FORM 10-Q FOR PERIOD ENDED 3/31/95
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
/X/ For the Quarterly Period Ended March 31, 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 March 31, 1995, the Registrant has outstanding 4,587,330 shares of its
Common stock, no par value.
<PAGE> 1
CU Bancorp
Quarter Ended March 31, 1995
Table of Contents - Form 10-Q
Page
Part I. Financial Information
Item 1. Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operation. 3
Consolidated Statements of Financial Condition:
-March 31, 1995, and December 31, 1994. 14
Consolidated Statements of Income:
-Three Month Periods Ended March 31, 1995, and
March 31, 1994. 15
Consolidated Statements of Cash Flows:
-Three Month Periods Ended March 31, 1995, and
March 31, 1994. 16
Notes to Consolidated Financial Statements 17
Signatures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Matters 21
Item 6. Exhibits and Filings on Form 8-K 21
<PAGE> 2
Management Discussion and Analysis
Overview
The Company earned $710 thousand, or $.15 per share, during the first quarter of
1995, compared to $578 thousand, or $0.13 per share, during the same period in
1994. Over 80% of the earnings in the first 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 March 31, 1995, only about
15% of pretax earnings related to sales of mortgage servicing.
The Bank's asset quality ratios continue to be exceptionally strong. At March
31, 1995, nonperforming assets were $ 66 thousand, compared with $36 thousand in
the prior quarter, and $1.1 million in the first quarter of 1994. The Bank did
not have any real estate acquired through foreclosure at March 31, 1995,
December 31, 1994 or March 31, 1994.
The Bank's allowance for loan losses as a percent of both nonperforming loans
and nonperforming assets at the end of the first quarter of 1995 was 11503 %,
compared to first quarter 1994 levels of 652%. The allowance for loan losses as
a percentage of nonperforming loans and assets has increased as both
nonperforming categories were reduced. During the first quarter of 1995, the
Bank enjoyed a net recovery as recoveries exceeded chargeoffs. Net recoveries
further increase the allowance's 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 16.4 %, the Tier 1 Risk-Based Capital Ratio was 15.1%,
and the Leverage Ratio was 10.2% at March 31, 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. During the first quarter of 1995, the Bank
generated approximately $31 million in new loan commitments, compared with
about $20 million for the comparable period of 1994.
Balance Sheet Analysis
Loan Portfolio Composition and Credit Risk
The Bank's loan portfolio at March 31, 1995 has maintained the high standards of
credit quality that have been established as the commercial loan portfolio has
been built over the past two 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 March 31, 1995 declined by $6 million from December 31, 1994, as
fundings against new loan committments were offset by loan payoffs. Loan
paydowns for the 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 were $30 million above the March 31,
1994 level, reflected the ongoing success in booking new commercial
relationships.
<PAGE> 3
<TABLE>
<CAPTION>
Table 1 Loan Portfolio Composition
Amounts in thousands of dollars March 31, December 31, March 31,
1995 1994 1994
<S> <C> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $138,709 82% $142,885 82% $100,527 73%
Real Estate Loans:
Commercial 24,539 15% 26,528 15% 27,923 20%
Mortgages 4,769 3% 4,773 3% 9,166 6%
Construction 413 416 1,010 1%
Total loans net of unearned fees $168,430 100% $174,602 100% $138,626 100%
</TABLE>
At March 31, 1995, the Bank had loans totaling $95 million maturing within one
year, $62 million maturing after one but within five years, and $11 million
maturing after five years. Loans due after one year totaling $5 million had
predetermined interest rates.
The real estate loans are generally collateralized by a first or second trust
deed position, and have historically represented little credit risk.
Lending efforts have been directed away from commercial real estate, as well as
construction and multifamily lending. The Bank is now focused on business
lending to middle market customers. Current credit policy now permits commercial
real estate lending generally only as part of a complete commercial banking
relationship with a middle market customer. Existing commercial real estate
loans 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.
