<PAGE> 1
As filed with the Securities and Exchange Commission on June 7, 1996
Registration No.: 333-02777
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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 of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification 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. T. Hale Boggs, Esq.
General Counsel Manatt, Phelps & Phillips, LLP
16030 Ventura Boulevard 11355 W. Olympic Boulevard
Encino, California 91436 Los Angeles, California 90064
(818) 907-9122 (310) 312-4269
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement has become 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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=================================================================================================================================
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered(1) per unit(2) offering price(2) fee
- ---------------------------------------------------------------------------------------------------------------------------------
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Common Stock without par value 5,940,034.00 $ 10.10 $ 60,000,000.00 $ 20,689.00
=================================================================================================================================
</TABLE>
(1) Based on approximate number of shares to be issued in respect of
outstanding shares of common stock of Home Interstate Bancorp
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) and (f).
================================================================================
<PAGE> 2
CU BANCORP
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM S-4
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<CAPTION>
FORM S-4 ITEM LOCATION IN PROSPECTUS
A. INFORMATION ABOUT THE TRANSACTION
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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
Prospectus of 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
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........ Incorporation of Certain Documents by
Reference
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
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 Registrants.............. Not applicable
16. Information with Respect to S-2 or S-3 Registrants....... Available Information, Incorporation of
Certain Documents by Reference
17. Information with Respect to Registrants Other Than S-2
or S-3 Registrants....................................... Not applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are
to be Solicited........................................... Proxy Statement/Prospectus Summary; the
CU Meeting; the Home Meeting
19. Information if Proxies, Consents or Authorizations are
Not to be Solicited in an Exchange Offer................ Not applicable
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<PAGE> 3
[CU Letterhead]
June 10, 1996
To Our Shareholders:
We are pleased to enclose a Notice of Annual Meeting of CU Bancorp, a
Notice of Annual Meeting of Home Interstate Bancorp, and a Joint Proxy
Statement/Prospectus (the "Joint Proxy Statement/Prospectus") relating to
actions to be taken at both meetings. At the Annual Meetings of both companies,
the shareholders will be asked:
1) To approve the principal terms of the Agreement and Plan of Reorganization
dated as of January 10, 1996, as amended on March 29, 1996 (the "Merger
Agreement"), by and among CU Bancorp and California United Bank, National
Association, a national banking association and a wholly owned subsidiary of CU
Bancorp, Home Interstate Bancorp ("Home Bancorp") and Home Bank ("Home Bank"), a
California state chartered bank and a wholly owned subsidiary of Home Bancorp,
pursuant to which, among other things, Home Bancorp will be merged with and into
CU Bancorp (the "Merger") with CU Bancorp surviving the Merger and California
United Bank, National Association will be merged with and into Home Bank (the
"Bank Merger") with Home Bank, under the name "California United Bank" surviving
the Bank Merger. Upon consummation of the Merger (the "Effective Time"), each
outstanding share of Common Stock, no par value, of Home Bancorp ("Home Stock")
will be converted into the right to receive 1.409 shares of CU Bancorp Common
Stock, without par value ("CU Stock"), in an exchange intended to be tax free
except to the extent of any cash received in exchange for fractional shares.
Shares of CU Stock outstanding immediately prior to the Merger will remain
outstanding after the consummation of the Merger. A copy of the Merger Agreement
is included in the Joint Proxy Statement/Prospectus as Appendix A.
At the CU Bancorp Annual Meeting (the "CU Meeting"), the shareholders of
CU Bancorp (the "CU Shareholders") will also be asked to consider and vote upon
the following additional matters:
REGULAR BUSINESS TO BE CONDUCTED:
2) To amend the Bylaws of CU Bancorp to decrease the authorized number of
directors to not less than six and not more than eleven. (See Proposal Number 6
with regard to a Bylaw amendment in connection with the Merger);
3) To elect as directors the six individuals nominated by the Board of
Directors subject to the effect of the Merger;
4) To approve the CU Bancorp 1996 Employee Stock Option Plan providing for
the issuance of options to purchase up to 375,000 shares of CU Stock thereunder;
5) To ratify the appointment of Arthur Andersen LLP as CU Bancorp's
independent accountants for the fiscal year ending December 31, 1996.
<PAGE> 4
TRANSACTIONS IN CONNECTION WITH THE MERGER:
6) To amend the Bylaws of CU Bancorp, effective upon the Effective Time, to
increase the number of directors to not less than seven and not more than
thirteen;
7) To approve the CU Bancorp Conversion Stock Option Plan, effective upon the
Effective Time, to provide for the assumption of all outstanding stock options
to purchase Home Stock as required by the Merger Agreement (THE ASSUMPTION OF
OPTIONS TO PURCHASE HOME STOCK BY CU BANCORP AND THE CONVERSION INTO OPTIONS TO
PURCHASE CU STOCK IS A CONDITION PRECEDENT TO THE MERGER);
8) To amend the CU Bancorp 1996 Employee Stock Option Plan, effective
immediately following the Effective Time, to increase the number of shares of CU
Stock which can be issued pursuant to such plan to 750,000 shares, in order to
reflect the capitalization and employee base of the Surviving Corporation;
9) To adopt the CU Bancorp 1996 Restricted Stock Plan effective immediately
following the Effective Time, to replace the CU Bancorp 1995 Restricted Stock
Plan which will be terminated at the Effective Time;
10) To approve amendments to the 1994 Non-Employee Director Stock Option Plan,
effective immediately following the Effective Time, to change certain portions
of the plan with regard to acceleration of vesting of options upon certain
transactions such as mergers or acquisitions (not including the Merger discussed
herein);
11) To consider and transact such other business as may properly be brought
before the meeting and any adjournment or adjournments thereof.
More detailed information about the nominees, the specified proposals and
other matters regarding the CU Meeting is included in the attached Joint Proxy
Statement/Prospectus.
THE BOARD OF DIRECTORS OF CU BANCORP HAS APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT THE HOLDERS OF CU
STOCK VOTE TO APPROVE THE MERGER AGREEMENT AT THE CU MEETING.
Whether or not you plan to attend, please sign and return the accompanying
proxy card in the postage-paid envelope as soon as possible so that your shares
will be represented at the meeting. The Board of Directors suggests that you
vote "FOR" each proposal listed on the proxy card. If you attend the meeting and
ask to vote in person, you may withdraw your proxy then. It is important that
your stock be represented.
Stephen G. Carpenter
Chairman of the Board
<PAGE> 5
CU BANCORP
16030 VENTURA BOULEVARD
ENCINO, CALIFORNIA 91436-4487
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 18, 1996
TO THE SHAREHOLDERS OF CU BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of the
Board of Directors, the Annual Meeting of Shareholders (the "CU Meeting") of
CU Bancorp, a California corporation ("CU Bancorp"), will be held in the
Renaissance Ballroom, at the Los Angeles Renaissance Hotel, located at 9620
Airport Boulevard, Los Angeles, California 90045, on July 18, 1996 at 8:30 a.m.,
California time, for the following purposes all as set forth in the attached
Joint Proxy Statement/Prospectus:
1. Approval of Merger Agreement. To approve the principal terms of the
Agreement and Plan of Reorganization dated as of January 10, 1996, as amended on
March 29, 1996 (the "Merger Agreement"), by and among CU Bancorp, California
United Bank, National Association, a national banking association and a wholly
owned subsidiary of CU Bancorp ("CU Bank"), Home Interstate Bancorp, a
California corporation ("Home Bancorp"), and Home Bank ("Home Bank"), a
California state chartered bank and a wholly owned subsidiary of Home Bancorp,
pursuant to which, among other things, Home Bancorp will merge with and into CU
Bancorp (the "Merger"), with CU Bancorp surviving the Merger (the "Surviving
Company") and CU Bank will merge with and into Home Bank under the name
"California United Bank" (the "Surviving Bank"). Upon consummation of the
Merger, each outstanding share of Common Stock, no par value, of Home Bancorp
("Home Stock") will be converted into the right to receive 1.409 shares of CU
Bancorp Common Stock, without par value ("CU Stock") in an exchange intended to
be tax free except to the extent of any cash received in exchange for fractional
shares. A copy of the Merger Agreement is included in the Joint Proxy
Statement/Prospectus as Appendix A.
REGULAR BUSINESS TO BE CONDUCTED:
2. Amendment of CU Bancorp Bylaws. To amend the Bylaws of CU Bancorp to
decrease the authorized number of directors to not less than six and not more
than eleven. See Proposal Number 6 with regard to a Bylaw amendment in
connection with the Merger.
3. Election of Directors. To elect as directors the six individuals
nominated by the Board of Directors to serve until the next Annual Meeting of
Shareholders and until their respective successors shall be elected and
qualified.* The following persons are the Board of Directors' nominees:
Kenneth L. Bernstein Paul W. Glass
Stephen G. Carpenter Ronald S. Parker
Richard H. Close* David I. Rainer
* In order to assist CU Bancorp in complying with the provisions of the Merger
Agreement which provide, among other things, that the Board of Directors of the
Surviving Company immediately following the Merger shall consist of five members
from each of the CU Bancorp and Home Bancorp Boards of Directors, Director
Richard H. Close has submitted his irrevocable resignation as a director and
officer of CU Bancorp and CU
<PAGE> 6
Bank, effective upon consummation of the Merger. In the event that the Merger is
not consummated as contemplated, Mr. Close will continue to serve as a director
of CU Bancorp for the period elected herein.
4. Adoption of New CU Bancorp 1996 Employee Stock Option Plan. To
approve the adoption of the CU Bancorp 1996 Employee Stock Option Plan (the
"1996 Option Plan") providing for the issuance of options to purchase up to
375,000 shares of CU Stock thereunder. See Proposal Number 8. below, regarding a
proposed amendment to the 1996 Option Plan, upon the Effective Time, to increase
the number of shares of CU Stock authorized and reserved for the 1996 Option
Plan to provide sufficient options for the Surviving Company.
5. Ratification of Appointment of Independent Accountants. To ratify
the appointment of Arthur Andersen LLP as CU Bancorp's independent accountants
for the fiscal year ending December 31, 1996.
TRANSACTIONS IN CONNECTION WITH THE MERGER:
6. Amendment to CU Bancorp Bylaws Changing Authorized Number of
Directors, Effective Upon the Merger. To amend the CU Bancorp Bylaws, effective
upon the Effective Time, to increase the number of directors to not less than
seven and not more than thirteen.
7. Adoption of CU Bancorp Conversion Stock Option Plan, Effective Upon
the Merger to Provide for the Assumption of Home Options and Conversion into CU
Options. To approve the CU Bancorp Conversion Stock Option Plan (the "Conversion
Plan"), effective upon the Effective Time, to provide for the assumption of all
outstanding stock options ("Home Options") to purchase Home Stock and the
conversion into options to purchase CU Stock ("CU Options"), as required by the
Merger Agreement (THE ASSUMPTION AND CONVERSION OF HOME OPTIONS INTO CU OPTIONS
IS A CONDITION PRECEDENT TO THE MERGER).
8. Increase in Shares of CU Stock Reserved under the 1996 Option Plan,
Effective Immediately Following the Effective Time. To amend the 1996 Option
Plan to increase the number of shares available under the 1996 Option Plan to
750,000 effective immediately following the Effective Time, in order to
accommodate the greater number of eligible employees after the Merger and to
provide for future requirements.
9. Adoption of CU Bancorp 1996 Restricted Stock Plan Effective
Immediately Following the Effective Time. To adopt the CU Bancorp 1996
Restricted Stock Plan to be effective immediately following the Effective Time,
to replace the CU Bancorp 1995 Restricted Stock Plan which will be terminated at
the Effective Time.
10. Amendments to 1994 Non-Employee Director Stock Option Plan to Amend
Vesting Provisions Effective Immediately Following the Merger. To amend the 1994
Non-Employee Director Stock Option Plan to change certain portions of the plan
with regard to acceleration of vesting of options upon certain transactions such
as mergers or acquisitions, such amendments to be effective immediately
following the Effective Time and shall not be applicable to the Merger.
11. Other Business. To consider and transact such other business as may
properly be brought before the meeting and any adjournment or adjournments
thereof.
<PAGE> 7
MORE DETAILED INFORMATION ABOUT THE NOMINEES, THE SPECIFIED PROPOSALS AND
OTHER MATTERS REGARDING THE CU MEETING IS INCLUDED IN THE ATTACHED JOINT PROXY
STATEMENT/PROSPECTUS.
THE BOARD OF DIRECTORS OF CU BANCORP HAS APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT THE HOLDERS OF THE CU
STOCK VOTE TO APPROVE THE MERGER AGREEMENT AT THE CU MEETING.
If the Merger is consummated, holders of the CU Stock who comply with the
requirements of Chapter 13 of the California General Corporation Law ("Chapter
13") may have the right to receive from CU Bancorp a cash payment of the fair
market value of their shares determined in accordance with Chapter 13. See
"DISSENTING SHAREHOLDERS' RIGHTS -- CU BANCORP" in the attached Joint Proxy
Statement/Prospectus for a discussion of the availability of dissenters' rights
and a description of the procedures which must be followed to enforce such
rights under Chapter 13, a copy of which is included as Appendix D thereto and
incorporated herein by this reference.
Shareholders of record at the close of business on June 6, 1996 are
entitled to notice of and to vote at the CU Meeting.
- --------------------------------------------------------------------------------
Provisions of the Bylaws of CU Bancorp govern nominations for election of
members of the Board of Directors as follows:
Section 2.11. NOMINATION OF DIRECTORS. Nominations for election of members of
the board of directors may be made by the board of directors or by any
shareholder of any outstanding class of capital stock of the corporation
entitled to vote for the election of directors. Notice of intention to make any
nominations (other than for persons named in the notice of the meeting at which
such nomination is to be made) shall be made in writing and shall be delivered
or mailed to the president of the corporation by the later of the close of
business twenty-one (21) days prior to any meeting of shareholders called for
the election of directors or ten (10) days after the date of mailing notice of
the meeting to shareholders. Such notification shall contain the following
information to the extent known to the notifying shareholder: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the number of shares of capital stock of the corporation owned by
each proposed nominee; (d) the name and residence address of the notifying
shareholder; (e) the number of shares of capital stock of the corporation owned
by the notifying shareholder; (f) with the written consent of the proposed
nominee, a copy of which shall be furnished with the notification, whether the
proposed nominee has ever been convicted of or pleaded nolo contendere to any
criminal offense involving dishonesty or breach of trust, filed a petition in
bankruptcy, or been adjudged bankrupt. The notice shall be signed by the
nominating shareholder and by the nominee. Nominations not made in accordance
herewith shall be disregarded by the chairman of the meeting, and upon his
instructions, the inspectors of election shall disregard all votes cast for each
such nominee. The restrictions set forth in this paragraph shall not apply to
nomination of a person to replace a proposed nominee who has died or
<PAGE> 8
otherwise become incapacitated to serve as a director between the last day for
giving notice hereunder and the date of election.
CU BANCORP
Stephen G. Carpenter
Chairman of the Board and
Chief Executive Officer
DATED: June 10, 1996
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> 9
[Home Letterhead]
June 10, 1996
To Our Shareholders:
We are pleased to enclose a Notice of Annual Meeting of Home Interstate
Bancorp ("Home Bancorp"), a Notice of Annual Meeting of CU Bancorp, and a Joint
Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus") relating to
actions to be taken at both meetings. At the Annual Meetings of both companies,
the shareholders will be asked to approve the principal terms of the Agreement
and Plan of Reorganization dated as of January 10, 1996 (the "Merger
Agreement"), as amended on March 29, 1996, by and among CU Bancorp and
California United Bank, National Association, a national banking association and
a wholly owned subsidiary of CU Bancorp, Home Bancorp and Home Bank, a
California state chartered bank and a wholly owned subsidiary of Home Bancorp,
pursuant to which, among other things, Home Bancorp will be merged with and into
CU Bancorp (the "Merger") and California United Bank, National Association will
be merged with and into Home Bank under the name "California United Bank." Upon
consummation of the Merger, each outstanding share of Common Stock, no par
value, of Home Bancorp will be converted into the right to receive 1.409 shares
of CU Bancorp Common Stock, without par value, in an exchange intended to be tax
free except to the extent of any cash received in exchange for fractional
shares. A copy of the Merger Agreement is included in the Joint Proxy
Statement/Prospectus as Appendix A.
At the Home Bancorp meeting (the "Home Meeting"), the shareholders of Home
Bancorp will also be asked to consider and vote upon the election as directors
of the nine individuals nominated by the Board of Directors subject to the
consummation of the Merger as more fully set out herein; and the ratification of
the appointment of Arthur Andersen LLP as Home Bancorp's independent accountants
for the fiscal year ending December 31, 1996.
More detailed information about the nominees, the specified proposals and
other matters regarding the Home Meeting is included in the attached Joint Proxy
Statement/Prospectus.
THE BOARD OF DIRECTORS OF HOME BANCORP HAS APPROVED THE MERGER AGREEMENT,
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT THE SHAREHOLDERS
OF HOME BANCORP VOTE TO APPROVE THE MERGER AGREEMENT AT THE HOME MEETING.
Whether or not you plan to attend, please sign and return the accompanying
proxy card in the postage-paid envelope as soon as possible so that your shares
will be represented at the meeting. The Board of Directors suggests that you
vote "FOR" each proposal listed on the proxy card. If you attend the meeting and
ask to vote in person, you may withdraw your proxy then. It is important that
your stock be represented.
Ruth A. Martin
Chairman of the Board
<PAGE> 10
HOME INTERSTATE BANCORP
2633 CHERRY AVENUE
SIGNAL HILL, CALIFORNIA 90806
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 17, 1996
TO THE SHAREHOLDERS OF HOME INTERSTATE BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of the
Board of Directors, the Annual Meeting of Shareholders (the "Home Meeting") of
Home Interstate Bancorp, a California corporation ("Home Bancorp"), will be held
in the Grand Ballroom, at the Long Beach Airport Marriott Hotel, located at 4700
Airport Plaza Drive, Long Beach, California 90815, on July 17, 1996 at 10:00
a.m., California time, for the following purposes all as set forth in the
attached Joint Proxy Statement/Prospectus:
1. Approval of Merger Agreement. To approve the principal terms of the
Agreement and Plan of Reorganization dated January 10, 1996, as amended on March
29, 1996 (the "Merger Agreement"), by and among CU Bancorp, a California
corporation ("CU Bancorp"), California United Bank, National Association, a
national banking association and a wholly owned subsidiary of CU Bancorp ("CU
Bank"), Home Bancorp, and Home Bank ("Home Bank"), a California state chartered
bank and wholly owned subsidiary of Home Bancorp, pursuant to which Home Bancorp
will merge with and into CU Bancorp (the "Merger"), with CU Bancorp surviving
the Merger (the "Surviving Company") and CU Bank will merge with and into Home
Bank under the name "California United Bank." Upon consummation of the Merger,
each outstanding share of Common Stock, no par value, of Home Bancorp ("Home
Stock") will be converted into the right to receive 1.409 shares of CU Bancorp
Common Stock, without par value. A copy of the Merger Agreement is included in
the Joint Proxy Statement/Prospectus as Appendix A.
2. Election of Directors. To elect nine persons to the Board of
Directors to serve until the next Annual Meeting of Shareholders and until their
successors are elected and have qualified. The Board of Directors' nominees are
the following persons:
Donald A. Buschenfield Donald G. Martin
J. Richard Denham Ruth A. Martin*
Randall G. Elston Bill Neal*
Roger K. Freeman, MD* George W. Post*
James P. Staes
* In order to assist Home Bancorp in complying with the Merger Agreement which
provides, among other things, that the Board of Directors of the Surviving
Company immediately following the Merger shall consist of five members from each
of the Home Bancorp and CU Bancorp Boards of Directors, Directors Roger K.
Freeman, MD, Ruth A. Martin, Bill Neal and George W. Post have submitted their
irrevocable resignations as directors of Home Bancorp and Home Bank, effective
upon the consummation of the Merger. In the event that the Merger is not
consummated as contemplated, the aforementioned persons will continue to serve
as directors of Home Bancorp and Home Bank for the period elected herein.
<PAGE> 11
3. Ratification of Appointment of Independent Accountants. To ratify
the appointment of Arthur Andersen LLP as Home Bancorp's independent accountants
for the fiscal year ending December 31, 1996.
4. Other Business. To transact such other business as may properly come
before the Home Meeting and at any and all adjournments thereof.
The Bylaws of Home Bancorp provide for the nomination of directors in the
following manner:
"Nominations for election of members of the Board of Directors may be made
by the Board of Directors or by any shareholder of any outstanding class of
voting stock of the Corporation entitled to vote for the election of directors.
Notice of intention to make any nominations, other than by the Board of
Directors, shall be received by the President of the Corporation no more than 60
days prior to a meeting of shareholders called for the election of directors,
and no more than 10 days after the date of notice of such meeting is sent to
shareholders pursuant to Section 2.2(d) of these bylaws; provided, however, that
if only 10 days' notice of the meeting is given to shareholders, such notice of
intention to nominate shall be received by the President of the Corporation not
later than the time fixed in the notice of the meeting for the opening of the
meeting. Such notification shall contain the following information to the extent
known to the notifying shareholder: (A) the name and address of each proposed
nominee; (B) the principal occupation of each proposed nominee; (C) the number
of shares of voting stock of the Corporation of each proposed nominee; (D) the
name and resident address of the notifying shareholder; and (E) the number of
shares of voting stock of the Corporation owned by the notifying shareholder.
Nominations not made in accordance herewith shall be disregarded by the chairman
of the meeting, and the inspectors of election shall then disregard all votes
cast for each such nominee."
Only those shareholders of record at the close of business on June 7, 1996
shall be entitled to notice of and to vote at the Home Meeting.
THE BOARD OF DIRECTORS OF HOME BANCORP HAS APPROVED THE MERGER AGREEMENT
(A COPY OF WHICH IS INCLUDED AS APPENDIX A TO THE ATTACHED JOINT PROXY
STATEMENT/PROSPECTUS) AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS
THAT THE HOLDERS OF HOME STOCK VOTE TO APPROVE THE MERGER AGREEMENT AT THE HOME
MEETING.
If the Merger is consummated, holders of the Home Stock who comply with
the requirements of Chapter 13 of the California General Corporation Law
("Chapter 13") may have the right to receive from Home Bancorp a cash payment of
the fair market value of their shares determined in accordance with Chapter 13.
See "DISSENTING SHAREHOLDERS' RIGHTS -- HOME BANCORP" in the attached Joint
Proxy Statement/Prospectus for a discussion of the availability of dissenters'
rights and a description of the procedures which must be followed to enforce
such rights under Chapter 13, a copy of which is included as Appendix D thereto
and incorporated herein by this reference.
HOME INTERSTATE BANCORP
Susan Monsoor
Vice President
Corporate Secretary
DATED: June 10, 1996
<PAGE> 12
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> 13
TABLE OF CONTENTS
<TABLE>
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PAGE
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SUMMARY....................................................................................................... 1
The Meetings......................................................................................... 1
The Parties.......................................................................................... 1
The Merger........................................................................................... 2
Exchange of Stock Certificates....................................................................... 7
Dissenters' Rights................................................................................... 7
Historical and Pro Forma per Share Data for CU Bancorp and Home Bancorp.............................. 8
Comparative Stock Price Information.................................................................. 9
Certain CU Bancorp Financial Data.................................................................... 10
CU BANCORP SUMMARY CONSOLIDATED FINANCIAL DATA................................................................ 10
Recent CU Bancorp Developments....................................................................... 11
Certain Home Bancorp Financial Data.................................................................. 11
HOME BANCORP SUMMARY CONSOLIDATED FINANCIAL DATA.............................................................. 12
Recent Home Bancorp Developments..................................................................... 13
PRO FORMA FINANCIAL DATA...................................................................................... 14
Unaudited Pro Forma Combined Financial Information................................................... 14
INTRODUCTION.................................................................................................. 19
THE CU MEETING................................................................................................ 20
Record Date.......................................................................................... 20
Proxies.............................................................................................. 20
Costs of Solicitations of Proxies.................................................................... 20
Quorum............................................................................................... 21
Vote Required........................................................................................ 21
THE HOME MEETING.............................................................................................. 21
Record Date.......................................................................................... 21
Proxies.............................................................................................. 22
Quorum............................................................................................... 22
Vote Required........................................................................................ 22
THE MERGER.................................................................................................... 23
Background of the Merger............................................................................. 23
Recommendation of the Boards of Directors and Reasons for the Merger................................. 27
Opinion of CU Bancorp Financial Advisor.............................................................. 28
</TABLE>
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<PAGE> 14
<TABLE>
<S> <C>
Opinion of Home Bancorp Financial Advisor............................................................ 34
Terms of the Merger.................................................................................. 38
Effective Time of Merger............................................................................. 38
Regulatory Approvals................................................................................. 38
Agreements with Certain Shareholders................................................................. 39
Interests of Certain Persons in the Merger........................................................... 40
Certain Related Transactions......................................................................... 42
Certain Federal Income Tax Consequences.............................................................. 42
Exchange Procedures.................................................................................. 44
Post-Merger Operations............................................................................... 45
Sales of CU Stock.................................................................................... 45
NASDAQ Listing....................................................................................... 45
Accounting Treatment................................................................................. 45
THE MERGER AGREEMENT.......................................................................................... 46
Conditions to the Merger............................................................................. 46
Nonsolicitation...................................................................................... 47
Treatment of Options................................................................................. 48
Termination.......................................................................................... 48
Covenants; Conduct of Business Prior to Effective Time............................................... 49
Amendment and Waiver................................................................................. 50
THE WARRANT AGREEMENTS........................................................................................ 50
Exercise of Warrants................................................................................. 50
Adjustment of Number of Shares to Warrants........................................................... 51
Repurchase of Warrants............................................................................... 52
Restrictions On Transfer............................................................................. 52
DISSENTING SHAREHOLDERS' RIGHTS............................................................................... 52
CU BANCORP.................................................................................................... 55
DESCRIPTION OF CU BANCORP CAPITAL STOCK....................................................................... 56
CU Stock............................................................................................. 56
CU Preferred Stock................................................................................... 56
Indemnification Provisions........................................................................... 56
HOME BANCORP.................................................................................................. 57
INFORMATION CONCERNING CU BANCORP MEETING ONLY................................................................ 59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 59
</TABLE>
ii
<PAGE> 15
<TABLE>
<S> <C>
REGULAR BUSINESS TO BE CONDUCTED.............................................................................. 62
DIRECTORS AND EXECUTIVE OFFICERS.............................................................................. 64
Committees of the Board of Directors; Director Attendance............................................ 66
Executive Officers................................................................................... 68
Compensation of Directors and Executive Officers..................................................... 68
STOCK OPTIONS................................................................................................. 70
OTHER MATTERS RELATED TO COMPENSATION......................................................................... 71
Other Compensation / Golden Parachutes............................................................... 71
Compensation of Directors............................................................................ 72
Additional Director Compensation..................................................................... 72
1987 Special (Director) Stock Option Plan................................................... 72
Director Warrants........................................................................... 73
CU Bancorp 1994 Non-Employee Director Stock Option Plan..................................... 74
Employee Stock Option and Restricted Stock Plans..................................................... 76
1983 Employee Stock Option Plan............................................................. 76
First Amended and Restated 1985 Employee Stock Option Plan.................................. 77
1993 Employee Stock Option Plan............................................................. 78
1995 Restricted Stock Plan.................................................................. 80
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION................................................. 81
Overall Philosophy................................................................................... 81
Recruitment of Management Personnel.................................................................. 82
Compensation Philosophy.............................................................................. 82
Base Salary.......................................................................................... 83
Bonuses.............................................................................................. 83
Long-Term Compensation / Stock Options and Restricted Stock.......................................... 83
Special Deduction Limit.............................................................................. 84
SHAREHOLDER RETURN GRAPH...................................................................................... 84
Indebtedness of Management........................................................................... 86
Other Material Transactions.......................................................................... 86
Regulatory Agreements................................................................................ 87
Summary of the New Stock Option Plan................................................................. 87
Purpose.............................................................................................. 88
Administration....................................................................................... 88
Shares Reserved...................................................................................... 88
Eligibility.......................................................................................... 88
Terms of Stock Options............................................................................... 88
Adjustments Upon Changes In Stock.................................................................... 89
Expiration, Termination and Transfer of Options...................................................... 89
</TABLE>
iii
<PAGE> 16
<TABLE>
<S> <C>
Termination and Amendment of the 1996 Option Plan.................................................... 89
Federal Income Tax Consequences...................................................................... 90
Grant of Options..................................................................................... 90
TRANSACTIONS IN CONNECTION WITH THE MERGER.................................................................... 92
Purpose.............................................................................................. 93
Administration....................................................................................... 93
Eligibility.......................................................................................... 93
Terms of Options..................................................................................... 93
Existing Restricted Stock Plan....................................................................... 95
Summary of the Restricted Stock Plan................................................................. 96
Purpose.............................................................................................. 96
Administration....................................................................................... 96
Shares Reserved...................................................................................... 97
Eligibility.......................................................................................... 97
Grants, Vesting and Restrictions Under the Restricted Stock Plan..................................... 97
Adjustments Upon Changes In Stock.................................................................... 97
Transfer of Restricted Stock......................................................................... 97
Termination and Amendment of the 1996 Restricted Stock Plan.......................................... 98
Federal Income Tax Consequences...................................................................... 98
Grant of Options..................................................................................... 99
SHAREHOLDER PROPOSALS......................................................................................... 101
OTHER MATTERS................................................................................................. 101
INFORMATION CONCERNING HOME BANCORP MEETING ONLY.............................................................. 102
ELECTION OF DIRECTORS......................................................................................... 102
Directors, Nominees and Executive Officers of Home Bancorp........................................... 104
The Board of Directors and Committees................................................................ 105
Report of the Personnel/Compensation Committee of Home Bank.......................................... 106
Compensation Philosophy.............................................................................. 106
Compensation Programs................................................................................ 107
Salary ................................................................................... 107
Home Bank Profit Sharing and Retirement Savings Plan........................................ 107
Home Bank Stakeholders (R) Incentive Compensation Plan...................................... 108
Stock Option Program........................................................................ 108
CEO Compensation..................................................................................... 108
JOINT PERSONNEL/COMPENSATION COMMITTEE........................................................................ 109
Executive Compensation............................................................................... 109
Retention Agreements................................................................................. 110
</TABLE>
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<PAGE> 17
<TABLE>
<S> <C>
Pension Plan......................................................................................... 111
Stock Option Exercises and Holdings.................................................................. 112
Compensation Committee Interlocks and Insider Participation.......................................... 112
Performance Graph.................................................................................... 113
Director Compensation................................................................................ 114
Certain Transactions................................................................................. 114
Compliance with Reporting Requirements of Section 16................................................. 114
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS........................................................ 115
PROPOSALS OF SHAREHOLDERS..................................................................................... 115
OTHER MATTERS................................................................................................. 115
LEGAL MATTERS................................................................................................. 115
EXPERTS....................................................................................................... 115
CU Bancorp........................................................................................... 115
Home Bancorp......................................................................................... 116
</TABLE>
v
<PAGE> 18
APPENDICES
<TABLE>
<S> <C>
Appendix A......................................................... Agreement and Plan of
Reorganization and certain
Exhibits thereto, with
Amendment No. 1 and
Exhibit thereto
Appendix B......................................................... CU Bancorp 1995 Annual
Report on Form 10-K, with
Amendment No. 1 on
Form 10-K/A thereto
Appendix C......................................................... Home Interstate Bancorp
1995 Annual Report on Form
10-K, with Amendment No.
1 on Form 10-K/A thereto
Appendix D......................................................... Chapter 13 of the California
General Corporation Law
Appendix E......................................................... CU Warrant Agreement (See
Appendix A, Exhibit C)
Appendix F......................................................... Home Warrant Agreement
(See Appendix A, Exhibit D)
Appendix G......................................................... Van Kasper & Company
Fairness Opinion
Appendix H......................................................... Piper Jaffray Inc. Fairness
Opinion
Appendix I......................................................... CU Bancorp Quarterly
Report on Form 10-Q for the
quarter ended March 31,
1996
Appendix J ........................................................ Home Interstate Bancorp
Quarterly Report on Form
10-Q for the quarter ended
March 31, 1996
</TABLE>
vi
<PAGE> 19
CU BANCORP
HOME INTERSTATE BANCORP
JOINT PROXY STATEMENT/PROSPECTUS
FOR ANNUAL MEETINGS OF SHAREHOLDERS
TO BE HELD ON JULY 18, 1996 AND JULY 17,1996, RESPECTIVELY
- --------------------------------------------------------------------------------
CU BANCORP
PROSPECTUS
This Joint Proxy Statement/Prospectus is furnished to the shareholders of
CU Bancorp, a California corporation ("CU Bancorp"), and to the shareholders of
Home Interstate Bancorp, a California corporation ("Home Bancorp"), in
connection with the solicitation by their respective Boards of Directors of
proxies to be used at annual meetings of their shareholders.
At the annual meetings of CU Bancorp (the "CU Meeting") and Home Bancorp
(the "Home Meeting"), the shareholders of each company will be asked to consider
and act upon, among other things, a proposal to approve the principal terms of
the Agreement and Plan of Reorganization by and among CU Bancorp, California
United Bank, National Association, a national banking association and a wholly
owned subsidiary of CU Bancorp ("CU Bank"), Home Bancorp, and Home Bank ("Home
Bank"), a California state chartered bank and a wholly owned subsidiary of Home
Bancorp, dated January 10, 1996, as amended on March 29, 1996 (the "Merger
Agreement"). A copy of the Merger Agreement is included with this Joint Proxy
Statement/Prospectus as Appendix A. The Merger Agreement provides for, among
other things, the merger (the "Merger") of Home Bancorp with and into CU
Bancorp, with CU Bancorp surviving the Merger (the "Surviving Company") and for
the conversion of each outstanding share of Common Stock, no par value, of Home
Bancorp ("Home Stock") into the right to receive 1.409 shares of Common Stock,
without par value, of CU Bancorp ("CU Stock"). Based on the number of fully
diluted shares of CU Stock outstanding as of the record date for the CU Meeting,
the shares of CU Stock to be issued to Home Bancorp shareholders pursuant to the
Merger Agreement will represent approximately 52% of the fully diluted shares of
CU Stock outstanding following the Merger.
At each of the CU Meeting and Home Meeting, shareholders will also be
asked to elect certain persons to their respective Boards of Directors. If the
Merger is consummated, however, the number of Directors of CU Bancorp will be
increased to ten and the Board of Directors will appoint five current members of
the Home Bancorp Board of Directors to the Board of Directors of the Surviving
Company. At such time, the Board of CU Bancorp will be comprised of five (5)
members from each of the current CU Bancorp Board of Directors and current Home
Bancorp Board of Directors. For a description of these and other actions to be
taken at the annual meetings, see "INFORMATION CONCERNING CU MEETING ONLY" and
"INFORMATION CONCERNING HOME BANCORP MEETING ONLY."
This Joint Proxy Statement/Prospectus is first being mailed to the
shareholders of CU Bancorp and Home Bancorp on or about June 10, 1996.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
CU Bancorp under the Securities Act of 1933, as amended (the "Securities Act"),
for the public offering of the shares of CU Stock to be issued in the Merger.
See "DESCRIPTION OF CU BANCORP CAPITAL STOCK -- CU Stock." This Joint Proxy
Statement/Prospectus does not cover any resales of such securities, and no
person is authorized to make any use of this Joint 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
JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JUNE 10, 1996
<PAGE> 20
AVAILABLE INFORMATION
Each of CU Bancorp and Home Bancorp is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (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 each of CU Bancorp and
Home 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.
CU Bancorp has filed with the Commission a Registration Statement (No.
333-02777) under the Securities Act relating to the shares of CU Stock to be
issued in the Merger (the "Registration Statement"). This Joint 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 CU
Bancorp contained in the Joint Proxy Statement/Prospectus has been furnished by
CU Bancorp, and all information concerning Home Bancorp has been furnished by
Home Bancorp.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Statements contained in this Joint Proxy Statement/Prospectus or in any
document incorporated by reference in this Joint Proxy Statement/Prospectus
relating to the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
The following documents filed with the Commission are incorporated herein
by reference: (i) CU Bancorp's Annual Report on Form 10-K and Form 10-K/A for
the year ended December 31, 1995; (ii) CU Bancorp's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996; (iii) Home Bancorp's Annual Report on
Form 10-K and Form 10-K/A for the year ended December 31, 1995; and (iv) Home
Bancorp's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. CU
BANCORP'S ANNUAL REPORT ON FORM 10-K AND FORM 10-K/A FOR THE YEAR ENDED DECEMBER
31, 1995 AND HOME BANCORP'S ANNUAL REPORT ON FORM 10-K FORM 10-K/A FOR THE YEAR
ENDED DECEMBER 31, 1995 ARE ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS
APPENDIX B AND C, RESPECTIVELY. CU BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED MARCH 31, 1996 AND HOME BANCORP'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 1996 ARE ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDIX I AND J, RESPECTIVELY.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT 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 CU BANCORP OR HOME BANCORP. THIS JOINT 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 JOINT
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 CU BANCORP OR HOME BANCORP SINCE THE DATE HEREOF OR
THAT THE INFORMATION IN THIS JOINT
<PAGE> 21
PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
<PAGE> 22
SUMMARY
The following is a summary of certain information included elsewhere in
this Joint Proxy Statement/Prospectus and is qualified in its entirety by
reference to that information. Shareholders are urged to review carefully the
entire Joint Proxy Statement/Prospectus (including the Appendices and the
documents incorporated by reference).
THE MEETINGS
CU Bancorp. The CU Meeting will be held at 8:30 a.m., California time, on
July 18, 1996 in the Renaissance Ballroom, at the Los Angeles Renaissance Hotel,
located at 9620 Airport Boulevard, Los Angeles, California 90045. CU Bancorp's
shareholders will consider and vote on (i) a proposal to approve the principal
terms of the Merger Agreement, (ii) a proposal to amend the Bylaws of CU Bancorp
to decrease the authorized number of directors to not less than six and not more
than eleven, (iii) a proposal to elect six persons to the CU Bancorp Board of
Directors (the "CU Board"), (iv) a proposal to adopt the CU Bancorp 1996
Employee Stock Option Plan (the "1996 Option Plan"), (v) a proposal to ratify
the appointment of Arthur Andersen LLP ("Arthur Andersen") as CU Bancorp's
independent accountants for the fiscal year ending December 31, 1996, (vi) a
proposal to amend the CU Bancorp Bylaws upon the Effective Time to increase the
authorized number of directors to not less than seven and not more than
thirteen, (vii) a proposal to adopt the CU Bancorp Conversion Stock Option Plan
(the "Conversion Plan"), (viii) a proposal to amend the 1996 Option Plan to
increase the number of shares available thereunder, effective immediately
following the Effective Time, (ix) a proposal to adopt the CU Bancorp 1996
Restricted Stock Plan (the "1996 Restricted Stock Plan"), (x) a proposal to
amend the 1994 Non-Employee Director Stock Option Plan (the "1994 Plan")
effective immediately following the Effective Time, and (xi) such other business
as may properly come before such meeting. The close of business on June 6, 1996
has been set as the record date (the "CU Record Date") for determining which
shareholders are entitled to receive notice of and to vote at the CU Meeting. On
the CU Record Date, there were 5,296,583 shares of CU Stock outstanding, held of
record by approximately 423 shareholders. See "THE CU MEETING."
Home Bancorp. The Home Meeting will be held at 10:00 a.m., California
time, on July 17, 1996 in the Grand Ballroom, at the Long Beach Airport Marriott
Hotel, located at 4700 Airport Plaza Drive, Long Beach, California 90815. Home
Bancorp's shareholders will consider and vote on (i) a proposal to approve the
principal terms of the Merger Agreement, (ii) a proposal to elect nine persons
to the Home Bancorp Board of Directors (the "Home Board"), (iii) a proposal to
ratify the appointment of Arthur Andersen as the independent accountants for the
fiscal year ending December 31, 1996 and (iv) such other business as may
properly come before such meeting. The close of business on June 7, 1996 has
been set as the record date (the "Home Record Date") for determining which
shareholders are entitled to receive notice of and to vote at the Home Meeting.
On the Home Record Date, there were 4,217,752 shares of Home Stock outstanding,
held of record by approximately 1,051 shareholders. See "THE HOME MEETING."
THE PARTIES
CU Bancorp. CU 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 (the "Bank Holding Company Act"). As of March 31, 1996, it
had total assets of $383.7 million. CU Bancorp's sole subsidiary is CU Bank
which provides CU Bancorp's principal source of income through dividends paid by
CU Bank. CU Bancorp, through its banking subsidiary, provides banking and
financial services throughout the greater Los Angeles and Orange County
metropolitan area. See "CU BANCORP."
1
<PAGE> 23
The principal executive office of CU Bancorp is located at 16030 Ventura
Boulevard, Encino, California 91436, telephone number (818) 907-9122. On January
12, 1996, CU Bancorp completed the acquisition of Corporate Bank, a California
State chartered bank located in Orange County, through the merger of Corporate
Bank into CU Bank. At the date of the merger of Corporate Bank into CU Bank,
Corporate Bank had approximately $70 million in assets.
California United Bank, National Association. CU Bank is a national
banking association founded in 1982. As of March 31, 1996, it had total loans of
$227.4 million, total deposits of $334.3 million and total assets of $383.7
million. CU Bank provides a wide range of commercial banking services to
individuals and business concerns through its seven branch offices in the
greater Los Angeles and Orange County metropolitan area.
The principal executive office of CU Bank is located at 16030 Ventura
Boulevard, Encino, California 91436, telephone number (818) 907-9122.
Home Interstate Bancorp. Home Bancorp is a California corporation
incorporated in 1979 and is registered as a bank holding company under the Bank
Holding Company Act. As of March 31, 1996, it had total assets of $433.4
million. Home Bancorp's sole subsidiary is Home Bank which provides Home
Bancorp's principal source of income through dividends paid by Home Bank. Home
Bancorp, through its banking subsidiary, provides banking and financial services
throughout Southern Los Angeles County and certain portions of Orange County.
