, in the same manner as
theretofore conducted, and there has not been any:
(a) Material adverse change in, or development which is likely to
result in a material adverse change in or affect, the business, prospects,
financial position, management, shareholders' equity or results of operations of
CorpBank on a consolidated basis;
(b) Damage, destruction or loss to property (whether or not covered by
insurance) individually or in the aggregate that materially and adversely
affects the financial condition, property, business or prospects of CorpBank on
a consolidated basis;
(c) Material contract, agreement, license or understanding which
CorpBank or any CorpBank Subsidiary has entered into or to which CorpBank or any
CorpBank Subsidiary is a party which has been terminated or amended other than
in the ordinary course of business;
(d) Capital expenditure exceeding $5,000 individually or $25,000 in the
aggregate;
(e) Labor trouble, dispute or problem of any character involving
employees having a material adverse effect upon the financial condition,
property, business or prospects of CorpBank on a consolidated basis;
(f) Change in accounting policies or practices;
(g) Material revaluation by CorpBank on a consolidated basis of any of
its assets except as required by GAAP;
(h) Increase in the salary schedule, compensation, rate, fees or
commissions, or the declaration, payment, commitment or obligation of any kind
directly or indirectly through the payment by CorpBank or any CorpBank
Subsidiary of a bonus or other additional salary, compensation, fee or
commission to any person, except for additional sums for increases paid in
accordance with employment contracts disclosed in Schedule 3.18 or paid in a
manner consistent with past practice in accordance with policies of CorpBank and
CorpBank Subsidiaries disclosed to Bancorp and CUB in writing prior to the date
hereof;
(i) Sale, assignment or transfer of any asset of CorpBank or any
CorpBank Subsidiary except in the usual and ordinary course of business;
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(j) Mortgage, pledge or encumbrance of any asset of CorpBank or any
CorpBank Subsidiary other than liens for taxes not yet due, pledges or security
interests given in connection with the acceptance of repurchase agreements or
government deposits, and as set forth in Sections 3.10 and 3.11;
(k) Declaration, setting aside or payment of any interest or dividend
with respect to any CorpBank security;
(l) Waiver or release of any right or claim of CorpBank or any CorpBank
Subsidiary except in the usual and ordinary course of business; or
(m) Declaration, setting aside or payment of any dividend or
distribution with respect to CorpBank Stock, or the stock of any CorpBank
Subsidiary or the issuance of any shares of, or options to purchase, CorpBank
Stock, or any other securities of CorpBank or any securities of any CorpBank
Subsidiary, or the direct or indirect redemption, acquisitions, repurchase or
other acquisition of securities of CorpBank or any CorpBank subsidiary by
CorpBank or any CorpBank subsidiary.
3.20 Licenses and Permits. CorpBank and CorpBank Subsidiaries have all
licenses and permits which are necessary for the conduct of their respective
businesses and such licenses are in full force and effect. The properties and
operations of CorpBank and CorpBank Subsidiaries are and have been maintained
and conducted, in all material respects, in compliance with all applicable laws
and regulations.
3.21 Undisclosed Liabilities. Neither CorpBank nor any CorpBank Subsidiaries
have any liabilities or obligations, either accrued or contingent, which are
material to CorpBank on a consolidated basis and which have not been either (i)
reflected or disclosed in the CorpBank Financial Statements as of December 31,
1994 or as of June 30, 1995; (ii) incurred subsequent to December 31, 1994 in
the ordinary course of business; or (iii) disclosed in Schedule 3.21. CorpBank
knows of no basis for the assertion against it or any CorpBank Subsidiary of any
liability, obligation or claim (including, without limitation, that of any
regulatory authority or Environmental Law or Hazardous Substance) that might
result in or cause material adverse change in the consolidated financial
condition, results of operations or prospects of CorpBank which is not fairly
reflected in the CorpBank Financial Statements or otherwise disclosed in the
Schedules to this Agreement.
3.22 Loans and Investments. All loans and investments of CorpBank and
CorpBank Subsidiaries are in all material respects legal, enforceable and
authorized under applicable federal and state laws and regulations except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
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other similar laws affecting the rights of creditors generally and by general
equitable principles. Except as set forth in Schedule 3.22, no loans or
investments held by CorpBank or CorpBank Subsidiaries are, at June 30, 1995 (i)
more than 60 days past due with respect to any scheduled payment of principal
or interest; (ii) classified as "loss," "doubtful," "substandard," "special
mention" or "criticized" by federal or state banking regulators; or (iii) on a
non-accrual status in accordance with CorpBank and CorpBank Subsidiaries' loan
review procedures. None of such investments are subject to any restriction,
contractual, statutory or other, that would materially impair the ability of
the entity holding such investment to dispose freely of any such investment at
any time, except restrictions on the public distribution or transfer of such
investments under the Securities Act of 1933, as amended ("Securities Act"),
and the regulations thereunder, or state securities laws.
(a) As to the loans made by CorpBank and each of them, except as set
forth on Schedule 3.22(a):
(i) CorpBank is the sole owner and holder of each such loan and
the documents related thereto;
(ii) CorpBank has full right and authority to sell, assign and
transfer such Loan, in the event such a sale is desired;
(iii) No participation has been sold in such loan;
(iv) Such loan complied, as of its date of origination with, or
is exempt from, applicable state or federal laws, regulations and other
requirements pertaining to usury, any and all other requirements of any federal,
state or local laws, including, without limitation, truth in lending, real
estate settlement procedures, equal credit opportunity or disclosure laws, all
laws applicable to such loans have been complied with since the date of origin
of such loan;
(v) The origination, servicing and collection practices used by
CorpBank with respect to each Loan have been in all respects legal, proper and
prudent and have met customary standards utilized by lenders in their relevant
lending business;
(vi) Each of the related note and other agreements executed in
connection therewith with regard to any loan, is the legal, valid and binding
obligation of the maker thereof, enforceable in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting he enforcement of creditors'
rights generally, and by general principles of equity, and there is no offset,
defense, counterclaim or right
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to rescission with respect to the note, any guaranty, pledge or other
agreements;
(vii) The loan or any of the terms or conditions thereof have not
been waived, modified, altered, satisfied, canceled or subordinated in any
respect or rescinded and no collateral for the loan has been released in whole
or in any part, except as set forth in the written loan records of CorpBank;
(viii) There is no default, breach, violation or event of
acceleration existing under the Loan or the related documents or note, and no
event (other than payments due but not yet delinquent) has occurred which, with
the passage of time or with notice and the expiration of any grace or cure
period, would, constitute a default, breach, violation or event of acceleration
which is not set forth in the books and records of CorpBank; CorpBank has not
waived any material default, breach, violation or event of acceleration of any
of the foregoing, except as set forth in the books and records of CorpBank; and
(ix) The related note and other agreements contain customary and
enforceable provisions such as to render the rights and remedies of the holder
thereof adequate for the realization of the benefits of any security or
collateral.
3.23 Employee Benefit Plans.
(a) Neither CorpBank nor any CorpBank Subsidiary has, or contributes
to, any pension, profit-sharing, option, other incentive plan, or any other type
of Employee Benefit Plan (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974 ("ERISA"), or has any obligation or customary
arrangement with employees for bonuses, incentive compensation, vacations,
severance pay, insurance, or other benefits, except as set forth in Schedule
3.23(a). Attached as Schedule 3.23(b) are true and correct copies signed by the
Chief Executive Officer and Chief Financial Officer of CorpBank of all documents
evidencing plans, obligations or arrangements referred to in Schedule 3.23(a)
(or true and correct written summaries as initialed of such plans, obligations
or arrangements to the extent not evidenced by documents) and true and correct
copies of all documents evidencing trusts related to any such plans. The
documents attached to Schedule 3.23(a) shall include: (i) the Form 5500 which
was filed in each of the three most recent plan years or such shorter period of
time during which each of the plans was in existence, including without
limitation all schedules thereto; (ii) the most recent determination letter from
the Internal Revenue Service; (iii) the statement of assets and liabilities as
of the most recent valuation date for each of the defined benefit pension plans;
(iv) the most recent plan document, together with all amendments; (v) the most
recent summary plan description for each plan, to the extent it is required by
law, and (vi) the most
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recent trust agreement for each plan, to the extent required by law, together
with all amendments.
(b) If any Employee Benefit Plan of CorpBank or any CorpBank Subsidiary
were to be terminated not later than the day prior to the date of the Closing,
(i) no liability under Title IV of ERISA would be incurred by CorpBank or any
CorpBank Subsidiary and (ii) all benefits accrued to such day prior to the
Closing Date (whether or not vested) under any defined benefit plan would be
fully funded in accordance with the assumptions contained in the regulations of
the Pension Benefit Guaranty Corporation governing the funding of terminated
defined benefit plans. All accrued liabilities (for contributions or otherwise)
of CorpBank or any CorpBank Subsidiary as of the Closing Date to each Employee
Benefit Plan and with respect to each obligation to or customary arrangement
with employees for bonuses, incentive compensation, vacations, severance pay,
insurance or other benefits have been paid and no payment to any such Employee
Benefit Plan or with respect to any such obligation or arrangement since
December 31, 1994 has been disproportionately large compared to prior payments.
For purposes of the preceding sentence, accrued liabilities shall include a pro
rata contribution to each Employee Benefit Plan or with respect to each such
obligation or arrangement for that portion of a plan year or other applicable
period which precedes the Closing Date, and accrued liabilities for any portion
of a plan year or other applicable period shall be determined by multiplying the
liability for the entire such year or period by a fraction, the numerator of
which is the number of days preceding the date of the Closing Date in such year
or period and the denominator of which is the number of days in such year or
period, as the case may be.
(c) There has been no violation of the reporting and disclosure
requirements imposed either under ERISA or the Code for which a penalty has been
or may be imposed with respect to any such Employee Benefit Plan of CorpBank or
any CorpBank Subsidiary. No such Employee Benefit Plan or related trust has any
liability of any nature, accrued or contingent, including without limitation
liabilities for federal, state, local or foreign taxes, other than for routine
payments to be made in due course to participants and beneficiaries, except as
set forth in Schedule 3.23(c). There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal) or investigation pending,
or to the knowledge of CorpBank or any CorpBank Subsidiary, threatened (or any
basis therefor known to CorpBank or any CorpBank Subsidiary) with respect to any
such Employee Benefit Plan or related trust or with respect to any fiduciary, or
to the knowledge of CorpBank or any CorpBank Subsidiary, administrator or
sponsor (in its capacity as such) of any such Employee Benefit Plan. No such
Employee Benefit Plan or related trust and no obligation or arrangement is in
violation of, or in default
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with respect to, any law, rule, regulation, order, judgment or decree nor is
CorpBank or any CorpBank Subsidiary or any such Employee Benefit Plan or any
related trust required to take any action in order to avoid violation or
default. No event has occurred or (to the knowledge of CorpBank and CorpBank
Subsidiaries) is threatened or about to occur which would constitute a
prohibited transaction under Section 406 of ERISA.
(d) The Internal Revenue Service has issued determinative letters to
the effect that each Pension Plan (as defined in Section 3(2) of ERISA)
maintained for the employees of CorpBank or any CorpBank Subsidiary that is
intended by CorpBank to be a qualified plan under Section 401(a) of the Code and
any related trust is an exempt trust under Section 501 of the Code. and nothing
has occurred that would jeopardize the tax qualified status of such Pension Plan
or the tax exempt status of its associated trust. No event has occurred that
will subject any such Pension Plan to a material amount of tax under Section 511
of the code. Any such Pension Plan which has engaged in a merger, consolidation
with any other plan or transfer of assets or liabilities from any other plan,
has done so incompliance with applicable law in all material respects. Each such
Pension Plan has been operated in accordance with its terms. To the best
knowledge of CorpBank and CorpBank Subsidiaries, no investigation or review by
the Internal Revenue Service is currently pending or is contemplated in which
the Internal Revenue Service has asserted or may assert that any such Pension
Plan which is intended by CorpBank to be qualified is not qualified under
Section 401(a) of the Code or that any related trust is not exempt under Section
501 of the Code. No assessment of any federal income taxes has been made or (to
the knowledge of CorpBank and CorpBank Subsidiaries) is contemplated against any
CorpBank- or any CorpBank Subsidiary-related trust or any Pension Plan or the
basis of a failure of such qualification or exemption. Form 5500's have been
timely filed with respect to all such Pension Plans to the extent required under
applicable law. No event has occurred or (to the knowledge of CorpBank and
CorpBank Subsidiaries) is threatened or about to occur which would constitute a
reportable event within the meaning of Section 4043(b) of ERISA. No notice of
termination has been filed by the plan administrator pursuant to Section 4041 of
ERISA or issued by the Pension Benefit Guaranty Corporation pursuant to Section
4042 of ERISA with respect to any such Pension Plan.
(e) Neither CorpBank nor any CorpBank Subsidiary contributes to any
multi-employer Pension Plan within the meaning of Section 3(37) of ERISA.
(f) Each Pension Plan maintained by CorpBank or to which CorpBank
contributes has been amended to comply with the requirements of the Tax Reform
Act of 1986 and later legislation on a timely basis and has been submitted or
will be
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submitted to the Internal Revenue Service for a determination on such Pension
Plan's qualifies status prior to the expiration of the remedial amendment
period set forth under Section 401(b) of the Code.
(g) Neither CorpBank nor any CorpBank subsidiary sponsor or participate
in, and has not sponsored or participated in, any employee benefit pension plan
to which Section 4021 of ERISA applies that would create a material amount of
liability to CorpBank or any CorpBank Subsidiary under Title IV of ERISA.
(h) All group health plans of CorpBank have been operated in compliance
with the group health plan continuation coverage requirements of Section 4980B
of the Code in all material respects, to the extent such requirements are
applicable.
(i) Except as referred to on Schedule 3.23(a) CorpBank does not
maintain any employee benefit plan or employment agreement pursuant to which any
material benefit or other payment will be required to be made by CorpBank or
pursuant to which any other material benefit will accrue on or vest in any
director, officer or employee of CorpBank, in either case solely as a result of
consummation of the transactions contemplated in this Agreement.
3.24 Loan Servicing Portfolio. Except as set forth on Schedule 3.24, neither
CorpBank nor any CorpBank Subsidiary services loans owned in whole or in part by
other persons.
3.25 Filings. Since January 1, 1995, CorpBank and each CorpBank Subsidiary
have filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with (a) the Superintendent (b) the Federal Reserve Bank of San Francisco
("Fed") or any Federal Reserve Bank, (c) the FDIC, and (d) any other applicable
federal, foreign, state or local governmental or regulatory authorities. Since
January 1, 1993, CorpBank and each CorpBank Subsidiary have filed all required
call reports of condition and income with all appropriate bank regulatory
agencies. All such reports, registrations and filings are collectively referred
to as the "CorpBank Regulatory Filings." Upon request by CUB and subject to
applicable legal restrictions, CorpBank will promptly provide to CUB all
CorpBank Regulatory Filings filed by CorpBank or any CorpBank Subsidiary since
January 1, 1993 together with copies of any orders or other administrative
actions taken in connection with such CorpBank Regulatory Filings. As of their
respective dates, each of the past CorpBank Regulatory Filings (a) was true and
complete in all material respects (or was amended so as to be so promptly
following discovery of any discrepancy); and (b) complied in all material
respects with all of the statutes, rules and
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regulations enforced or promulgated by the governmental or regulatory authority
with which it was filed (or was amended so as to be so promptly following
discovery of any such noncompliance) and none contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statement contained in any of such Filings that was intended to present the
financial position of the entities or entity to which it related fairly
presented the financial position of such entities or entity and was prepared in
accordance with GAAP or applicable banking regulations consistently applied
except as stated therein during the periods involved.
3.26 Powers of Attorney. No material power of attorney or similar
authorization given by CorpBank or any CorpBank Subsidiary is presently in
effect or outstanding other than powers of attorney given in the ordinary course
of business with respect to routine matters.
3.27 Accuracy and Current Status of Information Furnished. The
representations and warranties made by CorpBank and CorpBank Subsidiaries hereby
or in the Schedules attached hereto and or the schedule previously delivered as
of August 1, 1995 (which are incorporated herein by reference and which fully
disclose any exceptions to CorpBank warranties for the period from December 31,
1994 to August 1, 1995, as if required and set forth herein), contain no
statements of fact which are untrue or misleading, or omit any material fact
which is necessary under the circumstances to prevent the statements contained
herein or in such Schedules from being misleading. CorpBank and CorpBank
Subsidiaries hereby covenant that they shall, not later than the 15th day of
each calendar month between the date hereof and the Closing Date, amend or
supplement the Schedules prepared and delivered pursuant to this Article 3 to
ensure that the information set forth in such Schedules accurately reflects the
then-current status of CorpBank and all CorpBank Subsidiaries. CorpBank and
CorpBank Subsidiaries shall further amend or supplement the Schedules as of the
Closing Date if necessary to reflect any additional changes in the status of
CorpBank or any CorpBank Subsidiary.
3.28 Effective Date of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of CorpBank
and CorpBank Subsidiaries set forth in this Agreement shall be deemed to be made
on and as of the date hereof (unless otherwise set forth in the Schedules
hereto) and as of the Closing Date. The representations, warranties, covenants
and agreements of CorpBank set forth in the Schedules previously delivered as of
August 1, 1995, shall be deemed to made on and as of the date hereof (unless
otherwise set forth in the Schedules hereto) and of the Closing Date.
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3.29 Sale of Real Estate Development Subsidiary. The sale of Corporate
Investment Company by CorpBank was a sale of all the outstanding shares and
interests held by CorpBank in such entity. Such sale was without recourse and
all representations or warranties made by CorpBank in connection with such
transaction have been terminated. CorpBank has no indemnity obligations to any
party for breaches of representations, warranties, covenants or any agreements
in connection with such sale.
3.30 Information furnished by CorpBank and CorpBank Subsidiaries. No
information relating to CorpBank or CorpBank Subsidiaries furnished to CUB or
Bancorp for the Registration Statement referred to in Section 5.11, including al
amendments and supplements thereto, will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading. In the event
of any occurrence prior to the effective date of the Registration Statement
which would cause any material information relating to CorpBank or CorpBank
subsidiaries to be untrue or misleading, CorpBank shall so notify CUB and
Bancorp and shall furnish CUB and Bancorp with such information as may be
necessary to correct any such deficiencies.
4. REPRESENTATIONS AND WARRANTIES OF BANCORP AND CUB
Bancorp and CUB represent and warrant to CorpBank as follows (exceptions to
the representations and warranties herein shall be listed on schedules as listed
below and shall be necessary only to the extent of changes from those schedules
previously delivered to CorpBank by Bancorp and CUB):
4.1 Organization, Standing and Power. Bancorp is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as presently
conducted. CUB is a national banking association, duly organized and validly
existing and in good standing under the laws of the United States of America and
has all requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as presently conducted.
4.2 Bancorp Capital Stock. The authorized capital stock of Bancorp at
December 31, 1994 consisted of 20,000,000 shares of Bancorp Stock, without par
value ("Bancorp Common Stock"), of which there were 4,467,318 issued and
outstanding, and 10,000,000 shares of preferred stock, without par value
("Bancorp Preferred Stock"), of which there were none issued and outstanding.
All of the outstanding shares of Bancorp Stock are duly authorized, validly
issued and are fully
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paid and nonassessable. When issued, Bancorp Stock to be issued pursuant to
the Merger will have been duly and validly authorized, issued and outstanding
and will be fully paid and nonassessable.
4.3 Subsidiaries. With the exception of CUB, Bancorp does not own, directly
or indirectly (except as pledgee pursuant to loans which are not in default),
any equity position or other voting interest in any corporation, partnership,
joint venture or other entity. Bancorp owns of record and beneficially 100% of
each class of the outstanding capital stock of CUB free and clear of any lien,
encumbrance or security interest and of any adverse claim of any kind.
4.4 California United Bank, National Association. CUB is authorized by the
OCC to conduct a general banking business. CUB is a member of the Federal
Reserve System. CUB's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") in the manner and to the full extent provided by law. The
authorized capital stock of CUB at December 31, 1994, consisted of 540,000
shares of CUB Common Stock, $5.00 par value, of which there were 472,973 issued
and outstanding. All of the outstanding shares of CUB Stock are validly issued,
fully paid and nonassessable, except as provided for in Section 55 of Title 12
of the United States Code.
4.5 Bancorp Reports. Bancorp has previously furnished to CorpBank true and
complete copies of its (i) Annual Report on Form 10-K for the years ended
December 31, 1994, 1993 and 1992, (ii) Quarterly Reports on Form 10-Q for the
calendar quarters ended March 31, and June 30, 1995, (iii) proxy statements
relating to all meetings of shareholders (whether special or annual) during 1994
and 1995, and (iv) all other reports, registration statements or filings made by
Bancorp with the SEC since January 1, 1993. Such reports, registration
statements and other filings, together with any amendments thereof, are
collectively referred to as the "Bancorp SEC Filings". As of their respective
dates, the Bancorp SEC Filings were (or will be when filed) in compliance, in
all material respects, with the requirements of their respective forms and were
(or will be when filed) true and complete in all material respects and did not
(or will not when filed) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited financial statements and the unaudited interim
financial statements included in the Bancorp SEC Filings were (or will be)
prepared in accordance with GAAP and present (or will present) fairly the
consolidated financial position of Bancorp and its subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flow for the
periods then ended, subject, in the case of the unaudited interim financial
statements, to normal recurring adjustments. Neither the financial statements
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referred to above nor any report (including, without limitation, Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K),
prospectus, or any amendment or supplement thereto, filed, or to be filed,
prior to the Effective Time of the Merger with the SEC by or on behalf of
Bancorp contained (or will contain when furnished or filed) any untrue
statement of a material fact or omitted (or will omit when furnished or filed)
to state a material fact necessary in order to make the statements contained
therein not misleading.
4.6 Bancorp's and Bancorp Subsidiaries' Authority. The execution and
delivery by Bancorp and CUB of this Agreement and the Agreement of Merger and,
subject to the requisite approval of the shareholder of CUB, the consummation of
the transactions contemplated hereunder or thereunder, have been duly and
validly authorized by all necessary corporate action on the part of Bancorp and
CUB, and this Agreement is, and the Agreement of Merger will be upon due
certification, execution, acknowledgment and filing thereof in accordance with
applicable law, a valid and binding obligation of Bancorp and CUB, enforceable
in accordance with their terms, except as the enforceability hereof or thereof
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting the rights of creditors generally and by general equitable principles.
Except as set forth in Schedule 4.6, neither the execution and delivery by
Bancorp and CUB of this Agreement or the Agreement of Merger, nor the
consummation of the transactions contemplated herein or therein, nor compliance
by Bancorp and CUB with the provisions hereof or thereof, will (i) conflict with
or result in a breach of any provision of their respective Articles of
Incorporation, Articles of Association or Bylaws; (ii) constitute a breach of,
or result in a default (or give rise to any rights of termination, cancellation
or acceleration, or any right to acquire any securities or assets) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement or other instrument or obligation to which
Bancorp CUB is a party, or by which Bancorp or CUB or any of their respective
properties or assets are bound, except where such breach or default would not
have a material adverse effect on the consolidated financial condition, results
of operations or prospects of Bancorp; (iii) constitute a breach of, or result
in a default (or give rise to any rights of termination, acceleration or
cancellation, or any right to acquire any securities or assets) under any
material agreement to which Bancorp or CUB or any of their respective properties
or assets are bound; or (iv) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Bancorp or CUB. No consent or approval
of, notice to or filing with any governmental authority having jurisdiction over
any aspect of the business or assets of Bancorp or CUB, and except as set forth
in Schedule 4.6 no consent or approval of or notice to or filing with any other
person or entity, is required in connection with the execution and delivery by
Bancorp and CUB of this Agreement or the Agreement of Merger or the consummation
by Bancorp and CUB of the
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transactions contemplated hereunder or thereunder, except approval of the
Merger by the shareholder of CUB, and such approvals as may be required by the
OCC pursuant to Sections 215a and 1828(c) of Title 12 of the United States Code
or any successor statutes ("Merger Statutes") with respect to the Bank Merger;
such approvals as may be required by the Federal Reserve Board with respect to
the transactions contemplated herein and in the Merger Agreement, such
approvals by the Superintendent as may be required and the declaration by the
SEC and state securities law regulatory authorities that the Registration
Statement (as defined in Section 5.11) is effective and that Bancorp Stock to
be issued in connection with the Merger is qualified under applicable state
securities laws.
4.7 Insurance. Except as set forth in Schedule 4.7, Bancorp and CUB have,
and at all times within two years of the date of this Agreement have had, in
full force and effect policies of insurance and bonds (including, without
limitation, bankers' blanket bond, fidelity coverage, director and officer
liability, fire, third party liability, use and occupancy) with respect to their
respective assets and businesses and against casualties and contingencies which
in the judgment of Bancorp and CUB are adequate and appropriate to cover their
respective assets and businesses and are in amounts and coverages customarily
provided for by similar institutions. Set forth in Schedule 4.7 is a schedule of
all policies of insurance and bonds (other than title or credit insurance)
carried and owned by Bancorp and CUB, showing the name of the insurance or
bonding company, a summary of the coverage, the amounts, the deductible feature,
the annual premiums and the expiration dates. Neither Bancorp nor CUB is in
default under any such policy of insurance or bond such that it could be
canceled and all material claims thereunder have been filed in timely fashion.
Bancorp and CUB have filed claims with or given notice of claim to their
respective insurers or bonding companies with respect to all material matters
and occurrences for which they believe they have coverage.
4.8 Registration Statement. The Registration Statement required pursuant to
Section 5.11 and any other documents to be filed with the OCC, the SEC or any
regulatory authority in connection with the transactions contemplated by this
Agreement with respect to all information set forth therein relating to Bancorp
and CUB, the Merger and in respect to this Agreement and the Agreement of Merger
will, at the respective times such documents are filed or become effective, and
with respect to the Proxy Statement, at the time of mailing to shareholders, and
at the time of the shareholders' meeting:
(a) comply in all material respects with the provisions of all
applicable regulations issued by the SEC or the OCC pursuant to the Securities
Exchange Act of 1934, as amended ("1934 Act"), and all other applicable laws and
regulations;
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and
(b) do not contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact or omit any material fact necessary in order to make the
statements therein not false or misleading or necessary to correct any statement
in any earlier communication with respect to the solicitation of a proxy for the
same meeting or subject matter which have become false or misleading.
4.9 Books and Records.
(a) The minute books of Bancorp and CUB contain (i) true, accurate and
complete records of all meetings and actions taken by the respective Boards of
Directors, Board committees and shareholders of Bancorp and CUB and (ii) true
and complete copies of their respective charter documents and bylaws and all
amendments thereto. The books and records of Bancorp and CUB accurately reflect
in all material aspects their respective businesses and affairs.
(b) Bancorp and CUB have records which accurately and validly reflect,
in all material respects, their respective transactions and accounting controls
sufficient to insure that such transactions are (i) in all material respects,
executed in accordance with management's general or specific authorization, and
(ii) recorded in conformity with GAAP; such records, to the extent they contain
important information pertaining to Bancorp or CUB which is not easily and
readily available elsewhere, have been duplicated, and such duplicates are
stored safely and securely pursuant to procedures and techniques reasonably
adequate for companies of the sizes of Bancorp and CUB and in the respective
businesses in which Bancorp and CUB are engaged; and the data processing
equipment, data transmission equipment, related peripheral equipment and
software used by Bancorp and CUB in the operations of their respective
businesses (including any disaster recovery facility) to generate and retrieve
such records are reasonably adequate for companies of the sizes of Bancorp and
CUB and in the respective businesses in which Bancorp and CUB are engaged.
4.10 Title to Assets. Bancorp and CUB have good and marketable title to all
material properties and assets, other than real property, owned or purported to
be owned by Bancorp and CUB free and clear of all mortgages, liens,
encumbrances, pledges or charges of any kind or nature, except for (i) liens for
current taxes not yet due and payable; (ii) liens incurred in the ordinary
course of business and which do not materially impair the business of Bancorp or
CUB or materially detract from the usefulness of the properties subject thereto;
or (iii) such liens as are disclosed in the Bancorp Financial Statements of
December 31, 1994 or in Schedule 4.10.
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4.11 Real Estate. Schedule 4.11(a) contains a list of all real property,
including leaseholds, owned by Bancorp and CUB. True, correct and complete
copies of all such leases are included in Schedule 4.11(a). Schedule 4.11(b)
contains, among other things, an accurate summary of all material commitments
which Bancorp or CUB has to improve real estate owned by it. Schedule 4.11(c)
contains a list of other real estate owned ("OREO") by Bancorp and CUB. Bancorp
and CUB have good and marketable title to all the real property and valid
leasehold interests in the leaseholds described in Schedules 4.11(a), (b) and
(c), free and clear of all mortgages, covenants, conditions, restrictions,
easements, liens, security interests, charges, claims, assessments and
encumbrances, except for (i) rights of lessors, co-lessees or sublessees in such
matters which are reflected in the leases; (ii) current taxes not yet due and
payable; (iii) such as are described in any title policies delivered pursuant to
this Section 4.11; (iv) such imperfections of title and encumbrances, if any, as
do not in the aggregate materially and adversely detract from the value of or
materially and adversely interfere with the present use of such property; and
(v) as described in Schedule 4.11(d). True, correct and complete copies of title
policies for properties described in Schedules 4.11(a) and (c) as owned by
Bancorp or any Bancorp Subsidiary are included therein. To the best knowledge of
Bancorp and CUB, the activities of Bancorp and CUB with respect to all real
property and leaseholds owned by any of them for use in connection with their
respective operations are in all material respects permitted and authorized by
applicable zoning laws, ordinances and regulations and all laws and regulations
of any governmental department or agency relative to environmental matters
affecting such properties, except as otherwise disclosed in Schedule 4.11(e).
Bancorp and CUB enjoy peaceful and undisturbed possession under all material
leases to which they are parties, and all of such leases are valid and in full
force and effect.
4.12 Legal Proceedings; Agreements with Banking Authorities.
(a) Except as set forth on Schedule 4.12(a), there is no private or
governmental suit, claim, action, arbitration or proceeding pending, nor any
private or governmental suit, claim, action, arbitration or proceeding to
Bancorp's or CUB's knowledge threatened, nor does Bancorp or CUB know of any
facts or circumstances which would form a basis for any such suit, claim,
action, arbitration or proceeding against Bancorp or CUB or against any of their
respective directors, officers or employees relating to the performance of their
duties in such capacities or against or affecting any properties of Bancorp or
CUB which individually, or in the aggregate, could have a material adverse
effect upon the consolidated financial condition, business or results of
operations of Bancorp or the transactions contemplated hereunder. Also, except
as provided on Schedule 4.12(a), there are no judgments, decrees, stipulations
or orders against Bancorp or CUB enjoining it or
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any of its respective directors, officers or employees in respect of, or the
effect of which is to prohibit, any business practice or the acquisition of any
property or the conduct of business in any area. Schedule 4.12(b) contains
summary reports of Bancorp's and CUB' attorneys on all pending litigation to
which Bancorp or CUB is a party and which names Bancorp or CUB as a defendant
or cross-defendant. Schedule 4.12(c) contains a true, correct and complete
list of all pending litigation in which Bancorp or CUB is a named party.
(b) Neither Bancorp nor CUB is a party to any agreement or memorandum
of understanding with any federal, state or foreign governmental or regulatory
authority charged with the supervision or regulation of banks or bank holding
companies or engaged in the insurance of bank deposits that restricts the
conduct of its business, or in any manner relates to its capital adequacy, its
credit or investment policies or its management.
4.13 Taxes. Except as set forth on Schedule 4.13, (i) all federal income tax
returns, all state tax returns, and all real and personal property, sales, use
and other tax returns and reports that are required by law to be filed by or on
behalf of Bancorp or CUB have been duly prepared and filed; (ii) all taxes shown
to be due and payable by Bancorp or CUB on those returns, or which are otherwise
due and payable, whether disputed or not, have been paid or the liability
therefor is reflected in the Bancorp Financial Statements; (iii) Bancorp and CUB
have paid or deposited all taxes, tax penalties or interest owed by them or
which they are obligated to withhold and deposit from amounts paid to any
employee, creditor, depositor or third party; and (iv) Bancorp and CUB have
complied with all reporting requirements of the Internal Revenue Code of 1986 or
its predecessor statutes as applicable (the "Code") including, but not limited
to, obtaining taxpayer identification numbers. The current status of any audits
of those returns by the Internal Revenue Service or other applicable agencies is
as set forth in Schedule 4.13. There are no agreements by Bancorp or CUB waiving
a statute of limitations or extending the time for assessment or payment of any
taxes payable by any of them.
4.14 Compliance with Laws and Regulations.
(a) Except as set forth on Schedule 4.14, neither Bancorp nor CUB is in
default under or in breach of any law, ordinance, rule, regulation, order,
judgment or decree applicable to it promulgated by any governmental agency
having authority over it, where such default or breach would have a material
adverse effect on the consolidated financial condition, results of operations,
business or prospects of Bancorp.
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(b) Bancorp and CUB have conducted their businesses in accordance with
all applicable federal, foreign, state and local laws, regulations and orders
including, without limitation, disclosure, usury, equal credit opportunity,
equal employment, fair credit reporting, antitrust, licensing and other laws,
regulations and orders, and the forms, procedures and practices used by Bancorp
and CUB are in compliance with such laws, regulations and orders except for such
violations or non-compliance as will not have a material adverse effect on the
consolidated financial condition, results of operations, business or prospects
of Bancorp.
4.15 Performance of Obligations. Except as set forth on Schedule 4.15,
Bancorp and CUB have performed in all respects all of the obligations required
to be performed by them to date and are not in default under or in breach of any
term or provision of any covenant, contract, lease, indenture or any other
covenant to which Bancorp or CUB is a party or is subject or is otherwise bound,
and no event has occurred which, with the giving of notice or the passage of
time or both, would constitute such default or breach, where such default or
breach would have a material adverse effect on the consolidated financial
condition, results of operations, business or prospects of Bancorp. No party
with whom Bancorp or CUB has an agreement which is material to the consolidated
financial condition, results of operations or prospects of Bancorp is in default
thereunder, except for certain loans made by the Bank which have been identified
to Bancorp and CUB.
4.16 Employees. Except as set forth in Schedule 4.16(a), there are no
understandings for the employment of any officer or employee of Bancorp or CUB
which are not terminable by Bancorp or CUB without liability on not more than 30
days' notice. Except as set forth in Schedule 4.16(b), there are no material
controversies pending or threatened between (i) Bancorp or CUB and (ii) any of
their respective employees. Except as disclosed in the Bancorp Financial
Statements at December 31, 1994 or on Schedule 4.16(c), all material sums due
for employee compensation and benefits have been duly and adequately paid or
provided for and all deferred compensation obligations are fully funded. Neither
Bancorp nor CUB is a party to any collective bargaining agreement with respect
to any of their respective employees or any labor organization to which their
employees or any of them belong. Except as set forth on Schedule 4.16(c), no
director, officer or employee of Bancorp or CUB is entitled to receive any
payment of any amount under any existing employment agreement, severance plan or
other benefit plan as a result of the consummation of any transaction
contemplated by this Agreement.
4.17 Brokers and Finders. Neither Bancorp nor CUB is a party to any
agreement with any investment banker, broker or finder relating to the
transactions contemplated hereby, and neither the execution of this Agreement
nor the consummation of the transactions provided for or contemplated herein
will result
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in any liability to any such investment banker, broker or finder. Bancorp
agrees to indemnify and hold CorpBank harmless from and against any and all
claims, liabilities or obligations with respect to any fees, commissions or
expenses asserted by any person on the basis of any act, statement, agreement
or commitment alleged to have been made by Bancorp or CUB relating to the
employment of any such investment broker, broker or finder relating to the
execution of this Agreement or the consummation of the transactions
contemplated hereby.
4.18 Material Contracts. Except as set forth on Schedule 4.18 or excepted
below, neither Bancorp nor CUB is a party to any material contract, agreement,
understanding, commitment or offer, whether written or oral, which may become a
binding obligation if accepted by another person (collectively referred to as an
"Understanding") including the following:
(a) Any loan, letter of credit, pledge, security agreement, lease
(excluding transactions in the ordinary course of the banking business and
leases of real property listed on Schedule 4.11(a)), guarantee, commitment or
subordination agreement or other similar or related type of Understanding as to
which Bancorp or CUB is a debtor, pledgor, lessee or obligor;
(b) Any Understanding dealing with advertising, brokerage, licensing,
dealership, representative or agency relationships providing for an aggregate
annual payment in excess of $25,000;
(c) Any profit-sharing, group insurance, bonus, deferred compensation,
stock option, severance pay, pension, retirement or other employee benefit plan;
(d) Any written correspondent banking contracts;
(e) Any Understanding (other than this Agreement) for the sale of their
respective assets other than in the ordinary course of business or for the grant
of any preferential right to purchase any of their respective assets, properties
or rights, or any Understanding which requires the consent of any third party to
the transfer and assignment of any assets, properties or rights. For purposes of
this provisions sales of CUB's mortgage servicing portfolio shall be considered
to be in the ordinary course of business;
(f) Any Understanding which provides for an annual payment in excess of
$250,000 in the aggregate to purchase, sell or provide services, materials,
supplies, merchandise, facilities or equipment and which is not terminable
without penalty on not more than 30 days' notice;
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(g) Any Understanding for any one capital expenditure or series of
capital expenditures which is in excess of $200,000 individually or $500,000 in
the aggregate;
(h) Any Understanding to make, renew or extend the term of a loan (not
fully disbursed or funded as of December 31, 1994) to any person or to any
affiliate of such person, which undisbursed or unfunded amounts, when aggregated
with all outstanding indebtedness of such person or any affiliate of such person
to Bancorp or CUB, would exceed $2,500,000. The term "person" as used herein and
throughout this Agreement shall mean any individual, corporation, association,
partnership, joint venture or other entity or any government or governmental
department or agency. The term "affiliate of" or a person "affiliated with" a
specific person as used herein and throughout this Agreement shall mean a person
that directly or indirectly through one or more intermediaries controls or is
controlled by or under common control with the persons specified;
(i) Any Understanding of any kind, except for deposit relationships,
and overdraft lines of credit or credit cards not exceeding $25,000
individually, with any director or officer of Bancorp or CUB or with any
affiliate or any member of the immediate family of any such director or officer.
The term "immediate family" as used herein and throughout this Agreement shall
mean a person's spouse, parents, in-laws, children and siblings;
(j) Any Understanding which would be terminable other than by Bancorp
or CUB as a result of the consummation of the transactions contemplated by this
Agreement;
(k) Any contract of participation with any other bank in any loan
entered into by Bancorp or CUB subsequent to December 31, 1994 in excess of
$2,500,000 or any sales of assets of Bancorp or CUB with recourse of any kind to
Bancorp or CUB except the sale of mortgage loans, servicing rights, repurchase
or reverse repurchase agreements, securities or other financial transactions in
the ordinary course of business;
(l) Any Understanding of any kind that binds Bancorp or CUB and
contains a covenant not to compete; or
(m) Any Understanding not otherwise disclosed or excepted pursuant to
this Section 4.18 which is material to the consolidated financial condition,
results of operations, assets or business of Bancorp.
True and correct copies of all documents relating to the foregoing Under-
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standings are attached as Schedule 4.18.
4.19 Absence of Certain Changes. Except as set forth on Schedule 4.19, since
December 31, 1994 the businesses of Bancorp and CUB have been conducted
diligently and only in the ordinary course, in the same manner as theretofore
conducted, and there has not been any:
(a) Material adverse change in, or development which is likely to
result in a material adverse change in or affect, the business, prospects,
financial position, management, shareholders' equity or results of operations of
Bancorp on a consolidated basis;
(b) Damage, destruction or loss to property (whether or not covered by
insurance) individually or in the aggregate that materially and adversely
affects the financial condition, property, business or prospects of Bancorp on a
consolidated basis;
(c) Material contract, agreement, license or understanding which
Bancorp or CUB has entered into or to which Bancorp or CUB is a party which has
been terminated or amended other than in the ordinary course of business;
(d) Capital expenditure exceeding $200,000 individually or $500,000 in
the aggregate;
(e) Labor trouble, dispute or problem of any character involving
employees having a material adverse effect upon the financial condition,
property, business or prospects of Bancorp on a consolidated basis;
(f) Change in accounting policies or practices;
(g) Material revaluation by Bancorp on a consolidated basis of any of
its assets except as required by GAAP;
(h) Increase in the salary schedule, compensation, rate, fees or
commissions, or the declaration, payment, commitment or obligation of any kind
directly or indirectly through the payment by Bancorp or CUB of a bonus or other
additional salary, compensation, fee or commission to any person, except for
additional sums for increases paid in accordance with employment contracts
disclosed in Schedule 4.18 or paid in the ordinary course of business in a
manner consistent with past practice (which provides for annual performance
reviews during the first quarter of each year and which may result in salary
increases and/or bonuses at such time);
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(i) Sale, assignment or transfer of any asset of Bancorp or CUB except
in the usual and ordinary course of business;
(j) Mortgage, pledge or encumbrance of any asset of Bancorp or CUB
other than liens for taxes not yet due, pledges or security interests given in
connection with the acceptance of repurchase agreements or government deposits;
(k) Waiver or release of any right or claim of Bancorp or CUB except in
the usual and ordinary course of business; or
(l) Declaration, setting aside or payment of any dividend or
distribution with respect to Bancorp Stock, or the stock of Bancorp or the
issuance of any shares of, or options to purchase, Bancorp Stock, or any other
securities of Bancorp or any securities of Bancorp with the exception of not
more than $.02 per share dividend per quarter, $90,000 dividends to the
shareholder of CUB per quarter and the issuance of stock options to employees
and directors and set forth in respective stock option plans and in accordance
with the ordinary conduct of their respective businesses.
4.20 Licenses and Permits. Bancorp and CUB have all licenses and permits
which are necessary for the conduct of their respective businesses and such
licenses are in full force and effect. The properties and operations of Bancorp
and CUB are and have been maintained and conducted, in all material respects, in
compliance with all applicable laws and regulations.
4.21 Undisclosed Liabilities. Neither Bancorp nor CUB have any liabilities
or obligations, either accrued or contingent, which are material to Bancorp on a
consolidated basis and which have not been either (i) reflected or disclosed in
the Bancorp Financial Statements as of December 31, 1994; (ii) incurred
subsequent to December 31, 1994 in the ordinary course of business; or (iii)
disclosed in Schedule 4.21. Bancorp knows of no basis for the assertion against
it or CUB of any liability, obligation or claim (including, without limitation,
that of any regulatory authority) that might result in or cause material adverse
change in the consolidated financial condition, results of operations or
prospects of Bancorp which is not fairly reflected in the Bancorp Financial
Statements or otherwise disclosed in the Schedules to this Agreement.
4.22 Loans and Investments. All loans and investments of Bancorp and CUB are
in all material respects legal, enforceable and authorized under applicable
federal and state laws and regulations except as the enforceability thereof may
be limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of
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creditors generally and by general equitable principles. Except as set forth
in Schedule 4.22, no loans or investments held by Bancorp or CUB are, at
December 31, 1994 (i) more than 90 days past due with respect to any scheduled
payment of principal or interest; (ii) classified as "loss," "doubtful,"
"substandard," "special mention" or "criticized" by federal banking regulators;
or (iii) on a non-accrual status in accordance with Bancorp and CUB' loan
review procedures. None of such investments are subject to any restriction,
contractual, statutory or other, that would materially impair the ability of
the entity holding such investment to dispose freely of any such investment at
any time, except restrictions on the public distribution or transfer of such
investments under the Securities Act of 1933, as amended ("Securities Act"),
and the regulations thereunder, or state securities laws.
4.23 Employee Benefit Plans.
(a) Neither Bancorp nor CUB has, or contributes to, any pension,
profit-sharing, option, other incentive plan, or any other type of Employee
Benefit Plan (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974 ("ERISA"), or has any obligation or customary arrangement
with employees for bonuses, incentive compensation, vacations, severance pay,
insurance, or other benefits, except as set forth in Schedule 4.23(a). Attached
as Schedule 4.23(b) are true and correct copies signed by the Chief Executive
Officer and Chief Financial Officer of Bancorp of all documents evidencing
plans, obligations or arrangements referred to in Schedule 4.23(a) (or true and
correct written summaries as initialed of such plans, obligations or
arrangements to the extent not evidenced by documents) and true and correct
copies of all documents evidencing trusts related to any such plans.
(b) There has been no material violation of the reporting and
disclosure requirements imposed either under ERISA or the Code for which a
material penalty has been or may be imposed with respect to any such Employee
Benefit Plan of Bancorp or CUB. No such Employee Benefit Plan or related trust
has any material liability of any nature, accrued or contingent, including
without limitation liabilities for federal, state, local or foreign taxes, other
than for routine payments to be made in due course to participants and
beneficiaries, except as set forth in Schedule 4.23(c). There is no litigation,
arbitration, claim, governmental or other proceeding (formal or informal) or
investigation pending, or to the knowledge of Bancorp or CUB, threatened (or any
basis therefor known to Bancorp or CUB) with respect to any such Employee
Benefit Plan or related trust or with respect to any fiduciary, or to the
knowledge of Bancorp or CUB, administrator or sponsor (in its capacity as such)
of any such Employee Benefit Plan. No such Employee Benefit Plan or related
trust and no obligation or arrangement is in material violation of, or in
default with respect to, any law, rule, regulation, order, judgment or decree
nor
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is Bancorp or CUB or any such Employee Benefit Plan or any related trust
required to take any action in order to avoid violation or default. No event
has occurred or (to the knowledge of Bancorp and CUB) is threatened or about to
occur which would constitute a prohibited transaction under Section 406 of
ERISA.
(c) The Internal Revenue Service has issued determinative letters to
the effect that each Pension Plan (as defined in Section 3(2) of ERISA)
maintained for the employees of Bancorp or CUB that is intended by Bancorp to be
a qualified plan under Section 401(a) of the Code and any related trust is an
exempt trust under Section 501 of the Code. Each such Pension Plan has been
operated materially in accordance with its terms. To the best knowledge of
Bancorp and CUB, no investigation or review by the Internal Revenue Service is
currently pending or is contemplated in which the Internal Revenue Service has
asserted or may assert that any such Pension Plan which is intended by Bancorp
to be qualified is not qualified under Section 401(a) of the Code or that any
related trust is not exempt under Section 501 of the Code. No assessment of any
federal income taxes has been made or (to the knowledge of Bancorp and CUB) is
contemplated against any Bancorp- or CUB-related trust or any Pension Plan or
the basis of a failure of such qualification or exemption. Form 5500's have been
timely filed with respect to all such Pension Plans to the extent required under
applicable law. No event has occurred or (to the knowledge of Bancorp and CUB)
is threatened or about to occur which would constitute a reportable event within
the meaning of Section 4043(b) of ERISA. No notice of termination has been filed
by the plan administrator pursuant to Section 4041 of ERISA or issued by the
Pension Benefit Guaranty Corporation pursuant to Section 4042 of ERISA with
respect to any such Pension Plan.
(d) Neither Bancorp nor CUB contributes to any multi-employer Pension
Plan within the meaning of Section 3(37) of ERISA.
4.24 Loan Servicing Portfolio. Except as set forth on Schedule 4.24, neither
Bancorp nor CUB services loans owned in whole or in part by other persons.
4.25 Filings. Since January 1, 1994, Bancorp and CUB have filed all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that were required to be filed with (a) the Office of the
Comptroller of the Currency (b) the Federal Reserve Bank of San Francisco
("Fed") or any Federal Reserve Bank, (c) the FDIC, (d) the Securities and
Exchange Commission and; (e) any other applicable federal, foreign, state or
local governmental or regulatory authorities. Since January 1, 1994, Bancorp and
each Bancorp Subsidiary have filed all required call reports of condition and
income with all appropriate regulatory agencies. All such reports, registrations
and filings are
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collectively referred to as the "Bancorp Regulatory Filings." Upon request by
CorpBank and subject to applicable legal restrictions, Bancorp will promptly
provide to CorpBank all Bancorp Regulatory Filings filed by Bancorp or CUB
since January 1, 1990 together with copies of any orders or other
administrative actions taken in connection with such Bancorp Regulatory
Filings. As of their respective dates, each of the past Bancorp Regulatory
Filings (a) was true and complete in all material respects (or was amended so
as to be so promptly following discovery of any discrepancy); and (b) complied
in all material respects with all of the statutes, rules and regulations
enforced or promulgated by the governmental or regulatory authority with which
it was filed (or was amended so as to be so promptly following discovery of any
such noncompliance) and none contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Any financial statement contained in any of such
Filings that was intended to present the financial position of the entities or
entity to which it related fairly presented the financial position of such
entities or entity and was prepared in accordance with GAAP or applicable
banking regulations consistently applied except as stated therein during the
periods involved.
4.26 Powers of Attorney. No material power of attorney or similar
authorization given by Bancorp or CUB is presently in effect or outstanding
other than powers of attorney given in the ordinary course of business with
respect to routine matters.
4.27 Accuracy and Current Status of Information Furnished. The
representations and warranties made by Bancorp and CUB hereby or in the
Schedules attached hereto contain no statements of fact which are untrue or
misleading, or omit any material fact which is necessary under the circumstances
to prevent the statements contained herein or in such Schedules from being
misleading. Bancorp and CUB hereby covenant that they shall, not later than the
15th day of each calendar quarter between the date hereof and the Closing Date,
amend or supplement the Schedules prepared and delivered pursuant to this
Article 4 to ensure that the information set forth in such Schedules accurately
reflects the then-current status of Bancorp and CUB. Bancorp and CUB shall
further amend or supplement the Schedules as of the Closing Date if necessary to
reflect any additional changes in the status of Bancorp or CUB.