The amount and composition of the allowance for loan losses is as follows:
<PAGE> 4
<TABLE>
<CAPTION>
Table 2 Allocation of Allowance for Loan Losses
Amounts in thousands of dollars March 31, December 31, March 31,
1995 1994 1994
<S> <C> <C> <C>
Commercial & Industrial Loans(1) $7,247 $7,096 $6,392
Real estate loans - Mortgages 0 0 277
Real estate loans - Construction 0 0 5
Loans 0 7,096 6,674
Unfunded commitments and letters of credit 345 331 551
Total Allowance for loan losses $7,592 $7,427 $7,225
(1) Including Commercial loans secured by
real estate
</TABLE>
Adequacy of the allowance is determined using management's estimates of the risk
of loss for the portfolio and individual loans. Included in the criteria used to
evaluate credit risk are, wherever appropriate, the borrower's cash flow,
financial condition, management capabilities, and collateral valuations, as well
as industry conditions. A portion of the allowance is established to address the
risk inherent in general loan categories, historic loss experience, portfolio
trends, economic conditions, and other factors. Based on this assessment a
provision for loan losses may be charged against earnings to maintain the
adequacy of the allowance. The allocation of the allowance based upon the risks
by type of loan, as shown in Table 2, implies a degree of precision that is not
possible when using judgments. While the systematic approach used does consider
a variety of segmentations of the portfolio, management considers the allowance
a general reserve available to address risks throughout the entire loan
portfolio.
<PAGE> 5
<TABLE>
<CAPTION>
Activity in the allowance, classified by type of loan, is as follows:
Table 3 Analysis of the Changes in the Allowance for Loan Loss
Amounts in thousands of dollars For the Periods Ended
March 31, December 31, March 31,
1995 1994 1994
<S> <C> <C> <C>
Balance at January 1 $7,427 $6,513 $6,513
Loans charged off:
Real estate secured loans 0 486 200
Commercial loans secured and unsecured 0 820 464
Loans to individuals, installment and other loans 4 107 0
Total charge-offs 4 1,413 664
Recoveries of loans previously charged off:
Real estate secured loans 20 586 493
Commercial loans secured and unsecured 144 1,735 882
Loans to individuals, installment and other loans 5 6 0
Total recoveries of loans previously charged off 169 2,327 1,377
Net charge-off (recovery) (165) (914) (713)
Provision for loan losses 0 0 0
Balance at end of period $7,592 $7,427 $7,226
Net loan charge-offs (recoveries) as a percentage of
average gross loans outstanding during the period
ended (.098)% (0.61)% (0.52)%
</TABLE>
The Bank's policy concerning nonperforming loans is more conservative than is
generally required. It defines nonperforming assets as all loans ninety days or
more delinquent, loans classified nonaccrual, and foreclosed, or in substance
foreclosed real estate. Nonaccrual loans are those whose interest accrual has
been discontinued because the loan has become ninety days or more past due or
there exists reasonable doubt as to the full and timely collection of principal
or interest. When a loan is placed on nonaccrual status, all interest previously
accrued but uncollected is reversed against operating results. Subsequent
payments on nonaccrual loans are treated as principal reductions. At March 31,
1995, nonperforming loans amounted to $66 thousand compared with $36 thousand at
December 31, 1994.
<PAGE> 6
<TABLE>
<CAPTION>
Table 4: Nonperforming Assets
Amounts in thousands of dollars March 31, December 31 March 31,
1995 1994 1994
<S> <C> <C> <C>
Loans not performing (1) $66 $36 $308
Insubstance foreclosures 0 0 800
Total nonperforming loans 66 36 1,108
Other real estate owned 0 0 0
Total nonperforming assets $66 $36 $1,108
Allowance for loan losses as a percent of:
Nonperforming loans 11,503% 20,631% 652%
Nonperforming assets 11,503% 20,631% 652%
Nonperforming assets as a
percent of total assets 0% 0% 0.8%
Nonperforming loans as a
percent of total loans 0% 0% 0.8%
Note 1:
Loans not performing
Performing as agreed $66 $36 $271
Partial performance 0 0 0
Not performing 0 0 37
$66 $36 $308
Nonaccrual:
Loans $66 $36 $308
Troubled debt restructurings 0 0 0
</TABLE>
Securities
The securities portfolio at March 31, 1995, totaled $68 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 March 31, 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 first quarter
of 1995 or 1994. At March 31, 1995, there were unrealized gains of $5 thousand
and losses of $1.2 million 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 March 31,
1995, December 31, 1994, and March 31, 1994. The Bank's policy is to carry
properties acquired in foreclosure at fair value less estimated selling costs,
which is determined using recent appraisal values adjusted, if necessary, for
other market conditions. Loan balances in excess of fair value are charged to
the allowance for loan losses when the loan is reclassified to other real
estate. Subsequent declines in fair value are charged against an allowance for
real estate owned losses 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.