The principal executive office of Home Bancorp is located at 2633 Cherry
Avenue, Signal Hill, California 90806, telephone number (310) 988-9600.
Home Bank. Home Bank is a California state chartered bank founded in 1950.
As of March 31, 1996, it had total loans of $215.9 million, total deposits of
$379.5 million and total assets of $432.5 million. Home Bank provides a wide
range of financial services through its fifteen branches in Southern Los Angeles
County and certain portions of Orange County.
The principal executive office of Home Bank is located at 2633 Cherry
Avenue, Signal Hill, California 90806, telephone number (310) 988-9600.
THE MERGER
General. Pursuant to the terms of the Merger Agreement, Home Bancorp will
be merged with and into CU Bancorp (the "Merger"), with CU Bancorp surviving the
Merger (the "Surviving Company"). The parties have agreed that the Surviving
Company will retain the name "CU Bancorp." Simultaneously with the Merger and as
part of the same transaction, CU Bank will be merged with and into Home Bank
(the "Bank Merger"), with Home Bank surviving the Bank Merger (the "Surviving
Bank") under the name "California United Bank."
Pursuant to the terms of the Merger Agreement, at the effective time of
the Merger (the "Effective Time"), each share of Home Stock issued and
outstanding immediately prior to the consummation of the Merger (other than
shares as to which statutory dissenters' rights are perfected) will
automatically, without any action on the part of the holder thereof, be canceled
and converted into the right to receive 1.409 shares of CU Stock (the
"Conversion Ratio"). Each share of CU Stock issued and outstanding immediately
prior to the consummation of the Merger shall remain outstanding as a share of
CU Stock. No fractional shares of CU Stock will be issued in the Merger, but
cash will be paid to holders of Home Stock in lieu thereof.
2
<PAGE> 24
Based on the number of the fully diluted shares of CU Stock outstanding as of
the CU Record Date, the shares of CU Stock to be issued to the Home Bancorp
shareholders pursuant to the Merger Agreement will represent approximately 52%
of the fully diluted shares of CU Stock following the Merger.
Background and Reasons for the Merger and Management's Recommendations.
The Boards of Directors of CU Bancorp and Home Bancorp began to consider the
possibility of a business combination of their respective institutions during
the third quarter of 1995. After various discussions and negotiations between
certain of their directors and officers and presentations by its financial
advisor, Home Bancorp accepted a nonbinding expression of interest letter of CU
Bancorp on November 15, 1995 to effect the Merger. Following the acceptance of
the expression of interest, each party conducted a due diligence examination of
the other. Upon completion of such due diligence examination and after certain
additional discussions and negotiations, each of the CU Board and Home Board
held a meeting to discuss and evaluate the proposed transaction. Following the
approval of the Merger Agreement and the transactions contemplated thereby by
each of the CU Board and Home Board, CU Bancorp, CU Bank, Home Bancorp and Home
Bank entered into the Merger Agreement on January 10, 1996. However, after the
execution of the Merger Agreement, the parties had discussions with various bank
regulatory agencies and, based on such discussions and a further assessment of
the relative costs and benefits of a state bank versus a national bank, the
parties determined that it was in the best interests of the Surviving Company to
operate a state bank. Therefore, the parties executed Amendment No. 1 to the
Agreement and Plan of Reorganization (the "Amendment") effective March 29, 1996.
The Amendment modifies the structure of the Bank Merger to provide for a merger
of CU Bank, a national bank, with and into Home Bank, a state bank.
Each of the CU Board and Home Board believes the Merger to be in the best
interests of their respective institutions, shareholders and banking customers.
Each Board expects the Surviving Company to be stronger in terms of management,
growth opportunities and profitability than is either institution at present.
The CU Board and Home Board believe that the combination of CU Bank's
commercial loan generation capability and Home Bank's substantial retail deposit
base will have a positive impact on the operations of the Surviving Company.
Following the Merger, the Surviving Bank will be able to fund its commercial
loans utilizing the lower cost retail deposits of Home Bank. Prior to the
Merger, CU Bank elected to fund excess loan demand with more expensive deposit
sources. The Surviving Company will also have the advantage of consolidation and
centralization of certain management and operations functions and certain
resulting economies of scale. Furthermore, it is believed that the Surviving
Bank, as a stronger independent financial institution, will be better able to
compete with major banks in the communities now served by CU Bank and Home Bank
and will benefit such communities by providing increased banking services.
ACCORDINGLY, THE BOARDS OF DIRECTORS OF CU BANCORP AND HOME BANCORP HAVE
APPROVED THE MERGER AND THE TRANSACTIONS CONTEMPLATED IN CONNECTION THEREWITH
AND RECOMMEND APPROVAL OF THE MERGER BY THE SHAREHOLDERS OF CU BANCORP AND HOME
BANCORP, RESPECTIVELY. See "THE MERGER -- Background of the Merger" and
"Recommendation of the Boards of Directors and Reasons for the Merger."
CU Bancorp Fairness Opinion. CU Bancorp has received a written fairness
opinion from the investment banking firm of Van Kasper & Company ("Van Kasper")
that the Merger is fair, from a financial point of view, to the shareholders of
CU Bancorp as of June 3, 1996. The Van Kasper fairness opinion is attached to
this Joint Proxy Statement/Prospectus as Appendix G. See "THE MERGER -- Opinion
of CU Bancorp Financial Advisor."
3
<PAGE> 25
Home Bancorp Fairness Opinion. Home Bancorp has received a written opinion
from the investment banking firm of Piper Jaffray Inc. ("Piper") that the
consideration to be received in Merger is fair, from a financial point of view,
to the shareholders of Home Bancorp as of June 4, 1996. The Piper fairness
opinion is attached hereto as Appendix H. See "THE MERGER -- Opinion of Home
Bancorp Financial Advisor."
Conditions to the Merger; Termination. The obligation of each of the
parties to the Merger Agreement to consummate the Merger is subject to the
satisfaction or waiver on or before the Effective Time of, among other things,
the following conditions: (i) the approval by the shareholders of CU Bancorp and
Home Bancorp of the principal terms of the Merger Agreement; (ii) the absence of
any judgment, decree, injunction, order or proceeding which prohibits or
restricts the effectuation of, or threatens to invalidate, the Merger; (iii) the
receipt of all required governmental approvals and consents and satisfaction of
all other statutory or regulatory requirements; (iv) the written confirmation
from Arthur Andersen that the Merger and the Bank Merger will qualify for
pooling of interests accounting treatment; and (v) the performance of covenants,
the accuracy of representations and warranties and the receipt of various legal
opinions, officers' certificates and other documents, as provided in the Merger
Agreement. See "THE MERGER AGREEMENT."
The Merger Agreement may be terminated at any time prior to the Effective
Time by the mutual consent of CU Bancorp and Home Bancorp, or, among other
things, by either party (i) if any approval of shareholders of CU Bancorp or
Home Bancorp required for the Merger is not obtained at the applicable meeting,
(ii) upon the expiration of thirty (30) days after any regulatory authority or
governmental authority denies or refuses to grant any approval required to be
obtained in order to consummate the transactions contemplated by the Merger
Agreement unless within 30 days of such denial, all parties agree to submit a
new application to the regulatory or governmental authority which refused to
grant such approval, or (iii) if the Merger is not consummated by September 30,
1996.
Regulatory Approvals. Applications for prior approval of the Merger and
the Bank Merger were filed with the Federal Reserve Bank of San Francisco (the
"FRB") and the Superintendent of Banks of the State of California (the
"Superintendent") on or about June 3, 1996. 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."
Agreements with Certain Shareholders. Home Bancorp has entered into a
Shareholder's Agreement with certain shareholders of CU Bancorp, each of whom is
also a director of CU Bancorp (the "CU Directors") and CU Bancorp has entered
into a Shareholder's Agreement with certain shareholders of Home Bancorp, each
of whom is also a director of Home Bancorp (the "Home Directors"), pursuant to
which the CU Directors and Home Directors have agreed generally (i) to vote all
shares of CU Stock and Home Stock which they own or hold in trust in favor of
the approval of the Merger Agreement, thereby increasing the likelihood that the
Merger Agreement will be approved by the shareholders of both companies and (ii)
not to sell or otherwise transfer any of their shares of CU Stock or Home Stock
prior to the Effective Time. See "THE MERGER -- Agreements with Certain
Shareholders."
Current directors of Home Bancorp who are not expected to serve as
directors of the Surviving Company have entered into an agreement (the
"Affiliate Agreement") with CU Bancorp restricting such persons' ability to sell
shares of CU Stock which such persons may acquire in connection with the Merger
except in accordance with such Affiliate Agreement. See "THE MERGER --
Agreements with Certain Shareholders."
4
<PAGE> 26
Interests of Certain Persons in the Merger. In connection with the Merger,
it is anticipated that Home Bank will enter into agreements with certain senior
officers of Home Bancorp and Home Bank with regard to retention of such officers
(the "Retention Agreements"). Upon consummation of the Merger and upon his
execution of a Retention Agreement, Mr. James P. Staes, President and Chief
Executive Officer of Home Bank, will become entitled to receive two years (the
"Payment Term") of salary (or $402,132) payable in 48 substantially equal
installments over a two-year period subject to a covenant not to compete for a
period of three years and an agreement to provide certain consulting services
for a period of one year following the Payment Term. Additionally, upon
consummation of the Merger and upon the execution of the Retention Agreements,
ten other key employees of Home Bancorp or Home Bank will become entitled to
receive the equivalent of one year's salary, payable in 24 substantially equal
installments over a one-year period. Included among those ten key employees are
Mr. Bill Neal, Executive Vice President and Chief Operating Officer of Home
Bank, and Mr. Keith W. Barnes, Senior Vice President and Chief Financial Officer
of Home Bancorp, who will receive $119,474 and $92,926, respectively, under
their Retention Agreement. Total payments to be made by the Surviving Company
under the Retention Agreements are approximately $1.2 million. Payments under
the Retention Agreements are separate and apart from and in addition to
compensation the recipient may receive from CU Bancorp or its subsidiaries as an
employee.
See "THE MERGER -- Interests of Certain Persons in the Merger."
At the Effective Time, the Board of Directors of the Surviving Company
will be comprised of 10 directors, five (5) members from each of the CU Board
and the Home Board. The five members from the CU Board are expected to be
Kenneth L. Bernstein, Stephen G. Carpenter, Paul W. Glass, Ronald S. Parker and
David I. Rainer. The five members from the Home Board are expected to be Donald
A. Buschenfield, J. Richard Denham, Randall G. Elston, Donald G. Martin and
James P. Staes.
Stephen G. Carpenter, the current Chairman and Chief Executive Officer and
David I. Rainer, the current President and Chief Operating Officer of CU
Bancorp, will become the Chairman and Chief Executive Officer, and President and
Chief Operating Officer, respectively, of the Surviving Company and Surviving
Bank. James P. Staes, the current President of Home Bancorp, will become the
Vice Chairman of the Surviving Company and Surviving Bank.
The former officers and employees of Home Bancorp and CU Bank who become
officers or employees of the Surviving Company or the Surviving Bank will be
entitled to participate in all employee benefits and benefit programs of the
Surviving Company or the Surviving Bank, as the case may be, in accordance with
the terms of such plans or programs.
Home Bancorp has arranged to purchase directors' and officers' insurance,
which insurance shall cover persons serving as directors and officers of Home
Bancorp prior to the Effective Time for a period of three years from the
Effective Time. See "THE MERGER -- Interests of Certain Persons in the Merger."
As of the Home Record Date, the directors and executive officers of Home
Bancorp beneficially owned 763,478 shares of Home Stock (not including shares
such persons could acquire through the exercise of options), constituting
approximately 18.10% of the outstanding shares of Home Stock as of such date.
The affirmative vote of an additional 31.91% of the outstanding shares of Home
Stock entitled to vote at the Home Meeting will be required in order to approve
the Merger Agreement. In addition, directors and executive officers of Home
Bancorp held as of such date options to purchase 46,022 shares of Home Stock,
which, upon the consummation of the Merger, will be assumed by and deemed to be
options granted by the Surviving Company, subject to approval of the Conversion
Plan by CU Bancorp shareholders at the CU Meeting. See "THE MERGER AGREEMENT --
Treatment of Options." If exercised prior to the Merger, the shares of Home
Stock acquired will be converted into the right to receive CU Stock at the
5
<PAGE> 27
Effective Time in the same manner as will the shares of Home Stock held by all
other Home Bancorp shareholders.
As of the CU Record Date, the directors and executive officers of CU
Bancorp held 237,931 shares of CU Stock (not including shares such persons
could acquire through the exercise of options), constituting approximately
4.49% of the outstanding shares of CU Stock as of such date (adjusted for
additional shares issued in connection with Corporate Bank acquisition, as if
it took place on December 31, 1995. In addition, directors and executive
officers of CU Bancorp held as of such date options to purchase 527,740 shares
of CU Stock, of which 306,020 options are exercisable within 60 days of the CU
Record Date. See "THE MERGER - Interests of Certain Persons in the Merger."
Montgomery Securities ("Montgomery") has provided certain investment
advisory services to CU Bancorp and Home Bancorp in connection with the Merger
pursuant to a written agreement with such parties. As compensation for such
services, Montgomery received $200,000 upon the execution of the Merger
Agreement. Montgomery will also receive an additional fee equal to 1.0% of the
total combined market capitalization of CU Bancorp and Home Bancorp based on
each such company's trading price per share for the ten trading days prior to
the close of the Merger and the number of shares outstanding for each company as
of the Merger, up to a maximum of $1,100,000, less the $200,000 paid upon the
execution of the Merger Agreement and less an additional $200,000.
Warrant Agreements. As a condition to entering into the Merger Agreement,
each of CU Bancorp and Home Bancorp required the other to enter into a Warrant
Purchase Agreement (the "CU Warrant Agreement" and "Home Warrant Agreement,"
respectively, and together the "Warrant Agreements"). Each Warrant Agreement
provides for the grant of a warrant to purchase shares of the issuing party's
common stock. CU Bancorp granted to Home Bancorp a warrant to purchase up to
1,492,390 shares of CU Stock (representing approximately 19.9% of the
outstanding shares of CU Stock) at a price equal to $9.834 per share, subject to
adjustment as provided in the Warrant Agreement; Home Bancorp granted to CU
Bancorp a warrant to purchase up to 1,082,224 shares of Home Stock (representing
approximately 19.9% of the outstanding shares of Home Stock) at a price equal to
$12.050 per share, subject to adjustment as provided in the Warrant Agreement.
The warrant prices are equal to an average of the closing sales price for the 20
trading days prior to January 8, 1996. The Merger was announced on January 10,
1996. Each Warrant Agreement provides that the holder of the warrant is entitled
to purchase the warrant shares upon the occurrence of certain events that create
the potential for another party to acquire control of the issuing party. See
"THE WARRANT AGREEMENTS."
The Warrant Agreements could have the effect of discouraging persons who
now or prior to the Effective Time might be interested in acquiring all or a
significant interest in either CU Bancorp or Home Bancorp from considering or
proposing such an acquisition, even if such persons were prepared to propose
greater consideration per share for Home Stock than the consideration per share
represented by the Conversion Ratio or a higher price per share for CU Stock
than the market price. In addition, the Merger Agreement provides that CU
Bancorp and Home Bancorp and their respective subsidiaries will not, directly or
indirectly, solicit or encourage, or take any other action to facilitate, any
inquiries or the making of any proposal which constitutes, or may reasonably be
expected to lead to, any takeover proposal.
Certain Federal Income Tax Consequences. An opinion has been obtained from
Arthur Andersen limited to certain material federal tax consequences of the
Merger. Such an opinion is a condition to consummation of the Merger. Assuming
the opinion is not withdrawn or changed before the Effective Time, and based
upon the continuing accuracy of certain assumptions and representations of
parties to the Merger Agreement, it is the opinion of Arthur Andersen that the
Merger will constitute a reorganization under Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"), if carried out in the
6
<PAGE> 28
manner set forth in the Merger Agreement and that (1) a shareholder whose Home
Stock is exchanged solely for shares of CU Stock 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 lieu of fractional
shares; (2) the tax basis of the CU Stock received by Home Bancorp shareholders
will be the same as the basis of the Home Stock surrendered in exchange
therefor, decreased by the amount of basis allocated to the fractional shares
that are hypothetically received by the shareholder and redeemed for cash, and
increased by any gain recognized on the exchange (not including any gain
recognized for the receipt of cash in lieu of fractional shares); (3) the
holding period of the CU Stock received by the Home Bancorp shareholders will
include the period during which the Home Stock surrendered in exchange therefor
was held, provided that the Home Stock is held as a capital asset in the hands
of the Home Bancorp shareholders at the Effective Time; and (4) the payment of
cash in lieu of fractional share interests of CU Stock will be treated as if
each fractional share was distributed as part of the exchange and then redeemed
by CU Bancorp. Pursuant to Section 302(a) of the Code, these cash payments will
be treated as having been received as distributions in full payment in exchange
for the CU Stock. Any gain or loss recognized upon such exchange (as determined
under Section 1001 and subject to the limitations of Section 267) will be
capital gain or loss provided the fractional share would constitute a capital
asset in the hands of the exchanging shareholder. See "THE MERGER -- Certain
Federal Income Tax Consequences."
Accounting Treatment of the Merger. The Merger will be treated as a
pooling of interests for accounting and financial reporting purposes. Prior to
the Effective Time and as a condition precedent to the Closing, Arthur Andersen
will confirm in writing the accounting and financial reporting treatment of the
Merger as a pooling of interest.
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time, CU Bancorp will send to
Home Bancorp shareholders of record at the Effective Time a letter of
transmittal advising the shareholders of Home Bancorp of the procedure for
surrendering certificates representing shares of Home Stock in exchange for
certificates representing shares of CU Stock and cash in lieu of fractional
shares of CU Stock. SHAREHOLDERS SHOULD NOT SURRENDER THEIR CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL. All shares of CU Stock issued in the
Merger will be deemed issued as of the Effective Time.
The holder of a certificate representing shares of Home Stock will 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 CU Stock and cash in lieu of fractional shares of CU Stock or, in the
event such holder has dissented from the Merger, to surrender such certificates
in connection with a request to receive the fair market value of the shares
represented by such certificates. See "DISSENTING SHAREHOLDERS' RIGHTS." Upon
surrender of any certificate representing shares of Home Stock to be exchanged
for CU Stock, the holder thereof shall be entitled to receive (i) a certificate
representing the shares of CU Stock 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 CU
Stock as of a record date after the Effective Time but prior to surrender. See
"THE MERGER -- Exchange Procedures."
DISSENTERS' RIGHTS
A holder of CU Stock who, not later than the date of the CU Meeting,
delivers to CU Bancorp a written demand for dissenters' rights, and who votes
against the approval of the Merger Agreement and who
7
<PAGE> 29
complies with all other applicable requirements of Chapter 13 ("Chapter 13") of
the California General Corporation Law (the "California Law"), will have the
right to receive payment in cash of the "fair market value" of such holder's
shares of CU Stock; although no holder of CU Stock will be entitled to
dissenters' rights unless holders of at least 5% of the outstanding shares of CU
Stock have perfected their dissenters' rights in accordance with Chapter 13 of
the California Law. The procedure for perfecting dissenters' rights is
summarized under the caption "DISSENTING SHAREHOLDERS' RIGHTS -- CU Bancorp" and
the pertinent provisions of Chapter 13 of the California Law are included as
Appendix D to this Joint Proxy Statement/Prospectus.
A holder of Home Stock who, not later than thirty days after the date on
which Home Bancorp delivers the notice of approval of the Merger by the Home
Bancorp shareholders, delivers to Home Bancorp a written demand for dissenters'
rights, who does not vote in favor of the approval of the Merger Agreement and
who complies with all other applicable requirements of Chapter 13 of the
California Law, will have the right to receive payment in cash of the "fair
market value" of such holder's shares of Home Stock. The procedure for
perfecting dissenters' rights is summarized under the caption "DISSENTING
SHAREHOLDERS' RIGHTS -- Home Bancorp" and the pertinent provisions of Chapter 13
of the California Law are included as Appendix D to this Joint Proxy
Statement/Prospectus.
HISTORICAL AND PRO FORMA PER SHARE DATA FOR CU BANCORP AND HOME BANCORP
The following summary of comparative per share data sets forth certain
historical information for CU Bancorp and Home Bancorp, certain pro forma
information for CU Bancorp after giving effect to the merger of Corporate Bank
("Corporate Bank"), a California banking corporation, into CU Bank (as a
purchase transaction for accounting purposes), certain pro forma information for
CU Bancorp after giving effect to the Merger as a pooling of interests
transaction for accounting purposes, assuming it had been in effect at the
beginning of each period presented, and equivalent pro forma information for
Home Bancorp based on the pro forma CU 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 CU Bancorp and Home Bancorp, which are
included or incorporated by reference herein. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
<TABLE>
<CAPTION>
------------------------- ------------------------------------------
EQUIVALENT OF
CU HOME CU ONE SHARE OF
PER COMMON SHARE BANCORP BANCORP BANCORP (1) HOME STOCK (2)
- ---------------- ------------ ------------ ------------------ -----------------------
<S> <C> <C> <C> <C>
Net Income:
Quarter ended March 31, 1996 (unaudited) $ 0.10 $ 0.20 $ 0.12 $ 0.17
1995................................................ 0.60 0.90 0.53 0.75
1994................................................ 0.56 0.80 0.46 0.65
1993................................................ 0.47 0.87 0.35 0.49
Cash Dividends Declared:
Quarter ended March 31, 1996 (unaudited) $ 0.02 $ 0.09 $ 0.05 $ 0.07
1995................................................ 0.08 0.41 0.18 0.25
1994................................................ --- 0.30 0.10 0.14
1993................................................ --- 0.23 0.08 0.11
Book Value:
March 31, 1996 (unaudited) $ 6.96 $ 12.28 $ 7.80 $ 10.99
December 31, 1995................................... 7.12 12.28 7.72 10.88
- ------------------
</TABLE>
8
<PAGE> 30
(1) The pro forma CU Bancorp amounts are based on combined data for CU Bancorp
and Home Bancorp for the periods presented and have been prepared giving
effect, at the beginning of the respective periods, to the issuance of
approximately 5,950,000 shares (including common stock equivalents) of CU
Stock based on the Conversion Ratio of 1.409 in the Merger; and the
issuance of 649,000 shares of CU Stock in connection with the acquisition
of Corporate Bank.
(2) Represents the pro forma equivalent of one share of Home Stock calculated
by multiplying pro forma CU Bancorp data by the assumed Conversion Ratio
of 1.409 shares of CU Stock for each share of Home Stock.
* The pro forma and historical CU Bancorp amounts include Corporate Bank, as
if that merger was completed on January 1, 1993.
COMPARATIVE STOCK PRICE INFORMATION
CU Stock is traded on the Nasdaq National Market ("NASDAQ"). Home Stock is
traded in the over-the-counter market, but is not included for quotation on the
NASDAQ, nor is it listed on any exchange. Trading in Home Stock has been
infrequent, and such trades cannot be characterized as constituting an active
trading market. Home Bancorp is aware of approximately six securities dealers
who make a market in Home Stock. The following table sets forth, for the periods
indicated, the high and low closing sales prices of CU Stock as reported on
NASDAQ and the high and low bid prices Home Stock, as reported by Crowell Weedon
& Co., the principal market maker for Home Stock, for the periods indicated.
<TABLE>
<CAPTION>
PRICE PER SHARE
--------------------------------------------------------------------------
CU STOCK HOME STOCK
---------------------------------- ------------------------------------
HIGH LOW HIGH LOW
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1994
First Quarter............................ $ 7.50 $ 6.50 $ 10.25 $ 9.50
Second Quarter........................... 7.00 5.75 10.25 9.50
Third Quarter............................ 7.50 6.00 10.50 9.88
Fourth Quarter........................... 8.00 6.75 10.75 9.63
1995
First Quarter............................ 7.50 7.13 9.63 9.63
Second Quarter........................... 7.13 6.86 9.75 9.63
Third Quarter............................ 8.75 6.94 12.00 9.75
Fourth Quarter........................... 10.25 8.38 12.25 11.25
1996
First Quarter............................ 11.50 9.27 13.38 13.63
Second Quarter (through June 5, 1996).... 11.25 10.00 14.63 13.75
</TABLE>
The following table sets forth the high and low closing sale prices
of CU Stock as reported on the NASDAQ and the bid and ask prices of Home Stock
as reported by Crowell Weedon & Co. on January 9, 1996, the last trading day
before the first public announcement of the Merger, and the equivalent per share
prices for Home Stock based on the CU Stock price as of that date, assuming a
Conversion Ratio of 1.409 shares of CU Stock for each share of Home Stock:
<TABLE>
<CAPTION>
CU STOCK HOME STOCK
-------------------------- ---------------------------------------------------
HISTORICAL HISTORICAL EQUIVALENT
-------------------------- ------------------------ ------------------------
High Low Ask Bid Ask Bid
------------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
January 9, 1996........................... $10.13 $9.63 $13.50 $12.50 $19.02 $17.61
</TABLE>
9
<PAGE> 31
CERTAIN CU BANCORP FINANCIAL DATA
The following table sets forth certain selected financial data for CU
Bancorp for each year in the five-year period ended December 31, 1995, and for
the quarter ended March 31, 1996, and is qualified in its entirety by the
financial information incorporated by reference herein and attached hereto. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
CU BANCORP
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------------
1996 1995 1994 1993
-------------- -------------- --------------- ---------------
(unaudited) (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
EARNINGS SUMMARY:
Net interest income.............................. $ 4,817 $ 15,536 $ 13,881 $ 14,431
Other operating income........................... 632 2,065 5,408 26,423
Provision for loan losses........................ 0 0 0 450
Other operating expenses......................... 4,449 12,554 14,735 36,883
-------------- -------------- --------------- ---------------
Income (loss) before income taxes................ 1,000 5,047 4,554 3,521
Income taxes (benefit)........................... 433 2,153 1,980 1,423
-------------- -------------- --------------- ---------------
Net income (loss)................................ $ 567 $ 2,894 $ 2,574 $ 2,098
============== ============== =============== ===============
PER COMMON SHARE:
Fully diluted income (loss) per common
and equivalent share............................. $ .10 $ .60 $ 0.56 $ 0.47
Dividends declared............................... .03 .08 0 0
BALANCE SHEET SUMMARY:
Total assets..................................... 383,671 325,309 304,154 279,206
Total earning assets............................. 347,089 289,276 261,328 251,559
Total deposits................................... 333,995 284,510 264,181 238,928
Shareholders' equity............................. 38,180 33,006 29,744 26,990
RATIOS:
Net interest margin.............................. 5.54 % 5.68 % 5.99 % 5.85 %
Return (loss) on average assets.................. 0.64 0.97 0.97 0.69
Return on average shareholders equity............ 6.37 9.38 9.12 8.12
Common dividend payout ratio..................... 30.02 13.33 -- --
Regulatory risk-based capital ratio.............. 13.60 16.19 15.40 16.71
Regulatory leverage capital ratio................ 9.41 10.52 10.44 9.16
Allowance for loan losses to:
Period end total loans..................... 3.49 3.77 4.25 4.63
Nonperforming loans........................ 243 677.00 20,631.00 473.00
Nonperforming assets....................... 215 677.00 20,631.00 283.00
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1992 1991
--------------- ---------------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
EARNINGS SUMMARY:
Net interest income.............................. $ 20,625 $ 25,681
Other operating income........................... 21,499 10,537
Provision for loan losses........................ 17,090 14,267
Other operating expenses......................... 37,493 27,843
--------------- ---------------
Income (loss) before income taxes................ (12,459) (5,892)
Income taxes (benefit)........................... (4,269) (2,255)
--------------- ---------------
Net income (loss)................................ $ (8,190) $ (3,637)
=============== ===============
PER COMMON SHARE:
Fully diluted income (loss) per common
and equivalent share............................. $ (1.90) $ (0.83)
Dividends declared............................... 0 0.15
BALANCE SHEET SUMMARY:
Total assets..................................... 353,923 516,762
Total earning assets............................. 281,723 429,480
Total deposits................................... 318,574 473,125
Shareholders' equity............................. 24,632 32,598
RATIOS:
Net interest margin.............................. 6.07 % 6.99 %
Return (loss) on average assets.................. (1.89) (0.76)
Return on average shareholders equity............ (26.06) (10.27)
Common dividend payout ratio..................... -- N/A
Regulatory risk-based capital ratio.............. 12.87 12.31
Regulatory leverage capital ratio................ 6.12 6.91
Allowance for loan losses to:
Period end total loans..................... 6.28 4.33
Nonperforming loans........................ 95.00 75.00
Nonperforming assets....................... 95.00 59.00
</TABLE>
10
<PAGE> 32
RECENT CU BANCORP DEVELOPMENTS
On January 12, 1996, CU Bancorp completed the acquisition of Corporate
Bank, a California banking corporation based in Santa Ana, California with $70
million in assets, through the merger of Corporate Bank with and into CU Bank,
with CU Bank as the surviving bank. The consideration paid by CU Bancorp
consisted of CU Stock and cash in a 75/25 ratio of CU Stock to cash. The
purchase price was equal to Corporate Bank's shareholders' equity, determined
pursuant to audited financial statements prepared in accordance with generally
accepted accounting principles ("GAAP"), consistently applied, accompanied by
the unqualified opinion of Corporate Bank's independent accountants, Arthur
Andersen (the "Closing Audit") as of November 30, 1995 minus an amount equal to
a pro rata portion of Corporate Bank's net loss for the period from January 1,
1995 to the date of the Closing Audit applied to the period between the date of
the Closing Audit to the final date of calculation of the purchase price; plus
$200,000 (with regard to a bond claim filed by Corporate Bank which was pending
at the time of the completion of the acquisition). All financial analysis for
purposes of determining the purchase price was made by the parties based upon
the Closing Audit. For purposes of determining the exchange ratio, the CU Stock
to be issued was valued at $8.00 per share. The final purchase price was
$1,730,322 plus 648,877 shares of CU Stock.
The portfolio inherited by CU Bank in the merger with Corporate Bank
reflected the prior entity's business of engaging in commercial and retail
banking (with emphasis on real estate related transactions), including
substantially all of the business operations customarily conducted by
independent commercial banks in California. Corporate Bank's banking services
included the acceptance of checking and savings deposits, and the making of
commercial, real estate, personal, home improvement and automobile loans and
leases and other installment loans and term extensions of credit. Corporate Bank
also offered travelers' checks, notary public and other customary bank services
to its customers. Corporate Bank was a credit card issuing bank, offering
MasterCard and Visa to both individuals and businesses.
At the time of the merger of Corporate Bank into CU Bank, Corporate Bank
was operating under two cease and desist orders 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
Bank as of August 9, 1993. The second order required Corporate Bank to take
certain actions with regard to a prior employee. The cease and desist orders
were terminated by the FDIC in connection with the merger of Corporate Bank into
CU Bank.
CERTAIN HOME BANCORP FINANCIAL DATA
The following table sets forth certain selected financial data for Home
Bancorp for each year in the five-year period ended December 31, 1995, and for
the quarter ended March 31, 1996, and is qualified in its entirety by the
financial information incorporated by reference herein and attached hereto. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
11
<PAGE> 33
HOME BANCORP
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------- ------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ---------- ----------- ----------- --------- ---------
(unaudited) (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Net interest income ................. $ 5921 $ 24,496 $ 22,568 $ 20,382 $ 21,797 $ 22,288
Other operating income .............. 1,301 5,213 4,507 7,758 5,636 5,644
Less provisions for loan losses ..... 300 2,100 800 750 6,000 2,150
Less other operating expenses ....... 5,408 22,486 21,787 21,550 20,803 25,646
----------- ----------- ----------- ----------- --------- ---------
Income before income taxes .......... 1,514 5,123 4,488 5,840 630 136
Income taxes (benefit) .............. 664 1,359 1,169 2,215 188 (879)
----------- ----------- ----------- ----------- --------- ---------
Net income .......................... $ 850 $ 3,764 $ 3,319 $ 3,625 $ 442 $ 1,015
=========== =========== =========== =========== ========= =========
PER COMMON SHARE:
Net income per common and
equivalent share (1) ................ $ 0.20 $ 0.90 $ 0.80 $ 0.87 $ 0.10 $ 0.24
Dividends declared .................. 0.09 0.41 0.30 0.23 0.30 0.60
BALANCE SHEET SUMMARY:
Total assets ........................ 433,390 423,792 439,632 391,300 408,974 422,956
Total earning assets ................ 364,340 358,719 378,485 333,230 344,647 354,680
Total deposits ...................... 378,270 369,031 392,269 335,800 361,907 375,123
Shareholders' equity (2) ............ 51,737 51,416 45,654 47,411 43,649 45,156
RATIOS:
Net interest yield (3) .............. 6.63% 6.76% 6.18% 5.98% 6.13% 5.80%
Return on average assets ............ 0.80 0.89 0.77 0.90 0.11 0.23
Return on average shareholders equity 6.60 7.78 7.14 8.04 1.01 2.21
Common dividend payout ratio ........ 42.35 43.97 34.38 23.50
Regulatory risk-based capital ratio . 18.22 18.09 17.30 17.32 14.53 13.51
Regulatory leverage capital ratio ... 11.19 11.05 10.17 10.38 9.21 8.94
Allowance for loans losses to:
Period end total loans ........ 1.49 1.47 1.42 1.79 1.69 1.46
Nonperforming loans ........... 204.20 93.26 42.41 76.12 107.42 78.22
Nonperforming assets(4) ....... 50.35 37.71 31.95 44.44 33.89 27.91
</TABLE>
(1) Net income per share and book value per share were restated to reflect
the effect of a 5% stock dividend issued in 1995, 1994 and 1991.
(2) Shareholders' equity includes $171,000, $580,000, $(2,956,000) and
$989,000 of unrealized gains (losses), net of deferred taxes at March 31,
1996 and December 31, 1995, 1994 and 1993, respectively.
12
<PAGE> 34
(3) Represents net interest income as a percentage of average interest-earning
assets. The net interest yield is not computed on a tax equivalent basis.
(4) Nonperforming assets consist of non-accrual loans, loans past due 90 days
or more, restructured loans, non-accrual securities and real estate owned.
RECENT HOME BANCORP DEVELOPMENTS
In connection with the Merger, the Board of Directors of Home Bank has
determined that it would be in the best interests of Home Bank and its
employees to offer a Voluntary Severance Program (the "Program"), pursuant to
which employees having over 20 years of service with Home Bank as of September
30, 1996 may voluntarily opt to end their employment with Home Bank and, in
return, receive one year's salary and the continuation of the shared cost of
their medical benefits for one year. In accordance with the requirements of the
Merger Agreement, CU Bancorp has provided its written consent to Home Bank
offering the Program to eligible employees.
Fifteen employees of Home Bank qualify to participate in the Program,
which does not include employees at or above the senior vice president level.
The fifteen eligible employees have been given a period of 44 days in which to
exercise their severance option. The period extends from May 30, 1996 to July
12, 1996. If an employee elects to terminate his or her employment pursuant to
the Program, such termination will become effective on July 22, 1996. Employees
who exercise their option may elect to receive their severance pay in a lump
sum or in accordance with their current bi-monthly payment schedule, payable
over the duration of the one-year severance term. In addition, such employees
will have seven days to revoke their decision to exercise the severance option.
Because the time period in which employees may exercise their option has not
yet expired, it cannot be determined how many employees, if any, will do so.
However, if all fifteen eligible employees were to exercise their severance
option, the total payment to be made by Home Bank under the Program would be
approximately $604,862.
13
<PAGE> 35
PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Balance Sheet as of March 31,
1996 and Unaudited Pro Forma Combined Statements of Income for the quarter ended
March 31, 1996 and the years ended December 31, 1993, 1994 and 1995 have been
prepared to reflect the effects of the Merger on the historical results of CU
Bancorp. The Unaudited Pro Forma Combined Balance Sheet has been prepared as if
the Merger occurred on March 31, 1996. The Unaudited Pro Forma Combined
Statements of Income have been prepared as if the Merger occurred on January 1,
1993. The pro forma financial information set forth below is unaudited and not
necessarily indicative of the results that will actually occur in the future.
The pro forma financial statements reflect CU Bancorp's acquisition of
Corporate Bank which was completed on January 12, 1996. The Unaudited Pro Forma
Combined Statements of Income have been prepared as if the Corporate Bank
acquisition occurred on January 1, 1993.
UNAUDITED PRO FORMA COMBINED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Combined March 31, 1996 1995 1994 1993
-------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Period End Balances:
Securities held to maturity.............. $ 113,194 $ 79,867 $ 76,333 $ $97,148
Securities available for sale............ 112,411 131,336 173,831 121,121
Net loans................................ 440,083 437,285 414,800 384,692
Total earning assets..................... 700,288 708,687 693,264 662,949
Total assets............................. 817,061 819,955 813,849 755,687
Total deposits........................... 712,265 714,664 717,635 650,675
Total shareholders' equity............... 89,117 88,385 82,390 82,029
Consolidated Operating Results:
Net interest income...................... $ 10,728 $ 44,382 $ 41,443 $ 40,576
Non-interest income...................... 1,933 7,822 10,624 35,022
Provision for loan losses................ 300 3,069 1,934 2,065
Non-interest expense..................... 9,857 39,776 42,085 66,003
Net income .............................. 1,417 6,087 5,143 3,840
Common Share Data:
Fully diluted income per share........... $ 0.12 $ 0.53 $ 0.46 $ 0.35
Cash dividends per common share.......... 0.04 0.18 0.10 0.08
Book value per share..................... 7.80 7.72 7.36 7.40
Fully diluted shares..................... 11,432 11,456 11,192 11,089
</TABLE>
14
<PAGE> 36
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
CU
BANCORP
& HOME
CU HOME BANCORP
BANCORP BANCORP ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 30,883 $ 43,766 $ 74,649
Federal funds sold 22,000 12,600 34,600
Securities held to maturity 84,560 28,634 113,194
Securities available of sale 4,923 107,488 112,411
Loans, net 227,381 212,702 440,083
Premises and equipment 1,512 14,434 15,946
Other real estate owned 450 4,800 5,250
Goodwill 2,351 4,327 6,678
Other assets 9,611 4,639 14,250
----------- ---------- ---------
TOTAL ASSETS $ 383,671 $ 433,390 $ 817,061
=========== ========== =========
LIABILITIES
Demand deposits $ 119,026 $ 133,049 $ 252,075
Interest bearing deposits 214,969 245,221 460,190
----------- ---------- ---------
TOTAL DEPOSITS 333,995 378,270 712,265
Other Liabilities 11,496 3,383 $ (800)(12) 15,679
----------- ---------- ------
TOTAL LIABILITIES 345,491 381,653 727,944
CAPITAL 38,180 51,737 800 89,117
----------- ---------- ------ ---------
TOTAL LIABILITIES AND
CAPITAL $ 383,671 $ 433,390 $ 0 $ 817,061
=========== ========== ====== =========
</TABLE>
15
<PAGE> 37
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
CU
BANCORP &
HOME
CU HOME BANCORP
BANCORP BANCORP ADJUSTMENTS COMBINED
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Interest and fees on loans and leases $ 5,610 $ 5,659 $ 11,269
Interest on investment securities 1,223 1,938 3,161
Interest on federal funds sold 517 186 703
--------------- ------------- -----------------
TOTAL INTEREST INCOME 7,350 7,783 15,133
Interest on deposits 2,533 1,862 4,395
--------------- ------------- -----------------
Net interest income 4,817 5,921 10,738
Provision for loan loss 0 300 300
--------------- ------------- -----------------
Net revenue from earnings assets 4,817 5,621 10,438
Non interest income 632 1,301 1,933
Non interest expense 4,449 5,408 9,857
--------------- ------------- -----------------
Income before taxes 1,000 1,514 2,514
Taxes on income 433 664 1,097
--------------- ------------- -----------------
NET INCOME $ 567 $ 850 $ $ 1,417
=============== ============= ======== =================
Earnings per share $ 0.12
=================
Weighted average shares outstanding 11,432
=================
</TABLE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
CU
CU BANCORP &
BANCORP CORPORATE
& & HOME
CU CORPORATE CORPORATE HOME BANCORP
BANCORP BANK ADJUSTMENTS COMBINED BANCORP ADJUSTMENTS COMBINED
-------- --------- ----------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest and fees on loans and leases $ 18,693 $ 4,932 $ 23,625 $ 22,643 $ 46,268
Interest on investment securities 3,818 209 4,027 8,389 12,416
Interest on time certificates of deposit 2 28 30 1 31
Interest on federal funds sold 1,893 429 2,322 618 2,940
-------- -------- -------- -------- --------
TOTAL INTEREST INCOME 24,406 5,598 30,004 31,651 61,655
Interest on deposits 8,870 1,248 10,118 7,155 17,273
-------- -------- -------- -------- --------
Net Interest income 15,536 4,350 19,886 24,496 44,382
Provision for loan loss 0 969 969 2,100 3,069
Net revenue from earnings assets 15,536 3,381 18,917 22,396 41,313
Non interest income 2,065 531 2,596 5,226 7,822
Non interest expense 12,554 4,492 $ 231 17,277 22,499 39,776
-------- -------- -------- -------- -------- --------
Income before taxes 5,047 (580) (231)(8) 4,236 5,123 9,359
Taxes on income (loss) 2,153 (240) 1,913 1,359 3,272
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) $ 2,894 $ (340) $ (231) $ 2,323 $ 3,764 $ 0 $ 6,087
======== ======== ======== ======== ======== ======== ========
Earnings per share $ 0.53
========
Weighted average shares outstanding (9) 11,456
========
</TABLE>
16
<PAGE> 38
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
CU
CU BANCORP &
BANCORP CORPORATE
& & HOME
CU CORPORATE CORPORATE HOME BANCORP
BANCORP BANK ADJUSTMENTS COMBINED BANCORP ADJUSTMENTS COMBINED
-------- --------- ----------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest and fees on loans and leases $ 14,036 $ 5,524 $ 19,560 $ 19,928 $ 39,488
Interest on investment securities 2,966 258 3,224 8,249 11,473
Interest on time certificates of deposit 39 99 138 5 143
Interest on federal funds sold 918 370 1,288 801 2,089
-------- -------- -------- -------- --------
TOTAL INTEREST INCOME 17,959 6,251 24,210 28,983 53,193
Interest on deposits 4,078 1,257 5,335 6,415 11,750
-------- -------- -------- -------- --------
Net interest income 13,881 4,994 18,875 22,568 41,443
Provision for loan loss 0 1,134 1,134 800 1,934
-------- -------- -------- -------- --------
Net revenue from earnings assets 13,881 3,860 17,741 21,768 39,509
Non interest income 5,408 637 6,045 4,579 10,624
Non interest expense 14,735 5,260 $ 231(8) 20,226 21,859 42,085
-------- -------- -------- -------- -------- --------
Income before taxes 4,554 (763) (231) 3,560 4,488 8,048
Taxes on income (loss) 1,980 (244) 1,736 1,169 2,905
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 2,574 $ (519) $ (231) $ 1,824 $ 3,319 $ 0 $ 5,143
======== ======== ======== ======== ======== ======== ========
Earnings per share $ 0.46
========
Weighted average shares outstanding (9) 11,192
========
</TABLE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
CU
CU BANCORP &
BANCORP CORPORATE
& & HOME
CU CORPORATE CORPORATE HOME BANCORP
BANCORP BANK ADJUSTMENTS COMBINED BANCORP ADJUSTMENTS COMBINED
------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest and fees on loans and leases $16,487 $ 6,803 $23,290 $20,671 $43,961
Interest on investment securities 1,558 181 1,739 5,905 7,644
Interest on time certificates of deposit 123 90 213 0 213
Interest on federal funds sold 454 261 715 542 1,257
------- ------- ------- ------- -------
TOTAL INTEREST INCOME 18,622 7,335 25,957 27,118 53,075
Interest on deposits 4,191 1,572 5,763 6,736 12,499
------- ------- ------- ------- -------
Net interest income 14,431 5,763 20,194 20,382 40,576
Provision for loan loss 450 865 1,315 750 2,065
------- ------- ------- ------- -------
Net revenue from earnings assets 13,981 4,898 18,879 19,632 38,511
Non interest income 26,423 841 27,264 7,758 35,022
Non interest expense 36,883 5,539 $ 231(8) 42,653 21,550 $ 1,800(11) 66,003
------- ------- ------- ------- ------- ------- -------
Income before taxes 3,521 200 (231) 3,490 5,840 (1,800) 7,530
Taxes on income 1,423 52 (10) 1,475 2,215 3,690
------- ------- ------- ------- ------- ------- -------
NET INCOME $ 2,098 $ 148 $ (231) $ 2,015 $ 3,625 $(1,800) $ 3,840
======= ======= ======= ======= ======= ======= =======
Earnings per share $ 0.35
=======
Weighted average shares outstanding (9) 11,089
=======
</TABLE>
Notes:
1. Represents the $1,730,000 distributed to Corporate Bank's shareholders as
the cash portion of the purchase price of Corporate Bank.