4.28 Effective Date of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of Bancorp and
CUB set forth in this Agreement shall be deemed to be made on and as of the date
hereof (unless otherwise set forth in the Schedules hereto) and as of the
Closing Date.
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4.29 Bancorp's and CUB's Authority. The execution and delivery by Bancorp
and CUB of this Agreement and the Agreement of Merger and the consummation of
the transactions contemplated hereunder or thereunder have been duly and validly
authorized by all necessary corporate action on the part of Bancorp and CUB, and
this Agreement is, and the Agreement of Merger will be upon due certification,
execution, acknowledgment and filing thereof in accordance with applicable
provisions of the National Banking Act and the Bank Merger Act, a valid and
binding obligation of Bancorp and CUB, enforceable in accordance with their
terms, except as the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally and by general equitable principles. Except as set forth in
Schedule 4.29, neither the execution and delivery by Bancorp and CUB of this
Agreement or the Agreement of Merger, nor the consummation of the transactions
contemplated herein or therein, nor compliance by Bancorp and CUB with the
provisions hereof or thereof, will (i) conflict with or result in a breach of
any provision of their respective Certificates of Incorporation, Certificate of
Association or Bylaws; (ii) constitute a breach of, or result in a default (or
give rise to any rights of termination, cancellation or acceleration, or any
right to acquire any securities or assets) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, franchise, license,
permit, agreement or other instrument or obligation to which Bancorp or CUB is a
party, or by which Bancorp or CUB or any of their properties or assets is bound;
or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Bancorp or CUB. No consent or approval of, notice to or
filing with any governmental authority having jurisdiction over any aspect of
the business or assets of Bancorp or CUB, and no consent or approval of or
notice to any other person or entity, is required in connection with the
execution and delivery by Bancorp and CUB of this Agreement or the Agreement of
Merger or the consummation by Bancorp and CUB of the transactions contemplated
hereunder or thereunder, except such approvals as may be required by Bancorp as
the sole shareholder of Bank; the Fed pursuant to the applicable requirements of
the BHCA; the OCC pursuant to the Merger Statutes with respect to the Bank
Merger (as defined in Section 1.1(a); the filing of the Agreement of Merger with
the OCC; and the declaration by the SEC and state securities law regulatory
authorities that the Registration Statement (as defined in Section 5.11) is
effective and that Bancorp Stock to be issued in connection with the Merger is
qualified under applicable state securities law.
4.30 No Material Change. There has been no material adverse change in the
financial condition, results of operation or prospects of Bancorp since December
31, 1994. There are no facts or circumstances that, individually or in the
aggregate, materially and adversely has affected or is so affecting, or, may
reasonably be
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expected in the future to affect the financial condition or results of
operations or prospects of Bancorp that have not been disclosed in the Bancorp
SEC Filings, excluding changes in laws or regulations or economic conditions
which affect banking institutions generally.
4.31 Accuracy of Information Furnished. The representations and warranties
made by Bancorp and CUB hereunder or in the Schedules hereto contain no material
statements of fact which are untrue or misleading, or omit any material fact
which is necessary under the circumstances to prevent the statements contained
herein or in such Schedules from being misleading.
4.32 Registration Statement. The Registration Statement required pursuant to
Section 5.8 and any other documents to be filed with the SEC or any regulatory
authority in connection with the transactions contemplated by this Agreement
with respect to all information set forth therein relating to Bancorp, the
Merger and in respect to this Agreement and the Agreement of Merger will, at the
respective times such documents are filed or become effective:
(a) comply in all material respects with the provisions of the
Securities Act and the regulations thereunder, and all other applicable laws and
regulations; and
(b) (except with regard to information furnished by CorpBank) not
contain any untrue statement of a material fact and will not omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.33 Information Furnished by Bancorp and CUB. No information relating to
Bancorp or CUB furnished to CorpBank by Bancorp and CUB for inclusion in the
Proxy Statement or the applications referred to in Section 5.11, including all
amendments and supplements thereto, will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading. In the event
of any occurrence prior to the CorpBank shareholders' meeting which would cause
any material information relating to Bancorp and CUB included in the Proxy
Statement to be untrue or misleading, Bancorp or CUB shall so notify CorpBank
and shall furnish CorpBank such information as may be necessary to correct any
such deficiencies.
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ARTICLE 5.
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE TIME OF MERGER
5.1 Access.
(a) Bancorp and CUB and CorpBank, respectively, shall have the right,
on reasonable notice and during ordinary business hours, to examine through
their agents, auditors or attorneys all of the books, records and properties of
the respective party, including, but not limited to, all loan, investment,
accounting, property and legal records and files. Such examination shall be made
in a manner that will not unreasonably interfere with the conduct of the
business. CUB and CorpBank shall provide adequate space and facilities, to the
end that such examination shall be completed expeditiously, completely and
accurately. All parties shall retain in strict confidence all information gained
thereby, and shall not reveal it to anyone except as may be necessary for the
accomplishment of the purposes of such examination and the consummation of the
transactions provided for hereby. In the event the Merger provided for hereby is
not consummated for any reason, Bancorp and CUB and CorpBank, respectively,
shall not, directly or indirectly: (i) utilize for their own benefit any
Proprietary Information (as hereinafter defined) or (ii) disclose to any person
any Proprietary Information, except as such disclosure may be required in
connection with this Agreement or by law. "Proprietary Information" shall mean
all confidential business information concerning the pricing, costs, profits and
plans for the future development of any party's business and the identity,
requirements, preferences, practices and methods of doing business of specific
customers of any party or otherwise relating to the business and affairs of any
party, other than information which (i) was lawfully in the possession of a
party prior to January 1, 1995; (ii) is obtained by any party after the date
hereof from a source other than a party hereto not under an obligation of
confidentiality; or (iii) is in the public domain when received or thereafter
enters the public domain through no action of the other party. In the event the
Merger is not consummated for any reason, each party shall return to the other
all copies, notes and records obtained in the course of such examination.
(b) CorpBank agrees that on and after the date that all requisite
regulatory approvals are obtained, CUB, acting through its agents, employees and
representatives, may, at CUB's option and at CUB's own expense, on notice to
CorpBank and in a manner reasonably calculated to avoid undue interruption of
any operations of CorpBank, have reasonable access to the premises of the Bank
for the purposes of (i) training CorpBank's employees in the procedures,
techniques,
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methods or other banking practices of CUB; (ii) (subject to CUB's obligation to
bear the expense of removal and restoration should this Agreement be
terminated) installing telecommunications equipment, lines and facilities,
including, without limitation, telephones, branch terminal systems and
telecopiers; and (iii) (subject to CUB's obligation to bear the expense of
removal and restoration should this Agreement be terminated) installing
automated teller machines and comparable customer service equipment.
5.2 Limitation on Conduct of CorpBank and CorpBank Subsidiaries Prior to
Closing. Between the date hereof and the Effective Time of the Merger:
(a) CorpBank agrees to conduct its business and to cause the CorpBank
Subsidiaries to conduct their respective businesses only in the normal and
customary manner and in accordance with sound business practices and with
respect to CorpBank, in accordance with safe and sound banking practices;
(b) CorpBank shall not, without the prior written consent of CUB and
Bancorp (which consent shall not be unreasonably withheld and which consent
shall be deemed granted if within five (5) business days of receipt of notice by
CUB written notice of objection is not received by CorpBank) take any of the
following actions or allow any CorpBank Subsidiary to take any of the following
actions:
(i) carry on its business except in substantially the same
manner as heretofore conducted or introduce any new method of management or
operation in respect of its business and properties, except in a manner
consistent with prior practice and in the ordinary course of business;
(ii) amend, modify, or, except as they may be terminated in
accordance with their terms, terminate any Understanding or materially default
in the performance of any of its obligations under any Understanding where such
action would have a material adverse effect on the consolidated financial
condition, results of operations or prospects of CorpBank;
(iii) terminate or unilaterally fail to renew any existing
insurance or bonding coverage;
(iv) amend, modify, terminate or fail to renew or preserve its
business organization, material rights, franchises, permits and licenses, or
take any action which would jeopardize the continuance of the goodwill of its
customers where such action would have a material adverse effect on the
consolidated financial condition, results of operations or prospects of
CorpBank;
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(v) enter into any Understanding, except (A) deposits incurred,
and short-term debt securities (obligations maturing within one year) issued, in
the ordinary course of business and consistent with prior practice, and
liabilities arising out of, incurred in connection with, or related to the
consummation of this Agreement, (B) commitments to make loans or other
extensions of credit in compliance with clauses (vii) or (xii) of this
subsection (b) and (C) loan sales in the ordinary course of business, without
any recourse except to a reserve account funded by an interest rate spread
otherwise payable to the servicer of the loans sold, provided that no commitment
to sell loans shall extend beyond the Effective Time of the Merger;
(vi) enter into any new leases (regardless of dollar amount) or
contracts requiring annual payments of more than $1,000, or having a term in
excess of six months without prior approval of CUB, which approval shall not be
unreasonably withheld or enter into any leases or contracts requiring annual
payments of more than $10,000, which are not new, without the prior approval of
CUB, which approval shall not be unreasonably withheld;
(vii) make any loan or other extension of credit, or enter into
any commitment to make any loan or other extension of credit or enter into any
agreement, with or to any CorpBank or CorpBank Subsidiary director, officer or
employee or 5% shareholder, except in accordance with existing practice or
policy;
(viii) except as required by any existing contract, grant any
general or uniform increase in the rates of pay of employees or employee
benefits or any increase in salary or employee benefits of any officer, employee
or agent or pay any bonus to any person;
(ix) sell, transfer, mortgage, encumber or otherwise dispose of
any assets or any liabilities except in the ordinary course of business and
consistent with prior practice or as required by any existing contract or for
ordinary repairs, renewals or replacements or as contemplated by this Agreement;
(x) except pursuant to the exercise of outstanding stock
options, issue, sell, redeem or acquire for value, or agree to do so, any debt
securities or any shares of the capital stock or other ownership interests, or
securities convertible into or options, rights or warrants exercisable for such
shares or interests, of CorpBank or any CorpBank Subsidiary or declare, issue or
pay any dividend or other distribution of assets, whether consisting of money,
CorpBank Stock, CorpBank Preferred Stock, other personal property, real property
or other things of value, to CorpBank's shareholders or with respect to the
Bank's stock or the stock of any other CorpBank
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Subsidiary that is not directly or indirectly wholly owned by CorpBank, or
split, subdivide combine or reclassify any shares of its stock or other equity
security;
(xi) change or amend its charter documents or bylaws;
(xii) make its credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, less stringent than
those in effect on June 30, 1995;
(xiii) make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which do not exceed
$5,000 individually or $10,000 in aggregate;
(xiv) make special or extraordinary payments to any person or
enter into any agreement which could result in such special or extraordinary
payments other than $20,000 payments to each of the President and Vice Chairman
/ Executive Vice President and $15,000 to the Chief Financial Officer of
CorpBank as of the Closing, or as contemplated, or as disclosed, in this
Agreement as of the date hereof;
(xv) except for transactions in the ordinary course of business,
make any material investments, by purchase of stock or securities, contributions
to capital, property transfers, purchases of any property or assets or
otherwise, in any other individual, corporation or other entity;
(xvi) compromise or otherwise settle or adjust any assertion or
claim of a deficiency in taxes (or interest thereon or penalties in connection
therewith) or file any appeal from an asserted deficiency except in a form
previously approved by CUB in writing or file or amend any federal, foreign or
state tax return or report or make any tax election or change any method or
period of accounting unless required by GAAP or applicable law;
(xvii) except as contemplated in this Agreement, terminate any
plan or enter into any new employment agreement or other employee benefit
arrangement, or modify any employment agreement or other employee benefit
arrangement in effect on the date of this Agreement to which CorpBank or any
CorpBank Subsidiary is a party; or
(xviii) agree to take or make any commitment to take any actions
prohibited by this Section 5.2.
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5.3 Limitation on Conduct of Bancorp and CUB Prior to Closing. Between the
date hereof and the Effective Time of the Merger:
(a) Bancorp agrees to conduct its business and to cause the Bancorp
Subsidiaries to conduct their respective businesses only in the normal and
customary manner and in accordance with sound business practices and with
respect to the CUB, in accordance with safe and sound banking practices;
(b) Bancorp shall not, without the prior written consent of CorpBank
(which consent shall not be unreasonably withheld and which consent shall be
deemed granted if within five (5) business days of receipt of notice by CorpBank
written notice of objection is not received by Bancorp) take any of the
following actions or allow any Bancorp Subsidiary to take any of the following
actions:
(i) carry on its business except in substantially the same
manner as heretofore conducted or introduce any new method of management or
operation in respect of its business and properties, except in a manner
consistent with prior practice and in the ordinary course of business.
Acquisition of additional banking offices or banking assets or mergers or
combinations with other BIF insured banking institutions shall be deemed to be
in the ordinary course of business;
(ii) amend, modify, or, except as they may be terminated in
accordance with their terms, terminate any Understanding or materially default
in the performance of any of its obligations under any Understanding where such
action would have a material adverse effect on the consolidated financial
condition, results of operations or prospects of Bancorp;
(iii) terminate or unilaterally fail to renew any existing
insurance or bonding coverage, providing however, that CUB may change carriers
and coverage relative to any insurance or bonding coverage, and no notice need
be given unless the amount of coverage is materially less than that held by CUB
at the date of this Agreement;
(iv) amend, modify, terminate or fail to renew or preserve its
business organization, material rights, franchises, permits and licenses, or
take any action which would jeopardize the continuance of the goodwill of its
customers where such action would have a material adverse effect on the
consolidated financial condition, results of operations or prospects of Bancorp;
(v) make any loan or other extension of credit, or enter into
any commitment to make any loan or other extension of credit, to any Bancorp or
CUB Subsidiary director, officer or employee or 5% shareholder, except in
accordance
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with existing practice or policy;
(vi) except in the ordinary course of business and consistent
with prior practice or as required by any existing contract, grant any general
or uniform increase in the rates of pay of employees or employee benefits or any
increase in salary or employee benefits of any officer, employee or agent or pay
any bonus to any person;
(vii) sell, transfer, mortgage, encumber or otherwise dispose of
any assets or any liabilities except in the ordinary course of business and
consistent with prior practice or as required by any existing contract or for
ordinary repairs, renewals or replacements or as contemplated by this Agreement;
(viii) make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which do not exceed
$200,000 individually or $500,000 in aggregate;
(ix) make special or extraordinary payments to any person other
than as contemplated, or as disclosed, in this Agreement as of the date hereof;
(x) compromise or otherwise settle or adjust any material
assertion or claim of a material deficiency in taxes (or interest thereon or
penalties in connection therewith) or file any appeal from an asserted material
deficiency except in a form previously approved by CorpBank in writing or file
or amend in any material manner, any federal, foreign or state tax return or
report or make any material tax election or change any material method or period
of accounting unless required by GAAP or applicable law; or
(xi) agree to take or make any commitment to take any actions
prohibited by this Section 5.3.
5.4 Certain Loans and Other Extensions of Credit.
(a) CorpBank will promptly inform CUB of the amounts and categories of
any loans, leases or other extensions of credit that have been classified by any
bank regulatory authority or by any unit of CorpBank as "Criticized," "Specially
Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification
("Classified Credits"). CorpBank will furnish to CUB, as soon as practicable,
and in any event within fifteen days after the end of each calendar month,
schedules including the following: (a) Classified Credits (including with
respect to each credit in an amount equal to or greater than $25,000, its
classification category, its type, and the originating unit), and by type and
originating unit, the aggregate dollar
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amount of classified credits of less than $25,000; (b) nonaccrual credits
(including, with respect to each credit in an amount equal to or greater than
$25,000, its type and the originating unit), and by type and originating unit,
the aggregate dollar amount of nonaccrual credits of less than $25,000; (c)
accrual exception credits that are delinquent 90 or more days and have not been
placed on nonaccrual status (including with respect to each accrual exception
credit in an amount equal to or greater than $25,000, its type and the
originating unit), and by type and originating unit, the aggregate dollar
amount of such accrual exception credits of less than $25,000; (d) delinquent
credits (including with respect to each delinquent credit in an amount equal to
or greater than $25,000, its type and the originating unit), including an aging
into 30-59, 60-89, 90-119, and 120+ day categories, and by type and originating
unit, the aggregate dollar amount of delinquent credits of less than $25,000;
(e) participating loans and leases, stating, with respect to each, whether it
is purchased or sold, the loan or lease type, and the originating unit; (f)
loans or leases (including any commitments) by CorpBank or any CorpBank
Subsidiary to any CorpBank or CorpBank Subsidiary director, officer, employee,
or shareholder holding 10% or more of the capital stock of CorpBank, including
with respect to each such loan or lease the identity and, to the best knowledge
of CorpBank, the relation of the borrower to CorpBank or any CorpBank
Subsidiary, the loan or lease type and the outstanding and undrawn amounts; (g)
letters of credit (including with respect to each letter of credit in a face
amount equal to or greater than $25,000, the type and originating unit), and by
type and originating unit, the aggregate dollar amount of all letters of credit
of less than $25,000; (h) loans or leases charged off during the previous month
(including with respect to each such loan or lease, its type and the
originating unit), and by type and originating unit, the aggregate dollar
amount of such loans or leases less than $25,000; (i) loans or leases written
down during the previous month, including with respect to each the original
amount, the write off amount, its type and originating unit; and (j) other real
estate or assets owned, stating with respect to each its type.
(b) CUB will promptly inform CorpBank of the amounts and categories of
any loans, leases or other extensions of credit that have been classified by any
bank regulatory authority or by CUB as "Criticized," "Specially Mentioned,"
"Substandard," "Doubtful," "Loss" or any comparable classification ("Classified
Credits"). CUB will furnish to CorpBank, as soon as practicable, and in any
event within fifteen days after the end of each calendar month, schedules
including the following: (a) Classified Credits (including with respect to each
credit in an amount equal to or greater than $25,000, its classification
category), and the aggregate dollar amount of classified credits of less than
$25,000; (b) nonaccrual credits (including, with respect to each credit in an
amount equal to or greater than $25,000, its classification category, and the
aggregate dollar amount of nonaccrual credits of less than $25,000); (c) accrual
exception credits that are delinquent 90
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or more days and have not been placed on nonaccrual status (including with
respect to each accrual exception credit in an amount equal to or greater than
$25,000, its classification category), and the aggregate dollar amount of such
accrual exception credits of less than $25,000; (d) delinquent credits
(including with respect to each delinquent credit in an amount equal to or
greater than $25,000, its classification category ), including an aging into
30-59, 60-89, 90-119, and 120+ day categories, and the aggregate dollar amount
of delinquent credits of less than $25,000; (e) participating loans and leases,
stating, with respect to each, whether it is purchased or sold, the loan or
lease type, and the originating unit; (f) loans or leases (including any
commitments) by CUB to any Bancorp or CUB Subsidiary director, officer,
employee, or shareholder holding 10% or more of the capital stock of Bancorp,
including with respect to each such loan or lease the identity and, to the best
knowledge of CUB, the relation of the borrower to Bancorp or CUB, the loan or
lease type and the outstanding and undrawn amounts; (g) letters of credit
(including with respect to each letter of credit in a face amount equal to or
greater than $25,000, the classification category), and by type classification
category, the aggregate dollar amount of all letters of credit of less than
$25,000; (h) loans or leases charged off during the previous month (including
with respect to each such loan or lease, its classification category), and by
classification category, the aggregate dollar amount of such loans or leases
less than $25,000; (i) loans or leases written down during the previous month,
including with respect to each the original amount, the write off amount, its
classification category; and (j) other real estate or assets owned, stating
with respect to each its type.
5.5 Negotiations With Other Parties.
(a) CorpBank shall not, nor shall it authorize or knowingly permit any
of its representatives or CorpBank Subsidiaries, directly or indirectly, to,
entertain, solicit or encourage or participate in any discussions or
negotiations with, or provide any information to, any corporation, partnership,
person or other entity or group (other than Bancorp, CUB and their
representatives) concerning any Acquisition Proposal (as hereinafter defined)
other than the Acquisition Proposal set forth in this Agreement. CorpBank shall
notify CUB immediately in the manner set forth in Section 9.3 if any such
inquiry or Acquisition Proposal is received by CorpBank or any CorpBank
Subsidiary, including the terms thereof. For purposes of this Agreement,
"Acquisition Proposal" means any (i) proposal pursuant to which any corporation,
partnership, person or other entity or group, other than Bancorp or CUB, would
acquire or participate in a merger or other business combination involving
CorpBank or any CorpBank Subsidiary; (ii) proposal by which any corporation,
partnership, person or other entity or group, other than Bancorp or CUB, would
acquire the right to vote 5% or more of the capital stock of CorpBank or any
CorpBank Subsidiary entitled to vote thereon for the election of directors,
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other than persons designated as proxy holders by the Board of Directors of
CorpBank or any CorpBank Subsidiary; (iii) acquisition of the assets of
CorpBank or any CorpBank Subsidiary other than in the ordinary course of
business; or (iv) acquisition in excess of five percent (5%) of the outstanding
capital stock of CorpBank or any CorpBank Subsidiary, other than as
contemplated by this Agreement.
5.6 Affirmative Conduct of CorpBank Prior to Closing. Between the date
hereof and the Effective Time of the Merger, CorpBank shall do the following and
shall cause the CorpBank Subsidiaries to do the following:
(a) Use their respective commercially reasonable best efforts, or
cooperate with others, to expeditiously bring about the satisfaction of the
conditions specified in Article 6 hereof;
(b) Use and devote their respective commercially reasonable efforts
consistent with this Agreement to maintain and preserve intact their respective
present business organizations and to maintain and preserve their relationships
and goodwill with account holders, borrowers, employees and others having
business relationships with them;
(c) Advise CUB promptly in writing of any material adverse change known
to CorpBank or any CorpBank Subsidiary in the capital structure, financial
condition or business prospects of CorpBank or any CorpBank Subsidiary, or of
any other materially adverse change known to CorpBank respecting the business
and operations of CorpBank on a consolidated basis, or of any matter which would
make the representations and warranties set forth in Article 3 hereof not true
and correct in any material respect at the Closing, or which make the conditions
or other transactions contemplated in this Agreement impossible to perform or
substantially unlikely to be complied with;
(d) Keep in full force and effect all of the existing permits and
licenses of CorpBank and CorpBank Subsidiaries;
(e) Use their respective commercially reasonable best efforts to
maintain insurance or bonding coverage on all properties for which they are
responsible and on their respective business operations, and carry not less than
the same coverage for fidelity, director and officer liability, public
liability, personal injury, property damage and other risks equal to that which
is now in effect; and notify CUB in writing promptly of any facts or
circumstances which could affect CorpBank's or any CorpBank Subsidiary's ability
to maintain such insurance or bonding coverage;
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(f) Perform their respective material contractual obligations and not
become in material default on any of such obligations;
(g) Duly observe and conform to all legal requirements applicable to
their respective businesses;
(h) Duly and timely file all reports and returns required to be filed
with any federal, state or local governmental authority, unless any extensions
have been duly granted by such authority;
(i) Maintain their respective assets and properties in good condition
and repair, normal wear and tear excepted;
(j) Promptly advise CUB in writing of any event or any other
transaction within CorpBank's or any CorpBank Subsidiary's knowledge whereby any
person or related group of persons acquires, directly or indirectly, record or
beneficial ownership (as defined in Rule 13d-3 promulgated by the SEC pursuant
to the 1934 Act) or control of 5% or more of the outstanding shares of CorpBank
Stock prior to the record date fixed for the CorpBank shareholders' meeting or
any adjourned meeting thereof to approve the transactions contemplated herein;
(k) Promptly notify CUB of any event of which CorpBank obtains
knowledge which may materially and adversely affect the financial condition,
results of operations, or business prospects of CorpBank or any CorpBank
Subsidiary, or in the event it determines that the Merger will not be
consummated because of any inability to meet the conditions to the performance
of CUB set forth in Sections 6.2;
(l) Charge off all loans, receivables and other assets, or portions
thereof, deemed uncollectible in accordance with GAAP, applicable law or
regulation, or classified as "loss" or as directed by any regulatory authority;
and maintain the allowance for credit losses of CorpBank at a level which is
adequate to provide for all known and reasonably expected losses on assets
outstanding and other inherent risks in CorpBank's loan portfolio;
(m) Furnish to CUB, as soon as practicable, and in any event within ten
days after it is prepared, (i) a copy of any report submitted to the board of
directors of CorpBank or any CorpBank Subsidiary and access to the working
papers related thereto and copies of other operating or financial reports
prepared for management of any of their businesses and access to the working
papers thereto, provided, however, that CorpBank need not furnish CUB
communications of CorpBank's legal counsel regarding CorpBank's rights against
and obligations to
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CUB or its affiliates under this Agreement, (ii) copies of all reports,
renewals, filings, certificates, statements and other documents filed with or
received from the Superintendent, SEC, Fed, any Federal Reserve Bank, FDIC, or
any other governmental or regulatory body, (iii) separate consolidated monthly
unaudited statements of condition and statements of operations for CorpBank,
consolidated monthly statements of changes in consolidated shareholders' equity
for CorpBank, and separate quarterly unaudited consolidated and consolidating
statements of condition and statements of operations for CorpBank and
statements of changes in consolidated shareholders' equity for CorpBank, in
each case prepared in a manner consistent with past practice, and (iv) such
other reports as CUB may reasonably request relating to CorpBank. Each of the
financial statements delivered pursuant to this subsection (m), except as
stated therein, shall be prepared in accordance with GAAP, except that such
financial statements may omit statements of cash flow and footnote disclosures
required by GAAP. Each of the financial statements of CorpBank or any CorpBank
Subsidiary delivered pursuant to this subsection (m) shall be accompanied by a
certificate of each of the Chief Executive Officer and the Chief Financial
Officer of CorpBank to the effect that such financial statements fairly present
the financial condition and results of operations of CorpBank or the CorpBank
Subsidiary, as appropriate, for the periods covered, and reflect all
adjustments (which consist only of normal recurring adjustments) necessary for
a fair presentation;
(n) CorpBank agrees that through the Effective Time of the Merger, as
of their respective dates, (i) each of the CorpBank Filings will be true and
complete in all material respects; and (ii) each of the CorpBank Filings will
comply in all material respects with all of the statutes, rules and regulations
enforced or promulgated by the governmental or regulatory authority with which
it will be filed and none will contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they will
be made, not misleading. Any financial statement contained in any of such
CorpBank Filings that is intended to present the financial position of the
entities or entity to which it relates will fairly present the financial
position of such entities or entity and will be prepared in accordance with GAAP
or applicable banking regulations consistently applied, except as stated
therein, during the periods involved;
(o) Maintain proper reserves for contingent liabilities in accordance
with GAAP;
(p) Promptly notify CUB of the filing of any litigation, governmental
or regulatory action, or similar proceeding or notice of any claims against
CorpBank or any CorpBank Subsidiary or any of their assets;
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(q) At any time within 60 days of the day on which the Effective Time
of the Merger is expected to occur, at the written request of CUB and on CUB's
certification that it knows of no circumstance that would entitle it to
terminate this Agreement, (i) give, or cause to be given, any written notice to
the employees of CorpBank that CUB reasonably deems necessary or appropriate
under the Worker Adjustment and Retraining Notification Act ("WARN") ; (ii) take
such other actions, as CUB shall reasonably deem necessary or appropriate, to
comply with WARN; and (iii) give notice to its data processing vendors of
termination of the data processing contract at the end of the minimum notice
period provided for therein.
(r) Forward to CUB, not later than the 15th day of each calendar
quarter, CorpBank's list of holders of CorpBank Stock, certified by CorpBank's
transfer agent;
(s) Cooperate with CUB to enable the transactions contemplated by this
Agreement to qualify for the accounting treatment desired by CUB.
(t) Give three business days prior written notice to CUB prior to
approving any loans or leases in excess of $100,000, subsequent to the Execution
Date. Such notice must include copies of the description of the loan utilized
for consideration of the loan by CorpBank and copies of relevant financial
statements and other financial documents utilized by CorpBank in its review.
Notwithstanding the above, CorpBank is not required to obtain CUB's prior "non
disapproval" of any renewals of existing loans, regardless of amount, and is not
required to obtain CUB's prior approval of automobile secured loans, whether or
not such loans are part of a borrowing relationship in excess of $100,000.
CorpBank shall give CUB notice of all loans made, (including renewals) in excess
of $100,000 within ten (10) days of approval thereof. To the extent that CUB
does not "non disapprove" a loan which CorpBank is obligated to submit
hereunder, CUB reserves the right to place a 100% reserve against such loan,
without explanation, as part of its final due diligence provided for herein.
Notwithstanding anything herein to the contrary, CUB shall not have any power to
direct CorpBank to make particular loans or to refrain from making particular
loans and the effect of any comments on CorpBank loans in connection with this
provision shall be limited as set forth herein. CUB agrees that it will review
submitted loans promptly and will advise CorpBank of its determination regarding
any such loan within 3 business days of receipt of request therefore.
(u) Make its best efforts to obtain written general releases, in form
satisfactory to counsel for CUB, from all employees terminated for any reason
subsequent to March 1, 1995, including release of federal, state and common law
causes of action, with the exception of Richard Brown, Gary Wrigley and
Elizabeth Peters.
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(v) Settle or otherwise conclude all litigation as to which CorpBank or
any agent is a defendant and obtain general releases and dismissals with
prejudice in form and content satisfactory to counsel for CUB.
(w) Obtain all necessary consents and opinions from GT and AA to allow
three years audited financial statements with unqualified opinions to be
included in the Registration Statement, if determined to be necessary by
Bancorp.
(x) CorpBank shall purchase a three year tail on its Director and
Officer Liability Insurance, extending at least equivalent coverage to that
currently held by CorpBank to directors of CorpBank after the Merger, whether or
not they are directors of the Surviving Bank."
5.7 Affirmative Conduct of Bancorp Prior to Closing. Between the date
hereof and the Effective Time of the Merger, Bancorp shall do the following and
shall cause CUB to do the following:
(a) Use their respective commercially reasonable best efforts, or
cooperate with others, to expeditiously bring about the satisfaction of the
conditions specified in Article 6 hereof;
(b) Use and devote their respective commercially reasonable efforts
consistent with this Agreement to maintain and preserve intact their respective
present business organizations and to maintain and preserve their relationships
and goodwill with account holders, borrowers, employees and others having
business relationships with them;
(c) Advise CorpBank promptly in writing of any material adverse change
known to Bancorp or CUB in the capital structure, financial condition or
business prospects of Bancorp or CUB, or of any other materially adverse change
known to Bancorp respecting the business and operations of Bancorp on a
consolidated basis, or of any matter which would make the representations and
warranties set forth in Article 4 hereof not true and correct in any material
respect at the Closing;
(d) Keep in full force and effect all of the existing permits and
licenses of Bancorp and CUB;
(e) Use their respective commercially reasonable best efforts to
maintain insurance or bonding coverage on all properties for which they are
responsible and on their respective business operations, and carry not less than
the same coverage for fidelity, public liability, personal injury, property
damage and other risks equal
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to that which is now in effect; and notify CorpBank in writing promptly of any
facts or circumstances which could affect Bancorp's or CUB's ability to
maintain such insurance or bonding coverage;
(f) Perform their respective material contractual obligations and not
become in material default on any of such obligations;
(g) Duly observe and conform to all legal requirements applicable to
their respective businesses;
(h) Duly and timely file all reports and returns required to be filed
with any federal, state or local governmental authority, unless any extensions
have been duly granted by such authority;
(i) Maintain their respective assets and properties in good condition
and repair, normal wear and tear excepted;
(j) Promptly notify CorpBank of any event of which Bancorp obtains
knowledge which may materially and adversely affect the financial condition,
results of operations, or business prospects of Bancorp or CUB, or in the event
it determines that the Merger will not be consummated because of any inability
to meet the conditions to the performance of CorpBank set forth in Sections
6.2(d), (g) and (l);
(k) Charge off all loans, receivables and other assets, or portions
thereof, deemed uncollectible in accordance with GAAP, applicable law or
regulation, or classified as "loss" or as directed by any regulatory authority;
and maintain the allowance for credit losses of CUB at a level which is adequate
to provide for all known and reasonably expected losses on assets outstanding
and other inherent risks in the Bancorp and CUB's loan portfolio;
(l) Furnish to CorpBank, as soon as practicable, and in any event
within ten days after it is prepared, (i) a copy of any report submitted to the
board of directors of Bancorp or CUB, provided, however, that CUB need not
furnish communications of CUB's legal counsel regarding CUB's rights against and
obligations to CorpBank or its affiliates under this Agreement, (ii) copies of
all reports, renewals, filings, certificates, statements and other documents
filed with or received from the SEC, OCC, Fed, any Federal Reserve Bank, FDIC,
or any other governmental or regulatory body (except that copies shall not be
provided of Reports of Examination), (iii) copies of monthly financial
statements provided to Bancorp and CUB's Boards of Directors, and (iv) such
other reports as CorpBank may reasonably request relating to Bancorp. Each of
the financial statements
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delivered pursuant to this subsection (m), except as stated therein, shall be
prepared in accordance with GAAP, except that such financial statements may
omit statements of cash flow and footnote disclosures required by GAAP. Each
of the financial statements of Bancorp or CUB delivered pursuant to this
subsection (m) shall be accompanied by a certificate of each of the Chief
Executive Officer and the Chief Financial Officer of Bancorp to the effect that
such financial statements fairly present the financial condition and results of
operations of Bancorp or CUB, as appropriate, for the periods covered;
(m) Bancorp agrees that through the Effective Time of the Merger, as of
their respective dates, (i) each of the Bancorp Filings will be true and
complete in all material respects; and (ii) each of the Bancorp Filings will
comply in all material respects with all of the statutes, rules and regulations
enforced or promulgated by the governmental or regulatory authority with which
it will be filed and none will contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they will
be made, not misleading. Any financial statement contained in any of such
Bancorp Filings that is intended to present the financial position of the
entities or entity to which it relates will fairly present the financial
position of such entities or entity and will be prepared in accordance with GAAP
or applicable banking regulations consistently applied, except as stated
therein, during the periods involved;
(n) Maintain proper reserves for contingent liabilities in accordance
with GAAP; and
(o) Promptly notify CorpBank of the filing of any material litigation,
governmental or regulatory action, or similar proceeding or notice of any claims
against Bancorp or CUB or any of their assets;
(p) Registration Statement and Applications. Bancorp and CUB will use
commercially reasonable efforts to prepare and file or cause to be prepared and
filed: (i) with the SEC, the Registration Statement; (ii) with the Fed, an
application for approval of the Merger or related aspects thereof; (iii) with
the OCC, the required documents for approval of, and to effect, the change in
control of CorpBank and the Bank; and (iv) with the OCC, applications for
approval of the Bank Merger, except that Bancorp shall have no obligation to
file a new registration statement or a post-effective amendment to the
Registration Statement covering any reoffering of Bancorp Stock by CorpBank
Affiliates. Bancorp and CUB will cooperate with CorpBank in the preparation of
the Proxy Statement and covenant and agree that all information furnished by
Bancorp and CUB for inclusion in the Proxy Statement, all applications to
appropriate regulatory agencies for approval
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of or consent to the Merger , and all information furnished by Bancorp and CUB
to CorpBank pursuant to this Agreement, will comply in all material respects
with the provisions of applicable law, including the Securities Act and the
1934 Act and the rules and regulations of the SEC thereunder, and will not
contain any untrue statement of a material fact and will not omit to state any
material fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading;
(q) Blue Sky. Bancorp covenants and agrees to use its commercially
reasonable best efforts to have the shares of Bancorp Stock qualified or
registered for offering and sale under the securities or Blue Sky laws of each
jurisdiction in which shareholders of CorpBank reside.
(r) Action of Sole Shareholder. Prior to the Effective Time of the
Merger, Bancorp, as sole shareholder of CUB, will take all action necessary or
advisable for the consummation of the Merger by CUB and the carrying out by CUB
of the transactions contemplated hereby;
(s) Stock Exchange Listing. Bancorp will use its commercially
reasonable best efforts to have the shares of Bancorp Stock to be issued
pursuant to the Merger duly listed, subject to official notice of issuance, on
the Nasdaq Stock Exchange.
5.8 CorpBank Accountants. Promptly upon request of CUB, CorpBank will
request its independent accountants to permit CUB or its representatives to
review and examine the work papers relating to CorpBank and CorpBank's audited
financial statements for the years ended December 31, 1992 and 1993, 1994 and
permit such independent accountants to discuss with CUB any matter relating to
the audits of CorpBank. In addition, CorpBank will make available to CUB copies
of each management letter or other letter delivered to CorpBank, or any CorpBank
Subsidiary by Grant Thornton or by AA in connection with such financial
statements or relating to any review of the internal controls of CorpBank, or
any CorpBank Subsidiary since January 1, 1992, and has instructed each of them
to make available to CUB for inspection by CUB or its representatives all
reports and working papers produced or developed by in connection with their
examination of such financial statements, as well as all such reports and
working papers for any periods for which any tax of CorpBank, or CorpBank
Subsidiary has not been finally determined or barred by applicable statutes of
limitation.
5.9 Bancorp Accountants. Bancorp will make available to CorpBank copies of
each management letter or other letter delivered to Bancorp by Arthur Andersen &
Co. ("AA") in connection with such financial statements or relating to any
review by AA of the internal controls of Bancorp or CUB since January 1, 1994.
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5.10 Submission to Shareholders. Subject to satisfaction of applicable
federal and state securities laws, not later than December 15, 1995 (or such
earlier date as is reasonably possible), unless extended with the mutual written
consent of the parties, CorpBank shall hold a shareholder meeting for the
approval of its shareholders of the transactions contemplated herein and all
matters incident thereto. CorpBank hereby agrees that it shall unqualifiedly
recommend that its shareholders vote in favor of approval of the transactions
contemplated hereby.
5.11 Preparation of Registration Statement, Proxy Statement, Application for
Approval by Regulatory Authorities and Redemption Materials.
(a) CorpBank will cooperate with Bancorp in the preparation of a
registration statement (the "Registration Statement") to be filed with the SEC
under the Securities Act for the registration of the Bancorp Stock to be issued
in connection with the Merger, in connection with any listing application to be
filed with the Nasdaq Stock Exchange with respect to the Bancorp Stock, in the
preparation of a proxy statement to be filed with the SEC that will be used by
CorpBank to solicit proxies of its shareholders in connection with the approval
and adoption of the Agreement and the Agreement of Merger (the "Proxy
Statement") and in connection with any statements or applications to any
governmental body in connection with the transactions contemplated by this
Agreement. In connection therewith, CorpBank will furnish all financial or other
information, including accountant comfort letters relating thereto,
certificates, consents, and opinions of counsel concerning CorpBank and CorpBank
Subsidiaries reasonably deemed necessary by Bancorp for the filing or
preparation for filing of the Registration Statement and related matters.
(b) CorpBank will cooperate with Bancorp and provide such information
as may be necessary or advisable for Bancorp or CUB to make its applications
required for regulatory approvals and for any other consents or approvals or to
take any other action necessary or, in the reasonable judgment of Bancorp,
advisable to consummate the Merger and the Bank Merger.
(c) CorpBank covenants and agrees that all information furnished by
CorpBank or any CorpBank Subsidiary for inclusion in the Registration Statement,
the Proxy Statement, all applications to appropriate regulatory agencies for
approval of or consent to the Merger and the Bank Merger, and all information
furnished by CorpBank or any CorpBank Subsidiary to Bancorp or CUB pursuant to
this Agreement, will comply in all material respects with the provisions of
applicable law, including the Securities Act and the 1934 Act and the rules and
regulations of the SEC thereunder, and will not contain any untrue statement of
a material fact
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and will not omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
(d) Bancorp will cooperate with CorpBank in the preparation of a proxy
statement to be filed with the Superintendent and the FDIC that will be used by
CorpBank to solicit proxies of its shareholders in connection with the approval
and adoption of the Agreement and the Agreement of Merger (the "Proxy
Statement") and in connection with any statements or applications to any
governmental body in connection with the transactions contemplated by this
Agreement. In connection therewith, Bancorp will furnish all financial or other
information, including accountant comfort letters relating thereto,
certificates, consents, and opinions of counsel concerning Bancorp and CUB
reasonably deemed necessary by CorpBank for the filing or preparation for filing
of the Proxy Statement and related matters.
(e) Bancorp covenants and agrees that all information furnished by
Bancorp or CUB for inclusion in the Registration Statement, the Proxy Statement,
all applications to appropriate regulatory agencies for approval of or consent
to the Merger and the Bank Merger, and all information furnished by Bancorp or
CUB to CorpBank pursuant to this Agreement, will comply in all material respects
with the provisions of applicable law, including the Securities Act and the 1934
Act and the rules and regulations of the SEC thereunder, and will not contain
any untrue statement of a material fact and will not omit to state any material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
5.12 Termination of CorpBank Employee Stock Option Plans. CorpBank will take
all steps necessary to cause its stock option plans to be terminated as of or
prior to the Effective Time of the Merger, will grant no additional options
under said plans prior to the Effective Time of the Merger, and will cause any
options outstanding thereunder (irrespective of their exercise price and whether
or not then presently exercisable or fully vested) to be exercised prior to the
Calculation Date or canceled prior to the Calculation Date together with a
release of all claims against CorpBank or Surviving Association related to such
options.
5.13 Agreement of CorpBank Affiliates. CorpBank agrees to use its best
efforts to cause each person who is a CorpBank "affiliate" as defined pursuant
to Rule 145 promulgated by the SEC under the Securities Act ("CorpBank
Affiliate"), at least 30 days prior to the Effective Time of the Merger, to
enter into an Affiliate Agreement, in the form attached hereto as Exhibit E,
which provides that, among other things: (i) the CorpBank Stock owned by the
CorpBank affiliate may not be sold or
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transferred for a period of not less than 30 days prior to the Effective Time
of the Merger; (ii) the Bancorp Stock to be acquired by an CorpBank Affiliate
upon consummation of the Merger (such shares of Bancorp Stock being sometimes
referred to for purposes of this Section 5.13 as "Acquired Shares") will not be
acquired with a view to the sale or distribution thereof except as permitted by
Rule 145 promulgated by the SEC under the Securities Act ("Rule 145"); (iii)
the Acquired Shares will not be disposed of in such a manner as to violate the
Securities Act or the Affiliate Agreement and without Bancorp having first
received an opinion of counsel reasonably satisfactory to Bancorp to the
foregoing effect or other evidence of compliance with Rule 145 and the
Affiliate Agreement, in each case reasonably satisfactory to Bancorp; (iv) none
of the shares of CUB Common Stock received by the CorpBank Affiliate pursuant
to the Merger will be sold, transferred or otherwise disposed of and the
CorpBank Affiliate will not in any other way reduce their risk of ownership or
investment in any of the shares of CUB Common Stock so received until the later
of: (i) financial results covering a period of at least thirty (30) days of
combined operations of CUB and CorpBank following the Effective Time of the
Merger have been published by CUB (provided that the CorpBank Affiliate may
make bona fide gifts or distributions without consideration so long as the
recipients thereof agree not to sell, transfer or otherwise dispose of the CUB
Common Stock except as provided in the Affiliate Agreement);(v) the
certificates representing the Acquired Shares may bear a legend referring to
the foregoing restrictions on disposition, and Bancorp may issue to its
transfer agent appropriate stop transfer instructions with respect to the
Acquired Shares; and (vi) each CorpBank Affiliate will obtain an agreement, and
deliver a copy of such to Bancorp, from each transferee of Acquired Shares
which is substantially similar to an Affiliate Agreement, unless such
transferee may under the Securities Act dispose of the Acquired Shares
transferred to him without registration under the Securities Act.
Notwithstanding anything in this Section 5.13 to the contrary, in the event
that such affiliate is also a director of CorpBank, they shall enter into an
agreement in the form attached hereto as Exhibit E1, which shall provide, inter
alia, that such person will not sell or transfer the Bancorp Stock to be
acquired upon consummation of the Merger for a period of not less than six
months following the publication of financial information for a mimimum of 30
days of combined operation of CUB and CorpBank.
5.14 Bank Merger. At CUB's request, CorpBank and each CorpBank Subsidiary
shall take all necessary corporate and other action including publication
required under the Merger Statutes to approve and to permit the consummation of
the Bank Merger, on the Closing Date. CorpBank agrees that it will execute,
deliver and, when appropriate, file, and will cause each CorpBank Subsidiary to
execute, deliver and, when appropriate, file, any and all agreements,
applications and instruments necessary or desirable to permit the consummation
of the Merger on
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the Closing Date, including, but not limited to, agreements of merger relating
to the Merger, and will take, and will cause each CorpBank Subsidiary to take,
such other action as CUB may reasonably request to permit the consummation of
any transactions contemplated in connection with the Merger. CorpBank shall
not take any action or allow any CorpBank Subsidiary to take any action which
would prevent performance of agreements of merger or any transactions
contemplated in connection with the Merger.
5.15 Resignations. CorpBank shall obtain the resignations, to be effective
as of the Effective Time of the Merger, of the directors and officers of
CorpBank and the directors of all CorpBank Subsidiaries. Not less than ten (10)
days prior to the Closing, CUB shall provide CorpBank with a list of CorpBank
officers whose resignations will not be required.
5.16 Corporate Action. The parties shall each take or cause to be taken all
necessary corporate action required to carry out the transactions contemplated
in this Agreement and the Agreement of Merger.
5.17 Regulatory Approvals. Promptly following execution of this Agreement,
the parties hereto shall prepare, submit and file, or cause to be prepared,
submitted and filed, all applications for approvals and consents as may be
required of any of them, respectively, by applicable law and regulations with
respect to the transactions contemplated by this Agreement and by the Agreement
of Merger, including without limitation any and all applications required to be
filed with the OCC, the Fed and such other governmental or regulatory
authorities as Bancorp may reasonably believe necessary. Each party shall
cooperate with the others in the preparation of all of those applications and
will furnish promptly upon request all documents, information, financial
statements or other materials as may be required in order to complete said
applications. Each party hereto shall afford the others a reasonable opportunity
to review all such applications (except confidential portions thereof) and all
amendments and supplements thereto before filing.
5.18 Necessary Consents. In addition to the regulatory approvals referred to
in Section 5.17, the parties hereto shall each apply for and diligently seek to
obtain all other third party consents or approvals which may be necessary for
the consummation of the Merger, including, without limitation, the written
consent of any lessors of real and personal property which property cannot be
assigned without the written consent of the other such lessors.
5.19 Further Assurances. The parties agree that from time to time, whether
prior to, at or after the Effective Time of the Merger, they will execute and
deliver such
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further instruments of conveyance and transfer and take such other action as
may reasonably be expected to consummate the transactions contemplated hereby.
Bancorp, CUB, CorpBank and CorpBank Subsidiaries each agree to take such
further action as may reasonably be requested by any other party in order to
consummate the transactions contemplated by this Agreement and that are not
inconsistent with the other provisions hereof.
ARTICLE 6.
CONDITIONS PRECEDENT TO CONTEMPLATED TRANSACTIONS
6.1 General Conditions. The obligations of each of the parties hereto to
consummate the transactions contemplated herein are further subject to the
satisfaction, on or before the Closing Date, of the following conditions
precedent:
(a) Shareholder Approval. The transactions contemplated hereby shall
have received all requisite approvals of the shareholders of CorpBank, Bancorp,
and CUB.
(b) No Proceedings. No legal, administrative, arbitration,
investigatory or other proceeding by any governmental authority shall have been
instituted and, at what would otherwise have been the Effective Time of the
Merger, remain pending by or before a court or any governmental authority to
restrain or prohibit the transactions contemplated hereby.
(c) Regulatory Approvals. To the extent required by applicable law or
regulation, all approvals or consents of any governmental authority, including
without limitation, those of the OCC, Fed and Superintendent shall have been
obtained or made for the transactions contemplated hereby, and the applicable
waiting period under the BHCA and the Bank Merger Act shall have expired. All
other statutory or regulatory requirements for the valid completion of the
transactions contemplated hereby shall have been satisfied.
(d) Stock Exchange Listing. The shares of Bancorp Stock deliverable
pursuant to this Agreement shall have been duly authorized for listing, subject
to official notice of issuance, on the Nasdaq Stock Exchange.
(e) Registration Statement and Proxy Statement. The Registration
Statement shall have become effective under the Securities Act and copies of the
Proxy Statement shall have been mailed to every shareholder of record of
CorpBank on the record date not less than 20 days prior to the date of the
shareholders' meeting called to act upon the Merger.
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6.2 Conditions to Obligations of Bancorp and CUB. The obligations of
Bancorp and CUB to effect the transactions contemplated hereby shall be subject
to the following conditions, any of which may be waived in writing by Bancorp
and CUB:
(a) Representations and Warranties; Performance of Covenants. Each of
the representations and warranties of CorpBank and CorpBank Subsidiaries set
forth herein shall be true and correct as of the Effective Time of the Merger in
all material respects, as if made on such date; and CorpBank and CorpBank
Subsidiaries shall have performed in all material respects all of the covenants
to be performed by them on or prior to the Effective Time of the Merger.
(b) Opinion of Counsel for CorpBank. Bancorp and CUB shall have
received from Knecht & Hansen, counsel to CorpBank, an opinion dated the
Effective Time of the Merger in substantially the form attached hereto as
Exhibit F.