<PAGE> 7
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 March 31, 1995, was $35
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 $39 million in certificates of deposit larger than $100 thousand
dollars at March 31, 1995. The maturity distribution of these deposits is
relatively short term, with $24 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 $25 million
overnight federal funds line available from a correspondent bank. Potential
significant liquidity requirements are withdrawals from noninterest bearing
demand deposits and funding of commitments to loan customers.
From time to time the Bank may experience liquidity shortfalls ranging from one
to several days. In these instances, the Bank will either purchase federal
funds, and/or sell securities under repurchase agreements. These actions are
intended to bridge mismatches between funding sources and requirements, and are
designed to maintain the minimum required balances. The Bank has had no Fed
Funds purchased or borrowings under repurchase agreements during 1994 or 1995.
The Bank's historical portfolio of large certificates of deposit (those of $100
thousand or more) has not been significant relative to the total deposit base.
At March 31, 1995 this funding source was 15% of average deposits, compared to
14% at December 31, 1994. This funding source has traditionally been used to
manage liquidity needs within the deposit portfolio.
During 1994 and 1995, loan growth for the bank outpaced growth of deposits from
the banks commercial customers. The Bank funded this growth, combined with the
Bank's reduced 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 March 31,1995, the
Bank had approximately $81 million of these out of area deposits, up from $55
million at December 31, 1994.
<TABLE>
<CAPTION>
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at
March 31, 1995
<PAGE>8
Amounts in thousands of dollars Amounts Maturing or Repricing in
More Than More Than More Than 9
3 Months 6 Months Months But
Less Than But But Less than 12
3 Months Less Than Less Than 12 Months Months
6 Months 9 Months & Over
Earning Assets
<S> <C> <C> <C> <C> <C>
Gross Loans $159,587 $2,121 $229 $92 $6,564
Securities 3,001 1,989 7,982 5,057 49,957
Federal funds sold & other 53,200 ----- ----- ----- -----
Total earning assets 215,788 4,110 8,211 5,149 56,521
Interest-bearing deposits:
Now and money market 56,798
Savings 8,163
Time certificates of deposit:
Under $100 26,723 18,596 6,804 14,400 3,030
$100 or more 24,333 7,298 2,440 3,409 1,100
Non interest-bearing demand deposits 35,280 0 0 0 0
Total interest-bearing liabilities 151,297 25,894 9,244 17,809 4,130
Interest rate sensitivity gap 64,491 (21,784) (1,033) (12,660) 52,391
Cumulative interest rate sensitivity gap 64,491 42,707 41,674 29,014 81,405
Off balance sheet financial instruments 0 0 0 0 0
Net cumulative gap 64,491 42,707 41,674 29,014 81,405
Adjusted cumulative ratio of rate
sensitive assets to rate sensitive
liabilities (1) 1.43 1.24 1.22 1.14 1.39
(1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios
less than 1.0 indicate a liability sensitive position. A ratio of 1.0
indicates a risk neutral position.
</TABLE>
Assets and liabilities shown on Table 5 are categorized based on contractual
maturity dates. Maturities for those accounts without contractual maturities are
estimated based on the Bank's experience with these customers. Noninterest
bearing deposits of title and escrow companies, having no contractual maturity
dates, are considered subject to more volatility than similar deposits from
commercial customers. The net cumulative gap position shown in the table above
indicates that the Bank does not have a significant exposure to interest rate
fluctuations during the next twelve months.
<PAGE> 9
Capital
Total shareholders' equity was $31 million at March 31, 1995, compared to $30
million at year-end 1993. 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>
<CAPTION>
Table 7 Capital Ratios
Regulatory Standards
March 31, December 31, Well
1995 1994 Capitalized Minimum
<S> <C> <C> <C> <C>
Total Risk Based Capital 16.38% 15.40% 10.0% 8.00%
Tier 1 Risk Base Capital 15.10 14.12 6.0 4.00
Leveraged Capital 10.24 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. 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.
Branches have been established in three strategic locations in Southern
California. In January, 1994, two branches were opened to serve the San Gabriel
Valley and the South Bay areas. 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 1995.