2. The loan portfolio for Corporate Bank is adjusted in the purchase entry to
reflect the loan loss reserve at estimated market value as of the
acquisition date. Total additional required loss reserves are estimated at
$600,000.
17
<PAGE> 39
3. Fixed assets and leasehold improvements at Corporate Bank are adjusted
downward by $150,000 to estimate market value at the acquisition date.
4. The other real estate owned portfolio for Corporate Bank is adjusted in
the purchase entry to reflect the estimated market value of the properties
owned at the acquisition date. The additional loss reserve required is
estimated at $200,000.
5. Additions to other assets include $1,693,000 of deferred taxes and
$2,312,000 in goodwill generated by the Corporate Bank merger transaction.
The goodwill balance is the difference between the purchase price for
Corporate Bank of $6,493,000 and the estimated market value of Corporate
Bank's net assets.
6. Corporate Bank has lease commitments related to their Santa Ana office
that are in excess of estimated current market value. Under the purchase
method of accounting, a liability of approximately $3,000,000 would be
booked at the merger date to record the excess of lease commitments over
the current market for rental of similar facilities. Additional
liabilities of $260,000 are required to cover costs related to the
acquisitions and miscellaneous market value adjustments at the acquisition
date.
7. Adjustments to total capital include the assumed issuance of approximately
649,000 shares of CU Stock with a value of $4,763,000, and the elimination
of Corporate Bank's $6,778,000 in equity as the Corporate Bank shares are
exchanged for CU Stock and cash.
8. The only adjustment to the pro forma combined statements of income is the
assumed amortization of goodwill generated by the Corporate Bank merger
transaction. Goodwill of $2,312,000 amortized over the full years of 1993,
1994 and 1995, assuming a ten-year life, would have generated $231,000 of
expense annually. No adjustments have been made for any operational
synergies that may occur as a result of the Merger.
9. Pro forma earnings per share for the year ended December 31, 1993 were
calculated based on CU Bancorp's 4,490,000 weighted average shares
outstanding plus 649,000 shares assumed to be issued in the Corporate Bank
merger transaction and 5,950,000 shares issued in the Merger. Pro forma
earnings per share for the year ended December 31, 1994 were calculated
based on CU Bancorp's 4,593,000 weighted average shares outstanding plus
649,000 shares assumed to be issued in the Corporate Bank merger
transaction and 5,950,000 shares issued in the Merger, Pro Forma earnings
per share for the year ended December 31, 1995 were calculated based on CU
Bancorp's 4,857,000 weighted average shares outstanding plus 649,000
shares assumed to be issued in the Corporate Bank merger transaction and
5,950,000 shares issued in the Merger. Pro forma earnings per share for
the quarter ended March 31, 1996 were calculated based on CU Bancorp's
5,482 thousand weighted average shares outstanding plus 5,950 thousand
shares issued in the Home Interstate Bancorp transaction. There is no
difference for this entity between fully diluted and primary earnings per
share.
10. Corporate Bank's taxes on income in 1993 incudes a $42,000 cumulative
adjustment for the effect of a change in accounting for income taxes which
represents $.0038 per share.
11. Acquisition expense related to the Merger including investment banker
fees, attorney fees, filing expenses and expenses associated with the
Retention Agreements.
12. Expenses related to the Retention Agreements entered into with ten key
employees.
18
<PAGE> 40
INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished by CU
Bancorp to the holders of CU Stock in connection with the solicitation of
proxies by the CU Board for use at the CU Meeting to be held in the Renaissance
Ballroom, at the Los Angeles Renaissance Hotel, located at 9620 Airport
Boulevard, Los Angeles, California 90045, at 8:30 a.m., California time on July
18, 1996, and any adjournment or adjournments thereof. One purpose of the CU
Meeting is to consider and vote on a proposal to approve the principal terms of
the Merger Agreement. As a result of the Merger, Home Bancorp will be merged
with and into CU Bancorp. Pursuant to the terms of the Merger Agreement, at the
Effective Time, each share of Home Stock issued and outstanding immediately
prior to the consummation of the Merger (other than shares as to which statutory
dissenters' rights are perfected) will automatically, and without any action on
the part of the holder thereof, be canceled and converted into the right to
receive 1.409 shares of CU Stock. Each share of CU Stock issued and outstanding
immediately prior to the consummation of the Merger shall remain outstanding as
a share of CU Stock. The shareholders of CU Bancorp will also consider and vote
on (i) a proposal to amend the Bylaws of CU Bancorp to decrease the authorized
number of directors to not less than six and not more than eleven, (ii) a
proposal to elect six persons to the CU Board, (iii) a proposal to adopt the
1996 Plan, (iv) a proposal to ratify the appointment of Arthur Andersen as CU
Bancorp's independent accountants, (v) a proposal to amend the CU Bancorp Bylaws
upon the Effective Time to increase the authorized number of directors to not
less than seven and not more than thirteen, (vi) a proposal to adopt the
Conversion Plan, (vii) a proposal to amend the 1996 Option Plan to increase the
number of shares available thereunder immediately following the Effective Time,
(viii) a proposal to adopt the 1996 Restricted Stock Plan, (ix) a proposal to
amend the 1994 Plan immediately following the Effective Time and (x) such other
matters as may be properly brought before the CU Meeting.
This Joint Proxy Statement/Prospectus also constitutes the prospectus
of CU Bancorp with respect to the shares of CU Stock to be issued pursuant to
the Merger Agreement. It is presently anticipated that approximately 5,941,443
shares of CU Stock will be issued pursuant to the Merger Agreement and the
transactions which are described therein. Based on the fully diluted number of
shares of CU Stock outstanding on the CU Record Date, the shares of CU Stock
anticipated to be issued to Home Bancorp shareholders pursuant to the Merger
Agreement will represent approximately 52% of the fully diluted shares of CU
Stock outstanding following the Merger.
THE CU BOARD HAS APPROVED THE MERGER AGREEMENT, THE ISSUANCE OF THE
CU STOCK PURSUANT THERETO, AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE CU
BOARD BELIEVES THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE SHAREHOLDERS OF CU BANCORP AND RECOMMENDS THAT THE HOLDERS OF
CU STOCK VOTE TO APPROVE THE PROPOSALS DESCRIBED ABOVE AT THE CU MEETING. SEE
"THE MERGER -- Recommendation of the Boards of Directors and Reasons for the
Merger."
This Joint Proxy Statement/Prospectus is also being furnished by Home
Bancorp to the holders of the Home Stock in connection with the solicitation of
proxies by the Home Board for use at the Home Meeting to be held at 10:00 a.m.,
California time, on July 17, 1996 in the Grand Ballroom, at the Long Beach
Airport Marriott Hotel, located at 4700 Airport Drive, Long Beach, California
90815, and any adjournment or adjournments thereof. One purpose of the Home
Meeting is to consider and vote upon a proposal to approve the Merger Agreement.
The shareholders of Home Bancorp will also be asked to (i) elect nine
19
<PAGE> 41
persons to the Home Board, (ii) ratify the appointment of Arthur Andersen as its
independent accountants, and (iii) consider and vote upon such other matters as
may be properly brought before the Home Meeting.
THE HOME BOARD HAS APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. THE HOME BOARD BELIEVES THAT THE TERMS OF THE MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF HOME BANCORP AND
RECOMMENDS THAT THE HOLDERS OF HOME STOCK VOTE TO APPROVE THE MERGER AGREEMENT
AT THE HOME MEETING. SEE "THE MERGER -- Recommendation of the Boards of
Directors and Reasons for the Merger."
The principal executive offices of CU Bancorp are located at 16030
Ventura Boulevard, Encino, California 91436. The principal executive offices of
Home Bancorp are located at 2633 Cherry Avenue, Signal Hill, California 90806.
THE CU MEETING
RECORD DATE
The CU Board has fixed the close of business on June 6, 1996, as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the CU Meeting. Accordingly, only holders of record of shares of CU
Stock at the close of business on the CU Record Date will be entitled to vote at
the CU Meeting and any adjournment thereof. As of the CU Record Date, there were
5,296,583 shares of the CU Stock outstanding held by approximately 423
shareholders of record.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the CU Meeting and does not return
the signed proxy card, such holder's shares will not be voted and this will have
the effect of a vote against the matters to be voted on at the CU Meeting.
Shareholders are urged to mark the box on the proxy card to indicate how the
shares represented by the proxy card are to be voted. If a shareholder returns a
signed proxy card but does not indicate how his or her shares are to be voted,
such shares will be voted "FOR" all proposals. The proxy card also confers
discretionary authority on the individuals appointed by the CU Board named on
the proxy card to vote the shares represented thereby on any other matter that
is properly presented for action at the CU Meeting. A shareholder who has given
a proxy may revoke it at any time prior to its exercise at the CU Meeting by
delivering an instrument of revocation to the Secretary of CU Bancorp, by duly
executing and submitting a proxy card bearing a later date, or by appearing at
the CU Meeting and voting in person. The mere presence at the CU Meeting of the
person who has given a proxy will not revoke such proxy. In addition, brokers
who hold shares of CU Stock as nominees will not have discretionary
authorization to vote such shares on any of the matters to be voted thereon in
the absence of instructions from the beneficial owners; provided, however, that
such brokers may, in their discretion, vote "FOR" the election of directors and
"FOR" ratification of Arthur Andersen as CU Bancorp's independent public
accountants without instructions from the beneficial owners.
Proxies will be solicited through the use of the mails. In addition,
certain directors, officers and employees of CU Bancorp may solicit proxies (for
no additional compensation) by personal interview, telephone, telex, telegram or
similar means of communication.
20
<PAGE> 42
COSTS OF SOLICITATIONS OF PROXIES
CU Bancorp has engaged the services of D.F. King & Company to assist
in the solicitation of proxies. It is estimated that the total fees paid in
connection with this solicitation will be $7,500. The total expense of this
solicitation will be borne by CU Bancorp. Expenses may include reimbursement
paid to brokerage firms and others for their costs in forwarding soliciting
material and such expenses as may be paid to any proxy soliciting firm engaged
by CU Bancorp.
QUORUM
The presence, either in person or by properly executed proxies, of
the holders of a majority of the outstanding shares of CU Stock is necessary to
constitute a quorum at the CU Meeting. Abstentions will be counted for purposes
of establishing a quorum and will have the same legal effect as a vote against
the adoption of the proposals to be voted upon.
VOTE REQUIRED
CU Bancorp shareholders are entitled to one vote at the CU Meeting
for each share of CU Stock held of record by them on the CU Record Date, except
that in connection with the election of directors, shares of CU Stock are
entitled to be voted cumulatively if a candidate's or candidates' name(s) have
been placed in nomination prior to the voting and a shareholder present at the
CU meeting has given notice prior to the voting of his or her intention to vote
cumulatively. In the election of directors, the six candidates receiving the
highest number of votes are elected. The proposals concerning the approval of
the Merger Agreement and amendments of the Bylaws require the affirmative vote
of a majority of the outstanding shares entitled to vote. The proposals
concerning: (i) the 1996 Option Plan, (ii) the ratification of Arthur Andersen
as CU Bancorp's independent accountants, (iii) the Conversion Plan, (iv) the
increase of shares allocated to the 1996 Option Plan, (v) the 1996 Restricted as
CU Bancorp's independent accountants, Stock Plan and (vi) the 1994 Plan
Amendment require the affirmative vote of a majority of the shares represented
at the CU Meeting either in person or by properly executed proxies.
As of the CU Record Date, directors and executive officers of CU
Bancorp beneficially owned an aggregate of 237,931 shares of CU Stock (not
including shares issuable upon exercise of stock options), or approximately
4.49% of those outstanding as of the CU Record Date. CU Bancorp has been
advised that all of its directors and executive officers intend to vote all
such shares in favor of the approval of the Merger Agreement. See
"THE MERGER -- Agreements with Certain Shareholders."
THE HOME MEETING
RECORD DATE
The Home Board has fixed the close of business on June 7, 1996 as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the Home Meeting. Accordingly, only holders of record of shares of Home
Stock at the close of business on the Home Record Date will be entitled to vote
at the Home Meeting. As of the Home Record Date, there were 4,217,752 shares
of the Home Stock outstanding held by approximately 1,051 shareholders of
record.
21
<PAGE> 43
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the Home Meeting and if a
shareholder does not return the signed proxy card, such holder's shares will not
be voted and this will have the effect of a vote against the approval of the
Merger Agreement. Shareholders are urged to mark the box on the proxy card to
indicate how their shares are to be voted. If a shareholder returns a signed
proxy card but does not indicate how the shares represented by the proxy card
are to be voted, such shares will be voted "FOR" approval of the Merger
Agreement, "FOR" the Home Board's nominees for director and "FOR" ratification
of Arthur Andersen as Home Bancorp's independent accountants. The proxy card
also confers discretionary authority on the individuals appointed by the Home
Board named on the proxy card to vote the shares represented thereby on any
other matter that is properly presented for action at the Home Meeting. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise at the Home Meeting by delivering an instrument of revocation to the
Secretary of Home Bancorp, by duly executing and submitting a proxy card bearing
a later date, or by appearing at the Home Meeting and voting in person. The mere
presence at the Home Meeting of the person who has given a proxy will not revoke
such proxy. In addition, brokers who hold shares of Home Stock as nominees will
not have discretionary authority to vote such shares in connection with the
proposal to approve the principal terms of the Merger Agreement in the absence
of instructions from the beneficial owners; however, such brokers may, in their
discretion, vote "FOR" the election of directors and "FOR" ratification of
Arthur Andersen as Home Bancorp's independent public accountants without
instructions from the beneficial owners.
Proxies will be solicited through the use of the mails. In addition,
certain directors, officers and employees of Home Bancorp may solicit proxies
(for no additional compensation) by personal interview, telephone, telex,
telegram or similar means of communication.
QUORUM
The presence, either in person or by properly executed proxies, of
the holders of a majority of the outstanding shares of Home Stock is necessary
to constitute a quorum at the Home Meeting. Abstentions will be counted for
purposes of establishing a quorum and will have the same legal effect as a vote
against the adoption of the proposals to be voted upon.
VOTE REQUIRED
Home Bancorp shareholders are entitled to one vote at the Home
Meeting for each share of Home Stock held of record by them on the Home Record
Date, except that in connection with the election of directors, shares of Home
Stock are entitled to be voted cumulatively if a candidate's or candidates'
name(s) have been placed in nomination prior to the voting and a shareholder
present at the Home Meeting has given notice prior to the voting of his or her
intention to vote cumulatively. In the election of directors, the nine
candidates receiving the highest number of votes are elected. The proposal
concerning the approval of the Merger Agreement requires the affirmative vote of
the holders of a majority of the outstanding shares of Home Stock. The
ratification of Arthur Andersen as Home Bancorp's independent accountants
requires the affirmative vote by holders of the majority of the shares of Home
Stock present at the Home Meeting either in person or by properly executed
proxies.
22
<PAGE> 44
As of the Home Record Date, directors and executive officers of Home
Bancorp beneficially owned an aggregate of 763,478 shares of Home Stock (not
including shares issuable upon exercise of stock options and warrants), or
approximately 18.10% of those outstanding as of the Home Record Date. Home
Bancorp has been advised that all of its directors and executive officers intend
to vote all such shares in favor of the adoption of the Merger Agreement. See
"THE MERGER -- Agreements with Certain Shareholders."
THE MERGER
The Merger Agreement provides for the merger of Home Bancorp with and
into CU Bancorp, with CU Bancorp surviving the Merger. The obligation of the
parties to consummate the Merger is subject to the satisfaction of certain
conditions, including the approval of the Merger Agreement by the shareholders
of CU Bancorp and Home Bancorp. See "THE MERGER AGREEMENT-- Conditions to the
Merger" and "THE MERGER -- Regulatory Approvals."
BACKGROUND OF THE MERGER
CU Bancorp. In mid 1992, a new management team of Chief Executive
Officer Stephen Carpenter and Chief Operating Officer David Rainer joined CU
Bank. Thereafter, Messrs. Carpenter and Rainer assembled a substantially new
management group including, among others, Chief Credit Officer (formerly Senior
Loan Officer) Anne Williams and Chief Financial Officer Patrick Hartman. In the
period subsequent to 1992, as well as directing CU Bank to compliance with
regulatory orders related to the prior period, management of CU Bank embarked
upon an aggressive business development program, which resulted in new
commercial loan commitments of $101 million in 1993, $121 million in 1994 and
$135 million in 1995. Primarily through internal growth, CU Bank grew from a low
of $279.2 million in total assets at December 31, 1993 to $325.3 million in
total assets at year end 1995, prior to the acquisition of Corporate Bank. In
the fourth quarter 1993, CU Bancorp engaged in a profitable sale of its mortgage
loan origination operation. During that period, CU Bancorp also established
three additional branch offices and relocated its Beverly Hills branch to West
Los Angeles along the Wilshire corridor and adjacent to freeway access, as well
as establishing new products including SBA lending and international banking.
CU Bancorp's strategy was and is to establish its presence in the
greater Ventura, Los Angeles, and Orange County areas and adjacent locations. CU
Bancorp targeted six geographic "circles" of ten to twenty miles in diameter and
one large circle extending approximately 60 miles on all sides from downtown Los
Angeles. The six circles target: southern Ventura County, the San Fernando
Valley, West Los Angeles, the San Gabriel Valley, the South Bay and northern and
inland Orange County. Since the head office was located in the San Fernando
Valley and CU Bank had an existing West Los Angeles office, the first priorities
were to establish a presence in the circles located closest to the circles
occupied by existing circles. In 1994, CU Bank opened loan production offices in
the San Gabriel Valley (Industry) and the South Bay (Gardena), and in 1995
opened a loan production office in Ventura County (Camarillo). All of these
offices were converted to full service branches during 1995. As a result, by
mid-1995, with the pending acquisition of Corporate Bank, CU Bancorp had
achieved its initial geographic strategy and penetrated each of the initial
target zones. CU Bancorp was determined to then augment its presence in these
areas and consider expansion to adjacent areas. The acquisition of Corporate
Bank in January 1996 provided two offices in the targeted northern and inland
Orange County areas (Santa Ana and Anaheim).
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To complement and augment the internal growth in assets and branches,
CU Bancorp has continued to explore external sources of growth by acquisition.
In April 1994, CU Bancorp acquired the deposits of the Encino branch of
Mechanics National Bank from the FDIC. Home Bank was the data processing agent
for all banks assuming liabilities of Mechanics National Bank, and during that
transaction, the principals of each company became acquainted. In early 1995, CU
Bancorp entered into an agreement with Corporate Bank for the acquisition of
that institution. In addition, in August 1995, CU Bancorp retained Montgomery
Securities, an investment banking firm ("Montgomery"), to assist in locating
opportunities for external growth and evaluating and pursuing various
acquisition or merger opportunities. Montgomery had previously provided advice
to CU Bancorp in connection with the sale of its mortgage division in 1993 and
in connection with certain strategic alternatives during the period following.
In the third quarter of 1995, representatives of CU Bancorp were
encouraged to contact Home Bancorp by both Montgomery and attorneys familiar
with both banks, resulting in meetings between representatives of CU Bancorp and
Home Bancorp. At such initial meetings, the parties noted the disparate but
complementary business focuses of the two banks and recognized possible
synergies between such banks. In particular, the parties focused on CU Bank's
strong commercial business development capabilities and Home Bank's broad based
retail deposits and small business focus. Management of CU Bancorp recognized
that the combination of CU Bancorp and Home Bancorp would further augment its
strategy by providing penetration of target areas in the South Bay and northern
Orange County, and provide access to Home Bank (through CU Bank's offices) to
the large retail segment of the San Fernando Valley, West Los Angeles, San
Gabriel Valley and Ventura County populace.
After determining that there was a significant interest in a merger
of equals between the two companies, Montgomery assisted the CU Board and the
Home Board in further analyzing the proposed Merger, including the determination
of an exchange ratio and valuation methodology. During this period, CU Bancorp
and Montgomery made presentations to the Home Board with respect to the proposed
Merger.
On or about November 15, 1995, Home Bancorp accepted a non-binding
expression of interest letter from CU Bancorp which formed the basis for the
transaction outline and for due diligence protocols. Thereafter, the parties
conducted mutual due diligence, utilizing internal personnel and outside
advisors.
With Montgomery's assistance, the parties analyzed a merger of equals
transaction. In this regard, the parties considered, among other things: (i) a
noticeable increase in the number of merger of equals transactions; (ii) the
fact that merger of equals transactions offer an alternative to an outright sale
and may provide shareholders with greater long-term values; (iii) non-financial
issues and management compatibility; and (iv) the reasonableness of the
transaction to shareholders of both companies.
In connection with its analysis of the fairness of the transaction,
the CU Board retained Van Kasper to advise the board as to the fairness of the
proposed transaction from a financial point of view.
On January 10, 1996, the CU Board met to consider the transaction and
to review the Merger Agreement and related documents. At this meeting, Van
Kasper discussed with the Board the results of its analysis of the Merger and
delivered to the Board its opinion that the Merger was fair to the CU Bancorp
shareholders from a financial point of view (see "Opinion of CU Bancorp
Financial Advisor").
Thereafter, the CU Board approved, and authorized the execution of,
the Merger Agreement. In connection with the execution of this agreement, CU
Bancorp issued to Home Bancorp, and Home Bancorp
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issued to CU Bancorp, warrants to purchase up to 19.9% of the outstanding common
stock of the other company, exercisable only upon the occurrence of certain
specified events. See "THE WARRANT AGREEMENTS."
On March 29, 1996, the parties executed the Amendment to modify the
structure of the Bank Merger to provide for the survival of Home Bank in such
merger. The Merger Agreement originally provided that Home Bank would be merged
with and into CU Bank; however, after the execution of the Merger Agreement, the
parties had discussions with various bank regulatory agencies and, based on such
discussions and an assessment of the relative costs and benefits of a state bank
versus a national bank, the parties determined that it was in the best interests
of the Surviving Bank to operate as a state bank. Therefore, the Merger
Agreement, as amended, contemplates a merger of CU Bank, a national bank, with
and into Home Bank, a state bank.
Home Bancorp. Home Bancorp is proud of its community bank roots, and
its banking philosophy is deeply steeped in the independent bank tradition of
customer service and community involvement. In early 1995, however, the Home
Board recognized that it was becoming increasingly difficult for its banking
subsidiary, Home Bank, to compete with the money center banks that had
penetrated Home Bancorp's service area. Further, the Home Board recognized that
there was a succession issue in that Bill Neal, the Executive Vice President of
Home Bank had announced his intention to retire on December 31, 1995, and no
plans had been made for his replacement.
In January 1995, the Home Board engaged Montgomery to assist it in
analyzing strategic alternatives and identifying opportunities for maximizing
shareholder value. On February 15, 1995, Montgomery presented the Home Board
with three strategic alternatives: (i) staying the present course, (ii) growing
through acquisitions and (iii) selling Home Bancorp to a third party. Based on
this presentation, it appeared that selling Home Bancorp was the best
alternative. Representatives from Montgomery then outlined various scenarios for
acquisitions of Home Bancorp by in-state and out-of-state regional and
super-regional financial institutions that were deemed to be likely acquirors.
Thereafter, the Home Board authorized Montgomery to commence preliminary
discussions with likely acquirors.
In August 1995, Montgomery advised the Home Board that its
preliminary discussions had not resulted in any acquisition proposals.
Montgomery then reviewed additional strategic alternatives: (i) continue to
contact would-be acquirors, (ii) expand through acquisition or (iii) pursue a
merger of equals transaction. Montgomery presented a list of potential merger of
equals partners and listed CU Bancorp as one of three candidates due to its
financial results and strong management team. The Home Board authorized
Montgomery to explore the interests of the three prime merger of equals
partners, including CU Bancorp. On August 29, 1995, principals of Home Bancorp
and CU Bancorp met to preliminarily discuss the possible synergies between the
companies. In October 1995, Montgomery advised the Home Board that CU Bancorp
had shown the most interest in the merger of equals concept. CU Bancorp and Home
Bancorp thereafter continued to discuss a possible combination of the companies.
In October and November 1995, Home received two unsolicited
proposals--one for an acquisition of Home Bancorp, and the other to effect a
merger of equals transaction. On November 1, 1995, the Home Board received a
nonbinding expression of interest letter from CU Bancorp with respect to the
Merger. Two of three interested third parties made presentations to the Home
Board, outlining the proposed transaction and the projected benefits of such
transaction. The presentations by representatives of CU Bancorp and Montgomery
emphasized the complementary nature of CU Bank's strong commercial business
development
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capabilities and Home Bank's broad retail deposit base. After an extensive
review of the various proposed transactions, which review included, among other
things, an analysis of the financial health, management structure and future
prospects of the three potential acquirors, the Home Board executed a
non-binding expression of interest letter from CU Bancorp and determined to
undertake a due diligence examination of CU Bancorp and authorized CU Bancorp to
undertake a due diligence examination of Home Bancorp during the next 45-day
period. The Home Board also authorized its President, James P. Staes, to inform
the other parties who had made proposals to the Home Board that the Home Board
was not interested in continuing discussions.
During the due diligence phase, there were discussions and meetings
between the principals of Home Bancorp and CU Bancorp regarding nonfinancial
issues pertinent to the Merger. As a result of those discussions, it was decided
that if the parties determined to go forward, CU Bancorp would be the surviving
corporation primarily because its common stock was listed on NASDAQ, which would
expedite the state securities law aspects of the acquisition. Further, in
recognition of Home Bancorp's succession issue, it was decided that Stephen G.
Carpenter, the current Chairman of the Board and Chief Executive Officer of CU
Bancorp, would remain as Chairman and Chief Executive Officer of the Surviving
Company; James P. Staes, the current President of Home Bancorp, would become
Vice Chairman of the Board; and David Rainer, the current President and Chief
Operating Officer of CU Bancorp, would continue as President and Chief Operating
Officer.
In connection with its analysis of the fairness of the transaction,
the Home Board retained Piper to advise it as to the fairness to the Home
Bancorp shareholders of the consideration to be received in the transaction from
a financial point of view.
On January 10, 1996, the Home Board met to consider the transaction
and to review the Merger Agreement and related documents. At this meeting, Piper
discussed with the Home Board its analysis of the Merger and delivered to the
Home Board its opinion that the consideration to be received in the Merger was
fair to the Home Bancorp shareholders from a financial point of view (see
"Opinion of Home Bancorp Financial Advisor").
Thereafter, the Home Board approved, and authorized the execution of,
the Merger Agreement. In connection with the execution of this agreement, Home
Bancorp issued to CU Bancorp, and CU Bancorp issued to Home Bancorp, warrants to
purchase up to 19.9% of the outstanding common stock of the other company,
exercisable only upon the occurrence of certain specified events. See "THE
WARRANT AGREEMENTS."
On March 29, 1996, the parties executed the Amendment to modify the
structure of the Bank Merger to provide for the survival of Home Bank in such
merger. The Merger Agreement originally provided that Home Bank would be merged
with and into CU Bank; however, after the execution of the Merger Agreement, the
parties had discussions with various bank regulatory agencies and, based on such
discussions and an assessment of the relative costs and benefits of a state bank
versus a national bank, the parties determined that it was in the best interests
of the Surviving Bank to operate as a state bank. Therefore, the Merger
Agreement, as amended, contemplates a merger of CU Bank, a national bank, with
and into Home Bank, a state bank.
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RECOMMENDATION OF THE BOARDS OF DIRECTORS AND REASONS FOR THE MERGER
CU Bancorp. The CU Board approved the Merger at a meeting on January
10, 1996. The CU Board believes that the terms of the Merger are fair to, and in
the best interests of, CU Bancorp and its shareholders and unanimously
recommends that the shareholders of CU Bancorp vote FOR approval of the Merger.
In reaching its conclusion, the CU Board considered certain
information, including, among other things, (i) information concerning the
financial performance and condition, business operations, capital levels, asset
quality, loan portfolio breakdown and prospects of Home Bancorp; (ii) the
structure of the transaction, including the fact that CU Bancorp shareholders
would retain approximately 48% of the common equity of the Surviving Company on
a fully diluted basis, Messrs. Carpenter and Rainer would continue to serve as
Chairman of the Board and Chief Executive Officer, and President and Chief
Operating Officer, respectively, of the Surviving Company, and the Board of
Directors of the Surviving Company would be comprised of five directors
designated by the CU Board and five directors designated by the Home Board;
(iii) the terms of the Merger Agreement, the Warrant Agreements and other
documents to be executed in connection with the Merger and its review of such
documents with its financial and legal advisors; (iv) the presentation of Van
Kasper; (v) the opinion of Van Kasper that the Merger is fair to the
shareholders of CU Bancorp from a financial point of view; (vi) the CU Board's
review with its legal and financial advisors of alternatives to the Merger, the
range of possible values to CU Bancorp shareholders obtainable through
implementation of alternatives and the timing and likelihood of the same; (vii)
the CU Board's review with its legal and financial advisors of other merger
targets; (viii) the compatibility of Home Bancorp with CU Bancorp and the
complementary lines of business; (ix) the geographic distribution of Home Bank
offices vis-a-vis CU Bancorp's strategic plan; (x) the retail deposit generating
capabilities of Home Bank and the impact of that on CU Bank's commercial loan
generation and costs relative thereto; (xi) the effect of a higher lending limit
on CU Bank's customers and prospective customers; (xii) the ability of a larger
institution to compete in the banking environment and to leverage overhead
costs; (xiii) the effect of the Merger on existing shareholders, employees,
officers and customers of CU Bancorp; (xiv) the current and prospective economic
environment and regulatory and competitive burdens and constraints facing
commercial banks; (xv) the impact on the communities served by CU Bank and Home
Bank of the Merger, and the increased ability to serve the communities through
the larger branch network; (xvi) the results of the due diligence conducted as
to the financial condition of Home Bancorp, and the prospects of economic
viability of the combined institution; and (xvii) the pro forma financial
statements of the combined companies, and the capitalization of the combined
companies in excess of "well capitalized" requirements of federal regulatory
agencies.
In addition, in analyzing the proposed transaction, the CU Board
considered that Home Bank possesses an excellent retail deposit base which
complements CU Bank's commercial focus and provides broader geographic coverage
of strategic target markets already identified and initially penetrated by CU
Bank. The larger size of the combined company would increase shareholder
liquidity, make future acquisitions more possible, leverage the expense
structure and increase the lending limit. The fixed exchange ratio of 1.409
provides shareholders of Home Bancorp with a premium over market price for their
stock. In determining the exchange ratio, CU Bancorp and Montgomery analyzed the
relative contributions of each company relative to: assets (size and quality),
loans, non-performing assets ("NPAs"), allowance for loan and lease losses
("ALLL"), deposits, equity, tangible equity, loans/deposits, NPAs/assets,
ALLL/NPAs, equity/assets, net interest income, non-interest income, non-interest
expense, provision, taxes, net income, return on assets and return on equity.
After significant discussion and analysis of a number of factors, not all of
which are set forth herein, the parties, with the assistance of Montgomery,
arrived at a
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determination that the 52%/48% ownership of the Surviving Company, on a fully
diluted basis, was appropriate.
The CU Board did not assign any specific or relative weights to the
factors considered above.
Home Bancorp. The Home Board approved the Merger at its Board of
Directors meeting on January 10, 1996. The Home Board believes that the terms of
the Merger are fair to, and in the best interests of Home Bancorp and its
shareholders and recommends that the shareholders of Home Bancorp vote FOR
approval of the Merger.
In reaching its conclusion, the Home Board considered information
provided at meetings of its Board of Directors on November 15, 1995 and January
10, 1996, including, among other things, (i) information concerning the
financial performance and condition, business operations, capital levels, asset
quality, loan portfolio breakdown and prospects of CU Bancorp; (ii) the
structure of the transaction, including the fact that Home Bancorp shareholders
would retain approximately 52% of the common equity of the Surviving Company on
a fully diluted basis, (iii) the fact that Mr. Staes would serve as Vice
Chairman of the Board of Directors of the Surviving Company, and that the Board
of Directors of the Surviving Company would be comprised of five directors
designated by the Home Board and five directors designated by the CU Board; (iv)
the terms of the Merger Agreement, the Warrant Agreements, and other documents
to be executed in connection with the Merger, including the covenant of CU
Bancorp in the Merger Agreement to pay quarterly dividends to the shareholders
of the Surviving Company, subject to applicable law and the business judgment of
the Board of Directors of the Surviving Company, for each of the eight quarters
following the Effective Time in an amount per share no less than $.06 per share;
(v) the presentation of Piper and the opinion of Piper that the Merger is fair
to the shareholders of Home Bancorp from a financial point of view; (vi) the
results of its due diligence examination of CU Bancorp; (vii) the terms of other
recent comparable combinations of bank holding companies; (viii) the Home
Board's review with its legal and financial advisors of alternatives to the
Merger; (ix) the management succession issue of Home Bancorp and Home Bank; (ix)
the current and prospective economic environment and regulatory and competitive
burdens and constraints facing community banks; and (x) the pro forma financial
statements of the combined companies, and the capitalization of the combined
companies in excess of "well capitalized" requirements of federal regulatory
agencies.
In addition, the Home Board considered that, in recent years, Home
Bank has had a surplus of lower cost retail deposits which it was unable to
invest in additional loan growth and that CU Bank, on the other hand, has had
excess loan demand in recent years which it has elected to fund with deposit
sources other than lower-cost retail deposits. The Home Board believes that the
combination of CU Bank and Home Bank will result in a stronger and more
profitable financial institution going forward.
The Home Board did not assign any specific or relative weight to the
factors considered above.
OPINION OF CU BANCORP FINANCIAL ADVISOR
The CU Board retained Van Kasper, pursuant to an engagement letter
dated December 28, 1995, to provide financial advisory services with respect to
the proposed Merger, by rendering an opinion as to the fairness of the
Conversion Ratio from a financial point of view to the holders of CU Stock. Van
Kasper is a San Francisco-based regional investment banking and brokerage firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with merger
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transactions and other types of acquisitions, negotiated
underwritings, private placements and valuations for corporate and other
purposes. CU Bancorp selected Van Kasper as its financial advisor on the basis
of its experience in transactions similar to the Merger, its knowledge of
California bank equities, and its reputation in the banking and investment
communities. Van Kasper also makes a market in CU Stock. Van Kasper did not
participate in the negotiation of the Merger or discussions to determine the
Conversion Ratio.
A representative of Van Kasper attended the January 10, 1996 meeting
of the CU Board and provided a report and its preliminary written opinion dated
January 10, 1996 that, based on the information then available and the status of
Van Kasper's analysis on that date, the Conversion Ratio was fair to the
shareholders of CU Bancorp from a financial point of view as of such date. At
the January 10, 1996 meeting, the CU Board approved the execution of the Merger
Agreement. Van Kasper subsequently provided its final written opinion dated June
3, 1996. The January 10, 1996 Van Kasper Fairness Opinion is substantially
identical to the Van Kasper Fairness Opinion Letter attached hereto.
No limitations were imposed by CU Bancorp on Van Kasper with respect
to the investigations made or procedures followed in rendering its opinion. THE
FULL TEXT OF VAN KASPER'S WRITTEN OPINION TO THE CU BOARD, WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND LIMITATIONS ON
THE SCOPE OF REVIEW BY VAN KASPER (THE "VAN KASPER FAIRNESS OPINION"), IS
ATTACHED HERETO AS APPENDIX G AND IS INCORPORATED HEREIN BY REFERENCE AND SHOULD
BE READ CAREFULLY AND IN ITS ENTIRETY IN CONNECTION WITH THIS JOINT PROXY
STATEMENT/PROSPECTUS. The following summary of the Van Kasper Fairness Opinion
is qualified in its entirety by reference to the full text of the Van Kasper
Fairness Opinion. The Van Kasper Fairness Opinion is addressed to the CU Board
and does not constitute a recommendation to the CU Board or to any shareholder
of CU Bancorp as to how the CU Board or any such shareholder should vote with
respect to the Merger.
In connection with the Van Kasper Fairness Opinion, Van Kasper, among
other things: (a) reviewed drafts of the Joint Proxy Statement/Prospectus; (b)
reviewed the Joint Proxy Statement/Prospectus; (c) reviewed the Merger Agreement
and related documents; (d) reviewed certain publicly available financial and
other data with respect to CU Bancorp and Home Bancorp, including financial
statements for CU Bancorp and Home Bancorp for recent years to December 31,
1995, and certain other relevant financial and operating data relating to CU
Bancorp and Home Bancorp from published sources and from the internal records of
CU Bancorp and Home Bancorp; (e) reviewed certain historical market prices and
trading information on CU Bancorp and Home Bancorp; (f) compared CU Bancorp and
Home Bancorp from a financial point of view with certain other companies and
bank peer groupings; (g) considered the financial terms, to the extent publicly
available, of selected recent business combinations of companies that Van Kasper
deemed to be comparable, in whole or in part, to the Merger; (h) reviewed and
discussed with representatives of the management of CU Bancorp certain
information of a business and financial nature regarding CU Bancorp and Home
Bancorp provided to Van Kasper by CU Bancorp and Home Bancorp, respectively,
including financial forecasts and related assumptions; (i) made inquiries
regarding and discussed the Merger and the Merger Agreement and other matters
related thereto with CU Bancorp's counsel; and (j) performed such other analyses
and examinations as Van Kasper deemed appropriate.
In conducting its review and arriving at its opinion, Van Kasper
relied upon and assumed the accuracy and completeness of, without independent
verification, the financial and other information provided to Van Kasper or
publicly available, and did not assume any responsibility for independent
verification of such information. Van Kasper relied upon the managements of CU
Bancorp and Home Bancorp as to the reasonableness of the financial and operating
forecasts, projections and projected operating cost savings (and
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the assumptions and bases therefor) provided to Van Kasper, and Van Kasper
assumed that such forecasts, projections and projected operating cost savings
and margin enhancements reflect the best currently available estimates and good
faith judgments of the applicable managements as to the expected future
operating and financial performance of their respective companies, consistent
with historical data, and assumed that the benefits contemplated by the Merger,
as reflected in such forecasts, will be achieved. Van Kasper is not an expert in
the evaluation of loan portfolios for purposes of assessing the adequacy of the
allowances for losses with respect thereto and assumed, with the consent of CU
Bancorp, that such allowances for each of CU Bancorp and Home Bancorp are in the
aggregate adequate to cover such losses. Van Kasper did not review any
individual credit files. In addition, Van Kasper did not make an independent
evaluation, appraisal or physical inspection of the assets or individual
properties of CU Bancorp or Home Bancorp, nor was Van Kasper provided with any
such appraisal and assumed that all material assets and liabilities (including
contingent or unknown liabilities) of CU Bancorp and Home Bancorp are as set
forth in the financial statements of CU Bancorp and Home Bancorp, respectively.
For purposes of the Van Kasper Fairness Opinion, Van Kasper assumed that the
Merger will have the tax, accounting and legal effects (including, without
limitation, that the Merger will be accounted for as a pooling of interests)
described in the Merger Agreement. Van Kasper relied on advice of counsel to CU
Bancorp as to all legal matters with respect to CU Bancorp, the Merger, the
Joint Proxy Statement/ Prospectus and the Merger Agreement. Further, the Van
Kasper Fairness Opinion was based upon an analysis of the foregoing in light of
its assessment of general economic, market and financial 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 amendments
thereto, and without waiver by CU Bancorp of any of the conditions to its
obligations thereunder.