(c) Authorization of Merger. All action necessary to authorize the
execution, delivery and performance of this Agreement by CorpBank and the
CorpBank Subsidiaries and the consummation of the transactions contemplated
hereunder shall have been duly and validly taken by the Boards of Directors and
shareholders of CorpBank, and the CorpBank Subsidiaries including without
limitation approval by a vote of the holders of at least two thirds of the
outstanding shares of CorpBank Stock pursuant to the National Bank Act and the
California Corporations Code, and CorpBank shall have full power and right to
merge pursuant to the Agreement of Merger.
(d) Dissenters' Rights. Not more than 5% of the outstanding shares of
CorpBank Stock shall have been determined to be "dissenting shares" as defined
in the California Corporations Code, the National Banking Act and other
applicable law and regulation.
(e) Regulatory Approvals and Related Conditions. Any governmental and
regulatory approvals and consents referred to in Sections 6.1(c) and any other
section of this Agreement shall have been granted without the imposition of
conditions that are or would have become applicable to Bancorp, or the Surviving
Association and that Bancorp reasonably and in good faith concludes would
adversely affect the financial condition or operations of Bancorp, or the
Surviving Association, or otherwise would be burdensome.
(f) Third Party Consents. CorpBank shall have obtained all consents of
other parties to their material mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the transactions
contemplated herein to be consummated, without default, acceleration, breach or
loss of rights
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or benefits thereunder.
(g) Absence of Certain Changes. As of the Closing Date there shall not
exist any of the following: (i) any change(s) in the consolidated financial
condition, results of operation or prospects of CorpBank since June 30, 1995
which individually is or in the aggregate are materially adverse to CorpBank on
a consolidated basis; or (ii) any damage, destruction, loss or event materially
and adversely affecting the properties, business or prospects of CorpBank on a
consolidated basis.
(h) Termination of Stock Option Plans. CorpBank shall have caused its
stock option plans to be terminated as of the Calculation Date and shall have
obtained the consents or agreements specified in, and otherwise shall have
complied with the terms of, Section 5.12.
(i) Shareholders' Agreements. All directors of CorpBank and all
Shareholders specified in Section 1.9 shall have entered into agreements in
substantially the form attached hereto as Exhibit B concurrently with the
execution of this Agreement, and each of the persons executing such agreement
shall have performed in all material respects the obligations to be performed by
him under the agreement.
(j) Officers' Certificate. There shall have been delivered to Bancorp
on the Closing Date a certificate executed by the Chairman of the Board, Vice
Chairman of the Board, Chief Executive Officer and the Chief Financial Officer
of CorpBank certifying, to the best of their knowledge, compliance with all of
the provisions of Sections 6.2(a), (c), (d), (f), (g), (h) and (i).
(k) Validity of Transactions. The validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to Bancorp and CUB
hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for Bancorp and CUB.
(l) Accountants' Letters.
(i) Bancorp shall have received from AA, letters, dated the date
of mailing of the Proxy Statement and the Effective Time of the Merger, in form
and substance satisfactory to Bancorp: (i) confirming that they are independent
public accountants with respect to CorpBank and CorpBank Subsidiaries within the
meaning of the Securities Act and the published rules and regulations
thereunder; (ii) stating that, in their opinion, the audited consolidated
financial statements of CorpBank and CorpBank Subsidiaries, examined by them and
included or
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incorporated by reference in the Proxy Statement and Registration Statement and
reported therein by them, comply as to form in all material respects with the
applicable accounting requirements of the 1934 Act, the Securities Act and the
applicable published rules and regulations thereunder, as appropriate; (iii)
stating in effect that they have made a review of the unaudited consolidated
interim financial statements included or incorporated by reference in the proxy
statement or registration statement for periods subsequent to the most recent
audited consolidated financial statements included or incorporated by reference
in the Proxy Statement and the Registration Statement in accordance with
standards established by the American Institute of Certified Public Accountants
and nothing came to their attention that caused them to believe that such
unaudited consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the 1934 Act
and the Securities Act, as appropriate, or are not presented in conformity with
generally accepted accounting principles applied on a basis consistent in all
material respects with that of the most recent audited consolidated financial
statements included or incorporated by reference in the Proxy Statement and the
Registration Statement; (iv) stating in effect that, on the basis of certain
procedures and inquiries including a reading of the latest available unaudited
consolidated interim financial statements of CorpBank and CorpBank
Subsidiaries, inquiries of officials of CorpBank and CorpBank Subsidiaries
responsible for financial and accounting matters, and a reading of the minutes
of the meetings of the Boards of Directors and shareholders of CorpBank and
CorpBank Subsidiaries (which procedures and inquiries do not constitute an
examination made in accordance with generally accepted auditing standards and
would not necessarily reveal material adverse changes in the consolidated
financial position or results of operations of CorpBank and CorpBank
Subsidiaries ), nothing came to their attention that caused them to believe
that (A) the unaudited consolidated financial statements of CorpBank and the
CorpBank Subsidiaries incorporated by reference in the Proxy Statement and the
Registration Statement do not comply as to form in all material respects with
the applicable accounting requirements of the 1934 Act and the Securities Act,
as appropriate, or that the unaudited consolidated financial statements are not
in conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated financial
statements or that at a specified date not more than five days prior to the
date of mailing of the Proxy Statement or Effective Date of the Registration
Statement and the Effective Time of the Merger, as applicable, there has been
any material change in the capital stock, other equity securities or other
ownership interests of CorpBank or any of the CorpBank Subsidiaries , or any
increase in consolidated long-term debt of CorpBank or any of the CorpBank
Subsidiaries, or any reduction in consolidated shareholders' equity (excluding
unrealized gain or loss on marketable equity securities) or other ownership
interests as compared with the amounts of
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those items set out in the audited consolidated statement of condition at
December 31, 1994 and with any subsequent unaudited consolidated statement of
condition included or incorporated by reference in the Proxy Statement and
Registration Statement, except for changes and the amount of such reduction, if
any, which are described in such letter or are set forth in the Proxy Statement
and Registration Statement, or (B) since December 31, 1994 any dividends were
paid on the CorpBank Stock except as described in such letter; and (v) in
addition to the review referred to in clause (iii) above and the limited
procedures referred to in clause (iv) above, they have carried out certain
specified procedures, if any, not constituting an audit, with respect to
certain amounts or percentages and financial information which appear in the
Proxy Statement and Registration Statement and which have been reasonably
specified by Bancorp or CorpBank, as described in such letter.
(m) Covenants Not to Compete. Each director of CorpBank who is a
shareholder of CorpBank shall have entered into an "Agreement Not to Compete" in
substantially the form attached hereto as Exhibits G(1), and G(2)(Stanley
Pawlowski).
(n) Registration Statement. The Registration Statement shall have been
declared effective, no stop-order with respect to the Registration Statement
shall have been received by Bancorp and no proceeding for such purpose shall be
pending or threatened before the SEC.
(o) Blue Sky Qualification. The sale of the Bancorp Stock referred to
herein shall have been qualified or registered with the appropriate authorities
of all states in which qualification or registration is required under the state
securities or Blue Sky laws, and such qualifications or registrations shall not
have been suspended or revoked.
(p) Rule 145 Affiliate Agreements. CorpBank shall have delivered to
Bancorp not later than 30 days prior to the Effective Date, all of the executed
Affiliate Agreements specified in Section 5.13.
(q) Resignations. CorpBank shall have delivered the resignations
required by Section 5.15.
(r) Regulatory Approvals for Bank Merger. All approvals or consents of
any governmental authority shall have been obtained or made for the Bank Merger
and all applicable waiting periods shall have expired. All other statutory or
regulatory requirements for the valid completion of the Bank Merger shall have
been satisfied.
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(s) General Releases. The general releases and dismissals of litigation
set forth in Section 5.6 (u) shall have been received and are acceptable to CUB.
(t) Pawlowski. Stanley Pawlowski shall agree that at the Closing he
will become an employee of CUB, on terms and conditions to be agreed upon by CUB
and Pawlowski. He will further agree that in the event CUB or Bancorp offers him
a position as a director of either or both companies, he will accept such
appointment.
6.3 Conditions to Obligations of CorpBank. The obligations of CorpBank to
effect the transactions contemplated hereunder shall be subject to the following
conditions, any of which may be waived in writing by CorpBank:
(a) Representations and Warranties; Performance of Covenants. Each of
the representations and warranties of Bancorp and CUB set forth herein shall be
true and correct as of the Effective Time of the Merger in all material
respects, as if made on such date; and Bancorp and CUB shall have performed in
all material respects all of the covenants to be performed by them on or prior
to the Effective Time of the Merger.
(b) Authorization of Merger. All actions necessary to authorize the
execution, delivery and performance of this Agreement by Bancorp and CUB and the
consummation of the transactions contemplated hereby shall have been duly and
validly taken by the Board of Directors of each of Bancorp and CUB, and CUB
shall have full power and right to merge pursuant to the Agreement of Merger.
(c) Officers' Certificate. There shall have been delivered to CorpBank
on the Closing Date a certificate executed by the Chief Executive Officer and
the Chief Financial Officer of each of Bancorp and CUB certifying, to the best
of their knowledge, compliance with all of the provisions of Sections 6.3(a) and
(c).
(d) Third Party Consents. Bancorp and CorpBank shall have obtained all
consents of other parties to their material mortgages, notes, leases,
franchises, agreements, licenses and permits as may be necessary to permit the
transactions contemplated herein to be consummated, without default,
acceleration, breach or loss of rights or benefits thereunder.
(e) Absence of Certain Changes. As of the Closing Date there shall not
exist any of the following: (i) any change(s) in the consolidated financial
condition, results of operation or prospects of Bancorp since December 31, 1994
which individually is or in the aggregate are materially adverse to Bancorp on a
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consolidated basis; or (ii) any damage, destruction, loss or event materially
and adversely affecting the properties, business or prospects of Bancorp on a
consolidated basis.
(f) Fairness Opinion. Within ten (10) days of the execution of this
Agreement, CorpBank shall have received a letter from The Findley Group or such
other party as may be acceptable to the parties, substantially in the form
attached hereto as Schedule 6.3(f), to the effect that the transactions
contemplated by this Agreement are fair from a financial point of view to the
shareholders of CorpBank.
(g) Validity of Transactions. The validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to CorpBank
hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for CorpBank.
ARTICLE 7.
EMPLOYEE BENEFITS PLANS
7.1 Termination of CorpBank Employee Benefit Plans. Prior to the Effective
Time of the Merger, CorpBank will take, and will cause all CorpBank Subsidiaries
to take, all actions necessary to terminate their respective employee benefit
plans and pension plans as of the Effective Time of the Merger. Contributions
under the employee benefit plans and pension plans will be made at the rate
provided in those respective plans through the Effective Time of the Merger.
Except for amendments that are required by the Tax Reform Act of 1986 and later
legislation, no amendments to the employee benefit plans and pension plans shall
be made which increase the obligations of employers under any of the plans.
Distributions from the plans will be made to the participants as soon as
practicable after the termination of the plans in accordance with requirements
of ERISA and the Code.
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ARTICLE 8.
TERMINATION
8.1 Termination of this Agreement.
(a) This Agreement may be terminated:
(i) By mutual agreement of the parties, in writing;
(ii) By (A) Bancorp immediately upon the expiration of 30 days
from the date that Bancorp has given notice to CorpBank of a material breach or
default by CorpBank or any CorpBank Subsidiary in the performance of any
covenant, agreement, representation, warranty, duty or obligation hereunder or
(B) CorpBank immediately upon the expiration of 30 days from the date that
CorpBank has given notice to Bancorp of a material breach or default by Bancorp
or CUB in the performance of any covenant, agreement, representation, warranty,
duty or obligation hereunder; provided, however, that no such termination shall
be effective if, within such 30-day period, the breaching or defaulting party
shall have substantially corrected and cured the grounds for the termination as
set forth in said notice of termination.
(iii) By Bancorp or CUB if any governmental or regulatory
authority denies or refuses to grant the approvals, consents or authorizations
required to be obtained in order to consummate the transactions covered and
contemplated by this Agreement, or if any such approval contains conditions
which, in the reasonable opinion of Bancorp or CUB, are materially burdensome to
its ongoing operations.
(iv) By CorpBank if any governmental or regulatory authority
denies or refuses to grant the approvals, consents or authorizations required to
be obtained in order to consummate the transactions covered and contemplated by
this Agreement other than the Merger.
(v) By Bancorp or CUB at any time prior to the Effective Time of
the Merger, if (A) the Board of Directors of CorpBank approves a transaction (or
CorpBank executes a letter of intent or other document) pursuant to which any
person or entity or related group of persons or entities acquires, directly or
indirectly, record or beneficial ownership (as defined in Rule 13d-3 promulgated
by the SEC pursuant to the 1934 Act) or control of 5% or more of the outstanding
shares of CorpBank Stock; (B) any person or entity or related group of persons
or entities seeks to acquire 5% or more of the outstanding shares of CorpBank
Stock by tender offer
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or otherwise, and the Board of Directors of CorpBank does not advise CorpBank's
shareholders that the Board does not support such tender offer or acquisition
and that it does support the Merger; (C) if CorpBank violates its covenant
pursuant to Section 5.7(j); or (D) the Merger does not receive the requisite
approval of CorpBank shareholders.
(vi) By CUB in the event of any change)s) in the financial
condition, results of operation, business, property, assets (including loan
portfolios), prospects, operations, liquidity, income or condition (financial or
otherwise) or prospects of CorpBank since December 31, 1994 (except those events
related to the Audit Group Report dated June 12, 1995) which individually or in
the aggregate are materially adverse to CorpBank or any damage, destruction,
loss, or event materially and adversely affecting the properties, business or
prospects of CorpBank (a "material adverse change"). For purposes of this
section, only, and with regard only to matters the effect of which can be
reasonably quantified, an event, occurrence, or circumstances shall be deemed to
have occurred if the average Core Deposits for the three month period prior to
the end of the month just prior to the Closing, do not equal or exceed 85% of
the Core Deposits of CorpBank at December 31, 1994. For purposes of this
provision, Core Deposits shall include non interest bearing demand deposit
accounts, interest bearing demand deposit accounts, savings accounts and money
market accounts, but shall not include Certificate of Deposits. Additionally,
for purposes of this provision, CUB shall perform a review of CorpBank's loan
portfolio prior to Closing to determine if a material adverse change has
occurred in CorpBank's loan portfolio. A material adverse change will have
occurred if the reserves which need to be allocated in CUB's opinion and
pursuant to its loan grading and allowance for loan and lease losses policy,
uniformly applied, exceed CorpBank's allowance for loan and lease losses by
approximately 15%. CUB shall also conduct a legal audit prior to Closing to
determine if any legal matters or events constitute a material adverse change. A
material adverse change will also be deemed to have occurred if there is a 10%
negative change in any two or more of the factors affecting the business and
prospects of CorpBank, including but not limited to Core Deposits, allowance for
loan and lease losses or legal exposure.
(vii) By CorpBank in the event of any change(s) in the
consolidated financial condition, results of operation, business, property,
assets (including loan portfolios), prospects, operations, liquidity, income or
condition (financial or otherwise) or prospects of CUB since December 31, 1994,
which individually or in the aggregate are materially adverse to CUB or any
damage, destruction, loss, or event materially and adversely affecting the
properties, business or prospects of CUB on a consolidated basis (a "material
adverse change").
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(viii) By CorpBank or CUB if either reasonably disapproves the
determinations of AA with regard to CorpBank shareholders' equity, net income
(loss), and the net after tax effect of any sale or distribution of the Bond
Claim, providing that the terminating party shall be required to set forth the
reasons for such disapproval in writing.
(b) This Agreement shall be terminated if any conditions specified in
Article VI have not been satisfied or waived in writing by the party authorized
to waive such conditions by February 28, 1996 unless mutually extended by the
parties hereto.
(c) This Agreement may be terminated by Bancorp or CUB if Schedules
provided by CorpBank disclose material contracts, liabilities or potential
liabilities not previously disclosed orally or in writing by CorpBank to CUB or
fail to disclose material contracts, liabilities or potential liabilities which
come to CUB's attention in any other manner.
8.2 Effect of Termination; Survival. No termination of this Agreement under
this Article VIII for any reason or in any manner shall release, or be construed
as so releasing, any party hereto from its obligations pursuant to Sections 5.1,
9.1 or 9.2 hereof or from any liability or damage to any other party hereto
arising out of, in connection with or otherwise relating to, directly or
indirectly, said party's material breach, default or failure in performance of
any of its covenants, agreements, duties or obligations arising hereunder, or
any breaches of any representation or warranty contained herein arising prior to
the date of termination of this Agreement.
ARTICLE 9.
GENERAL PROVISIONS
9.1 Indemnification.
(a) CorpBank agrees to defend, indemnify and hold harmless Bancorp and
CUB, their officers and directors, their attorneys, and each person who controls
Bancorp within the meaning of the Securities Act from and against any costs,
damages, liability and expenses of any nature, insofar as such costs, damages,
liabilities and expenses arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Proxy Statement
or in the Registration Statement or any amendments or supplements thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that CorpBank shall be
liable in any
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such case only to the extent that any such cost, damage, liability or expense
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in said Proxy Statement or Registration
Statement or amendments or supplements thereto, in reliance upon and in
conformity with information with respect to CorpBank or CorpBank Subsidiaries
furnished to Bancorp by or on behalf of CorpBank specifically for use therein.
(b) Bancorp and CUB agree to defend, indemnify and hold harmless
CorpBank, its officers and directors, its attorneys, accountants and each person
who controls CorpBank within the meaning of the Securities Act from and against
any costs, damages, liabilities and expenses of any nature, insofar as any such
costs, damages, liabilities or expenses arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Proxy Statement or in the Registration Statement or any amendments or
supplements thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make statements therein not misleading; provided, however, that
neither Bancorp nor Bank will be liable in any such case to the extent that any
such cost, damage, liability or expense arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in said Proxy Statement or Registration Statement, or amendments or
supplements thereto, in reliance upon and in conformity with information with
respect to CorpBank or CorpBank Subsidiaries furnished to Bancorp by or on
behalf of CorpBank specifically for use therein.
9.2 Expenses. Each party hereto shall pay its own costs and expenses,
including, but not limited to, those of its attorneys and accountants, in
connection with this Agreement and the transactions covered and contemplated
hereunder.
9.3 Notices. All notices, demands or other communications hereunder shall
be in writing or by telex or facsimile transmission and shall be deemed to have
been duly given on the date of service if delivered (i) in person or by telex or
facsimile transmission (provided that telexed or telecopied notices are also
mailed by first class, certified or registered mail, postage prepaid); or (ii)
72 hours after mailing by United States mail, first-class, certified or
registered, with return receipt requested and postage prepaid, and properly
addressed as follows:
(a) If to CorpBank:
Corporate Bank
2740 North Grand Avenue
Santa Ana, California 94105
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Attention:
Allan Stokke, Chairman
Stanley Pawlowski, Vice Chairman
With copies to:
Richard Knecht, Esq.
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
fax: (714) 851 1732
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(b) If to Bancorp and CUB:
CU Bancorp and California United Bank, National Association
16030 Ventura Boulevard
Encino, California 90071
Attention: Stephen G. Carpenter.
Chief Executive Officer
Telecopier Number (818) 907-5024
With copies to:
Anita Y. Wolman, Esq.
General Counsel
California United Bank, N.A.
16030 Ventura Boulevard
Encino, California 91436
Telecopier No. (818) 907-5024
The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
Section 9.3.
9.4 Successors and Assigns. All terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective transferees, successors and assigns; provided, however, that, except
as otherwise contemplated herein, this Agreement and all rights, privileges,
duties and obligations of the parties hereto may not be assigned or delegated by
any party hereto without the prior written consent of the other parties to this
Agreement and any purported assignment in violation of this Section 9.4 shall be
null and void.
9.5 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit, or create any right or cause of action in or on
behalf of, any person other than the parties hereto. As used in this Agreement,
the term "party" or "parties" shall refer only to Bancorp, CUB, CorpBank,
CorpBank Subsidiaries, the Surviving Association or any of them.
9.6 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
9.7 Governing Law. This Agreement is made and entered into in the State of
California and, except to the extent that the provisions of the National Banking
Act
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are mandatorily applicable, the laws of the State of California shall govern
the validity and interpretation hereof and the performance of the parties
hereto of their respective duties and obligations hereunder. The parties
hereto agree to venue in the city of Los Angeles, State of California.
9.8 Captions. The captions contained in this Agreement are for convenience
of reference only and do not form a part of this Agreement.
9.9 Waiver and Modification. No waiver of any term, provision or condition
of this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such term, provision or condition of this Agreement. This Agreement and
the Agreement of Merger, when executed and delivered, may be modified or amended
by action of the Boards of Directors of Bancorp, CUB, CorpBank or CorpBank
Subsidiaries without action by their respective shareholders. This Agreement may
be modified or amended only by an instrument of equal formality signed by the
parties or their duly authorized agents.
9.10 Attorneys' Fees. In the event any of the parties to this Agreement
brings an action or suit against any other party by reason of any breach of any
covenant, agreement, representation, warranty or other provision hereof, or any
breach of any duty or obligation created hereunder by such other party, the
prevailing party, as determined by the court or other body having jurisdiction,
shall be entitled to have and recover of and from the losing party, as
determined by the court or other body having jurisdiction, all reasonable costs
and expenses incurred or sustained by such prevailing party in connection with
such suit or action, including, without limitation, legal fees and court costs
(whether or not taxable as such).
9.11 Jury Waiver. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY MATTER
ARISING OUT OF THIS AGREEMENT OR RELATED TO THIS AGREEMENT OR IN CONNECTION WITH
ANY TRANSACTION OR MATTER CONTEMPLATED IN THIS AGREEMENT.
9.12 Entire Agreement. The making, execution and delivery of this Agreement
by the parties hereto have not been induced by any representations, statements,
warranties or agreements other than those herein expressed. This Agreement
embodies the entire understanding of the parties and there are no further or
other agreements or understandings, written or oral, in effect between the
parties relating to the subject matter hereof, unless expressly referred to by
reference herein.
9.13 Severability. Whenever possible, each provision of this Agreement and
every related document shall be interpreted in such manner as to be valid under
applicable law. However, if any provision of any of the foregoing shall be
invalid
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or prohibited under said applicable law, it shall be construed, interpreted and
limited to effectuate its purpose to the maximum legally permissible extent.
If it cannot be so construed and interpreted so as to be valid under such law,
such provision shall be ineffective to the extent of such invalidity or
prohibition without invalidating the remainder of such provision or the
remaining provisions of this Agreement, and this Agreement shall be construed
to the maximum extent possible to carry out its terms without such invalid or
unenforceable provision or portion thereof.
9.14 Effect of Disclosure. Any list, statement, document, writing or other
information set forth in, referenced to or attached to any Schedule or Exhibit
delivered pursuant to any provision of this Agreement shall be deemed to
constitute disclosure for purposes of any other Schedule or Exhibit required to
be delivered pursuant to any other provision of this Agreement.
9.15 Publicity. The parties hereto agree that they will coordinate on any
publicity concerning this Agreement, and the transactions contemplated hereby.
Except as may be required by law, no party shall issue any press release,
publicity statement or other public notice relating in any way to this Agreement
or any of the transactions contemplated hereby without obtaining the prior
consent of the others, which consent shall not be unreasonably withheld.
9.16 Knowledge. Whenever any statement herein or in any schedule, exhibit,
certificate or other documents delivered to any party pursuant to this Agreement
is made "to the knowledge" or "to the best knowledge" of any party or other
person, such party or other person shall make such statement only after
conducting an investigation reasonable under the circumstances of the subject
matter thereof, and each such statement shall constitute a representation that
such investigation has been conducted.
9.17 Schedules. Notwithstanding anything to the contrary herein, Schedules
to this Reorganization Agreement may be submitted not more than ten (10)
business days following execution of this Reorganization Agreement. If a party
does not object to any Schedule within 3 business days of receipt thereof, it
shall be deemed acceptable.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
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Bancorp: CU BANCORP
By:
--------------------------------
Name: STEPHEN G. CARPENTER
Title: PRESIDENT
By:
--------------------------------
Name: PATRICK HARTMAN
Title: CHIEF FINANCIAL OFFICER
CUB: CALIFORNIA UNITED BANK, NATIONAL
ASSOCIATION
By:
--------------------------------
Name: STEPHEN G. CARPENTER
Title: CHIEF EXECUTIVE OFFICER
By:
--------------------------------
Name: DAVID I. RAINER
Title: PRESIDENT
CorpBank: CORPORATE BANK
By:
--------------------------------
Name: C. ELLIS PORTER
Title: PRESIDENT
By:
--------------------------------
Name: JAMES HANSEN
Title: VICE PRESIDENT
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<PAGE> 222
EXHIBIT A
AGREEMENT TO MERGE
BETWEEN
CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION
AND
CORPORATE BANK
UNDER THE CHARTER OF
CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION
UNDER THE TITLE OF
CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION
THIS AGREEMENT TO MERGE ("Agreement") dated as of __________, 1995 by
and between CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION ("CUBNA"), a national
banking association organized under the laws of the United States, with its
principal executive office located in Encino, California, with a capital stock
of $__________________ divided into ______________ shares of common stock, each
of $5.00 par value ("CUBNA Common"), capital surplus of approximately $________
million and undivided profits, including capital reserves, of approximately
$________ million, as of September 30, 1995, and CORPORATE BANK ("CorpBank") a
California state chartered banking corporation with its principal executive
office located in Santa Ana, California, with a capital stock of $_________,
divided into _____________ shares of common stock, each of $_____ par value
("CorpBank Common"), surplus of approximately $________ and undivided profits,
including capital reserves, of approximately $________ million, as of September
30, 1995, each acting pursuant to the Amended and Restated Agreement and Plan
of Reorganization, dated as of October 11, 1995, by and between CU Bancorp
("CUB") CUBNA and CorpBank ("Agreement and Plan of Reorganization"), and
pursuant to a resolution of its board of directors, adopted by the vote of a
majority of its directors, pursuant to the authority given by and in accordance
with the provisions of the Act of November 7, 1918, as amended (12 USC Section
215a), witnesseth as follows:
WHEREAS, CUB, a California corporation and the owner of 100% of the
outstanding shares of CUBNA has entered into an Agreement and Plan of
Reorganization through which it will acquire the outstanding shares of CorpBank
through a merger of CUBNA and CorpBank, in which the holders of the outstanding
shares of CorpBank will receive a combination of cash and outstanding shares of
CUB; and
WHEREAS, this Agreement of Merger is conditioned upon the closing of the
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<PAGE> 223
Agreement and Plan of Reorganization and it is the intent of the parties that
CorpBank be merged into CUBNA on the same day as the Closing as defined in the
Agreement and Plan of Reorganization; and
WHEREAS, the transactions set forth in the Agreement and Plan of Reorganization
and the Agreement to Merge are to be accounted for by CUB using the purchase
accounting method.
NOW THEREFORE, For and in consideration of the execution of the Agreement and
Plan of Reorganization, the premises and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties do
hereby enter into this Agreement to Merge and prescribe the terms and
conditions of the merger of CorpBank into CUBNA and the method of effecting the
merger.
SECTION 1.
CorpBank shall be merged with and into CUBNA ("Merger") under the charter of
CUBNA.
SECTION 2.
The name of the receiving association ("Receiving Bank") shall be California
United Bank, National Association.
2
<PAGE> 224
SECTION 3.
The business of the Receiving Bank shall be that of a national banking
association. This business shall be conducted by the Receiving Bank at its
principal executive office, which shall be located at 16030 Ventura Boulevard,
Encino, California 91436, and at its legally established branches and offices.
SECTION 4.
The amount of capital stock of the Receiving Bank shall be $________, divided
into ________ shares of common stock, each of $5.00 par value, and at the time
the Merger shall become effective as specified in the approval to be issued by
the United States Comptroller of the Currency ("Closing Date"), the Receiving
Bank shall have a surplus of approximately $________ million, and undivided
profits, including capital reserves, which when combined with the capital and
surplus will be equal to the combined capital structures of CorpBank and CUBNA
as stated in the preamble of this Agreement, adjusted, however, for normal
earnings and expenses, any adjustments required by transactions contemplated in
the Agreement and Plan of Reorganization, any distributions by CUBNA or
CorpBank, and purchase accounting adjustments between June 30, 1995 and the
Closing Date.
SECTION 5.
The Receiving Bank shall possess all of the rights, privileges, immunities and
franchises, of a public as well as of a private nature, of each of CorpBank and
CUBNA; and all property, real, personal and mixed, and all debts due on
whatever account, and all other choses in action, and all and every other
interest, of or belonging to or due to each of CorpBank and CUBNA, shall be
deemed to be vested in the Receiving Bank without further act or deed,
including appointments, designations and nominations and all other rights and
interests in any fiduciary capacity; and the title to any real estate or any
interest therein, vested in either of CorpBank or CUBNA shall not revert or be
in any way impaired by reason of the Merger. The Receiving Bank shall
thenceforth be liable for all the liabilities, obligations and penalties of
each of CorpBank and CUBNA.
SECTION 6.
The existing holder of CUBNA Common shall retain its present rights. All of
the issued and outstanding shares of CorpBank Common shall be converted as of
the Closing Date into the right to receive from CUB ____________ shares of CUB
Common Stock, without par value ("CUB Common") and cash in the amount of
$_______________; provided, however, that no fractional shares of CUB Common
shall be issued and
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<PAGE> 225
CUB shall pay or cause to be paid cash in lieu of fractional shares of CUB
Common. The cash payment as to a fractional share of CUB Common which would
otherwise be issuable pursuant to this Section 6 shall equal the product of (i)
the fraction of a share of CUB Common which would have been so issuable
multiplied by (ii) $8.00.
SECTION 7.
Between the date of this Agreement and the Closing Date, CorpBank shall not
issue, sell, redeem or acquire for value, or agree to do so, any debt
securities or any shares of the capital stock or other ownership interests, or
securities convertible into, or options, rights or warrants exercisable for,
such shares or interests of CorpBank, or declare, issue or pay any dividend or
other distribution of assets, whether consisting of money, other personal
property, real property or other things of value, to CorpBank's shareholders,
or split, combine or reclassify any shares of CorpBank Common, or any other
equity security of CorpBank, or otherwise engage in any acts which are
inconsistent with CorpBank's obligations with respect to its conduct as
provided in the Agreement and Plan of Reorganization.
SECTION 8.
The directors of the Receiving Bank shall be the directors of CUBNA in office
immediately prior to the Merger becoming effective, who shall hold office until
the next annual meeting of its stockholders or until such time as their
successors are elected and qualified.
SECTION 9.
Effective as of the Closing Date, the Articles of Association attached hereto
as Exhibit A shall be the Articles of Association of the Receiving Bank.
SECTION 10.
It is a condition to the closing and consummation of this Agreement to Merge
that the Agreement and Plan of Reorganization shall close, according to its
terms on the same day as the effective time of the merger described in this
Agreement to merge.
SECTION 11.
This Agreement shall be terminated by any termination of the Agreement and Plan
of Reorganization or may be terminated by mutual agreement of the parties.
4
<PAGE> 226
SECTION 12.
This Agreement shall be ratified and confirmed by the affirmative vote of the
holders of at least two-thirds of the capital stock outstanding of each of
CorpBank and CUBNA at meetings of each to be held on the call of the directors
or otherwise in accordance with law, and the Merger shall become effective on
the Closing Date.
WITNESS, the signature and seal of California United Bank, National
Association this ____ day of ________, 1995, set by its President and attested
to by its Secretary, pursuant to a resolution of its Board of Directors, acting
by a majority, and witness the signature of a majority of its Board of
Directors:
California United Bank, National Association
By: _______________________________________
David I. Rainer, President
Attest:
___________________________________________
Anita Y. Wolman Esq., Assistant Secretary
(Seal)
____________________________
____________________________
____________________________
____________________________
____________________________
5
<PAGE> 227
____________________________
____________________________
____________________________
____________________________
____________________________
Directors of CUBNA
6
<PAGE> 228
WITNESS, the signature and seal of Corporate Bank, a California Banking
Corporation, this ____ day of ________, 1995, set by its President and
attested to by its Secretary, pursuant to a resolution of its Board of
Directors, acting by a majority, and witness the signature of a majority of its
Board of Directors:
Corporate Bank
By:________________
Attest: President
__________________________
Secretary
(Seal)
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
7
<PAGE> 229
Directors of CorpBank
8
<PAGE> 230
STATE OF CALIFORNIA )
) SS:
COUNTY OF Los Angeles )
On this ____ day of ________, 1995, before me, a notary public for this
state and county, personally came David I. Rainer, as President, and Anita Y.
Wolman as Assistant Secretary, of California United Bank, National Association,
and each in his or her capacity acknowledged this instrument to be the act and
deed of California United Bank, National Association and the seal affixed to it
to be its seal; and also came
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
being a majority of the Board of Directors of California United Bank, National
Association, and each of them acknowledged this instrument to be the act and
deed of California United Bank, National Association and of himself as a
director.
WITNESS my official seal and signature this day and year.
__________________________________
(Seal of Notary) Notary Public, Los Angeles County
My commission expires ____________
9
<PAGE> 231
STATE OF CALIFORNIA )
) SS.
COUNTY OF Los Angeles )
On this ____ day of ______, 1995, before me, a notary public for this
state and county, personally came Ellis Porter, as President, and
______________, as Secretary, of Corporate Bank, and each in his capacity
acknowledged this instrument to be the act and deed of Corporate Bank and the
seal affixed to it to be its seal; and also came
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
being a majority of the Board of Directors of Corporate Bank, and each of them
acknowledged this instrument to be the act and deed of Corporate Bank and of
himself or herself as a director.
WITNESS my official seal and signature this day and year.
____________________________________
(Seal of Notary) Notary Public, Orange County
My commission expires ______________
10
<PAGE> 232
EXHIBIT B-1
STOCKHOLDERS' AGREEMENT
(Directors)
This Stockholders' Agreement ("Agreement") is made and entered
into this ____ day of _____________, 1995, by and between CU Bancorp ("CUB")
and each of the other persons executing this Agreement (each such person is
referred to individually as a "CorpBank Stockholder" and collectively referred
to as the "CorpBank Stockholders"), with reference to the following facts:
A. CUB, California United Bank National Association
("CUBNA"), and Corporate Bank ("CorpBank") have entered into that certain
Amended and Restated Agreement and Plan of Reorganization ("Reorganization
Agreement"), dated as of October 11, 1995, pursuant to which CUBNA will merge
with CorpBank (the "Merger") and will pay consideration to CorpBank
shareholders in the form of CUB Common Stock and cash.
B. Each of the CorpBank Stockholders is also a director
of CorpBank.
C. In order to induce CUB to enter into the
Reorganization Agreement, the CorpBank Stockholders (comprising the entire
Board of Directors of CorpBank who own CorpBank stock) desire to enter into
this Agreement solely in their capacity as Stockholders.
NOW, THEREFORE, in consideration of the promises and of the
respective representations, warranties and covenants, agreements and conditions
contained herein and in the Reorganization Agreement, the parties hereto agree
as follows:
1. Agreements of CorpBank Stockholders.
1.1 Agreement to Vote. At any meeting of shareholders of
CorpBank or in connection with any solicitation of the written consent of
shareholders of CorpBank to approve the Reorganization Agreement and the
transactions contemplated thereby, each of the CorpBank Stockholders shall vote
or cause to be voted all shares of common stock of CorpBank ("CorpBank Stock")
owned by each such CorpBank Stockholder, and any other shares of CorpBank Stock
hereafter acquired
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<PAGE> 233
by each such CorpBank Stockholder, in favor of, and to approve, the principal
terms of the Merger and any other matter contemplated by the Reorganization
Agreement which requires the approval of the shareholders of CorpBank.
1.2 Agreement to Recommend. Each CorpBank Stockholder shall
recommend to the shareholders of CorpBank to vote in favor of, and to approve,
the principal terms of the Merger and any other matter contemplated by the
Reorganization Agreement.
1.3 Restrictions on Dispositions. Each CorpBank Stockholder agrees
that he will not pledge or otherwise encumber, nor sell, assign or otherwise
dispose of, any shares of CorpBank Stock currently owned or acquired by such
CorpBank Stockholder after the date of this Agreement, except (i) with the
prior written consent of CUB (which shall not be unreasonably withheld); (ii)
pursuant to the Merger; or (iii) by a bona fide pledge to secure a loan made on
a full-recourse basis.
1.4 Cooperation. Each CorpBank Stockholder agrees to cooperate
fully with CUB in connection with the Acquisition. Each CorpBank Stockholder
agrees that he will not directly or indirectly, solicit any inquiries or
proposals from, or enter into, or continue any discussions, negotiations or
agreements relating to, or vote in favor of any proposal or transaction for
disposition of the business or assets of CorpBank or any subsidiary thereof, or
the acquisition of CorpBank's voting securities or any business combination
with any person other than CUB or any wholly-owned subsidiary of CUB.
2. Representations and Warranties of CorpBank Stockholders.
Each of the CorpBank Stockholders represents and warrants to and
agrees with CUB as follows:
2.1 Capacity. Each such CorpBank Stockholder has all the
requisite capacity and authority to enter into and perform such CorpBank
Stockholder's obligations under this Agreement.
2.2 Binding Agreement. This Agreement constitutes the valid and
legally binding obligation of each such CorpBank Stockholder.
2.3 Non-Contravention. The execution and delivery of this
Agreement by each such CorpBank Stockholder does not, and the performance by
such CorpBank Stockholder of such CorpBank Stockholder's obligations hereunder
and
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<PAGE> 234
the consummation by such CorpBank Stockholder of the transactions contemplated
hereby will not, violate or conflict with or constitute a default under any
agreement, instrument, contract or other obligation or any order, arbitration
award, judgment or decree to which such CorpBank Stockholder is a party or by
which such CorpBank Stockholder is bound, or any statute, rule or regulation to
which such CorpBank Stockholder or any of such CorpBank Stockholder's property
is subject.
2.4 Ownership of Shares. Schedule 1 hereto correctly sets forth
the number of shares of CorpBank Stock owned by each CorpBank Stockholder, or
with respect to which each CorpBank Stockholder has voting power or beneficial
ownership, as of the date indicated on such Schedule. Each CorpBank
Stockholder has good title to all of the shares of CorpBank Stock indicated as
owned by such CorpBank Stockholder in the capacity set forth on Schedule 1 as
of the date indicated on such Schedule 1, and such shares of CorpBank Stock are
so owned free and clear of any liens, security interest, charges or other
encumbrances, except as set forth in such Schedule 1.
2.5 Litigation and Other Matters. Each CorpBank Stockholder,
as an individual and on behalf of his affiliates (which do not include other
CorpBank Stockholders), represents and warrants that there is no private or
governmental suit, claim, action, arbitration or proceeding pending, nor any
private or governmental suit, claim, action, arbitration or proceeding to each
CorpBank Stockholder's knowledge pending, nor does each CorpBank Stockholder as
an individual know of any facts or circumstances which would form a basis for
any such suit, claim, action, arbitration or proceeding against CorpBank or
against of its respective directors, officers or employees relating to the
performance of their duties in such capacities or against or affecting any
properties of CorpBank, which is not disclosed in a Schedule to the
Reorganization Agreement. Each CorpBank Stockholder, as an individual and on
behalf of his affiliates, shall inform CUB in writing within 3 days of
discovery of such a legal proceeding prior to the Closing.
Each CorpBank Stockholder, as an individual represents and warrants
that nothing has come to his attention to cause him to believe that the
representations and warranties by CorpBank in the Reorganization Agreement are
inaccurate in any material manner or omit to set forth a material fact.
3. Termination.
3.1 Termination Date. Except as set forth in Section 3.2 below,
this Agreement shall terminate and be of no further force and effect
immediately upon the earlier of: (a) consummation of the Merger or (b)
termination of the
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<PAGE> 235
Reorganization Agreement in accordance with the terms thereof.
3.2 Termination of Representations and Warranties.
Notwithstanding the above, each CorpBank Stockholder agrees and recognizes that
in the representation and warranties set forth in section 2.5 herein shall
survive the termination of this Agreement and shall be effective until one year
after the Closing Date as defined in the Reorganization Agreement.
4. Specific Performance. The parties hereto recognize and agree that
monetary damages will not compensate adequately the parties hereto for
nonperformance. Accordingly, each party agrees that his obligations shall be
enforceable by court order requiring specific performance.
5. Miscellaneous.
5.1 Expenses. Each party hereto shall pay its own costs and
expenses, including, but not limited to, those of its attorneys and
accountants, in connection with this Agreement and transactions covered and
contemplated hereby.
5.2 Notices. All notices, demands or other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered in person, by telex, telecopy, facsimile transmission, or by United
States mail, certified or registered, with return receipt requested, or
otherwise actually delivered, as follows:
(a) If to an CorpBank Stockholder:
Attention:
With a copy to:
____________________
____________________
____________________
____________________
(b) If to CUB:
Stephen G. Carpenter.
Chief Executive Officer
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436
Telecopier No. (818) 907-5024
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<PAGE> 236
With a copy to:
Anita Y. Wolman, Esq.
General Counsel
California United Bank, N.A.
16030 Ventura Boulevard
Encino, California 91436
Telecopier No. (818) 907-5024
The persons or address to which mailings or deliveries shall be made may change
from time to time by notice given pursuant to the provisions of this Section
5.2. Any notice, demand or other communication given pursuant to the
provisions of this Section 5.2 shall be deemed to have been given on the date
actually delivered or three days following the date mailed, as the case may be.
5.3 Successors and Assigns. All terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective transferees, successors and assigns; provided, however,
that, except as otherwise contemplated herein, this Agreement and all rights,
privileges, duties and obligations of the parties hereto may not be assigned or
delegated by any party hereto without the prior written consent of the other
parties to this Agreement and any purported assignment in violation of this
Section 5.3 shall be null and void.
5.4 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit, or create any right or cause of action in or on
behalf of, any person other than the parties hereto. As used in this
Agreement, the term party or parties shall refer only to CUB and the CorpBank
Stockholders or any of them.
5.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
5.6 Governing Law. This Agreement is made and entered into in the
State of California and the laws of that state shall govern the validity and
interpretation hereof and the performance of the parties hereto of their
respective duties and obligations hereunder. The parties hereto agree to venue
in the City of Los Angeles.
5.7 Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
5.8 Waiver and Modification. No waiver of any term, provision or
condition of this Agreement, whether by conduct or otherwise, in any one or
more instances,
5
<PAGE> 237
shall be deemed to be or construed as a further or continuing waiver of any
such term, provision or condition of this Agreement. This Agreement may be
modified or amended only by an instrument of equal formality signed by the
parties or their duly authorized agents.
5.9 Attorneys' Fees. In the event any of the parties to this
Agreement brings an action or suit against any other party by reason of any
breach of any covenant, agreement, representation, warranty or other provision
hereof, or any breach of any duty or obligation created hereunder by such other
party, the prevailing party in whose favor final judgment is entered shall be
entitled to have and recover of and from the losing party all reasonable costs
and expenses incurred or sustained by such prevailing party in connection with
such suit or action, including without limitation, legal fees and court costs
(whether or not taxable as such).
5.10 Entire Agreement. The making, execution and delivery of this
Agreement by the parties hereto have been encouraged by no representations,
statements, warranties or agreements other than those herein expressed. This
Agreement embodies the entire understanding of the parties and there are no
further or other agreements or understandings, written or oral, in effect
between the parties relating to the subject matter hereof, unless expressly
referred to by reference herein.
5.11 Severability. Whenever possible, each provision of this
Agreement and every related document shall be interpreted in such manner as to
be valid under applicable law. However, if any provision of any of the
foregoing shall be invalid or prohibited under said applicable law, it shall be
construed, interpreted and limited to effectuate its purpose to the maximum
legally permissible extent. If it cannot be so construed and interpreted so as
to be valid under such law, such provision shall be ineffective to the extent
of such invalidity or prohibition without invalidating the remainder of such
provision or the remaining provisions of this Agreement, and this Agreement
shall be construed to the maximum extent possible to carry out its terms
without such invalid or unenforceable provision or portion thereof.
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5.12 Several Obligations. All duties and obligations of each party
to this Agreement shall be several and not joint.
5.13 JURY WAIVER. THE PARTIES HERETO AGREE TO WAIVE TRIAL BY JURY
IN ANY DISPUTE OVER THIS AGREEMENT OR RELATED THERETO IN ANY MANNER.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
CU BANCORP
By:___________________________
Name:_________________________
Title:________________________
"CorpBank Stockholders"
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
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<PAGE> 239
Schedule 1
as of ___________ ___, 1995
<TABLE>
<CAPTION>
Common Stock
------------
Common Issuable Total
Shares Upon Common
Name Owned Conversion Equivalent
- ---- ------- ---------- ----------
<S> <C> <C> <C>
</TABLE>
8
<PAGE> 240
EXHIBIT B-2
STOCKHOLDERS' AGREEMENT
(5% holders)
This Stockholders' Agreement ("Agreement") is made and entered
into this ____ day of _____________, 1995, by and between CU Bancorp ("CUB")
and each of the other persons executing this Agreement (each such person is
referred to individually as a "CorpBank Stockholder" and collectively referred
to as the "CorpBank Stockholders"), with reference to the following facts:
A. CUB, California United Bank National Association ("CUBNA"),
and Corporate Bank ("CorpBank") have entered into that certain Amended and
Restated Agreement and Plan of Reorganization ("Reorganization Agreement"),
dated as of October 11, 1995, pursuant to which CUBNA will merge with CorpBank
(the "Merger") and will pay consideration to CorpBank shareholders in the form
of CUB Common Stock and cash.
B. Each of the CorpBank Stockholders is an owner of in excess of
5% of the outstanding CorpBank Common Stock.
C. In order to induce CUB to enter into the Reorganization
Agreement, the CorpBank Stockholders desire to enter into this Agreement
solely in their capacity as Stockholders.
NOW, THEREFORE, in consideration of the promises and of the
respective representations, warranties and covenants, agreements and conditions
contained herein and in the Reorganization Agreement, the parties hereto agree
as follows:
1. Agreements of CorpBank Stockholders.
1.1 Agreement to Vote. At any meeting of shareholders of CorpBank or
in connection with any solicitation of the written consent of shareholders of
CorpBank to approve the Reorganization Agreement and the transactions
contemplated thereby, each of the CorpBank Stockholders shall vote or cause to
be voted all shares of common stock of CorpBank ("CorpBank Stock") owned by
each such CorpBank Stockholder, and any other shares of CorpBank Stock
hereafter acquired by each such CorpBank Stockholder, in favor of, and to
approve, the principal terms of the Merger and any other matter contemplated by
the Reorganization
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Agreement which requires the approval of the shareholders of CorpBank.
1.2 Agreement to Recommend. Subject to fiduciary obligations, each
CorpBank Stockholder shall recommend to the shareholders of CorpBank to vote in
favor of, and to approve, the principal terms of the Merger and any other
matter contemplated by the Reorganization Agreement.
1.3 Restrictions on Dispositions. Each CorpBank Stockholder agrees
that he will not pledge or otherwise encumber, nor sell, assign or otherwise
dispose of, any shares of CorpBank Stock currently owned or acquired by such
CorpBank Stockholder after the date of this Agreement, except (i) with the
prior written consent of CUB (which shall not be unreasonably withheld); (ii)
pursuant to the Merger; or (iii) by a bona fide pledge to secure a loan made on
a full-recourse basis.
1.4 Cooperation. Each CorpBank Stockholder agrees to cooperate fully
with CUB in connection with the Acquisition. Each CorpBank Stockholder agrees
that he will not directly or indirectly, solicit any inquiries or proposals
from, or enter into, or continue any discussions, negotiations or agreements
relating to, or vote in favor of any proposal or transaction for disposition of
the business or assets of CorpBank or any subsidiary thereof, or the
acquisition of CorpBank's voting securities or any business combination with
any person other than CUB or any wholly-owned subsidiary of CUB.
2. Representations and Warranties of CorpBank Stockholders.
Each of the CorpBank Stockholders represents and warrants to and agrees
with CUB as follows:
2.1 Capacity. Each such CorpBank Stockholder has all the requisite
capacity and authority to enter into and perform such CorpBank Stockholder's
obligations under this Agreement.
2.2 Binding Agreement. This Agreement constitutes the valid and
legally binding obligation of each such CorpBank Stockholder.
2.3 Non-Contravention. The execution and delivery of this Agreement
by each such CorpBank Stockholder does not, and the performance by such
CorpBank Stockholder of such CorpBank Stockholder's obligations hereunder and
the consummation by such CorpBank Stockholder of the transactions contemplated
hereby will not, violate or conflict with or constitute a default under any
agreement, instrument, contract or other obligation or any order, arbitration
2
<PAGE> 242
award, judgment or decree to which such CorpBank Stockholder is a party or by
which such CorpBank Stockholder is bound, or any statute, rule or regulation to
which such CorpBank Stockholder or any of such CorpBank Stockholder's property
is subject.
2.4 Ownership of Shares. Schedule 1 hereto correctly sets forth the
number of shares of CorpBank Stock owned by each CorpBank Stockholder, or with
respect to which each CorpBank Stockholder has voting power or beneficial
ownership, as of the date indicated on such Schedule. Each CorpBank
Stockholder has good title to all of the shares of CorpBank Stock indicated as
owned by such CorpBank Stockholder in the capacity set forth on Schedule 1 as
of the date indicated on such Schedule 1, and such shares of CorpBank Stock are
so owned free and clear of any liens, security interest, charges or other
encumbrances, except as set forth in such Schedule 1.