On March 27, 1995, the Company entered into an agreement to acquire Santa Ana -
based Corporate Bank in a stock transaction. Completion of this transaction
is subject to Corporate Bank shareholder approval and regulatory approvals.
Net Interest Income and Interest Rate Risk
Net interest income is the difference between interest and fees earned on
earning assets and interest paid on funding liabilities. Net interest income for
the first quarter of 1995 was $3.8 million, compared to $2.8 million for the
same period in 1994. The change is attributable to changes in volume and
deposit mix. The Bank's net interest income has improved with the growth of the
commercial loan portfolio from 1994 to 1995. This improvement was offset in
part by the change in deposit mix away from non interest bearing title and
escrow deposits.
<PAGE> 10
<TABLE>
<CAPTION>
Table 8 Analysis of Changes in Net Interest Income (1)
Amounts in thousands of dollars Three months ended Three months ended
March 31, March 31,
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 $751 $830 $1,581 $(1,244) $(235) $(1,479)
Investments 5 254 260 265 (116) 149
Federal Funds Sold 162 192 354 93 8 101
Total interest income 918 1,276 2,195 (886) (343) (1,229)
Interest Expense
Interest-bearing deposits:
Demand and Savings (37) 100 63 (58) (47) (105)
Time Certificates of deposit:
Under $100 539 220 759 50 2 52
$100 or more 236 203 439 (75) 18 (57)
Federal funds purchased / Repos 0 0 0 (14) (14) (27)
Other borrowings (42) (22) (64) (35) 5 30
Total interest expense 696 501 1,197 (132) (36) (137)
Net interest income $222 $775 $998 $(754) $(307) $(1,092)
(1) The change in interest income or interest expense that is attributable to
both change in average balance and average rate has been allocated to the
changes due to (i) average balance and (ii) average rate in proportion to the
relationship of the absolute amounts of the changes in each.
</TABLE>
Yields on earning assets were approximately 8.7% in the first quarter of 1995,
compared to a 6.5% yield for the same period in 1994. The higher average yield
on earning assets in 1995 is the primarily the result of an increase in the
prime rate from an average of 6% in the first quarter of 1994 to an average of
8.8% in the first quarter of 1995.
Rates on interest bearing liabilities resulted in an average cost of funds of
4.9% in 1995, compared with 2.7% for the comparable period of 1994. In addition
to the generally higher level of interest rates in 1995, certificates of deposit
represent a higher proportion of the funding liabilities, rather than lower cost
money market or savings accounts.
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin for 1995 was 5.6%, compared to 5.0% for the same
period in 1994. The Bank's margin is strong because it has funded itself with a
significant amount of noninterest bearing deposits. The higher margin in 1995
is largely due to the higher general level of interest rates.
<PAGE> 11
<TABLE>
<CAPTION>
Table 9 Average Balance Sheets and Analysis of Net Interest Income
Three months ended Three months ended
Amounts in thousands of dollars March 31, 1995 March 31, 1994
Interest Annual Interest Annual
Income or Yield or Income or Yield
Balance Expense Rate Balance Expense or Rate
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans, Net $160,816 $4,413 10.98% $130,117 $2,832 8.71%
Investments 71,129 915 5.15 69,316 642 3.70
Certificates of Deposit
in other banks 149 3 6.71 1,377 16 4.65
Federal Funds Sold 34,489 501 5.81 19,439 147 3.02
Total Earning Assets 266,583 5,832 8.75 220,249 3,647 6.61
Non Earning Assets
Cash & Due From Banks 23,985 25,229
Other Assets 8,397 7,769
Total Assets $298,965 $253,247
Interest-bearing Liabilities
Demand and savings $63,740 469 2.94 $69,832 406 2.32
Time Certificates of Deposits
Less Than $100 63,599 973 6.12 23,657 214 3.62
More Than $100 38,545 582 6.04 18,375 143 3.11
Total interest-bearing 165,884 2,024 4.88 111,864 763 2.73
Noninterest-bearing Deposits 92,797 105,668
Total Deposits 258,681 2,024 3.13 217,532 763 1.40
Other Borrowings 3,798 58 6.11 6,335 122 7.70
Total Funding Liabilities 262,479 2,082 3.17 223,867 885 1.58
Other Liabilities 6,630 2,538
Shareholders' Equity 29,859 26,842
Total Liabilities and Shareholders'
Equity $298,968 $253,247
Net Interest Income $3,750 5.63% $2,752 5.00%
Shareholders' Equity to
Total Assets 9.99% 10.60%
</TABLE>
Other Operating Income
A significant portion of other operating income in 1994 was earned as mortgage
servicing rights were sold. After the $197 gain from the sale of servicing
rights in 1995, the Bank no longer has a portfolio of mortgage servicing rights
available for sale. The trends and composition of other operating income are
shown in the following table.