Set forth below is a brief summary of certain analyses performed by
Van Kasper in preparing the Van Kasper Fairness Opinion. The analysis also
focused on core financial and operating projections and statistics which were
not specifically adjusted for nonrecurring charges, unless otherwise stated.
The Van Kasper Fairness Opinion is directed to the CU Board and the
fairness to the shareholders of CU Bancorp, from a financial point of view, of
the conversion ratio to be paid in the merger by CU Bancorp and does not
address any other aspect of the merger.
Contribution Analysis. Van Kasper analyzed the contribution of each
of CU Bancorp and Home Bancorp to, among other things, total assets, total
earning assets, total loans, total deposits, and tangible equity of the pro
forma Surviving Company as of December 31, 1995 and to, among other things, core
revenues (net interest income and noninterest income) and pretax pre-provision
income and pretax income of the Surviving Company for 1996. This analysis
assumed that CU Bancorp's acquisition of Corporate Bank was completed on a pro
forma basis as of December 31, 1995 for balance sheet analysis and January 1,
1996 for income statement analysis, but in both cases without regard to the
effect of merger costs or projected synergies. Additionally, the analysis
assumed that the Corporate Bank acquisition was structured with a mix of 75%
stock and 25% cash and generated $1.5 million in goodwill.
This analysis showed, among other things, that based on the Surviving
Company's pro forma balance sheet as of December 31, 1995, CU Bancorp would
contribute approximately 48% of total assets, approximately 51% of earning
assets, approximately 53% of total loans, approximately 50% of total deposits,
and approximately 44% of the tangible equity of the Surviving Company.
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The analysis showed, among other things, that based on the Surviving
Company's pro forma income statements for fiscal year 1996, CU Bancorp would
contribute in 1996 approximately 44% of core revenues, approximately 43% of
pretax, preprovision income, and approximately 47% of pretax income.
With a Conversion Ratio of 1.409 shares of CU Stock per one share of
Home Stock, the CU Bancorp shareholders would own approximately 48% of the
Surviving Company on a fully-diluted basis.
Dilution Analysis. Van Kasper analyzed the effect of the Merger on a
holder of CU Stock by comparing, among other things, the book value per share,
the tangible book value per share, and the fully-diluted book value per share as
of December 31, 1996 through 2000 and the dividends per common share and
fully-diluted earnings per share for the fiscal years ending December 31, 1996
through 2000 of CU Bancorp with that of the Surviving Company. This analysis
employs the Conversion Ratio and assumes that CU Bancorp's acquisition of
Corporate Bank was completed on a pro forma basis as of January 1, 1996 under
the assumptions stated above.
The analysis assumed, unless otherwise stated, Merger-related
operating cost savings projected by CU to be realized partially in 1996 and
fully in 1997 and subsequent years. The analysis assumed, unless otherwise
stated, margin enhancements to be realized in 1998, 1999, and 2000 on
incremental earning assets.
The analysis assumed that the Merger would be completed on June 30, 1996.
These projected operating cost savings represent approximately 5% and
7% of the Surviving Company's projected noninterest expense in 1996 and 1997,
respectively, on a pre-tax basis. The Merger is viewed by CU Bancorp and Home
Bancorp as a merger of equals transaction in which operating cost savings are
less important than the strategic benefits of the Merger. This level of
projected operating cost savings, expressed as a percentage of the Surviving
Company's projected noninterest expense, is at the lower end of the range of
similar savings forecasted by other banks in similar transactions reviewed by
Van Kasper.
The margin enhancements represent the increase in net interest
margins expected to be realized by the Surviving Company by using the generally
lower cost deposits of Home Bank's branch system versus other sources to fund
the incremental growth in the Surviving Company's incremental earning assets in
1998 through 2000. CU Bancorp projects margin enhancements of 0.25% in 1998,
0.35% in 1999, and 0.50% in 2000 on the Surviving Company's incremental earning
assets.
The results of an analysis of changes in book value, tangible book
value, fully-diluted book value, dividends and fully-diluted earnings (without
giving effect to transaction expenses) attributable to one share of CU Stock
before the Merger compared to one share of CU Stock after the Merger, assuming
projected CU Bancorp and Home Bancorp earnings and merger-related operating cost
savings and margin enhancements, indicate the following: book value per share
would increase approximately 8% by 1996 year-end, but would decrease
approximately 4% by 2000 year-end; tangible book value per share would increase
approximately 5% by 1996 year-end, but would decrease approximately 5% by 2000
year-end; fully-diluted book value would increase approximately 6% by 1996
year-end, but would decrease by approximately 1% by 2000 year-end; dividends
would increase from $0.10 to $0.25 for fiscal 1996 and would increase from $0.25
to $0.44 for fiscal 2000; and fully-diluted earnings would increase by
approximately 18% for fiscal 1996 (without giving effect to transaction
expenses), but would decrease by approximately 9% for fiscal 2000.
Comparable Company Analysis. Using publicly and other available
information, Van Kasper compared financial ratios of CU Bancorp and Home Bancorp
including, among other things: the ratio of net
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income to average total assets, the ratio of net income to average total equity,
the ratio of equity to assets and certain credit ratios for the twelve months
ended September 30, 1995 and as of September 30, 1995 to a proxy group
consisting of 44 selected banks located in California. While CU Bancorp's
statistics were included in the proxy group, no other bank used in the analysis
is believed to be identical to CU Bancorp or Home Bancorp. The analysis
necessarily involved complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies. The
results of this analysis indicated that both CU Bancorp and Home Bancorp were
not as cost control efficient as the peer group and did not perform as well as
the peer group on the basis of profitability. CU Bancorp's asset quality and
allowance levels were better than the peer group, while Home Bancorp's were
generally below the peer group. Both CU Bancorp and Home Bancorp had capital
ratios above the peer group.
Analysis of Selected Bank Merger Transactions. Van Kasper reviewed
the consideration paid in recently announced transactions whereby California
banks were acquired. Specifically, Van Kasper reviewed 31 transactions involving
acquisitions of selected banks in the State of California that were either
announced or completed during calendar 1995 and a larger group that were
announced beginning in 1990.
For each bank acquired or to be acquired in such transactions, Van Kasper
compiled figures illustrating, among other things, at announcement the ratio of
the offer price to book value and the ratio of offer price to last twelve months
("LTM") earnings.
No other bank, company or transaction used in the above analysis as a
comparison is identical to CU Bancorp, Home Bancorp or the Merger. Accordingly,
an analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading value of the companies to which CU Bancorp, Home
Bancorp and the Merger are being compared.
Additionally, both CU Bancorp and Home Bancorp entered into the
Merger Agreement from the perspective that the Merger was a "merger of equals"
rather than an acquisition. Nearly all of the transactions analyzed were
structured as traditional acquisitions versus "mergers of equals."
Discounted Cash Flow Analysis. Van Kasper examined the results of a
discounted cash flow analysis designed to compare the present value, under
certain assumptions, that would be attained if CU Bancorp remained independent
through 2000 or was acquired in 2000 by a larger financial institution. This
analysis was based solely upon information, including forecasted statements of
operations and balance sheet data or financial assumptions, provided by CU
Bancorp and Home Bancorp to Van Kasper for the years 1995 through 2000. The cash
flows were based on the Conversion Ratio of 1.409 shares of CU Stock per one
share of Home Stock. The results produced in the analyses did not purport to be
indicative of actual values or expected values of CU Bancorp or the Surviving
Company at such future date. All cases were analyzed assuming realization of
operating cost savings and margin enhancements, estimated by CU Bancorp, in the
amounts and time periods previously indicated.
The discount rates used ranged from 10% to 20%. For the CU Bancorp
stand alone analysis, the terminal price multiples applied to the 2000 estimated
book value ranged from 1.00x to 2.00x. The mid- levels of the price/book value
multiples range reflected an estimated future trading range of CU Bancorp or the
Surviving Company, while the higher levels of the price/book value multiples
range were more indicative of a future sale of CU Bancorp or the Surviving
Company to a larger financial institution.
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For the CU Bancorp stand alone analysis, the cash flows were
comprised of the projected stand alone dividends per share in years 1995 through
2000 plus the terminal value of CU Stock at year-end 2000 (calculated by
applying each one of the assumed terminal price/book value multiples as stated
above to the 2000 projected CU Bancorp book value per share). A similar analysis
was done for the Surviving Company. The discount rates described above were then
applied to these cash flows to obtain the present values per share of CU Stock.
The Van Kasper analysis assumed that projected earnings, among other
things, would be achieved; that projected operating cost savings are fully
realized (for the Surviving Company case); a present value discount rate of 13%;
and a terminal price/book value multiple of 1.80x. Assuming CU Bancorp remains
independent through 2000 and is then acquired by a larger financial institution,
a holder of one share of CU Stock as of the date of the Van Kasper analysis
would receive cash flows with a present value of $12.21. Assuming the Merger is
consummated and that Surviving Company remains independent through 2000 and is
then acquired by a larger financial institution, a holder of one share of CU
Stock today would receive cash flows with a present value of $12.68.
Overall Analysis. The foregoing summarizes the material portions of
Van Kasper's analysis, but does not purport to be a complete description of the
presentation by Van Kasper to the CU Board or of the analyses performed and
factors considered by Van Kasper. Van Kasper believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analysis and the factors considered, without considering all
analyses and factors, would create a misleading view of the process underlying
the analyses set forth in its presentation to the CU Board. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. In addition, Van Kasper may have given
certain analyses more or less weight than other analyses and may have deemed
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting from any particular analysis described above
should not be taken to be Van Kasper's view of the actual value of CU Bancorp,
Home Bancorp or the Surviving Company which may be significantly more or less
favorable. The fact that any specific analysis has been referred to in the
summary above is not meant to indicate that such analysis was given greater
weight than any other analysis. Because such analyses, and any estimates
contained therein, are inherently subject to uncertainty, neither CU Bancorp,
Van Kasper or any other person assumes responsibility for the accuracy.
In performing its analyses, Van Kasper made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of CU Bancorp or Home
Bancorp. The analyses performed by Van Kasper 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 Van Kasper's analysis of the fairness of the Conversion Ratio to CU
Bancorp's shareholders and were provided to the CU Board in connection with the
delivery of the Van Kasper Fairness 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. Van Kasper used in its analyses
various projections of future performance prepared by the management of CU
Bancorp. The projections are based on numerous variables and assumptions which
are inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those set
forth in such projections.
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As described above, the Van Kasper Fairness Opinion and presentations
to the CU Board were among the many factors taken into consideration by the CU
Board in making its determination to approve the Merger Agreement.
CU Bancorp has agreed to pay Van Kasper $75,000 for financial
advisory services with respect to the preparation of the Van Kasper Fairness
Opinion. None of Van Kasper's fee is contingent upon the consummation of the
Merger. CU Bancorp paid Van Kasper a retainer and partial fee of $55,000 on
January 10, 1996. An additional fee of $20,000 was paid to Van Kasper in April
1996 upon delivery of the attached Van Kasper Fairness Opinion. CU Bancorp also
has agreed to reimburse Van Kasper for certain of its reasonable out-of-pocket
expenses, including reasonable fees and expenses of Van Kasper's counsel, and to
indemnify Van Kasper and its officers, directors, employees, agents and
controlling persons against certain liabilities, including liabilities under
federal securities laws.
OPINION OF HOME BANCORP FINANCIAL ADVISOR
Piper was retained by Home Bancorp in December 1995 to render its
opinion to the Home Board regarding the fairness, from a financial point of
view, to the shareholders of Home Bancorp of the consideration to be received by
them in the Merger. On January 10, 1996, Piper delivered to the Home Board its
written opinion to the effect that, as of the date of its opinion and based on
and subject to the assumptions, factors and limitations as set forth in the
opinion and so described below, the consideration proposed to be received by the
shareholders of Home Bancorp, based on a Conversion Ratio of 1.409, is fair to
the shareholders of Home Bancorp from a financial point of view. This opinion
was subsequently reaffirmed by issuance to the Home Board of a written opinion,
dated June 4, 1996. Those opinions are collectively referred to as the "Piper
Opinion." A copy of the Piper Opinion letter dated June 4, 1996, is attached
to this Joint Proxy Statement/Prospectus as Appendix H and is incorporated
herein by reference. The January 10, 1996 Piper Opinion letter is substantially
identical to the Piper Opinion letter attached hereto. Home Bancorp shareholders
are urged to read the attached Piper Opinion letter in its entirety.
The Piper Opinion is directed to the Home Board and does not
constitute a recommendation to any Home Bancorp shareholder as to how such
shareholder should vote with respect to the Merger. Piper was not requested to
and did not make any recommendation to the Home Board as to the form or amount
of consideration to be received by shareholders of Home Bancorp in the Merger.
Piper was not requested to opine as to, and the Piper Opinion does not address,
the Board's underlying business decision to proceed with or effect the Merger.
In reaching its conclusion as to the fairness to the shareholders of
Home Bancorp of the consideration to be received by such shareholders in the
Merger and in its presentation to the Home Board, Piper did not rely on any
single analysis or factor described below, assign weights to the analyses or
factors considered by it, or make any conclusions as to how the results of any
given analysis, taken alone, supported its fairness opinion. The preparation of
a fairness opinion is a complex process and not necessarily susceptible to
partial analysis or summary description. Piper believes that its analysis must
be considered as a whole and that selecting portions of its analysis, and of the
factors considered by it, without considering all factors and analyses, would
create a misleading view of the process underlying the Piper Opinion. The
analyses of Piper are not necessarily indicative of future values or future
results, which may be significantly more or less favorable than suggested by the
analyses. Analyses relating to the value of companies do not purport to be
appraisals or valuations or necessarily reflect the price at which companies may
actually be sold. No company or transaction used in any comparable analyses as a
comparison is identical to Home
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Bancorp, CU Bancorp or the Merger. Accordingly, an analysis of results is not
mathematical, rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the Comparable
Companies (as defined below) and other factors that could affect the public
trading value of the Comparable Companies.
In arriving at the Piper Opinion, Piper reviewed, among other things,
(i) the Merger Agreement, (ii) certain publicly available information relative
to Home Bancorp, (iii) certain internal financial information of Home Bancorp
prepared for financial planning purposes and furnished by the management of Home
Bancorp, (iv) certain financial and securities data of Home Bancorp and
companies deemed similar to Home Bancorp, (v) to the extent publicly available,
the financial terms of certain merger transactions deemed similar to the Merger,
(vi) publicly available information related to CU Bancorp, (vii) certain
internal financial information of CU Bancorp prepared for financial planning
purposes and furnished by the management of CU Bancorp, (viii) certain internal
financial information of the Surviving Company prepared for financial planning
purposes and furnished by the management of CU Bancorp, and (ix) certain
financial and securities data of CU Bancorp and companies deemed similar to CU
Bancorp. In addition, Piper engaged in discussions with members of the
management of Home Bancorp and CU Bancorp concerning the respective financial
condition, current operating results and business outlook of Home Bancorp and CU
Bancorp, including the prospects for the Surviving Company and Home Bancorp and
CU Bancorp's plans relating to the Surviving Company.
In delivering the Piper Opinion to the Board on January 10, 1996,
Piper prepared and delivered to the Home Board certain written material
containing certain analyses and other information relevant to the Piper Opinion.
The following is a summary of those materials:
Selected Market Information. Piper reviewed certain stock trading
characteristics of Home Stock and CU Stock including stock prices and volume
comparisons for the one-year period ending January 5, 1996.
Dilution Analysis. Piper analyzed the projections of fully diluted
earnings per share and book value per share of Home Bancorp for 1996 and 1997
provided by the management of Home Bancorp and calculated pro forma estimates of
fully diluted earnings per share and tangible book value per share for the
Surviving Company for 1996 and 1997, assuming non-recurring transaction expenses
of $3.65 million in 1996 and pre-tax earnings enhancements of $4.3 million and
$5.9 million in 1996 and 1997, respectively, which are expected to result from,
among other things, certain revenue enhancements and expense reductions. This
analysis showed, among other things, that, on a share equivalent basis, holders
of Home Stock would realize accretion of 23.1% in earnings per share (without
giving effect to transaction expenses) and dilution of 4.6% in tangible book
value per share in 1996 and accretion of 35.9% in earnings per share and
dilution of 0.8% in tangible book value per share in 1997.
Contribution Analysis. Piper analyzed certain historical income
statement and balance sheet data for Home Bancorp and CU Bancorp for 1994
through September 30, 1995, and for Home Bancorp and CU Bancorp on a projected
basis for 1995 through 1998 (based upon estimates prepared by managements of
both parties to the Merger). The analysis showed, among other things, that for
the nine months ended September 30, 1995 and for the years ended December 31,
1996 and 1997, respectively on a projected basis, Home Bancorp would contribute
the following percentages of the pro forma amounts of the Surviving Company:
51.4 %, 52.7 % and 49.5%, respectively of pre-tax income; 55.1%, 54.1% and
50.9%, respectively of net income; 57.8%, 52.2% and 51.4%, respectively of total
assets; 57.9%, 52.1% and 51.2%
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of total deposits; 58.6%, 54.8% and 54.0%, respectively of tangible book value;
53.3%, 47.0% and 44.2%, respectively of net loans; and 31.3%, 27.6% and 28.4%,
respectively of loan loss reserves. Based on the Conversion Ratio of 1.409
shares of CU Stock for each share of Home Stock, the holders of Home Stock will
own 52.0% of the Surviving Company on a fully diluted basis.
Historical and Projected Financial Performance Comparison. Piper
prepared comparisons of various historical and projected measures of performance
ratios, yields, margins and financial condition for Home Bancorp and the
Surviving Company, including comparison of return on average assets and average
equity, comparison of average loans as a percentage of average deposits, and
comparison loan-loss reserves as a percentage of total loans.
Discounted Dividend Stream Analysis. Piper prepared an estimated
stand-alone valuation for Home Bancorp by adding (i) the present value of
implied future dividend streams that might be available to be paid by Home
Bancorp over a five-year period from 1996 through 2000 and (ii) the present
value of Home Bancorp's estimated terminal value. The implied future dividend
stream projection was based upon the assumption that Home Bancorp would maximize
yearly dividend payments subject to maintaining a constant year-end ratio of
shareholders' equity to total assets of 10%. Estimated terminal values were
calculated by applying multiples ranging from 10.0 to 14.0 to projected net
income and, alternatively, applying multiples ranging from 1.0 to 1.3 to
projected tangible book value. The dividend streams and terminal values were
discounted to present values using a range of discount rates from 13% to 17%.
The analysis indicated a value per share for Home Stock ranging from $11.16 to
$16.19, based upon terminal values derived from net income multiples and a value
per share for Home Stock ranging from $9.79 to $13.24 based upon terminal values
derived from tangible book value multiples.
Selected Comparable Transaction Analysis. Piper analyzed selected
merger-of-equals transactions between commercial banks and/or bank holding
companies in which the total assets of the target company exceeded $100 million
and both parties were publicly traded. The merger-of-equals transactions
selected (the "Comparable Transactions") were: Chemical Banking Corp./Chase
Manhattan Corporation, Commercial Bancorp/West Coast Bancorp, Southern National
Corporation/BB&T Financial Corporation, Comerica Incorporated/Manufacturers
Hanover Corporation and Chemical Banking Corp./Manufacturers Hanover
Corporation. Piper calculated the premium (or discount) to the target's stock
price represented by the conversion ratio for each Comparable Transaction. Based
on the closing price per share of Home Stock and of CU Stock on January 5, 1996
and a Conversion Ratio of 1.409 shares of CU Stock for each share of Home Stock,
holders of Home Stock would receive a 16.4% premium on account of the Merger
compared to a range of a 7.2% discount to a 5.6% premium, a mean of a 0.3%
discount and a median of 1.7% discount for Comparable Transactions.
Selected Comparable Companies Analysis. Piper compared certain
financial information and stock market information relating to Home Bancorp and
CU Bancorp to corresponding data and ratios for a group of California based
commercial banks and bank holding companies deemed similar to Home Bancorp and
CU Bancorp for which earnings estimates for 1995 and 1996 were available. The
companies selected (the "Comparable Companies") were: California State Bank,
Civic Bancorp, Eldorado Bancorp, GBC Bancorp, Pacific Bancorp, Professional
Bancorp, Redwood Empire Bancorp, Santa Monica Bank, Sierra Tahoe Bancorp and
TriCo Bancshares. Based on closing prices for shares of common stock of Home
Bancorp, CU Bancorp and each of the Comparable Companies on January 6, 1996,
Piper calculated the following multiples: (i) market price to latest twelve
months ("LTM") earnings per share of 14.4x for Home Bancorp and 16.3x for CU
Bancorp, compared to a range of 9.3x to 19.7x, a mean of 12.5x and a median of
12.3x for
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the Comparable Companies; (ii) market price to 1995 estimated earnings per share
of 12.8x for Home Bancorp and 15.7x for CU Bancorp, compared to a range of 8.2x
to 21.1x, a mean of 13.1x and a median of 12.3x for the Comparable Companies;
(iii) market price to 1996 estimated earnings per share of 10.7x for Home
Bancorp and 12.2x for CU Bancorp, compared to a range of 8.2x to 11.6x, a mean
of 9.6x and a median of 9.4x for the Comparable Companies; and (iv) market price
to tangible book value of 1.1x for Home Bancorp and 1.4x for CU Bancorp,
compared to a range of 0.8x to 1.6x, a mean of 1.1x and a median of 1.1x for the
Comparable Companies.
Piper also compared Home Bancorp and CU Bancorp to the Comparable
Companies with respect to certain financial ratios, including the following: (i)
return on average assets of 0.8% for Home Bancorp and 0.9% for CU Bancorp,
compared to a range of -0.3% to 3.4%, a mean of 1.0% and a median of 1.0% for
the Comparable Companies; (ii) return on average equity of 7.3% for Home Bancorp
and 9.3% for CU Bancorp, compared to a range of -5.5% to 22.7%, a mean of 9.8%
and a median of 9.8% for the Comparable Companies; (iii) earnings per share
growth from 1993 to 1994 of -8.8% for Home Bancorp and 19.1% for CU Bancorp,
compared to a range of -36.4% to 7.7%, a mean of -12.3% and a median of -10.2%
for the Comparable Companies; (iv) nonperforming assets as a percentage of total
assets of 1.9% for Home Bancorp and 0.2% for CU Bancorp, compared to a range of
0.5% to 5.9%, a mean of 2.5% and a median of 2.0% for the Comparable Companies;
and (v) reserves as a percentage of loans of 1.5% for Home Bancorp and 3.8% for
CU Bancorp, compared to a range of 0.9% to 6.6%, a mean of 2.8% and a median of
2.4% for the Comparable Companies.
Additional Considerations. Piper also considered a number of
qualitative factors that might result from the Merger in arriving at its
opinion, including enhanced commercial loan capabilities, greater management
depth, improved liquidity for shareholders and increased acquisition
opportunities for the Surviving Company compared to Home Bancorp.
For purposes of the Piper Opinion, Piper relied upon and assumed the
accuracy, completeness and fairness of the financial and other information made
available to it and did not attempt to independently verify such information.
Piper relied upon the assurances of Home Bancorp and CU Bancorp management that
the information provided by Home Bancorp and CU Bancorp had a reasonable basis
and, with respect to financial planning data, and other business outlook
information, reflected the best available estimates, and that they were not
aware of any information or fact that would make the information provided to
Piper incomplete or misleading. Piper assumed the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code and will be
recorded using the pooling of interests method of accounting under generally
accepted accounting principles. In arriving at the Piper Opinion, Piper did not
perform, nor was it furnished, an appraisal or valuation of specific assets or
liabilities of Home Bancorp or CU Bancorp and expressed no opinion regarding the
liquidation value of any entity. No limitations were imposed by the Home Board
on the scope of Piper's investigation or the procedures to be followed in
rendering the Piper Opinion. Piper was not authorized by the Home Board to
solicit, and did not solicit, other entities for purposes of a business
combination with Home Bancorp. Piper expressed no opinion as to the price at
which shares of Home Stock or CU Stock have traded or may trade at a future
time. The Piper Opinion is based upon information available to Piper and the
facts and circumstances as they existed and were subject to evaluation on the
respective dates of the Piper Opinions. Events occurring after such dates could
materially affect the assumptions used in preparing the Piper Opinion.
In the normal course of its business, Piper may, from time to time,
actively trade securities of Home Bancorp and CU Bancorp for its own account or
the account of its customers and, accordingly, may at any
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time have a long or short position in such securities. Additionally, Piper or
its affiliates may, from time to time, produce research materials regarding Home
Bancorp or CU Bancorp. Since the date of its engagement with respect to the
Merger, Piper has not held a long or short position for its own account in Home
Stock or CU Stock and neither it nor its affiliates have issued any research
materials with respect to Home Bancorp or CU Bancorp.
Piper is a nationally-recognized investment banking firm and, as a
customary part of its investment banking business, it is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwriting and secondary distributions of securities, private
placements and valuations for estate, corporate and other purposes. Piper was
selected by the Home Board based on Piper's qualifications, expertise and
reputation.
For rendering its fairness opinion to the Home Board in connection
with the Merger, Home Bancorp has paid Piper fees aggregating $75,000. Home
Bancorp has also agreed to pay the reasonable out-of-pocket expenses of Piper
and to indemnify Piper against certain liabilities incurred (including
liabilities under the federal securities laws) in connection with the engagement
of Piper by Home Bancorp. The fees payable to Piper were not contingent upon
consummation of the Merger.
TERMS OF THE MERGER
Upon the Effective Time, Home Bancorp will be merged with and into CU
Bancorp, with CU Bancorp surviving the Merger. The parties have agreed that the
Surviving Company will retain the name "CU Bancorp." At the Effective time, each
share of Home Stock issued and outstanding immediately prior to the Effective
Time, except any shares held by shareholders of Home Bancorp dissenting from the
Merger, will, on and after the Effective Time, be converted into 1.409 shares of
CU Stock pursuant to the Conversion Ratio. No fractional shares will be issued
in the Merger. In lieu thereof, each holder of Home Stock who would otherwise be
entitled to receive a fractional share will receive an amount in cash equal to
the product (calculated to the nearest thousandth) obtained by multiplying (a)
the average closing price of CU Stock for the 10 consecutive trading days prior
to the trading day prior to the Effective Time by (b) the fraction of the share
of CU Stock to which such holder would otherwise be entitled.
Simultaneously with the Merger and as part of the same transaction,
CU Bank will be merged with and into Home Bank, with Home Bank surviving the
Bank Merger under the name "California United Bank."
EFFECTIVE TIME OF MERGER
The Merger will be effective on a date to be designated by the
parties and upon the filing of the Merger Agreement with the Secretary of State
of the State of California, which the parties expect to occur on or about
July 22, 1996. The parties expect that the Bank Merger will be effected
simultaneously with the Merger.
REGULATORY APPROVALS
The consummation of the Merger is subject to the approval of the FRB.
Consummation of the Bank Merger is subject to the approval of the FRB and
Superintendent. Receipt of all requisite regulatory approvals and consents is a
condition precedent to the consummation of the Merger. See "THE MERGER AGREEMENT
- -- Conditions to the Merger."
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An application for the prior approval of the Merger was filed with
the FRB on June 3, 1996. An application for the prior approval of the Bank
Merger was filed with the Superintendent and FRB on June 3, 1996. There
can be no assurances that the required approvals will be obtained, or as to
conditions or timing of such approvals.
Although neither Home Bancorp nor CU Bancorp is aware of any reason
why the requisite approval of and consents to the Merger or Bank 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 Home Bancorp, Home Bank,
CU Bancorp or CU Bank from their obligation to consummate the Merger and Bank
Merger. See "THE MERGER AGREEMENT-- Conditions to the Merger" and "--
Termination."
In determining whether to approve the Merger, the FRB will consider
factors such as the financial condition of CU Bancorp, the effects of the Merger
on CU Bancorp, the effects of the Merger on competition, the financial and
managerial resources and future prospects of CU Bancorp and Home Bancorp
separately and as a combined entity, and the convenience and needs of the
communities served by Home Bank. The Bank Holding Company Act prohibits approval
of the Merger if it would have specified anti- competitive effects unless the
FRB finds those effects are clearly outweighed by the probable benefits of the
Merger.
In determining whether to approve the Bank Merger, the Superintendent
and FRB will consider factors such as the effects of the Merger on Home Bank,
the effects of the Bank Merger on competition, the financial and managerial
resources and future prospects of CU Bank and Home Bank, as a combined entity,
the convenience and needs of the communities to be served by Home Bank and CU
Bank as a combined entity and the record of performance of Home Bank and CU Bank
under the Community Reinvestment Act.
AGREEMENTS WITH CERTAIN SHAREHOLDERS
Each director of Home Bancorp who is also a shareholder of Home
Bancorp (the "Home Directors") has entered into a Shareholder's Agreement with
CU Bancorp (the "Home Shareholder's Agreement") and each director of CU Bancorp
who is also a shareholder of CU Bancorp (the "CU Directors") has entered into a
Shareholder's Agreement with Home Bancorp (the "CU Shareholder's Agreement", and
together with the Home Shareholder's Agreement, the "Shareholder's Agreements")
pursuant to which each such person has agreed (i) to vote the number of shares
of CU Stock or Home Stock owned by such director to approve the principal terms
of the Merger Agreement, the Merger, and the transactions contemplated thereby;
(ii) recommend approval of the Merger Agreement to the shareholders of CU
Bancorp or Home Bancorp, as the case may be, (iii) not to sell or otherwise
transfer any such shares or the right to vote or direct the vote of such shares;
and (iv) not to sell any CU Stock acquired in the Merger, in the case of the
Home Directors or, in the case of the CU Directors, held as of the Effective
Time, for a minimum period of thirty days following the date of publication of
combined financial statements for CU Bancorp and Home Bancorp. The Shareholder's
Agreements will terminate immediately upon the earlier of the Effective Time or
termination of the Merger Agreement.
Under the Home Shareholder's Agreements, the Home Directors have
agreed to vote 759,401 shares of Home Stock (approximately 18.00% of the
outstanding shares of Home Stock entitled to vote at the Annual Meeting) to
approve the principal terms of the Merger Agreement, increasing the likelihood
that the Merger will be approved. The affirmative vote of the holders of an
additional 32.01% of the
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outstanding shares of Home Stock entitled to vote at the Annual Meeting will be
required in order to approve the Merger Agreement. The full text of the Home
Shareholder's Agreement is reprinted as Exhibit H to the Merger Agreement
attached as Appendix A to this Joint Proxy Statement/Prospectus.
Under the CU Shareholder's Agreements, the CU Directors have agreed
to vote 234,931 shares of CU Stock (approximately 4.43% of the outstanding
shares of CU Stock entitled to vote at the Annual Meeting) to approve the
principal terms of the Merger Agreement, increasing the likelihood that the
Merger Agreement will be approved. The affirmative vote of the holders of an
additional 45.58% of the outstanding shares of CU Stock will be required in
order to approve the Merger Agreement. The full text of the CU Shareholder's
Agreement is reprinted as Exhibit F to the Merger Agreement attached as Appendix
A to this Joint Proxy Statement/Prospectus.
In addition, current directors of Home Bancorp who are not expected
to serve as directors of the Surviving Company have entered into Affiliate
Agreements with CU Bancorp, pursuant to which they agreed, among other things,
not to (i) purchase, sell, transfer or otherwise dispose of, or reduce their
risk of ownership or investment in Home Stock prior to the Merger; or (ii) sell,
transfer or dispose of any shares of CU Stock which such directors 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 (A) pursuant to an
exemption from the registration requirements of the Securities Act as provided
in the Affiliate Agreement, or (B) pursuant to an effective registration
statement under, and in compliance with, the Securities Act (provided that such
directors 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 CU Stock except as provided in the Affiliate Agreement.)
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Home Record Date, the directors and executive officers of
Home Bancorp beneficially owned 763,478 shares of Home Stock not including
shares such persons may acquire through the exercise of vested stock options. On
such date, directors and executive officers of Home Bancorp held options to
acquire 46,022 shares of Home Stock. Options not exercised prior to the
Effective Time will be converted into Options to acquire CU Stock on
substantially the same terms and conditions as the options to purchase Home
Stock held by such persons prior to the Merger, subject to approval of the
Conversion Plan by CU Bancorp shareholders at the CU Meeting. See "THE MERGER
AGREEMENT -- Treatment of Options." Immediately after the Effective Time, the
current directors and executive officers of Home Bancorp as a group will own
less than 9.60% of the outstanding shares of CU Bancorp.
As of the CU Record Date, the directors and executive officers of CU
Bancorp owned 237,931 shares of CU Stock not including shares such persons may
acquire through the exercise of vested stock options. On such date, directors
and executive officers of CU Bancorp held options to acquire 527,740 shares of
CU Stock, of which 306,020 options are exercisable within 60 days of the CU
Record Date.
Pursuant to the Retention Agreements expected to be entered into
prior to the Effective Time, upon consummation of the Merger, (i) Mr. James P.
Staes, President and Chief Executive Officer of Home Bank, will become entitled
to receive two years of salary (or $402,132) payable in 48 substantially equal
installments over a two-year period (the "Payment Term") and (ii) ten other key
employees of Home Bancorp or Home Bank will become entitled to receive the
equivalent of one year's salary, payable in 24 substantially
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equal installments over a one-year period. Included among these ten key
employees are Mr. Bill Neal, Executive Vice President and Chief Operating
Officer of Home Bank, and Mr. Keith W. Barnes, Senior Vice President and Chief
Financial Officer of Home Bancorp, who each receive $119,474 and $92,926,
respectively, under their Retention Agreement. Mr. Staes' Retention Agreement
further provides that Mr. Staes will provide certain consulting services for a
one-year period after the expiration of the Payment Term, and Mr. Staes will for
a three-year period after the Effective Time not serve as a director or
executive officer of another bank, savings and loan association, credit union or
thrift and loan which has an office within five miles of a branch office of Home
Bank existing immediately prior to the Effective Time. Total payments to be made
by the Surviving Company under the Retention Agreements are approximately $1.2
million. Payments under the Retention Agreements will be made whether or not the
recipient is employed by the Surviving Company.
At the Effective Time, the Board of Directors of the Surviving
Company will be comprised of five members from each of the current Boards of
Directors of CU Bancorp and Home Bancorp. The five members from the CU Board are
expected to be Kenneth L. Bernstein, Stephen G. Carpenter, Paul W. Glass, Ronald
S. Parker and David I. Rainer. See "INFORMATION CONCERNING CU BANCORP MEETING
ONLY -- Directors and Executive Officers." The five members from the Home Board
are expected to be Donald A. Buschenfield, J. Richard Denham, Randall G. Elston,
Donald G. Martin and James P. Staes. See "INFORMATION CONCERNING HOME BANCORP
MEETING ONLY -- Election of Directors."
The former officers and employees of Home Bancorp and CU Bank who
become officers or employees of the Surviving Company or the Surviving Bank will
be entitled to participate in all employee benefits and benefit programs of the
Surviving Company or the Surviving Bank, as the case may be, in accordance with
the terms of such plans or programs.
Home Bancorp has arranged to purchase directors' and officers' tail
insurance (the "D&O Tail"), under which the persons serving as officers and
directors of Home Bancorp 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 Home Bancorp.
At the Effective Time, Stephen G. Carpenter will become the Chief
Executive Officer, James P. Staes will become the Vice Chairman and David I.
Rainer will become the President and Chief Operating Officer of the Surviving
Company and the Surviving Bank.
Montgomery has provided certain investment advisory services to CU
Bancorp and Home Bancorp in connection with the Merger pursuant to a written
agreement with such parties. As compensation for such services, Montgomery
received $200,000 upon the execution of the Merger Agreement. Montgomery will
also receive an additional fee equal to 1.0% of the total combined market
capitalization of CU Bancorp and Home Bancorp based on each such company's
trading price per share for the ten (10) trading days prior to the close of the
Merger and the number of shares outstanding for each company as of the Merger,
up to a maximum of $1,100,000, less the $200,000 paid upon the execution of the
Merger Agreement and less an additional $200,000.
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CERTAIN RELATED TRANSACTIONS
As a condition to entering the Merger Agreement, CU Bancorp and Home
Bancorp each required the other to enter into a Warrant Purchase Agreement and
issue a warrant pursuant to which the issuing party granted to the other an
option to purchase shares of the issuing party's common stock, representing
19.9% of such party's issued and outstanding shares. The Warrant Agreements
could have the effect of discouraging persons who now or prior to the Effective
Time might be interested in acquiring all or a significant interest in either CU
Bancorp or Home Bancorp. Each Warrant Agreement provides for the grant of a
warrant to purchase shares of the issuing party's common stock. CU Bancorp
granted to Home Bancorp a warrant to purchase up to 1,492,390 shares of CU Stock
(representing approximately 19.9% of the outstanding shares of CU Stock) at a
price equal to $9.834 per share, subject to adjustment as provided in the
Warrant Agreement; Home Bancorp granted to CU Bancorp a warrant to purchase up
to 1,082,224 shares of Home Stock (representing approximately 19.9% of the
outstanding shares of Home Stock) at a price equal to $12.050 per share, subject
to adjustment as provided in the Warrant Agreement. The warrant prices are equal
to an average of the closing sales price for the 20 trading days prior to
January 8, 1996. The Merger was announced on January 10, 1996. Each Warrant
Agreement provides that the holder of the warrant is entitled to purchase the
warrant shares upon the occurrence of certain events that create the potential
for another party to acquire control of the issuing party. See "THE WARRANT
AGREEMENTS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Arthur Andersen has advised Home Bancorp that, in its opinion, the
following discussion is a fair and accurate summary of all material federal
income tax consequences of the Merger affecting shareholders of Home Bancorp.
The discussion and conclusions set forth below are based upon the Code, the
Treasury Regulations, and existing administrative and judicial interpretations
thereof as of the Effective Time, 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 HOME BANCORP
SHAREHOLDERS SHOULD THEREFORE CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM ARISING FROM THE MERGER.
CU Bancorp and Home Bancorp intend that the Merger qualify as a
reorganization within the meaning of Section 368(a) of the Code
("Reorganization"). If the Merger qualifies as a Reorganization, the exchange of
shares of Home Stock for shares of CU Stock pursuant to the Merger will not be a
taxable event except to the extent of cash received for fractional shares. (The
receipt of cash by dissenters, if any, who exercise dissenters' rights will also
be treated as a taxable event.) The purpose of this discussion is to advise Home
Bancorp shareholders of the conditions that must be satisfied in order for the
exchange of stock pursuant to the Merger to qualify as a Reorganization.
Neither CU Bancorp nor Home Bancorp 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. Home Bancorp shareholders should also
be aware that an opinion of Arthur Andersen, unlike a ruling, is not binding on
the IRS.
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BASED UPON THE CONTINUING ACCURACY OF CERTAIN ASSUMPTIONS AND
REPRESENTATIONS OF THE PARTIES TO THE MERGER, it is the opinion of Arthur
Andersen that the Merger will constitute a Reorganization under Section 368(a)
of the Code, if carried out in the manner set forth in the Merger Agreement, and
that:
1. A shareholder whose Home Stock is exchanged solely for
shares of CU Stock 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 lieu of fractional shares;
2. The tax basis of the CU Stock received by Home Bancorp
shareholders will be the same as the basis of the Home Stock surrendered in
exchange therefor, decreased by the amount of basis allocated to the fractional
shares that are hypothetically received by the shareholder and redeemed for
cash, and increased by any gain recognized on the exchange (not including any
gain recognized for the receipt of cash in lieu of fractional shares);
3. The holding period of the CU Stock received by the Home
shareholders will include the period during which the Home Stock surrendered in
exchange therefor was held, provided that the Home Stock is held as a capital
asset in the hands of the Home Bancorp shareholders on the Effective Time; and
4. The payment of cash in lieu of fractional share interests
of CU Stock will be treated as if each fractional share was distributed as part
of the exchange and then redeemed by CU Bancorp. Pursuant to Section 302(a) of
the Code, these cash payments will be treated as having been received as
distributions in full payment in exchange for the CU Stock. Any gain or loss
recognized upon such exchange (as determined under Section 1001 and subject to
the limitations of Section 267) will be capital gain or loss provided the
fractional share would constitute a capital asset in the hands of the exchanging
shareholder.
The opinion of Arthur Andersen 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 to the opinion of Arthur
Andersen are assumptions and representations relating to the Merger's
satisfaction of one of the requirements for a Reorganization -- the "continuity
of interest" requirement.
In order for the continuity of interest requirement to be met,
holders of Home Stock must not, pursuant to a plan or intent existing at or
prior to the Merger, dispose of so much of either (i) their Home Stock in
anticipation of the Merger (including Home Stock surrendered in the exercise of
dissenters' rights, if any), or (ii) the CU Stock to be received in the Merger
(collectively, the "Planned Dispositions") and retained such that holders of
Home Stock, as a group, no longer have a significant, direct or indirect, equity
interest in the Home Bancorp business being conducted after the Merger. Holders
of Home Stock will generally be regarded as having a significant equity interest
as long as the CU Stock 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 Home Stock in the Merger. The
IRS advance ruling guidelines require 50% continuity of interest. In accordance
with these guidelines, Home Bancorp , Home Bank, and CU Bancorp have made
representations that this will be the case. Holders of Home Stock should be
aware that the actual number of shares (if any) of Home Stock for which
dissenters' rights are exercised cannot be determined until after the vote of
shareholders with respect to the Merger. If the continuity of interest
requirement is not satisfied because of a significant number of Planned
Dispositions (including the exercise of dissenters' rights), the Merger will be
treated as a taxable event.
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IF THE MERGER IS TREATED AS A TAXABLE EVENT, holders of Home 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 Home Stock surrendered and the fair market value of
the shares of CU Stock received in exchange therefor plus any cash proceeds
received in lieu of fractional shares. The gain or loss will be capital gain or
loss if the shares of Home Stock are held as capital assets at the Effective
Time. Capital losses 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 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 CU Stock received in the Merger will
be equal to the fair market value of such shares at the Effective Time, and the
holding period for those shares will not include the period during which the
holder held the share of Home Stock exchanged therefor.