3. Termination.
3.1 Termination Date. This Agreement shall terminate and be of no
further force and effect immediately upon the earlier of: (a) consummation of
the Merger or (b) termination of the Reorganization Agreement in accordance
with the terms thereof.
3.2 Effect of Termination. Upon the termination of this Agreement in
accordance with Section 3.1 hereof, the respective obligations of the parties
hereto shall immediately become void and have no further force or effect.
(a) Specific Performance. The parties hereto recognize and agree
that monetary damages will not compensate adequately the parties hereto for
nonperformance. Accordingly, each party agrees that his obligations shall be
enforceable by court order requiring specific performance.
4. Miscellaneous.
4.1 Expenses. Each party hereto shall pay its own costs and expenses,
including, but not limited to, those of its attorneys and accountants, in
connection with this Agreement and transactions covered and contemplated
hereby.
4.2 Notices. All notices, demands or other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered in
person, by telex, telecopy, facsimile transmission, or by United States mail,
certified or registered, with return receipt requested, or otherwise actually
delivered, as follows:
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(a) If to an CorpBank Stockholder:
Attention:
With a copy to:
____________________________
____________________________
____________________________
____________________________
(b) If to CUB:
Stephen G. Carpenter.
Chief Executive Officer
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436
Telecopier No. (818) 907-5024
4
<PAGE> 244
With a copy to:
Anita Y. Wolman, Esq.
General Counsel
California United Bank, N.A.
16030 Ventura Boulevard
Encino, California 91436
Telecopier No. (818) 907-5024
The persons or address to which mailings or deliveries shall be made may change
from time to time by notice given pursuant to the provisions of this Section
4.2. Any notice, demand or other communication given pursuant to the
provisions of this Section 4.2 shall be deemed to have been given on the date
actually delivered or three days following the date mailed, as the case may be.
4.3 Successors and Assigns. All terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective transferees, successors and assigns; provided, however,
that, except as otherwise contemplated herein, this Agreement and all rights,
privileges, duties and obligations of the parties hereto may not be assigned or
delegated by any party hereto without the prior written consent of the other
parties to this Agreement and any purported assignment in violation of this
Section 5.3 shall be null and void.
4.4 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit, or create any right or cause of action in or on
behalf of, any person other than the parties hereto. As used in this
Agreement, the term party or parties shall refer only to CUB and the CorpBank
Stockholders or any of them.
4.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
4.6 Governing Law. This Agreement is made and entered into in the
State of California and the laws of that state shall govern the validity and
interpretation hereof and the performance of the parties hereto of their
respective duties and obligations hereunder. The Parties hereto agree to venue
in the City of Los Angeles.
4.7 Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
4.8 Waiver and Modification. No waiver of any term, provision or
condition of this Agreement, whether by conduct or otherwise, in any one or
more instances,
5
<PAGE> 245
shall be deemed to be or construed as a further or continuing waiver of any
such term, provision or condition of this Agreement. This Agreement may be
modified or amended only by an instrument of equal formality signed by the
parties or their duly authorized agents.
4.9 Attorneys' Fees. In the event any of the parties to this
Agreement brings an action or suit against any other party by reason of any
breach of any covenant, agreement, representation, warranty or other provision
hereof, or any breach of any duty or obligation created hereunder by such other
party, the prevailing party in whose favor final judgment is entered shall be
entitled to have and recover of and from the losing party all reasonable costs
and expenses incurred or sustained by such prevailing party in connection with
such suit or action, including without limitation, legal fees and court costs
(whether or not taxable as such).
4.10 Entire Agreement. The making, execution and delivery of this
Agreement by the parties hereto have been encouraged by no representations,
statements, warranties or agreements other than those herein expressed. This
Agreement embodies the entire understanding of the parties and there are no
further or other agreements or understandings, written or oral, in effect
between the parties relating to the subject matter hereof, unless expressly
referred to by reference herein.
4.11 Severability. Whenever possible, each provision of this Agreement
and every related document shall be interpreted in such manner as to be valid
under applicable law. However, if any provision of any of the foregoing shall
be invalid or prohibited under said applicable law, it shall be construed,
interpreted and limited to effectuate its purpose to the maximum legally
permissible extent. If it cannot be so construed and interpreted so as to be
valid under such law, such provision shall be ineffective to the extent of such
invalidity or prohibition without invalidating the remainder of such provision
or the remaining provisions of this Agreement, and this Agreement shall be
construed to the maximum extent possible to carry out its terms without such
invalid or unenforceable provision or portion thereof.
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<PAGE> 246
4.12 Several Obligations. All duties and obligations of each party to
this Agreement shall be several and not joint.
4.13 JURY WAIVER. THE PARTIES HERETO WAIVE THE RIGHT TO TRIAL BY JURY
IN ANY ACTION RELATED TO THIS AGREEMENT IN ANY MANNER.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.
CU BANCORP
By:_________________________
Name:________________________
Title:________________________
"CorpBank Stockholders"
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
7
<PAGE> 247
Schedule 1
as of ___________ ___, 1995
<TABLE>
<CAPTION>
Common Stock
------------
Common Issuable Total
Shares Upon Common
Name Owned Conversion Equivalent
- ---- ------- ---------- ----------
<S> <C> <C> <C>
</TABLE>
8
<PAGE> 248
EXHIBIT E
AFFILIATE'S AGREEMENT
(NON DIRECTOR)
________ __,1995
Ladies and Gentlemen:
Reference is made to the Amended and Restated Agreement and Plan of
Reorganization, dated as of October 11, 1995 (the "Merger Agreement"), by and
among CU Bancorp ("CUB"); California United Bank, National Association ("CUBNA"
or "Subsidiary") and Corporate Bank ("CorpBank") which Merger Agreement
provides for the merger of CorpBank with and into Subsidiary (the "Merger") in
a transaction in which, among other things, shares of common stock, without par
value, of CorpBank ("CorpBank Common Stock") will be changed and converted into
the right to receive shares of common stock, without par value, of CUB ("CUB
Common Stock") and cash, as more fully provided therein.
The undersigned has been informed that the Merger constitutes a
transaction covered by Rule 145 under the Securities Act of 1933, as amended
(the "Securities Act"); that the undersigned may be deemed to be an "affiliate"
of CorpBank within the meaning of Rule 145; and that, accordingly, the shares
of CUB Common Stock which the undersigned may acquire in connection with the
Merger may only be disposed of in conformity with the provisions hereof.
The capitalized terms used and not defined herein shall have the meaning
set forth in the Merger Agreement.
Provided the Merger occurs on or before February 28, 1996, the undersigned,
after inquiry of any agent with discretionary power to transfer the
undersigned's shares of CorpBank Common Stock, represents, warrants and agrees
as follows:
1. The undersigned has full power to execute this Affiliate's Agreement and
to make the representations, warranties and agreements herein, and to perform
his or her obligations hereunder.
2. The undersigned is currently the owner of that number of shares of
CorpBank Common Stock set forth in Appendix A hereto (the "CorpBank Shares")
and has held the CorpBank Shares at all times since January 1, 1995 unless
otherwise set forth in Appendix A.
3. The undersigned shall not sell, pledge, assign, transfer or otherwise
dispose
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<PAGE> 249
of, or reduce the undersigned's risk of ownership or investment in any of the
CorpBank Shares prior to the Merger.
4. The undersigned will not sell, transfer or dispose of any shares of CUB
Common Stock which the undersigned may acquire in connection with the Merger or
any securities which may be paid as a dividend or otherwise distributed thereon
or with respect thereto or issued or delivered in exchange or substitution
therefor (all such shares and other securities herein sometimes collectively
referred to as "Restricted Securities"), or any option, right or other interest
with respect to any Restricted Securities, unless such sale, transfer or
disposition is effected (i) pursuant to an exemption from the registration
requirements of the Securities Act as provided in Section 3 hereof, or (ii)
pursuant to an effective registration statement under, and in compliance with,
the Securities Act (provided that the undersigned may make bona fide gifts or
distributions without consideration so long as the recipients thereof agree not
to sell, transfer or otherwise dispose of the CUB Common Stock except as
provided herein.)
5. The undersigned has no present plan or intent to engage in a sale,
exchange, transfer, redemption or reduction in any way of the undersigned's
risk of ownership by short sale or otherwise, or other disposition, directly or
indirectly (such actions being collectively referred to as a "Sale") of CUB
Common Stock to be received by the undersigned pursuant to the Merger.
6. Notwithstanding any other provisions of this Affiliate's Agreement to
the contrary, none of the shares of CUB Common Stock received by the
undersigned pursuant to the Merger will be sold, transferred or otherwise
disposed of and the undersigned will not in any other way reduce the
undersigned's risk of ownership or investment in any of the shares of CUB
Common Stock so received by the undersigned, until financial results covering
a period of at least thirty (30) days of combined operations of CUB and
CorpBank following the Effective Time of the Merger have been published by CUB
(provided that the undersigned may make bona fide gifts or distributions
without consideration so long as the recipients thereof agree not to sell,
transfer or otherwise dispose of the CUB Common Stock except as provided
herein).
7. The undersigned has not engaged in a Sale of any shares of CorpBank
Stock at any time since January 1, 1995 unless otherwise set forth in Appendix
A.
8. The undersigned has no present plan or intent to (i) engage in a Sale of
the CorpBank Shares (other than in exchange for CUB Common Stock pursuant to
the Merger), or (ii) exercise dissenters' rights in connection with the Merger.
2
<PAGE> 250
9. The representations contained herein shall be true and correct at all
times from the date hereof through the date the Merger is consummated.
10. The undersigned has consulted such legal and financial counsel as the
undersigned deems appropriate in connection with the execution of this
Affiliate's Agreement.
11. CUB represents, warrants and agrees to use its best efforts to file all
reports and data with the Securities and Exchange Commission ("SEC") necessary
to permit the undersigned to sell Restricted Securities pursuant to and
otherwise in conformity with Rule 145(d) under the Securities Act.
12. CUB acknowledges that the provisions of Section 4 of this Affiliate's
Agreement will be satisfied as to any sale by the undersigned of Restricted
Securities pursuant to Rule 145(d) under the Securities Act, as evidenced by a
broker's letter stating that the requirements of Rule 145 have been met;
provided, however, that if counsel for CUB reasonably believes that the
provisions of Rule 145 have not been complied with, or if requested by CUB in
connection with a proposed disposition, the undersigned shall furnish to CUB a
copy of a "no action" letter or other communication from the staff of the SEC
or an opinion of counsel in form and substance satisfactory to CUB and its
counsel, to the effect that the applicable provisions of paragraphs (c), (e),
(f) and (g) of Rule 144 under the Securities Act have been complied with or
that the disposition may be otherwise effected in the manner requested in
compliance with the Securities Act. It is agreed and understood that the
undersigned may rely upon CUB's representation, warranty and agreement in
Section 11 above in complying with this Section 12.
13. The undersigned also understands that stop transfer instructions will be
given to CUB's transfer agent with respect to the Restricted Securities and
that there will be placed on the certificates evidencing the Restricted
Securities, or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), APPLIES AND MAY ONLY BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT
BETWEEN THE REGISTERED HOLDER HEREOF AND CU BANCORP, A COPY OF WHICH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF CU BANCORP."
3
<PAGE> 251
CUB agrees that such stop transfer instructions and legend will be
promptly removed if the provisions of Section 12 and Section 6 are complied
with, and further, after the expiration of one year from the Effective Date of
the Merger, upon request, CUB will remove the portion of the legend related to
this Agreement.
14. This Affiliate's Agreement shall be binding upon and enforceable against
administrators, executors, representatives, heirs, legatees and devisees of the
undersigned and any pledgee holding the Restricted Securities as collateral.
15. In the event any of the parties to this Agreement brings an action or
suit against any other party by reason of any breach of any covenant,
agreement, representation, warranty or other provision hereof, or any breach of
any duty or obligation created hereunder by such other party, the prevailing
party, as determined by the court or other body having jurisdiction, shall be
entitled to have and recover of and from the losing party, as determined by the
court or other body having jurisdiction, all reasonable costs and expenses
incurred or sustained by such prevailing party in connection with such suit or
action, including, without limitation, legal fees and court costs (whether or
not taxable as such).
16. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY MATTER ARISING OUT OF THIS
AGREEMENT OR RELATED TO THIS AGREEMENT OR IN CONNECTION WITH ANY TRANSACTION OR
MATTER CONTEMPLATED IN THIS AGREEMENT.
4
<PAGE> 252
IN WITNESS WHEREOF, the undersigned has executed the foregoing
Affiliate's Agreement this ___Th day of ____________, 1995.
Very truly yours,
______________________________
By:
Title: Affiliate
Agreed to and accepted:
CU BANCORP
By:_______________________
Title:____________________
By:_______________________
Title:____________________
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<PAGE> 253
APPENDIX A TO AFFILIATE'S REPORT
Dated _______________ --- 1995
___________________
Name of Affiliate
<TABLE>
<CAPTION>
Number of Shares of CorpBank
Common Stock as to which the
Affiliate had sole or shared Shares Held as of
voting or dispositive power
as of the above date (including
the number of shares which Common Issuable Total
such person had the right Shares Upon Common
to acquire as of such date) Owned Conversion Equivalent
- --------------------------- ------- ---------- ----------
<S> <C> <C> <C>
Affiliate
</TABLE>
4
<PAGE> 254
EXHIBIT E-1
AFFILIATE'S AGREEMENT
________ __,1995
Ladies and Gentlemen:
Reference is made to the Amended and Restated Agreement and Plan of
Reorganization, dated as of October 11, 1995 (the "Merger Agreement"), by and
among CU Bancorp ("CUB"); California United Bank, National Association ("CUBNA"
or "Subsidiary") and Corporate Bank ("CorpBank") which Merger Agreement
provides for the merger of CorpBank with and into Subsidiary (the "Merger") in
a transaction in which, among other things, shares of common stock, without par
value, of CorpBank ("CorpBank Common Stock") will be changed and converted into
the right to receive shares of common stock, without par value, of CUB ("CUB
Common Stock") and cash, as more fully provided therein.
The undersigned has been informed that the Merger constitutes a
transaction covered by Rule 145 under the Securities Act of 1933, as amended
(the "Securities Act"); that the undersigned may be deemed to be an "affiliate"
of CorpBank within the meaning of Rule 145; and that, accordingly, the shares
of CUB Common Stock which the undersigned may acquire in connection with the
Merger may only be disposed of in conformity with the provisions hereof.
The capitalized terms used and not defined herein shall have the meaning
set forth in the Merger Agreement.
1. Provided the Merger occurs on or before February 28, 1996,
the undersigned, after inquiry of any agent with discretionary power to
transfer the undersigned's shares of CorpBank Common Stock, represents,
warrants and agrees as follows:
(a) The undersigned has full power to
execute this Affiliate's Agreement and to make the representations, warranties
and agreements herein, and to perform his or her obligations hereunder.
(b) The undersigned is currently the
owner of that number of shares of CorpBank Common Stock set forth in Appendix A
hereto (the "CorpBank Shares") and has held the CorpBank Shares at all times
since January 1, 1995 unless otherwise set forth in Appendix A.
(c) The undersigned shall not sell, assign, pledge,
1
<PAGE> 255
transfer or otherwise dispose of, or reduce the undersigned's risk of ownership
or investment in any of the CorpBank Shares prior to the Merger.
(d) The undersigned will not sell, transfer or dispose
of any shares of CUB Common Stock which the undersigned may acquire in
connection with the Merger or any securities which may be paid as a dividend or
otherwise distributed thereon or with respect thereto or issued or delivered in
exchange or substitution therefor (all such shares and other securities herein
sometimes collectively referred to as "Restricted Securities"), or any option,
right or other interest with respect to any Restricted Securities, unless such
sale, transfer or disposition is effected (i) pursuant to an exemption from the
registration requirements of the Securities Act as provided in Section 3
hereof, or (ii) pursuant to an effective registration statement under, and in
compliance with, the Securities Act (provided that the undersigned may make
bona fide gifts or distributions without consideration so long as the
recipients thereof agree not to sell, transfer or otherwise dispose of the CUB
Common Stock except as provided herein.)
(e) The undersigned has no present plan or intent to
engage in a sale, exchange, transfer, redemption or reduction in any way of the
undersigned's risk of ownership by short sale or otherwise, or other
disposition, directly or indirectly (such actions being collectively referred
to as a "Sale") of CUB Common Stock to be received by the undersigned pursuant
to the Merger.
(f) Notwithstanding any other provisions of this
Affiliate's Agreement to the contrary, none of the shares of CUB Common Stock
received by the undersigned pursuant to the Merger will be sold, transferred or
otherwise disposed of and the undersigned will not in any other way reduce the
undersigned's risk of ownership or investment in any of the shares of CUB
Common Stock so received by the undersigned until the later of: (i) financial
results covering a period of at least thirty (30) days of combined operations
of CUB and CorpBank following the Effective Time of the Merger have been
published by CUB (provided that the undersigned may make bona fide gifts or
distributions without consideration so long as the recipients thereof agree not
to sell, transfer or otherwise dispose of the CUB Common Stock except as
provided herein); or (ii) the elapse of a period of six months after financial
results covering a period of at least thirty (30) days of combined operations
of CUB and CorpBank following the Effective Time of the Merger have been
published by CUB (provided that the undersigned may make bona fide gifts or
distributions without consideration so long as the recipients thereof agree not
to sell, transfer or otherwise dispose of the CUB Common Stock except as
provided herein).
(g) The undersigned has not engaged in a Sale of any
2
<PAGE> 256
shares of CorpBank Stock at any time since January 1, 1995 unless otherwise set
forth in Appendix A.
(h) The undersigned has no present plan or intent to (i)
engage in a Sale of the CorpBank Shares (other than in exchange for CUB Common
Stock pursuant to the Merger), or (ii) exercise dissenters' rights in
connection with the Merger.
(i) The undersigned will not make a Cash Election with
regard to all shares of CorpBank owned by the undersigned and will limit any
Cash Election to no more than the Elected Cash Percentage.
(j) The representations contained herein shall be true
and correct at all times from the date hereof through the date the Merger is
consummated.
(k) The undersigned has consulted such legal and
financial counsel as the undersigned deems appropriate in connection with the
execution of this Affiliate's Agreement.
2. CUB represents, warrants and agrees to use its best efforts to
file all reports and data with the Securities and Exchange Commission ("SEC")
necessary to permit the undersigned to sell Restricted Securities pursuant to
and otherwise in conformity with Rule 145(d) under the Securities Act.
3. CUB acknowledges that the provisions of Section 1(d) of this
Affiliate's Agreement will be satisfied as to any sale by the undersigned of
Restricted Securities pursuant to Rule 145(d) under the Securities Act, as
evidenced by a broker's letter stating that the requirements of Rule 145 have
been met; provided, however, that if counsel for CUB reasonably believes that
the provisions of Rule 145 have not been complied with, or if requested by CUB
in connection with a proposed disposition, the undersigned shall furnish to CUB
a copy of a "no action" letter or other communication from the staff of the SEC
or an opinion of counsel in form and substance satisfactory to CUB and its
counsel, to the effect that the applicable provisions of paragraphs (c), (e),
(f) and (g) of Rule 144 under the Securities Act have been complied with or
that the disposition may be otherwise effected in the manner requested in
compliance with the Securities Act. It is agreed and understood that the
undersigned may rely upon CUB's representation, warranty and agreement in
Section 2 above in complying with this Section 3.
4. The undersigned also understands that stop transfer instructions
will be given to CUB's transfer agent with respect to the Restricted Securities
and that there
3
<PAGE> 257
will be placed on the certificates evidencing the Restricted Securities, or any
substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), APPLIES AND MAY ONLY BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT
BETWEEN THE REGISTERED HOLDER HEREOF AND CU BANCORP, A COPY OF WHICH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF CU BANCORP."
CUB agrees that such stop transfer instructions and legend will be
promptly removed if the provisions of Section 3 and Section 1(f) are complied
with, and further, after the expiration of nine months from the Effective Date
of the Merger, upon request, CUB will remove the portion of the legend related
to this Agreement.
5. This Affiliate's Agreement shall be binding upon and enforceable
against administrators, executors, representatives, heirs, legatees and
devisees of the undersigned and any pledgee holding the Restricted Securities
as collateral.
6. In the event any of the parties to this Agreement brings an
action or suit against any other party by reason of any breach of any covenant,
agreement, representation, warranty or other provision hereof, or any breach of
any duty or obligation created hereunder by such other party, the prevailing
party, as determined by the court or other body having jurisdiction, shall be
entitled to have and recover of and from the losing party, as determined by the
court or other body having jurisdiction, all reasonable costs and expenses
incurred or sustained by such prevailing party in connection with such suit or
action, including, without limitation, legal fees and court costs (whether or
not taxable as such).
7. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY MATTER ARISING OUT
OF THIS AGREEMENT OR RELATED TO THIS AGREEMENT OR IN CONNECTION WITH ANY
TRANSACTION OR MATTER CONTEMPLATED IN THIS AGREEMENT.
IN WITNESS WHEREOF, the undersigned has executed the foregoing
Affiliate's Agreement this ___Th day of ____________, 1995.
Very truly yours,
4
<PAGE> 258
______________________________
By:
Title: Director
Agreed to and accepted:
CU BANCORP
By:_______________________
Title:____________________
By:_______________________
Title:____________________
5
<PAGE> 259
APPENDIX A TO AFFILIATE'S REPORT
Dated _______________ --- 1995
___________________
Name of Affiliate
<TABLE>
<CAPTION>
Number of Shares of CorpBank
Common Stock as to which the
Affiliate had sole or shared Shares Held as of
voting or dispositive power
as of the above date (including
the number of shares which Common Issuable Total
such person had the right Shares Upon Common
to acquire as of such date) Owned Conversion Equivalent
- --------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Affiliate
</TABLE>
4
<PAGE> 260
EXHIBIT F
FORM OF OPINION OF CORPBANK'S COUNSEL
The opinion of counsel required by Section 6.2(b) of the
Amended and Restated Agreement and Plan of Reorganization (the "Agreement")
shall be dated the Closing Date, shall be in form and substance reasonably
satisfactory to CUB, and shall be substantially to the following effect (all
capitalized terms not otherwise defined herein having the meaning specified in
the Agreement):
1. CorpBank is a California state chartered bank,
duly organized, validly existing and in good standing under the laws of the
State of California. CorpBank and each CorpBank Subsidiary have all requisite
corporate power and authority to own, lease and operate their properties and
assets and to carry on their business as presently conducted. Neither the
scope of the business of CorpBank nor the location of any of its properties
requires that it be licensed to do business in any jurisdiction other than the
State of California.
2. CorpBank and CorpBank Subsidiaries hold all
material licenses, permits and franchises as are required to permit them to
conduct their business as now conducted, and all such licenses, permits and
franchises are valid and in full force and effect.
3. CorpBank is duly licensed to engage in the banking
business by the Superintendent of Banks of the State of California. CorpBank
is not a member of the Federal Reserve System. CorpBank's deposits are insured
by the FDIC in the manner and to the full extent provided by law.
4. The authorized capitalization of CorpBank is as
set forth in Section 3.2 of the Agreement. All of the outstanding shares of
CorpBank Stock are validly issued, fully paid and nonassessable, except as
provided for in Section 662 of the California Financial Code. All outstanding
shares of capital stock of each CorpBank Subsidiary are duly authorized and
validly issued and are fully paid and nonassessable. The authorized capital
stock of each CorpBank Subsidiary is set forth on Schedule 3.2(a) of the
Agreement. All issuances of stock by CorpBank and CorpBank Subsidiaries were
either registered pursuant to, or exempt from registration under, the
Securities Act. There are no outstanding options, warrants, commitments,
agreements or other rights in or with respect to the unissued shares of
CorpBank Stock or stock of any CorpBank Subsidiary. Immediately prior to the
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<PAGE> 261
Effective Time of the Merger, all of CorpBank's issued and outstanding common
stock will have been either outstanding on the date of this Agreement or issued
upon exercise of stock options outstanding pursuant to the Employee Stock
Option Plan.
5. The execution and delivery by CorpBank and
CorpBank Subsidiaries of the Agreement, and the consummation of the
transactions contemplated thereby, have been duly and validly
authorized by all necessary action on the part of CorpBank and CorpBank
Subsidiaries. The Agreement is a valid and binding obligation of CorpBank and
CorpBank Subsidiaries, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors of bank holding companies,
banks and mortgage companies generally and by general equitable principles.
Neither the execution and delivery by CorpBank and CorpBank Subsidiaries of the
Agreement, nor the consummation of the transactions contemplated thereby, nor
compliance by CorpBank and CorpBank Subsidiaries with any of the provisions
thereof, will (i) conflict with or result in a breach of any provision of their
respective Articles of Incorporation or Bylaws; (ii) to the best of counsel's
knowledge constitute a breach of or result in a default (or give rise to any
rights of termination, cancellation or acceleration, or any right to acquire
any securities or assets) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, franchise, license, permit, agreement or
other instrument or obligation to which CorpBank or any CorpBank Subsidiary is
a party, or by which CorpBank or any CorpBank Subsidiary or any of their
properties or assets is bound and which is material to their operations; or
(iii) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to CorpBank or any CorpBank Subsidiary or any of their properties or
assets which violation would have a material effect on their operations.
6. Except as disclosed in the Schedules to the
Agreement, to the best knowledge of such counsel, based upon reasonable
investigation and responses of attorneys to audit inquiries of the public
accountants of CorpBank and CorpBank Subsidiaries and responses, if any, to
inquiries of the Superintendent or the FDIC, (i) there are no actions, suits,
arbitrations or proceedings pending or threatened against CorpBank or any
CorpBank Subsidiary or any directors, officers or employees of any of them
relating to the performance of their duties in such capacities, or affecting
any of the property of CorpBank and CorpBank Subsidiaries, before any court or
arbitration tribunal or before or by any governmental or regulatory authority
or body which questions the validity of the Agreement or any action to be taken
by CUB, Bancorp or CorpBank or any CorpBank Subsidiary pursuant to or in
connection with the provisions of this Agreement; (ii) CorpBank and CorpBank
Subsidiaries have not been the subject of any indictment, information or
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administrative notice of charges with respect to, nor is CorpBank or any
CorpBank Subsidiary under investigation with respect to, any violation of any
provision of any federal, state or other applicable law or regulation in
respect of its business, except as disclosed in writing to Bancorp and
acknowledged by it; (iii) neither CorpBank nor any CorpBank Subsidiary is a
party to or bound by, and none of the property of CorpBank and CorpBank
Subsidiaries is subject to, any order, arbitration award, judgment or decree
entered in an action or proceeding brought by any governmental or regulatory
authority or body or by any other person against CorpBank or any CorpBank
Subsidiary; and (iv) neither CorpBank nor any CorpBank Subsidiary is a party to
any agreement or memorandum of understanding with any federal, state or foreign
governmental or regulatory authority charged with the supervision or regulation
of banks or bank holding companies or engaged in the insurance of bank deposits
that restricts the conduct of its business, or in any manner relates to its
capital adequacy, its credit or investment policies or its management.
7. Upon the filing of the Agreement of Merger with
the OCC in accordance with the National Banking Act, the Merger will have been
validly consummated in accordance with the terms of the Agreement of Merger and
each outstanding share of CorpBank Stock will be canceled and converted into
the right to receive the consideration specified in the Agreement of Merger.
8. The portion of the Registration Statement
(including the Proxy Statement contained therein) relating to CorpBank and
CorpBank Subsidiaries, as of its effective date complies as to form in all
material respects with the requirements of the Securities Act (except that such
counsel need express no opinion as to the financial statements and other
financial or statistical data included therein); such counsel participated in
the preparation of the Registration Statement (including the Proxy Statement
contained therein) and, on the basis of this participation in connection with
the preparation of the Registration Statement, no facts have come to the
attention of such counsel which cause such counsel to believe that the
Registration Statement (including the Proxy Statement contained therein) at the
time it became effective contained any untrue statement of a material fact
concerning CorpBank or any CorpBank Subsidiary or omitted to state a material
fact required to be stated therein concerning CorpBank or any CorpBank
Subsidiary or necessary to make the statements therein concerning CorpBank and
CorpBank Subsidiaries, in light of the circumstances under which they were
made, not misleading (except that such counsel need express no opinion or
belief as to the financial statements or other financial or statistical data
contained therein).
9. Except as contemplated by the Agreement, no
consent, approval,
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waiver or authorization from, or notice to, or registration or filing with, any
person, United States federal or California governmental authority or entity is
necessary for the consummation by CorpBank of the transactions contemplated by
the Agreement.
10. In the event there has been a sale of the Bond
Claim, as defined in the Agreement, (i) the assignment and sale is in
accordance and compliance with all provisions of applicable law, including but
not limited to the California Financial Code and the Corporations Code; and
(ii) CorpBank has received the non disapproval of all necessary governmental or
regulatory agencies, including but not limited to California Superintendent of
Banks and the Federal Deposit Insurance Corporation, if required.
11. The FDIC San Francisco Regional Office
______________, has advised the undersigned, in a telephone conference on or
about ______ that in the event of the implementation of the transactions
contemplated in the Agreement and the acquisition of CorpBank by CUB, the FDIC
will not impose any requirements upon the Surviving Bank with regard to
affirmative actions against former employees.
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EXHIBIT G(1)
AGREEMENT NOT TO COMPETE
(Stanley Pawlowski)
THIS AGREEMENT NOT TO COMPETE ("Agreement") has been executed
and delivered on the ____ day of ___________, 1995 by and between the
individual signatory hereto, who is a shareholder and director of Corporate
Bank, ("CorpBank") (hereinafter referred to as a "Director" ), and CU Bancorp
("CUB") with respect to the following Recitals, each of which constitute an
essential part of this Agreement and shall be construed as a part of this
Agreement for all purposes, including the judicial construction and enforcement
of this Agreement:
RECITALS
A. Pursuant to that certain Amended and Restated Agreement
and Plan of Reorganization, dated as of October 11, 1995
(the "Reorganization Agreement"), among CUB, California
United Bank, National Association ("CUBNA") and CorpBank,
CUB has agreed to acquire CorpBank through a merger of
CorpBank with and into CUBNA, and to pay the holders of
the outstanding shares of the CorpBank Common Stock an
amount in CUB Common Stock and cash, for each such share
of CorpBank Common Stock as set forth in the
Reorganization Agreement; and
B. The Director is a holder of shares of CorpBank Common
Stock and has induced CUB to enter into the
Reorganization Agreement and to purchase the CorpBank
Common Stock pursuant thereto in material part in
reliance upon the agreement of Director to protect and
preserve the goodwill and business advantage of CorpBank
by protecting, preserving and fostering its customer and
employee relationships and trade secrets and other
confidential information as provided in the
Reorganization Agreement, and in reliance upon the
agreement of Director not to compete in the area of the
business and operations with CUB and its subsidiaries, as
provided in this Agreement.
NOW, THEREFORE, in consideration of the agreements, covenants
and premises herein set forth, the Director and CUB hereby agree as follows:
SECTION 1. Representations and Warranties of Director.
Director hereby represents and warrants to CUB as follows:
<PAGE> 265
1.1 The financial services of CorpBank, directly or
through its subsidiaries, consist of the origination, purchasing, selling and
servicing of commercial, real estate, residential, construction, and consumer
loans; the purchase, sale, brokering and referral of mortgage loans (for
compensation); and the solicitation and provision of deposit services and
services related thereto; and all other services incidental to the aforesaid
financial services (collectively referred to herein as "Financial Services").
The Financial Services have been developed or are being developed by the
Director, among others, in his capacity as director of CorpBank.
1.2 The Director and CorpBank have offered and
promoted the Financial Services by promotional, marketing and other activities,
including the personal solicitation of customers and prospective customers by
the Director.
1.3 Director acknowledges that CUB would not enter
into the Reorganization Agreement unless such Director agreed not to undertake
activities competitive with the existing and intended Financial Services and
operations of CorpBank as provided in this Agreement and that, accordingly,
this Agreement is a material inducement to CUB to enter into and to carry out
the terms of the Reorganization Agreement. Director has therefore entered into
this Agreement to induce CUB to enter into and carry out the terms of the
Reorganization Agreement and to purchase the CorpBank Common Stock pursuant
thereto.
1.4 This Agreement will not constitute a violation of
any other agreement to which Director is a party and has been executed and
delivered by such Director after having an opportunity to consult with such
Director's legal and other professional advisors.
1.5 Director has taken all necessary action to execute
and deliver this Agreement, and it constitutes a valid and binding agreement of
such Director.
SECTION 2. Agreement Not to Compete.
The Director, hereby covenants and agrees with CUB as follows:
2.1 Non-Competition. From the date hereof through the
Effective Time of the Merger and for a two (2) year period commencing at the
Effective Time of the Merger (as defined in the Reorganization Agreement),
Director shall not directly or indirectly through an agent or otherwise, either
individually, as a member of any group formed for such purpose or together with
any other Director, without the prior written consent of CUB (i) acquire more
than five
<PAGE> 266
percent (5%) of the equity or voting interest in, or (ii) participate in the
organization or founding of, or (iii) serve on the Board of Directors or
Advisory Board of, or (iv) act as a consultant to, or (v) serve as an officer
or employee or participate in the management of, any Depository Institution, as
that term is defined in 12 C.F.R. Section 348.2, or any parent, affiliate or
subsidiary thereof (individually a "Financial Institution" and collectively
"Financial Institutions"), having an office or branch within Los Angeles,
Orange, San Diego, or Riverside Counties. Director agrees, during the term of
this Agreement, to provide CUB with prior notice of any and all investments
proposed to be made by such Director in any Financial Institution described
above, except those listed next to such Director's name on Exhibit "B" attached
hereto, which would exceed five percent (5%) of the outstanding stock of such
Financial Institution individually, or with other shareholders or with other
persons or entities acting as a group.
2.2 No Solicitation. For the period specified in
Section 2.1, Director shall not, without the prior written consent of CUB, on
behalf of any Financial Institution (whether or not within the geographic
boundaries specified in Section 2.1), directly or indirectly through an agent
or otherwise, solicit, or aid in the solicitation of, persons or business
entities to become customers for Financial Services if such persons or business
entities are customers for Financial Services of CorpBank as of the Execution
Date of the Reorganization Agreement or the Effective Time of the Merger.
SECTION 3. Enforcement Rights.
Director acknowledges and agrees that:
3.1 In the event of a prospective or actual breach of
this Agreement by such Director, damages would not be an adequate remedy to
compensate CUB for the loss of goodwill and other harm to the business of CUB;
and
3.2 Therefore, in the event of a threatened or actual
breach of this Agreement by such Director, or by any person or entity described
in Section 2 above, CUB shall be entitled to a temporary restraining order, and
to temporary and permanent injunctive relief, to prevent or terminate such
anticipated or actual breach, provided that nothing in this Agreement shall be
construed to limit the damages otherwise recoverable by CUB in any such event;
and
3.3 After discussing the matter with such Director,
CUB shall have the right to inform any entity described in Section 2 above, and
the principals thereof, and any other third party that CUB reasonably believes
to be, or to be contemplating, participating with such Director or receiving
from such Director
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assistance in violation of this Agreement, of the terms of this Agreement and
of the rights of CUB hereunder, and that participation by any such entity or
persons with such Director in activities in violation of such Director's
agreement not to compete with CUB may give rise to claims by CUB against such
entity, persons or third party.
SECTION 4. General Provisions.
4.1 Binding Effect; Benefit to Successors. This
Agreement shall be binding upon Director and upon such Director's successors,
representatives and assigns, and shall inure to the benefit of CUB and its
successors, representatives and assigns.
4.2 Attorneys' Fees and Costs. In the event of a
breach, or alleged breach, of any agreement, term or provision of this
Agreement and the filing of a suit or other legal proceeding in connection with
the enforcement or construction of any provision hereof, the prevailing party
in such suit or other proceeding shall, in addition to any other remedies
available to it, be entitled to reasonable attorneys' fees and costs from the
losing party.
4.3 Governing Law; Consent to Jurisdiction. This
Agreement shall be governed by and construed in accordance with the law of the
State of California in all respects, including all matters of validity,
construction and performance of this Agreement.
4.4 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original for all purposes, including the judicial proof of the terms hereof.
However, all of such counterparts shall constitute one and the same Agreement,
and it shall not be necessary, in making proof of this Agreement, to produce or
account for more than one such counterpart.
4.5 Entire Agreement; Modification. This Agreement
constitutes the entire agreement between the Director and CUB with respect to
the subject matter hereof. No claim of waiver, modification, amendment,
consent or acquiescence with respect to any of the provisions shall be made
against CUB, except on the basis of a written instrument duly executed by an
officer of CUB.
4.6 Severability. Whenever possible, each provision
of this Agreement and every related document shall be interpreted in such
manner as to be valid under applicable law. However, if any provision of any
of the foregoing shall be invalid or prohibited under said applicable law, it
shall be construed, interpreted and limited to effectuate its purpose to the
maximum legally permissible extent. If it cannot be so construed and
interpreted so as to
<PAGE> 268
be valid under such law, such provision shall be ineffective to the extent of
such invalidity or prohibition without invalidating the remainder of such
provision or the remaining provisions of this Agreement, and this Agreement
shall be construed to the maximum extent possible to carry out its terms
without such invalid or unenforceable provision or portion thereof.
4.7 Incorporation of Recitals. The Recitals to this
Agreement are an integral part of this Agreement and are hereby incorporated
herein verbatim as a part of this Agreement as if set forth here in full.
4.8 Failure to Enforce. The failure of CUB to enforce
any threatened or existing violation, default or breach of this Agreement shall
not be deemed a waiver of such violation, default or breach, and CUB shall have
the right to enforce the same at a later time and the right to waive in writing
any condition imposed herein for its benefit without thereby waiving any other
provision or condition.
4.9 JURY WAIVER. THE PARTIES HERETO WAIVE TRIAL BY
JURY IN ALL DISPUTES RELATED TO THIS AGREEMENT OR THE REORGANIZATION AGREEMENT
IN ANY MANNER.
IN WITNESS WHEREOF, the Directors and CUB have executed
and delivered this Agreement Not To Compete on the date set forth above.
CU BANCORP "DIRECTOR"
By:________________________ _________________________
Stanley Pawlowski
Title:_____________________
By:________________________
Title:_____________________
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EXHIBIT G(2)
AGREEMENT NOT TO COMPETE
(Non-Officer Directors)
THIS AGREEMENT NOT TO COMPETE ("Agreement") has been executed and
delivered on the ____ day of ___________, 1995 by and between the individuals
signatory hereto, each of whom is a shareholder and director of Corporate
Bank, ("CorpBank") (hereinafter referred to individually as a "Director" and
collectively as the "Directors"), and CU Bancorp ("CUB") with respect to the
following Recitals, each of which constitute an essential part of this
Agreement and shall be construed as a part of this Agreement for all purposes,
including the judicial construction and enforcement of this Agreement:
RECITALS
A. Pursuant to that certain Amended and Restated Agreement and Plan
of Reorganization, dated as of October 11, 1995 (the "Reorganization
Agreement"), among CUB, California United Bank, National Association ("CUBNA")
and CorpBank has agreed to acquire CorpBank through a merger and to pay the
holders of the outstanding shares of the CorpBank Common Stock an amount in CUB
Common Stock and cash, for each such share of CorpBank Common Stock as set
forth in the Reorganization Agreement; and
B. The Directors are each holders of shares of CorpBank Common Stock
and have induced CUB to enter into the Reorganization Agreement and to purchase
the CorpBank Common Stock pursuant thereto in material part in reliance upon
the agreement of Directors to protect and preserve the goodwill and business
advantage of CorpBank by protecting, preserving and fostering its customer and
employee relationships and trade secrets and other confidential information as
provided in the Reorganization Agreement, and in reliance upon the agreement of
each Director not to compete in the area of the business and operations with
CUB and its subsidiaries, as provided in this Agreement.
NOW, THEREFORE, in consideration of the agreements, covenants and
premises herein set forth, each of the Directors and CUB hereby agree as
follows:
SECTION 1. Representations and Warranties of Directors.
Each Director hereby represents and warrants to CUB as follows:
1.1 The financial services of CorpBank, directly or through its
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subsidiaries, consist of the origination, purchasing, selling and servicing of
commercial, real estate, residential, construction, and consumer loans; the
purchase, sale, brokering and referral of mortgage loans (for compensation);
and the solicitation and provision of deposit services and services related
thereto; and all other services incidental to the aforesaid financial services
(collectively referred to herein as "Financial Services"). The Financial
Services have been developed or are being developed by the Directors, among
others, in their respective capacities as directors of CorpBank.
1.2 The Directors and CorpBank have offered and promoted
the Financial Services by promotional, marketing and other activities,
including the personal solicitation of customers and prospective customers by
the Directors.
1.3 Each Director acknowledges that CUB would not enter
into the Reorganization Agreement unless such Director agreed not to undertake
activities competitive with the existing and intended Financial Services and
operations of CorpBank as provided in this Agreement and that, accordingly,
this Agreement is a material inducement to CUB to enter into and to carry out
the terms of the Reorganization Agreement. Each Director has therefore entered
into this Agreement to induce CUB to enter into and carry out the terms of the
Reorganization Agreement and to purchase the CorpBank Common Stock pursuant
thereto.
1.4 This Agreement will not constitute a violation of any
other agreement to which any Director is a party and has been executed and
delivered by such Director after having an opportunity to consult with such
Director's legal and other professional advisors.
1.5 Each Director has taken all necessary action to
execute and deliver this Agreement, and it constitutes a valid and binding
agreement of such Director.
SECTION 2. Agreement Not to Compete.
Each of the Directors, for himself, hereby covenants and agrees
with CUB as follows:
2.1 Non-Competition. For a five (5) year period
commencing at the Effective Time of the Merger (as defined in the
Reorganization Agreement), no Director shall directly or indirectly through an
agent or otherwise, either individually, as a member of any group formed for
such purpose or together with any other Director, without the prior written
consent of CUB (i) acquire more than five percent
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(5%) of the equity or voting interest in, or (ii) participate in the
organization or founding of, or (iii) serve on the Board of Directors or
Advisory Board of, or (iv) act as a consultant to, or (v) serve as an officer
or employee or participate in the management of, any Depository Institution, as
that term is defined in 12 C.F.R. Section 348.2, or any parent, affiliate or
subsidiary thereof (individually a "Financial Institution" and collectively
"Financial Institutions"), having an office or branch within Los Angeles,
Orange, San Diego, or Riverside Counties. Each Director agrees, during the
term of this Agreement, to provide CUB with prior notice of any and all
investments proposed to be made by such Director in any Financial Institution
described above, except those listed next to such Director's name on Exhibit
"B" attached hereto, which would exceed five percent (5%) of the outstanding
stock of such Financial Institution individually, or with other shareholders or
with other persons or entities acting as a group.
2.2 No Solicitation. For the period specified in Section
2.1, no Director shall, without the prior written consent of CUB, on behalf of
any Financial Institution (whether or not within the geographic boundaries
specified in Section 2.1), directly or indirectly through an agent or
otherwise, solicit, or aid in the solicitation of, persons or business entities
to become customers for Financial Services if such persons or business entities
are customers for Financial Services of CorpBank as of the Execution Date of
the Reorganization Agreement or the Effective Time of the Merger.
SECTION 3. Enforcement Rights.
Each Director acknowledges and agrees that:
3.1 In the event of a prospective or actual breach of
this Agreement by such Director, damages would not be an adequate remedy to
compensate CUB for the loss of goodwill and other harm to the business of CUB;
and
3.2 Therefore, in the event of a threatened or actual
breach of this Agreement by such Director, or by any person or entity described
in Section 2 above, CUB shall be entitled to a temporary restraining order, and
to temporary and permanent injunctive relief, to prevent or terminate such
anticipated or actual breach, provided that nothing in this Agreement shall be
construed to limit the damages otherwise recoverable by CUB in any such event;
and
3.3 After discussing the matter with such Director, CUB
shall have the right to inform any entity described in Section 2 above, and the
principals thereof, and any other third party that CUB reasonably believes to
be, or to be contemplating, participating with such Director or receiving from
such Director
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assistance in violation of this Agreement, of the terms of this Agreement and
of the rights of CUB hereunder, and that participation by any such entity or
persons with such Director in activities in violation of such Director's
agreement not to compete with CUB may give rise to claims by CUB against such
entity, persons or third party.
SECTION 4. General Provisions.
4.1 Binding Effect; Benefit to Successors. This
Agreement shall be binding upon each Director and upon such Director's
successors, representatives and assigns, and shall inure to the benefit of CUB
and its successors, representatives and assigns.
4.2 Attorneys' Fees and Costs. In the event of a breach,
or alleged breach, of any agreement, term or provision of this Agreement and
the filing of a suit or other legal proceeding in connection with the
enforcement or construction of any provision hereof, the prevailing party in
such suit or other proceeding shall, in addition to any other remedies
available to it, be entitled to reasonable attorneys' fees and costs from the
losing party.
4.3 Governing Law; Consent to Jurisdiction. This
Agreement shall be governed by and construed in accordance with the law of the
State of California in all respects, including all matters of validity,
construction and performance of this Agreement.
4.4 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original for all purposes, including the judicial proof of the terms hereof.
However, all of such counterparts shall constitute one and the same Agreement,
and it shall not be necessary, in making proof of this Agreement, to produce or
account for more than one such counterpart.
4.5 Entire Agreement; Modification. This Agreement
constitutes the entire agreement between the Directors and CUB with respect to
the subject mater hereof. No claim of waiver, modification, amendment, consent
or acquiescence with respect to any of the provisions shall be made against
CUB, except on the basis of a written instrument duly executed by an officer of
CUB.
4.6 Severability. Whenever possible, each provision of
this Agreement and every related document shall be interpreted in such manner
as to be valid under applicable law. However, if any provision of any of the
foregoing shall be invalid or prohibited under said applicable law, it shall be
construed, interpreted and limited to effectuate its purpose to the maximum
legally permissible extent. If
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it cannot be so construed and interpreted so as to be valid under such law,
such provision shall be ineffective to the extent of such invalidity or
prohibition without invalidating the remainder of such provision or the
remaining provisions of this Agreement, and this Agreement shall be construed
to the maximum extent possible to carry out its terms without such invalid or
unenforceable provision or portion thereof.
4.7 Incorporation of Recitals. The Recitals to this
Agreement are an integral part of this Agreement and are hereby incorporated
herein verbatim as a part of this Agreement as if set forth here in full.
4.8 Failure to Enforce. The failure of CUB to enforce
any threatened or existing violation, default or breach of this Agreement shall
not be deemed a waiver of such violation, default or breach, and CUB shall have
the right to enforce the same at a later time and the right to waive in writing
any condition imposed herein for its benefit without thereby waiving any other
provision or condition.
4.9 Several Obligations. All duties and obligations, and
representations and warranties, of each party to this Agreement shall be
several and not joint.
4.10 JURY WAIVER. THE PARTIES HERETO WAIVE TRIAL BY JURY
IN ALL DISPUTES RELATED TO THIS AGREEMENT OR THE REORGANIZATION AGREEMENT IN ANY
MANNER.
IN WITNESS WHEREOF, the Directors and CUB have executed and
delivered this Agreement Not To Compete on the date set forth above.
CU BANCORP "DIRECTORS"
By:________________________ _________________________
Title:_____________________ _________________________
By:________________________ _________________________
Title:_____________________ _________________________
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APPENDIX A-2
AMENDMENT NO. 1
TO THE AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
This Amendment No. 1 to the Amended and Restated Agreement and Plan of
Reorganization dated as of October 11, 1995 (the "Agreement') by and among CU
Bancorp, a California corporation ("Bancorp"); California United Bank, National
Association, a national banking association and a wholly-owned subsidiary of
Bancorp ("CUB"); and Corporate Bank, a California state chartered bank
("CorpBank"), is made and entered into as of November 10, 1995.
RECITALS
This Agreement provides for the merger of CorpBank with and into CUB.
In accordance with Section 9.9 of the Agreement, the parties have decided to
amend certain terms and conditions of the Agreement as set forth herein.
In consideration of the mutual covenants, agreements and
representations contained herein, the parties hereto agree as follows:
1. All capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in the Agreement.
2. Section 1.1(b) of the Agreement is hereby amended by revising
the lead-in clause to read as follows:
(b) Purchase Price/Conversion of Shares. Subject to the
provisions of Section 5.11(f) at the Effective Time of the Merger:
3. Section 5.11 of the Agreement is hereby amended by adding a
new subsection (f) to read in its entirety as follows:
(f) Resolicitation of CorpBank Shareholders. In the event that
CorpBank's Shareholders' Equity as of the Calculation Date (plus an
amount equal to the pro rata net income or net loss from operations for
the Audit Period applied to the Applicable Period and plus any recovery
by sale or collection of insurance proceeds of the Bond Claim)
(collectively the "Determined Equity") is less than $6,705,100 (i.e.
95% of the Corporate Shareholders' Equity set forth in Corporate's
Consolidated Report of Condition and Income as of September 30, 1995,
filed with the FDIC on November 9, 1995, of $7,058,000), Bancorp agrees
that CorpBank's shareholders be resolicited and given an opportunity to
rescind their prior approval and vote again on the Merger, unless
Bancorp decides, in its sole discretion, (i) to calculate the Purchase
Price in accordance with Section 1.1(b) based on a Determined Equity of
no less than $6,705,100 or (ii) to terminate the Agreement in
accordance with Section 8.1(a)(ix). Notwithstanding the above, the
additional $200,000 payment by Bancorp in the event there has been no
recovery on or sale of the Bond Claim, shall not be added
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to the Determined Equity for purposes of determining whether the
Determined Equity is less than $6,705,100.