<PAGE> 12
<TABLE>
<CAPTION>
Table 10 Other operating income
Amounts in thousands of dollars
For three months
ended ended
March 31, March 31,
1995 1994
<S> <C> <C>
Gain on sale of SBA Loans $100 $8
Premium on sales of mortgage loans 68
Service income 466
Documentation fees 22
Other service fees and charges 323 339
Gain on sale of mortgage servicing portfolio 197 838
Total $620 $1,741
</TABLE>
Operating Expense
Total operating expenses for the bank were $1.5 million in the first quarter of
1995, compared to $1.9 million for the same period in 1994. Refocusing
productive resources toward commercial banking activities and eliminating
historic inefficiencies allowed this reduction. The current level of operating
expense is deemed to be adequate and will be leveraged further as the core
middle market business is expanded.
Provision for Loan Losses
The Bank has made no provision for loan losses in 1995 or 1994. No loan loss
provision has been deemed necessary for 1995 and 1994, due to the declining
levels of nonperforming assets, net recoveries received, and the strong reserve
position.
<PAGE> 13
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
Amounts in thousands of dollars March 31, December 31,
1995 1994
<S>
Assets <C> <C>
Cash and due from banks $26,944 $35,397
Federal funds sold 53,000 20,000
Total cash and cash equivalents 79,944 55,397
Time deposits with other financial institutions 200 0
Investment securities (Market value of $66,776 and $71,423 at March 31,
1995 and December 31, 1994, respectively) 67,985 74,153
Loans, (Net of allowance for loan losses of $7,592 and $7,427 at March
31, 1995, and December 31, 1994, respectively) 161,001 167,175
Premises and equipment, net 1,000 996
Other real estate owned, net 0 0
Accrued interest receivable and other assets 6,697 6,433
Total Assets $316,827 $304,154
Liabilities and Shareholders' equity
Deposits:
Demand deposits $104,185 $112,034
Savings deposits 64,962 67,896
Time deposits under $100 69,553 47,896
Time deposits of $100 or more 38,579 36,415
Total deposits 277,279 264,181
Accrued interest payable and other liabilities 8,622 10,229
Total liabilities 285,901 274,410
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 3,934 3,314
Total Shareholders' equity 30,926 29,744
Total Liabilities and Shareholders' equity $316,827 $304,154
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
Consolidated Statements of Income CU Bancorp and
Subsidiary
Amounts in thousands of dollars, except per share data For the three
months
ended March 31,
1995 1994
<S> <C> <C>
Revenue from earning assets:
Interest and fees on loans $4,413 $2,831
Interest on taxable investment securities 900 641
Interest on tax exempt investment securities 15 1
Interest on time deposits with other financial 3 16
institutions
Interest on federal funds sold 501 147
Total revenue from earning assets 5,832 3,636
Cost of funds:
Interest on interest-bearing demand deposits 399 361
Interest on savings deposits 70 45
Interest on time deposits under $100 973 214
Interest on time deposits of $100 or more 582 143
Interest on other borrowings 58 122
Total cost of funds 2,082 885
Net revenue from earning assets before provision for
loan losses 3,750 2,752
Provision for loan losses 0 0
Net revenue from earning assets 3,750 2,752
Other operating revenue: 3,750 2,752
Servicing Income - mortgage loans sold 0 466
Other fees & charges - commercial 423 229
Premium on sales of mortgage loans 0 68
Other fees and charges - mortgage 0 140
Gain on sale of mortgage servicing portfolio 197 838
Total other operating revenue 620 1,741
Other operating expenses:
Salaries and related benefits 1,652 1,543
Selling expenses - mortgage loans 0 126
Other operating expenses 1,458 1,816
Total operating expenses 3,110 3,485
Income before provision for income taxes 1,260 1,008
Provision for income taxes 550 430
Net income $710 $578
Earnings per share $0.15 $0.13
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
CU BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF DOLLARS)
For the three
months
ended March 31,
1995 1994
<S> <C> <C>
Increase(decrease) in cash and cash equivalents:
Cash flows from operating activities
Net income/(loss) $710 $578
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for depreciation and amortization 120 106
Amortization of real estate mortgage servicing rights 0 15
Benefit of deferred taxes 298 139
Increase/(decrease) in other assets (374) 1,741
Increase/(decrease) in other liabilities (1,809) (5,270)
(Increase)/decrease in accrued interest receivable (188) (723)
Increase/(decrease) in deferred loan fees 81 70
Increase/(decrease) in accrued interest payable 202 (12)