Irrespective of whether or not the Merger qualifies as a
Reorganization, holders of Home Stock who are entitled to cash payment for their
shares pursuant to the dissenters' rights provisions of the California Law
should recognize capital gain or loss for federal income tax purposes (if such
shares are held as capital assets at the Effective Time) in an amount equal to
the difference between the adjusted tax basis for their shares and the amount of
cash received in exchange therefor, provided such shareholder does not actually
or constructively own any Home Stock after the exchange under the provisions and
limitations of Section 302.
Shareholders of Home Bancorp 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 (as defined
below) 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. HOME BANCORP 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 HOME 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.
EXCHANGE PROCEDURES
As soon as practicable after the Effective Time, the financial
institution appointed by CU Bancorp with the consent of Home Bancorp to effect
the exchange (the "Exchange Agent") will mail to each holder of record of
outstanding shares of Home Stock a letter of transmittal which is to be used by
each Home Bancorp shareholder to return to the Exchange Agent the stock
certificates representing the Home Stock owned by him (the "Old Certificates"),
which certificates should be duly endorsed in blank by such Home Bancorp
shareholder. As soon as practicable after receiving such Old Certificates from a
Home Bancorp shareholder together with the duly executed letter of transmittal
and any other items specified by the letter
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of transmittal, the Exchange Agent will deliver to such Home Bancorp shareholder
new certificates ("New Certificates") representing the appropriate number of
shares of CU Stock, together with checks for payment of cash in lieu of
fractional shares. No dividends or other distributions that are declared on CU
Stock will be paid to persons otherwise entitled to receive the same until the
Old Certificates have been surrendered in exchange for New Certificates, but
upon such surrender, such dividends or other distributions, from and after the
Effective Time, will be paid to such persons in accordance with the terms of CU
Stock. No interest will be paid to the Home Bancorp shareholders on the cash or
the value of the CU Stock into which their shares of Home Stock will be
converted.
If the CU Stock and/or the cash, or any part thereof, are to be
delivered to a person other than the record holder of the Old Certificates of
Home 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 of 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.
POST-MERGER OPERATIONS
At the Effective Time, the Board of Directors of the Surviving
Company will consist of ten directors of which five directors will be designated
by the Home Board and five directors will be designated by the CU Board. On or
prior to the Effective Time, CU Bancorp will deliver to Home Bancorp the written
resignations of one director of CU Bancorp and Home Bancorp will deliver the
written resignations of five directors of Home Bancorp.
At the Effective Time, Stephen G. Carpenter will become the Chairman
and Chief Executive Officer, James P. Staes will become Vice Chairman and David
Rainer will become President and Chief Operating Officer of the Surviving
Company and the Surviving Bank.
SALES OF CU STOCK
The shares of CU Stock to be issued to shareholders of Home Bancorp
in the Merger have been registered under the Securities Act. Such shares will be
freely transferable under the Securities Act, except for shares issued to any
person who may be deemed to be an "affiliate" of Home Bancorp within the meaning
of Rule 145 under the Securities Act.
NASDAQ LISTING
CU Bancorp will file an application to list the shares of CU Stock to
be issued in the Merger on NASDAQ. A condition to the consummation of the Merger
is that such CU Stock be authorized for listing, upon notice of issuance, on
NASDAQ.
ACCOUNTING TREATMENT
The Merger is expected to be treated as "pooling of interests" for
accounting and financial reporting purposes. As a condition precedent to the
Merger, Arthur Andersen must confirm in writing that the Merger and the Bank
Merger qualify for pooling of interest accounting and financial reporting
treatment.
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THE MERGER AGREEMENT
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 JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN
BY REFERENCE. SHAREHOLDERS OF CU BANCORP AND HOME BANCORP ARE URGED TO READ THE
MERGER AGREEMENT AND THE EXHIBITS THERETO IN THEIR ENTIRETY.
CONDITIONS TO THE MERGER
The obligations of each of the parties to consummate the Merger are
subject to the conditions, among others, that (i) the Merger Agreement and the
transactions contemplated by the Merger Agreement will have received all
requisite approvals of the shareholders of CU Bancorp, CU Bank, Home Bancorp and
Home Bank; (ii) no judgment, decree, injunction, order or proceeding will be
outstanding or threatened by any governmental entity which prohibits or
restricts the transactions contemplated by the Merger Agreement; (iii) the
Merger and Bank Merger will be approved by all applicable regulatory agencies;
(iv) the sum of the shares of Home Stock that will not be converted into CU
Stock due to the exercise of dissenters' rights granted in Chapter 13 of the
California Law and the shares of CU Stock that become dissenting shares will not
exceed 10% of the aggregate number of issued and outstanding shares of Home
Stock and CU Stock; (v) CU Bancorp and Home Bancorp will have received an
opinion from Manatt, Phelps & Phillips, LLP or Arthur Anderson that the Merger
and the Bank Merger will not result in the recognition of gain or loss for
federal income tax purposes, nor will the issuance of CU Stock result in the
recognition of gain or loss to holders of Home Stock who receive CU Stock in the
Merger; and (vi) Arthur Andersen will have confirmed in writing to CU Bancorp
and Home Bancorp that the Merger and Bank Merger will qualify for pooling of
interests accounting treatment. Additionally, the consummation of the Merger is
subject to the performance of covenants, the accuracy of representations and
warranties and the receipt of various legal opinions, third party consents,
officers' certificates and other documents.
The obligations of CU Bancorp and CU Bank to consummate the Merger
and the Bank Merger are also subject to fulfillment of certain other conditions,
including the following: (i) all required governmental approvals with respect to
the transactions contemplated by the Merger Agreement will be granted without
the imposition of conditions applicable to CU Bancorp or the Surviving Bank
which CU Bancorp reasonably and in good faith concludes would be materially
burdensome; (ii) there will not have occurred, between January 10, 1996 and the
Effective Time, any materially adverse change in the financial condition,
results of operation, assets or prospects of Home Bancorp on a consolidated
basis, or any damage, destruction, loss or event materially adversely affecting
the properties, business or prospects of Home Bancorp on a consolidated basis;
(iii) CU Bancorp will have received a fairness opinion from Van Kasper & Company
to the effect that the transactions contemplated by the Merger Agreement are
fair from a financial point of view to CU Bancorp shareholders; (iv) Home
Bancorp will have obtained insurance coverage under a directors' and officers'
liability policy and coverage under a bankers' blanket bond, each for a period
of 36 months following the Effective Time, for acts or omissions occurring prior
to the Effective Time; (v) Home Bank's loans which are (i) more than 90 days
past due, (ii) classified as a "loss," "doubtful," "substandard," "other assets
especially mentioned" or "special mention," or (iii) or non-accrual status
("Non-Performing Loans") will not exceed 75% of (a) the shareholders' equity of
Home Bank plus (b) the loan loss reserves of Home Bank (as of March 31, 1996,
the applicable percentage was 19.5%); and (vi) subject to Home Bancorp's right
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to cure, the real property owned or leased by Home Bancorp or Home Bank, based
on a reasonable analysis of the Phase II Site Assessments, will not require
remediation expenses in excess of $1,000,000. CU Bancorp has determined, after
review of such Phase I or Phase II assessments as it deemed appropriate, that
item (vi) has been satisfied and is no longer a condition to the Merger
Agreement.
The obligations of Home Bancorp and Home Bank to consummate the
Merger and the Bank Merger are also subject to the fulfillment of certain other
conditions, including the following: (i) the shareholders of CU Bancorp will
have voted in favor of the adoption of the Conversion Plan; (ii) there will not
have occurred, between January 10, 1996 and the Effective Time, any material
adverse change in the financial condition, results of operations, assets or
prospects of CU Bancorp or CU Bank or any damage, destruction, loss or event
materially adversely affecting the properties, business or prospects of CU
Bancorp on a consolidated basis; (iii) Home Bancorp will have received a
fairness opinion from Piper to the effect that the transactions contemplated by
the Merger Agreement are fair from a financial point of view to the shareholders
of Home Bancorp; (iv) all necessary action will have been taken to have the five
persons designated by Home Bancorp elected or appointed to serve, from and after
the Effective Time, as directors of Surviving Company; (v) the shares of CU
Stock issuable pursuant to the Merger will have been duly authorized for
listing, subject to notice of issuance, on NASDAQ or any other national exchange
on which the shares of CU Stock may be listed; and (vi) CU Bank's Non-Performing
Loans will not exceed 75% of (i) the shareholders' equity of CU Bank plus (ii)
the loan loss reserves of CU Bank (as of March 31, 1996, the applicable
percentage was 8.0%).
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 "Termination."
NONSOLICITATION
Under the terms of the Merger Agreement, each party has agreed not to
directly or indirectly solicit, initiate, encourage, entertain or enter into any
Alternative Transaction (as hereafter defined). In addition, each party has
agreed not to directly or indirectly participate in any negotiations or
discussions regarding, or furnish any information with respect to, or otherwise
cooperate in any way in connection with, any effort or attempt to effect any
Alternative Transaction with or involving any person other than the other
parties to the Merger Agreement, unless the party receives an unsolicited
written offer from a person other than the parties to the Merger Agreement and
subject to the fiduciary obligations of each respective Board of Directors. Each
party has agreed to promptly notify the other parties to the Merger Agreement of
the terms of any proposal which it may receive in respect of any Alternative
Transaction. The term "Alternative Transaction" means any merger, consolidation,
share exchange or other business combination; a sale; lease, exchange, mortgage,
pledge, transfer or other disposition of assets of Home Bancorp or Home Bank or
CU Bancorp or CU Bank (as applicable) representing 10% or more of consolidated
assets; a sale of shares of capital stock (or securities convertible or
exchangeable into or otherwise evidencing, or any Merger Agreement or instrument
evidencing, the right to acquire capital stock), representing 10% or more of the
voting power of Home Bancorp or Home Bank or CU Bancorp or CU Bank (as
applicable); a tender offer or exchange offer for at least 10% of the
outstanding shares of Home Bancorp or CU Bancorp (as applicable); a solicitation
of proxies in opposition to the Merger by Home Bancorp's shareholders or CU
Bancorp's shareholders (as applicable); or a public announcement of a proposal,
plan, or intention to do any of the foregoing.
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TREATMENT OF OPTIONS
All of the Home Options issued and outstanding immediately prior to
the Effective Time will, on and after the Effective Time, be assumed by and be
deemed to be options granted by the Surviving Company pursuant to the Conversion
Plan to purchase that number of shares of CU Stock equal to the Conversion Ratio
times the number of shares of Home Stock subject to the option; provided,
however, that no option shall be deemed granted by the Surviving Company to
acquire a fractional share of CU Stock.
Assumption by CU Bancorp of the Home Options will be pursuant to the
terms of the Conversion Plan providing for the assumption of such options and is
subject to the approval of the Conversion Plan by CU Bancorp shareholders at the
CU Meeting.
To the extent that the assumption of a Home Option by the Surviving
Company would result in the issuance of an option to purchase a fractional share
of CU Stock, such fractional share option will be canceled, and the aggregate
exercise price of the option to purchase shares of CU Stock will be reduced by
the proportionate amount of the aggregate exercise price attributable to the
fractional share.
The assumption by the Surviving Company of Home Options pursuant to
the Conversion Plan will be subject to the following limitations: (i) the excess
of the aggregate fair market value of the shares of CU Stock subject to an
option immediately after the assumption over the aggregate option exercise price
of such shares of CU Stock will not be greater than the excess of the aggregate
fair market value of the shares subject to the Home Option immediately before
the assumption over the aggregate option exercise price of such shares of Home
Stock; (ii) for any option, on a share-by-share comparison, the ratio of the
option exercise price to the fair market value of the CU Stock subject to the
option immediately after the assumption will not be more favorable to the
optionee than the ratio of the Home Option exercise price to the fair market
value on the Home Stock subject to the option immediately before the assumption;
and (iii) the optionee will not receive additional benefits under the Surviving
Company option which he did not have under the Home Option.
Each option to purchase shares of CU Stock issued and outstanding
immediately prior to the Effective Time will not be affected by the Merger.
TERMINATION
The Merger Agreement may be terminated at any time prior to the
Effective Time (i) by mutual consent of CU Bancorp, CU Bank, Home Bancorp and
Home Bank in writing; (ii) by CU Bancorp or Home Bancorp if any material breach
or default by the other party is not cured within 20 days after notice thereof;
(iii) by CU Bancorp or Home Bancorp if any governmental or regulatory authority
denies or refuses to grant any approval, consent or authorization required to be
obtained to consummate transactions contemplated by the Merger Agreement, unless
within 30 days after such denial or refusal, CU Bancorp, CU Bank, Home Bancorp
and Home Bank agree to resubmit the application to the regulatory authority that
has denied or refused to grant the approval, consent or qualification requested;
(iv) by Home Bancorp if any conditions set forth in Article X of the Merger
Agreement have not been met; (v) by CU Bancorp if any conditions set forth in
Article XI of the Merger Agreement have not been met; (vi) by Home Bancorp or CU
Bancorp if any conditions of Article IX of the Merger Agreement shall not have
been met by September 30, 1996 or such earlier time as it becomes apparent such
conditions cannot be met; or (vii) the Merger does not receive the requisite
shareholder approval.
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The Merger Agreement will be terminated if the Closing Date shall not
have occurred by September 30, 1996 unless extended in writing by the parties.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
The Merger Agreement provides that, during the period from the date
of the Merger Agreement to the Effective Time, each party will conduct its
respective business only in the normal and customary manner and in accordance
with sound banking practices and will not, without the prior written consent of
the other, which will not be unreasonably withheld, take any of the following
actions: (i) issue any security except pursuant to the exercise of options
outstanding as of the date of the Merger Agreement or with respect to CU
Bancorp, shares of CU Stock issued in connection with CU Bancorp's Corporate
Bank merger (ii) except in accordance with each party's customary and past
practice of paying dividends, declare, set aside or pay any dividend or make any
other distribution upon, or purchase or redeem any shares of its stock; (iii)
except as may be required to effect the transactions contemplated by the Merger
Agreement, amend its respective Articles of Incorporation or its Bylaws; (iv)
grant any general or uniform increase in the rate of pay of employees or
employee benefits; (v) grant any material increase in salary, incentive
compensation or employee benefits or pay any bonus to any person except for
payments in the ordinary course of business consistent with past practices or,
in the case of Home Bancorp, pursuant to the Retention Agreements or any
pre-existing contract, arrangement or bonus plan; (vi) make any capital
expenditure in excess of $100,000, except for ordinary repairs, renewals and
replacements; (vii) compromise, settle or adjust any assertion or claim of a
deficiency in taxes (or interest thereon or penalties in connection therewith),
extend the statute of limitations with any tax authority or file any pleading in
court on any tax litigation or any appeal from an asserted deficiency; (viii)
grant or commit to grant any new extension of credit or amend the terms of any
such credit outstanding on the date hereof to any executive officer, director or
principal shareholder, or to any corporation, partnership, trust or other entity
controlled by any such person, except consistent with practices and policies in
existence as of the date of the Merger Agreement; (ix) close or open any offices
at which business is conducted except, in the case of CU Bancorp, in connection
with the Corporate Bank merger; (x) adopt or amend any employee benefit or other
benefit plan or arrangement of any such type except such amendments as are
required by law or do not materially increase the costs or benefits of such plan
or arrangement, except, with respect to Home Bancorp, the Retention Agreements
or, with respect to CU Bancorp, as contemplated by the Merger Agreement; (xi)
change any policies and practices with respect to liquidity management and cash
flow planning, lending, personnel practices, accounting or any other material
aspect of their respective business or operations on a consolidated basis,
except such changes as may be required in the opinion of management to respond
to economic or market conditions or as may be required by the rules of the
American Institute of Certified Public Accountants or Financial Accounting
Standards Board or by applicable governmental authorities; (xii) grant any
person a power of attorney or similar authority; (xiii) make any material
investment by purchase of stock or securities, contributions to capital,
property transfers or otherwise in any other person, except for investments made
in the ordinary course of business consistent with past practice; (xiv) amend,
modify or terminate, except in accordance with its terms, any material contract
or enter into any material agreement or contract; (xv) create or incur or suffer
to exist any mortgage, lien, pledge, security interest, charge, encumbrance or
restraint of any kind against or in any property or right of the respective
party; (xvi) sell, lease or otherwise dispose of any of their respective assets
which are material, individually or in the aggregate, except in the ordinary
course of business consistent with past practice; (xvii) make any extraordinary
payment to any person, other than, in the case of Home Bancorp, with respect to
the Retention Agreements; or (xviii) except as required by law, take or cause to
be taken any action which would prevent the transactions contemplated hereby
from qualifying as tax free reorganizations under Section 368 of the Code.
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The Merger Agreement also provides that each party will (i) use its
best efforts to take, or cause to be taken, all actions and to do, or cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the transactions contemplated by the Merger Agreement
as promptly as practical; (ii) consult with each other before any party to the
Merger Agreement issues any press release or makes any public statement with
respect to the Merger Agreement or the transactions contemplated hereby; (iii)
use its best efforts to keep in full force and effect all material licenses and
permits; (iv) use its best efforts to maintain insurance coverage substantially
the same as in effect as of the date of the Merger Agreement; (v) perform its
material obligations; (vi) duly and timely file all required governmental
reports; (vii) periodically furnish to the other certain information, loan
reports and updates of information previously provided; (viii) promptly notify
the other of certain communications from tax authorities, material litigation
and any event which has had or may reasonably be expected to have a materially
adverse effect on the financial condition, operations, business or prospects on
a consolidated basis; (ix) provide access to the other of certain information;
and (x) use its reasonable efforts between the date of the Merger Agreement and
the Effective Time to take all actions necessary or desirable, including the
filing of any regulatory applications, so that the Bank Merger will occur
concurrently with the Effective Time. In addition, the Merger Agreement provides
that, subject to applicable law and regulations and the good faith determination
of the Board of Directors of the Surviving Company, the Surviving Company will
pay dividends to its shareholders for each of the eight quarters following the
Effective Time in an amount not less than $.06 per share.
AMENDMENT AND WAIVER
Subject to applicable law, (a) the Merger Agreement may be amended at
any time by the action of the CU Board or Home Board pursuant to a writing
signed by all parties to the Merger Agreement and (b) the parties, by action of
their respective boards of directors, may, at any time prior to the Effective
Time, extend the performance of any obligation or action required by the Merger
Agreement, may waive inaccuracies in representations and warranties and may
waive compliance with any agreements or conditions for their respective benefit
contained in the Merger Agreement.
THE WARRANT AGREEMENTS
The following is a summary of the material provisions of the CU
Warrant Agreement and the Home Warrant Agreement, which are attached as Appendix
E and F, respectively, to this Joint Proxy Statement/Prospectus and are
incorporated herein by reference. The terms of the CU Warrant Agreement and the
Home Warrant Agreement are identical in all material respects other than with
respect to the shares which may be purchased pursuant thereto and the exercise
price. The following summary refers to the party granting the option as the
issuer and the party to whom the option was granted as the grantee. The
following summary is qualified in its entirety by reference to the Warrant
Agreements.
EXERCISE OF WARRANTS
The Warrants may be exercised in whole or in part only after the
occurrence of one of the following events (each an "Acquisition Event"):
(i) any person (other than the grantee or an
affiliate of the grantee) shall have commenced (as such
term is defined in Rule 14d-2 under Exchange Act), or shall
have filed a registration statement under the Securities
Act, with respect to, a tender offer or exchange offer to
purchase any shares of the issuer's common
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stock such that, upon consummation of such offer, such
person would own or control 10% or more of the then
outstanding common stock;
(ii) the issuer, without having received
grantee's prior written consent or except as permitted by
the Merger Agreement, shall have authorized, recommended,
proposed or publicly announced an intention to authorize,
recommend or propose, or entered into, an agreement with
any person (other than grantee or any affiliate of grantee)
to (A) effect a merger, consolidation or similar
transaction involving the issuer, (B) sell, lease or
otherwise dispose of assets of the issuer representing 10%
or more of the consolidated assets of the issuer, or (C)
issue, sell or otherwise dispose of (including by way of
merger, consolidation, share exchange or any similar
transaction) securities representing 10% or more of the
voting power of the issuer (any of the foregoing is defined
as an "Acquisition Transaction");
(iii) any person shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 under the
Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined in the Exchange
Act) shall have been formed which beneficially owns or has
the right to acquire beneficial ownership of, 10% or more
of the then outstanding common stock of the issuer; or
(iv) the holders of the issuer's common stock
shall not have approved the Merger Agreement at the meeting
of such shareholders held for the purpose of voting on the
Merger Agreement, such meeting shall not have been held or
shall have been canceled prior to termination of the Merger
Agreement or the issuer's Board of Directors shall have
withdrawn or modified in a manner adverse to the grantee
the recommendation of the issuer's Board of Directors with
respect to the Merger Agreement, in each case after any
person (other than the grantee) shall have (A) publicly
announced a proposal, or publicly disclosed an intention to
make a proposal, to engage in an Acquisition Transaction or
(B) filed an application (or given a notice), whether in
draft or final form, under the Bank Holding Company Act or
the Change in Bank Control Act of 1978, as amended, for
approval to engage in an Acquisition Transaction.
ADJUSTMENT OF NUMBER OF SHARES TO WARRANTS
The number and type of securities subject to the warrants and the
purchase price of shares will be adjusted for any change in the issuer's common
stock by reason of stock split, combination, dividend, exchange of shares or
similar transaction, such that the grantee will receive (upon exercise of the
warrant) the same number and type of securities as if the warrant had been
exercised immediately prior to the change in the issuer's common stock. The
number of shares of common stock subject to each Warrant will also be adjusted
in the event the issuer issues additional shares of common stock, such that the
number of shares of common stock subject to the Warrant represents 19.9% of the
issuer's issued and outstanding common stock. In the event of a capital
reorganization, merger or consolidation of the issuer with or into another
corporation, or the sale of all or substantially all of the issuer's assets to
any other person, then, as a part of any such transaction, provision shall be
made so that the grantee shall be entitled to receive upon exercise of the
Warrants the number of shares of stock or other securities or property of the
issuer, or of the successor
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corporation resulting from such transaction, to which a holder of issuer's
common stock deliverable upon exercise of the Warrants would have been entitled
in such transaction.
REPURCHASE OF WARRANTS
At any time after the occurrence of an Acquisition Event, the issuer
has the right to purchase and the grantee has the right to require that the
issuer repurchase the warrants and/or common stock owned by the grantee. The
Warrants will be purchased at a price equal to the product of (a) the maximum
number of shares of common stock purchasable upon exercise of the warrant and
(b) the "Share Price" on such date; provided that in no event shall the
aggregate profit derived by the grantee exceed $5,000,000. "Share Price" is
defined to mean, with respect to any Warrants, the amount by which, on the date
of the Acquisition Event triggering the exercisability of the Warrants (i) the
Warrant Price on such date is less than (ii) the greatest of:
A) the market value of a share of common stock on
such date; and
B) the highest price paid on or prior to such date
for a share of common stock (including in any merger or consolidation) by a
purchaser or group of purchasers acting in concert of 50% or more of the
outstanding shares of common stock, or, in the case of a purchaser of 50% or
more of the consolidated assets of the issuer, the market value of a share of
common stock on the date of consummation of such asset acquisition.
Common stock will be purchased at a price equal to the aggregate
market value of such shares.
RESTRICTIONS ON TRANSFER
Prior to the occurrence of an Acquisition Event, the grantee shall be
prohibited from transferring the Warrants. In the event grantee intends at any
time after the occurrence of an Acquisition Event to transfer its Warrants or
common stock acquired pursuant to such warrants, except for certain transactions
specified in the Warrant Agreements, then the grantee shall notify the issuer by
writing of its intention to transfer such securities and disclose to the issuer
the material terms of the proposed transfer; the issuer shall, thereafter, have
15 days to purchase all of the securities which grantee proposes to transfer on
the same terms and conditions set forth in the above written notice. Grantee and
its affiliates are prohibited from selling Warrants which, upon their exercise,
would permit the acquisition of more than 2% of their outstanding shares of
common stock of the issuer.
DISSENTING SHAREHOLDERS' RIGHTS
CU Bancorp. Because CU Stock is traded on NASDAQ, dissenters' rights
will be available to the shareholders of CU Bancorp only if the holders of five
percent (5%) or more of CU Stock make a written demand upon CU Bancorp for the
purchase of dissenting shares in accordance with Chapter 13 of the California
Law. If this condition is satisfied and the Merger is consummated, shareholders
of CU Bancorp who dissent from the Merger by complying with the procedures set
forth in Chapter 13 would be entitled to receive an amount equal to the fair
market value of their shares as of January 9, 1996, the day before the public
announcement of the Merger. The high, low and closing sales prices for CU Stock
on January 9, 1996
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were $10.25, $9.625 and $9.9375, respectively. A copy of Chapter 13 of the
California Law is attached hereto as Appendix D and should be read for more
complete information concerning dissenters' rights, THE REQUIRED PROCEDURE SET
FORTH IN CHAPTER 13 OF THE CALIFORNIA LAW MUST BE FOLLOWED EXACTLY OR ANY
DISSENTERS' RIGHTS MAY BE LOST. The information set forth below is a general
summary of dissenters' rights as they apply to CU Bancorp shareholders and is
qualified in its entirety by reference to Appendix D.
In order to be entitled to exercise dissenters' rights, a shareholder
of CU Bancorp must vote "Against" the Merger. Thus, any shareholder who wishes
to dissent and executes and returns a proxy in the accompanying form must
specify that his or her shares are to be voted "Against" the Merger. If the
shareholder returns a proxy without voting instructions or with instructions to
vote "For" the Merger, his or her shares will automatically be voted in favor of
the Merger and the shareholder will lose any dissenters' rights. In addition, if
the shareholder abstains from voting his or her shares, the shareholder will
lose his or her dissenters' rights.
Furthermore, in order to preserve his or her dissenters' rights, a
shareholder must make a written demand upon CU Bancorp for the purchase of
dissenting shares and payment to such shareholder of their fair market value,
specifying the number of shares held of record by such shareholder and a
statement of what the shareholder claims to be the fair market value of those
shares as of January 9, 1996. Such demand must be addressed to CU Bancorp, 16030
Ventura Boulevard, Encino, California 91436; Attention: Anita Wolman, Esq., and
must be received by CU Bancorp not later than the date of the CU Bancorp
Meeting. A vote "Against" the Merger does not constitute such written demand.
If the holders of five percent (5%) or more of the outstanding shares
of CU Stock have submitted a written demand for CU Bancorp to purchase their
shares, these demands are received by CU Bancorp on or before the date of the CU
Bancorp Meeting and the Merger is approved by the shareholders, CU Bancorp will
have ten days after such approval to send to those shareholders who have voted
against the approval of the Merger written notice of such approval accompanied
by a copy of Chapter 13 of the California Law, a statement of the price
determined by CU Bancorp to represent the fair market value of the dissenting
shares as of January 9, 1996, and a brief description of the procedure to be
followed if a shareholder desires to exercise dissenters' rights. Within 30 days
after the date on which the notice of the approval of the Merger is mailed, the
dissenting shareholder must surrender to CU Bancorp, at the office designated in
the notice of approval, the certificates representing the dissenting shares to
be stamped or endorsed with a statement that they are dissenting shares or to be
exchanged for certificates of appropriate denomination so stamped or endorsed.
Any shares of CU Stock that are transferred prior to their submission for
endorsement lose their status as dissenting shares.
If CU Bancorp and the dissenting shareholder agree that the
surrendered shares are dissenting shares and agree upon the price of the shares,
the dissenting shareholder will be entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the agreement. Payment
of the fair market value of the dissenting shares shall be made within 30 days
after the amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later,
subject to the surrender of the certificates therefor, unless provided otherwise
by agreement.
If CU Bancorp denies that the shares surrendered are dissenting
shares, or CU Bancorp and the dissenting shareholder fail to agree upon a fair
market value of such shares of CU Stock, then the dissenting shareholder of CU
Bancorp must, within six months after the notice of approval is mailed, file a
complaint
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at the Superior Court of the proper county requesting the court to make such
determinations or intervene in any pending action brought by any other
dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenters' rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting shareholder may not withdraw his or her dissent or
demand for payment unless CU Bancorp consents to such withdrawal.
Home Bancorp. Each holder of shares of Home Stock which were
outstanding as of the Record Date and remain outstanding at the Effective Time
who did not vote such shares in favor of the proposal to approve the Merger by
complying with the procedures set forth in Chapter 13 of the California Law
would be entitled to receive an amount equal to the fair market value of his or
her shares as of January 9, 1996, the day before the public announcement of the
Merger. The bid and ask prices for Home Stock on January 9, 1996 were $12.50 and
$13.50, respectively. A copy of Chapter 13 of the California Law is attached
hereto as Appendix D and should be read for more complete information concerning
dissenters' rights. THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA LAW MUST BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
The information set forth below is a general summary of dissenters' rights as
they apply to Home Bancorp shareholders and is qualified in its entirety by
reference to Appendix D.
In order to be entitled to exercise dissenters' rights, a shareholder
of Home Bancorp must not vote "For" the Merger. Thus, any shareholder who wishes
to dissent and executes and returns a proxy in the accompanying form must
specify that his or her shares are to be either voted "Against" or "Abstain" on
the Merger. If the shareholder returns a proxy without voting instructions or
with instructions to vote "For" the Merger, his or her shares will automatically
be voted in favor of the Merger and the shareholder will lose his or her
dissenters' rights.
If the Merger is approved by the shareholders, Home Bancorp will have
ten days after such approval to send to those shareholders who did not vote in
favor of the Merger written notice of such approval accompanied by a copy of
Chapter 13 of the California Law, a statement of the price determined by Home
Bancorp to represent the fair market value of the dissenting shares as of
January 9, 1996 and a brief description of the procedure to be followed if a
shareholder desires to exercise dissenters' rights. Within 30 days after the
date on which the notice of the approval of the Merger is mailed, the dissenting
shareholder must make written demand upon Home Bancorp for the purchase of
dissenting shares and payment to such shareholder of their fair market value,
specifying the number of shares held of record by such shareholder and a
statement of what the shareholder claims to be the fair market value of those
shares as of January 9, 1996, and must surrender to Home Bancorp, at the office
designated in the notice of approval, the certificates representing the
dissenting shares to be stamped or endorsed with a statement that they are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. Any shares of Home Stock that are
transferred prior to their submission for endorsement lose their status as
dissenting shares.
If Home Bancorp and the dissenting shareholder agree that the
surrendered shares are dissenting shares and agree upon the price of the shares,
the dissenting shareholder will be entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the agreement. Subject
to the restrictions imposed under Chapter 13 of the California Law on the
ability of Home Bancorp to purchase its outstanding
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shares, payment of the fair value of the dissenting shares shall be made within
30 days after the amount thereof has been agreed upon or 30 days after any
statutory or contractual conditions to the Merger have been satisfied, whichever
is later, subject to the surrender of the certificates therefor, unless provided
otherwise by agreement.
If Home Bancorp denies that the shares surrendered are dissenting
shares or Home Bancorp and the dissenting shareholder fail to agree upon a fair
market value of such shares of Home Stock, then the dissenting shareholder of
Home Bancorp must, within six months after the notice of approval is mailed,
file a complaint at the Superior Court of the proper county requesting the court
to make such determinations or intervene in any pending action brought by any
other dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenter's rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting shareholder may not withdraw his or her dissent or
demand for payment unless Home Bancorp consents to such withdrawal.
CU BANCORP
CU Bancorp is a California corporation incorporated in 1981 and is
registered as a bank holding company under the Bank Holding Company Act. As of
March 31, 1996, it had total consolidated assets of $383,671,000. On January
12, 1996, CU Bancorp completed the acquisition of Corporate Bank, a California
bank with assets of $70,000,000. CU Bancorp's sole subsidiary is CU Bank, which
had total assets of $383,671,000 as of March 31, 1996. CU Bank was founded
in April 1982 and provides an extensive range of commercial banking services.
CU Bank 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. CU Bank 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 by providing
similar services for motion picture and television production firms, record
labels, talent agencies, business managers, commercial houses as well as a
variety of other related business activities. The SBA Division offers financing
alternatives to businesses in CU Bank's market. The International Trade Services
Division 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 International Trade Services 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.
Neither CU Bancorp nor CU Bank operates under enforcement agreements
with or orders from any banking regulatory agency at the current time. Prior
agreements were terminated in 1993. In 1992, CU Bank and CU 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, a "credit
culture" and other new management techniques, the OCC released CU Bank from the
Formal
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Agreement and later that same month the Federal Reserve Bank of San Francisco
determined that CU Bancorp had met all the requirements of the Memorandum of
Understanding and terminated that document.
CU Bank's capital ratios, as of March 31, 1996, are in excess of all
minimums imposed by law and regulation and qualify to rate CU Bank as a "well
capitalized" bank. Following the acquisition of Corporate Bank, CU Bank's
capital ratios continued to qualify CU Bank to be "well capitalized."
DESCRIPTION OF CU BANCORP CAPITAL STOCK
CU STOCK
The CU Board is authorized to issue a maximum of 20,000,000 shares
of CU Stock. As of the CU Record Date, 5,296,583 shares of CU Stock were
outstanding. No shares of any CU Bancorp Preferred Stock ("CU Preferred Stock")
have been issued (see "CU Preferred Stock"). Subject to any prior rights of any
CU Preferred Stock then outstanding, holders of the CU Stock are entitled to
receive such dividends as are declared by the CU Board out of funds legally
available therefor. Subject to the rights, if any, of any CU Preferred Stock,
all voting rights are vested in the holders of CU Stock, each share being
entitled to one vote. Subject to any prior rights of the CU Preferred Stock, in
the event of liquidation, holders of shares of CU Stock are entitled to receive
pro rata any assets distributable to shareholders in respect of shares held by
them. Holders of shares of CU Stock do not have any preemptive right to
subscribe for any additional securities which may be issued by CU Bancorp. The
outstanding shares of CU Stock are, and the shares of CU Stock offered hereby
will be, fully paid and non-assessable. The transfer agent and registrar for the
CU Stock is Wells Fargo National Bank.
CU PREFERRED STOCK
The CU Board has the authority, without further stockholder action,
to issue from time to time a maximum of 10,000,000 shares of CU Preferred Stock
in one or more series and with such terms and at such times and for such
consideration as the CU Board may determine. The authority of the CU 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 CU Preferred Stock be entitled to more than one vote for each
share of CU Preferred Stock held by such holder; and (vi) the rights of the
holders upon the dissolution, or upon the distribution of assets, of CU Bancorp.
Any shares of CU Preferred Stock which may be issued may rank prior to shares of
CU Stock as to payment of dividends and upon liquidation. No CU Preferred Stock
is currently outstanding.
INDEMNIFICATION PROVISIONS
Article Five of CU 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
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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.
There is no action or proceeding pending or, to the knowledge of CU
Bancorp, threatened which may result in a claim for indemnification by any
director, officer, employee or agent of CU Bancorp.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of CU Bancorp pursuant to the provisions described above or otherwise, CU
Bancorp has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by CU Bancorp of expenses
incurred or paid by a director, officer or controlling person of CU 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, CU 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 Securities Act and will be governed by the final
adjudication of such issue.
HOME BANCORP
Home Bancorp is a corporation which was organized under the laws of
the State of California on September 17, 1979 and registered as a bank holding
company under the Bank Holding Company Act. The Company's principal asset is the
capital stock of Home Bank, which became its wholly-owned subsidiary on November
8, 1982.
Home Bancorp's principal business is to serve as a holding company
for Home Bank and its principal source of income is derived from dividends paid
by Home Bank. The payment of dividends to Home Bancorp by Home Bank is subject
to restrictions that could limit Home Bancorp's payment of dividends to its
shareholders. As of March 31, 1996, Home Bancorp had total consolidated assets
of approximately $433,390,000, total consolidated net loans and leases of
approximately $212,702,000 and total consolidated deposits of approximately
$378,270,000.
Home Bank is a corporation which was organized under the laws of the
State of California on February 10, 1950. Home Bank was licensed by the
California State Banking Department and commenced operations as a
state-chartered bank on October 28, 1950. The deposits of each of its clients
are insured up to the maximum extent permitted by law. Home Bank provides a wide
range of banking services to individuals and business concerns located in and
around its primary service areas. Those services include personal and business
checking accounts, NOW and savings accounts and time certificates of deposit.
Home Bank offers a variety of special banking and financial services to its
customers, which include collection accounting, telephone transfers between
accounts, travelers' checks, money orders, safe deposit boxes, discount stock
brokerage and notary services. Home Bank acts as a merchant depository for
cardholder drafts. Home Bank also has walk-up, drive-through and ATM facilities
with extended hours for customers' convenience.
Home Bank's primary service areas are southern Los Angeles County and
certain portions of Orange County. Its service areas encompass a diverse economy
which includes commercial, retail, manufacturing, agricultural, health care,
recreational and governmental sectors. Home Bank conducts its business through
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fifteen full service branches in Los Angeles County and Orange County. Ten of
those offices are located in Los Angeles County in the cities of Signal Hill,
Redondo Beach, Paramount, Hacienda Heights, Lynwood, Manhattan Beach, Torrance,
Lomita and two in San Pedro. The other five offices are located in Orange County
in the cities of Los Alamitos, Westminster, Fountain Valley, Brea and Irvine.
Home Bank's main office is located in Signal Hill, California.
Most of Home Bank's deposits are obtained from small and medium-sized
businesses, professionals and individuals. As of March 31, 1996, Home Bank had
approximately 43,859 deposit accounts, representing 23,507 non-interest
bearing (demand) accounts with balances totaling approximately $133,070,000
for an average balance per account of approximately $5,661; 16,269 savings,
interest-bearing demand and money market accounts with balances totaling
approximately $159,978,000 for an average balance per account of approximately
$9,833; and 4,083 time certificate of deposits accounts with balances totaling
approximately $86,443,000 for an average balance of account of approximately
$21,171.
Home Bank's lending activities are concentrated in four primary
areas: commercial loans, real estate construction loans, other real estate loans
and installment loans. At March 31, 1996, these four categories accounted for
approximately 35%, 9%, 41% and 15%, respectively, of Home Bank's loan portfolio.
Home Bank's commercial loan department provides personalized
financial services to the diverse commercial and professional businesses in its
primary service areas. However, it does not concentrate on any single industry.
Its commercial credit services include accounts receivable financing, equipment
financing, working capital and growth loans, SBA loans and letters of credit.
Significant emphasis is placed on the borrower's earning history,
capitalization, secondary sources of financing repayment (e.g., accounts
receivable) and high liquid collateral (e.g., time deposits or marketable
securities).
Home Bank makes real estate construction loans and a variety of other
real estate loans. The primary focus of Home Bank's real estate construction
activity is to provide short-term loans (less than one year) to local
individuals and developers for the construction of single family residences and
small commercial developments in its primary service areas. Home Bank also
provides limited short term real estate financing to individuals and
corporations and offers home improvement and real estate equity loans to
individuals in its primary service areas. Also, Home Bank's installment and
consumer loans include automobile, home improvement, home equity loans and other
secured and unsecured lines of credit.
Although Home Bank does not directly offer trust or international
banking services, such services are offered by Home Bank indirectly through
correspondent institutions.
Neither Home Bancorp nor Home Bank holds any patents, licenses (other
than licenses obtained by Home Bank from bank regulatory authorities),
franchises or concessions.
58
<PAGE> 80
INFORMATION CONCERNING CU BANCORP MEETING ONLY
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the CU Record Date
pertaining to beneficial ownership of CU Stock by persons known to CU Bancorp to
own five percent or more of such stock, current directors of CU Bancorp, all
nominees to be directors of CU Bancorp and all directors and officers of CU
Bancorp as a group. The information contained herein has been obtained from CU
Bancorp's records, from information furnished directly by the individual or
entity to CU Bancorp, or from various filings made by the named individuals with
the Commission.
CU Bancorp 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 CU Bancorp, 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.
59
<PAGE> 81
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
RELATIONSHIP WITH BENEFICIAL PERCENT OF
-----------------
NAME OF BENEFICIAL OWNER COMPANY OWNERSHIP(1)(2)(3) CLASS(4)
------------------------ ------- ------------------ --------
<S> <C> <C> <C>
Kenneth L. Bernstein Director, Nominee 28,480 .54%
Director, Nominee, 140,907 2.60
Stephen G. Carpenter President, Chief Executive
Officer
Richard H. Close Director, Nominee 121,413 2.28
Paul W. Glass Chairman, Director Nominee 104,403 1.96
Ronald S. Parker Director, Nominee 9,750 .18
David I. Rainer Director, Nominee, Chief 76,499 1.42
Operating Officer
Anne Williams Chief Credit Officer 18,000 .34
Patrick Hartman Chief Financial Officer 17,499 .33
FBL Investment Advisory Beneficial Owner of More 536,100(5) 11.86(5)
Services, Inc. Than 5%
Dimensional Fund Advisors Beneficial Owner of More 262,796(6) 5.73(6)
Inc.(6) Than 5%
All directors and nominees as
a group (6 in number) Directors/Nominees 481,452 8.64
ALL CURRENT EXECUTIVE
OFFICERS AND DIRECTORS AS A
GROUP
(8 IN NUMBER)(7)(8)(9) 516,951 9.23
------- -----
</TABLE>
- --------------------------------
(1) 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.
60
<PAGE> 82
(2) Includes as if currently outstanding the following shares subject to
options which are exercisable within 60 days.
<TABLE>
<CAPTION>
OPTIONS
DIRECTOR EXERCISABLE
- --------------------------------------- ------------
<S> <C>
Kenneth Bernstein 3,750
Stephen Carpenter 129,907
Richard Close 18,870
Paul Glass 20,745
Ronald Parker 3,750
David Rainer 96,499
Anne Williams 16,500
Patrick Hartman 15,999
</TABLE>
(3) Shares issuable pursuant to options which may be exercised within 60
days are deemed to be issued and outstanding in calculating the
percentage ownership of those individuals possessing such interest,
but not for any other individuals.
(4) Only common stock is outstanding.
(5) FBL Investment Advisory Services, Inc. ("FBL"), 5400 University
Avenue, West Des Moines, IA is an investment advisor registered
under the Investment Advisors Act of 1940. According to a Schedule
13-G filed as of December 31, 1995, FBL was deemed to have beneficial
ownership of 536,100 shares or 11.86% of CU Stock as of such date.