4. Section 6.1(a) of the Agreement shall be amended to read in
its entirety as follows:
(a) Shareholder Approval. The transactions contemplated hereby
shall have received all requisite approvals of the shareholders of
CorpBank, Bancorp, and CUB in accordance with Sections 5.7(r), 5.10 and
5.11(f) (if applicable).
5. Section 8.1(a) of the Agreement is hereby amended by adding a
new subsection (ix) to read in is entirety as follows:
(ix) By Bancorp or CUB if Corporate's Determined Equity is
below $6,705,100 as of the Calculation Date.
6. Except as set forth herein, all other terms and conditions of
the Agreement shall remain in full force and effect.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment No. 1 as of November 10, 1995.
Bancorp: CU BANCORP
By: STEPHEN G. CARPENTER
Name: Stephen G. Carpenter
Title: President
By: PATRICK HARTMAN
Name: Patrick Hartman
Title: Chief Financial Officer
CUB: CALIFORNIA UNITED BANK, NATIONAL
ASSOCIATION
By: STEPHEN G. CARPENTER
Name: Stephen G. Carpenter
Title: Chief Executive Officer
By: DAVID I. RAINER
Name: David I. Rainer
Title: President
CorpBank: CORPORATE BANK
By: C. ELLIS PORTER
Name: C. Ellis Porter
Title: President
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APPENDIX B
October 23, 1995
[THE FINDLEY GROUP LETTERHEAD]
Board of Directors
CORPORATE BANK
2740 North Grand Avenue
Santa Ana, California 92701
Gentlemen and Mesdames:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the outstanding shares of Common Stock, no par value
per share (the "Shares"), of Corporate Bank (the "Company") of the Purchase
Price Per Share defined in the Amended and Restated Agreement and Plan of
Reorganization, dated as of October 11, 1995, (the "Amended Agreement"),
regarding the proposed merger of the Company with and into California United
Bank, N.A. (the "Bank") and the exchange of the Shares for shares of Common
Stock, no par value, of CU Bancorp ("CUB"), parent corporation to the Bank, and
cash. On March 27, 1995 the Company and CUB entered into an Agreement and Plan
of Reorganization ("The Old Agreement"). The Findley Group issued an opinion
to the Board of Directors of the Company on March 27, 1995 that the
transaction, as set forth in the Old Agreement, was fair from a financial point
of view to the Company shareholders. Due to changes in the Company's
management, financial results of the Company, potential claims against former
employees of the Company, and delays in receiving the Company's audited
financial statements for the period ending December 31, 1994, the transaction
incurred significant delay resulting in a renegotiation of the transaction.
Such renegotiation resulted in the execution of the Amended Agreement.
Under the Amended Agreement, the Company shareholders shall receive CUB common
stock and cash based upon the Purchase Price Per Share. The Purchase Price Per
Share is based upon a Purchase Price equal to the Shareholder's Equity of the
Company as of the Audit Date (which is expected to be November 30, 1995) plus
or minus an amount equal to the Company's pro rata net income/loss for the
audit period from January 1, 1995 to the Audit Date applied to the Calculation
Date (excluding the effect of extraordinary gains) and plus any net recovery on
the Bond Claim. If there is no recovery on the Bond Claim prior to the
Calculation Date, the Purchase Price will be
<PAGE> 278
Board of Directors - 2 October 23, 1995
Corporate Bank
will be increased by $200,000. To determine the Purchase Price Per Share, the
Purchase Price is divided by the number of shares of the Company common stock
outstanding at the Calculation Date. Each share of the Company common stock
shall receive the Purchase Price Per Share either in the form of CUB common
stock valued at $8.00 per share or cash, or a combination thereof. The Amended
Agreement limits the aggregate amount of cash payout to no greater than
twenty-five percent (25%) nor less than ten percent (10%) of the Purchase
Price. As of June 30, 1995 the Purchase Price Per Share would have been $14.49
based upon 500,000 shares of the Company common stock outstanding. Due to high
operating costs incurred by the Company and costs identified with the
transaction, it is possible that the Purchase Price Per Share may be less than
$14.49.
The Findley Group, as part of its investment banking business, is continually
engaged in the valuation of banking institutions and their securities in
connection with mergers and acquisition, negotiated underwritings, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as an advisor in connection with certain
limited aspects of the Company's current operation.
In connection with this opinion, we have reviewed, among other things, the
Amended Agreement; the Old Agreement; Annual Reports to Stockholders of the
Company for the two years ended December 31, 1994; Annual Reports to
Stockholders and Annual Reports on Form 10- K of CUB for the five years ended
December 31, 1994; certain interim reports to stockholders of the Company,
Quarterly Reports on Form 10-Q of CUB; September 30, 1995 financial statements
for the Company and CUB; Board of Director reports; a draft of the Form S- 4
Registration Statement to be filed by CUB as part of the transaction; certain
other communications from the Company to its stockholders; and certain internal
financial analyses and forecasts for the Company prepared by its management.
We also have held discussions with members of the senior managements of the
Company and CUB regarding the past and current business operations, financial
condition and future prospects of their respective companies. In addition, we
have reviewed the reported price and trading activity for the Company and CUB,
compared certain financial and stock market information for the Company and CUB
with similar information for certain other companies, reviewed the financial
terms of certain recent business combinations in the banking industry and
performed such other studies and analyses as we considered appropriate.
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. In that regard, we have assumed, with your consent,
that the financial forecasts, including, without limitation, projections
regarding underperforming and nonperforming assets and net charge-offs, have
been reasonably prepared on a basis reflecting the best currently available
judgments and estimates of the Company and that such forecasts will be realized
in the amounts and at the times contemplated thereby. We are not
<PAGE> 279
Board of Directors - 3 October 23, 1995
Corporate Bank
experts in the evaluation of loan and lease portfolios for the purposes of
assessing the adequacy of the allowances for losses with respect thereto and
have assumed, with your consent, that such allowances for each of the Company
and CUB/Bank are in the aggregate adequate to cover all such losses. In
addition, we have not reviewed individual credit files nor have we made an
independent evaluation or appraisal of the assets and liabilities of the
Company or CUB or any of their subsidiaries and have not been furnished with
any such evaluation or appraisal. We also have assumed that CUB\Bank will
receive all necessary regulatory approvals without undue delay.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be relied upon by any other person or used
for any other purpose without our prior written consent. This letter does not
constitute a recommendation to the Board of Directors or to any shareholders of
the Company with respect to any approval of the transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Purchase
Price Per Share pursuant to the Amended Agreement, and the methodology for
computing the Purchase Price Per Share as of the Calculation Date, are fair
from a financial point of view, to the holders of Shares.
Respectfully,
THE FINDLEY GROUP
/s/ Gary Steven Findley
Gary Steven Findley
Co-Director
<PAGE> 280
APPENDIX C
SECTION 215a. MERGER OF NATIONAL BANKS OR STATE BANKS INTO NATIONAL BANKS
(a) APPROVAL OF COMPTROLLER, BOARD AND SHAREHOLDERS; MERGER AGREEMENT;
NOTICE; CAPITAL STOCK; LIABILITY OF RECEIVING ASSOCIATION
One or more national banking associations or one or more State banks,
with the approval of the Comptroller, under an agreement not inconsistent with
this subchapter, may merge into a national banking association located within
the same State, under the charter of the receiving association. The merger
agreement shall --
(1) be agreed upon in writing by a majority of the board
of directors of each association or State bank participating in the
plan of merger;
(2) be ratified and confirmed by the affirmative vote of
the shareholders of each such association or State bank owning at
least two-thirds of its capital stock outstanding, or by a greater
proportion of such capital stock in the case of a State bank if the
laws of the State where it is organized so require, at a meeting to
be held on the call of the directors, after publishing notice of the
time, place, and object of the meeting for four consecutive weeks in
a newspaper of general circulation published in the place where the
association or State bank is located, or, if there is no such
newspaper, then in the newspaper of general circulation published
nearest thereto, and after sending such notice to each shareholder of
record by certified or registered mail at least ten days prior to the
meeting, except to those shareholders who specifically waive notice,
but any additional notice shall be given to the shareholders of such
State bank which may be required by the laws of the State where it is
organized. Publication of notice may be waived, in cases where the
Comptroller determines that an emergency exists justifying such
waiver, by unanimous action of the shareholders of the association or
State banks;
(3) specify the amount of the capital stock of the
receiving association, which shall not be less than that required
under existing law for the organization of a national bank in the
place in which it is located and which will be outstanding upon
completion of the merger, the amount of stock (if any) to be
allocated, and cash (if any) to be paid, to the shareholders of the
association or State bank being merged into the receiving
association; and
(4) provide that the receiving association shall be
liable for all liabilities of the association or State bank being
merged into the receiving association.
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(b) DISSENTING SHAREHOLDERS
If a merger shall be voted for at the called meetings by the
necessary majorities of the shareholders of each association or State bank
participating in the plan of merger, and thereafter the merger shall be
approved by the Comptroller, any shareholder of any association or State bank
to be merged into the receiving association who has voted against such merger
at the meeting of the association or bank of which he is a stockholder, or has
given notice in writing at or prior to such meeting to the presiding officer
that he dissents from the plan of merger, shall be entitled to receive the
value of shares so held by him when such merger shall be approved by the
Comptroller upon written request made to the receiving association at any time
before thirty days after the date of consummation of the merger, accompanied by
the surrender of his stock certificates.
(c) VALUATION OF SHARES
The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective date of the merger, by an appraisal made by a
committee of three persons, composed of (1) one selected by the vote of the
holders of the majority of the stock, the owners of which are entitled to
payment in cash; (2) one selected by the directors of the receiving
association; and (3) one selected by the two so selected. The valuation agreed
upon by any two of the three appraisers shall govern. If the value so fixed
shall not be satisfactory to any dissenting shareholder who has requested
payment, that shareholder may, within five days after being notified of the
appraised value of his shares, appeal to the Comptroller, who shall cause a
reappraisal to be made which shall be final and binding as to the value of the
shares of the appellant.
(d) APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS: APPRAISAL BY
COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF
SHARES; STATE APPRAISAL AND MERGER LAW
If, within ninety days from the date of consummation of the merger,
for any reason one or more of the appraisers is not selected as herein
provided, or the appraisers fail to determine the value of such shares, the
Comptroller shall upon written request of any interested party cause an
appraisal to be made which shall be final and binding on all parties. The
expenses of the Comptroller in making the reappraisal or the appraisal, as the
case may be, shall be paid by the receiving association. The value of the
shares ascertained shall be promptly paid to the dissenting shareholders by the
receiving association. The shares of stock of the receiving association which
would have been delivered to such dissenting shareholders had they not
requested payment shall be sold by the receiving association at an advertised
public auction, and the receiving association shall have the right to purchase
any of such shares at such public auction, if it is the highest bidder
therefor, for the purpose of reselling such shares within thirty days
thereafter to such person or persons and at such price not less than par as its
board of directors by resolution may determine. If the shares are sold at
public auction at a price greater than the amount paid to the dissenting
shareholders, the excess in such sale price shall be paid to such dissenting
shareholders. The appraisal of such shares of stock in any State bank shall be
determined in the manner prescribed by the law of the State in such cases,
rather than as provided in this section, if such provision is made in the State
law; and no such merger shall be in contravention of the law of the State under
which such bank is incorporated. The provisions of this subsection shall apply
only to shareholders of (and stock owned by them in) a bank or association
being merged into the receiving association.
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CALIFORNIA CORPORATIONS CODE
CHAPTER 13
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND
"DISSENTING SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section
152) of a corporation is required for a reorganization under
subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201,
each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a
short-term merger may, by complying with this chapter, require the
corporation in which the shareholder holds shares to purchase for
cash at their fair market value the shares owned by the shareholder
which are dissenting shares as defined in subdivision (b). The fair
market value shall be determined as of the day before the first
announcement of the terms of the proposed reorganization or
short-term merger, excluding any appreciation or depreciation in
consequence of the proposed action, but adjusted for any stock split,
reverse stocks split or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means
shares which come within all of the following descriptions:
(1) Which were not immediately prior to the
reorganization or short-form merger either (A) listed
on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin
stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303
and 1304; provided, however, that this provision does
apply to any shares with respect to which there
exists any restrictions on transfer imposed by the
corporation or by any law or regulation; and
provided, further, that this provision does not apply
to any class of shares described in subparagraph (A)
or (B) if demands for payment are filed with respect
to 5 percent or more of the outstanding shares of
that class.
(2) Which were outstanding on the date for the
determination of shareholders entitled to vote on the
reorganization and (A) were not voted in favor of the
reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph
(A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the
reorganization, or which were held of record on the
effective date of a short-form merger; provided,
however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any
case where the approval required by Section 1201 is
sought by written consent rather
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than at a meeting.
(3) Which the dissenting shareholder has demanded that
the corporation purchase at their fair market value,
in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted the
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder"
means the recordholder of dissenting shares and includes a transferee
of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation
to purchase their shares of cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's rights
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subsection (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any
purpose unless it is received by the corporation or any transfer agent thereof
(1) in the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held
of record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to vote
the fair market value of those shares as of the day before the announcement of
the proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder
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demands that the corporation purchase, to be stamped or endorsed with a
statement that the shares are dissenting shares or to be exchanged for
certificates or appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written statements
issued therefor shall bear a like statement, together with the name of the
original dissenting holder of the shares.
SECTION 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market value of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares
are dissenting shares or the fair market value of the dissenting shares or both
or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholder may join as plaintiffs or
be joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the
issues. If the status of the shares as dissenting shares is in issue, the
court shall first determine that issue. If the fair market value of the
dissenting shares is in issue, the court shall determine, or shall appoint one
or more impartial appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the
time fixed, by the court, the appraisers, or a majority of them, shall make and
file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and considered
on such evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
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(b) If a majority of the appraisers appointed fail to make and
file a report within 10 days from the date of their appointment or within such
further time as may be allowed by the court or the report is not confirmed by
the court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at
the legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to
the appraisers to be fixed by the court, shall be assessed or apportioned as
the court considers equitable, but, if the appraisal exceeds the price offered
by the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
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(a) The corporation abandons the reorganization. Upon abandonment
of the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree
upon the status of the shares as dissenting shares or upon the purchase price
of the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the
corporation, withdraws the shareholder's demand for purchase of the dissenting
shares.
\\
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APPENDIX D-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1994.
OR
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
------------ ------------
Commission file number 0-11008
C U BANCORP
(Exact name of registrant as specified in its charter)
California 95-3657044
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
16030 Ventura Boulevard
Encino, California 91436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 907-9122
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(title of class)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 220.405 of this chapter) is
not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K /x/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1995:
Common Stock, no par value -
The number of shares outstanding of the issuer's classes of common stock as of
February 28, 1995:
Common Stock, no par value 4,527,324 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
1
<PAGE> 288
This document contains 81 pages.
2
<PAGE> 289
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
Part Number Item Page
- ---- ------ ---- ----
<S> <C> <C> <C>
I 1. Business 3
I 2. Properties 16
I 3. Legal Proceedings 17
I 4. Submission of Matters to a Vote 19
of Security Holders
II 5. Market for the Company's Common Stock 20
and Related Stockholder Matters
II 6. Selected Financial Data 21
II 7. Management's Discussion and Analysis 22
of Financial Condition and Results
of Operations
II 8. Financial Statements and Supplementary 36
Data
II 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 56
III 10. Directors and Executive Officers of
the Company 57
III 11. Executive Compensation 57
III 12. Security Ownership of Certain 57
Beneficial Owners and Management
III 13. Certain Relationships and Related 57
Transaction
IV 14. Exhibits, Financial Statement 57
Schedules and Reports on Form 8-K
</TABLE>
3
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PART 1
Item 1. BUSINESS
General Development of Business
CU Bancorp, (the "Company) was incorporated under the laws of the State
of California on September 3, 1981. It is the parent of California United Bank,
a National Banking Association (the "Bank") which is a wholly owned subsidiary
of the Company.
DESCRIPTION OF BUSINESS
Commercial Banking Business
The Bank engages in the commercial banking business primarily serving
the San Fernando Valley, Beverly Hills, West Los Angeles, and the South Bay
portions of the County of Los Angeles which are generally affluent residential
and business centers. The Bank also serves the greater Southern California
metropolitan area.
Until November 1993, the Bank operated in two distinct segments,
commercial banking and mortgage banking. The Bank sold the origination portion
of its mortgage banking division in November 1993.
The Bank's primary focus is to engage in middle market lending to
businesses, professionals, the entertainment industry, and high net-worth
individuals. While in the past, the Bank specialized in serving the real estate
industry, the Bank is currently attempting to diversify its portfolios and will
in the future specialize in asset based lending to middle market businesses.
While the Bank does not actively solicit retail or consumer banking business, it
offers these services primarily to owners, officers, and employees of its
wholesale customers, and customers of accounting and business management firms
with which the Bank regularly does business.
The Bank customers and deposits by offering a personalized approach
and a high degree of service. The key to the Bank's deposit generation is
personal contacts and services rather than rate competition. A significant
portion of its business is with business customers who conduct substantially all
of their banking business with the Bank.
Either alone or in concert with correspondent banks, the Bank offers a
wide variety of credit and deposit services to its customers. Management
believes that its current and prospective customers favorably respond to the
individualized tailored banking services that the Bank provides. Deposit
services, which the Bank offers, include personal and business checking accounts
and savings accounts, insured money market deposit accounts, interest-bearing
negotiable orders of withdrawal ("NOW") accounts, and time certificates of
deposit, along with IRA and Keogh accounts. The Bank has not requested and does
not have regulatory approval to offer trust services; nor does it have any
present intention to seek such approval.
The Bank has developed relationships with an extensive network or
correspondent banks through which it is able to offer customers and prospective
customers a wide variety of commercial and international banking services which
it is otherwise unable to offer by itself. The Bank has successfully attracted
and developed these relationships with several sizable correspondents which have
participated in providing a portion of the Bank's customers' borrowing needs
while the Bank remains the customers' bank of record.
Continued development of a diversified commercial oriented deposit base
is the Bank's highest priority. Time and demand deposits are actively solicited
by the directors, officers, and employees of the Bank. The executive and senior
officers of the Bank have had substantial experience in soliciting bank deposits
and in serving the comprehensive banking needs of
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small and mid-size businesses.
The Bank services the commercial banking business from its head office
at 16030 Ventura Boulevard, in Encino, California 91436, a suburb of Los
Angeles, and an office in West Los Angeles, located at 10880 Wilshire Boulevard,
Los Angeles California 90024, in the Westwood commercial and retail district,
with close freeway access. The Bank also maintains a South Bay Regional Office
(non depository) in Gardena, California, in order to serve the burgeoning South
Bay area, a San Gabriel Valley Regional Office (non depository), located in City
of Industry, which serves the San Gabriel Valley and northern Orange County and
a Ventura County Loan Production Office in Camarillo which services northern Los
Angeles County and Ventura County.
Mortgage Banking
In November 1993, the Bank sold the mortgage origination portion of its
mortgage banking division to Republic Bancorp of Ann Arbor Michigan. This
division had been established in February of 1988. The purpose of this division
was to underwrite residential mortgages and subsequently sell them into the
secondary market. Mortgages were originated on both a servicing retained and
servicing released basis. Substantially all the loans originated by this
division were presold to institutional investors or government agencies and are
only originated subject to this forward commitment. The division had loan
origination offices in Calabasas, Irvine, Costa Mesa, Pasadena, San Jose, and
Sacramento, California in addition to origination centers at other Bank
branches.
The Bank retained the mortgage servicing portfolio after the
sale of the division, although it retained the former division to service the
loans. Aer 31, 1994, the Bank sold all servicing with one sale to close in
January, 1995. The Bank entered into an agreement with the Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation to dispose of
any remaining portion of this portfolio by the of 1994 because, with the sale of
the mortgage origination operation, the Bank is no longer a qualified
seller/servicer of such loans. See Management's Discussion and Analysis for
further amplification on the effect of the sale.
Entertainment Division
The Bank's entertainment division, housed in its West Los Angeles
Regional Office, is designed specifically to serve the needs of accountants and
business managers serving artists and other entertainment industry related
companies and individuals, while providing a more diverse source of deposits for
the Bank as a whole. At December 31, 1994 and 1993, this division had total
deposits of $33 million and $35 million, respectively.
Customers and Business Concentration
The Bank believes that there is no single customer whose loss would
have a material adverse effect on the Bank. At year end 1993, the Bank obtained
approximately 24% of its deposits from companies associated with the real estate
business, primarily title and escrow companies. However by year end 1994, this
had been reduced to 17 %. While this appears to be a significant deposit
concentration, because these deposits are attributable to a large number of
companies in a diverse market (from small single family homes to larger
projects), the Bank does not believe there is a problematical concentration in
any one industry. To account for seasonal and economic variations in this
industry, the Bank has taken a number of steps to insure liquidity. Regarding
business concentrations in both lending and deposit activities, see Management's
Discussion and Analysis.
Competition
The Company does not conduct any business unrelated to the business of
the Bank and thus is affected by competition only in the banking industry.
The Bank's primary commercial banking market area consists of the San
Fernando Valley, Beverly Hills, West Los Angeles, and metropolitan areas of the
City and County of Los Angeles. The Bank also serves the South Bay, Orange
County, Northern San Diego County, the San Gabriel Valley, the Conejo Valley,
Ventura County and much of Southern California.
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The banking business in California generally, and specifically in the Bank's
primary market area, is highly competitive with respect to both loans and
deposits. The business is dominated by a relatively small number of major banks
which have many offices operating over wide geographic areas. Many of the major
commercial banks offer certain services (such as international services, trust
services, and securities brokerage) which are not offered directly by the Bank.
By virtue of the greater total capitalization of such banks, they have
substantially higher lending limits than the Bank and substantial advertising
and promotional budgets. However, smaller independent financial institutions
also represent a competitive force, particularly as to the class of customers
which the Bank typically serves.
To compete with major financial institutions, the Bank relies upon
specialized services, responsive handling of customer needs, local promotional
activity, and personal contacts by its officers, directors, and staff, as
opposed to large multi- branch banks which compete primarily by rate and
location of branches. For customers whose loan demands exceed the Bank's lending
limit, the Bank seeks to arrange for such loans on a participation basis with
correspondent banks. The Bank also assists customers requiring services not
offered by the Bank in obtaining such services from its correspondent banks.
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks), savings and loan
associations, and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies, and insurance
companies. In the past several years, the trend has been for other financial
intermediaries to offer financial services traditionally offered by banks. Other
institutions, such as brokerage houses, credit card companies, and even retail
establishments, have offered new investment vehicles such as money-market funds
or cash advances on credit card accounts. This led to increased cost of funds
for most financial institutions. Even within the banking industry, the trend
has been towards offering more varied services, such as discount brokerage,
often through affiliate relationships. The direction of federal legislation
seems to favor and foster competition between different types of financial
institutions and to encourage new entrants into the financial services market.
However, it is not possible to forecast the impact such developments will have
on commercial banking in general, or on the Bank in particular.
Economic Environment in the Bank's Market Area
The general economy in the Southern California market area, and
particularly the real estate market, are suffering from the effects of a
prolonged recession that have negatively impacted upon the ability of certain
borrowers of the Bank to perform their obligations to the Bank. According to the
First Interstate Bancorp Forecast 1994/1995 (the "Forecast"), Los Angeles County
continues to serve as "ground zero" for the California recession. Los Angeles'
unemployment rate remains higher than the adjusted rates for both the state or
the nation. The Forecast predicts that economic recovery "continues to elude
California's most populous county, besieged by weak demand, falling real estate
values and defense procurement cuts which have Los Angeles' aerospace/defense
related industries in full retreat. A stabilization in the area's defense
related industries and real estate market is necessary before a full fledged
recovery can begin to take hold. This is unlikely to happen until early 1995 in
Los Angeles." It is too early to predict the effect of the January 1994
earthquake on the Los Angeles Area, although reports have indicated that it will
be the most costly natural disaster on record, surpassing the midwest floods of
1993. It is also expected that it will have a positive effect on the
construction industry, but a negative effect on the real estate market which may
further delay the economic recovery.
The financial condition of the Bank has been, and is expected to
continue to be, dependent upon overall general economic conditions and the real
estate market in Southern California. The future success of the Bank is
dependent, in large part, upon the quality of its assets. Although management of
the Bank has devoted substantial time and resources to the identification,
collection and workout of nonperforming assets, and the diversification of
portfolios, the real estate markets in Southern California and the overall
economy in this area is likely to continue to have a significant effect on the
quality of the Bank's assets in future periods and, accordingly, its financial
condition and results of operations.
REGULATION AND SUPERVISION
The following discussion of statutes and regulations is only a summary
and does not purport to be complete. This discussion is qualified in its
entirety by reference to such statutes and regulations. No assurance can be
given that such regulations will not change in the future.
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The Company is subject to periodic reporting requirements of Section 13
(d) of the Securities Exchange Act of 1934, which requires the Company to file
annual, quarterly, and other current reports as well as proxy materials with the
Securities and Exchange Commission ("the Commission").
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio comprise
the major portion of the Company's earnings. These rates are highly sensitive
to many factors that are beyond the control of the Bank. Accordingly, the
earnings and growth of the Company are subject to the influence of domestic and
foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other
financial institutions are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
For example, legislation was recently introduced in Congress that would repeal
the current statutory restrictions on affiliations between commercial banks and
securities firms. Under the legislation, as proposed, bank holding companies
would be allowed to control both a commercial bank and a securities affiliate,
which could engage in the full range of investment banking activities,
including corporate underwriting. The likelihood of any major legislative
changes and the impact such changes might have on the Company are impossible to
predict. See "Item 1. Business - Supervision and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
laws which relate to the regulation of the Company and the Bank. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
THE COMPANY
The Company, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA").
The Company is required to file with the Federal Reserve Board quarterly and
annual reports and such additional information as the Federal Reserve Board may
require pursuant to the BHCA. The Federal Reserve Board may conduct
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
must file written notice
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and obtain approval from the Federal Reserve Board prior to purchasing or
redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "Item 1. Business - Supervision and Regulation - Capital
Standards."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank
or bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank
holding company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to
differentiate between activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern and is generally
prohibited from approving an application by a bank holding company to acquire
voting shares of any commercial bank in another state unless such acquisition
is specifically authorized by the laws of such other state.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.
THE BANK
The Bank, as a national banking association, is subject to primary
supervision, examination and regulation by the Comptroller. If, as a result of
an examination of a Bank, the Comptroller should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of the Bank's operations are unsatisfactory or that
the Bank or its management is violating or has violated any law or regulation,
various remedies are available to the Comptroller. Such remedies include the
power to enjoin "unsafe or unsound practices," to require affirmative action to
correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially
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enforced, to direct and increase in capital, to restrict the growth of the Bank,
to assess civil monetary penalties, and to remove officers and directors. The
FDIC has similar enforcement authority, in addition to its authority to
terminate a Bank's deposit insurance in the absence of action by the Comptroller
and upon a finding that a Bank is in an unsafe or unsound condition, is engaging
in unsafe or unsound activities, or that its conduct poses a risk to the deposit
insurance fund or make prejudice the interest of its depositors. The Bank is
not currently subject to any such actions by the Comptroller or the FDIC.
The deposits of the Bank are insured by the FDIC in the manner and to
the extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See "Item 1. Business - Supervision and Regulation
Premiums for Deposit Insurance." The Bank is also subject to certain
regulations of the Federal Reserve Board and applicable provisions of
California law, insofar as they do not conflict with or are not preempted by
federal banking law.
Various other requirements and restrictions under the laws of the
United States and the State of California affect the operations of the Bank.
Federal and California statutes and regulations relate to many aspects of the
Bank's operations, including reserves against deposits, interest rates payable
on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices, capital requirements and disclosure
obligations to depositors and borrowers.
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE COMPANY BY THE BANK
The Company is a legal entity separate and distinct from the Bank.
The Company's ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. The prior approval of
the Comptroller is required if the total of all dividends declared by a
national bank in any calendar year exceeds the bank's net profits (as defined)
for that year combined with its retained net profits (as defined) for the
preceding two years, less any transfers to surplus.
The Comptroller also has authority to prohibit the Bank from engaging
in activities that, in the Comptroller's opinion, constitute unsafe or unsound
practices in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the
Comptroller could assert that the payment of dividends or other payments might,
under some circumstances, be such an unsafe or unsound practice. Further, the
Comptroller and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks or bank
holding companies under their jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount
of dividends which the Bank or the Company may pay. See "Item 1. Business -
Supervision and Regulation - Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms" and - "Capital Standards" for a discussion of these
additional restrictions on capital distributions. The Comptroller has approved
the Bank's plan to pay not more than $90,000 in dividends in each calendar
quarter of 1995 to the Company.
At present, substantially all of the Company's revenues, including
funds available for the payment of dividends and other operating expenses, is,
and will continue to be, primarily dividends paid by the Bank. At December 31,
1994, the Bank had no retained earnings available for the payment of cash
dividends but had received the prior approval of the Comptroller to pay certain
dividends as set forth above.
The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Company or other affiliates, the purchase of or investments
in stock or other securities thereof, the taking of such securities as
collateral for loans and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate is limited to
10% of the Bank's capital and surplus (as defined by federal regulations) and
such secured loans and investments are limited, in the aggregate, to 20% of the
Bank's capital and surplus (as defined by federal regulations). California law
and National Banking Law also imposes certain restrictions with respect to
transactions involving the Company and other controlling persons of the Bank.
Additional restrictions on transactions with
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affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law. See "Item 1. Business - Supervision and Regulation -
Prompt Corrective Regulatory Action and Other Enforcement Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board and the Comptroller have adopted risk-based
minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of assets
and credit equivalent amounts of off balance sheet items are multiplied by one
of several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet
items, against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, term preferred stock, term subordinated
debt and certain other instruments with some characteristics of equity. The
inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. For all banking organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The federal banking regulators have issued a proposed rule to take
account of interest rate risk in calculating risk- based capital. The proposed
rule includes a supervisory model for taking account of interest rate risk.
Under that model, institutions would report their assets, liabilities and off
balance sheet positions in time bands based upon their remaining maturities.
The federal banking agencies would then calculate a net risk weighted interest
rate exposure. If that interest rate risk exposure was in excess of a certain
threshold (1% of assets), the institution could be required to hold additional
capital proportionate to that excess risk. Alternatively, the agencies have
proposed making interest rate risk exposure a subjective factor in considering
capital adequacy. Exposures would be measured in terms of the change in the
present value of an institution's assets minus the change in the present value
of its liabilities and off-balance sheet positions for an assumed 100 basis
point parallel shift in market interest rates. However, the federal banking
agencies have proposed to let banks use their own internal measurement of
interest rate risk if it is declared adequate by examiners.
Effective January 17, 1995, the federal banking agencies issued a
final rule relating to capital standards and the risks arising from the
concentration of credit and nontraditional activities. Institutions which have
significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these
risks, will be required to set aside capital in excess of the regulatory
minimums. The federal banking agencies have not imposed any quantitative
assessment for determining when these risks are significant, but have
identified these issues as important factors they will review in assessing an
individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and
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lease losses which, among other things, establishes certain benchmark ratios of
loan loss reserves to classified assets. The benchmark set forth by such policy
statement is the sum of (a) assets classified loss; (b) 50 percent of assets
classified doubtful; (c) 15 percent of assets classified substandard; and (d)
estimated credit losses on other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. See
"Item 1. Business -- Supervision and Regulation -- Accounting Changes." The
federal banking agencies recently issued final rules governing banks and bank
holding companies, which become effective April 1, 1995, which limit the amount
of deferred tax assets that are allowable in computing an institutions
regulatory capital. The standard has been in effect on an interim basis since
March 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year
of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of
any deferred tax in excess of this limit would be excluded from Tier 1 Capital
and total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
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The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1994.
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------
Actual Minimum
------ Capital
Amount Ratio Requirement
------ ----- -----------
(In thousands)
<S> <C> <C> <C>
Leverage ratio $29,506 10.4% 4.0%
Tier 1 risk-based ratio 29,506 14.1 4.0
Total risk-based ratio 32,178 15.4 8.0
</TABLE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its
capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal
law. An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
---------------- ----------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
---------------- ------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
---------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The federal banking
agencies, however, may not treat an institution as "critically
undercapitalized" unless its capital ratio actually warrants such treatment.
The Bank believes it meets all of the criteria for "well capitalized".
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot
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accept a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is limited
to the lesser of (a) an amount equal to 5% of the depository institution's total
assets at the time the institution became undercapitalized or (b) the amount
which is necessary to bring the institution into compliance with all capital
standards applicable to such institution as of the time the institution fails to
comply with its capital restoration plan. Finally, the appropriate federal
banking agency may impose any of the additional restrictions or sanctions that
it may impose on significantly undercapitalized institutions if it determines
that such action will further the purpose of the prompt correction action
provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be prohibited
from engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
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<PAGE> 300
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The
standards, which were issued in the form of guidelines rather than regulations,
relate to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are
expected to be issued in the near future.
In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate lending. The
regulations, which became effective on March 19, 1993, require insured
depository institutions to adopt written policies establishing standards,
consistent with such guidelines, for extensions of credit secured by real
estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan
or investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United
States Treasury; up to 90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any borrowings not repaid
by asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate
on deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC has adopted final regulations implementing a risk-based
premium system required by federal law. Under the regulations, which cover the
assessment periods commencing on and after January 1, 1994, insured depository
institutions are required to pay insurance premiums currently within a range of
23 cents per $100 of deposits to 31 cents per $100 of deposits depending on
their risk classification. On January 31, 1995, the FDIC issued proposed
regulations that would establish a new assessment rate schedule of 4 cents per
$100 of deposits to 31 cents per $100 of deposits applicable to members of BIF.
There can be no assurance that the final regulations will be adopted as
proposed. To determine the risk-based assessment for each institution, the
FDIC will categorize an institution as well capitalized, adequately capitalized
or undercapitalized based on its capital ratios. A well-capitalized
institution is one that has at least a 10% total risk-based capital ratio, a 6%
Tier 1 risk- based capital ratio and a 5% Tier 1 leverage capital ratio. An
adequately capitalized institution will have at least an 8% total risk-based
capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% Tier 1 leverage
capital ratio. An undercapitalized institution will be one that does not meet
either of the above definitions. The FDIC will also assign each institution to
one of three subgroups based upon reviews by the institution's primary federal
or state regulator, statistical analyses of financial statements and other
information relevant to evaluating the risk posed by the institution.
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<PAGE> 301
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a
bank holding company that is adequately capitalized and managed may obtain
approval under the BHCA to acquire an existing bank located in another state
without regard to state law. A bank holding company would not be permitted to
make such an acquisition if, upon consummation, it would control (a) more than
10% of the total amount of deposits of insured depository institutions in the
United States or (b) 30% or more of the deposits in the state in which the bank
is located. A state may limit the percentage of total deposits that may be
held in that state by any one bank or bank holding company if application of
such limitation does not discriminate against out-of- state banks. An
out-of-state bank holding company may not acquire a state bank in existence for
less than a minimum length of time that may be prescribed by state law except
that a state may not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the
laws of that state, subject to the same requirements and conditions as for a
merger transaction.
The Interstate Act is likely to increase competition in the Company's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two stages. The first stage allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. On December 21, 1993, the federal
banking agencies issued a proposal to change the manner in which they measure a
bank's compliance with its CRA obligations, but no final regulation has yet
been approved.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
ACCOUNTING CHANGES
In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109, "Accounting for Income
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<PAGE> 302
Taxes," which supersedes SFAS No. 96 of the same title. SFAS No. 109, which
became effective for fiscal years beginning after December 31, 1992, employs an
asset and liability approach in accounting for income taxes payable or
refundable at the date of the financial statements as a result of all events
that have been recognized in the financial statements and as measured by the
provisions of enacted tax laws. Adoption by the Company of SFAS No. 109 did not
have a material impact on the Company's results of operations.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," which is effective for fiscal years
ending after December 15, 1992 (December 15, 1995 in the case of entities with
less than $150 million in total assets). SFAS No. 107 requires financial
intermediaries to disclose, either in the body of their financial statements or
in the accompanying notes, the "fair value" of financial instruments for which
it is "practicable to estimate that value." SFAS No. 107 defines "fair value"
as the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale. Quoted market prices, if available, are deemed the best evidence of the
fair value of such instruments. Most deposit and loan instruments issued by
financial intermediaries are subject to SFAS No. 107, and its effect will be to
require financial statement disclosure of the fair value of most of the assets
and liabilities of financial intermediaries such as the Company and the Bank.
The disclosure required by SFAS No. 107 at December 31, 1994 is presented in
Note 8 to the Company's Consolidated Financial Statements. See "Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan". SFAS No. 114 prescribes the recognition criterion
for loan impairment and the measurement methods for certain impaired loans and
loans whose terms are modified in troubled debt restructurings. SFAS No. 114
states that a loan is impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according to the
contracted terms of the loan agreement. A creditor is required to measure
impairment by discounting expected future cash flows at the loan's effective
interest rate, or by reference to an observable market price, or by determining
that foreclosure is probable. SFAS No. 114 also clarifies the existing
accounting for in-substance foreclosures by stating that a collateral-dependent
real estate loan would be reported as real estate owned only if the lender had
taken possession of collateral.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. To accomplish
that it eliminated the provisions in SFAS No. 114 that described how a creditor
should report income on an impaired loan. SFAS No. 118 did not change the
provisions in SFAS No. 114 that require a creditor to measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or as a practical expedient, at the observable market
price of the loan or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investments in certain impaired loans
and about how a creditor recognizes interest income related to those impaired
loans. SFAS No. 114 is effective for financial statements issued for fiscal
years beginning after December 15, 1994. Although earlier application is
encouraged, it is not required. SFAS No. 118 is effective concurrent with the
effective date of SFAS No. 114. The Company has not adopted SFAS No. 114 for
fiscal year 1994, and the Company has not yet determined the impact of the
adoption of this statement.
In December 1990, FASB issued SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions" effective for fiscal years
beginning after December 15, 1992. In November 1992, FASB issued Statement of
Financial Standards No. 112, "Employers' Accounting For Post-Employment
Benefits," effective for fiscal years beginning after December 15, 1993. SFAS
No. 106 and SFAS No. 112 focus primarily on post-retirement health care
benefits. The Company does not provide post-retirement benefits, and SFAS No.
106 and SFAS No. 112 will have no impact on net income in 1994.
In May 1993, the FASB issued SFAS No. 115 "Accounting For Certain
Investments in Debt and Equity Securities" addressing the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments
would be classified in three categories and accounted for as follows: (i) debt
and equity securities that the entity has the positive intent and ability to
hold to maturity would be classified as "held to maturity" and reported at
amortized cost; (ii) debt and equity securities that are held for current
resale would be classified as trading securities and reported at fair value,
with unrealized gains and losses included in operations; and (iii) debt and
equity securities not classified as either securities held to maturity or
trading securities would be classified as securities available for
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sale, and reported at fair value, with unrealized gains and losses excluded from
operations and reported as a separate component of shareholders' equity. The
statement is effective for financial statements for calendar year 1994, but may
be applied to an earlier fiscal year for which annual financial statements have
not been issued. The Company adopted SFAS No. 115 in 1993. The cumulative
effect of the change in accounting was not material.
ADDITIONAL REGULATORY MATTERS
The assets of a commercial banking institution consist largely of
interest earning assets, including loans, federal funds sold, time certificates
of deposit, and investment securities. The liabilities of a commercial banking
institution consist of non-interest bearing demand deposits, and interest
bearing liabilities, including time deposits, savings accounts, and other bank
borrowings. The values and yields of these assets and rates paid on these
liabilities are sensitive to changes in prevailing market rates of interest. The
earnings and growth of the Company are largely dependent on the Company's
ability to increase the amount and net yield of its interest earning assets
which, in turn, depends upon deposit growth and the ability of the Company to
maintain a favorable differential or "spread" between the yield on interest
earning assets and the rate paid on interest bearing deposits and other interest
bearing liabilities. The FRB implements national monetary policies (for
example, to curb inflation and combat recession) by its open market operations
in United States government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirements and by
varying the discount rates applicable to borrowing by banks that are members of
the Federal Reserve System. The actions of the FRB in these areas influence the
growth of bank loans, investments, and deposits, and also effect interest rates
charged on loans and deposits. Thus, the earnings and growth of monetary and
fiscal policies of the federal government, and the policies of regulatory
agencies, particularly the FRB. The nature and impact of any future changes in
economic conditions and government policies cannot be predicted.
Supervision, regulation, and examination of the Bank by bank regulatory
agencies are generally intended to protect depositors and are not intended for
the protection of the Company's stockholders.
In November 1993, the Office of the Comptroller of the Currency
released the Bank from its Formal Agreement entered into in June 1992. The
Formal Agreement required the implementation of certain policies and procedures
for the operation of the bank to improve lending operations and management of
the loan portfolio. The Formal Agreement required the Bank to maintain a Tier 1
risk weighted capital ratio of 10.5% and a 6% Tier 1 capital ratio based on
adjusted total assets. 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.
In November 1993, the Federal Reserve Bank of San Francisco released
the Company from its August 1992, Memorandum of Understanding ("MOU") which
required: 1) a plan to improve the financial condition of CU Bancorp and the
Bank; 2) development of a formal policy regarding the relationship of CU Bancorp
and the Bank, with regard to dividends, intercompany transactions, tax
allocation and management or service fees; 3) a plan to assure that CU Bancorp
has sufficient cash to pay its expenses; 4) 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.
The release of both agreements indicates that the Company has complied
with the Formal Agreement and the Memorandum of Understanding, including
improvement of asset and management quality, the development and implementation
of policies and procedures as well as reporting methodologies and the
maintenance of the required capital ratios.
In addition, the Bank is subject to certain restrictions imposed by
federal law on any extensions of credit to affiliates (including parent bank
holding companies), investments of stock or other securities thereof, and the
taking of such securities as capital and surplus for all affiliates.
Transactions with affiliates are only permissible if they are on terms
consistent with safe and sound banking practices, and must be on substantially
identical terms (or not less favorable to the bank) as similar transactions
with non-affiliates. A bank may not purchase a "low quality asset" (as defined
in section 23a(b)(10) of the
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Federal Reserve Act) from an affiliate.
Other restrictions require that transactions with affiliates be on
substantially the same terms as would be available for non-affiliates and
applies to the transactions already described as well as to a bank's sale of
assets, payment of money, of furnishing of services to an affiliate;
transactions in which an affiliate acts as an agent or broker and transactions
with a third party, if an affiliate is a participant or has a financial interest
in the transaction.
EMPLOYEES
As of December 31, 1994, the Company had two employees, its Chief
Executive Officer and Chief Financial Officer, who received no compensation. At
December 31, 1994, the Bank had 91 full-time employees and 7 part-time
employees. Of these employees, 12 held titles of senior vice president or above.
At December 31, 1994, none of the executive officers of the Bank served pursuant
to written employment agreements. None of the Company's or the Bank's employees
are represented by a labor union. The Company considers its relationship and
the Bank's relationship with each company's respective employees to be
excellent.
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Item 2. PROPERTIES
The principal offices of the Company are located in a multi-story
office building located at 16030 Ventura Boulevard, Encino, California 91364 for
which it pays a monthly rental of $60 thousand. The lease contains a ceiling on
cost on living adjustments of 5% per year. The lease is renewable. The Bank
leases the property in which its West Los Angeles branch and offices are located
for a monthly rent of $ 6 thousand. The Bank also has certain month to month or
short term leases for offices in the South Bay, Camarillo and the San Gabriel
Valley. Management believes that the existing leases will be renegotiated at
termination to provide for additional space requirements, which are not expected
to be material.
From time to time the Bank may acquire real property through
foreclosure. See Management's Discussion and Analysis "Nonperforming Assets"
for further amplification on real property acquired in this manner.
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Item 3. LEGAL PROCEEDINGS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, 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 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, when consummated, will dismiss all of the above
referenced cases, with prejudice, against the Bank, its officers and directors,
with the exception of the officer/director previously named. The settlement is
subject to appropriate Court approvals, which have now been received. In
connection with the settlement, the Bank will release 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 will also make a cash payment to the Plaintiffs in connection with the
settlement. In connection with the settlement the Bank will assign its rights,
if any, under various insurance policies, to the Plaintiffs. The settlement
does not resolve the claims asserted against the officer/director.
The settlement has been approved by the Federal District Court and the Federal
Bankruptcy Court. While one party to these matters filed an appeal to the
approval by the courts, they have indicated that they will dismiss such appeal,
which would allow the settlement to be effectuated. Based upon advice of
counsel, the Bank believes that the possibility of the settlement not being
finalized is remote. 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
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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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 4(A). EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are brief summaries of the background and business
experience of each of the executive officers of the Company and the Bank as of
December 31, 1994:
<TABLE>
<CAPTION>
Name Age Position with the Company Position with the Bank Years in Job
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen G. Carpenter 54 CEO Chairman/CEO 2.5
David I. Rainer 38 President President/Chief Operating Officer 2.5
Patrick Hartman 45 Chief Financial Officer Senior V.P./Chief Financial Officer 2.2
Anne Williams 36 Chief Credit Officer 1.5
</TABLE>
Set forth below are brief summaries of the background and business experience,
of the executive officers of the Company.
STEPHEN G. CARPENTER joined the Company in 1992 from Security Pacific
National Bank where he was Vice Chairman in charge of middle market lending
from July 1989 to June 1992. Mr. Carpenter was previously employed at Wells
Fargo Bank from July 1980 to July 1989, where he was an Executive Vice
President.
DAVID I. RAINER was appointed Executive Vice president of the Bank in
June 1992 and assumed the position of Chief Operating Office in late 1992.
From July 1989 to June 1992, Mr. Rainer was employed by Bank of America, where
he held the position of Senior Vice President. From March 1989 to July 1989,
Mr. Rainer was a Senior Vice President at Faucet & Company, where he co-managed
a stock and bond portfolio. From July 1982 to March 1989, Mr. Rainer was
employed at Wells Fargo Bank, where he held the positions of Vice President and
Manager.
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PATRICK HARTMAN has been employed by the Bank since November, 1992.
Prior to assuming his present positions he was Senior Vice President/ Chief
Financial Officer for Cenfed Bank for a period during 1992. Mr. Hartman held
the post of Senior Vice President/ Chief Financial Officer of Community Bank,
Pasadena, California, for thirteen years.
ANNE WILLIAMS joined the Bank in 1992 as Senior Loan Officer. She
was named to the position of Chief Credit Officer in July 1993. Prior to that
time she spent five years at Bank of America/Security Pacific National Bank,
where she was a credit administrator in asset based lending, for middle market
in the Los Angeles area. Ms Williams was trained at Chase Manhattan Bank in
New York, and was a commercial lender at Societe Generale in Los Angeles and
Boston Five Cents Savings Bank where she managed the corporate lending group.
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PART II
Item 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
see Management's Discussion and Analysis "Capital"
Holders of Company's Common Stock
As of the close of business on December 31, 1994 there were 424 record
holders of the Company's issued and outstanding Common Stock.
Dividends
Under national banking laws the Bank may not pay dividends from its
capital. All dividends must be paid out of net profits then on hand, after
deducting expenses, including losses and bad debts. In addition, the payment of
dividends out of net profits is further limited in that the Bank is prohibited
from declaring a dividend on its shares of common stock until the surplus fund
equals the amount of capital stock, or, if the surplus fund does not equal the
amount of capital stock, until there has been transferred to the surplus fund
not less than one-tenth of the bank's net profits for the preceding half-year in
the case of quarterly or semi-annual dividends, or not less than one-tenth of
its net profits for the preceding two consecutive half-year periods in the case
of annual dividends.
The approval of the Comptroller of the Currency is required if the
total of all dividends declared by the Bank in any calendar year exceeds the
total of its net profits for that year combined with its net profits for the two
preceding years, less any required transfers to surplus or to a fund for the
retirement of any preferred stock. In first quarter 1995, the Bank received the
Comptroller's prior approval for payment of dividends in 1995, not to exceed
$90,000 per quarter.
While the Company has generally followed a policy of retaining earnings
for the purpose of increasing the net worth of the Company in order to support
asset growth. Accordingly, in recent years, the Company had not paid any cash
dividends. However, a $.02 per share dividend was declared in first quarter
1995. Holders of the Common Stock are entitled to receive dividends as and when
declared by the Board of Directors out of funds legally available therefor under
the laws of the State of California. The Company declared a 20 % stock dividend
in 1989, 5% stock dividends in 1988, 1987, and 1986, a 2 for 1 stock split in
1984 and a 6 for 5 split effected in the form of a stock dividend in 1985. All
per share amounts throughout this Form 10-K are adjusted to give effect to these
share dividends and splits.