Net amortization of (discount)/premium on investment securities 145 306
Total Adjustments (1,525) (3,628)
Net cash provided by operating activities (815) (3,050)
Cash flows from investing activities
Proceeds from investment securities sold or matured 6,023 18,886
Purchase of investment securities 0 0
Net decrease in time deposits with other financial institutions (200) 0
Net (Increase/(decrease) in loans 6,093 4,243
Purchases of premises and equipment, net (124) (54)
Net cash provided by investing activities 11,792 23,075
Cash Flows from financing activities
Net increase/(decrease) in demand and savings deposits (10,783) 1,408
Net increase/(decrease/ in time certificates of deposits 23,881 (13,416)
Proceeds from exercise of stock options and director warrants 562 54
Cash dividend paid (90) 0
Net cash provided by financing activities 13,570 (11,954)
Net increase (decrease) in cash and cash equivalents 24,547 8,071
Cash and cash equivalents at beginning of year 55,397 46,440
Cash and cash equivalents at end of year $79,944 $54,511
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest $1,880 $897
Taxes 1,500 0
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 0 0
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE> 16
Notes to Consolidated Financial Statements
March 31, 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.
Note B. EARNINGS PER SHARE
Net income per share is computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods
presented, except when the effect of the latter would be anti-dilutive.
NOTE C. SECURITIES
The Bank has the intent and ability to hold its investment securities until
maturity. Accordingly, investment securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a straight-line basis,
which approximates the effective interest method. Gains and losses recognized on
the sale of investment securities are based upon the adjusted cost and
determined using the specific identification method.
The Bank has no securities classified as "held for sale", indicating the
willingness to sell these securities under certain conditions. These securities
would be carried at current market value with unrealized gains or losses not
recognized as current income but reported as an increase or decrease to capital
in the statements of financial condition and in the statements of shareholders'
equity.
The following tables set forth the book value and market value, of investment
securities at March 31, 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 $60,996 $(1,188) $59,807
Mortgage-backed securities 81 81
U.S. Government Agency Securities 5,726 (27) 5,698
State and Municipal Securities 750 $5 756
Federal Reserve Bank Stock 433 0 0 433
Total $67,986 $5 $(1,215) $66,775
</TABLE>
At March 31, 1995, investment securities with a book value of $25.9 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
<PAGE> 17
The average cash reserve required to be maintained at the Federal Reserve Bank
was approximately $3 million, $6 million, and $6 million for the periods ending
March 31, 1995 and December 31 and March 31, 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 March 31, 1995, December 31 or March
31, 1994.
Note G. INCOME TAXES
Effective January 1, 1993, the Bank implemented the provisions of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
implementation had no significant impact on the financial condition or
operations of the Bank. SFAS No. 109 utilizes the liability method and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of the enacted tax laws.
Note H. LOANS
Loans are carried at face amount, less payments collected, allowance for loan
losses, and unamortized deferred fees. Interest on loans is accrued monthly on a
simple interest basis. The general policy of the Bank is to discontinue the
accrual of interest and transfer loans to nonaccrual (cash basis) status where
reasonable doubt exists with respect to the timely collectibility of such
interest. Payments on nonaccrual loans are accounted for using a cost recovery
method.
Loan origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can reasonably be anticipated. Management considers
current economic conditions, historical loan loss experience, and other factors
in determining the adequacy of the allowance. The allowance is based on
estimates and ultimate losses may differ from current estimates. These estimates
are reviewed periodically and as adjustments become necessary, they are charged
to earnings in the period in which they become known. The allowance is increased
by provisions charged to operating expenses, increased for recoveries of loans
previously charged-off, and reduced by charge-offs.