According to a Schedule 13-G, the shares are owned on behalf
various investment advisory clients of the reporting person which
have the right to receive or the power to direct the receipt of
dividends from, or the proceeds from a sale of such securities. None
of such clients individually own more than five percent except for
FBL Series Fund, Inc. - Growth Common Stock Portfolio, Md. Corp.;
which through ownership of 251,000 common shares had a pecuniary
interest of 5.47% as of the date of the Schedule 13-G.
(6) Percentage of outstanding CU Stock is as of December 31, 1995.
Dimensional Fund Advisors, Inc. ("DFA"), a registered investment
advisor, is deemed to have sole voting power over 262,796 shares
and sole dispositive power over 203,356 shares of CU Stock as of
December 31, 1995. Persons who are officers of DFA also serve as
officers of DFA Investment Dimensions Group Inc. (the "Fund") and The
DFA Investment Trust Company (the "Trust") each an open-end
management investment company registered under the Investment Company
Act of 1940. In their capacities as officers of the Fund and the
Trust, these persons vote 38,000 additional shares which are owned by
the Fund and 21,440 shares which are owned by the Trust. All
securities are owned by advisory clients of DFA, and no one to the
knowledge of DFA owns more than 5%. DFA disclaims beneficial
ownership of all such shares. As of December 31, 1995, such shares
represented 5.73% of the outstanding CU Stock on such date.
(7) The listing of individuals as executive officers in this table or
elsewhere in this Joint Proxy Statement/ Prospectus should not be
interpreted as an indication that such individuals are considered to
be executive officers of CU Bancorp or CU Bank for any other
purposes.
(8) Includes as if currently outstanding 306,020 shares subject to
options held by directors and executive officers which are
exercisable within 60 days from the CU Record Date.
(9) The address of all listed individuals, with the exception of DFA and
FBL Investment is c/o CU Bancorp, 16030 Ventura Boulevard, Encino,
California 91436. The address of DFA is 1299 Ocean Avenue, 11th
Floor, Santa Monica, California 90401. The address of FBL Investment
Advisory Securities, Inc. is 5400 University Avenue, West Des Moines,
IA.
61
<PAGE> 83
- -------------------------------------------------------------------------------
PROPOSAL NUMBER 1.
TO APPROVE THE PRINCIPAL TERMS OF THE MERGER AGREEMENT PURSUANT TO
WHICH, AMONG OTHER THINGS, HOME BANCORP WILL BE MERGED WITH AND
INTO CU BANCORP AND CU BANK WILL BE MERGED WITH AND INTO HOME
BANK UNDER THE NAME CALIFORNIA UNITED BANK. UPON CONSUM-
MATION OF THE MERGER, EACH OUTSTANDING SHARE OF HOME
STOCK WILL BE CONVERTED INTO THE RIGHT TO RECEIVE
1.409 SHARES OF CU STOCK IN A TAX-FREE EXCHANGE.
See "THE MERGER", "THE MERGER AGREEMENT", "THE WARRANT AGREEMENTS" and
"DISSENTING SHAREHOLDERS' RIGHTS" herein for discussion of matters relative to
Proposal Number 1.
THE CU BOARD RECOMMENDS A VOTE FOR PROPOSAL NUMBER 1 AND WILL VOTE ALL PROXIES
HELD BY IT FOR PROPOSAL NUMBER 1, UNLESS A SHAREHOLDER DIRECTS OTHERWISE. EACH
OF THE MEMBERS OF THE BOARD OF DIRECTORS, AS A SHAREHOLDER, HAS AGREED TO VOTE
ALL SHARES HELD BY THEM IN FAVOR OF PROPOSAL NUMBER 1.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
OF CU STOCK ENTITLED TO VOTE.
REGULAR BUSINESS TO BE CONDUCTED:
PROPOSAL NUMBER 2.
TOAMEND THE BYLAWS OF CU BANCORP TO DECREASE
THE AUTHORIZED NUMBER OF DIRECTORS TO NOT
LESS THAN SIX AND NOT MORE THAN ELEVEN.
The Bylaws of CU Bancorp currently provide that the number of
directors of CU Bancorp may not be less than seven and not more than thirteen,
with the exact number to be fixed from time to time by resolution of the CU
Board or by action of the shareholders. The number of directors of CU Bancorp at
the present time is less than the minimum number of directors specified in the
Bylaws, as a result of the resignation of M. David Nathanson during 1995. In
view of the pendency of the Merger and the contractual requirement that the CU
Board immediately following the Merger consist of five members of the current CU
Board and five members of the current Home Board, the CU Board has determined to
neither seek nor appoint an additional director to fill this vacancy, nor to
nominate an additional person to serve as a director.
For this reason, the CU Board determined that the range of directors
should be reduced to reflect the current board distribution, but to leave
opportunity for flexibility in the event that the Merger does not occur and
should a qualified director candidate become available. The proposal herein
would reduce the authorized number of directors to a number not less than six
and not more than eleven. THE CU BOARD HAS FIXED THE
62
<PAGE> 84
NUMBER AT SIX. CHANGES IN THE NUMBER OF DIRECTORS WITHIN THE RANGE MAY BE MADE
FROM TIME TO TIME BY RESOLUTION OF THE CU BOARD OR ACTION OF THE SHAREHOLDERS.
In conjunction with the Merger and effective only upon the Merger, the CU Board
has recommended to the shareholders that an additional amendment to the Bylaws,
returning the minimum and maximum number of directors to seven and thirteen,
respectively, be adopted. See Proposal Number 4 herein.
The CU Board believes that each director should represent a broad
spectrum of shareholders and should provide special expertise, experience or
service to CU Bancorp. While the proposed amendment will have the effect of
increasing the number of shares necessary to elect or remove a director, and
could decrease the ability of minority shareholders to be elected to the CU
Board solely by reason of their share holdings, it will not impair the
philosophy that each director should have and continue to warrant the support of
a broad range of shareholders.
The CU Board believes that the proposed amendment will facilitate
preparation for the Merger, maintain the quality of CU Bancorp's directors and
more accurately reflect the current CU Board make-up. In the event that the
Merger does not occur, the CU Board may seek additional qualified members of the
Board of Directors, may set the number of directors at any number within the
range, and may appoint directors to fill such vacancies, including vacancies
created by such CU Board action, without additional vote of the shareholders. In
the event the Merger does not occur, such directors would serve until the next
Annual Meeting and until their successors shall be duly elected and qualified.
For further information about the terms proposed for the directors see Proposal
Number 3, herein.
THE CU BOARD RECOMMENDS A VOTE FOR AN AMENDMENT OF SECTION 3.2 OF THE CU BANCORP
BYLAWS AS FOLLOWS:
SECTION 3.2. NUMBER OF DIRECTORS. The affairs of the corporation
shall be managed by a board of directors consisting of not less than
six (6) nor more than eleven (11) directors. The exact number of
directors shall be fixed from time to time, within the limits
specified in this Section 3.2 (i) by resolution duly adopted by the
board of directors; or (ii) by a bylaw or amendment thereof duly
adopted by the vote of a majority of the shares entitled to vote or
by the written consent of the holders of a majority of the
outstanding shares entitled to vote or of the board of directors; or
(iii) by approval of the shareholders (as defined in Section 153 of
the General Corporation Law).
THE CU BOARD WILL VOTE ALL PROXIES HELD BY IT FOR PROPOSAL NUMBER 2, UNLESS A
SHAREHOLDER DIRECTS OTHERWISE AND URGES YOU TO VOTE FOR PROPOSAL NUMBER 2.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
OF CU STOCK ENTITLED TO VOTE.
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<PAGE> 85
DIRECTORS AND EXECUTIVE OFFICERS
PROPOSAL NUMBER 3.
ELECTION OF BOARD OF DIRECTORS AND NOMINEES.
The persons named below have been nominated for election as directors
to serve until the next annual meeting and until their successors are duly
elected and qualified, with the exception discussed below. Votes will be cast in
such a way as to effect the election of all nominees or as many as possible
under the rules of cumulative voting. If any nominee should become unable or
unwilling to serve as a director, the proxies will be voted for such substitute
nominee as shall be designated by the CU Board or the number of nominees may be
reduced. The Board presently has no knowledge that any of the nominees will be
unable or unwilling to serve. The procedures for nominating directors, other
than by the Board, are set forth in the Bylaws and are included in the Notice of
Annual Meeting. This Bylaw provision is designed to give the CU Board advance
notice of competing nominations, if any, and the qualifications of nominees, and
may have the effect of precluding third-party nominations if not followed. The
six nominees receiving the highest number of votes at the CU Meeting shall be
elected.
The following table provides information as of the CU Record Date
with respect to each person nominated and recommended to be elected by the
current CU Board. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" for information pertaining to stock ownership of the nominees.
<TABLE>
<CAPTION>
POSITION AND POSITION AND DIRECTOR OF
------------ ------------ -----------
OFFICE WITH CU OFFICE WITH THE COMPANY AND
-------------- --------------- -----------
NAME AGE BANCORP BANK BANK SINCE:
- ---- --- ------- ---- -----------
<S> <C> <C> <C> <C>
Kenneth L. Bernstein 53 Director Director 1994
Stephen G. Carpenter 56 Chairman, Chief Chairman, Chief 1992
Executive Officer Executive Officer
Richard H. Close (1) 51 Director, Secretary Director, 1981
Secretary
Paul W. Glass 50 Director Director 1984
Ronald S. Parker 51 Director Director 1993
David I. Rainer 39 Director, Director, 1992
President, Chief President, Chief
Operating Officer Operating Officer
</TABLE>
(1) As previously discussed, the Merger Agreement provides that
immediately following the Merger, the CU Board shall consist of ten
directors, five of whom shall be current members of the CU Board and
five of whom shall be current members of the Home Board. While not
contractually mandated, it is the intention of both CU Bancorp and
Home Bancorp that the number and identity of the directors of the
surviving subsidiary bank shall mirror the number and identity of
directors of the surviving parent corporation. In order to assist CU
Bancorp in complying with this contractual obligation and in
consideration of the benefit of the Merger as a shareholder, director
Richard Close has submitted his irrevocable
64
<PAGE> 86
resignation as a director and officer of CU Bancorp and CU Bank,
effective upon the Merger. In the event the Merger does not occur,
Mr. Close would continue to serve as a director of CU Bancorp for the
period elected herein.
None of the directors or officers of CU Bancorp or CU Bank were
selected pursuant to any arrangement or understanding other than with the
directors and officers of CU Bancorp and CU 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 CU Board to become a
director or officer and none serve as directors of any company required to
report under the Exchange Act, or any investment company registered under the
Investment Company Act of 1940, as amended.
Upon the Effective Time, in order to comply with the Merger
Agreement, the CU Board will set the number of directors within the range
approved by the CU Bancorp shareholders in connection with the Merger (as more
fully discussed herein) at ten and will appoint the following five current Home
Bancorp directors to be directors of CU Bancorp:
Donald A. Buschenfield J. Richard Denham
Randall G. Elston Donald G. Martin
James P. Staes
These individuals shall serve until the next annual meeting of shareholders and
until their successors shall be duly elected and qualified.
Set forth below are brief summaries of the background and business
experience, including principal occupation, of the CU Board director nominees.
SUMMARIES OF THE BACKGROUND AND BUSINESS EXPERIENCE, INCLUDING PRINCIPAL
OCCUPATION OF THE INDIVIDUALS WHO WILL BE APPOINTED TO THE CU BOARD IN
CONJUNCTION WITH THE MERGER AND IN ACCORDANCE WITH THE MERGER AGREEMENT CAN BE
FOUND IN THE SECTION "INFORMATION CONCERNING HOME BANCORP MEETING ONLY --
ELECTION OF DIRECTORS" OF THIS JOINT PROXY STATEMENT/PROSPECTUS, WHICH IS
INCORPORATED HEREIN BY REFERENCE.
KENNETH L. BERNSTEIN, was elected to the Board of CU Bancorp and CU
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 services for both the
finance industry and clients of that industry.
STEPHEN G. CARPENTER, joined CU Bank 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. He
assumed the additional role of Chairman of CU Bank in February, 1994 and
Chairman of CU Bancorp in 1995.
RICHARD H. CLOSE has been a principal in the law firm of Shapiro,
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.
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
65
<PAGE> 87
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 CU Bank in
June 1992 and assumed the position of Chief Operating Officer in late 1992. He
assumed the additional title of President of CU Bank in February, 1994 and
President and Chief Operating Officer of CU Bancorp in 1994. He was elected to
the CU Board and CU Bank Board in 1993. 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 CU Bancorp or of CU Bank, no
owner of record or beneficially of more than five percent of any class of voting
securities of CU Bancorp or no associate of any such director, officer or
affiliate is a party adverse to CU Bancorp or CU Bank in any material pending
legal proceedings to which CU Bancorp or CU Bank is a party.
THE CU BOARD RECOMMENDS A VOTE FOR THE SIX NOMINEES SET FORTH HEREIN, AND
WILL VOTE ALL PROXIES HELD BY IT FOR THE SIX NOMINEES SET FORTH HEREIN, UNLESS
A SHAREHOLDER DIRECTS OTHERWISE AND URGES YOU TO VOTE FOR THE SIX NOMINEES
SET FORTH HEREIN: KENNETH L. BERNSTEIN, STEPHEN G. CARPENTER, RICHARD H. CLOSE,
PAUL W. GLASS, RONALD S. PARKER AND DAVID I. RAINER.
THE SIX CANDIDATES RECEIVING THE HIGHEST NUMBER OF VOTES SHALL BE ELECTED.
COMMITTEES OF THE BOARD OF DIRECTORS; DIRECTOR ATTENDANCE
The CU Board maintains the following committees, which perform the
functions and were comprised during 1995 of the members listed below:
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<PAGE> 88
<TABLE>
<CAPTION>
NAME FUNCTIONS / NUMBER OF MEETINGS MEMBERS
- ----------------------------- ------------------------------------------------------------------ ------------------------
<S> <C> <C>
Audit Committee The Audit Committee monitors significant accounting Glass (Chair)
policies; approves services rendered by the auditors; Close
reviews audit and management reports and other reports
concerning the adequacy of internal accounting controls by
independent auditors together with proposed responses by
management; monitors outside auditing and credit review
functions; reviews the adequacy of controls relating to
regulatory and financial accounting and reporting; makes
recommendations regarding the appointment of
independent auditors and the fees payable for their services;
meets with management and with the outside auditors and
independent auditors to oversee the quality and integrity of
financial accounting and reporting, and audit processes; and
reviews significant new or proposed accounting policy or
reporting issues. The Audit Committee met at least four
times during 1995. (Also serves as Audit Committee of CU
Bank.)
Compensation The Compensation Committee determines compensation of Glass
Committee executive officers. It serves as the Stock Option Parker
Committee for all employee stock option plans. The
Compensation Committee met at least 4 times during 1995.
(Also serves as Bank Compensation Committee.)
</TABLE>
CU Bancorp does not have a Nominating Committee. The CU Board
performs the functions of this committee. The CU Board will consider nominees
recommended by security holders, in accordance with the procedures set forth in
the Bylaws, which are set forth in this Joint Proxy Statement/Prospectus. The
Board of Directors of CU Bank maintains regular Audit, Loan, Compensation, and
Community Reinvestment committees.
During 1995, the CU Board held 12 regularly scheduled meetings and
one special meeting. Each director attended at least 75% of the aggregate of (1)
the total number of meetings of the CU Board and (2) the total number of
meetings of committees of the CU Board on which he served (during the period for
which they served).
67
<PAGE> 89
EXECUTIVE OFFICERS
Set forth below is certain information as of April 30, 1996 with
respect to each of the executive officers of CU Bancorp.
<TABLE>
<CAPTION>
POSITION AND POSITION
OFFICES WITH AND OFFICES OFFICER
NAME AGE THE COMPANY WITH THE BANK SINCE
- ---- --- ----------- ------------- -----
<S> <C> <C> <C> <C>
STEPHEN G. CARPENTER 56 Director, Chief Chairman, Chief 1992
Executive Officer Executive Officer
DAVID I. RAINER 39 Director, President, Director, President, 1992
Chief Operating Chief Operating
Officer Officer
PATRICK HARTMAN 45 Chief Financial Chief Financial 1992
Officer Officer
ANNE WILLIAMS 37 Chief Credit Officer Chief Credit Officer 1992
</TABLE>
Set forth below are brief summaries of the background and business
experience, including principal occupation, of the executive officers of CU
Bancorp who have not previously been discussed herein.
PATRICK HARTMAN has been employed by CU 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 CU 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.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following information is furnished with respect to (i) the chief
executive officer of CU Bancorp and (ii) each of the other executive officers of
CU Bancorp (including officers of CU Bank who may be deemed to be executive
officers of CU Bancorp), who served as executive officers during 1995 and earned
over $100,000 (the "Named Executives").
68
<PAGE> 90
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------- -------------------------------------------------
Award Payouts
------------------------- -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Award(s)(4) Options/SAR's Payouts Compensation
--------------------------- ---- ------ ----- ------------ ----------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen G. Carpenter - Chief 1993 $250,000 $50,000 $12,000(2) 0 25,000 0 $1,882(3)
Executive Officer / Chief 1994 $256,250 $50,000 $13,440(2) 100,000 $2,250(3)
Executive Officer - CU Bank(1) 1995 $263,937 $100,000(5) $14,250(2) 0 $2,250(3)
David I. Rainer - Chief 1993 $200,000 $100,000 $12,000(2) 0 25,000 0 $3,000(3)
Operating Officer / President 1994 $205,000 $50,000 $12,330(2) 0 75,000 $2,250(3)
and Chief Operating Officer - 1995 $211,150 $100,000(5) $12,330(2) 0 0 $2,250(3)
CU Bank (1)
Patrick Hartman - Senior Vice 1993 $138,000 $0 $8,450(2) 0 20,000 0 0
President Chief Financial 1994 $140,021 $13,000 $8,653(2) 0 10,000 0
Officer / Chief Financial Officer 1995 $143,452 $25,000(5) $8,668(2) $14,595 12,500 $450(3)
- - CU Bank
Anne Williams- Executive Vice 1993 $103,400 $25,000 $7,800(2) 0 5,000 0 $1,439(3)
President Chief Credit Officer / 1994 $124,000 $15,000 $8,092(2) 0 10,000 $2,085(3)
Chief Credit Officer - CU Bank 1995 $128,960 $37,500(5) $8,095(2) $14,595 12,500 $2,250(3)
</TABLE>
(1) CU Bancorp provides memberships in certain clubs for certain
executives, the use of which primarily relates to CU Bancorp
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) Consists of CU Bancorp's matching portion of 401-K Plan
contributions.
(4) Grants pursuant to CU Bancorp 1995 Restricted Stock Plan. 25% of any
grant of restricted stock ("Restricted Stock") vests at the second
anniversary of the grant. At each anniversary thereafter, an
additional 25% of the grant becomes vested. Dividends are payable on
the Restricted Stock, at the amount and times payable to all holders
of CU Stock. The Restricted Stock does not have any preferential or
special dividend provisions. At December 31, 1995, 19,000 shares of
Restricted Stock had been granted at an aggregate market value at
December 31, 1995 of $194,750 or $10.25 per share and at date of
grant at an aggregate market value of $185,000 or $9.73 per share.
The holders named in the table above at December 31, 1995, held an
aggregate of 3000 shares of Restricted Stock at an aggregate market
value of $30,750 or $10.25 per share or $15,375 for each of Mr.
Hartman and Ms. Williams. The vesting of the Restricted Stock is not
subject to performance based conditions, other than lapse of time and
continued service.
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<PAGE> 91
(5) In addition, discretionary bonuses paid in 1995 with regard to
services in 1994 of Messrs. Carpenter, Rainer and Hartman and Ms.
Williams were $60,000, $60,000, $25,000 and $30,000, respectively.
STOCK OPTIONS
The table below contains information concerning the grant of stock
options during the fiscal year ended December 31, 1995 to the Named Executives:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES OF
INDIVIDUAL OPTIONS/SARS EXERCISE STOCK PRICE APPRECIATION FOR
GRANTS OPTIONS/SARS GRANTED TO OR BASE THE OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION
Name (1)(2)(3)(4) FISCAL YEAR ($ / SH) DATE 5% 10%
- -------------------- ------------------- -------------------- --------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen G. Carpenter 0 0 --- --- --- ---
David I. Rainer 0 0 --- --- --- ---
Patrick Hartman 12,500 12.4% $7.125 2/28/05 $56,011 $141,943
Anne Williams 12,500 12.4% $7.125 2/28/05 $56,011 $141,943
</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 certain options shall vest fully upon the
occurrence of certain significant events that include a merger or
dissolution of CU Bancorp where CU Bancorp is not the surviving
corporation, or sale of substantially all CU Bancorp's assets. As of
December 31, 1995 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 CU 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 CU Bancorp are increased, decreased or changed
into or exchanged for, a different number or kind of shares or
securities of CU Bancorp, without receipt of consideration by CU
Bancorp, 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 CU
Bancorp.
(2) The exercise price of all options is adjustable in connection with
stock dividends, stock splits and similar events.
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<PAGE> 92
(3) The Potential Realizable Value is the product of (a) the difference
between (i) 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 CU 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 CU Stock underlying the option at December
31, 1995. 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 CU 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 CU Stock underlying the options
granted to the Named Executives during the year. Each of the options
was granted pursuant to CU Bancorp's 1985 or 1993 Plans.
No options were exercised during 1995 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 1995.
AGGREGATED FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/95 AT 12/31/95
----------------------------------- ---------------------
EXERCISABLE /
NAME EXERCISABLE / UNEXERCISABLE UNEXERCISABLE
- ------------------------------ ----------------------------------- ---------------------
<S> <C> <C>
Stephen G. Carpenter 87,253 / 111,747 $409,142 / $466,983
David I. Rainer 66,179 /88,821 $316,495 / $372,803
Patrick Hartman 10,499 / 32,001 $37,809 / $109,378
Anne Williams 13,500 / 29,000 $66,188 / $110,687
</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
CU Bank or its parent company (including a change of more than 50% of the
current shareholders of CU Bancorp), Mr. Carpenter and Mr. Rainer will each be
entitled to any accrued but unpaid bonus at that time. THIS ARRANGEMENT WAS
ENTERED INTO IN 1992. MESSRS. CARPENTER AND RAINER HAVE AGREED THAT THEY WILL
NOT RECEIVE ANY ACCRUED BUT UNPAID BONUS IN CONNECTION WITH THE MERGER PURSUANT
TO THESE AGREEMENTS. Additionally, in the event of a Change of Control, if a
position commensurate with either of their current positions with CU Bank is not
offered and either elects to resign, CU Bank will pay the resigning party,
subject to non-disapproval by the regulators, 12 months' compensation.
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<PAGE> 93
During 1993, CU 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
CU 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 CU Bank concurrently with the sale of the mortgage
origination network, to be employed by the purchaser of the network.
COMPENSATION OF DIRECTORS
Directors of CU Bancorp receive no compensation for attending
meetings of the CU Board. However, the directors of CU Bancorp also serve as
directors of CU Bank. CU Bank paid the sum of between $3,800 and $1,600 per
month during 1995 to each director of CU Bank, depending on the number and type
of 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 CU Bank do not
receive any additional compensation for activities as directors. Eligible
directors receive: (i) $1,000 per regular monthly board meeting; and (ii) $200
per committee meeting (for committees for which they are members). During 1995,
director compensation ranged from $23,400 at the highest to $22,000 at the
least, for the entire year, and totaled $100,400 in the aggregate for the year
1995. In addition to attendance at Board and committee meetings, directors
discharge their responsibilities throughout the year by personal meetings and
telephone contact with CU Bancorp and CU Bank executive officers and others
regarding the business and affairs of CU Bancorp and CU Bank. Current directors
also participate in the CU Bancorp 1994 Non-Employee Director Stock Option Plan
as more fully described below. The CU Board does not have a mandatory retirement
policy, nor are any retirement benefits paid.
ADDITIONAL DIRECTOR COMPENSATION
CU Bancorp has two director stock option plans, one of which has no
options available for grant. In addition, in the past, as more fully described
below, CU Bancorp has issued and sold warrants to purchase CU Stock to certain
directors.
1987 SPECIAL (DIRECTOR) STOCK OPTION PLAN
On October 20, 1987, the shareholders of CU Bancorp approved the 1987
Special Stock Option Plan ("Special Plan") for CU Bancorp's directors, to
encourage them to continue as directors, give them additional incentive as
directors and reward them for past services. This Special Plan was limited to
directors of CU Bancorp and CU Bank and provided for the issuance of 120,960
authorized but previously unissued shares of CU Stock. Only options which do not
qualify as "incentive stock options" ("Non-qualified Stock Options") under
Section 422 of 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 options,
pursuant to the Special Plan. Options terminate 90 days after a director ceases
being a director.
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<PAGE> 94
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
which was not less than fair market value on such date. The options have an
exercise period of ten years and are currently fully vested.
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 CU Stock previously owned by the
optionee (to the extent legally permissible), or (c) in a combination of CU
Stock and cash. The Special Plan also enables an optionee the possibility to
satisfy tax withholding amounts due upon exercise with shares of CU Stock rather
than cash, by either delivering already owned shares of CU Stock or withholding
from the shares of CU Stock to be issued upon exercise that number of shares
which, based on the value of the CU Stock, would satisfy the tax withholding
amounts due. Since CU Stock is listed on NASDAQ, the value of the CU 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 CU Stock occurred.
Directors hold options under the Special Plan at December 31, 1995 as
follows:
<TABLE>
<CAPTION>
Number of Shares Termination
Director Number of Shares Exercisable Price Date
-------- ---------------- ---------------- ----- ----
<S> <C> <C> <C> <C>
Richard H. Close 15,120 15,120 $5,791 10/20/97
Paul W. Glass 15,120 15,120 $5,791 10/20/97
</TABLE>
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 CU Stock, over a ten-year period as compensation for the personal
guarantees of a capital note of CU Bancorp 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 CU Bancorp's additional asset growth, CU
Bancorp 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
CU 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 these warrants had been exercised and there are currently no
warrants from this program outstanding.
In January 1994, the CU Board 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 CU
Bancorp, 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.
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<PAGE> 95
CU BANCORP 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On April 27, 1994, the CU Board adopted and approved, subject to
shareholder approval, the 1994 Plan, which was approved by the shareholders of
CU Bancorp at the 1994 Annual Meeting of Shareholders. 200,000 shares were
reserved for options under the 1994 Plan. All non-employee directors of CU
Bancorp are eligible to participate in the 1994 Plan. The following discussion
summarizes the principal features of the 1994 Plan. This description is
qualified in its entirety by reference to the full text of the 1994 Plan, copies
of which are available for review at CU Bancorp's principal office.
The 1994 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 Exchange Act. The CU Board 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 1994 Plan. Options issued
under the 1994 Plan are Non-Qualified Stock Options.
Under the 1994 Plan, non-employee directors of CU Bancorp on the date
of each annual meeting receive Non-Qualified Stock Options. The 1994 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: (i)
each person who was a director of CU Bancorp on July 1, 1994 received
Non-Qualified Stock Options to acquire 5,000 shares of CU stock. The Chairman of
the Board on July 1, 1994 received options to purchase an additional 2,500
shares of CU Stock; (ii) each person who is a director of CU Bancorp on the day
following an Annual Meeting of Shareholders after 1994 receives Non-Qualified
Stock Options to acquire 5,000 shares of CU Stock, provided that the person who
is then the Chairman of the Board receives options to purchase an additional
2,500 shares of CU Stock (in the event the shares available under the 1994 Plan
are insufficient to make any such grant, all grants made thereunder on such date
shall be prorated); (iii) none of the options will be exercisable until the
March 31 next following the date of grant. Each option becomes 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;
(iv) subject to earlier termination as provided elsewhere in the 1994 Plan, each
option shall expire ten years from the date the option was granted or twelve
months following the termination of directorship (except for termination for
cause), whichever is first; and (v) the exercise price of each option shall be
equal to one hundred percent of the fair market value of the stock subject to
the option on the date the option is granted.
The exercise price of CU Stock acquired pursuant to an option shall
be paid in cash, in whole shares of CU Stock 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
74
<PAGE> 96
being purchased, or a combination of stock and cash, equal in the aggregate to
the option price of the shares being purchased.
The 1994 Plan will terminate upon the occurrence of a terminating
event, including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp with another corporation in which CU Bancorp is not
the surviving corporation or resulting corporation, or a sale of substantially
all the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property (a "Terminating Event"). The CU Board or the Committee (as the
case may be) shall notify each optionee not less than thirty 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 1994 Plan. The CU
Board or the Committee (as the case may be) may also suspend or terminate the
1994 Plan at any time. Unless sooner terminated, the 1994 Plan shall terminate
ten years from the effective date, of the 1994 Plan. No options may be granted
under the 1994 Plan while the 1994 Plan is suspended or after the 1994 Plan is
terminated. Rights and obligations under any option granted pursuant to the 1994
Plan, while in effect, shall not be altered or impaired by suspension or
termination of the 1994 Plan, except with the consent of the person to whom the
stock option was granted.
THE CU BOARD, BASED UPON ADVICE OF COUNSEL, HAS DETERMINED THAT THE
MERGER DOES NOT CONSTITUTE A TERMINATING EVENT UNDER THE PROVISIONS OF THE 1994
PLAN.
Directors hold options under the 1994 Plan at December 31, 1995 as
follows:
<TABLE>
<CAPTION>
Number of Shares Termination
Director Number of Shares Exercisable Price Date
-------- ---------------- ---------------- ----- -----------
<S> <C> <C> <C> <C>
$6.25- 7/1/04-
Kenneth L. Bernstein 10,000 1,250 $6.88 6/30/05
$6.25- 7/1/04-
Richard H. Close 10,000 1,250 $6.88 6/30/05
$6.25- 7/1/04-
Paul W. Glass 15,000 1,875 $6.88 6/30/05
$6.25- 7/1/04-
Ronald S. Parker 10,000 1,250 $6.88 6/30/05
</TABLE>
75
<PAGE> 97
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLANS
CU Bancorp has three stock option plans, pursuant to which options
have in the past been granted to employees. Two of the plans have terminated and
no further grants may be made pursuant to these plans, although options granted
under such plans continue to vest and are eligible to be exercised over the
period specified in the stock option agreements. Each of the plans is
substantially similar as to the material provisions thereof, as described below.
The three plans were adopted at intervals of two and eight years and were
designed to augment options available after substantial depletion of the prior
plan through grants and exercises of options.
1983 EMPLOYEE STOCK OPTION PLAN
In April 1983, CU Bancorp adopted the CU Bancorp 1983 Employee Stock
Option Plan ("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 422 of the Code ("Incentive Stock Options") and Non-Qualified
Stock Options. The number of shares of CU Stock reserved for issuance under the
1983 Plan was 400,075. As of December 1, 1995, there were 49,030 shares subject
to outstanding options under the 1983 Plan . 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
AND IN INDIVIDUAL STOCK OPTION AGREEMENTS. Options are generally exercisable in
equal increments over a five year period and are outstanding for a total of ten
years.
The exercise price of options under the 1983 Plan was equal to at
least 100% of the fair market value of the CU 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 CU 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 CU Stock. The value
of the CU 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 CU Stock occurred.
Upon the occurrence of a terminating event, including, but not
limited to, liquidation, reorganization, merger or consolidation of CU Bancorp
with another corporation in which CU Bancorp is not the surviving corporation or
resulting corporation, or a sale of substantially all the assets of CU Bancorp
to another person, or a reverse merger in which CU Bancorp is the surviving
corporation but the shares of CU Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property (a "Terminating
Event"), 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 1983 Plan.
THE CU BOARD, BASED UPON ADVICE OF COUNSEL, HAS DETERMINED THAT THE
MERGER IS NOT A TERMINATING EVENT AS DEFINED IN THE 1983 PLAN.
The sole holder of options under the 1983 Plan is David Rainer,
director and President of CU Bancorp who holds options to purchase 49,030
shares, of which 29,418 are currently exercisable at a purchase price of $5.00.
This option will expire in June 2002.
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<PAGE> 98
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 CU Bancorp 1985 Employee Stock Option Plan ("1985 Plan") which provides
for the issuance of Incentive Stock Options or Non-Qualified Stock Options to
full time employees of CU Bancorp and its subsidiaries. The 1985 Plan provides
for the issuance of options to purchase 350,000 shares of CU Stock. As of
December 31, 1995, there were 243,250 shares subject to outstanding options,
62,828 shares had been issued upon exercise of options, and no shares were
available for future grants. The 1985 Plan expired during 1995, although options
granted pursuant to the 1995 Plan continue to be outstanding and options
continue to be exercisable pursuant to the provisions of the 1985 Plan and
individual stock option agreements.
The exercise price of options under the 1985 Plan is due in full upon
exercise and may be paid (a) in cash, (b) by delivering shares of CU 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 CU Stock. The value of the CU 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 CU
Stock occurred.
Upon the occurrence of a terminating event, including, but not
limited to, liquidation, reorganization, merger or consolidation of CU Bancorp
with another corporation in which CU Bancorp is not the surviving corporation or
resulting corporation, or a sale of substantially all the assets of CU Bancorp
to another person, or a reverse merger in which CU Bancorp is the surviving
corporation but the shares of CU Stock outstanding under the 1985 Plan
immediately preceding the merger are converted by virtue of the merger into
other property (a "Terminating Event"), any option outstanding under the 1985
Plan 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 1985 Plan.
THE CU BOARD, BASED UPON ADVICE OF COUNSEL, HAS DETERMINED THAT THE
MERGER IS NOT A TERMINATING EVENT AS DEFINED IN THE 1985 PLAN.
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<PAGE> 99
Information as to options granted pursuant to the 1985 Plan to
executive officers is contained in the section "Compensation of Directors and
Executive Officers." At December 31, 1995 the following options issued under the
1985 Plan were outstanding:
<TABLE>
<CAPTION>
Number of Shares
Director Number of Shares Exercisable Price Term
-------- ---------------- ---------------- ----- ----
<S> <C> <C> <C> <C>
$4.88- 6/2/02-
Stephen G. Carpenter 99,000 54,000 $5.13 2/16/03
$5.00- 6/16/02-
David I. Rainer 30,970 13,581 $6.88 4/8/03
$6.00- 4/8/03-
Patrick Hartman 20,000 8,000 $6.88 8/4/03
$4.75- 8/31/02-
Anne Williams 20,000 11,000 $6.00 8/4/03
All employees as 8/90-
a group 243,250 139,690 $5.42* 4/8/03
</TABLE>
* Average Price
1993 EMPLOYEE STOCK OPTION PLAN
In October, 1993, the CU Board 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 reserved for option issuances under
the 1993 Plan. At December 31, 1995, options for 360,000 shares had been granted
under the 1993 Plan, there were 354,000 shares outstanding under the 1993 Plan
and there were 46,000 shares available for grant under the 1993 Plan. All full
time employees of CU Bancorp and CU Bank are eligible to participate.
Options issued under the 1993 Plan shall, in the discretion of a
committee appointed by the CU Board (as described below), be either Incentive
Stock Options or Non-Qualified Stock Options.
The 1993 Plan is administered by the Compensation Committee.
Under the 1993 Plan, the Compensation Committee selects 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 receive Incentive Stock Options 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 CU Bancorp)
shall not exceed one hundred thousand dollars ($100,000). Should it be
determined that any Incentive Stock Option granted exceeds such maximum, such
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<PAGE> 100
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 are exercisable within the first 12 months from
the date of the grant. Each option becomes 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 CU Stock acquired pursuant to an option granted
under the 1993 Plan shall be paid in cash, in whole shares of CU Stock owned by
the optionee having a fair market value on the exercise date equal to the option
price of the shares being purchased, or a combination of stock and cash.
Under the 1993 Plan, no option may extend more than ten years from
the date of grant. Except in the event of termination of employment due to
death, disability or termination for cause, options will terminate three months
after an employee optionee ceases to be employed by CU Bancorp or its
subsidiaries, unless the options by their terms were scheduled to terminate
earlier.
The 1993 Plan will terminate upon the occurrence of a terminating
event, including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp with another corporation in which CU Bancorp is not
the surviving corporation or resulting corporation, or a sale of substantially
all the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property (a "Terminating Event"). The Compensation Committee notifies each
optionee not less than thirty 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 Compensation
Committee may also suspend or terminate the 1993 Plan at any time. Unless sooner
terminated, the 1993 Plan shall terminate ten 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 COMPENSATION COMMITTEE, BASED UPON ADVICE OF COUNSEL, HAS
DETERMINED THAT THE MERGER IS NOT A TERMINATING EVENT AS DEFINED IN THE 1993
PLAN.
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<PAGE> 101
1995 RESTRICTED STOCK PLAN
In March 1995 the CU Board adopted, and the shareholders approved on
June 29, 1995, the CU Bancorp 1995 Restricted Stock Plan (the "1995 Restricted
Stock Plan"). During 1995, 19,000 shares in the aggregate of the 75,000 shares
subject to the 1995 Restricted Stock Plan were issued to 26 of CU Bank's
employees.
The only executive officers to receive Restricted Stock were Ms.
Williams and Mr. Hartman who each received 1,500 shares.
The issuance of Restricted Stock is intended to provide a vehicle
through which CU Bancorp can reward employees for their past service and
encourage their continued service and their stock ownership in CU Bancorp.
Restricted Stock is common stock issued by CU Bancorp, subject to restrictions
on sale or transfer (more fully described below) which continue until such time
as may be specified in the 1995 Restricted Stock Plan or the granting documents.
An employee holding Restricted Stock is entitled to receive cash dividends when
and as declared, and to vote the shares. At such time as the conditions set
forth in the 1995 Restricted Stock Plan or the granting documents are satisfied,
the restrictions lapse. The primary conditions set forth in the 1995 Restricted
Stock Plan are the lapse of time and continued employment by or its
subsidiaries. If the employee's employment is terminated before the restrictions
lapse, or if any conditions are not fulfilled, the restricted stock ( or that
portion of it as to which the restrictions have not lapsed) must be returned to
CU Bancorp.
The number of shares of CU Stock reserved for issuance under the 1995
Restricted Stock Plan is 75,000. All employees of CU Bancorp and its
subsidiaries are eligible to participate in the 1995 Restricted Stock Plan.
Under the 1995 Restricted Stock Plan, the employees of CU Bancorp are
eligible to receive Restricted Stock. The Compensation Committee will determine
which employees and the amount of Restricted Stock to be granted to each.
Subject to the rights of the Compensation Committee to vary the restrictions
under the 1995 Restricted Stock Plan, each grant shall conform to the following:
Restrictions with regard to 25% of any award 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.
The restrictions on the common stock issued pursuant to the 1995
Restricted Stock Plan will terminate upon the occurrence of a terminating event,
including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp (or its principal subsidiary) with another
corporation in which CU Bancorp (or its principal subsidiary) is not the
surviving corporation or resulting corporation, or a sale of substantially all
the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU 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 CU Bancorp is transferred (a "Terminating Event"). The CU Board or the
Compensation Committee (as the case may be) may also suspend or terminate the
1995 Restricted Stock Plan at any time. No grants may be made under the 1995
Restricted Stock Plan after the third anniversary of the date of adoption of the
1995 Restricted Stock Plan. Rights and obligations under any Restricted Stock
granted pursuant to the 1995 Restricted Stock Plan, while in effect, shall not
be altered or impaired by
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suspension or termination of the 1995 Restricted Stock Plan, except with the
consent of the person to whom the Restricted Stock was granted.
THE CU BOARD, BASED UPON ADVICE OF COUNSEL, HAS DETERMINED THAT THE
MERGER IS A TERMINATING EVENT FOR PURPOSES OF THE 1995 RESTRICTED STOCK PLAN.
ALL RESTRICTED STOCK PREVIOUSLY GRANTED WILL VEST IN THE RECIPIENTS, FREE OF
RESTRICTIONS, AT THE EFFECTIVE TIME. THE CU BOARD HAS RESOLVED TO TERMINATE THE
1995 RESTRICTED STOCK PLAN AS TO ANY UNISSUED SHARES AT THE EFFECTIVE TIME, AND
HAS PROPOSED A NEW 1996 RESTRICTED STOCK PLAN FOR APPROVAL OF THE SHAREHOLDERS
(SEE PROPOSAL NUMBER 8 HEREIN).
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which consists solely of outside
directors, determines and administers the compensation of CU Bank's executive
officers. The present membership of the Compensation Committee consists of Paul
W. Glass and Ronald S. Parker. CU Bancorp does not pay any direct compensation
to its executive officers, except pursuant to the stock option and restricted
stock plans. The executive officers of CU Bancorp are compensated by CU Bank for
their services to CU Bank, and receive benefits under various CU Bank employee
benefit plans. The Compensation Committee oversees the compensation programs of
the officers of CU Bank and also serves as a Compensation Committee for CU Bank.
The Compensation Committee is responsible for establishing compensation programs
for executive officers of CU Bancorp and CU Bank designed to attract, motivate,
reward and retain key executives responsible for the success of the corporation
as a whole; administering and maintaining such programs in a manner that will
benefit the long term interests of CU Bancorp and its shareholders; and
determining the compensation of CU Bancorp and CU Bank's executive officers. The
Committee also advises on the selection, development and performance of
executive officers of CU Bancorp and its subsidiary. This report is presented by
the Compensation Committee as the Compensation Committee for CU Bancorp and CU
Bank. None of the members of the Compensation Committee is an employee of CU
Bank or CU Bancorp, nor have any of the members been an employee in the past.
The Compensation Committee provides the following report on executive
compensation.
Notwithstanding anything to the contrary set forth in CU Bancorp's
previous filings under the Securities Act or the Exchange Act that might
incorporate future filings, including this Joint Proxy Statement/Prospectus, in
whole or in part, the following Report, and the performance graph shall not be
incorporated by reference into any such filings.