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Item 6. SELECTED FINANCIAL DATA
Selected Financial Data
CU Bancorp and Subsidiary
Amounts in thousands of dollars, except per share data
<TABLE>
<CAPTION>
As of the years ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Total securities $ 74,153 $ 88,034 $ 84,724 $ 59,533 $ 37,755
Net loans 167,175 134,148 193,643 273,126 308,346
Total earning assets 261,328 251,559 281,723 429,480 415,602
Total assets 304,154 279,206 353,923 516,762 485,697
Total deposits 264,181 238,928 318,574 473,125 444,542
Total shareholders' equity 29,744 26,990 24,632 32,598 36,600
Regulatory risk based capital ratio 15.40% 16.71% 12.87% 12.31% 14.15%
Regulatory capital leverage ratio 10.44% 9.16% 6.12% 6.91% 9.25%
Allowance for loan losses to:
Period end total loans 4.25% 4.63% 6.28% 4.33% 1.32%
Nonperforming loans 20,631% 473% 95% 75% 79%
Nonperforming assets 20,631% 283% 95% 59% 79%
Consolidated Operating Results
Net interest income $ 13,881 $ 14,431 $ 20,625 $ 25,681 $ 28,851
Other operating income 5,408 26,423 21,499 10,537 6,936
Provision for loan losses 0 450 17,090 14,267 3,650
Operating expenses 14,735 36,883 37,493 27,843 22,265
Net income (loss) 2,574 2,098 (8,190) (3,637) 5,863
Fully diluted income/(loss) per
common & equivalent share $ 0.56 $ 0.47 $ (1.90) $ (0.83) $ 1.27
Net interest margin 5.98% 5.86% 6.07% 6.99% 7.61%
Return on average shareholders'
equity 9.12% 8.12% (26.06)% (10.27)% 16.85%
Return on average assets 0.97% 0.69% (1.89)% (0.76)% 1.31%
Cash dividends per common share -- -- -- $ 0.150 $ 0.225
</TABLE>
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Item 7.
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
The Bank's strong performance in 1994 has been the result of the continuation
of the strategy that was developed over two years ago. Continued emphasis on
growing as a middle market bank committed to a discipline of credit quality and
cost control has resulted in solid earnings and growth for the year.
The Bank's seasoned commercial lenders generated new loan commitments of $121
million in 1994, 20% more than the $101 million in commitments generated in
1993. Two consecutive years of significant new business development have
demonstrated the Bank's ability to meet the needs of middle market companies
for relationship-based services. This positive growth trend is expected to
continue into 1995 and be a significant contributor to improved profit
performance in the coming years.
The Company earned $2.6 million, or $.56 per share, in 1994, compared to $2.1
million, or $0.47 per share, in 1993. The 1994 earnings included profitable
performance by the Bank and a gain on the sale of the mortgage servicing rights
retained by the Bank when its mortgage origination network was sold in 1993.
The Bank's asset quality ratios continue to be exceptionally strong. At
December 31, 1994, nonperforming assets were $ 36 thousand, down $ 2.3 million,
or 98 %, from the prior year. At December 31, 1994, the Bank did not have any
real estate acquired through foreclosure.
The Bank's allowance for loan losses as a percent of both nonperforming loans
and nonperforming assets at the end of 1994 was 20,631%, compared to 1993
levels of 473% and 283%, respectively. The allowance for loan losses as a
percentage of nonperforming loans and assets has increased as both
nonperforming categories were reduced. During 1994, the Bank enjoyed a net
recovery as recoveries exceeded chargeoffs. Net recoveries further increase
the allowance and its coverage of the nonperforming loans and assets.
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 15.40%, the Tier 1 Risk-Based Capital Ratio was
14.12%, and the Leverage Ratio was 10.44% at December 31, 1994.
The successful results in 1993 and 1994 concerning asset quality, regulatory
relations, growth of middle market lending and strategic focus make expansion
and growth possible. Two new loan production offices were opened in January
1994. These offices have allowed expanded market penetration and commercial
portfolio diversification. These offices have since been converted to
branches. On April 1, 1994, the Bank acquired the deposits of the Encino
branch of Mechanics National Bank from the FDIC, to expand and improve deposit
mix. In October 1994, another loan production office was opened in Camarillo,
California to be the Ventura County regional center. The Bank has received
authorization to convert the Camarillo office to a branch, and expects to make
that conversion in 1995.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
Significant improvements in loan portfolio composition and credit quality are
the result of management's commitment to middle market commercial lending and a
strong credit culture. The credit standards established over two years ago
have allowed creation of a high quality commercial loan portfolio and nearly
eliminated non performing assets. Real estate concentrations established
before that time have been reduced to the point that they are no longer
concentrations.
26
<PAGE> 313
The Bank's focus on middle market lending, in its infancy at year-end 1992,
gained momentum in 1993 and further accelerated in 1994. Total loans
increased over $33.9 million from December 31, 1993 to December 31, 1994.
Offsetting this, the remaining Held for Sale mortgages of $10.4 million at
December 31, 1993 were sold in the first quarter of 1994. Excluding this
planned liquidation, loans increased by $44 million, or 34%, for the
year ended December 31, 1994.
27
<PAGE> 314
<TABLE>
<CAPTION>
Table 1 Loan Portfolio
Composition
Amounts in thousands of dollars
December 31,
1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $169,413 97% $120,513 86% $118,575 57% $163,472 57% $187,031 60%
Real Estate Loans:
Held for Sale 0 10,426 40,167 40,350 24,156
Mortgages 4,773 3% 8,496 6% 40,311 20% 52,259 18% 81,593 26%
Construction 416 1,226 2,392 14,368 2,743
Other Loans 0 0 1,184 3,044 3,175
-------- --------- -------- -------- --------
Loans 174,602 140,661 202,629 273,493 298,698
Term federal funds sold 0 0 4,000 12,000 15,000
-------- --------- -------- -------- --------
Total loans net of unearned fees $174,602 100% $140,661 100% $206,629 100% $285,493 100% $313,698 100%
======== === ======== ==== ======== === ======== === ======== ===
</TABLE>
At December 31, 1994, the Bank had loans totaling $169 million maturing within
one year, $3 million maturing after one but within five years, and $3 million
maturing after five years. The loans due after one year totaling $6 million
all had predetermined interest rates.
Historically, the Bank's real estate loans held for sale were secured by single
family residences originated by the Mortgage Banking Operation. These loans
were sold to investors through firm commitments, generally in less than 90
days, and presented almost no credit risk. The sale of the mortgage
origination operation eliminated this loan concentration. The remainder of real
estate loans are generally collateralized by a first or second trust deed
position.
Lending efforts have been directed away from commercial real estate, as well as
construction and multifamily lending. The Bank is now focused on business
lending to middle market customers. Current credit policy in general now
permits commercial real estate lending only as part of a complete commercial
banking relationship with a middle market customer. Existing commercial real
estate loans, 14% of the loan portfolio, or $25 million at year end 1994,
compared to $27 million at year-end 1993, 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
analyzed in determining the adequacy of the allowance for loan losses.
28
<PAGE> 315
The amount and composition of the allowance for loan losses is as follows:
Table 2 Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
Amounts in thousands of dollars
December 31,
Amounts in thousands of dollars 1994 1993 1992 1991 1990
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $7,096 $5,699 $11,597 $11,147 $3,986
Real estate loans - Held for Sale 0 67 368 90 60
Real estate loans - Mortgages 0 225 249 28 21
Real estate loans - Construction 0 10 62 100 37
Other loans 0 0 19 0 0
------ ------ ------- ------- ------
Loans 7,096 6,001 12,295 11,365 4,104
Unfunded commitments and letters of
credit 331 512 691 1,002 24
------ ------ ------- ------- ------
Total Allowance for loan losses $7,427 $6,513 $12,986 $12,367 $4,128
====== ====== ======= ======= ======
</TABLE>
Adequacy of the allowance is determined using management's estimates of
potential portfolio and individual loan. 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 loans (as shown in Table 2), implies a degree of
precision that is not possible when using judgment. 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.
29
<PAGE> 316
Activity in the allowance, classified by type of loan, is as follows:
Table 3 Analysis of the Changes in the Allowance for Loan Losses
<TABLE>
<CAPTION>
Amounts in thousands of dollars
For the years ended December 31,
1994 1993 1992 1991 1990
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 6,513 $12,986 $12,367 $ 4,128 $3,158
Loans charged off: ------- ------- ------- ------- ------
Real estate secured loans 486 3,266 4,425 1,220 1,858
Commercial loans secured and unsecured 820 6,582 12,562 5,422 640
Loans to individuals, installment and
other loans 107 901 813 258 321
------- ------- ------- ------- ------
Total charge offs 1,413 10,749 17,800 6,900 2,819
------- ------- ------- ------- ------
Recoveries of loans previously charged off:
Real estate secured loans 586 393 249 15 42
Commercial loans secured and unsecured 1,735 3,189 1,001 819 97
Loans to individuals, installment and other
loans 6 244 79 38 --
------- ------- ------- ------- ------
Total recoveries of loans previously
charged off 2,327 3,826 1,329 872 139
------- ------- ------- ------- ------
Net charge offs (914) 6,923 16,471 6,028 2,680
Provision for loan losses 0 450 17,090 14,267 3,650
------- ------- ------- ------- ------
Balance at December 31 $ 7,427 $ 6,513 $12,986 $12,367 $4,128
======= ======= ======= ======= ======
Net loan charge offs (recoveries) as a
percentage of average gross loans outstanding
during the year ended
December 31 (0.61)% 3.49% 6.70% 2.36% 0.98%
======= ======= ======= ======= ======
</TABLE>
30
<PAGE> 317
The Bank's policy concerning nonperforming loans is more conservative than is
generally required. It defines nonperforming assets as all loans ninety days
or more delinquent, loans classified nonaccrual, and foreclosed, or in
substance foreclosed real estate. Nonaccrual loans are those whose interest
accrual has been discontinued because the loan has become ninety days or more
past due or there exists reasonable doubt as to the full and timely collection
of principal or interest. When a loan is placed on nonaccrual status, all
interest previously accrued but uncollected is reversed against operating
results. Subsequent payments on nonaccrual loans are treated as principal
reductions. At December 31, 1994, nonperforming loans amounted to $36
thousand, down 97% from $1.4 million at December 31, 1993.
Table 4: Nonperforming Assets
Amounts in thousands of dollars
<TABLE>
<CAPTION>
December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Loans not performing (1) $ 36 $ 378 $ 8,978 $14,955 $4,000
Insubstance foreclosures 0 1,000 4,652 1,512 1,224
-------- ------ ------- ------- ------
Total nonperforming loans 36 1,378 13,630 16,467 5,224
Other real estate owned 0 920 0 4,564 0
-------- ------ ------- ------- --------
Total nonperforming assets $ 36 $2,298 $13,630 $21,031 $5,224
======== ------ ------- ------- -------
Allowance for loan losses as a percent of:
Nonperforming loans 20,631% 473% 95% 75% 79%
Nonperforming assets 20,631 283 95 59 79
Nonperforming assets as a percent of
total assets 0 0.8 3.8 4.2 1.1
Nonperforming loans as a percent of total
loans 0 1.0 6.6 5.8 1.8
Note 1:
Loans not performing
Performing as agreed $ 36 $ 9 $ 2,895 $ 4,783
Partial performance 0 369 1,075 1,531
Not performing 0 0 5,008 8,641
-------- ------ ------- -------
$ 36 $ 378 $ 8,978 $14,955
======== ====== ======= =======
Nonaccrual:
Loans $ 36 $ 378 $ 7,728 $11,357 $1,486
Troubled debt restructurings 0 0 1,250 1,326 818
</TABLE>
31
<PAGE> 318
<TABLE>
<S> <C> <C> <C> <C> <C>
Past due ninety or more days (a):
Loans 0 0 0 2,272 1,696
</TABLE>
(a) Past due with respect to principal and/or interest and continuing
to accrue interest.
SECURITIES
The securities portfolio at December 31, 1994, totaled $74 million, compared to
$88 million at year-end 1993. The securities are all classified as a Held to
Maturity portfolio. This portfolio is recorded at amortized cost. It is the
Bank's intention to hold these securities to their individual maturity dates.
There was no Available for Sale portfolio at year-end 1994 and 1993.
There have been no realized gains or losses on securities in during 1994. Gains
of $77 thousand were realized during 1993. At December 31, 1994, there were
unrealized gains of $9 thousand and losses of $2.7 million in the securities
portfolio.
Additional information concerning securities is provided in the footnotes to
the accompanying financial statements.
OTHER REAL ESTATE OWNED
At December 31, 1994, there was no Other Real Estate Owned on the Bank's
balance sheet, compared with $920 thousand at December 31, 1993. The carrying
values of these properties are 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 an allowance for
real estate owned losses created by charging a provision to other operating
expenses.
During 1994, the bank sold properties held as Other Real Estate Owned,
realizing gains of $585 thousand. There were no comparable sales in 1993.
Expenses related to Other Real Estate Owned were $22 thousand in the year
ended December 31, 1994. This compares to $234 thousand at December 31,
1993.
DEPOSIT CONCENTRATION
Due to its historic focus on real estate related activities, the Bank has
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 title insurance and escrow
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 experience.
Noninterest bearing deposits represent nearly the entire title and escrow
relationship. These balances have been reduced substantially as the Bank
focused on middle market business loans. The balance at December 31, 1994, was
$44 million, compared to $58 million at December 31, 1993. Costs relative to
servicing the above relationships are the significant portion of the Bank's
customer data processing and messenger and courier costs. There have been no
significant changes in these costs during 1994.
32
<PAGE> 319
<TABLE>
<CAPTION>
Table 5 Real Estate Escrow and Title Average balance
Insurance Company Deposits Year ended 12 months ended
Amounts in thousands of dollars December 31,1994 December 31,1994
---------------------------- --------------------------------
Percent of Percent Percent of
Total of Total Percent of
Amount Deposits Class Amount Deposits class
------- ---------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1994 Balances
Noninterest bearing demand deposits $44,382 16.8% 39.6% $44,670 19.2% 41.0%
Interest-bearing demand & savings deposits 1,263 .5% .8% 1.501 .6% 1.2%
------- ---- ---- ------- ---- ----
Total deposit concentration $45,645 17.3% 40.4% $46,171 19.8%
======= ==== ==== ======= ====
1993 Balances $58,943 25% $70,238 26%
======= ==== ======= ====
</TABLE>
The Bank had $36 million in certificates of deposit larger than $100 thousand
dollars at December 31, 1994. The maturity distribution of these deposits is
relatively short term, with $27 million maturing within 3 months and the
balance maturing within 12 months.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the Bank's ability to meet
cash requirements. The liquidity position is managed giving consideration to
both on and off-balance sheet sources and demands for funds.
Sources of liquidity include cash and cash equivalents (net of Federal Reserve
requirements to maintain reserves against deposit liabilities), securities
eligible for pledging to secure borrowings from dealers pursuant to repurchase
agreements, loan repayments, deposits, and borrowings from a $20 million
overnight federal funds line available from a correspondent bank. Potential
significant liquidity requirements are withdrawals from noninterest bearing
demand deposits and funding under commitments to loan customers.
During 1993, the Bank maintained a $20 million line of credit with a major
purchaser of the mortgage loans originated by the mortgage origination
operation. This warehouse line was terminated in conjunction with the sale of
that operation.
From time to time the Bank may experience liquidity shortfalls ranging from one
to several days. In these instances, the Bank will either purchase federal
funds, and/or sell securities under repurchase agreements. These actions are
intended to bridge mismatches between funding sources and requirements, and are
designed to maintain the minimum required balances. The Bank had no Federal
Funds purchased or borrowings under repurchase agreements during 1994.
The Bank's historical portfolio of large certificates of deposit (those of $100
thousand or more) at December 31, 1994 was 14% of total deposits, compared to
8.1% at December 31, 1993. The funding source has traditionally been used to
manage liquidity needs.
During 1994, 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 generally certificates of deposit of
$90,000 or greater, that are priced competitively with similar certificates
from other financial institutions throughout the country. At December 31,
1994, the Bank had approximately $55 million of these out of area deposits.
33
<PAGE> 320
Table 6 Interest Rate Maturities of Earning Assets and Funding Liabilities at
December 31, 1994
Amounts in thousands of dollars
<TABLE>
<CAPTION>
Amounts Maturing or Repricing in
------------------------------------------------------------------------
More Than More Than More Than
3 Months But 6 Months But 9 Months But
Less Than Less Than Less Than Less than 12 Months
Amounts in thousands of dollars 3 Months 6 Months 9 Months 12 Months & Over
--------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans (1) $162,531 $ 1,172 $ 1,271 $ 121 $ 9,506
Investments 6,000 3,001 4,975 4,983 55,194
Federal funds sold & other 20,000 -- -- -- --
-------- -------- ------- ------- -------
Total earning assets 188,531 4,173 6,246 5,104 64,700
-------- -------- ------- ------- -------
Interest bearing deposits:
Demand 54,694 0 0 0 0
Savings 13,202 0 0 0 0
Time certificates of deposit:
Under $100 30,731 8,879 1,530 6,600 96
$100 or more 26,859 5,616 1,335 2,500 105
Non interest bearing demand deposits 34,560 -- -- -- --
-------- -------- ------- ------- -------
Total interest bearing liabilities 160,046 14,495 2,865 9,100 201
-------- -------- ------- ------- -------
Interest rate sensitivity gap 28,485 (10,322) 3,381 (3,996) 64,499
-------- -------- ------- ------- -------
Cumulative interest rate sensitivity gap 28,485 18,163 21,544 17,548 82,047
Off balance sheet financial instruments 0 0 0 0 0
-------- -------- ------- ------- -------
Net cumulative gap $ 28,485 $ 18,163 $21,544 $17,548 $82,047
======== ======== ======= ======= =======
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities 1.18% 1.11% 1.12% 1.09% 1.40%
======== ======== ======= ======= =======
</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
risk neutral position.
34
<PAGE> 321
Assets and liabilities shown on Table 6 are categorized based on contractual
maturity dates. Maturities for those accounts without contractual maturities are
estimated based on the Bank's experience with these customers. Noninterest
bearing deposits of title and escrow companies, having no contractual maturity
dates, are considered subject to more volatility than similar deposits from
commercial customers. The net cumulative gap position shown in the table above
indicates that the Bank does not have a significant exposure to interest rate
fluctuations during the next twelve months.
CAPITAL
Total shareholders' equity was $30 million at December 31, 1994, compared to $27
million at year-end 1993. The 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 1994 and 1993. the Bank's capital levels exceeded the
"well-capitalized" standards, the highest classification established by bank
regulators.
Table 7 Capital Ratios
<TABLE>
<CAPTION>
Regulatory Standards
--------------------------
Dec 31 Dec 31 Well -
1994 1993 Capitalized Minimum
------ ------ ----------- -------
<S> <C> <C> <C> <C>
Total Risk Based Capital 15.4% 16.7% 10.0% 8.0%
Tier 1 Risk Based Capital 14.1 15.4 6.0 4.0
Leveraged Capital 10.4 9.2 5.0 3.0
</TABLE>
No dividends have been paid in 1994 or 1993. In February, 1995, the Bank
declared a dividend of $.02 per share for the fourth quarter of 1994, payable
March 13, 1995 to shareholders of record February 20, 1995.
The common stock of the Bank is listed and traded on the National Association of
Securities Dealers Automated System (NASDAQ) National Market Systems where it
trades under the symbol CUBN.
Table 8 Stock Prices - Unaudited
<TABLE>
<CAPTION>
1994 1993
---------------- ---------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $7.50 $6.50 $6.25 $3.38
Second Quarter 7.00 5.75 7.00 4.75
Third Quarter 7.50 6.00 6.25 5.00
Fourth Quarter 8.00 6.75 7.25 5.75
</TABLE>
EARNINGS BY LINE OF BUSINESS
Prior to the sale of the mortgage origination network in November, 1993, the
Bank operated a commercial bank and a mortgage
35
<PAGE> 322
bank as two distinct business segments. In 1994, real estate lending is
generally only done as part of a commercial banking relationship. For 1994,
therefore, the Bank consists of only a single segment, the commercial banking
operation. Tables 9 shows the pre-tax operating contributions.
36
<PAGE> 323
Table 9 Pre-tax operating contribution by line of business (i)
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1994 1993 1992
Commercial Mortgage Commercial Mortgage
Consolidated Consolidated Banking Banking Consolidated Banking Banking
------------ ------------ ------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 13,881 $ 14,431 $13,844 $ 587 $ 20,625 $ 18,888 $ 1,737
Provisions for loan losses 0 450 200 250 17,090 15,843 1,247
-------- -------- ------- -------- -------- -------- --------
Risk adjusted net interest income 13,881 13,981 13,644 337 3,535 3,045 490
Noninterest revenue 2,836 24,940 1,032 23,908 21,499 1,865 19,634
-------- -------- ------- -------- -------- -------- --------
Total revenues 16,717 38,921 14,676 24,245 25,034 4,910 20,124
-------- ------- -------- -------- -------- --------
Salaries and related benefits 6,335 11,020 6,151 4,869 12,647 7,998 4,649
Other operating expenses 7,800 25,416 7,738 17,678 24,846 12,910 11,936
-------- ------- -------- -------- -------- --------
Total operating expenses 14,135 36,436 13,889 22,547 37,493 20,908 16,585
-------- -------- ------- -------- -------- -------- --------
Operating income 2,582 2,485 787 1,698 (12,459) (15,998) 3,539
Gain on sale of mortgage
origination operation 1,483
Gain on sale of mortgage servicing
portfolio 2,572
Restructuring charge (600)
Reserve for branch relocation (447)
-------- -------- ------- -------- -------- -------- --------
Income before taxes $ 4,554 $ 3,521 $ 787 $ 1,698 $(12,459) $(15,998) $ 3,539
======== ======== ======= ======== ======== ======== ========
</TABLE>
(i) Inter-divisional transactions for 1993 have been eliminated at the
division level.
The Bank is committed to the expansion of its market penetration of the
commercial bank including the creation of loan production offices, establishment
of a Small Business Administration ("SBA") loan production group, and
development of an international trade services group.
Branches have been established in three strategic locations in Southern
California. In January 1994, two branches were established to serve the San
Gabriel Valley area and the South Bay area. The offices are staffed with
seasoned commercial lenders whose primary focus is business development. Such
offices are cost effective approaches to business development and allow the Bank
access to wider market exposure. While these offices are primarily staffed with
existing personnel, when appropriate, key people with specific market knowledge
and experience have been hired. In October 1994, the Bank opened a loan
production office in Camarillo, California as its regional center for Ventura
County. The Camarillo office is expected to be converted to a Branch in the
coming year.
The Bank established, in the fourth quarter of 1993, a group of lenders to focus
on the production of commercial loans that can be participated with the SBA.
These loans are subject to the same credit quality policies and procedures as
all commercial loan production. Fees generated from the sale of the guaranteed
portion of the loans will be an important new source of noninterest income.
Another new product was added late in 1993, with the creation of an
international trade services group. Many of the Bank's existing commercial
customers and prospects are involved in import and/or export. This product line
includes letters of credit, foreign exchange, and foreign collections, and is
another important element in the total banking relationship offered to our
business customers.
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
1994 was $13.9 million, compared to $14.4 million in 1993 and $20.6 million in
1992. The change is primarily attributable to lower levels of average loans and
deposits in 1994 being offset by favorable rate variations. The
37
<PAGE> 324
change in 1993 compared with 1992 was primarily attributable to changes in
volume. As a result of efforts to deal with credit quality issues and refocus
the Bank on middle market business customers, loans outside target markets have
been motivated to leave the Bank. Initially this has an adverse affect on net
interest margin but subsequent growth of the middle market loan portfolio
replaces these assets and provides a more reliable and valuable source of
interest margin.
38
<PAGE> 325
Table 10 Analysis of Changes in Net Interest Income (1) (Amounts in thousands
of dollars)
Amounts in thousands of dollars
Increases(Decreases)
<TABLE>
<CAPTION>
Year ended December 31, Year ended December 31,
1994 compared to 1993 1993 compared to 1992
========================================================================================================
Increases(Decreases) Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, net $(4,466) $ 2,016 $(2,450) $(3,871) $(1,210) $(5,081)
Investments 1,149 175 1,324 (1,623) (549) (2,172)
Federal Funds Sold 213 252 465 (326) (118) (444)
------- ------- ------- ------- ------- -------
Total interest income (3,104) 2,443 (661) (5,820) (1,877) (7,697)
------- ------- ------- ------- ------- -------
Interest Expense
Interest bearing deposits:
Demand 182 (114) 68 (196) (492) (688)
Savings (80) 97 17 (138) (99) (237)
Time Certificates of deposit:
Under $100 (179) 195 16 522 (50) 472
$100 or more (177) 166 (11) (478) (193) (671)
Federal funds purchased / Repos (40) (40) (80) (40) (23) (63)
Other borrowings (135) 19 (116) (123) (193) (316)
------- ------- ------- ------- ------- -------
Total interest expense (429) 323 (106) (453) (1,050) (1,503)
------- ------- ------- ------- ------- -------
Net interest income $(2,675) $ 2,120 $ (555) $(5,367) $ (827) $(6,194)
======= ======= ======= ======= ======= =======
</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.
Yields on earning assets were approximately 7.8% in 1994, compared to a 7.6%
yield for 1993 and 7.8% 1992. The higher average yield on earning assets in 1994
is largely due to the higher yields on loans as the prime rate began to rise in
1994. Through October 8, 1993, net interest income continued to benefit from an
interest rate swap agreement, discussed below. Rates on interest bearing
deposits resulted in an average cost of funds of 3.0 % in 1994, compared to 2.9%
for 1993 and 3.4% for 1992.
Shrinkage in the Bank's earning asset and funding liability portfolios
contributed to the reduction in net interest income. Average loans during 1994
decreased $47 million from $189 million in 1993. Average loans in 1992 were
$233 million. These decreases resulted from the sale of the held for sale
mortgage loans, discussed below, and management's efforts to improve the quality
of the loan portfolio and redirect production to middle market commercial loans.
Earning assets averaged $231.9 million in 1994, down from $ 246.5 million in
1993, and $339 million in 1992.
39
<PAGE> 326
Table 11 Average Balance Sheets and Analysis of Net Interest Income
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1994 1993 1992
==================================================================================================================================
Interest Interest Interest
Income or Yield or Income or Yield or Income or Yield or
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans, Net (1) $141,878 $14,036 9.89% $188,967 $16,487 8.72% $233,203 $21,568 9.25%
Investments(2) 66,891 2,947 4.41 37,534 1,558 4.15 76,161 3,667 4.81
Certificates of Deposit
in other banks 1,010 58 5.74 4,102 123 3.00 3,135 186 5.93
Federal Funds Sold 22,100 918 4.15 15,927 454 2.85 26,862 898 3.34
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Earning Assets 231,879 17,959 7.74 246,530 18,622 7.55 339,361 26,319 7.76
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non Earning Assets
Cash & Due From Banks 29,559 41,243 74,999
Other Assets 7,351 15,645 18,613
-------- -------- --------
Total Assets $268,789 $303,418 $432,973
======== ======== ========
Interest Bearing Liabilities
Demand $ 71,821 1,730 2.41 $ 64,179 1,594 2.48 $ 70,702 2,282 3.23
Savings 9,893 255 2.58 12,741 315 2.47 17,787 552 3.10
Time Certificates of Deposits
Less Than $100 22,144 997 4.50 26,577 979 3.68 12,529 507 4.05
More Than $100 19,713 773 3.92 24,737 784 3.17 39,085 1,455 3.72
Federal Funds Purchased / Repos 0 0 0 2,712 79 2.91 4,011 142 3.54
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest Bearing
Liabilities 123,571 3,755 3.04 130,946 3,751 2.86 144,114 4,938 3.43
Non Interest Bearing Deposits 109,004 0 0 137,485 0 0 244,543 0 0
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Deposits 232,575 3,755 1.61 268,431 3,751 1.40 388,657 4,938 1.27
Other Borrowings 4,909 323 6.58 6,964 440 6.32 8,644 756 8.75
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Funding Liabilities 237,484 4,078 1.72 275,395 4,191 1.52 397,301 5,694 1.43
-------- ------- ---- -------- ------- ---- -------- ------- ----
Other Liabilities 3,264 2,175 4,328
Shareholders' Equity 28,006 25,848 31,344
-------- -------- --------
Total Liabilities and
Shareholders' Equity $268,754 $303,418 $432,973
======== ======== ========
Net Interest Income $13,881 5.99% $14,431 5.85% $20,625 6.08%
======= ==== ======= ==== ======= ====
Shareholders' Equity to Total
Assets 10.42% 8.52% 7.24%
======== ======== ========
</TABLE>
(1) Non-accrual loans are included in average loan balances, and loan fees
earned have been included in interest income on loans.
(2) Tax exempt securities do not materially affect reported yields.
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin was 5.99% for 1994 compared to 5.85% for 1993 and
6.08% for 1992. The Bank's margin is strong because it has funded itself with a
significant amount of noninterest bearing deposits. The higher margin in 1994 is
largely due to the benefits of rising interest rates, largely offset by the
maturing of the interest rate swap discussed below.
Through October 8, 1993, the Bank continued to benefit from an interest rate
swap agreement entered into October 8, 1991, which had a notional value of $100
million. Under this arrangement, the Bank received a fixed rate of 8.18% and
paid interest at prime rate, which was 6.0% during 1993. The income earned from
the interest rate swap agreement was $0 in 1994, compared to $1.7
40
<PAGE> 327
million in 1993 and $1.9 million in 1992.
41
<PAGE> 328
OTHER OPERATING INCOME
The majority of other operating income was earned as the Mortgage Banking
Operation originated and sold mortgage loans. The trends and composition of
other operating income are shown in the following table.
Table 12 Other operating income
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1994 1993 1992
===============================================================================================================
Commercial Mortgage Commercial Mortgage
Consolidated Banking Banking Consolidated Banking Banking Consolidated
------------ ------- ------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Processing fees $ 1,143 $ 1,143 $ 1,137 $ 1,137
Capitalization of
excess servicing
rights 207 207 821 821
Fees on loans sold $ 15 1,182 1,182 3,336 3,336
Premium on sales of
mortgage loans (8) 18,022 18,022 11,346 11,346
Service income 980 2,129 2,129 1,812 1,812
Documentation fees 99 104 826 930 $ 111 914 1,025
Other service fees and
charges 1,165 851 399 1,250 904 363 1,267
Gain on sale of mortgage
origination operation 1,483
Gain on sale of mortgage
servicing 2,572
Gain on Sale of Reo 585
Securities & other
nonoperating gains 755 755
------ ------ ------- ------- ------- ------- -------
Total $5,408 $1,032 $25,391 $26,423 $ 1,770 $19,729 $21,499
====== ====== ======= ======= ======= ======= =======
</TABLE>
42
<PAGE> 329
The Mortgage Banking Operation earned fee income on loans originated and gains
as loans were sold to permanent investors. Loans for which servicing was
retained were conventional mortgages under approximately $200 thousand which
were sold to the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and other institutional investors. Excess servicing rights
were capitalized, and related gains recognized, based on the present value of
the servicing cash flows discounted over a period of seven years. When loan
prepayments occurred within this period, the remaining capitalized cost
associated with the loan was written off.
The servicing rights were retained by the bank following sale of the mortgage
origination operation. The Bank entered into an agreement with the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation to
dispose of any remaining portion of this portfolio by the end of 1994 because,
with the sale of the mortgage origination operation, the Bank is no longer a
qualified seller/servicer of such loans. During 1994, the bank sold the retained
servicing rights realizing a gain of $2,572.
OPERATING EXPENSE
The Bank restructured its branch operations functions in 1994, re-engineering
its entire work flow and information handling activities. This resulted in a one
time charge of $600 thousand for severance pay and other expenses associated
with the changes to the operating policies and procedures. Operating expense for
the commercial bank excluding this charge was $14.1 million in 1994, compared to
$13.9 million in 1993 and $20.9 million in 1992. Operating expenses for the
consolidated Bank have declined in 1994, primarily due to the sale of the
mortgage origination operation at the end of 1993.
Expenses for the Mortgage Banking Division increased by $6.0 million to $22.5
million in 1993, compared to $16.6 million in 1992. Selling expense was $12.2
million in 1993, up from $8.1 million in 1992. These expenses are affected by
interest rate fluctuations. Premium on sales of mortgage loans included in other
operating income is directly related to these expenses and subject to the same
factors and conditions. The premium on sales of mortgage loans was $18.0 million
in 1993, up from $11.3 million in 1992.
PROVISION FOR LOAN LOSSES
The Bank made no provision for loan losses in 1994 compared with compared to
$450 thousand during 1993 and over $17 million in 1992. No loan loss provision
was deemed necessary for 1994 due to the declining levels of nonperforming
assets, net recoveries received for the year, and the strong reserve position.
The reduction in provision in 1993 was made possible by the significant
reduction of nonperforming assets during 1993. The relationship between the
level and trend of the allowance for loan losses and nonperforming assets,
combined with the results of the ongoing review of credit quality, determine the
level of provisions.
LEGAL AND REGULATORY MATTERS
In June 1992, the Bank entered into an agreement with the Office of the
Comptroller of the Currency, 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 has signed, was terminated because the
requirements of the agreement were satisfied.
43
<PAGE> 330
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Report of Independent Public Accountants dated January 17, 1995; 37
2. Consolidated Statements of Financial Condition as of December 31, 1994
and 1993; 38
3. Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992; 39
4. Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1994, 1993, and 1992; 40
5. Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992; 41
6. Notes to Consolidated Financial Statements -- December 31, 1994. 42
</TABLE>
44
<PAGE> 331
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of CU Bancorp and Subsidiary:
We have audited the accompanying consolidated statements of financial conditions
of CU Bancorp and Subsidiary (the Company) as of December 31, 1994 and 1993, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CU Bancorp and
Subsidiary as of December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
January 17, 1995
45
<PAGE> 332
Consolidated Statements of Financial Condition
CU Bancorp and Subsidiary
<TABLE>
<CAPTION>
December 31,
Amounts in thousands of dollars, except share data 1994 1993
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,397 $ 18,440
Federal funds sold 20,000 28,000
-------- --------
Total cash and cash equivalents 55,397 46,440
Time deposits with other financial institutions 0 1,377
Investment securities (Market value of $71,423 and $87,889 in 1994
and 1993, respectively) 74,153 88,034
Loans, (Net of allowance for loan losses of $7,427 and $6,513 at December 31,
1994 and 1993, respectively) 167,175 134,148
Premises and equipment, net 996 924
Other real estate owned, net 0 920
Accrued interest receivable and other assets 6,433 7,363
-------- --------
Total Assets $304,154 $279,206
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $112,034 $125,665
Savings deposits 67,896 66,214
Time deposits under $100 47,836 27,753
Time deposits of $100 or more 36,415 19,296
-------- --------
Total deposits 264,181 238,928
Accrued interest payable and other liabilities 10,229 13,288
-------- --------
Total liabilities 274,410 252,216
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1994 or 1993 -- --
Common stock, no par value:
Authorized - 20,000,000 shares
Issued and outstanding - 4,467,318 in 1994,
and 4,424,306 in 1993 26,430 26,250
Retained earnings 3,314 740
-------- --------
Total Shareholders' equity 29,744 26,990
-------- --------
</TABLE>
46
<PAGE> 333
<TABLE>
<S> <C> <C>
$304,154 $279,206
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
47
<PAGE> 334
<TABLE>
<CAPTION>
Consolidated Statements of Income CU Bancorp and Subsidiary
For the years ended December 31,
Amounts in thousands of dollars, except per share data 1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Revenue from earning assets:
Interest and fees on loans $ 14,036 $14,761 $ 19,641
Benefits of interest rate hedge transactions 0 1,726 1,927
Interest on taxable investment securities 2,947 1,525 3,624
Interest on tax exempt securities 19 33 43
Interest on time deposits with other financial institutions 39 123 186
Interest on federal funds sold 918 454 898
-------- ------- --------
Total revenue from earning assets 17,959 18,622 26,319
-------- ------- --------
Cost of funds:
Interest on savings deposits 1,985 1,909 2,834
Interest on time deposits under $100 997 979 507
Interest on time deposits of $100 or more 773 784 1,455
Interest on federal funds purchased & securities sold under agreements to repurchase 0 79 142
Interest on other borrowings 323 440 756
-------- ------- --------
Total cost of funds 4,078 4,191 5,694
-------- ------- --------
Net revenue from earning assets before provision for loan losses 13,881 14,431 20,625
Provision for loan losses 0 450 17,090
-------- ------- --------
Net revenue from earning assets 13,881 13,981 3,535
-------- ------- --------
Other operating revenue:
Capitalization of excess servicing rights 0 207 821
Servicing income - mortgage loans sold 980 2,129 1,812
Service charges and other fees 1,121 955 1,015
Fees on loans sold 15 1,182 3,336
Premium on sales of mortgage loans (8) 18,022 11,346
Other fees and charges - mortgage 143 2,368 2,414
Gain on sale of mortgage servicing portfolio 2,572 0 0
Gain on sale of mortgage origination operation 0 1483 0
Gain on sale of other real estate owned 585
Gain on sale of investment securities (before taxes of $11 and $250,
in 1993 and 1992) 0 28 617
Gain on sale of securities held for sale (before taxes of $20 and $56 in 1993 and
1992, respectively) 0 49 138
-------- ------- --------
Total other operating revenue 5,408 26,423 21,499
-------- ------- --------
Other operating expenses:
Salaries and related benefits 6,335 11,020 12,647
Selling expenses - mortgage loans 333 12,193 8,088
Restructuring Charge 600
Other operating expenses 7,467 13,670 16,758
-------- ------- --------
Total operating expenses 14,735 36,883 37,493
-------- ------- --------
Income (loss) before provision for (benefit from) income taxes 4,554 3,521 (12,459)
Provision for (benefit from) income taxes 1,980 1,423 (4,269)
-------- ------- --------
Net income (loss) $ 2,574 $ 2,098 $ (8,190)
======== ======= ========
</TABLE>
48
<PAGE> 335
<TABLE>
<S> <C> <C> <C>
Earnings (loss) per share $ 0.56 $ 0.47 $ (1.90)
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE> 336
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity CU Bancorp and Subsidiary
Common Stock
---------------------
Amounts in thousands of dollars Number of Retained
except share data Shares Amount Earnings Total
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1991 4,283,531 $25,766 $ 6,832 $ 32,598
Exercise of stock options 83,319 224 -- 224
Net loss for the year -- -- (8,190) (8,190)
--------- ------- ------- --------
Balance at December 31, 1992 4,366,850 25,990 (1,358) 24,632
Exercise of stock options 57,456 260 -- 260
Net income for the year -- -- 2,098 2,098
--------- ------- ------- --------
Balance at December 31, 1993 4,424,306 26,250 740 26,990
Exercise of stock options 1,000 5 0 5
Exercise of director warrants 42,012 175 0 175
Net Income for the year -- -- 2,574 2,574
--------- ------- ------- --------
Balance at December 31, 1994 4,467,318 $26,430 $ 3,314 $ 29,744
========= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
50
<PAGE> 337
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows CU Bancorp and Subsidiary
Amounts in thousands of dollars For the years ended December 31,
Increase(decrease) in cash and cash equivalents 1994 1993 1992
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income/(loss) $ 2,574 $ 2,098 $ (8,190)
-------- -------- ---------
Adjustments to reconcile net income/(loss)to net cash provided by
operating activities:
Provision for depreciation and amortization 459 821 772
Amortization of real estate mortgage servicing rights 15 983 1,504
Provision for losses on loans and other real estate owned 0 450 17,090
Benefit of deferred taxes (1,180) 1,510 (2,854)
Gain on sale of investment securities, net 0 (77) (755)
Increase/(decrease) in other assets 3,781 2,628 2,452
Increase/(decrease) in other liabilities (3,035) 2,582 (160)
(Increase)/decrease in accrued interest receivable (766) 494 742
Increase/(decrease) in deferred loan fees 160 48 (12)
Capitalization of excess mortgage servicing rights 0 (207) (821)
Increase/(decrease) in accrued interest payable (24) (11) (161)
Net amortization of (discount)/premium on investment securities 972 48 34
Accrued benefits from interest rate hedge transactions 0 485 (343)
-------- -------- ---------
Total adjustments 382 9,754 17,488
-------- -------- ---------
Net cash provided by operating activities 2,956 11,852 9,298
-------- -------- ---------
Cash flows from investing activities
Proceeds from investment securities sold or matured 52,882 78,545 93,986
Purchase of investment securities (39,973) (81,826) (118,740)
Net decrease in time deposits with other financial institutions 1,377 1,979 2,143
Net (increase)/decrease in loans (33,187) 58,997 67,886
Purchases of premises and equipment, net (531) 290 (919)
-------- -------- ---------
Net cash provided by investing activities (19,432) 57,985 44,356
-------- -------- ---------
Cash flows from financing activities
Net increase/(decrease) in demand and savings deposits (11,949) (81,848) (141,077)
Net increase/(decrease) in time certificates of deposit 37,202 2,202 (13,473)
Proceeds from exercise of stock options and director warrants 180 260 224
Cancellation of warrants previously issued -- -- --
Cash dividend paid -- -- --
-------- -------- ---------
Net cash provided (used) by financing activities 25,433 (79,386) (154,326)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 8,957 (9,549) (100,672)
Cash and cash equivalents at beginning of year 46,440 55,989 156,661
-------- -------- ---------
Cash and cash equivalents at end of year $ 55,397 $ 46,440 $ 55,989
======== ======== =========
Supplemental disclosure of cash flow information
</TABLE>
51
<PAGE> 338
<TABLE>
<S> <C> <C> <C>
Cash paid during the year:
Interest $ 4,102 $ 4,179 $ 5,525
Taxes 2,201 -- 836
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 700 1,503 2,577
</TABLE>
The accompanying notes are an integral part of these consolidated statements
52
<PAGE> 339
Notes to Consolidated Financial Statements
CU Bancorp and Subsidiary
December 31, 1994
(Amounts in thousands unless otherwise specified)
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies -
CU Bancorp, a bank holding company (the Company), is a California corporation.
The accounting and reporting policies of the Company and its subsidiary conform
with generally accepted accounting principles and general practice within the
banking industry. The following comments describe the more significant of those
policies.
(a) Principles of consolidation -
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, California United Bank N.A. (the Bank).
All significant transactions and accounts between the Company and the Bank have
been eliminated in the consolidated financial statements.
(b) Investment portfolio -
The Bank's investment portfolio is separated into two groups, Investment
Securities and Securities Available For Sale. Securities are segregated in
accordance with management's intention regarding their retention. Accounting for
each group of securities follows the requirements of SFAS 115 "Accounting for
Certain Investments in Debt and Equity Securities". The adoption of SFAS 15 in
1993 had no material impact on the financial position or results of operations
of the Bank.
The Bank has the intent and ability to hold Investment Securities until
maturity. Securities in this classification are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a straight-line basis.
This approach approximates the effective interest method. Gains and losses
recognized on the sale of Investment Securities are based upon the adjusted cost
and determined using the specific identification method.
Securities Available For Sale are those where management has the willingness to
sell under certain conditions. This category of securities is carried at current
market value with unrealized gains or losses recognized as a tax affected
adjustment to capital in the statements of financial condition and in the
statements of shareholders' equity.
(c) 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 non-accrual (cash basis) status where
reasonable doubt exists with respect to the timely collectibility of such
interest. Payments on non-accrual loans are accounted for using a cost recovery
method. No interest income on non-accural loans.
Loan origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can reasonably be anticipated. Management considers
current economic conditions, historical loan loss experience, and other factors
in determining the adequacy of the allowance. The allowance is based on
estimates and ultimate losses may differ from current estimates. These estimates
are reviewed periodically and as adjustments become necessary, they are charged
to earnings in the period in which they become known. The allowance is increased
by provisions charged to operating expenses, increased for recoveries of loans
previously charged-off, and reduced by charge-offs.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS 114 addresses the accounting by creditors for
impairment of certain loans, as well as troubled debt restructurings. It is
applicable to all homogeneous loans that are collectively evaluated for
impairment, and may impact how the Bank is currently reporting the loans and the
loan loss reserves. This statement is
53
<PAGE> 340
effective for financial statements issued for fiscal years beginning after
December 15, 1994. Management plans to adopt SFAS 114 in the first quarter of
1995. Management does not expect that adoption of this statement will have a
material impact on the financial position or results of operations of the Bank.
54
<PAGE> 341
(d) Mortgage Banking Division --
The bank's real estate Mortgage Banking Division became operational in 1988. The
mortgage origination operation was sold November 10, 1993. The Bank carried the
first trust deed loans generated and held for sale by this Operation at the
lower of aggregate cost or market. As of December 31, 1993, cost approximated
market value. All loan inventory held for sale by this division had been sold
prior to the end of 1994.
During 1993, and 1992, the Bank capitalized $207, and $821, respectively, in
connection with the right to service real estate mortgage loans originated in
that Operation. This excess servicing asset, included in other assets, was
initially capitalized at its discounted present value and amortized over a
period of five to seven years. When prepayments of loans serviced occur, any
remaining servicing asset associated with the loan was charged to operations in
the year of occurrence. Amortization for 1994, 1993, and 1992, was $15, $983,
and $1,504 respectively.
(e) Premises and equipment --
Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful life of the asset. Amortization is computed on the
straight-line method over the useful life of leasehold improvements or the
remaining term of the lease, whichever is shorter.
(f) Other real estate owned --
Other real estate owned, acquired through direct foreclosure or deed in lieu of
foreclosure, is recorded at the lower of the loan balance or estimated fair
market value. When a property is acquired, any excess of the loan balance over
the estimated fair market value is charged to the allowance for loan losses.
Subsequently, the assets are recorded at the lower of the new cost basis at
foreclosure or fair market value less estimated selling expenses. Subsequent
write-downs, if any, are included in other operating expenses in the period in
which they become known. Gains or losses on sales are recorded in conformity
with standards which apply to accounting for sales of real estate. Other real
estate owned, net of reserves, amounted to $0 at December 31, 1994, and $920 at
December 31, 1993.
In substance foreclosures ("ISF") are included in the loan category and are
carried at the lower of cost or estimated net realizable value. When a property
is classified ISF, any excess of the loan balance over market or the estimated
net realizable value is charged to the allowance for loan losses. Expenses
related to these assets are included in other operating expenses in the period
in which they are incurred. In substance foreclosures were $0 at December 31,
1994, and $1.0 million at December 31, 1993.
(g) Interest Rate Derivatives --
Amounts receivable or payable under derivative financial instruments used to
manage interest rate risks arising from the Bank's financial assets and
financial liabilities are recognized as interest income or expense unless the
instrument qualifies for hedge accounting. Gains and losses on qualifying hedges
of existing assets or liabilities are included in the carrying amounts of those
assets or liabilities and are ultimately recognized in income as part of those
carrying amounts. Gains and losses on early terminations of derivatives are
included in the carrying amount of the related loans or debt and amortized as
yield adjustments over the remaining terms of the loans or debt.
Fees received in connection with loan commitments are deferred in other
liabilities until the loan is advanced and are then recognized over the term of
the loan as an adjustment of the yield. Fees on commitments that expire unused
are recognized in fees and commission revenue at expiration. Fees received for
guarantees are recognized as fee revenue over the term of the guarantees.
(h) Income taxes --
As discussed in Note 8, effective January 1, 1993, the Bank adopted the
Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting
for Income Taxes." Under SFAS No. 109, deferred tax assets or liabilities are
computed based on the difference between the financial statement and income tax
basis of assets and liabilities using the enacted marginal tax rate. Deferred
income tax expenses or credits are based on the changes in the asset or
liability from period to
55
<PAGE> 342
period. Prior to January 1, 1993, the deferred income tax expenses or credits
were recorded to reflect the tax consequences of timing differences between the
recording of income and expenses for financial reporting purposes and for
purposes of filing federal income tax returns at income tax rates in effect when
the difference arose.
(i) Earnings per share (amounts in whole numbers) --
Earnings per share are computed based on the weighted average number of shares
and common stock equivalents outstanding during each year (4,593,103 in 1994,
4,489,861 in 1993, and 4,317,913 in 1992), retroactively restated for stock
dividends and stock splits. Common stock equivalents include the number of
shares issuable on the exercise of outstanding options and warrants reduced by
the number of shares that could have been purchased with the proceeds from the
exercise of the options and warrants plus any tax benefits, based on the average
price of common stock.
(j) Statement of cash flows --
The Company presents its cash flows using the indirect method and reports
certain cash receipts and payments arising from customer loans and deposits, and
deposits placed with other financial institutions on a net basis. For purposes
of reporting cash flows, cash and cash equivalents include cash and due from
banks and federal funds sold. Generally, federal funds are sold for one-day
periods.
(k) Post-retirement benefits --
The Company provides no post-retirement benefits. Accordingly, the accounting
prescribed by Statement of Financial Accounting Standards No. 106 "Accounting
for Post-Retirement Benefits" has no effect on the Company's consolidated
financial statements.
(l) Reclassifications --
Certain amounts have been reclassified in the prior years to conform to
classifications followed in 1994.
56
<PAGE> 343
2. Average Federal Reserve balances --
The average cash reserve balances required to be maintained at the Federal
Reserve Bank were approximately $6.0 million and $8.7 million for the years
ended December 31, 1994 and 1993, respectively.
3. Investment portfolio --
A summary of the investment portfolio at December 31, 1994 and 1993, is as
follows:
<TABLE>
<CAPTION>
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1994
U.S. Treasury securities $67,140 --- $(2,535) $64,605
U.S. Government agency securities 105 --- --- 105
State and municipal bonds 750 $9 --- 759
Mortgage-backed securities 5,725 --- (204) 5,521
Federal Reserve Bank stock 433 --- --- 433
------- ---- ------- -------
Total investment portfolio $74,153 $9 $(2,739) $71,423
------- ---- ------- -------
1993
U.S. Treasury securities $57,822 $80 $ (259) $57,643
U.S. Government agency securities 29,029 --- --- 29,029
State and municipal bonds 750 34 --- 784
Mortgage-backed securities --- --- --- ---
Federal Reserve Bank stock 433 --- --- 433
------- ---- ------- -------
Total investment portfolio $88,034 $114 $ (259) $87,889
======= ==== ======= =======
</TABLE>
Investments with a book value of $29,200 and $27,093 were pledged as of December
31, 1994 and 1993, respectively, to secure court deposits and for other purposes
as required or permitted by law. Included in interest on investments in 1994,
1993, and 1992, is $19, $33, and $43, respectively, of interest from tax-exempt
securities.