The Bank adopted Statement of Financial Standards (SFAS) 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," as of January 1, 1995.
SFAS 114 requires that impaired loans be
<PAGE> 18
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.
At March 31, 1995, the Bank had $66 thousand in impaired loans, against which a
loss allowance of $45 thousand has been provided. All impaired loans are
included in nonaccrual status, and as such no interest income is recognized.
For the first quarter of 1995, the Bank had an average investment in impaired
loans of approximately $50 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 March 31,
1995.
Note J. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, the Bank believes that pending or threatened litigation involving the
Bank will have no adverse material effect upon its financial condition, or
results of operations.
The Bank is a defendant in multiple lawsuits related to the failure of two real
estate investment companies, Property Mortgage Company, Inc., ("PMC") and
S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by investors
in PMC and SLGH (the "Federal Investor Action"), at least three state court
actions by groups of Investors (the "State Investor Actions"), and an action
filed by the Resolution Agent for the combined and reorganized bankruptcy estate
of PMC and SLGH (the "Neilson" Action). An additional action was filed by an
individual investor and his related pension and profit sharing plans (the
"Individual Investor Action").
Other defendants in these multiple actions and in related actions include
financial institutions, title companies, professionals, business entities and
individuals, including the principals of PMC and SLGH. The Bank was a
depository bank for PMC, SLGH and related companies and was a lender to certain
principals of PMC and SLGH ("Individual Loans").
Plaintiffs allege that PMC/SLGH was or purported to be engaged in the business
of raising money from investors by the sale and issuance of interests in loans
evidenced by promissory notes secured by real property. Plaintiffs allege that
false representations were made, and the investment merely constituted a "Ponzi"
scheme. Other charges relate to the Bank's conduct with regard to the
depository accounts, the lending relationship with the principals and certain
collateral taken , pledged by PMC and SLGH in conjunction with the Individual
Loans. The lawsuits allege inter alia violations of federal and state securities
laws, fraud, negligence, breach of fiduciary duty, and conversion as well as
conspiracy and aiding and abetting counts with regard to these violations. The
Bank denies the allegations of wrongdoing.
<PAGE>20
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. Court approval of
these settlements has 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. 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 Memorandum of
Understanding was executed in August 1992.
<PAGE> 21
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CU BANCORP
May 12, 1995
By:___________________
Patrick Hartman
Chief Financial Officer
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Notes J and K, on pages 21 and 23 above, for a complete
discussion of both legal and regulatory 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 Mattters
On March 27, 1995, the Company entered into an agreeement to acquire Corporate
Bank, through a merger of Corporate Bank into the Company's subsidiary
California United Bank, National Association. The consideration for the
transaction was the Company's common stock. On May 12, 1995, Corporate Bank
announced that the schedule for completion of the transaction had been delayed,
as a result of a change of outside auditors by Corporate Bank, and also
announced changes in management at Corporate Bank.
Item 6. Exhibits and Filings on Form 8-K
(a) Exhibits:
(10) Material Contracts (NONE)
(b) Reports on Form 8-K: In a report filed on Form 8-K dated April 7, 1995,
the Company reported the signing of a definitive agreement to acquire
Corporate Bank.
<PAGE> 22
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 26,944
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 53,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 67,985
<INVESTMENTS-MARKET> 66,776
<LOANS> 168,593
<ALLOWANCE> 7,592
<TOTAL-ASSETS> 316,827
<DEPOSITS> 277,279
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,622
<LONG-TERM> 0
<COMMON> 26,992
0
0
<OTHER-SE> 3,934
<TOTAL-LIABILITIES-AND-EQUITY> 316,827
<INTEREST-LOAN> 4,413
<INTEREST-INVEST> 1,419
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,832
<INTEREST-DEPOSIT> 2,024
<INTEREST-EXPENSE> 2,082
<INTEREST-INCOME-NET> 3,750
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,110
<INCOME-PRETAX> 1,260
<INCOME-PRE-EXTRAORDINARY> 710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 710
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<YIELD-ACTUAL> 5.63
<LOANS-NON> 66
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,485
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,427
<CHARGE-OFFS> 4
<RECOVERIES> 169
<ALLOWANCE-CLOSE> 7,592
<ALLOWANCE-DOMESTIC> 7,592
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