OVERALL PHILOSOPHY
In view of the past history of CU Bancorp and in what the
Compensation Committee believes is in the best interests of the shareholders in
building long term value, the Compensation Committee has adopted a philosophy to
accentuate long term profitability over short term compensation. However, it is
expected that development of a compensation strategy is a dynamic process that
will continue to provide the appropriate mix of long term incentive and current
reward. The Compensation Committee views the executive compensation program as a
major factor in the competitive strategy of CU Bank. The program's goal is to
attract, provide incentive to and retain competent managers whose goals are
aligned with those of CU Bancorp's shareholders. To this end, it is the ongoing
responsibility of the Compensation Committee to establish and administer an
executive compensation program that fosters competency in management, provides
high caliber executive talent and both recognizes and motivates performance in
the short and long term.
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Among the CU Board's requirements of management are the following,
none of which is assigned any particular weight or emphasis: (i) develop
strategies to deliver strong market franchises and build shareholder wealth over
the long term; (ii) recommend appropriate strategic and operating plans; (iii)
maintain effective control of operations; (iv) measure performance against
peers; (v) strong, principled and ethical leadership; (vi) assure sound
succession planning and management development; (vii) sound organizational
structure; (viii) inform the CU Board regularly regarding the status of key
initiatives; (ix) no surprises; (x) CU Board meetings which are well planned,
allow meaningful participation and provide for timely resolution of issues; and
(xi) advance CU Board materials which contain the right amount of information
and are received sufficiently in advance of meetings.
The Compensation Policy of CU Bancorp is threefold. First it seeks to
align compensation with profitability of CU Bancorp and enhancement of
shareholder value. Second, it seeks to serve to attract, motivate and retain the
most qualified professionals to CU Bancorp as employees by providing competitive
compensation packages and seeking employees with diverse and sophisticated
experience. Finally, it is designed to put a substantial portion of employee
compensation "at risk," by designing long term compensation and option plans the
value of which is dependent on long term profitability of CU Bancorp but to
balance that with the realistic needs of the employees for current income.
RECRUITMENT OF MANAGEMENT PERSONNEL
In seeking executive officers, it is CU Bancorp's strategy to seek
highly credentialed, experienced bankers and other professionals, with proven
skills. The Compensation Committee acknowledges that these requirements may
result in recruitment of individuals whose primary experience is in much larger
and more sophisticated institutions, with concomitant compensation requirements.
It is the philosophy of CU Bancorp to command the best talent available at all
levels, to position CU Bancorp to take advantage of growth, strategic
acquisition and other opportunities in the future, which may require such a
sophisticated management group. The Compensation Committee believes that CU
Bank's current chief executive officer, chief operating officer and top
executive group reflects the successful satisfaction of the Board's recruitment
objectives.
COMPENSATION PHILOSOPHY
The Compensation Committee believes it has in place a
performance-driven executive incentive plan to reflect the philosophy set forth
above, in tandem with an executive performance evaluation system. CU Bancorp's
goal is to be competitive with those financial institutions which the
Compensation Committee deems to be similar, and in this manner to attract and
retain top financial institution executives. Similarity will be determined on a
number of factors, of which size may or may not be a significant determinant.
Other factors will include, but not be limited to, similar business strategy and
customer base, financial condition and results of operation, individual
contributions and teamwork, and level and type of professional experience.
Informal surveys of such institutions will be conducted or reviewed on a
periodic basis.
The philosophy of the Compensation Committee is oriented toward
compensation and performance systems that merge the interests of the
shareholders and management by placing emphasis on rewards tied to various
financial measures. The goal of all compensation and the evaluation system is to
motivate and monitor the exceptional executive performances that will be
required for CU Bank to achieve its strategic business objectives.
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The compensation and performance system rewards employees based on
the achievement of corporate and individual objectives by providing annual
variable compensation awards. The corporate objectives are outlined, in part, in
the strategic plan of CU Bancorp and its subsidiary, and include the attainment
of specific levels of return on equity and return on assets which are for future
periods.
There are three major components of CU Bancorp's executive officer
compensation: (i) base salary; (ii) annual incentive awards (bonuses); and (iii)
long-term incentive awards (stock options and restricted stock). The process
utilized by the Compensation Committee in determining executive officer
compensation levels for all of these components is based upon the Compensation
Committee's subjective judgment and takes into account both qualitative and
quantitative factors. No weights are assigned to such factors with respect to
any compensation component. Among the factors considered by the committee are
the recommendations of the chief executive officer with respect to the
compensation of CU Bancorp's other key executive officers. The Compensation
Committee conducts an annual review of performance by the chief executive
officer, and the chief operating officer, at a meeting which neither the chief
executive officer nor any other officer attend.
BASE SALARY
The Compensation Committee believes that the chief executive officer
base salary (and total compensation package) is in line with both the goals of
CU Bancorp discussed above and is in the top quartile of similarly situated
executive salaries. The Compensation Committee believes that such level of
compensation is acceptable based on the background, experience and
sophistication of the chief executive officer, which is in line with the
standards discussed above. Based on this information, and providing no
substantial change in the data, the Compensation Committee would expect base
salary increases for the chief executive officer and executive officers to be
related primarily to changes in the cost of living and changes in duties or
responsibilities, unless the survey material suggests adjustments are in order.
BONUSES
Bonuses will be related to achievement of corporate and individual
goals, some of which will be established as part of the review process and some
of which will relate to CU Bancorp's strategic planning. The goal of bonuses is
to motivate the exceptional executive performances which will be required in
order for CU Bank to achieve its strategic business objectives, to monitor the
achievement of these objectives, and to reward extraordinary effort. The general
pool available for bonuses will be determined after review of CU Bancorp's
profitability, and thereafter the individual benchmarks will be reviewed. It is
expected that bonuses will constitute the primary cash compensation increases in
the near term.
LONG-TERM COMPENSATION / STOCK OPTIONS AND RESTRICTED STOCK
The long-term plan will make awards based upon the achievement of
corporate and individual objectives which will enable CU Bank to reach financial
goals determined in its strategic planning process. The financial goals include
increasing profitability, the attainment of specific levels of return on equity
and return on assets. The magnitude of awards under the plan will be determined
by increases in the value of CU Stock, thus increasing the plan participants'
incentive to achieve the goals of shareholders. It is the philosophy of the
Compensation Committee to provide the potential for long-term incentives to all
employees of CU Bank.
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Stock options and Restricted Stock grants, will also be utilized to
encourage executive officers to have a stake in CU Bancorp, encourage them to
remain with CU Bancorp and to align their interests more fully with those of the
other shareholders.
SPECIAL DEDUCTION LIMIT
Section 162 (m) of the Code limits federal income tax deductions for
compensation paid after 1993 to CU Bancorp's chief executive officer and its
four other most highly compensated officers to $1,000,000 per year per
individual, but includes an exception for performance based compensation that
satisfies certain conditions. CU Bancorp has not adopted performance based
compensation which qualifies under these provisions, and does not believe that
in the ordinary course, compensation to any executive officer will exceed or
approach such $1,000,000 cap and the Compensation Committee will monitor
compensation to minimize the impact of this provision. It is the intent of CU
Bancorp to retain the deduction for compensation, to the extent possible. Based
on the current level of compensation to executives of CU Bancorp and the level
contemplated for the immediate future, it is believed that this limitation will
not materially affect CU Bancorp, except for some unforeseen circumstance.
SHAREHOLDER RETURN GRAPH
The following line graph compares the total cumulative shareholder return on CU
Stock, based upon quarterly reinvestment of all dividends, to the cumulative
total returns of the Standard & Poors 500, and the Montgomery Securities Western
Bank Monitor Southern California Proxy Index of selected bank stocks. The graph
assumes $100 invested on December 31, 1990, in CU Stock and each of the indices.
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[CU Stock Price Performance CHART]
Source: Montgomery Securities Western Bank Monitor
The following table sets forth the data points for the performance graph.
<TABLE>
<CAPTION>
December 31,
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CU BANCORP 100 56.56 49.55 79.19 79.19 117.09
S&P 500 100 130.37 140.30 154.46 156.50 215.32
SO. CA PROXY 100 100.98 100.50 122.83 140.10 177.81
</TABLE>
SOURCE: Montgomery Securities Western Bank Monitor
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INDEBTEDNESS OF MANAGEMENT
Some of CU Bancorp's directors and executive officers, as well as
their immediate family and associates, are customers of, and have had banking
transactions with, CU Bank in the ordinary course of CU Bank's business, and CU
Bank expects to have such limited ordinary banking transactions with such
persons in the future. CU 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 CU 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 CU
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 CU Bank's respective lending policies and statutory
lending limits, and prior approval of the CU Board is required for these loans.
There were no loans to directors, executive officers or their
immediate family or associates as of March 31, 1996.
OTHER MATERIAL TRANSACTIONS
Except as set forth below, there are no other existing or proposed
material transactions between CU Bancorp or CU Bank and any of CU Bancorp's
directors, executive officers or beneficial owners of five percent or more of CU
Stock, or the immediate family or associates of any of the foregoing persons.
In 1993, prior to his election as a director of CU Bancorp, Kenneth
Bernstein entered into an agreement with CU Bank to assist in collection of a
large charged off credit. In exchange for Mr. Bernstein's assistance, CU Bank
agreed to pay him 50% of amounts recovered on such credit (after deduction of
legal fees). Although CU Bank, with Mr. Bernstein's assistance, located the
debtor, the debtor subsequently filed bankruptcy and no amounts have been
recovered.
The members of the CU Board hold options under the CU Bancorp 1994
which have not yet vested and which will not vest by reason of the Merger unless
the Merger constitutes a Terminating Event as defined in the 1994 Plan.
The CU Board has determined that the Merger is not a Terminating
Event as defined in the 1994 Plan because CU Bancorp is the surviving
corporation in the Merger. However, director Close has indicated that he
disagrees with the CU Board's interpretation and maintains that the existing
options should all be exercisable immediately prior to the Merger.
If the Merger were to constitute a Terminating Event under the 1994
Plan, all directors, including Mr. Close, would be able to exercise all options
held by them under the 1994 Plan prior to the Merger. Further, since the
"terminating event" definition in each of the CU Bancorp's other pre-1994 stock
option plans is substantially similar to the definition in the 1994 Plan, such
other stock option plans would terminate by reason of the Merger and all stock
options thereunder would vest.
Based upon the advice of counsel and a review of the provisions of
the 1994 Plan, the remaining members of the CU Board (which constitute a
majority of the CU Board), have unanimously concluded that
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the 1994 Plan will not terminate by reason of the Merger. The CU Board believes
that this conclusion is consistent with the intent of the 1994 Plan and is
mandated by the clear language of the 1994 Plan.
Mr. Close has not indicated whether or not he will take any
affirmative action to enforce his interpretation of the 1994 Plan.
REGULATORY AGREEMENTS
In November 1993, CU Bank was informed by the OCC, that the OCC had
terminated the formal written agreement (the "Agreement") with the OCC entered
into in June 1992, based upon CU 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 CU Bancorp, originally entered
into in August 1992. The termination of the Memorandum of Understanding was
taken in recognition of CU Bancorp's compliance with these requirements.
PROPOSAL NUMBER 4.
APPROVAL OF THE 1996 OPTION PLAN PROVIDING FOR
THE ISSUANCE OF OPTIONS TO PURCHASE UP TO
375,000 SHARES OF CU STOCK THEREUNDER
SUMMARY OF THE NEW STOCK OPTION PLAN
On April 22, 1996, the CU Board adopted and approved, subject to
shareholder approval, the 1996 Option Plan.
As a result of the expiration of two of CU Bancorp's employee stock
option plans and the lack of shares available to be granted under the remaining
1993 Plan, the CU Board has adopted this new 1996 Option Plan which is
substantially similar to the 1993 Plan in all material respects.
The 1996 Option Plan is designed to provide a vehicle through which
CU Bancorp can continue to grant options to key employees of CU Bancorp and CU
Bank. The CU Board believes that CU Bancorp's long-standing policy of
encouraging stock ownership by its key employees in part through the granting of
stock options has enhanced CU Bancorp's ability to retain and attract such
persons. The CU Board continues to believe that a stock option program is an
important factor in retaining, motivating and attracting key employees and
recommends approval of the 1996 Option Plan.
The following discussion summarizes the principal features of the
1996 Option Plan. This description is qualified in its entirety by reference to
the full text of the 1996 Option Plan, copies of which are available for review
at CU Bancorp's principal office.
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PURPOSE
The purpose of the 1996 Option Plan is to strengthen CU Bancorp by
encouraging stock ownership of CU Bancorp by employees of CU Bancorp and CU
Bank. The 1996 Option Plan also seeks to heighten the desire of such key
employees to remain with CU Bancorp.
CU Bancorp intends that the options issued under the 1996 Option Plan
shall, in the discretion of the CU Board or a committee appointed by the CU
Board, be either Incentive Stock Options, or Non- Qualified Stock Options.
ADMINISTRATION
The 1996 Option Plan is administered by the CU Board unless and until
the CU Board delegates administration to a committee (the "Committee") appointed
by the CU Board, which shall consist of not less than two non-employee members
of the CU Board. Each member of a Committee shall be a disinterested person as
provided in Rule 16b-3(c)(2) promulgated pursuant to the Exchange Act. The CU
Board 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 1996 Option Plan.
SHARES RESERVED
The number of shares of CU Stock reserved for issuance upon exercise
of options granted under the 1996 Option Plan is 350,000. If any option granted
under the 1996 Option Plan shall for any reason expire, be canceled or otherwise
terminate without having been exercised in full, the shares not purchased under
such option shall again become available for grant.
ELIGIBILITY
All employees of CU Bancorp or its subsidiaries are eligible to
participate in the 1996 Option Plan.
TERMS OF STOCK OPTIONS
Under the 1996 Option Plan, the CU Board or the Committee (as the
case may be) shall select the 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 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 CU Bancorp)
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
and not to qualify for treatment as an Incentive Stock Option under Section 422
of the Code to the extent, but only to the extent, of such excess.
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
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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 each option granted pursuant to the 1996 Option
Plan shall be not less than one hundred percent (100%) of the fair market value
of the stock subject to the option on the date the option is granted; provided,
however, that the purchase price of the stock subject to the Incentive Stock
Option may not be less than one hundred ten percent (110%) for Incentive Stock
Options where the optionee owns stock possessing more than ten percent (10%) of
the total combined voting power of CU Stock.
ADJUSTMENTS UPON CHANGES IN STOCK
If the outstanding shares of CU Stock are increased, decreased or
changed into, or exchanged for a different number or kind of shares or
securities of CU Bancorp, without receipt of consideration by CU Bancorp,
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.
EXPIRATION, TERMINATION AND TRANSFER OF OPTIONS
Under the 1996 Option Plan, no option may extend more than ten years
from the date of grant. Except in the event of termination of employment due to
death, disability or termination for cause, options will terminate three months
after an employee optionee ceases to be employed by CU Bancorp or its
subsidiaries unless the options by their terms were scheduled to terminate
earlier. 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 CU Board or the Committee.
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 1996 OPTION PLAN
The 1996 Option Plan will terminate when all shares available for
grant have been acquired through the exercise of options or ten years from the
effective date, whichever is earlier. The 1996 Option Plan will also terminate
upon the occurrence of a terminating event, including, but not limited to,
liquidation, reorganization, merger or consolidation of CU Bancorp with another
corporation in which CU Bancorp is not the surviving corporation or resulting
corporation, or a sale of substantially all the assets of CU Bancorp to another
person, or a reverse merger in which CU Bancorp is the surviving corporation but
the shares of CU Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property. Rights and obligations
under any option granted pursuant to the 1996 Option Plan, while in effect,
shall not be altered or impaired by suspension or termination of any of the 1996
Option Plan, except with the consent of the person to whom the stock option was
granted.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal federal
income tax consequences of the options and rights to be granted under the 1996
Option Plan, and is based on existing federal law (including administrative
regulations and rulings) which is subject to change, in some cases
retroactively. State and local tax consequences may differ. This discussion is
also qualified by the particular circumstances of individual optionees, which
may substantially alter or modify the federal income tax consequences herein
discussed.
Incentive Stock Options and Non-Qualified Stock Options are treated
differently for federal income tax purposes. Incentive Stock Options are
intended to comply with the requirements of Section 422 of the Code.
Non-Qualified Stock Options need not comply with such requirements.
An optionee is not taxed on the grant or exercise of an Incentive
Stock Option. The difference between the exercise price and the fair market
value of the shares on the exercise date will, however, be a preference item for
the purposes of the alternative minimum tax. If an optionee holds the shares
acquired upon exercise of an Incentive Stock Option for at least two years
following grant and at least one year following exercise, the optionee's gain,
if any, upon a subsequent disposition of such shares is long-term capital gain.
The measure of the gain is the difference between the proceeds received on
disposition and the optionee's basis in the shares (which generally equals the
exercise price). If an optionee disposes of stock acquired pursuant to exercise
of an Incentive Stock Option before satisfying the one- and two-year holding
periods described above, the optionee will recognize both ordinary income and
capital gain the year of disposition. The amount of ordinary income will be the
lesser of (i) the amount realized on disposition less the optionee's adjusted
basis in the stock (usually the exercise price) or (ii) the difference between
the fair market value of the stock on the exercise date and the option price.
The balance of the consideration received on such a disposition will be
long-term capital gain if the stock had been held for at least one year
following exercise of the Incentive Stock Option. CU Bancorp is not entitled to
an income tax deduction on the grant or exercise of an Incentive Stock Option or
on the optionee's disposition of the shares after satisfying the holding period
requirement described above. If the holding periods are not satisfied, CU
Bancorp will be entitled to a deduction in the year the optionee disposes of the
shares, in an amount equal to the ordinary income recognized by the optionee.
An optionee is not taxed on the grant of a Non-Qualified Stock
Option. Upon exercise however, the optionee recognizes ordinary income equal to
the difference between the option price and the fair market value of the shares
on the date of exercise. CU Bancorp is entitled to an income tax deduction in
the year of exercise in the amount recognized by the optionee as ordinary
income. Any gain on subsequent disposition of the shares is long-term capital
gain if the shares are held for at least one year following exercise. CU Bancorp
does not receive a deduction for this gain.
GRANT OF OPTIONS
No options have been granted to date under the 1996 Option Plan and
all grants are discretionary with the Committee. Therefore it cannot be
determined at this time if any executive officers of CU Bancorp will receive
options pursuant to the 1996 Option Plan, although all executive officers are
eligible.
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THE CU BOARD RECOMMENDS A VOTE FOR PROPOSAL NUMBER 4 AND WILL VOTE ALL PROXIES
HELD BY IT FOR PROPOSAL NUMBER 4, UNLESS A SHAREHOLDER DIRECTS OTHERWISE AND
URGES YOU TO VOTE FOR PROPOSAL NUMBER 4.
APPROVAL OF THE 1996 OPTION PLAN REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF
THE SHARES OF CU STOCK PRESENT, OR REPRESENTED AT THE CU MEETING (PROVIDING A
QUORUM IS PRESENT). UNDER APPLICABLE CALIFORNIA LAW, AN ABSTENTION WILL BE
COUNTED IN DETERMINING THE PRESENCE OF A QUORUM AND WILL HAVE THE SAME EFFECT AS
A VOTE AGAINST THE PROPOSAL AND A BROKER NON-VOTE WILL NOT BE COUNTED IN
DETERMINING THE PRESENCE OF A QUORUM AND WILL HAVE NO EFFECT ON THE OUTCOME OF
THE PROPOSAL.
PROPOSAL NUMBER 5.
TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN AS
CU BANCORP'S INDEPENDENT ACCOUNTANTS FOR
THE FISCAL YEAR ENDING DECEMBER 31, 1996.
The Audit Committee of the CU Board has selected Arthur Andersen to
serve as independent accountants, to examine the financial statements of CU
Bancorp and its consolidated subsidiary, CU Bank, for its fiscal year ending
December 31, 1996. Arthur Andersen has served as CU Bancorp's independent
accountants since 1981. In recognition of the important role of the independent
public accountants the CU Board has determined that its selection of the
independent public accountants should be submitted to the shareholders for
review and ratification.
Arthur Andersen has also served as the independent accountants for
Home Bancorp.
In the event the appointment is not ratified through the affirmative
vote of a majority of the shares of CU Stock represented and voting at a duly
held meeting (at which a quorum is present), the adverse vote will be deemed to
be an indication to the CU Board that it should consider selection of other
independent accountants for 1997. Because of the difficulty and expense of
making any substitution of accounting firms after the beginning of the current
fiscal year, it is the intention of the CU Board that the appointment of Arthur
Andersen for the year 1996 will stand unless for other reasons the CU Board
deems it necessary or appropriate to make a change. The CU Board also retains
the power to appoint another independent accounting firm to replace an
accounting firm ratified by the shareholders in the event the CU Board
determined that the interests of CU Bancorp require such a change.
Arthur Andersen has no direct or material financial interest in CU
Bancorp. A representative of Arthur Andersen is expected to attend the CU
Meeting, with the opportunity to make a statement and respond to appropriate
questions.
THE CU BOARD RECOMMENDS A VOTE FOR PROPOSAL NUMBER 5, AND WILL VOTE ALL PROXIES
HELD BY IT FOR PROPOSAL NUMBER 5 UNLESS A SHAREHOLDER DIRECTS OTHERWISE AND
URGES YOU TO VOTE FOR PROPOSAL NUMBER 5.
RATIFICATION REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF CU
STOCK REPRESENTED AND VOTING AT A DULY HELD MEETING (AT WHICH A QUORUM IS
PRESENT). UNDER APPLICABLE CALIFORNIA LAW, AN ABSTENTION WILL BE COUNTED IN
DETERMINING THE PRESENCE OF A QUORUM AND WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE PROPOSAL AND BROKER NON-VOTE WILL NOT BE COUNTED IN DETERMINING THE
PRESENCE OF A QUORUM AND WILL HAVE NO EFFECT ON THE OUTCOME OF THE PROPOSAL.
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TRANSACTIONS IN CONNECTION WITH THE MERGER
PROPOSAL NUMBER 6.
TO AMEND OF THE CU BANCORP BYLAWS EFFECTIVE UPON
THE EFFECTIVE TIME TO INCREASE THE AUTHORIZED
NUMBER OF DIRECTORS TO NOT LESS THAN
SEVEN AND NOT MORE THAN THIRTEEN.
The Bylaws of CU Bancorp, as amended in Proposal Number 2 above,
provide that the number of directors of CU Bancorp may be not less than six and
not more than eleven, with the exact number to be fixed from time to time by
resolution of the CU Board or by action of the shareholders. The Merger
Agreement requires that the Board of Directors immediately following the Merger
consist of five (5) members of the current CU Board and five (5) members of the
current Home Board.
The CU Board believes it to be in the best interests of the Surviving
Company that the Bylaws provide flexibility in the event of the resignation of a
director or the identification of an additional director, to permit the Board of
Directors of the Surviving Company to configure the Board, in a manner which in
its opinion is in the best interests of the shareholders, without the necessity
and expense of seeking shareholder approval between meetings.
For this reason, the CU Board has determined that the range of
directors should be increased upon the Effective Time to reflect the increased
size of the Board, but to leave opportunity for flexibility should a director
resign and the Board not choose a replacement or should a qualified director
candidate become available. The proposal herein would increase the authorized
number of directors to a number not less than SEVEN AND NOT MORE THAN THIRTEEN.
THE CU BOARD PLANS TO FIX THE EXACT NUMBER AT TEN. THEREAFTER, CHANGES MAY BE
MADE FROM TIME TO TIME BY RESOLUTION OF THE CU BOARD OR ACTION OF THE
SHAREHOLDERS.
THE CU BOARD RECOMMENDS A VOTE FOR AN AMENDMENT OF SECTION 3.2 OF THE CU BANCORP
BYLAWS AS FOLLOWS:
SECTION 3.2. NUMBER OF DIRECTORS. The affairs of the corporation
shall be managed by a board of directors consisting of not less than
seven (7) nor more than thirteen (13) directors. The exact number of
directors shall be fixed from time to time, within the limits
specified in this Section 3.2 (i) by resolution duly adopted by the
board of directors; or (ii) by a bylaw or amendment thereof duly
adopted by the vote of a majority of the shares entitled to vote, or
by the written consent of the holders of a majority of the
outstanding shares entitled to vote or of the board of directors; or
(iii) by approval of the shareholders (as defined in Section 153 of
the General Corporation Law).
THE CU BOARD RECOMMENDS A VOTE FOR PROPOSAL NUMBER 6 AND WILL VOTE ALL PROXIES
HELD BY IT FOR PROPOSAL NUMBER 6, UNLESS A SHAREHOLDER DIRECTS OTHERWISE AND
URGES YOU TO VOTE FOR PROPOSAL NUMBER 6.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
OF CU STOCK ENTITLED TO VOTE. IN THE EVENT THAT THIS PROPOSAL IS NOT APPROVED,
THE EXISTING RANGE OF DIRECTORS WOULD REMAIN THE SAME. IN ANY CASE, UPON THE
EFFECTIVE TIME, THE CU BOARD WILL INCREASE THE AUTHORIZED NUMBER OF DIRECTORS TO
TEN (10) AND APPOINT FIVE MEMBERS OF THE CURRENT HOME BOARD TO THE CU BOARD.
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PROPOSAL NUMBER 7.
TO APPROVE A CU BANCORP CONVERSION STOCK OPTION PLAN TO PROVIDE
FOR THE ASSUMPTION OF AND TO ASSUME OUTSTANDING HOME
BANCORP STOCK OPTIONS AT THE EFFECTIVE TIME.
The Merger Agreement provides that all outstanding Home Options shall
be assumed by CU Bancorp in connection with the Merger and after the Effective
Time shall be options to purchase CU Stock. Assumption of the Home Options will
be implemented through adoption of the Conversion Plan. This plan is contingent
upon completion of the Merger and will become effective upon the Effective Time.
The following discussion summarizes the principal features of the Conversion
Plan. This description is qualified in its entirety by reference to the full
text of the Conversion Plan, copies of which are available for review at CU
Bancorp's principal office.
PURPOSE
The purpose of the Conversion Plan is to provide for the assumption
of Home Options as required in the Merger Agreement.
ADMINISTRATION
The Conversion Plan is administered by the CU Board which may
delegate the administration of the Conversion Plan to a committee composed of
not less than two members of the CU Board, none of whom is eligible to
participate in the Conversion Plan. The interpretations and construction of any
provision of the Conversion Plan is within the sole discretion of the CU Board
or its committee, whose determination is final and binding.
ELIGIBILITY
Optionees under the Conversion Plan shall be limited to holders of
Home Options upon the Effective Time.
TERMS OF OPTIONS
All of the Home Options issued and outstanding immediately prior to
the Effective Time shall, on and after the Effective Time, be deemed options
granted pursuant to the Conversion Plan. The options shall be to purchase the
number of shares of CU Stock equal to the Conversion Ratio times the number of
shares of Home Stock subject to the Home Options, provided, however, that no
option shall be deemed granted by CU Bancorp to acquire a fractional share of CU
Stock.
Options granted under the Conversion Plan may be either Incentive
Stock Options or Non-Qualified Stock Options and become exercisable in
accordance with terms established at the time of grant. Subject to the
provisions of the Conversion Plan, all options granted are exercisable on such
terms and conditions as the Board or Committee determines. Each option is
evidenced by a stock option agreement between CU Bancorp and the optionee
setting forth the terms and conditions of the option. The term of an option
granted under the Conversion Plan may not exceed ten years. Additionally, all of
the Home Options are fully vested, and will continue to be fully vested.
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The exercise price for Incentive Stock Options may not be less than
100% of the fair market value, as adjusted, of a share of CU Bancorp Common
Stock on the date of grant. If the optionee, at the time an Incentive Stock
Option is granted owns stock possessing more than 10% of the total voting power
of all classes of stock, the exercise price may not be less than 110% of the
fair market value on the date of grant.
The Conversion Plan provides that options are nonassignable and
nontransferable, other than by will or the laws of descent and distribution, and
may be exercised only by the employee while he or she is employed by CU Bancorp.
The assumption by CU Bancorp of the Home Options is subject to the
following limitations: (i) the excess of the aggregate fair market value of the
shares of CU Stock subject to an option immediately after the assumption, over
the aggregate option exercise price of such shares of CU Stock shall not be
greater than the excess of the aggregate fair market value of the shares subject
to the Home Option immediately before the assumption, over the aggregate option
exercise price of such shares of Home Stock; (ii) for any option on a share by
share comparison, the ratio of the option exercise price to the fair market
value of the CU Stock subject to the option immediately after the assumption
shall not be more favorable to the optionee than the ratio of the Home Option
exercise price to the fair market value of the Home Stock subject to the option
immediately before the assumption, and (iii) the optionee shall not receive
additional benefits under the Conversion Plan which he/she did not have under a
Home Option.
Subject to earlier exercise by the holders thereof, it is expected
that 138,336 Home Options to purchase 138,336 shares of Home Stock will be
assumed by CU Bancorp and will become approximately 194,915 options to
purchase 194,915 shares of CU Stock (subject to adjustments related to market
price at the Effective Time as discussed above).
Options to purchase CU Stock issued and outstanding immediately prior
to the Effective Time will not be affected by the Merger.
All of the Home Options issued and outstanding immediately prior to
the Effective Time shall, on and after the Effective Time be assumed by and be
deemed to be options granted by the Surviving Company pursuant to the Conversion
Plan, to purchase that number of shares of CU Stock equal to the Conversion
Ratio times the number of shares of Home Stock subject to the option, provided
however, that no option shall be deemed granted by the Surviving Company to
acquire a fractional share of CU Stock.
To the extent that the assumption of a Home Option by the Surviving
Company would result in the issuance of an option to purchase a fractional share
of CU Stock, such fractional share option shall be canceled, and the aggregate
exercise price of the option to purchase shares of CU Stock shall be reduced by
the proportionate amount of the aggregate exercise price attributable to the
fractional share.
THE CU BOARD RECOMMENDS A VOTE FOR PROPOSAL NUMBER 7 AND WILL VOTE ALL PROXIES
HELD BY IT FOR PROPOSAL NUMBER 7, UNLESS A SHAREHOLDER DIRECTS OTHERWISE AND
URGES YOU TO VOTE FOR PROPOSAL NUMBER 7.
APPROVAL OF THE CONVERSION PLAN IS A CONDITION PRECEDENT TO THE MERGER.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF CU STOCK
PRESENT, OR REPRESENTED AT THE CU MEETING (PROVIDING A QUORUM IS PRESENT). UNDER
APPLICABLE CALIFORNIA LAW, AN ABSTENTION WILL BE COUNTED IN DETERMINING THE
PRESENCE OF A QUORUM AND WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
PROPOSAL AND A BROKER NON VOTE WILL NOT BE COUNTED IN DETERMINING THE PRESENCE
OF A QUORUM AND WILL HAVE NO EFFECT ON THE OUTCOME OF THE PROPOSAL.
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PROPOSAL NUMBER 8.
TO AMEND THE 1996 OPTION PLAN TO INCREASE NUMBER OF SHARES OF
CU STOCK WHICH CAN BE ISSUED PURSUANT TO SUCH PLAN.
In April 1996, the CU Board adopted the 1996 Option Plan, subject to
approval by the shareholders no later than one year thereafter. Providing the
shareholders have approved such 1996 Option Plan by vote on Proposal Number 4
herein, the CU Board proposes that the 1996 Option Plan be amended to increase
the number of shares allocated and reserved for issuance pursuant to the 1996
Option Plan from 375,000 to 750,000, effective immediately following the
Effective Time.
Following the Merger, CU Bancorp will have approximately 11,239,395
shares outstanding representing 1,474 shareholders, which represents an increase
of 112% in outstanding shares. The number of employees of CU Bancorp and its
subsidiary, on a consolidated basis, immediately after the Merger will reflect
an approximately 75-100% increase.
In order to reflect the desire to be able to provide incentive and
rewards to the larger employee base, the CU Board believes that additional
shares of CU Stock should be allocated and reserved for issuance pursuant to the
1996 Option Plan. The CU Board has adopted an amendment to the 1996 Option Plan
providing for the allocations and reservation of 375,000 additional shares of CU
Stock for issuance pursuant to the 1996 Option Plan, which would increase the
total shares allocated and reserved for issuance of options pursuant to the 1996
Option Plan to 750,000. Less than 500 shares of CU Stock remain available for
issuance of stock options in connection with the 1993 Plan, the only other
employee option plan currently in force.
THE CU BOARD RECOMMENDS A VOTE FOR PROPOSAL NUMBER 8 AND WILL VOTE ALL PROXIES
HELD BY IT FOR PROPOSAL NUMBER 8, UNLESS A SHAREHOLDER DIRECTS OTHERWISE AND
URGES YOU TO VOTE FOR PROPOSAL NUMBER 8.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF CU STOCK
PRESENT, OR REPRESENTED AT THE CU MEETING (PROVIDING A QUORUM IS PRESENT). UNDER
APPLICABLE CALIFORNIA LAW, AN ABSTENTION WILL BE COUNTED IN DETERMINING THE
PRESENCE OF A QUORUM AND WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
PROPOSAL AND A BROKER NON VOTE WILL NOT BE COUNTED IN DETERMINING THE PRESENCE
OF A QUORUM AND WILL HAVE NO EFFECT ON THE OUTCOME OF THE PROPOSAL.
PROPOSAL NUMBER 9.
TO APPROVE THE 1996 RESTRICTED STOCK PLAN TO
REPLACE THE 1995 RESTRICTED STOCK PLAN.
EXISTING RESTRICTED STOCK PLAN
On March 28, 1995 the CU Board adopted and approved, subject to
shareholder approval, the 1995 Restricted Stock Plan. The 1995 Restricted Stock
Plan was approved by the shareholders in June, 1995. During 1995 and 1996,
30,500 shares of Restricted Stock were issued to 30 employees of CU Bank. The CU
Board has determined, based upon advice of counsel, that pursuant to the
provisions of the 1995 Restricted Plan, the Merger will constitute a
"Terminating Event" which will accelerate all vesting of the Restricted Stock
previously granted. As a result of a Terminating Event, restrictions will no
longer be applicable to the stock issued pursuant to such 1995 Restricted Stock
Plan and all holders of Restricted Stock
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shall receive the shares free of restriction, Therefore, on April 22, 1996, the
CU Board resolved to terminate the 1995 Restricted Stock Plan (as to shares not
previously issued) and adopted and approved, subject to shareholder approval,
the 1996 Restricted Stock Plan which is identical to the 1995 Restricted Stock
Plan in all respects other than the number of shares allocated to it, which have
been increased to reflect the greater size, capitalization and employee base of
CU Bancorp after the Merger and the period of restriction which has been
modified to commence elimination of restriction one year after issuance rather
than two years, as in the prior plan. The 1996 Restricted Stock Plan will become
effective immediately following the Effective Time and the termination of the
1995 Restricted Stock Plan in connection therewith.
SUMMARY OF THE RESTRICTED STOCK PLAN
The 1996 Restricted Stock Plan is intended to provide a vehicle
through which CU Bancorp can reward employees for their past service and
encourage their continued service and their stock ownership in CU Bancorp. The
following discussion summarizes the principal features of the 1996 Restricted
Stock Plan. This description is qualified in its entirety by reference to the
full text of the 1996 Restricted Stock Plan, copies of which are available for
review at CU Bancorp's principal office.
Restricted Stock is common stock issued by CU Bancorp, subject to
restrictions on sale or transfer (more fully described below) which continue
until such time as may be specified in the 1996 Restricted Stock Plan or the
granting documents. An employee holding Restricted Stock is entitled to receive
cash dividends when and as declared, and to vote the shares. At such time as the
conditions set forth in the 1996 Restricted Stock Plan or the granting documents
are satisfied, the restrictions lapse. The primary conditions set forth in the
1996 Restricted Stock Plan are the lapse of time and continued employment by CU
Bancorp. If the employee's employment is terminated before the restrictions
lapse, or if any conditions are not fulfilled, the restricted stock (or that
portion of it as to which the restrictions have not lapsed) must be returned to
CU Bancorp.
PURPOSE
The purpose of the 1996 Restricted Stock Plan is to strengthen CU
Bancorp by providing to employees added incentives for high levels of
performance and to encourage stock ownership in CU Bancorp. The 1996 Restricted
Stock Plan seeks to accomplish these goals by providing a means whereby such
employee of CU Bancorp may be given an opportunity to benefit from increase of
stock value and growth in the value of CU Stock without the necessity of
additional payment to realize the benefits of the stock. The 1996 Restricted
Stock Plan is also intended to enable CU Bancorp and its subsidiaries to compete
effectively for and retain the services of such persons and to provide
incentives for such persons to exert maximum efforts for the success of CU
Bancorp and its subsidiaries.
ADMINISTRATION
The 1996 Restricted Stock Plan will be administered by a Committee,
to the extent possible under applicable law. The Committee will have discretion
in the amount of shares to be granted to any party, the restrictions applicable
to the shares and other matters under the 1996 Restricted Stock Plan. Each
member of a Committee shall be a disinterested person as provided in Rule
16b-3(c)(2) promulgated pursuant to the Exchange Act. The CU Board 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 1996 Restricted Stock Plan.
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SHARES RESERVED
The number of shares of CU Stock reserved for issuance under the 1996
Restricted Stock Plan is 175,000. If any an employee is required under the terms
of the 1996 Restricted Stock Plan to return the Restricted Shares to CU Bancorp
(or if such shares automatically are canceled), such shares shall again become
available for the 1996 Restricted Stock Plan.
ELIGIBILITY
All employees of CU Bancorp and its subsidiaries are eligible to
participate in the 1996 Restricted Stock Plan.
GRANTS, VESTING AND RESTRICTIONS UNDER THE RESTRICTED STOCK PLAN
Under the 1996 Restricted Stock Plan, the employees of CU Bancorp are
eligible to receive Restricted Stock. The Committee will determine which
employees and the amount of Restricted Stock to be granted to each. Subject to
the rights of the Committee to vary the restrictions under the 1996 Restricted
Stock Plan, each grant shall conform to the following:
Restrictions with regard to 20% of the stock subject to the grant
shall expire and terminated upon the first anniversary of the grant. Thereafter
restrictions shall expire and terminate as to an additional 20% of such award on
each anniversary of the grant thereof.
If a participant ceases to be an employee of CU Bancorp (for any
reason other than death, disability or retirement (as defined in CU Bancorp's
401-K Plan) prior to the expiration and termination of any restrictions on a
grant of Restricted Stock, such Restricted Stock shall be automatically
forfeited and returned to CU Bancorp. In the event of death, retirement or
disability of an employee then any Restricted Shares shall become free and clear
of any restrictions and all restrictions shall automatically expire and
terminate. In the event that a participant elects to retire before the normal
retirement age (as defined in CU Bancorp's 401-K Plan) 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.
ADJUSTMENTS UPON CHANGES IN STOCK
If the outstanding shares of CU Stock are increased, decreased or
changed into, or exchanged for a different number or kind of shares or
securities of CU Bancorp, without receipt of consideration by CU Bancorp,
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 of
Restricted Stock available under the 1996 Restricted Stock Plan or previously
granted. 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 1996 Restricted Stock Plan on account of any such adjustment.
TRANSFER OF RESTRICTED STOCK
Restricted Stock by its terms may only be transferred by will or by
laws of descent and distribution upon the death of the optionee, and shall not
be transferable during the optionee's lifetime.
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TERMINATION AND AMENDMENT OF THE 1996 RESTRICTED STOCK PLAN
The restrictions on the common stock issued pursuant to the 1996
Restricted Stock Plan will terminate upon the occurrence of a terminating event,
including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp (or its principal subsidiary) with another
corporation in which CU Bancorp (or its principal subsidiary) is not the
surviving corporation or resulting corporation, or a sale of substantially all
the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU 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"). The CU Board or the
Committee (as the case may be) may also suspend or terminate the 1996 Restricted
Stock Plan at any time. No grants may be made under the 1996 Restricted Stock
Plan after the third anniversary of the date of adoption of the 1996 Restricted
Stock Plan. Rights and obligations under any Restricted Stock granted pursuant
to the 1996 Restricted Stock Plan, while in effect, shall not be altered or
impaired by suspension or termination of the 1996 Restricted Stock Plan, except
with the consent of the person to whom the Restricted Stock was granted.
The 1996 Restricted Stock Plan may be amended by the CU Board or the
Committee (as the case may be) at any time. However, except as otherwise
provided in the 1996 Restricted Stock 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
CU Stock 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 CU Stock entitled to vote, if the amendment will: (a)
increase the number of shares reserved under the 1996 Restricted Stock Plan; (b)
materially modify the requirements as to eligibility for participation in the
1996 Restricted Stock Plan; or (c) materially increase the benefits accruing to
participants under the 1996 Restricted Stock Plan. Notwithstanding the
foregoing, shareholder approval need not be obtained to effect any such
amendment if the CU Board or the Committee (as the case may be) determines that
such approval is not otherwise required under applicable law and that the
failure to obtain such approval will not adversely affect the 1996 Restricted
Stock Plan under the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal federal
income tax consequences of the options and rights to be granted under the 1996
Restricted Stock Plan, and is based on existing federal law (including
administrative regulations and rulings) which is subject to change, in some
cases retroactively. This discussion is also qualified by the particular
circumstances of individual Participants, which may substantially alter or
modify the federal income tax consequences herein discussed.
During the period of restrictions, and as long as Restricted Stock
remains both nontransferable and subject to a substantial risk of forfeiture,
there are generally no tax consequences resulting from the award of Restricted
Stock for either the recipient or CU Bancorp. At such time as the Restricted
Stock either becomes transferable or is no longer subject to a substantial risk
of forfeiture, the recipient will recognize ordinary income in an amount equal
to the excess of the fair market value of the stock over the amount the
recipient paid for it, if any. However the recipient may elect, within 30 days
after receipt of the award of Restricted Stock, to report the fair market value
of the restricted stock subject to the award (valued as if it were unrestricted)
as ordinary income at the time of receipt.
CU Bancorp will receive a compensation deduction equal to the
ordinary income recognized by the recipient when so recognized. If such an
election is made and the restrictions on the stock fail to lapse for any reason,
the recipient will not be entitled to a deduction. For accounting purposes, CU
Bancorp
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recognizes a compensation expense during the period of vesting according to the
rules of the Financial Accounting Standards Board.