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
57
<PAGE> 344
The book and market value of Investment securities as of December 31, 1994, by
maturity, are shown below.
<TABLE>
<CAPTION>
Book Market
Value Yield Value
------- ----- -------
<S> <C> <C> <C>
Due in one year or less $18,973 4.4% $18,752
Due after one through five years 48,272 5.2 45,958
Due after five years 1,183 7.1 1,192
Mortgage-backed securities 5,725 6.9 5,521
------- -------
$74,153 $71,423
======= =======
</TABLE>
At December 31, 1994 and 1993, there were no Securities Available For Sale.
Proceeds from the sales and maturities of debt securities during 1994, 1993, and
1992 were $ 54,259, $78,545, and $93,986, respectively. Gains of $0, $77, and
$755 were realized on those transactions. There were no realized losses on sales
in 1994, 1993, and 1992.
4. Loans --
The loan portfolio, net of unamortized deferred fees of $652 at December 31,
1994, and $492 at December 31, 1993, consisted of the following:
<TABLE>
<CAPTION>
December 31,
1994 1993
-------- --------
<S> <C> <C>
Commercial and industrial loans $169,413 $120,513
Real estate loans -- held for sale 0 10,426
Real estate loans -- mortgages 4,773 8,496
Real estate loans -- construction 416 1,226
-------- --------
Gross Loans 174,602 140,661
Less - Allowance for loan losses (7,427) (6,513)
-------- --------
Net loans $167,175 $134,148
======== ========
</TABLE>
Total non-performing loans were $36 and $1,378 at December 31, 1994 and 1993,
respectively. This includes in substance foreclosures of $ 0 and $1,000, at
December 31, 1994 and 1993, respectively. Interest income, which would have been
recognized had non-accrual loans and in substance foreclosures been current,
amounted to $6, $469, and $780, in 1994, 1993, and 1992, respectively. No
interest income has been reported on non-accrual loans for the years 1994, 1993,
or 1992.
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of period $6,513 $ 12,986 $ 12,367
Loans charged off (1,413) (10,749) (17,800)
Recoveries on loans previously charged off 2,327 3,826 1,329
Provision for loan losses 0 450 17,090
-------- -------- --------
Balance, end of period $7,427 $ 6,513 $ 12,986
======== ======== ========
</TABLE>
58
<PAGE> 345
5. Loans to related parties --
There were no loans to directors and their affiliates for the years ended 1994
and 1993.
6. Premises and equipment --
Book value of premises and equipment is as following.
<TABLE>
<CAPTION>
December 31,
1994 1993
------ ------
<S> <C> <C>
Furniture, fixtures and equipment $3,796 $3,382
Leasehold improvements 690 608
------ ------
Cost 4,486 3,990
Less - accumulated depreciation and amortization 3,490 3,066
------ ------
Net Book Value $ 996 $ 924
------ ------
</TABLE>
The Bank leases facilities under renewable operating leases. Rental expense for
premises included in occupancy expenses were $741 in 1994, $1,133 in 1993, and
$1,011 in 1992. As of December 31, 1993, the approximate future lease payable
under the lease commitments is as follows:
<TABLE>
<CAPTION>
Year ended December 31, --
<S> <C>
1995 $ 830
1996 737
1997 720
1998 720
1999 720
2000 180
Thereafter 0
------
$3,907
======
</TABLE>
59
<PAGE> 346
7. Disclosures about Fair Value of Financial Instruments
Financial instruments are defined as cash, evidence of an ownership interest in
an entity or a contract that both imposes contractual obligations and rights to
exchange cash, and/or other financial instruments on the parties to the
transaction.
For cash and cash equivalents, investments, floating rate loans and deposits
with no contractual maturity date, the carrying value is considered a reasonable
estimate of fair value. Where active and liquid markets exist, fair value
indications per individual trading unit can be obtained. A modeling tool which
calculated discounted cash flows was used to estimate fair value for other
financial instruments. The model used discount rates that included current
market rates adjusted for approximated credit risk, operating costs and interest
rate risk inherent in the instruments. The net book value and fair value of
financial instruments as of December 31, 1994, and 1993, were as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Book Value, Estimated Book Value, Estimated
Net Fair Value Net Fair Value
--- ---------- --- ----------
<S> <C> <C> <C> <C>
Cash & Due From Banks $ 35,397 $ 35,397 $ 18,440 $ 18,440
Federal Funds Sold 20,000 20,000 28,000 28,000
Securities 74,153 71,423 88,034 87,887
Loans 167,175 175,023 134,148 143,402
Deposit Liabilities 264,181 264,181 238,928 238,928
Other Borrowed Money 3,794 3,794 6,698 6,698
Off Balance Sheet Items ---- ---- ---- ----
Core Deposit Intangible ---- 22,527 ---- 10,200
</TABLE>
Estimations of fair value of financial instruments are subject to significant
estimate because active and liquid markets do not exist for a majority of them.
The estimates pertain to financial conditions, risk characteristics, expected
future losses, and market interest levels, among other factors, and if changed
could have a significant impact on them. The resulting presentations of
estimated fair value is not necessarily indicative of the value realizable in an
actual exchange of financial instruments.
8. Income taxes -
The Bank changed its method of accounting for income taxes on January 1, 1993,
and adopted Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
approach for financial accounting and reporting for income taxes, and changes
the criteria for the recognition and measurement of deferred tax assets and
liabilities, including net operating loss carryforwards.
60
<PAGE> 347
The effect on the Bank of adopting SFAS No. 109 was the recognition of a
deferred tax asset, which was offset by deferred tax liabilities and a valuation
allowance, with no resulting change in net assets to the financial position of
the Bank. As of December 31, 1994 and 1993, the temporary differences which give
rise to a significant portion of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Allowance for loan losses $ 3,348 $ 2,742
Deferred loan fees 294 221
Depreciation 196 83
Other expense accruals 1,631 646
State loss carryforward 0 395
Amortization of mortgage servicing asset 0 0
State tax expense (353) (428)
Other (1) 4
Valuation allowance (1,404) (1,132)
------- -------
Net deferred tax asset $ 3,711 $ 2,531
------- -------
</TABLE>
The provisions (benefits) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ -------
<S> <C> <C> <C>
Current -
Federal $ 2,876 $ (89) $(1,415)
State 284 2 --
------- ------ -------
3,160 (87) (1,415)
------- ------ -------
Deferred -
Federal (1,404) 1,268 (2,750)
State 224 242 (104)
------- ------ -------
(1,180) 1,510 (2,854)
------- ------ -------
$ 1,980 $1,423 $(4,269)
------- ------ -------
</TABLE>
61
<PAGE> 348
The provisions (benefits) for income taxes varied from the Federal statutory
rate of 34% for 1993, 1992, and 1991, for the following reasons:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Provisions (benefit) for income at
statutory rate $1,548 34.0% $1,198 34.0% $(4,236) (34.0)%
Interest on state and municipal bonds
and other tax exempt transactions (25) (.5)% (25) (.7)% (15) (0.1)%
State franchise taxes, net of federal
income tax benefit 335 7.3% 256 7.3% (103) (0.9)%
Other, net 122 2.7% (6) (0.2)% 85 (0.7)%
------ ---- ------ ---- ------- -----
$1,980 43.5% $1,423 40.4% $(4,269) (34.3)%
------ ---- ------ ---- ------- -----
</TABLE>
At December 31, 1993, the Company had a California Franchise Tax carryforward of
$1.9 million, with the entire operating loss carryforward being utilized in
1994.
9. Shareholders' Equity -
The Company has three employee stock option plans. The plans authorize the
issuance of up to 400,075, 350,000, and 180,000 shares of common stock, and
expire in 1993, 1995, and 2003, respectively. Options are granted at a price not
less than the fair market value of the stock at the date of grant. Options under
these plans expire up to ten years after the date of grant. The options granted
under the 1983 plan are incentive stock options, as defined in the Internal
Revenue Code. The options granted under the 1985 plan can be either incentive
stock options or non-qualified options. There is a $100,000 limitation on the
value of the stock covered by incentive stock options which may be granted or
become exercisable in any calendar year. Any options in excess of this amount
must be non-qualified options.
In 1987, a special stock option plan was approved that is limited to directors
of the Company and provides for the issuance of 120,960 shares of common stock.
The plan expires in 1997. Options granted under the plan are non-qualified stock
options. Each of the directors of the Company, at the time the special stock
option plan was approved, received stock options to purchase 15,120 shares at
$5.78 per share, which was in excess of the then prevailing market price.
Options expire 10 years after the date of grant. There are no remaining options
available for grant under the 1987 special stock plan.
In 1994, a non-employee director stock option plan was approved that provides
for the issuance of 200,000 shares of common stock. The plan expires in 2004.
Options granted under the plan are non-qualified stock options. During 1994,
options were granted to purchase 27,500 shares at $6.25 per share, which was
equal to the market price at the date of grant. Options expire 10 years from the
date of grant.
62
<PAGE> 349
The following information is presented concerning the stock option plans as of
December 31, 1994:
<TABLE>
<CAPTION>
Shares Subject to Range of Exercise Number of Shares
Option Prices Exercisable
----------------- ----------------- ----------------
<S> <C> <C> <C>
Plan Expiring May 10, 1993
Non-qualified stock options 49,030 $5.00 19,612
Plan Expiring October 22, 1995
Non-qualified stock options 248,440 $4.75 - $15.21 79,956
Plan Expiring December 17, 2003
Non-qualified stock options 258,000 $6.63 0
Special Stock Option:
Non-qualified stock options 45,360 $5.78 45,360
Plan Expiring April 27, 2004
Non-qualified stock options 27,500 6.25 0
</TABLE>
During 1994, no incentive stock options under the 1983 plan were exercised and
1,000 non-qualified stock options under the 1985 plan were exercised at $4.75
per share.
In 1984, certain members of the Board of Directors were granted warrants to
purchase up to 360,067 shares of common stock at $4.17 per share, primarily for
guaranteeing a capital note issued by the Company. These warrants became
exercisable when the capital note was paid off in 1987, therefore all
outstanding warrants are currently exercisable. During 1994 warrants for
57,012 shares were exercised. In 1994, warrants to purchase 7,500 shares of
common stock at the fair market value at date of grant of $7.00 per share were
issued to the former chairman of the board.
The stock options and warrants have been retroactively adjusted to reflect
stock splits and stock dividends.
10. Financial instruments with off-balance sheet risk and commitments and
contingencies --
The consolidated statements of financial condition do not reflect various
commitments relating to financial instruments which are used in the normal
course of business. Management does not anticipate that the settlement of these
financial instruments will have a material adverse effect on the Bank's
financial position. These instruments include commitments to extend credit,
standby and commercial letters of credit, and interest rate floor and swap
agreements.
These financial instruments carry various degrees of credit and market risk.
Credit risk is defined as the possibility that a loss may occur from the
failure of another party to perform according to the terms of the contract.
Market risk is the possibility that future changes in market prices may make a
financial instrument less valuable.
The Bank primarily grants commercial and real estate loan commitments with
variable rates of interest and maturities of one year or less to customers in
the greater Los Angeles area. The contractual amounts of commitments to extend
credit and standby and commercial letters of credit represent the amount of
credit risk. Since many of the commitments and letters of credit are expected
to expire without being drawn, the contractual amounts do not necessarily
represent future cash requirements. For interest rate floor and swap
agreements, the notional amounts do not represent exposure to credit loss.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank evaluates the
creditworthiness of each
63
<PAGE> 350
customer. The amount of collateral obtained, if deemed necessary by the Bank
upon the extension of credit, is based upon management's evaluation. Collateral
held varies, but may include securities, accounts receivable, inventory,
personal property, equipment, and income-producing commercial or residential
property.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. Standby letters of credit
generally have terms of up to one year.
Commercial letters of credit are issued to customers to facilitate foreign and
domestic trade transactions. They represent a substitution of the Bank's
credit for the customer's credit. Such letters of credit are generally short
term in nature and are collateralized by the merchandise covered by the
transaction. At December 31, 1994 and 1993 there were $1.5 million and $.5
million outstanding, respectively. These amounts reduce the availability under
the applicable customer's loan facility.
Interest rate swaps and floors may be created to hedge certain assets and
liabilities of the Bank. These transactions involve either an exchange of fixed
or floating rate payment obligations on an underlying notional amount. In the
case of a rate floor, there is a guaranteed payment of a rate differential on a
notional amount, should a specific market rate fall below a specific agreed
upon level. Credit risk related to interest rate swaps is limited to the
interest receivable from the counterparty less the interest owed that party or,
in the case of rate floors, to interest receivable on the differential between
the specific rate contracted in the floor agreement and actual rates in effect
at various settlement dates. Market risk fluctuates with interest rates.
64
<PAGE> 351
The following is a summary of various financial instruments with off-balance
sheet risk at December 31,1994 and 1993:
<TABLE>
<CAPTION>
December 31,
------------
Amounts in millions of dollars
1994 1993
---- ----
<S> <C> <C>
Standby letters of credit $ 7 $ 3
Undisbursed loans 69 48
Interest rate floor agreements* 0 1
Interest rate swap agreements* 0 0
*Notional amounts
</TABLE>
In response to continued economic declines and anticipating interest rate
declines, the Bank entered into an interest rate swap agreement effective
October 8, 1991, for $100 million. Terms of this agreement were that the Bank
would receive a fixed rate of 8.18% over two years in exchange for paying the
average prime rate. Accrued benefits from this transaction amounted to $1,726
and $1,927 in 1993, and 1992, respectively, and are included in interest
income. At December 31, 1992, the market value of this instrument was $ 1.7
million, net of accrued interest. Amounts due the Bank or counterparty were
settled quarterly. This agreement expired on October 8, 1993.
In the normal course of business, the Company occasionally becomes a party to
litigation. See footnote 13.
11. Other operating expenses --
Other operating expenses included the following:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------- -------
<S> <C> <C> <C>
Promotional expenses $ 264 $ 393 $ 494
Data processing for customers 737 920 3,030
Director and advisory fees 107 146 233
Legal fees 455 1,370 1,065
Messenger services 408 583 746
Other data processing fees 301 455 468
Regulatory assessments 568 946 1,011
Expenses for other real estate owned 22 234 2,737
Amortization of mortgage servicing rights 15 983 1,504
Occupancy expense 966 1,333 1,447
Reserve for branch relocation 58 447 --
Other 3,566 5,860 4,023
------ ------- -------
Total operating expenses $7,467 $13,670 $16,758
------ ------- -------
</TABLE>
65
<PAGE> 352
12. Condensed financial information of CU Bancorp --
At December 31, 1994 and 1993, the condensed unconsolidated balance sheets of
the Company are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
<S> <C> <C>
Balance Sheets
Cash $ 426 $ 343
Prepaid expenses 0 0
Investment in California United Bank N.A. 29,507 26,720
------- --------
Total assets $29,933 $ 27,063
------- --------
Other liabilities $ 189 $ 73
------- --------
Shareholders' equity 29,744 26,990
------- --------
Total liabilities and shareholders' equity $29,933 $ 27,063
------- --------
</TABLE>
For the years ended December 31, 1994, 1993, and 1992, the condensed
unconsolidated statements of income of the Company are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
Statements of Income
Equity in earnings/(loss) of the Bank $2,785 $2,265 $(7,986)
Operating expenses 221 167 204
Interest Income 9 0 0
------ ------ -------
Net income/(loss) $2,573 $2,098 $(8,190)
------ ------ --------
</TABLE>
Under National banking law, the Bank is limited in its ability to declare
dividends to the Company to the total of its net income for the year, combined
with its retained net income for the preceding two years less any required
transfers to surplus. The effect of this law is to preclude the bank from
declaring any dividends at December 31, 1994 and 1993 Dividends paid by the
Bank during 1991 amounted to $920. No dividends were declared in 1994 or 1993,
consistent with the Bank's supervisory agreements.
13. Legal Matters
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, 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
66
<PAGE> 353
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 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, when consummated, will dismiss all of the above
referenced cases, with prejudice, against the Bank, its officers and directors,
with the exception of the officer/director previously named. The settlement is
subject to appropriate court approvals which have now been received. In
connection with the settlement, the Bank will release 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 will also make a cash payment to the Plaintiffs in connection with the
settlement. In connection with the settlement the Bank will assign its rights,
if any, under various insurance policies, to the Plaintiffs. The settlement
does not resolve the claims asserted against the officer/director.
The settlement has been approved by the Federal District Court and the Federal
Bankruptcy Court. While one party to these matters filed an appeal to the
approval by the courts, they have indicated that they will dismiss such appeal,
which would allow the settlement to be effectuated. Based upon advice of
counsel, the Bank believes that the possibility of the settlement not being
finalized is remote. The Bank is still providing a defense to its former
director/officer 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.
67
<PAGE> 354
14. Regulatory Matters
On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"),
after completion of their annual examination of the Bank, terminated the Formal
Agreement entered into in June, 1992. In December 1993, the Fed terminated the
Memo of Understanding entered into in August, 1992. The Formal Agreement had
been entered into in June 1992 and required the implementation of certain
policies and procedures for the operation of the Bank to improve lending
operations and management of the loan portfolio. The Memorandum of
Understanding was executed in August 1992.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
NONE.
68
<PAGE> 355
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Except as hereinafter noted, the information concerning directors
and executive officers of the Company will be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year. For information
concerning the executive officers of the Company, see Item 4 (A) "EXECUTIVE
OFFICERS OF THE COMPANY".
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation will be filed
pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial
owners and management will be filed pursuant to Regulation 14A within 120 days
after the end of the fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED MATTERS
Information concerning certain relationships and related matters
will be filed pursuant to Regulation 14A within 120 days after the end of the
fiscal year.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10. Material Contracts
10.1 CU Bancorp 1994 Non-Employee Director Stock Option Plan 61
10.2 CU Bancorp 1993 Non Employee Director Stock Agreement 67
10.3 Mortgage Servicing Purchase Agreement 72
21. Subsidiaries of the Registrant 81
</TABLE>
69
<PAGE> 356
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 1995 C U BANCORP
By /s/ STEPHEN G. CARPENTER
----------------------------------
Stephen G. Carpenter
President and Chief
Executive Officer
By /s/ PATRICK HARTMAN
----------------------------------
Patrick Hartman
Chief Financial Officer
70
<PAGE> 357
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
KENNETH BERNSTEIN Director March 28, 1995
- ----------------------------------
Kenneth Bernstein
STEPHEN G. CARPENTER
Director, March 28, 1995
- ---------------------------------- President/
Stephen G. Carpenter Chief Executive
Officer
RICHARD CLOSE
Director March 28, 1995
- ---------------------------------- Secretary
Richard H. Close
PAUL W. GLASS
Director March 28, 1995
- -----------------------------------
Paul W. Glass
M. DAVID NATHANSON
Director March 28, 1995
- -----------------------------------
M. David Nathanson
RONALD S. PARKER
Director March 28, 1995
- -----------------------------------
Ronald S. Parker
DAVID I. RAINER
Director March 28, 1995
- -----------------------------------
David I. Rainer
</TABLE>
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15 (d) of the Act by Registrant Which Have Not Registered Securities Pursuant
to Section 12 of the Act.
71
<PAGE> 358
The proxy statement with respect to the annual meeting of the
shareholders shall be furnished to shareholder subsequent to the filing of this
Form 10-K and shall also be furnished to the Securities and Exchange Commission.
72
<PAGE> 359
APPENDIX D-2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NUMBER ONE
Form 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1994.
OR
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to ____________
Commission file number 0-11008
CU BANCORP
(Exact name of registrant as specified in its charter)
California 95-3657044
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
16030 Ventura Boulevard
Encino, California 91436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 907-9122
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(title of class)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 month (or for shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 220.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1995: $29,139,633.
Common Stock, no par value-
The number of shares outstanding of the issuer's classes of common stock as of
February 28, 1995 Common Stock, no par value 4,527,324 shares
DOCUMENTS INCORPORATED BY REFERENCE
NONE
This document contains 20 pages.
<PAGE> 360
THE UNDERSIGNED REGISTRANT HEREBY AMENDS THE FOLLOWING ITEMS, FINANCIAL
STATEMENTS, EXHIBITS OR OTHER PORTIONS OF ITS ANNUAL REPORT ON FORM 10 -K AS
SET FORTH IN THE PAGES ATTACHED HERETO:
FORM 10 -K FOR THE YEAR ENDED DECEMBER 31, 1994 IS HEREBY AMENDED TO INCLUDE
PART III, ITEMS 10, 11, 12 AND 13.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CU BANCORP
(REGISTRANT)
BY: /s/ STEPHEN G. CARPENTER
________________________________________________
STEPHEN G. CARPENTER, CHIEF EXECUTIVE OFFICER
BY: /s/ PATRICK HARTMAN
________________________________________________
PATRICK HARTMAN, CHIEF FINANCIAL OFFICER
DATE: APRIL 29, 1995
<PAGE> 361
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Bylaws of the Company provide that the number of directors of the
Company may be no less than seven and no more than thirteen, with the exact
number to be fixed by resolution of the Board of Directors or the shareholders.
The number of directors is presently fixed at seven.
The following table provides information as of the December 31, 1994 with
respect to each person who was a member of the Board of Directors of the
Company. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"
for information pertaining to stock ownership of the nominees.
<TABLE>
<CAPTION>
POSITION AND OFFICE POSITION AND OFFICE DIRECTOR OF COMPANY
------------------- ------------------- -------------------
NAME AGE WITH THE COMPANY WITH THE BANK AND BANK SINCE:
---- --- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Kenneth L. Bernstein 51 Director Director 1994
Stephen G. Carpenter 54 Director, Chairman, Chief 1992
President, Chief Executive Officer
Executive Officer
Richard H. Close 49 Director, Secretary Director, Secretary 1981
Paul W. Glass 48 Chairman Director 1984
M. David Nathanson 64 Director Director 1981
Ronald S. Parker 49 Director Director 1993
David I. Rainer 37 Director, Chief Director, 1992
Operating Officer President, Chief
Operating Officer
</TABLE>
None of the directors or officers of the Company or the Bank were
selected pursuant to any arrangement or understanding other than with the
directors and officers of the Company and the Bank acting in their capacities
as such. There are no family relationships between any two or more of the
directors, officers, or persons nominated or chosen by the Board of Directors
to become a director or officer and none serve as directors of any company
required to report under the Securities Exchange Act of 1934, as amended, or
any investment company registered under the Investment Company Act of 1940, as
amended.
Set forth below are brief summaries of the background and business
experience, including principal occupation, of the director nominees.
KENNETH L. BERNSTEIN, was elected to the Board of the Company and the
Bank in December 1993, and assumed the positions in February 1994. He is the
President of BFC Financial Corporation and has served in such capacity since
1965. BFC Financial Corporation performs a variety of service for both the
finance industry and clients of that industry.
STEPHEN G. CARPENTER, joined the Bank in 1992 from Security Pacific
National Bank where
<PAGE> 362
he was Vice Chairman in charge of middle market lending from July 1989 to June
1992. Mr. Carpenter was previously employed at Wells Fargo Bank from July 1980
to July 1989, where he was an Executive Vice President. He assumed the role of
Chairman of the Bank in February, 1994.
RICHARD H. CLOSE has been a principal in the law firm of Shapiro,
Posell, Rosenfeld & Close, a Professional Corporation, in Los Angeles,
California, since 1977.
PAUL W. GLASS is a certified public accountant and has been a
principal in the accountancy firm of Glass & Rosen, in Encino, California,
since 1980.
M. DAVID NATHANSON was formerly President of Nathanson, Lewis & Harris
Advertising until 1989. He is currently retired.
RONALD S. PARKER has been the Chairman of Parker, Mulcahy &
Associates, a regional merchant banking firm, since May 1992. Prior to that he
was the Executive Vice President and Group Head of the Corporate Banking Group
of Security Pacific National Bank from March of 1991 to May of 1992. He held a
similar position at Wells Fargo National Bank from 1984 to 1991. *Mr. Parker
resigned from the Board in December 1993. He was reappointed in 1994.
DAVID I. RAINER was appointed Executive Vice President of the Bank in
June 1992 and assumed the position of Chief Operating Officer in late 1992. He
assumed the title of President of the Bank in February, 1994. From July 1989
to June 1992, Mr. Rainer was employed by Bank of America (Security Pacific
National Bank) where he held the position of Senior Vice President. From March
1989 to July 1989, Mr. Rainer was a Senior vice President at Faucet & Company,
where he co-managed a stock and bond portfolio. From July 1982 to March 1989,
Mr. Rainer was employed by Wells Fargo Bank, where he held the positions of
Vice President and Manager.
No director, officer or affiliate of the Company or of the Bank, no
owner of record or beneficially of more than five percent of any class of
voting securities of the Company or no associate of any such director, officer
or affiliate is a party adverse to the Company or the Bank in any material
pending legal proceedings to which the Company or the Bank is a party.
EXECUTIVE OFFICERS
Set forth below is certain information as of December 31, 1994 with
respect to each of the executive officers of the Company.
<TABLE>
<CAPTION>
POSITION AND POSITION AND
OFFICES WITH THE OFFICES WITH OFFICER
NAME AGE COMPANY THE BANK SINCE
---- --- ------- --------- -----
<S> <C> <C> <C> <C>
STEPHEN G. CARPENTER 55 Director, Chief Chairman, Chief 1992
Executive Officer Executive Officer
DAVID I. RAINER 38 Director, Chief Director, President, 1992
Operating Officer Chief Operating
Officer
ANNE WILLIAMS 37 Chief Credit Officer Chief Credit Officer 1992
PATRICK HARTMAN 45 Chief Financial Chief Financial 1992
Officer Officer
</TABLE>
<PAGE> 363
Set forth below are brief summaries of the background and business experience,
including principal occupation, of the executive officers of the Company who
have not previously been discussed herein.
PATRICK HARTMAN has been employed by the Bank since November, 1992.
Prior to assuming his present positions he was Senior Vice President/Chief
Financial Officer for Cenfed Bank for a period during 1992. Mr. Hartman held
the post of Senior Vice President/Chief Financial Officer of Community Bank,
Pasadena, California, for thirteen years.
ANNE WILLIAMS joined the Bank in 1992 as Senior Loan Officer. She
was named to the position of Chief Credit Officer in July 1993. Prior to that
time she spent five years at Bank of America / Security Pacific National Bank,
where she was a credit administrator in asset based lending, for middle market
in the Los Angeles Area. Ms. Williams was trained at Chase Manhattan Bank in
New York, and was a commercial lender at Societe Generale in Los Angeles and
Boston Five Cents Savings Bank where she managed the corporate lending group.
<PAGE> 364
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following information is furnished with respect to (i) the chief
executive officer of the Corporation and (ii) each of the other executive
officers of the Corporation (including officers of the Bank who may be deemed
to be executive officers of the Corporation), who were serving as executive
officers at December 31, 1994 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
Name and Principal Position Year Salary Bonus Other Annual Options LTIP All Other
--------------------------- ---- ------ ----- ------------ ------- ---- ---------
Compensation / Sar's Payouts Compensation
------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen G. Carpenter 1992 $144,872 $ 50,000(3) $ 7,000(2) 74,000 0 0
Chief Executive Officer / 1993 $250,000 $ 50,000(3) $12,000(2) 25,000 $1,882(5)
Chief Executive Officer - 1994 $256,250 $ 50,000 $13,440(2) 100,000 $2,250(5)
California United Bank
David I. Rainer 1992 $108,333 $ 50,000 $ 5,000(2) 55,000 0 0
Chief Operating Officer / 1993 $200,000 $100,000 $12,000(2) 25,000 $3,000(5)
President and Chief Operating 1994 $205,000 $ 50,000 $12,330(2) 75,000 $2,250(5)
Officer - California United
Bank
Patrick Hartman 1993 $138,000 $ 0 $ 8,450(2) 20,000 0 0
Senior Vice President 1994 $140,021 $ 13,000 $ 8,653(2) 10,000 0
Chief Financial Officer /
Chief Financial Officer -
California United Bank
Anne Williams 1993 $103,400 $ 25,000 $ 7,800(2) 5,000 0 $1,439(5)
Executive Vice President 1994 $124,000 $ 15,000 $ 8,092(2) 10,000 $2,085(5)
Chief Credit Officer / Chief
Credit Officer - California
United Bank
</TABLE>
(1) The Company provides memberships in certain clubs for certain
executives, the use of which primarily relates to Company business. The value
of the personal use, if any, of all such benefits cannot be specifically
determined and is not reported in the table.
(2) Consists of amounts paid for automobile allowances and term life
insurance.
(3) These amounts were signing bonuses.
(4) One half of this amount was a signing bonus. The remainder was a
merit bonus.
(5) Consists of the Company's matching portion of 401-K Plan
contributions.
<PAGE> 365
STOCK OPTIONS
The table on the following page contains information concerning the grant of
stock options during the fiscal year ended December 31, 1994 to the Named
Executives:
OPTION / SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES
OF STOCK PRICE
APPRECIATION FOR
THE OPTION TERM
Name OPTIONS/SARS % OF TOTAL EXERCISE OR EXPIRATION 5%($) 10%($)
GRANTED OPTIONS/SARS GRANTED BASE PRICE DATE
# (1)(2)(3)(4) TO EMPLOYEES IN FISCAL ($ / SH)
YEAR
<S> <C> <C> <C> <C> <C> <C>
Stephen Carpenter 100,000 36.45% $6.625 3/29/04 $416,642.69 $1,055,854.38
David Rainer 75,000 28.09% $6.625 3/29/04 $312,482.02 $ 791,890.78
Patrick Hartman 10,000 3.75% $6.625 3/29/04 $ 41,664.27 $ 105,585.44
Anne Williams 10,000 3.75% $6.625 3/29/04 $ 41,664.27 $ 105,585.44
</TABLE>
(1) The options are exercisable in 20% increments commencing one year
subsequent to grant and are exercisable over a six year period, provided
however, that the options shall vest fully upon the occurrence of certain
significant events that include a merger or dissolution of the Company or sale
of substantially all the Company's assets. As of December 31, 1994 options
equal to the amounts set forth in the section herein entitled "Security
Ownership of Certain Beneficial Owners and Management", above were vested.
The vested portion of each option may be exercised at any time prior to its
expiration by tendering the exercise price in cash, check or in Shares of
Common Stock, valued at fair market value on the date of exercise. Each option
will terminate three months after termination of employment for any reason
other than death or disability. In the event of termination due to death or
disability, the option will terminate no later than one year after such
termination. Each option is not transferable other than by will or the laws of
distribution and is not exercisable by anyone other than the optionee during
his lifetime. If the outstanding shares of stock of the Company are increased,
decreased or changed into or exchanged for, a different number or kind of
shares or securities of the Company, without receipt of consideration by the
Company, a corresponding adjustment changing the number or kind of shares and
the exercise price per share allocated to unexercised options shall be made.
Subject to certain limitations in the Plan, each option may be amended by
mutual agreement of the optionee and the Company.
(2) The exercise price of all options is adjustable in connection with stock
dividends, stock splits and similar events.
(3) The Potential Realizable Value is the product of (a) the difference
between (i) and the product of the closing market price per share at the
grant date and the sum of (A) 1 plus (B) the assumed rate of appreciation of
the Common Stock compounded annually over the term of the option and (ii) the
per share exercise price of the option and (b) the number of shares of Common
Stock underlying the option at December 31, 1994. These amounts represent
certain assumed rates of appreciation only. Actual gains, if any, on stock
option exercises are dependent on a variety of factors, including market
conditions and the price performance of the Common Stock. There can be no
assurance that the rate of appreciation presented in this table will be
achieved.
(4) Reflects the number of shares of Common Stock underlying the options
granted to the Named Executives during the year. Each of the options was
granted pursuant to the Company's 1983, 1985, or 1993 Stock Option Plans.
No options were exercised during 1994 by any of the named parties in the
Compensation Table. No exercise price of any option previously granted to any
executive officer was adjusted or amended ("repriced") during 1994.
<PAGE> 366
AGGREGATED FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at 12/31/94 In-the-money Options
------------------- at 12/31/94
-----------
Name Exercisable / Unexercisable Exercisable / Unexercisable
---- --------------------------- ---------------------------
<S> <C> <C>
S. Carpenter 39,600 / 159,400 $66,850 / $112,775
D. Rainer 31,429 / 123,571 $55,111 / $ 92,044
Patrick Hartman 3,999 / 26,001 $ 750 / $ 5,000
Anne Williams 7,000 / 23,000 $12,375 / $ 20,750
</TABLE>
DEFERRED COMPENSATION PLAN
In December of 1992, the Bank terminated its deferred compensation
plan whereby eligible senior officers and directors of the Bank were entitled
to defer certain amounts of compensation and received limited matching amounts
from the Bank. All participants were paid in full. No compensation was
received by the parties named in the Summary Compensation Table.
OTHER MATTERS RELATED TO COMPENSATION
OTHER COMPENSATION / GOLDEN PARACHUTES
Mr. Carpenter and Mr. Rainer do not have employment contracts,
However, in the event that there is a change in control ("Change of Control) of
the Bank or its parent company (including a change of more than 50% of the
current shareholders of the Company), Mr. Carpenter and Mr. Rainer will each be
entitled to any accrued but unpaid bonus at that time. Additionally, in the
event of a Change of Control, if a position commensurate with either of their
current positions with the Bank is not offered and either elects to resign, the
Bank will pay the resigning party, subject to non-disapproval by the
regulators, 12 months' compensation.
During 1993, the Bank sold its mortgage origination network and
certain related loan production offices. In connection with that transaction,
compensation was required by prior agreement to be paid to the two officers who
had founded the mortgage banking division and who managed that business with
regard to the value of the mortgage servicing portfolio (which was retained by
the Bank) and related to the profitability of the division. As a result, each
of Messrs. Douglas Jones and Daniel LuVisi received total compensation of
$900,507 for the period January 1, 1993 through the sale date of November 10,
1993, including $714,126 related to bonuses and other payments based on
profitability and value of the mortgage servicing portfolio. Messrs. Jones and
LuVisi resigned from their positions with the Bank concurrently with the sale
of the mortgage origination network, to be employed by the purchaser of the
network.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation for attending
meetings of the Board of Directors. However, the directors of the Company also
serve as directors of the Bank. The Bank paid the sum of between $3,800 and
$1,600 per month during 1993 to each director of the Bank, depending on the
number and type of
<PAGE> 367
meetings attended by the director. The Director Compensation Plan ties director
compensation to board and committee meeting attendance and is also designed to
be substantially similar in total compensation to similar banking institutions.
Directors who are also salaried employees of the Bank do not receive any
additional compensation for activities as directors. Eligible directors
receive: (i) $1,000 per board meeting; and (ii) $200 per committee meeting (for
committees for which they are members). During 1994, director compensation
ranged from $22,600 at the highest to $15,600 at the least, for the entire
year, and totalled $130,200 in the aggregate for the year 1994.
SPECIAL STOCK OPTION PLAN
On October 20, 1987, the shareholders of the Company approved the 1987
Special Stock Option Plan ("Special Plan") for the Company's directors, to
encourage them to continue as directors, give them additional incentive as
directors and reward them for past services. This Special Plan is limited to
directors of the Company and the Bank and provides for the issuance of 120,960
authorized but previously unissued shares of Common Stock. Only options which
do not qualify as "incentive stock options" ("Nonstatutory Stock Options")
under Section 422A of the Internal Revenue Code of 1986, as amended (the
"Code"), may be issued. Pursuant to the shareholders' approval of the Special
Plan, each then current director received options to purchase 15,120 shares.
THERE ARE NO ADDITIONAL OPTIONS CURRENTLY AVAILABLE FOR GRANT UNDER THE SPECIAL
PLAN. The majority of the current directors do not have any special options,
although Messrs. Carpenter and Rainer have employee stock options. Options
terminate 90 days after a director ceases being a director.
The Special Plan provides that the exercise price shall not be less
than 100% of the fair market value of the shares on the day the options are
granted. On October 20, 1987, when the shareholders approved the Special Plan,
the directors received such options with an exercise price of $5.791 per share.
The options have an exercise period of ten years and are currently fully
vested.
Options granted under the Special Plan are nontransferable (other than
by the laws of descent and distribution) and may not be exercised more than
three months after termination of directorship, except in the case of the death
or disability of an optionee. In such event, the option remains exercisable
for one year to the extent it was exercisable at the date of death or
disability.
Pursuant to the Special Plan, payment for the exercise of options must
be received in full prior to the issuance of shares. Payment may be made (a)
in cash, (b) by delivery of shares of Common Stock previously owned by the
optionee (to the extent legally permissible), or (c) in a combination of common
Stock and cash. The Special Plan also enables an optionee the possibility to
satisfy tax withholding amounts due upon exercise with shares of Common Stock
rather than cash, by either delivering already owned shares of Common Stock or
withholding from the shares of Common Stock to be issued upon exercise that
number of shares which, based on the value of the Common Stock, would satisfy
the tax withholding amounts due. Since the Common Stock is listed on NASDAQ,
the value of the Common Stock delivered as payment or withheld is deemed to be
the closing price of the stock on the date of exercise or, if no sale occurred
on such date, the nearest preceding day on which a sale of Common Stock
occurred.
DIRECTOR WARRANTS
In May 1985, the shareholders ratified the grant to certain directors
at that time, of warrants to purchase 30,006 shares each, a total of 330,066
shares of Common Stock, over a ten-year period as compensation for the personal
guarantees of a capital note of the Company in the amount of $1,250,000 from
First Interstate Bank of California. Director Glass received an identical
warrant to purchase 30,006 shares, at a later date. To comply with regulatory
capital requirements by supporting the Company's additional asset growth, the
Company issued the capital note, for which the lender required the guarantees
by the directors in connection with the purchase of such capital note. The
exercise price of such warrants of $4.17 per share was the weighted average
price of the Common Stock for the 60 days prior to April 2, 1984, the date on
which First Interstate Bank of California approved the purchase of the capital
note. The purchase price of each warrant to purchase 30,006 shares was $750.
As of March 31, 1995, all of the warrants had been exercised and there are no
warrants outstanding.
<PAGE> 368
In January 1994, the board of directors awarded former chairman of the
board Dr. Jon P. Goodman warrants to purchase 7,500 shares of stock at fair
market value on date of grant which was $7.00, in recognition of her services
to the Company, in view of the fact that she was the only long term director
without such incentive, and in connection with her resignation. Dr. Goodman
also received special compensation of $30,000 at the same time.
EMPLOYEE STOCK OPTION PLAN (1983)
In April 1983, the Company adopted the Employee Stock Option Plan
(1983) ("1983 Plan") which the shareholders approved in May 1983. The 1983
Plan provided for the issuance of both "incentive stock options" within the
meaning of Section 422A of the Code ("Incentive Stock Options") and
Nonstatutory Stock Options. The number of shares of Common Stock reserved for
issuance under the 1983 Plan was 400,075. As of December 31, 1994, there were
49,030 shares subject to outstanding options. NO SHARES REMAIN AVAILABLE FOR
FUTURE GRANTS. THE 1983 PLAN HAS EXPIRED BY ITS TERMS, ALTHOUGH OUTSTANDING
OPTIONS REMAIN AND ARE EXERCISABLE OVER THE PERIOD DESIGNATED IN THE 1983 PLAN.
Only full time employees of the Company or the Bank were eligible to
participate in the 1983 Plan. No director of the Company who is not an officer
was eligible for a grant of options under the 1983 Plan. Options are
exercisable in installments as provided in individual stock option agreements.
The exercise price of options under the 1983 Plan was equal to at
least 100% of the fair market value of the Common Stock as of the date of
grant. The exercise price is due in full upon exercise and may be paid (a) in
cash, (b) by delivering shares of Common Stock equal in value to the exercise
price, subject to certain limitations for shares of stock previously acquired
upon exercise of an incentive stock option, or (c) by a combination of cash and
Common Stock. Since the Common Stock is listed on NASDAQ, the value of the
Common Stock delivered as payment is deemed to be the closing price of such
stock as the date of exercise or, if no sale occurred on such date, the nearest
preceding day on which a sale of Common Stock occurred.
No option granted under the 1983 Plan is transferable by the optionee
other than by will or the laws of descent and distribution. Each option is
exercisable only while the optionee is employed by the Company, except that if
the optionee's employment is terminated for any reason, the option is
exercisable for a period of three months thereafter. Upon the disability or
death of an optionee, such option is exercisable within one year from the date
of disability or death. Information as to grants of options under the 1983
Plan during 1992 is set forth in the section entitled "Compensation of
Executive Officers and Directors".
FIRST AMENDED AND RESTATED 1985 EMPLOYEE STOCK OPTION PLAN
In October 1985 the shareholders approved the adoption of, and in
October 1987 the shareholders approved the amendment to, the First Amended and
Restated 1985 Employee Stock Option Plan ("1985 Plan") which provides for the
issuance of incentive or nonstatutory stock options. The 1985 Plan provides
for the issuance of options to purchase 350,000 shares of Common Stock. As of
December 31, 1994, there were 248,440 shares subject to outstanding options,
62,828 shares had been issued upon exercise of options, and 38,732 shares were
available for future grants.
As the 1985 Plan is presently drafted, the Board of Directors, or a
Stock Option Committee appointed by the Board of Directors, may administer the
plan.
Only full time employees and directors are eligible to participate in
the 1985 Plan. However, no options have been issued to any director who is not
a full-time employee under the 1985 Plan and there is no intention to do so.
Options are exercisable in installments as provided in individual stock option
agreements. The 1985 Plan terminates in 1995.
The Board of Directors has the authority to determine the exercise
price for all stock options granted under the 1985 Plan; provided, however,
such exercise price must be equal to at least 100% of the fair market value of
the Common Stock as of the date of grant, and provided further, the exercise
price for an incentive
<PAGE> 369
stock option granted to a Ten Percent Shareholder may not be less than 110% of
the fair market value of the Common Stock on the date of grant. The exercise
price is due in full upon exercise and may be paid (a) in cash, (b) by
delivering shares of Common Stock equal in value to the exercise price, subject
to certain limitations for shares of stock previously acquired upon exercise of
an incentive stock option, or (c) a combination of cash and Common Stock.
Since the Common Stock is listed on NASDAQ, the value of the Common Stock
delivered as payment is deemed to be the closing price of such stock as the
date of exercise or, if no sale occurred on such date, the nearest preceding
day on which a sale of Common Stock occurred.
The term during which an option granted under the 1985 Plan is
exercisable may not exceed ten years from the date of grant; provided, however,
an option granted to a Ten Percent Shareholder may not have a term in excess of
five years. The aggregate fair market value of the Common Stock (determined at
the date of grant) for which any employee may be granted incentive stock
options to be first exercisable in any fiscal year may not exceed $100,000. No
option granted under the 1985 Plan is transferable by the optionee other than
by will or the laws of descent and distribution. Each option is exercisable
only while the optionee is employed by the Company, except that if the
optionee's employment is terminated for any reason, the option is exercisable
for a period of three months thereafter. Upon the disability or death of an
optionee, such option is exercisable within one year from the date of
disability or death.
Information as to options granted pursuant to the 1985 Plan to
executive officers is contained in the section "Compensation of Executive
Officers and Directors".
1993 EMPLOYEE STOCK OPTION PLAN
In November, 1993, the Board of Directors adopted and approved,
subject to shareholder approval, the CU Bancorp 1993 Employee Stock Option Plan
(the " 1993 Plan"). The 1993 Plan was approved by requisite vote of the
shareholders on December 17, 1993. There were 400,000 shares reserves for
option issuances under the 1993 Plan. At December 31, 1995 options for 262,000
shares had been granted under the 1993 Plan, there were 258,000 shares
outstanding under the 1993 Plan and there were 142,000 shares available for
grant under the 1993 Plan. All full time employees of the Company and its
subsidiary are eligible to participate.
The 1993 Plan supplements the Company's other stock option plans and
provides an additional vehicle through which the Company can continue to grant
options to key employees. The Board of Directors believes that the Company's
long-standing policy of encouraging stock ownership by its key employees in
part through the granting of stock options has enhanced the Company's ability
to retain and attract such persons.
Options issued under the 1993 Employee Plan shall, in the discretion
of a committee appointed by the Board of Directors (as described below), be
either incentive stock options ("Incentive Stock Options") as that term is used
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
or any successor thereto, or options which do not qualify as incentive stock
options ("Non-Qualified Stock Options").
ADMINISTRATION
The 1993 Plan is administered by a committee (the "Committee")
appointed by the Board of Directors, which shall consist of not less than two
members of the Board of Directors. Each member of the Committee shall be a
disinterested person as provided in Rule 16b-3(c)(2) promulgated pursuant to
the Securities Exchange Act of 1934, as amended. The Committee shall have full
power and authority in its discretion to take any and all action required or
permitted to be taken under the 1993 Plan. At the present time the
Compensation Committee serves as the Stock Option Committee.
GRANTS, VESTING AND EXERCISE PRICE OF OPTIONS UNDER THE 1993 EMPLOYEE PLAN
Under the 1993 Employee Plan, the Committee shall select the eligible
participants to whom options will be granted, the type of option to be granted,
the exercise price of each option, the number of shares covered by such option
and the other terms and conditions of each option. The eligible employees are
able to
<PAGE> 370
receive Incentive and Non-Qualified Stock Options; provided, however, that the
aggregate fair market value (determined at the time the Incentive Stock Option
is granted) of the stock with respect to which Incentive Stock Options are
exercisable for the first time by the optionee during any calendar year (under
all Incentive Stock Option plans of the Company) shall not exceed One Hundred
Thousand Dollars ($100,000). Should it be determined that any Incentive Stock
Option granted exceeds such maximum, such Incentive Stock Option shall be
considered to be a Non-Qualified Stock Option to the extent, but only to the
extent, of such excess.
None of the options will be exercisable within the first 12 months
from the date of the grant. Each option shall become exercisable in the
following four cumulative annual installments: 25% on the first anniversary
date of the grant; an additional 25% on the second anniversary date of the
grant; an additional 25% on the third anniversary date of the grant; and the
last 25% on the fourth anniversary date of the grant. From time to time during
each of such installment periods, the option may be exercised with respect to
some or all of the shares allotted to that period and/or with respect to some
or all of the shares allotted to any prior period as to which the option was
not fully exercised. During the remainder of the term of the option (if its
term extends beyond the end of the installment periods), the option may be
exercised from time to time with respect to any shares then remaining subject
to the option.
The exercise price of Common Stock acquired pursuant to an option
granted under the 1993 Employee Plan shall be paid in cash or check payable at
the time the option is exercised, in whole shares of stock of the Company owned
by the optionee having a fair market value on the exercise date (determined by
the Committee in accordance with any reasonable evaluation method including the
evaluation method) equal to the option price of the shares being purchased, or
a combination of stock and cash or check, equal in the aggregate to the option
price of the shares being purchased.
ADJUSTMENTS UPON CHANGES IN STOCK
If the outstanding shares of the stock of the Company are increased,
decreased or changed into, or exchanged for a different number or kind of
shares or securities of the Company, without receipt of consideration by the
Company, through reorganization, merger, recapitalization, reclassification,
stock split, stock dividend, stock consolidation, or otherwise, an appropriate
and proportionate adjustment shall be made in the number and kind of shares as
to which options may be granted. A corresponding adjustment changing the
number or kind of shares and the exercise price per share allocated to
unexercised options, or portions thereof, which shall have been granted prior
to any such change shall likewise be made. Any such adjustment, however, in an
outstanding option shall be made without change in the total price application
to the unexercised portion of the option but with a corresponding adjustment in
the price for each share subject to the option. Adjustments under this section
shall be made by the Committee whose determination as to what adjustments shall
be made, and the extent thereof, shall be final and conclusive. No fractional
shares of stock shall be issued under the 1993 Plan on account of any such
adjustment.
EXPIRATION, TERMINATION AND TRANSFER OF OPTIONS
Under the 1993 Employee Plan, no option may extend more than ten (10)
years from the date of grant. For purposes of the 1993 Plan, the date of
grant of an option shall be the date on which the Committee takes final action
approving the award of the option, notwithstanding the date the optionee
accepts the option, the date of execution of the option agreement, or any other
date with respect to such option. Except in the event of termination of
employment due to death, disability or termination for cause, options will
terminate three (3) months after an employee optionee ceases to be employed by
the Company or its subsidiaries, unless the options by their terms were
scheduled to terminate earlier. During that three (3) month period after the
employee optionee ceases to be employed by the Company or its subsidiaries,
such options shall be exercisable only as to those shares with respect to which
installments, if any, had accrued as of the date of which the optionee ceased
to be employed by the Company or its subsidiaries. If such termination was due
to such optionee's permanent and total disability, or such optionee's death,
the option, by its terms, may be exercisable for one year after such
termination of employment. If the employee optionee's employment is terminated
for cause, the option terminates immediately, unless such termination is waived
by the Committee. An option by its terms may only be transferred by will or by
laws of descent and distribution upon the death of
<PAGE> 371
the optionee, shall not be transferable during the optionee's lifetime and
shall be exercisable during the lifetime of the person to whom the option is
granted only by such person.
TERMINATION AND AMENDMENT OF THE 1993 PLAN
The 1993 Plan will terminate upon the occurrence of a terminating
event, including, but not limited to, liquidation, reorganization, merger or
consolidation of the Company with another corporation in which the Company is
not the surviving corporation or resulting corporation, or a sale of
substantially all the assets of the Company to another person, or a reverse
merger in which the Company is the surviving corporation but the shares of the
Company's stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property (a "Terminating Event"). The
Committee shall notify each optionee not less than thirty (30) days prior
thereto of the pendency of a Terminating Event. Upon delivery of such notice,
any option outstanding shall be exercisable in full and not only as to those
shares with respect to which installments, if any, have then accrued, subject,
however, to earlier expiration or termination as provided elsewhere in each of
the 1993 Plan. The Committee may also suspend or terminate the 1993 Plan at
any time. Unless sooner terminated, the 1993 Plan shall terminate ten (10)
years from the effective date, October 27, 1993, of the 1993 Plan. No options
may be granted under the 1993 Plan while the 1993 Plan is suspended or after
the 1993 Plan is terminated. Rights and obligations under any option granted
pursuant to the 1993 Plan, while in effect, shall not be altered or impaired by
suspension or termination of the 1993 Plan, except with the consent of the
person to whom the stock option was granted.
The 1993 Plan may be amended by the Committee at any time. However,
except as otherwise provided in the 1993 Plan relating to adjustments upon
changes in stock (e.g., stock splits or stock dividends), no amendment shall be
effective unless approved by the affirmative vote of a majority of the shares
of the Company present, or represented, and entitled to vote at a duly held
meeting at which a quorum is present or by the unanimous written consent of the
holders of all outstanding shares of the Company entitled to vote, if the
amendment will: (a) increase the number of shares reserved for options under
the 1993 Plan; (b) materially modify the requirements as to eligibility for
participation in the 1993 Plan; or (c) materially increase the benefits
accruing to participants under the 1993 Plan. Notwithstanding the foregoing,
shareholder approval need not be obtained to effect any such amendment if the
Committee determines that such approval is not otherwise required under
applicable law and that the failure to obtain such approval will not adversely
affect the 1993 Plan under the Code.
1994 NON EMPLOYEE DIRECTOR STOCK OPTION PLAN
On April 27, 1994, the Board of Directors adopted and approved,
subject to shareholder approval, the CU Bancorp 1994 Non-Employee Director
Stock Option Plan (the "1994 Non-Employee Director Plan"), which was approved
by the shareholders of the Company at the 1994 Annual Meeting of Shareholders.
200,000 shares were reserved for options under the 1994 Non-Employee Director
Plan. All non-employee directors of the Company are eligible to participate in
the 1994 Non-Employee Director Plan.
The Plan is intended to provide a vehicle through which the Company
can reward directors for the risks of directorship, encourage their continued
service and encourage their stock ownership in the Company. The following
discussion summarizes the principal features of the Plan. This description is
qualified in its entirety by reference to the full text of the Plan, copies of
which are available for review at the Company's principal office.
The Company intends that options issued under the 1994 Non-Employee
Directors plan shall be Non-Qualified Stock Options.
The 1994 Non-Employee Director Plan is administered by a Committee, to
the extent possible under applicable law. The Committee will not have any
discretion in the amount of options to be granted to any party, the price of
any option or the term and exercisability of any option. Option grants shall
be automatic as described herein and shall not be variable by the Committee.
Each member of a Committee shall be a disinterested person as provided in Rule
16b-3(c)(2) promulgated pursuant to the Securities Exchange Act of
<PAGE> 372
1934, as amended. The Board of Directors or the Committee (as the case shall
be) shall have full power and authority in its discretion to take any and all
action required or permitted to be taken under the Plan.
GRANTS, VESTING AND EXERCISE PRICE OF OPTIONS UNDER THE 1994
NON-EMPLOYEE DIRECTOR PLAN
Under the 1994 Non-Employee Director Plan, the non-employee directors
of the Company are eligible to receive Non-Qualified Stock Options. The 1994
Non-Employee Director Plan provides for the grant of options to non-employee
directors, without any action on the part of the Committee, only upon the
following terms and conditions:
a. Each such person who was a director of the Company on
July 1, 1994 (the "Effective Date") received Non-Qualified
Stock Options to acquire 5,000 shares of stock of the Company,
subject to adjustment, on the Effective Date, and such options
shall be deemed to have been granted on the Effective Date.
The Chairman of the Board on the Effective Date received
options to purchase an additional 2,500 shares of the Company's
Common Stock.
b. Each such person who is a director of the Company on
the day following an Annual Meeting of Shareholders in years
commencing in 1995, shall receive non-qualified options to
acquire 5,000 shares of stock of the Company, subject to
adjustment, provided that the person who is then the Chairman
of the Board shall receive additional nonqualified options to
acquire 2,500 shares of stock of the Company, subject to
adjustment; provided, however, that in the event the shares
available under the 1994 Non-Employee Director Plan are
insufficient to make any such grant, all grants made thereunder
on such date shall be prorated.
c. None of the options will be exercisable until the
March 31 next following the date of grant. Each option shall
become exercisable in the following four cumulative annual
installments: 25% on the first March 31 following the date of
the grant; an additional 25% on the second March 31 following
the date of the grant; an additional 25% on the third March 31
following the date of the grant; and the last 25% on the fourth
March 31 following the date of the grant. From time to time
during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to
that period, and/or with respect to some or all of the shares
allotted to any prior period as to which the option was not
fully exercised. During the remainder of the term of the
option (if its term extends beyond the end of the installment
periods), the option may be exercised from time to time with
respect to any shares then remaining subject to the option.
d. Subject to earlier termination as provided elsewhere in
the 1994 Non-Employee Director Plan, each option shall expire
ten (10) years from the date the option was granted.
e. The exercise price of each option shall be equal to one
hundred percent (100%) of the fair market value of the stock
subject to the option on the date the option is granted, which
shall be the closing price for the stock of the Company on the
date of such grant or if the date of such grant is not a
trading day, the first immediately preceding trading day. The
closing price for any day shall be the last reported sale price
regular way or, in case no such reported sale takes place on
such date, the average of the last reported bid and asked
prices regular way, in either case on the principal national
securities exchange registered under the 1934 Act on which the
stock of the Company is admitted to trading or listed, or if
not listed or admitted to trading on any national securities
exchange, the last sale price of the stock of the Company on
the National Association of Securities Dealers National Market
System ("NMS") or, if not quoted in the NMS, the average of the
closing bid and asked prices of the stock of the Company on the
National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or any comparable system, or if the stock of
the Company is not listed on NASDAQ or any comparable system,
the closing bid and asked prices as furnished by any member of
the National Association of Securities Dealers, Inc. selected
from time to time by the Company for that purpose.
<PAGE> 373
The exercise price of Common Stock acquired pursuant to an option
shall be paid in cash or check payable to the order of the Company at the time
the option is exercised, in whole shares of stock of the Company owned by the
optionee having a fair market value on the exercise date (determined by the
Committee in accordance with any reasonable evaluation method) equal to the
option price of the shares being purchased, or a combination of stock and cash
or check payable to the order to the Company, equal in the aggregate to the
option price of the shares being purchased.
ADJUSTMENTS UPON CHANGES IN STOCK
If the outstanding shares of the stock of the Company are increased,
decreased or changed into, or exchanged for a different number or kind of
shares or securities of the Company, without receipt of consideration by the
Company, through reorganization, merger, recapitalization, reclassification,
stock split, stock dividend, stock consolidation, or otherwise, an appropriate
and proportionate adjustment shall be made in the number and kind of shares as
to which options may be granted. A corresponding adjustment changing the
number or kind of shares and the exercise price per share allocated to
unexercised options, or portions thereof, which shall have been granted prior
to any such change shall likewise be made. Any such adjustment, however, in an
outstanding option shall be made without change in the total price application
to the unexercised portion of the option but with a corresponding adjustment in
the price for each share subject to the option. Adjustments under this section
shall be made by the Committee whose determination as to what adjustments shall
be made, and the extent thereof, shall be final and conclusive. No fractional
shares of stock shall be issued under the Plan on account of any such
adjustment.
EXPIRATION, TERMINATION AND TRANSFER OF OPTIONS
Each option granted under the 1994 Non-Employee Director Plan shall,
except as discussed below, expire ten (10) years from the date of the grant.
Except in the event of termination of directorship due to death, or
termination for cause, options will terminate twelve (12) months after an
optionee ceases to be a director of the Company, unless the options by their
terms were scheduled to terminate earlier. During that twelve (12) month
period after the non-employee director optionee ceases to serve as a director
of the Company, such options shall be exercisable only as to those shares with
respect to which installments, if any, had accrued as of the date of which the
optionee ceased to be a director of the Company or its subsidiaries. If such
termination was due to such optionee's death while a director or in the twelve
month period following termination of the directorship, the option, by its
terms, may be exercisable for one year after death. If the non-employee
director optionee is removed from the Board of Directors of the Company for
cause, the option terminates immediately on the date of such removal. Removal
for cause shall include removal of a director who has been declared of unsound
mind by an order of court or convicted of a felony. An option by its terms may
only be transferred by will or by laws of descent and distribution upon the
death of the optionee, shall not be transferable during the optionee's
lifetime, and shall be exercisable during the lifetime of the person to whom
the option is granted only by such person.
TERMINATION AND AMENDMENT OF THE PLAN
The Plan will terminate upon the occurrence of a terminating event,
including, but not limited to, liquidation, reorganization, merger or
consolidation of the Company with another corporation in which the Company is
not the surviving corporation or resulting corporation, or a sale of
substantially all the assets of the Company to another person, or a reverse
merger in which the Company is the surviving corporation but the shares of the
Company's stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property (a "Terminating Event"). The Board of
Directors or the Committee (as the case may be) shall notify each optionee not
less than thirty (30) days prior thereto of the pendency of a Terminating
Event. Upon delivery of such notice, any option outstanding shall be
exercisable in full and not only as to those shares with respect to which
installments, if any, have then accrued, subject, however, to earlier
expiration or termination as provided elsewhere in the Plan. The Board of
Directors or the Committee (as the case may be) may also suspend or terminate
the Plan at any time. Unless sooner terminated, the Plan shall terminate ten
(10) years from the effective date, of the Plan. No options may be granted
under the Plan while the Plan is
<PAGE> 374
suspended or after the Plan is terminated. Rights and obligations under any
option granted pursuant to the Plan, while in effect, shall not be altered or
impaired by suspension or termination of the Plan, except with the consent of
the person to whom the stock option was granted.
<PAGE> 375
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31,
1994 pertaining to beneficial ownership of Common Stock by persons known to
the Company to own five percent or more of such stock, current directors of the
Company, all nominees to be directors of the Company and all directors and
officers of the Company as a group. The information contained herein has been
obtained from the Company's records, from information furnished directly by the
individual or entity to the Company, or from various filings made by the named
individuals with the Securities and Exchange Commission.
The Company is of the opinion that there is no person who
possesses, directly or indirectly, the power to direct or cause to direct the
management and policies of the Company, nor is it aware of the existence of a
group of persons formed for such purpose, whether through the ownership of
voting securities, by contract, or otherwise.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER RELATIONSHIP WITH COMPANY OWNERSHIP(2)(3)(4) CLASS(1)
------------------------ ------------------------- ------------------ --------
<S> <C> <C> <C>
Kenneth L. Bernstein Director, Nominee 27,864 .62
Stephen G. Carpenter Director, Nominee, President, 45,100 1.20
Chief Executive Officer
Richard H. Close Director, Nominee 116,486 1.89
Paul W. Glass Chairman, Director Nominee 100,028 1.52
M. David Nathanson Director 97,145 1.46
Ronald S. Parker Director, Nominee 6,000 .13
David I. Rainer Director, Nominee, Chief 33,429 .74
Operating Officer
Dimensional Fund Advisors Inc. Beneficial Owner of More Than 240,396(10) 5.38
5%
ALL CURRENT EXECUTIVE OFFICERS 437,551 9.33
AND DIRECTORS AS A GROUP (9 IN
NUMBER)(6)(9)
- ------------------------------------------------------------------------------------
</TABLE>
(1) Only Common Stock is outstanding.
(2) Includes shares beneficially owned, directly and indirectly, together
with associates. Subject to applicable community property laws and
shared voting and investment power with a spouse, the persons listed
have sole voting and investment power with respect to such shares
unless otherwise noted.
<PAGE> 376
(3) Includes as if currently outstanding the following shares subject to
options or warrants which are exercisable within 60 days.
<TABLE>
<CAPTION>
Director Options Exercisable Warrants Exercisable
-------- ------------------- ---------------------
<S> <C> <C>
Bernstein 0 0
Carpenter 39,600 0
Close 15,120 30,006
Glass 15,120 30,006
Parker 0 0
Nathanson 15,120 30,006
Rainer 31,429 0
</TABLE>
(4) Shares issuable pursuant to options and warrants which may be
exercised within 60 days of December 31, 1994 are deemed to be issued
and outstanding in calculating the percentage ownership of those
individuals possessing such interest, but not for any other
individuals.
(5) Includes 27,461 shares held by the Glass, and Rosen Profit Sharing
Plan of which Mr. Glass is a trustee.
(6) The listing of individuals as executive officers in this table or
elsewhere in this Proxy Statement should not be interpreted as an
indication that such individuals are considered to be executive
officers of the Company or the Bank for any other purposes.
(7) Includes as if currently outstanding 127,388 shares subject to
options and 90,018 shares subject to warrants held by directors and
officers which are exercisable within 60 days from December 31, 1994.
(8) Information is based on filing with Securities and Exchange Commission
(9) The address of all listed individuals, with the exception of
Dimensional Fund Advisers, Inc. is c/o CU Bancorp, 16030 Ventura
Boulevard, Encino, California 91436. The address of Dimensional Fund
Advisers, Inc. is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 90401.
(10) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
investment advisor is deemed to have beneficial ownership of
240,396 shares of CU Bancorp stock as of December 31, 1994, all of
which shares are held in portfolios of DFA Investment Dimensions Group
Inc.,a registered open-end investment company or in a series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group
Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, of which Dimensional Fund Advisors
Inc. serves as an investment manager. Dimensional Disclaims beneficial
ownership of all such shares.
- --------------------------------------------------------------------------------
<PAGE> 377
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
Some of the Company's directors and executive officers, as well as
their immediate family and associates, are customers of, and have had banking
transactions with, the Bank in the ordinary course of the Bank's business, and
the Bank expects to have limited such ordinary banking transactions with such
persons in the future. The Bank has adopted a policy that it generally will
not make new loans to Directors, with the exception of loans fully secured by
cash. In the opinion of the management of the Bank and except as provided
below, all loans and commitments to lend included in such transactions were
made in compliance with applicable laws, and on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other persons of similar credit worthiness, and did not
involve more than a normal risk of collectibility or present other unfavorable
features. Although the Bank does not have any limits on the aggregate amount
it would be willing to lend to directors and officers as a group, loans to
individual directors and officers must comply with the Bank's respective
lending policies and statutory lending limits, and prior approval of the Board
of Directors is required for these loans.
There were no related party loans as of December 31, 1994.
During 1992, the Bank charged off loans, and a letter of credit
totalling $1,300,000 and $650,000 respectively, to a former director and
another party. As a result of Bank initiated legal actions against the
obligors and certain former officers and directors of the Bank settlements were
entered into which resulted in recovery of approximately $1.1 Million. In
addition, the settlement included potential long term payments of additional
amounts. The Collateral for this long term obligation which was not given
specific value by the Bank, has been substantially diminished or extinguished
by the exercise of foreclosure powers under a deed of trust by an unaffiliated
financial institution. The Bank has charged off all amounts related to these
transactions and there is no assurance of further recovery.
OTHER MATERIAL TRANSACTIONS
Except as set forth below, there are no other existing or proposed
material transactions between the Company and the Bank and any of the Company's
directors, executive officers, or beneficial owners of five percent or more of
the Common Stock, or the immediate family or associates of any of the foregoing
persons.
In 1993, prior to his election as a director of the Company, Kenneth
Bernstein entered into an agreement with the Bank to assist in collection of a
large charged off credit. In exchange for Mr. Bernstein's assistance, the Bank
agreed to pay him 50% of amounts recovered on such credit (after deduction of
legal fees). Although the Bank, with Mr. Bernstein's assistance, located the
debtor, the debtor subsequently filed bankruptcy and no amounts have been
recovered.
<PAGE> 378
REGULATORY AGREEMENT
In November 1993, the Bank was informed by the Office of the
Comptroller of the Currency ("OCC"), that the OCC had terminated the formal
written agreement (the "Agreement") with the OCC entered into in June 1992,
based upon the Bank's compliance with the provisions of the Agreement.
In November 1993, the Federal Reserve Bank of San Francisco terminated
a Memorandum of Understanding with the Company, originally entered into In
August, 1992. The termination of the MOU was taken in recognition of the
Company's compliance with these requirements.
<PAGE> 379
APPENDIX D-3
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.
1
<PAGE> 380
CU Bancorp
Quarter Ended September 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:
-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>
2
<PAGE> 381
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.
3
<PAGE> 382
Table 1 Loan Portfolio Composition
<TABLE>
<CAPTION>
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.
4
<PAGE> 383
The amount and composition of the allowance for loan losses is as follows:
Table 2 Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
Amounts in thousands of dollars 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
====== ====== ======
</TABLE>
(1) Including Commercial loans secured by real estate
Adequacy of the allowance is determined using management's estimates of the risk
of loss for the portfolio and individual loans. Included in the criteria used to
evaluate credit risk are, wherever appropriate, the borrower's cash flow,
financial condition, management capabilities, and collateral valuations, as well
as industry conditions. A portion of the allowance is established to address the
risk inherent in general loan categories, historic loss experience, portfolio
trends, economic conditions, and other factors. Based on this assessment a
provision for loan losses may be charged against earnings to maintain the
adequacy of the allowance. The allocation of the allowance based upon the risks
by type of loan, as shown in Table 2, implies a degree of precision that is not
possible when using judgments. While the systematic approach used does consider
a variety of segmentations of the portfolio, management considers the allowance
a general reserve available to address risks throughout the entire loan
portfolio.
Activity in the allowance, classified by type of loan, is as follows:
Table 3 Analysis of the Changes in the Allowance for Loan Loss
<TABLE>
<CAPTION>
Amounts in thousands of dollars For the 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>
5
<PAGE> 384
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 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 4: Nonperforming Assets
<TABLE>
<CAPTION>
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
6
<PAGE> 385
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 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.
7
<PAGE> 386
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.
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities
at September 30, 1995
<TABLE>
<CAPTION>
Amounts in thousands of dollars Amounts Maturing or Repricing in
-------------------------------------------------------------------------
More Than 3 More Than 6 More Than 9
Months But Months But Months But
Less Than Less Than Less Than Less than 12 Months
3 Months 6 Months 9 Months 12 Months & Over
-------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans $173,740 $ 3,387 $ 431 $ 290 $ 5,739
Securities 4,993 5,032 4,509 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%
======== ======== ======== ======= ======
</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.
8
<PAGE> 387
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 7 Capital Ratios
<TABLE>
<CAPTION>
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>
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
9
<PAGE> 388
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 8 Analysis of Changes in Net Interest Income (1)
<TABLE>
<CAPTION>
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>
(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.
10
<PAGE> 389
Table 9 Average Balance Sheets and Analysis of Net Interest Income
<TABLE>
<CAPTION>
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 Income or Yield or
Balance Expense Rate Balance Expense Rate
--------- --------- -------- --------- --------- --------
<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%
====
$ 11,447 5.62% $ 9,774
======== ===== =========
Shareholders' Equity to Total
Assets 10.10% 10.56%
====== =======
</TABLE>
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.
11
<PAGE> 390
Table 10A Other operating income
Amounts in thousands of dollars
<TABLE>
<CAPTION>
For three months ended
September 30, 1995 September 30, 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 10B Other operating income
Amounts in thousands of dollars
<TABLE>
<CAPTION>
For nine months ended
September 30, 1995 September 30, 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.
12
<PAGE> 391
Consolidated Statements of Financial Condition
CU Bancorp and Subsidiary
<TABLE>
<CAPTION>
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
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 392
<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
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE> 393
CU BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
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
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 394
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>
16
<PAGE> 395
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.
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
17
<PAGE> 396
determining the adequacy of the allowance. The allowance is based on estimates
and ultimate losses may differ from current estimates. These estimates are
reviewed periodically and as adjustments become necessary, they are charged to
earnings in the period in which they become known. The allowance is increased by
provisions charged to operating expenses, increased for recoveries of loans
previously charged-off, and reduced by charge-offs.
The Bank adopted Statement of Financial Standards (SFAS) 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," as of January 1, 1995.
SFAS 114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
When the measure of the impaired loan is less than the recorded balance of the
loan, the impairment is recorded through a valuation allowance included in the
allowance for loan losses. The Bank had previously measured the allowance for
loan losses using methods similar to the prescribed in SFAS 114. As a result, no
additional provision was required by the adoption of this pronouncement.
The Bank considers all loans where reasonable doubt exists as to the payment of
interest or principal to be impaired loans. All loans that are ninety days or
more past due are automatically included in this category. An impaired loan will
be charged off when the Bank determines that repayment of principal has become
unlikely or subject to a lengthy collection process. All loans that are six
months or more past due and not well secured or in the process of collection are
charged off.
At 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
18
<PAGE> 397
financial institutions, title companies, professionals, business entities and
individuals, including the principals of PMC and SLGH. The Bank was a depository
bank for PMC, SLGH and related companies and was a lender to certain principals
of PMC and SLGH ("Individual Loans"). Plaintiffs alleged that PMC/SLGH was or
purported to be engaged in the business of raising money from investors by the
sale and issuance of interests in loans evidenced by promissory notes secured by
real property. Plaintiffs alleged that false representations were made, and the
investment merely constituted a "Ponzi" scheme. Other charges related to the
Bank's conduct with regard to the depository accounts, the lending relationship
with the principals and certain collateral taken , pledged by PMC and SLGH in
conjunction with the Individual Loans. The lawsuits alleged inter alia
violations of federal and state securities laws, fraud, negligence, breach of
fiduciary duty, and conversion as well as conspiracy and aiding and abetting
counts with regard to these violations. The Bank denied all allegations of
wrongdoing. Damages in excess of $100 million were alleged, and compensatory and
punitive damages were sought generally against all defendants, although no
specific damages were prayed for with regard to the Bank. A former officer and
director of the Bank was also been named as a defendant.
The Bank has entered into a settlement agreement with the representatives of the
various plaintiffs, which has now been consummated, with the dismissal of all of
the above referenced cases, with prejudice, against the Bank, its officers and
directors, with the exception of the officer/director previously named pending.
Court approval of these settlements has been received. In connection with the
settlement, the Bank released its security interest in certain disputed
collateral and cash proceeds thereof, which the Bank received from PMC, SLGH, or
the principals, in connection with the Individual Loans. This collateral had
been a subject of dispute in the Neilson Action, with both the Bank and the
representatives of PMC/SLGH asserting the right to such collateral. All the
Individual Loans have been charged off. The Bank also made a cash payment to the
Plaintiffs in connection with the settlement. The effect of this settlement on
CU Bancorp or the Bank's financial statements was immaterial. In connection with
the settlement the Bank assigned its rights, if any, under various insurance
policies, to the Plaintiffs. The settlement does not resolve the claims asserted
against the officer/director. The Bank is still providing a defense to its
former director/officer who continues as a defendant and who retains his rights
of indemnity, if any, against the Bank arising out of his status as a former
employee. At this time the only viable claims which remain against the former
director/employee are claims of negligence in connection with certain depository
relationships with 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
19
<PAGE> 398
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. (beta) 55 and 60 and (c) the Bank receives the prior written
approval of the OCC District Administrator); 13) develop and implement a written
liquidity, asset and liability management policy; 14) document and support the
reasonableness of any management and other fees to any director or other party;
15) correct violations of law; and 16) provide reports to the OCC regarding
compliance.
The Memorandum of Understanding was executed in August 1992 and required 1) a
plan to improve the financial condition of CU Bancorp and the Bank; 2)
development of a formal policy regarding the relationship of CU Bancorp and the
Bank, with regard to dividends, inter-company transactions, tax allocation and
management or service fees; 3) a plan to assure that CU Bancorp has sufficient
cash to pay its expenses; 4) ensure that regulatory reporting is accurate and
submitted on a timely basis; 5) prior approval of the Federal Reserve Bank prior
to the payment of dividends; 6) prior approval of the Federal Reserve Bank prior
to CU Bancorp incurring any debt and 7) quarterly reporting regarding the
condition of the Company and steps taken regarding the Memorandum of
Understanding.
20
<PAGE> 399
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:/s/ Patrick Hartman
----------------------
Patrick Hartman
Chief Financial Officer
21
<PAGE> 400
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,
22
<PAGE> 401
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 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
23
<PAGE> 402
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 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
24
<PAGE> 403
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' 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.
25
<PAGE> 404
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation provide that the liability
of the directors of the corporation for monetary damages shall be eliminated to
the fullest extent permissible under California law and that the corporation is
authorized to provide for the indemnification of agents (as defined in Section
317 of the California General Corporation Law) of the corporation in excess of
that expressly permitted by such Section 317 for breach of duty to the
corporation and its shareholders to the fullest extent permissible under
California law.
Section 317 sets forth the provisions pertaining to indemnification of
corporate "agents." For purposes of this law, an agent is any person who is or
was a director, officer, employee or other agent of a corporation, or is or was
serving at the request of the corporation in such capacity with respect to any
other corporation, partnership, joint venture, trust or other enterprise.
Indemnification for expenses, including amounts paid on settling or otherwise
disposing of a threatened or pending action or defending against same can be
made in certain circumstances by action of the Company through: 1) a majority
vote of a quorum of the Board of Directors consisting of directors who are not
party to the proceedings; or 2) approval of the shareholders, with the shares
owned by the person to be indemnified not being entitled to vote thereon; or 3)
such court in which the proceeding is or was pending upon application by
designated parties. Under certain circumstances, an agent can be indemnified,
even when found liable. Indemnification is mandatory where the agent's defense
is successful on the merits. The law allows the Company to make advances of
expenses for certain actions upon the receipt of an undertaking that he will
reimburse the corporation if he is found liable.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to directors,
officers or persons controlling the Company, pursuant to the foregoing
provisions or otherwise, the Company understand that in the opinion of the
Securities and Exchange Commission such indemnification is against the public
policy as expressed in the Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against a public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
2. PLAN OF ACQUISITION OR REORGANIZATION
2.1 Amended and Restated Agreement and Plan of Reorganization and
Exhibits thereto; contained herein at Appendix A.
<PAGE> 405
3. ARTICLES OF INCORPORATION AND BYLAWS OF THE REGISTRANT
(A) Articles of Incorporation
3.1 Articles of Incorporation dated September 3, 1981: Filed as
Exhibit 3(a) to Form S-1 dated March 21, 1985; Registration Number
2-96568, and incorporated herein by reference.
3.2 Certificate of Amendment of Articles Dated September 3, 1984;
Filed as Exhibit 3(b) to Form S-1 dated March 21, 1985; Registration
Number 2-96568, and incorporated herein by reference.
3.3 Certificate of Amendment of Articles dated January 28, 1985;
Filed as Exhibit 3(c) to Form S-1 dated March 21, 1985; Registration
Number 2-96568, and incorporated herein by reference.
3.4 Certificate of Amendment of Articles dated March 13, 1985;
Filed as Exhibit 3(d) to Form S-1 dated March 21, 1985; Registration
Number 2-96568, and incorporated herein by reference.
3.5 Certificate of Amendment of Articles of Incorporation dated
June 22, 1988.
3.6 Certificate of Amendment of Articles of Incorporation dated
May 14, 1990.
3.7 Certificate of Amendment of Articles of Incorporation dated
June 19, 1990.
B. Bylaws
3.8 Bylaws of the Registrant: Bylaws of Lincoln Bancorp (previous
name) Dated September 14, 1984; Filed as Exhibit 3(e) to Form S-1
dated March 21, 1985; Registration Number 2-96568, and incorporated
herein by reference.
4. SPECIMEN CERTIFICATE
4.1 Specimen Certificate evidencing shares of Registrant's Common
Stock
5. OPINION RE LEGALITY
5.1 Opinion of Knecht & Hansen*
5.2 Opinion of Anita Y. Wolman, Esq.*
8. OPINION RE TAX MATTERS
8.1 Opinion of Arthur Andersen LLP, re tax matters dated October
11, 1995.
10. MATERIAL CONTRACTS:
10.1 CU Bancorp 1993 Employee Stock Option Plan and Agreements;
filed as Exhibit 10.1, 10.2 and 10.3 to the Registrants Annual
Report on Form 10-K for the year ended
<PAGE> 406
December 31, 1993, and incorporated by reference herein.
10.2 CU Bancorp 1994 Non-Employee Director Stock Option Plan and
Agreements; filed as Exhibits 10.1 and 10.2 to the
Registrant's Annual Report of Form 10-K for the year ended
December 31, 1995.
10.3 CU Bancorp 1995 Restricted Stock Plan.*
10.4 Lease for headquarters branch and executive offices at 16030
Ventura Boulevard, Encino, California 91436; filed as Exhibit
10(a) to Form S-1 dated March 21, 1985; Registration Number
2-96568 and incorporated herein by reference.
11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS - not applicable
12. STATEMENTS RE COMPUTATION OF RATIOS - not applicable
21. SUBSIDIARIES OF REGISTRANT
23. CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Grant Thornton LLP
23.4 Consent of Knecht & Hansen (included in Exhibit 5.1)*
23.5 Consent of Anita Y. Wolman
23.6 Consent of The Findley Group, Incorporated (included in
fairness opinion attached as Appendix B to Proxy Statement /
Prospectus filed herewith.
24. POWER OF ATTORNEY -- included with signature herein
- -------------
* To be filed by amendment.
(b) FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Changes in Financial Position
Notes to Consolidated Financial Statements
<PAGE> 407
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Pre-Effective Amendment Number 1 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles,
State of California, on the 10th day of November, 1995.
CU BANCORP
By: STEPHEN G. CARPENTER
--------------------------------
Stephen G. Carpenter
Chief Executive Officer
By: PATRICK HARTMAN
--------------------------------
Patrick Hartman
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen G. Carpenter and Patrick
Hartman, and each or any one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
<PAGE> 408
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement on Form S-4 has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
STEPHEN G. CARPENTER
________________________________ Chairman of the Board, 11/10/95
Stephen G. Carpenter Chief Executive Officer
*DAVID A. RAINER
________________________________ President and Director 11/10/95
David I. Rainer
*RICHARD H. CLOSE
_______________________________ Director, Secretary 11/10/95
Richard H. Close
*KENNETH BERNSTEIN
_______________________________ Director 11/10/95
Kenneth Bernstein
*RON PARKER
_______________________________ Director 11/10/95
Ron Parker
*PAUL W. GLASS
_______________________________ Director 11/10/95
Paul W. Glass
By /s/ PATRICK HARTMAN
_______________________________ Attorney-in-Fact 11/10/95
Patrick Hartman
By /s/ STEPHEN G. CARPENTER
_______________________________ Attorney-in-Fact 11/10/95
Stephen G. Carpenter
</TABLE>
<PAGE> 409
EXHIBIT INDEX
EXHIBIT PAGE NUMBER
(a) EXHIBITS.
2. PLAN OF ACQUISITION OR REORGANIZATION
2.2 Amendment No. 1 to Amended and Restated Agreement and Plan of
Reorganization dated as of November 10, 1995; contained herein
at Appendix A-2.
5. OPINION RE LEGALITY
5.1 Opinion of Anita Y. Wolman, Esq.
10. MATERIAL CONTRACTS:
10.3 CU Bancorp 1995 Restricted Stock Plan
23. CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Grant Thornton LLP*
23.4 Consent of Knecht & Hansen
23.5 Consent of Anita Y. Wolman -- contained in Exhibit 5.1
23.6 Consent of The Findley Group, Incorporated
--------------
*Previously filed
<PAGE> 1
EXHIBIT 5.1
[C.U. BANCORP LETTERHEAD]
November 9, 1995
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436
Re: Offering of up to 837,718 Shares of CU Bancorp Common Stock, Pursuant to
Registration Statement on From S-4
Ladies and Gentlemen:
The undersigned renders this opinion as counsel to you in connection with the
issuance of up to 837,718 shares of CU Bancorp Common Stock in exchange for all
of the outstanding shares of Corporate Bank, a California banking corporation
and the merger of Corporate Bank into CU Bancorp's wholly owned subsidiary,
California United Bank, National Association, a national banking association,
pursuant to a Registration Statement on Form S-4 (No. 33-63729).
In connection with this opinion, the undersigned has examined such records and
documents as are necessary and appropriate, including but not limited to the
following:
1. Minutes of the Board of Directors of CU Bancorp;
2. Articles of Incorporation and Bylaws of CU Bancorp;
3. Registration Statement on Form S-4 (No. 33-63729); and
4. Amended and Restated Agreement and Plan of Reorganization dated as of
October 11, 1995 and exhibits and attachments thereto.
Based upon the undersigned's review of the records and documents, and such other
matters as deemed reasonable and appropriate, and in consideration of applicable
laws, I am of the opinion that the shares to be issued by CU Bancorp have been
duly authorized and when issued and paid in accordance with the terms of the
Amended and Restated Agreement and Plan of Reorganization dated as of October
11, 1995, between CU Bancorp, California United Bank and Corporate Bank, will be
legally issued, fully paid and non assessable, and free of preemptive rights.
<PAGE> 2
CU Bancorp
November 9, 1995
Page 2
This opinion is qualified in its entirety by reference to the law and the facts
as of the date hereof. As to matters noted, I have relied on information
provided by CU Bancorp in preparing this opinion. I am not qualified to practice
law in any jurisdiction other that the state of California,
and do not render any opinion on the law of any other jurisdiction, other than
the federal law of the United States. This opinion is expressly limited to the
matters set forth herein. This opinion may not be relied upon by any party other
than the addressee without the undersigned's specific consent.
I consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of my name under the caption "Legal
Matters".
Very Truly Yours,
/s/ ANITA Y. WOLMAN
- ---------------------
ANITA Y. WOLMAN, ESQ.
<PAGE> 1
EXHIBIT 10.3
CU BANCORP 1995 RESTRICTED STOCK PLAN
1. PURPOSE
This CU BANCORP 1995 RESTRICTED STOCK PLAN (the "Plan") is intended to promote
the interests of CU Bancorp (the "Corporation") and its subsidiaries by
providing a method whereby employees performing services for the Corporation and
its subsidiaries may be offered incentives and rewards which will encourage them
to view the Corporation from an ownership perspective, create shareholder value
and continue in the employ or service of the Corporation or its subsidiaries.
The Plan will become effective upon stockholder approval of the Plan.
2. ADMINISTRATION
The Plan will be administered by a committee or committees (which term includes
subcommittees) appointed by, and consisting of one or more members of, the Board
of Directors of the Corporation (the "Board"). The Board may delegate the
responsibility for administration of the Plan with respect to designated classes
of eligible award recipients to different committees, subject to such
limitations as the Board deems appropriate. The composition of any committee
responsible for administration of the Plan with respect to persons who are
subject to trading restrictions of Section 16(b) of the Securities Exchange Act
of 1934 (the "1934 Act") with respect to securities of the Corporation shall
comply with the applicable requirements of Rule 16b-3 of the Securities and
Exchange Commission (or a successor provision). All of the members of the
Committee shall be "disinterested persons" as provided in Rule 16b-3(c)(2)(i).
Members of a committee will serve for such term as the Board may determine,
subject to removal by the Board at any time. Any committee appointed by the
Board shall have full authority to administer the Plan within the scope of its
delegated responsibilities, including authority to interpret and construe any
relevant provision of the Plan and to adopt such rules and regulations as it may
deem necessary. Decisions of a committee made within the discretion delegated to
it by the Board are final and binding on all persons who have an interest in the
Plan. With respect to any matter, the term "Committee" refers to the committee
that has been delegated authority with respect to such matter. Any action of the
Committee shall be taken pursuant to a majority vote or by the unanimous written
consent of its members.
a. Specific Powers
1
<PAGE> 2
The Committee shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
i. To determine any conditions or restrictions imposed
on Restricted Stock acquired pursuant to the Plan
(including, but not limited to, repurchase rights,
forfeiture restrictions and restrictions on
transferability).
ii. Subject to section 6, to construe and interpret the
Plan and the Restricted Stock granted under it, to
construe and interpret any conditions or restrictions
imposed on Restricted Stock acquired pursuant to the
Plan, to define the terms used herein, and to
establish, amend and revoke rules and regulations for
its administration. The Committee, in the exercise
of this power, may correct any defect, omission or
inconsistency in the Plan or in any Agreement in a
manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.
iii. Generally, to exercise such powers and to perform
such acts as it deems necessary or expedient to
promote the best interests of the Corporation.
iv. The Committee shall comply with the provisions of
Rule 16b-3 promulgated pursuant to the 1934 Act, as
in effect from time to time, to the extent applicable
to the Plan.
b. Definitions
Subject to the Committee's powers to interpret and modify the Plan and
definitions thereunder, the following definitions shall apply:
i. "Restricted Stock" or "Restricted Shares" is/are
shares of Common Stock which have been awarded to a
Participant subject to the restrictions set forth in
Section 6a herein, so long as such restrictions are
in effect.
ii. Restricted Period means the period or periods
designated by Section 6a or otherwise by the
Committee or the Board of Directors of the
Corporation, as the case may be, in respect of any
award of shares of Common Stock, or any part or parts
of such award with respect to any Participant.
2
<PAGE> 3
3. ELIGIBILITY FOR AWARDS
Awards may be granted under the Plan to those employees of the Corporation and
its subsidiaries (including officers, whether or not they are directors) as the
Committee from time to time selects. However, in no event may an award be made
to any individual who is a director, but not an officer, of the Corporation.
Except as expressly provided otherwise, subsidiary includes, for purposes of the
Plan, any entity in which the Corporation has a directo or indirect significant
ownership interest, and any entity which may become a direct or indirect parent
of the Corporation.
4. STOCK SUBJECT TO THE PLAN
a. Class.
The stock which is the subject of awards granted under the Plan is the
Corporation's authorized but unissued common stock ("Common Stock").
b. Aggregate Award Limit.
The total number of shares made subject to awards issued under the Plan
may not exceed 75,000 shares (subject to adjustment under Section 4(c)
and (e)).
c. Share Counting Rules.
i. For purposes of this Section 4, the number of shares
subject to an award is the maximum, gross number of
shares which could be issued under the award.
ii. The maximum number of shares that may be made subject
to awards under the Plan shall be increased by the
number of shares subject to the Restricted Period
under the Plan if such award is terminated, cancelled
or forfeited for any reason prior to lapse of the
Restricted Period.
d. Adjustments.
In the event any change is made to the Common Stock subject to the Plan
or subject to any outstanding award granted under the Plan
3
<PAGE> 4
(whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination of shares,
exchange of shares, or other change in corporate or capital structure
of the Corporation), then, unless such change results in a Terminating
Event as defined hereinbelow, the Committee shall make appropriate
adjustments to the maximum number of shares subject to the Plan, and
shares previously granted. Any additional shares received by an
individual with respect to shares of Restricted Stock will be subject
to the same restrictions and shall be deposited with the corporation.
FORM AND GRANT OF AWARDS
An award must be in the form of shares of Restricted Stock meeting the
specifications of Section 6, as the Committee may determine. The Committee may
grant awards independently of other compensation or in lieu of compensation that
would otherwise be paid, whether at the election of the grantee or otherwise.
5. RESTRICTED SHARES
The terms, conditions and restrictions to which restricted shares and share
rights are subject shall be evidenced by instruments in such form as the
Committee may from time to time approve and may vary from grant to grant, but
shall conform to the following:
a. Provisions of Restricted Shares.
A Restricted Share issued under the Plan shall consist of a share of
Common Stock, the retention and transfer of which are subject to such
terms, conditions and restrictions (including repurchase and/or
forfeiture rights in favor of the Corporation) as the Committee shall
determine.
Subject to the authority of the Committee to determine restrictions,
the restrictions on each share of Common Stock granted hereunder shall
terminate as follows: Restrictions with regard to 25% of any award
(shares granted at any one time) shall expire and terminate upon the
second anniversary of the grant. Thereafter restrictions shall expire
and terminate as to an additional 25% of such award on each anniversary
of the grant thereof.
b. Restrictions Applicable.
During the Restricted Period the following restrictions shall apply:
4
<PAGE> 5
i. If a Participant ceases to be an employee of the
Corporation for any reason other than death,
disability or retirement, all shares of Restricted
Stock ( which are then still defined as Restricted
Stock) theretofore awarded to him shall, upon such
cessation of employment be forfeited and returned to
the Corporation.
ii. If a Participant ceases to be an employee of the
Corporation by reason of retirement, death or
disability, then any shares of Restricted Stock owned
by such Participant shall become free and clear of
the restrictions imposed by Section 6 and the
Corporation will deliver to him (or his legal
representative, beneficiary or heir) , shares of
Common Stock. In the event that a Participant ceases
to be an employee of the Corporation by reason of his
election to retire before the normal retirement age
as defined in the CU Bancorp and California United
Bank 401K Plan, then the committee, in its
discretion, shall determine whether all or any
portion of the Restricted stock then owned by such
Participant shall be forfeited or become free of such
restrictions, and if so freed of such restrictions
the Corporation will deliver pursuant to Section 6e ,
within 60 days of his retirement, any shares of
Common Stock which have not been forfeited.
c. Agreement.
Each Participant awarded shares of Restricted Stock shall enter into an
agreement with the Corporation in a form specified by the Committee,
agreeing to the terms and conditions of the award and to such other
matters as the Committee shall, in its sole discretion, determine.
d. Certificates.
Each certificate issued in respect of shares of Restricted Stock shall
be registered in the name of the Participant, shall be deposited by him
with the Corporation together with a stock power endorsed in blank and
shall bear the following (or a similar legend):
The transferability of the shares of stock represented hereby
are subject to the terms and conditions (including forfeiture)
contained in Section 6 of the CU Bancorp 1995 Restricted Stock
Plan, as it may be
5
<PAGE> 6
amended from time to time, and an Agreement entered into
between the registered owner and CU Bancorp. A copy of such
Plan and Agreement is on file in the Office of the General
Counsel of CU Bancorp at the principal office of the
Corporation.
e. Expiration of Restrictions.
As and when the restrictions imposed by Section 6 expire, the
Corporation shall deliver to the Participant (or his legal
representative, beneficiary or heir) a certificate without the legend
referred to in Section 6d above, representing the number of shares of
Common Stock equal to the number of shares of Restricted Stock
deposited with it by the Participant pursuant to Section 6d, as to
which the restrictions have expired. When all restrictions have
expired, the Agreement referred to in Section 6c shall be terminated.
6. ASSIGNABILITY
No Restricted Shares granted under the Plan may be sold, assigned or transferred
by the grantee other than by will or by the laws of descent and distribution
during the Restricted Period applicable to such shares., except as hereinafter
provided. Except for such restrictions, the Participant, as owner of such
shares, shall have all the rights of a stockholder, including (but not limited
to) the right to receive all dividends paid on such shares (subject the
provisions of Section 6b ) and the right to vote such shares.
7. WITHHOLDING
The Corporation's obligation to deliver shares upon the settlement of any award
under the Plan is subject to the satisfaction of all applicable federal, state
and local income and employment tax withholding obligations. The Committee may,
in its discretion and subject to such rules as it may adopt, permit the optionee
to satisfy withholding obligations, in whole or in part, by delivering shares of
Common Stock already held by the optionee or by electing that a portion of the
total value of the shares of Common Stock otherwise issuable under the award be
paid in the form of cash in lieu of the issuance of Common Stock and that such
cash payment be applied to the satisfaction of the withholding obligations.
8. ACCELERATION AND TERMINATION OF AWARDS
Not less than thirty (30) days prior to the dissolution or liquidation of the
Corporation (or its principal subsidiary), or a reorganization, merger, or
consolidation of the Corporation (or its principal subsidiary) with one or more
corporations as a result of which the Corporation (or its principal subsidiary)
will not be the surviving or result-
6
<PAGE> 7
ing corporation (or the ownership of 50% of the shares of the corporation or its
principal subsidiary changes as a result of the transaction), or a sale of
substantially all the assets of the Corporation to another person, or a reverse
merger in which the Corporation is the surviving corporation but the shares of
the Corporation's stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property or any other transaction
in which more than 50% of the ownership of the Corporation is transferred (a
"Terminating Event"), all restrictions on any Restricted Shares shall lapse and
the Restricted Period shall immediately terminate.
The Committee shall have the discretion, exercisable at any time before a sale,
merger, consolidation, reorganization, liquidation or change in control of the
Corporation, as defined by the Committee, (other than a Terminating Event) to
provide for the termination of the Restricted Period as to any Restricted Shares
and/or the settlement of any such award in cash upon or immediately before the
effective time of such event. However, the grant of awards under the Plan will
in no way affect the right of the Corporation to adjust, reclassify, reorganize,
or otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
9. REGISTRATION OF SHARES.
Certificates shall bear appropriate legends indicating that the Restricted
Shares have not been registered pursuant to the Securities Act of 1933, if
applicable. The Corporation is under no obligation to register such shares or to
comply with any exemption from such registration, including those portions of
Rule 144 under the Act to be complied with by the issuer.
10. VALUATION OF COMMON STOCK
For all valuation purposes under the Plan, the fair market value of a share of
Common Stock will be its closing price, as quoted on the NASDAQ, on the day
immediately prior to the date in question. If there is no quotation available
for such day, then the closing price on the next preceding day for which there
does exist such a quotation shall be used. If, however, the Committee determines
that, as a result of circumstances existing on any date, the use of such price
is not a reasonable method of determining fair market value on that date, the
Committee may use such other method as, in its judgment, is reasonable.
11. EFFECTIVE DATE AND TERM OF PLAN
a. Effective Date.
7
<PAGE> 8
The Plan will become effective on the date it is approved by the
holders of at least a majority of the Corporation's voting stock
represented and voting at a duly held meeting at which a quorum is
present or by written consent. If such shareholder approval is not
obtained within 12 months of adoption by the Board, no awards may be
granted hereunder.
b. Term.
No further grants may be made under the Plan after the third
anniversary of the date of adoption of the Plan by the Board.
12. AMENDMENT OR DISCONTINUANCE
a. Plan.
The Board may amend, suspend or discontinue the Plan in whole or in
part at any time; provided, however, that, such action may not
adversely affect rights and obligations with respect to awards at the
time outstanding under the Plan. The Board may not, without the
approval of the Corporation's shareholders (i) materially increase the
number of shares of Common Stock which may be issued under the Plan
(unless necessary to effect the adjustments required under Section
4(e), (ii) materially modify the eligibility requirements for awards
under the Plan or (iii) make any other change with respect to which the
Board determines that shareholder approval is required by applicable
law or regulatory standards.
b. Awards.
The Committee shall have full power and authority to modify or waive
any or all of the terms, conditions or restrictions applicable to any
outstanding award, to the extent not inconsistent with the Plan;
provided, however, that no such modification or waiver may, without the
consent of the holder, adversely affect the holder's rights thereunder.
13. NO OBLIGATION
Nothing contained in the Plan (or in any award granted pursuant to the Plan)
shall confer upon any person any right to continue in the employ of, or to
provide services to, the Corporation or any affiliate or constitute any contract
or agreement of employment or service or interfere in any way with the right of
the Corporation or an
8
<PAGE> 9
affiliate to reduce such person's compensation from the rate in existence at the
time of the granting of an award or to terminate such person's employment or
services at any time, with or without cause, but nothing contained herein or in
any award shall affect any contractual rights of any person pursuant to a
written employment, consulting or service agreement.
14. REGULATORY APPROVALS
The implementation of the Plan, the granting of any award under the Plan, and
the issuance of Common Stock are subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the awards granted under it or the Common Stock issued pursuant
to it.
15. GOVERNING LAW
To the extent not otherwise governed by federal law, the Plan and its
implementation shall be governed by and construed in accordance with the laws of
the State of California.
9
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of CU Bancorp:
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 17, 1995
included in CU Bancorp's Form 10-K for the year ended December 31, 1994 and to
all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
November 9, 1995
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all reference to our Firm included in the registration statement.
ARTHUR ANDERSEN LLP
Orange County, California
November 9, 1995
<PAGE> 1
EXHIBIT 23.4
KNECHT & HANSEN
A PARTNERSHIP OF PROFESSIONAL CORPORATIONS
ATTORNEYS AT LAW
1201 DOVE STREET, SUITE 900
NEWPORT BEACH, CALIFORNIA 92660
TELEPHONE (714) 851-8070
CONSENT OF COUNSEL
As legal counsel to Corporate Bank, we consent to all
references to Knecht & Hansen included in this Registration Statement on Form
S-4.
Dated: November 10, 1995
KNECHT & HANSEN
<PAGE> 1
EXHIBIT 23.6
[THE FINDLEY GROUP LETTERHEAD]
CONSENT OF THE FINDLEY GROUP
We consent to the use in this Registration Statement of CU Bancorp on Form S-4
of our fairness opinion dated October 23, 1995, appearing in the Proxy
Statement/Prospectus, which is part of this Registration Statement.
We also consent to the references to our firm in such Proxy
Statement/Prospectus.
THE FINDLEY GROUP
/s/ Gary Steven Findley
-------------------------
November 9, 1995 Gary Steven Findley
Co-Director