When stock that was formerly Restricted Stock is sold or otherwise
disposed of, the tax treatment will depend on whether the recipient made the
election described above. If the recipient did not make the election,
disposition of the stock will result in a long or short term capital gain or
loss, depending on the length of time from the date the restrictions lapsed to
the date of the sale or other disposition, in an amount equal to the difference
between the amount received on disposition and the greater of the amount the
recipient paid for the stock or the fair market value of the stock on the date
the restrictions lapsed. If the recipient made the election, disposition of the
stock will result in a long or short term capital gain or loss, depending on the
length of time from the award to the date of disposition, in an amount equal to
the difference between the amount received on disposition and the sum of any
amount paid by the recipient for the Restricted Stock, if any, and the amount
recognized by the recipient as ordinary income at the time of the award.
If, as a result of a Terminating Event (see above) an employee's
Restricted Stock vests free of restrictions, the additional economic value
attributable to the acceleration, if any, may be deemed a "parachute payment" if
such value, when combined with all other payments resulting from the change of
control (if any), equals or exceeds 300% of the employee's average annual
taxable compensation over the five preceding calendar years. In such case, the
excess of the total parachute payment over such average annual taxable
compensation is subject to a 20% non deductible excise tax, in addition to any
income tax payable, CU Bancorp is not entitled to deduct the portion of the
parachute payment that is subject to such excise tax. In such an event or in the
event of changes in applicable law, if the aggregate compensation of the
executive officer would exceed such limit, the deductibility of awards of
Restricted Stock cannot be assured.
GRANT OF OPTIONS
No options have been granted to date under the 1996 Restricted Stock
Plan and all grants are discretionary with the Committee. Therefore, it cannot
be determined at this time if any executive officers of CU Bancorp will receive
options pursuant to the 1996 Restricted Stock Plan, although all executive
officers are eligible.
THE CU BOARD RECOMMENDS A VOTE FOR PROPOSAL NUMBER 9 AND WILL VOTE ALL PROXIES
HELD BY IT FOR PROPOSAL NUMBER 9, UNLESS A SHAREHOLDER DIRECTS OTHERWISE AND
URGES YOU TO VOTE FOR PROPOSAL NUMBER 9.
APPROVAL OF THE 1996 RESTRICTED STOCK PLAN REQUIRES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE SHARES OF CU STOCK PRESENT, OR REPRESENTED, AND ENTITLED TO VOTE
AT A DULY HELD MEETING (AT WHICH A QUORUM IS PRESENT). UNDER APPLICABLE
CALIFORNIA LAW, AN ABSTENTION WILL BE COUNTED IN DETERMINING THE PRESENCE OF A
QUORUM AND WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL AND A BROKER
NON VOTE WILL NOT BE COUNTED IN DETERMINING THE PRESENCE OF A QUORUM AND WILL
HAVE NO EFFECT ON THE OUTCOME OF THE PROPOSAL.
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PROPOSAL NUMBER 10.
TO APPROVE AMENDMENTS TO THE 1994 PLAN TO AMEND THE 1994 PLAN TO
CHANGE THE VESTING OF OPTIONS GRANTED UNDER THE 1994 PLAN AND
TO AMEND THE DEFINITION OF "TERMINATING EVENT" UNDER THE
1994 PLAN TO INCLUDE A CHANGE IN CONTROL OF 60% OR
MORE OF THE CU STOCK, EFFECTIVE IMMEDIATELY
FOLLOWING THE EFFECTIVE TIME.
On April 27, 1994, the CU Board adopted and approved subject to
shareholder approval, the 1994 Plan, which was approved by the shareholders of
CU Bancorp at the 1994 Annual Meeting of Shareholders. 200,000 shares were
reserved for options under the 1994 Plan. All non-employee directors of CU
Bancorp are eligible to participate in the 1994 Plan. The 1994 Plan is intended
to provide a vehicle through which CU Bancorp can reward directors for the risks
of directorship, encourage their continued service through the knowledge that
options will be regularly granted and encourage their stock ownership in CU
Bancorp.
Grants under the 1994 Plan are automatic and are not discretionary.
Each director on the date of an annual meeting of shareholders is automatically
granted 5,000 shares, except that the Chairman (if he is not an employee of CU
Bancorp or its subsidiary) receives an additional 2,500 shares.
Options granted under the 1994 Plan currently vest over a four year
period in 25% increments, commencing the March 31 following the date of grant.
As presently drafted, the 1994 Plan will terminate upon a terminating event,
including but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp with another corporation in which CU Bancorp is not
the surviving corporation or the resulting corporation, or a sale of
substantially all the assets of CU Bancorp to another person, or a reverse
merger in which CU Bancorp is the surviving corporation but the shares of CU
Bancorp's stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property (a "Terminating Event"). Counsel for CU
Bancorp has advised CU Bancorp that the Merger does not constitute a Terminating
Event.
The CU Board has approved two amendments to the 1994 Plan. The first
amendment would change the vesting schedule for options granted under the 1994
Plan after the Effective Time to provide that options would completely vest on
the March 31 first following the date of grant. As a result, within one year
from the date of any grant of options pursuant to the 1994 Plan, all options
granted at such date would be fully exercisable.
The second amendment would provide that any event resulting in a
change in control of 60% or more of the CU Stock, or a transfer of power to vote
60% or more of the outstanding shares of CU Stock, at any date after the
Effective Time, would be a "Terminating Event" under the 1994 Plan and would
cause all options not previously vested to be vested and exercisable.
The CU Board has proposed and approved these amendments to more
accurately reflect the intent that the options are intended to reward directors
for past service and not necessarily to retain directors, since the retention of
directors is largely at the discretion of the shareholders. Moreover, the CU
Board anticipates that in future merger or acquisition transactions (or in the
event of a sale of a large portion of CU Stock), additional members may be added
to the CU Board, possibly necessitating the resignation of current directors (as
is the case in the Merger). The CU Board believes that it would be an undue
hardship on such resigning directors to forfeit stock options granted but not
vested, given their contribution to the transaction which necessitates their
resignation.
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These amendments will not affect the rights of option holders in
connection with the Merger.
THE CU BOARD RECOMMENDS A VOTE FOR THE APPROVAL OF PROPOSAL NUMBER 10 AND
INTENDS TO VOTE ALL SHARES HELD BY IT FOR PROPOSAL 10, UNLESS A SHAREHOLDER
SPECIFIES OTHERWISE AND URGES YOU TO VOTE FOR PROPOSAL NUMBER 10.
APPROVAL OF THE AMENDMENTS TO THE 1994 PLAN REQUIRES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE SHARES OF CU STOCK PRESENT, OR REPRESENTED, AND ENTITLED TO VOTE
AT A DULY HELD MEETING (AT WHICH A QUORUM IS PRESENT). UNDER APPLICABLE
CALIFORNIA LAW, AN ABSTENTION WILL BE COUNTED IN DETERMINING THE PRESENCE OF A
QUORUM AND WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL AND A BROKER
NON VOTE WILL NOT BE COUNTED IN DETERMINING THE PRESENCE OF A QUORUM AND WILL
HAVE NO EFFECT ON THE OUTCOME OF THE PROPOSAL.
SHAREHOLDER PROPOSALS
Any shareholder desiring to submit a proposal for action at the 1997
Annual Meeting of Shareholders which is desired to be presented in CU Bancorp's
proxy statement with respect to such meeting, should submit such proposal to CU
Bancorp at its principal place of business no later than December 15, 1996,
which is 120 days prior to the anticipated mailing date of the proxy materials
for the 1997 Annual Meeting.
OTHER MATTERS
Management is not aware of any other matters to come before the CU
Meeting. If any other matter not mentioned in this Joint Proxy
Statement/Prospectus is brought before the CU Meeting, the persons named in the
enclosed form of proxy will have discretionary authority to vote all proxies
with respect thereto in accordance with their judgment.
CU BANCORP WILL SUPPLY TO SHAREHOLDERS WITHOUT COST, UPON WRITTEN
REQUEST, A COPY OF CU BANCORP'S MOST RECENT ANNUAL REPORT ON FORM 10-K AS
AMENDED ON FORM 10-K/A INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES. EXHIBITS TO THE FORM 10-K WILL BE FURNISHED UPON PAYMENT OF
REASONABLE CHARGES. WRITTEN REQUESTS SHOULD BE DIRECTED TO PATRICK HARTMAN,
CHIEF FINANCIAL OFFICER, CU BANCORP, 16030 VENTURA BOULEVARD, ENCINO, CALIFORNIA
91436.
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INFORMATION CONCERNING HOME BANCORP MEETING ONLY
ELECTION OF DIRECTORS
The Bylaws of Home Bancorp provide that the number of directors shall
be not fewer than seven nor more than eleven until changed by amendment of Home
Bancorp's Articles of Incorporation or by a Bylaw amendment duly adopted by the
vote or written consent of Home Bancorp's shareholders. The Bylaws further
provide that the exact number of directors shall be fixed from time to time,
within the foregoing range, by a Bylaw or amendment thereof duly adopted by the
vote or written consent of Home Bancorp's shareholders or by the Home Board. The
number of directors to be elected at the Meeting has been fixed at nine by the
Home Board.
The persons listed below, other than Keith W. Barnes and Susan
Monsoor, will be nominated for election to serve until the next Annual Meeting
of Shareholders and until their successors are duly elected and have qualified.
Each of such nominees are present members of the Home Board. Votes will be cast
pursuant to the enclosed Proxy in such a way as to effect the election of said
nine nominees, or as many thereof as possible under applicable voting rules. In
the event that any of the nominees should be unable to serve as a director, it
is intended that the Proxy will be voted for the election of such substitute
nominee, if any, as shall be designated by the Home Board. Management has no
reason to believe that any nominee will become unavailable to serve as a
director of Home Bancorp.
At the Effective Time and pursuant to the Merger Agreement, the Board
of Directors of the Surviving Company will consist of five members of the
current CU Board and five members from the Home Board. It is currently
contemplated that the five members of the Home Board who will serve as directors
of the Surviving Company are Donald A. Buschenfield, J. Richard Denham, Randall
G. Elston, Donald G. Martin and James P. Staes. For information on the members
of the CU Board who will serve on the Surviving Company's Board of Directors,
see "INFORMATION CONCERNING CU BANCORP MEETING ONLY -- DIRECTORS AND EXECUTIVE
OFFICERS."
Management knows of no person who, as of the Home Record Date, owned
beneficially more than five percent (5%) of the outstanding Home Stock, except
for Ruth A. Martin, who is a nominee for director.
The following table sets forth certain information, as of the Home
Record Date, with respect to the persons to be nominated by the Home Board for
election as directors, the named executive officers(1) and for the directors and
executive officers(2) of Home Bancorp as a group:
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<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY PERCENT
NAME OWNED ON JUNE 7, 1996(3) OF CLASS (4)
- ---- ------------------------ ------------
<S> <C> <C>
Keith W. Barnes 8,978(5) *
Donald A. Buschenfield 103,339(6) 2.37%
J. Richard Denham 11,422(7) *
Randall G. Elston 28,725(8) *
Roger K. Freeman, MD 12,664 *
Donald G. Martin (9) 130,027 2.90%
Ruth A. Martin(10) (11) 370,917 8.51%
Susan Monsoor 6,000(12) *
Bill Neal 20,661(13) *
George W. Post 60,026(14) 1.37%
James P. Staes 56,631(15) 1.30%
Directors and executive officers as a
Group (10 persons) 809,500(16) 19.21%
</TABLE>
- ---------------------------------------
* Less than 1%
(1) As used throughout this Joint Proxy Statement/Prospectus, the term
"named executive officers" means the chief executive officer of Home
Bank and the two most highly compensated executive officers of Home
Bancorp or Home Bank, other than the chief executive officer, who
received salary and bonus compensation of more than $100,000 during
1995. The principal executive officer of Home Bancorp does not
receive any compensation for serving in such capacity and she is,
therefore, not treated herein as a named executive officer. Home
Bancorp's named executive officers are James P. Staes, Bill Neal and
Keith W. Barnes.
(2) As used throughout this Proxy Statement, the term "executive officer"
means, with respect to Home Bancorp, the chairman of the Board,
president, senior vice president/chief financial officer and vice
president/corporate secretary of Home Bancorp and the executive vice
president/chief operating officer of Home Bank.
(3) Except as otherwise noted, includes shares held by such person's
spouse (except where legally separated) and minor children, and by
any other relative of such person who has the same home, shares held
in a family trust and shares held in individual retirement accounts.
Such persons have sole voting and investment power with respect to
all shares shown as beneficially owned by them, subject to community
property laws where applicable and the information set forth in the
other footnotes to this table.
(4) Percentage ownership figures are computed by dividing the total
number of shares beneficially owned (including shares which the
individual (or group) has the right to acquire within 60 days of the
Home Record Date) by the sum of the total number of shares
outstanding on the Home Record Date plus the number of shares the
individual (or group) has the right to acquire within 60 days of the
Home Record Date.
(5) Includes 4,901 shares which Mr. Barnes has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to Home Bancorp's stock option plans (the
"Stock Option Plans") .
(6) Includes 1,106 shares which Mr. Buschenfield has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to the Stock Option Plans.
(7) Includes 5,106 shares which Mr. Denham has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to the Stock Option Plans.
(8) Includes 5,106 shares which Mr. Elston has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to the Stock Option Plans.
(9) Donald G. Martin is the son of Home Bancorp Chairman Ruth A. Martin.
(10) Mrs. Martin's business address is 2633 Cherry Avenue, Signal Hill,
California 90806.
(11) Mrs. Martin is the mother of director Donald G. Martin.
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(12) Includes 6,000 shares which Ms. Monsoor has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to the Stock Option Plans.
(13) Includes 5,155 shares which Mr. Neal has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to the Stock Option Plans.
(14) Includes 4,863 shares which Mr. Post has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to the Stock Option Plans.
(15) Includes 13,785 shares which Mr. Staes has the right to acquire
within sixty days of the Home Record Date by the exercise of stock
options vested pursuant to the Stock Option Plans.
(16) Includes 46,022 shares which the directors and executive officers
of Home Bancorp have the right to acquire within sixty days of the
Home Record Date by the exercise of stock options vested pursuant to
the Stock Option Plans.
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS OF HOME BANCORP
The following table sets forth certain information as of the Home Record Date,
with respect to the directors, nominees for election as directors and executive
officers of Home Bancorp.
<TABLE>
<CAPTION>
Name Age Biographical Information
- ---- --- ------------------------
<S> <C> <C>
Keith W. Barnes 50 Keith W. Barnes has been Senior Vice President and Chief Financial
Officer of Home Bancorp from May 1988 to present and of Home Bank
from July 1986 to present. He served as Vice President and Chief Financial
Officer of Home Bancorp from July 1986 to May 1988 and as Senior Vice
President, Cashier of Home Bank from July 1982 to June 1986. Mr. Barnes
has been with Home Bank since 1974 and has been in banking industry for
27 years.
Donald A. Buschenfield 80 Donald A. Buschenfield has been a Vice President of Home Bancorp since
1982 and a director of Home Bancorp since 1981. Mr. Buschenfield is also
the Vice Chairman of Home Bank and a former Home Bank executive
officer. He has been a director of Home Bank since 1970. Mr.
Buschenfield has served as a consultant to Home Bank since 1985. (See
"Director Compensation").
J. Richard Denham 63 J. Richard Denham has been a Vice President of Home Bancorp since 1982
and has been a director of Home Bank and Home Bancorp since 1981. Mr.
Denham is the owner of Cement Tool Co./D & G Manufacturing Company,
which is engaged in industrial development. He served as Chief of Police
for the City of Signal Hill, California from 1967 to 1979. Mr. Denham
became a rancher and industrial developer after leaving the Signal Hill
Police Department in 1979. Since January 1984, Mr. Denham has been
breeding and training Andalusian horses.
Randall G. Elston, MAI 42 Randall G. Elston has been a director of Home Bancorp since 1987, and of
Home Bank since March 1992. He is a real estate appraiser and has, since
1982, owned Elston Enterprises, Inc., a corporation doing business under
the name Pacific Real Estate Appraisal.
Roger K. Freeman, MD 61 Roger K. Freeman, MD, has been a director of Home Bancorp and Home
Bank since August 19, 1992. Dr. Freeman has been a Professor of
Obstetrics and Gynecology at UC Irvine since 1975. He was the Medical
Director of Women's Services at Long Beach Memorial Medical Center
from 1975 to 1990, and has been a Senior Fellow with Memorial Health
Service since 1990. He also served as Senior Vice President of Women's
Services at Long Beach Memorial Hospital from January 1992 through
December 1992.
</TABLE>
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<TABLE>
<CAPTION>
Name Age Biographical Information
- ---- --- ------------------------
<S> <C> <C>
Donald G. Martin, CPA 48 Donald G. Martin has been a director of Home Bancorp since December,
1993 and of Home Bank since February 1994. Since 1970, Mr. Martin has
been involved in the agricultural industry in South Dakota where he
maintains an interest in cattle ranching. He has also been a practicing
Certified Public Accountant since 1980. Mr. Martin is the son of Ruth A.
Martin, Chairman of the Board of Home Bancorp and Home Bank.
Ruth A. Martin 81 Ruth A. Martin has been the Chairman of the Home Board since 1986 and
served as its President from 1986 to February 1993. She has also been
Chairman of the Board of Home Bank since 1986. Mrs. Martin has been a
director of Home Bank and Home Bancorp since 1983. She formerly
served as Area Administrator for the State Department of Mental Health
from which position she retired in January 1981. Mrs. Martin is the mother
of Donald G. Martin, a director of Home Bancorp and Home Bank.
Susan Monsoor 40 Susan Monsoor has been Vice President/Corporate Secretary of Home Bank
since February 1989 and Corporate Secretary of Home Bancorp and Home
Bank since April 1987. She was appointed Vice President/Corporate
Secretary of Home Bancorp in February 1993. Prior to joining Home Bank,
Ms. Monsoor was employed in the legal field for 12 years.
Bill Neal 65 Bill Neal has been a director of Home Bancorp since May 1993, and of
Home Bank since August 1992. He has served as the Executive Vice
President and Chief Operating Officer of Home Bank since January 1989.
He has been with Home Bank since 1974 and has been in the banking
industry for 36 years.
George W. Post 71 George W. Post retired as Executive Vice President of Home Bank in
October 1992, a position he held from October 1990. He has been and
continues to serve as a director of Home Bancorp and Home Bank since
October 1990. Prior to the acquisition of The Torrance National Bank
("TTNB") by Home Bank, Mr. Post had served as President and Chief
Executive Officer of TTNB from 1973 to October 1990. Mr. Post had also
served as a director and Chairman of the Board of TTNB from 1973 to
October 1990.
James P. Staes 57 James P. Staes served as Home Bancorp's Chief Executive Officer and Vice
Chairman from 1985 to 1987. He served as Home Bancorp's President
from 1986 to 1987 and from February 1993 to present. Mr. Staes served as
a director of Home Bancorp since 1985 (except from May 1987 to May
1988). Mr. Staes has also served as a director of Home Bank and its
President since 1984 and as Chief Executive Officer of Home Bank since
1985. Previously, Mr. Staes served as President and Chief Executive
Officer of the Bank of Manhattan from 1982 to 1983. Mr. Staes has been
in the banking industry for 28 years.
</TABLE>
THE BOARD OF DIRECTORS AND COMMITTEES
In July 1994, the Boards of Directors of Home Bancorp and Home Bank
formed joint committees of their respective Boards of Directors. Therefore, Home
Bancorp and Home Bank have a Joint Executive Committee, Joint Long Term Planning
Committee, Joint Audit Committee and Joint Personnel/ Compensation Committee.
Home Bancorp has no standing Nominating Committee; however, the procedures for
nominating Directors, other than by the Home Board itself, are set forth in Home
Bancorp's Bylaws and in the Notice of Annual Meeting which accompanies this
Joint Proxy Statement/Prospectus.
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The Joint Executive Committee, which consists of Ruth A. Martin
(Chairman), Donald A. Buschenfield, Donald G. Martin, Bill Neal and James P.
Staes, met three times during 1995. The Joint Executive Committee reviews and
assists in implementing all Home Bancorp and Home Bank operational policies and
makes recommendations to the Boards of Directors of Home Bancorp and Home Bank
in all areas of management policy.
The Joint Audit Committee, which consists of Randall G. Elston
(Chairman), Donald A. Buschenfield, J. Richard Denham, Donald G. Martin, Ruth A.
Martin (as an ex-officio member) and George W. Post, met six times during 1995.
The Joint Audit Committee provides assistance and advice to the Board of
Directors relating to auditing and related matters and facilitates communication
among the Board of Directors of Home Bank, Home Bank's management, the internal
auditing staff and the independent accountants. The Committee reviews all
internal, external, and regulatory audit reports and examinations, and reviews
internal controls and the recommendations of the auditors and/or examiners.
The Joint Personnel/Compensation Committee, which consists of Roger
K. Freeman, MD, (Chairman), Donald A. Buschenfield, J. Richard Denham, Donald G.
Martin, Ruth A. Martin and James P. Staes (as an ex-officio, non-voting member),
met one time during 1995. This committee reviews the performance of all
executive officers of Home Bank and makes compensation recommendations to the
Board of Directors of Home Bank.
The Long Term Planning Committee, which consists of James P. Staes
(Chairman), Donald A. Buschenfield, Roger K. Freeman, MD, Ruth A. Martin, Bill
Neal and George W. Post, met three times during 1995. This committee explores
strategic alternatives to increase profitability of Home Bancorp, including but
not limited to acquisitions, mergers and/or a possible sale of Home Bancorp. The
meetings of this Committee involved discussions of the Merger. Due to the
importance of the matters discussed, the entire Home Board attended all three
meetings.
During the fiscal year ended December 31, 1995, the Home Board held a
total of thirteen meetings. Each person who was a director of Home Bancorp
during 1995 attended at least 75% of the aggregate of (i) the total number of
such meetings and (ii) the total number of meetings held by all committees of
the Board on which such director served during 1995.
REPORT OF THE PERSONNEL/COMPENSATION COMMITTEE OF HOME BANK
The executive officers of Home Bancorp do not receive compensation
except in their capacities as employees of Home Bank or as directors of Home
Bancorp or Home Bank.
Home Bank applies a consistent philosophy to compensation for all
employees, including senior management. This philosophy is based on the premise
that the achievements of Home Bank result from the coordinated efforts of all
individuals working toward common objectives. Home Bank strives to achieve those
objectives through teamwork that is focused on meeting the expectations of
customers and shareholders.
COMPENSATION PHILOSOPHY
The goals of the executive compensation program are to align
compensation with business objectives and performance and to enable Home Bank to
attract, retain and reward executive officers who contribute to the long-term
success of Home Bank. Home Bank's compensation program for executive officers is
based on the same four principles applicable to compensation decisions for all
of Home Bank's employees:
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Home Bank pays competitively. Home Bank is committed to providing a
pay program that helps attract and retain the best people in the industry. To
ensure that pay is competitive, Home Bank regularly compares its pay practices
with those of other banks and sets its pay parameters based on this review. Home
Bank's primary source for competitive pay rates is the California Bankers
Association yearly Compensation Survey.
Home Bank pays for relative sustained performance. Executive officers
are rewarded based upon both corporate performance and individual performance.
Corporate performance is evaluated by reviewing the extent to which strategic
and business plan goals are met, including such factors as operating profits and
performance relative to competitors. Individual performance is evaluated by
reviewing progress in organizational and management areas against set objectives
and the degree to which teamwork and Bank values are fostered.
Home Bank strives for fairness in the administration of pay. Home
Bank strives to achieve a balance with respect to the compensation paid to a
particular individual and the compensation paid to other executives both inside
Home Bank and by others employed within the banking industry and performing
similar functions.
Home Bank believes that employees should understand the performance
evaluation and pay administration process. The process of assessing performance
is as follows:
1. At the beginning of the performance cycle, the evaluating
manager sets objectives and key goals.
2. The evaluating manager gives the employee ongoing feedback
on performance.
3. At the end of the performance cycle, the manager evaluates
the accomplishments of the objectives/key goals.
4. The manager compares the results to the results of peers
within Home Bank.
5. The manager communicates the comparative results to the
employee.
6. The comparative results affect decisions on salary
options.
COMPENSATION PROGRAMS
Home Bank has had a long and successful history employing a simple
total compensation program that consists of cash and equity-based compensation.
Having a compensation program that allows Home Bank to successfully attract and
retain key employees permits Home Bank to provide useful products and services
to customers, enhance shareholder value, foster teamwork and adequately reward
employees. The programs are:
Salary. Home Bank sets the base salary for employees.
Home Bank Profit Sharing and Retirement Savings Plan. Home Bank has a
profit-sharing plan (the "Profit Sharing Plan") under which it distributes to
all employees, including executive officers, a percentage of profits before
taxes and other adjustments. Home Bank believes that all employees share the
responsibility of achieving profits. Accordingly, it shares a portion of these
profits with all eligible employees. The same profit-sharing percentage applies
to each employee, with the payment determined by
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applying this percentage to the individual's salary level. Contributions to the
profit-sharing plan are discretionary on the part of the Home Board. For 1995,
the Home Board committed to contributing 10% of pre-tax profits to the Profit
Sharing Plan. The dollar amount contributed for 1995 was $496,585.
In addition to the Profit Sharing Plan, Home Bank has a 401(k)
savings plan for employees. This retirement savings plan allows eligible
employees to set aside pre-tax salary dollars toward their retirement. To
increase employee participation in the plan, in 1994 the Home Board voted to
contribute a matching dollar amount up to $200 for each $1 that an employee
contributed to their individual 401(k) plan. For the 1995 plan year, this match
equaled $35,763 which was deducted from the overall profit sharing contribution
prior to the year end allocation of profit sharing.
Home Bank Stakeholders (R) Incentive Compensation Plan. One of the
components of Home Bank's mission statement is the focus on long-term
shareholder value. Home Bank has adopted a Stakeholders (R) Incentive
Compensation Plan, hereinafter referred to as "Plan", to reward employees for
increases in long-term shareholder value. The goal is to balance profit and
growth with productivity and quality. The incentive program consists of
incentive payments tied to specific goals established and communicated to
participants before the start of the performance period. At the outset, Home
Bank and team budget goals are established then rewards are linked to the
success at meeting and exceeding these goals at the end of the performance
period.
Plan rewards initially consist of funding Home Bank's Profit Sharing
Plan based on meeting an established bankwide budget goal. Additional cash
bonuses are rewarded for any profits generated by performance levels above those
specified for in Home Bank's and the individual team's budgeted goals. All
employees of Home Bank are eligible to participate in the Plan, and rewards are
linked not only to Home Bank's overall results, but the team contributions to
those results. The total cash incentive pay earned for 1995 was $209,065.
Stock Option Program. Home Bank believes that stock-based performance
compensation arrangements are beneficial in aligning employees' and
shareholders' interest. The stock option program is also utilized to encourage
employees to continue in the employ of Home Bank. To facilitate these
objectives, Home Bank has, since 1950, granted stock options to employees
through various stock option plans. Stock options have been granted at the
discretion of the Board of Directors based on the recommendations of the
Personnel/Compensation Committee. Home Bancorp's Stock Option Plan expired on
March 12, 1995; however, options already granted and outstanding may still be
exercised in the future in accordance with their terms.
CEO COMPENSATION
As with each of the other executive officers, the compensation paid
to Mr. Staes as chief executive officer of Home Bank is a combination of salary
and equity-based incentive compensation. To determine his salary, the
Personnel/Compensation Committee considered information regarding the salaries
paid to CEOs of banks and thrift institutions with assets of between
$250,000,000 and $500,000,000, both in and outside the State of California. To
determine incentive compensation, the Personnel/Compensation Committee measured
Mr. Staes' performance against the goals set for him by the Board. The Committee
evaluated Mr. Staes' performance on factors which focused on the long-term
health and growth of Home Bank. The continued attention given to Home Bancorp's
quality of service, including actions taken under Mr. Staes' leadership were
also considered by the Personnel/Compensation Committee in determining Mr.
Staes' compensation.
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The foregoing report shall not be deemed incorporated by reference by
any general statement incorporating by reference this Joint Proxy
Statement/Prospectus into any filing under the Securities Act or the Exchange
Act, except to the extent that Home Bancorp specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
JOINT PERSONNEL/COMPENSATION COMMITTEE
Roger K. Freeman, MD, Chairman
Donald A. Buschenfield
J. Richard Denham
Donald G. Martin
Ruth A. Martin
James P. Staes (ex-officio, non-voting)
EXECUTIVE COMPENSATION
No executive officer of Home Bancorp received cash compensation
during the year ended December 31, 1995, except in his or her capacity as an
executive officer of Home Bank, and except for directors' fees paid by Home
Bancorp and Home Bank to members of their respective Boards of Directors. The
following table sets forth the aggregate cash compensation that Home Bancorp and
its subsidiaries paid to or accrued on behalf of each of (i) the chief executive
officer of Home Bank during 1995 (the principal executive officer of Home
Bancorp does not receive any compensation for serving in such capacity), and
(ii) the four most highly compensated individuals, other than the chief
executive officer, whose aggregate cash compensation exceeded $100,000 (two
persons) ("named executive officers"), in each case, for fiscal 1993, 1994 and
1995:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
LONG TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- ---------------------------------------------------
(a) (b) (c) (d) (e)(3)
NAME & PRINCIPAL YEAR SALARY BONUS OTHER STOCK OPTIONS/ LTIP ALL OTHER
---------------- ---- ------ ----- -----
POSITION ($) ($) COMP ($) AWARDS S A R'S PAYOUTS COMP
-------- --- --- -------- ------ ------- ------- ----
(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAMES P. STAES 1995 201,066 3,820 21,154 N / A N / A N / A 11,792
(1)(2)(4) 1994 201,066 30,000 20,959 N / A N / A N / A 9,560
PRESIDENT & CEO, 1993 187,923 12,000 21,378 N / A N / A N / A 4,220
HOME BANK
BILL G. NEAL (1)(4) 1995 119,474 2,270 22,396 N / A N / A N / A 9,433
EVP & COO, 1994 119,474 5,496 22,398 N / A N / A N / A 8,612
HOME BANK 1993 107,508 10,000 21,692 N / A N / A N / A 2,486
KEITH W. BARNES 1995 92,926 1,766 4,993 N / A N / A N / A 7,382
(1)(4) 1994 92,926 7,209 3,956 N / A N / A N / A 6,604
SR. V P & C F O, 1993 86,419 3,000 4,257 N / A N / A N / A 1,964
HOME BANCORP
</TABLE>
- ------------------------------------
(1) 1995 BONUS NUMBERS REPRESENT COMPENSATION ACCRUED IN 1995 AND PAID IN
1996.
(2) 1994 BONUS NUMBER INCLUDES $30,000 FOR STAES ACCRUED IN 1994 AND PAID IN
1995.
(3) REPRESENTS PERSONAL COMPENSATION RECOGNIZED FOR THE USE OF VEHICLES
PROVIDED BY HOME BANCORP. OTHER COMPENSATION FOR MESSRS. STAES AND NEAL
ALSO INCLUDES $14,400 FOR 1995, 1994 AND 1993 WHICH REPRESENTS DIRECTORS
FEES PAID IN EACH OF THOSE YEARS.
(4) 1993 BONUS NUMBERS REPRESENT COMPENSATION ACCRUED IN 1993 AND PAID IN
1994.
(5) REPRESENTS ANNUAL PROFIT SHARING CONTRIBUTION.
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RETENTION AGREEMENTS
Effective June 30, 1995, Mr. Staes, president and chief executive
officer of Home Bank, entered into an agreement (the "Staes Retention
Agreement") with Home Bank pursuant to which Mr. Staes would become entitled to
receive two years' base annual salary (or $402,132) payable in 48 substantially
equal installments over a two-year period upon the occurrence of a "change of
control" of Home Bancorp or Home Bank (as defined in such agreement). Ten other
key employees of Home Bancorp or Home Bank, including Messrs. Neal and Barnes,
entered into similar agreements (the "Employee Retention Agreements" and
together with the Staes Retention Agreement, the "Original Retention
Agreements") with Home Bank effective June 30, 1995. Pursuant to the Employee
Retention Agreements, each of the ten employees would be entitled to receive the
equivalent of one years' base annual salary, payable in 24 substantially equal
installments over a one-year period, upon a "change of control" of Home Bancorp
or Home Bank. Accordingly, Messrs. Neal and Barnes would become entitled to
receive $119,474 and $92,926, respectively, under the Employee Retention
Agreements.
The purpose of the Original Retention Agreements was to (i) minimize
the distraction to senior managers occasioned by threats of abrupt changes in
control of Home Bancorp or Home Bank and to permit such managers to concentrate
on the business and operation of Home Bancorp and Home Bank and (ii) enhance the
ability of Home Bank to retain the services of such managers. The Original
Retention Agreements did not contemplate the Merger, and the payment terms set
forth in such agreements will not be triggered by the consummation of the
Merger. The spirit of the Original Retention Agreements, however, was to
compensate the aforementioned persons in the event of a substantial change of
control of Home Bancorp or Home Bank. As such, the Home Board believes the
parties to the Original Retention Agreements should be compensated upon the
consummation of the Merger on the terms set forth in such agreements. Based on
this belief, Home Bank intends to enter into Retention Agreements with the
aforementioned persons prior to the consummation of the Merger. The Retention
Agreements, when executed, will supersede the Original Retention Agreements. The
terms and provisions of the Retention Agreements are substantially similar to
those of the Original Retention Agreements, except that the Retention Agreements
are effective only upon the consummation of the Merger or some similar
transaction between CU Bancorp and Home Bancorp (rather than upon a "change of
control") and, with respect to Mr. Staes, his Retention Agreement includes
provisions requiring Mr. Staes to provide certain consulting services for a
one-year period after the
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48 month payment term and prohibits Mr. Staes for a three-year period after the
Effective Time from serving as a director or executive officer of another bank,
savings and loan association, credit union or thrift and loan which has an
office within five miles of a branch office of Home Bank. Total payments to be
made by the Surviving Company under the Retention Agreements are approximately
$1.2 million. Payments under the Retention Agreements will be made whether or
not the recipient is employed by the Surviving Company.
PENSION PLAN
Salaried employees of Home Bancorp and Home Bank over 21 years of age
are also eligible to participate in Home Bancorp's Pension Plan (the "Pension
Plan"). As of January 1, 1990, employees must complete one consecutive year of
service to Home Bancorp with a minimum of 1,000 hours worked per year in order
to become eligible to participate in this plan. (Between January 1, 1989 and
December 31, 1989 employees had to complete two such years of continuous service
and prior to January 1, 1989 employees had to complete three such years of
continuous service.)
The normal annual retirement benefit under the Pension Plan at age 65
is based upon an annual accrued amount over the career of the participant. The
annual amount accrued for individuals for each year after 1988 is calculated as
the sum of (i) 1.15% of annual pay over $10,000; (ii) 1.75% of annual pay over
$10,000 for each year of benefit service through 35 years; (iii) 1.50% of annual
pay for each year of benefit service over 35 years; and (iv) any earned benefit
under the Pension Plan on December 30, 1988.
Effective January 31, 1994, Home Bancorp terminated the accrual of
pension benefits for pension plan participants, and all funding for the Pension
Plan was terminated effective on such date. In December, 1994, the Home Board
voted to terminate the Pension Plan effective April 3, 1995. Accrued benefits
will be transferred to employees participating in the Pension Plan in the form
of either an annuity or a rollover into the employee's 401(k) savings account,
at the option of the employee.
PENSION PLAN TABLE
Pension Benefits Available At
Normal Retirement Age
<TABLE>
<S> <C>
James P. Staes
President & CEO $26,923
Bill Neal
EVP & COO $21,332
Keith W. Barnes
Sr. VP & CFO $16,951
</TABLE>
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STOCK OPTION EXERCISES AND HOLDINGS
The following table contains information on stock option exercises in
fiscal 1995 by the named executive officers and the number and value of their
respective unexercised options at December 31, 1995:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN 1995
(a) (b) (c) (d) (e)
------------------------------ ----------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options / SAR's at In-the-Money Options/
12/31/95 SAR's at 12/31/95
------------------------------ ----------------------------
Shares
Acquired Value
Name On Realized Exercisable Unexercisable Exercisable Unexercisable
---- -- -------- ----------- ------------- ----------- -------------
Exercise
--------
<S> <C> <C> <C> <C> <C> <C>
James P. Staes N / A N / A 13,785 N / A $40,390 N / A
President & CEO
Bill Neal 1,500 $1,470 9,655 N / A $28,289 N / A
EVP & COO
Keith W. Barnes N / A N / A 4,901 N / A $14,360 N / A
Sr. VP & CFO
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of Home Bank's Personnel/Compensation Committee served as
an officer or employee of Home Bank in 1995, except James P. Staes (who became
an ex-officio member of the Committee in January 1993, with no voting rights.)
Each member of the Personnel/Compensation Committee, other than Messrs. Donald
G. Martin and Roger K. Freeman, MD, served as an officer of Home Bancorp during
1995. However, none of such individuals received any compensation from Home
Bancorp or Home Bank for serving in such capacities, other than Committee fees.
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PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage in
cumulative total shareholder return on Home Stock since December 31, 1990 with
the cumulative total return of the Standard & Poor's 500 stock index and of a
selected financial peer group index consisting of Southern California banks and
bank holding companies ranging in asset size from $140,000,000 to
$2,050,000,000.
[COMPARISON OF 6 YEAR CUMULATIVE TOTAL RETURN
OF COMPANY, BROAD MARKET AND PEER GROUP GRAPH]
Source: Montgomery Securities Western Bank Monitor
The following table sets forth the data points for the above graph.
<TABLE>
<CAPTION>
DECEMBER 31,
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
HOME BANCORP 100 105.22 62.70 74.65 76.44 109.66
S&P 500 100 130.37 140.30 154.46 156.50 215.32
SO. CA PROXY 100 100.98 100.50 122.83 140.19 177.81
</TABLE>
The foregoing graph shall not be deemed incorporated by reference by
any general statement incorporating by reference this Joint Proxy
Statement/Prospectus into any filing under the Securities Act or the Exchange
Act, except to the extent that Home Bancorp specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
113
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DIRECTOR COMPENSATION
Directors of Home Bancorp are currently paid fees of $300 for monthly
Home Board meetings, with the exception of the Chairman of the Board who is paid
$900. Directors also receive $200 for attending any special meetings of the Home
Board. In addition, non-salaried directors receive $200 for attendance at each
meeting of a joint Board committee of which they are a member. The Chairman of
the Board receives the use of an automobile. No other agreements or arrangements
exist with respect to remuneration for services as a director of Home Bancorp.
Home Bancorp paid aggregate compensation of $46,000 to its directors during 1995
pursuant to the foregoing arrangements.
Directors of Home Bank are currently paid fees of $900 for monthly
Home Bank Board meetings, with the exception of the Chairman of the Board who is
paid $1,500. Directors also receive $200 for attending any special meetings of
the Home Board. In addition, non-salaried directors receive $200 for attendance
at each meeting of a joint Board committee of which they are a member. The Vice
Chairman of the Board receives the use of an automobile. No other agreements or
arrangements exist with respect to remuneration for services as a director of
Home Bank. Home Bank paid aggregate compensation of $117,400 to its directors
during 1995 pursuant to the foregoing arrangements.
During 1995, Home Bank contracted with Donald A. Buschenfield, Vice
Chairman of Home Bank and a Director of Home Bancorp, to act as a consultant to
Home Bank. Under the terms of the Consulting Agreement, Mr. Buschenfield advises
Home Bank on insurance, loan, investment and shareholder matters. Mr.
Buschenfield was paid a sum of $2,000 per month, for an aggregate of $24,000
during 1995.
CERTAIN TRANSACTIONS
Some of the directors and officers of Home Bancorp and Home Bank and
the companies with which they are associated have financial dealings with, or
customers of, and have banking transactions with Home Bank in the ordinary
course of Home Bank's business. Home Bank expects to have banking transactions
with such persons in the future. All loans and commitments to lend included in
such transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons of similar creditworthiness and, in the opinion
of management of Home Bank, did not involve more than a normal risk of repayment
or present other unfavorable features.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16
Under Section 16(a) of the Exchange Act, Home Bancorp's directors,
executive officers and any persons holding ten percent or more of Home Stock are
required to report their ownership of Home Stock and any changes in that
ownership to the Commission and to furnish Home Bancorp with copies of such
reports. Specific due dates for these reports have been established and Home
Bancorp is required to report in this Joint Proxy Statement/Prospectus any
failure to file on a timely basis by such persons. Based solely upon a review of
copies of reports filed with the Commission during the fiscal year ended
December 31, 1995, all persons subject to the reporting requirements of Section
16(a) filed all required reports on a timely basis, with the exception of one
Form 5, which was filed on February 8, 1996 for Roger K. Freeman, MD.
114
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RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Home Board has appointed Arthur Andersen as independent
accountants for Home Bancorp for its fiscal year ending December 31, 1996.
Arthur Andersen has served as Home Bancorp's independent accountants since 1986.
Arthur Andersen has served as CU Bancorp's independent accounts since 1981. It
is anticipated that a representative or representatives of Arthur Andersen will
be present at the Home Meeting, will have the opportunity to make a statement if
they desire to do so, and will be available to respond to appropriate questions
from shareholders. All professional services rendered by Arthur Andersen during
1995 were furnished at customary rates and terms.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
PROPOSALS OF SHAREHOLDERS
Under certain circumstances, shareholders are entitled to present
proposals at shareholder meetings. Any such proposal to be included in the proxy
statement for Home Bancorp's 1997 Annual Meeting of Shareholders must be
submitted by a shareholder sufficiently far in advance so that it is received by
Home Bancorp prior to December 15, 1996, in a form that complies with applicable
regulations.
OTHER MATTERS
Management does not know of any matters to be presented to the
shareholders at the Home Meeting other than those set forth above. However, if
other matters properly 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 Home Board, and authority to do so is included in the
proxy.
ATTACHED AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS IS HOME
BANCORP'S ANNUAL REPORT ON FORM 10-K AS AMENDED ON FORM 10-K/A. UPON WRITTEN
REQUEST TO SUSAN MONSOOR, VICE PRESIDENT AND CORPORATE SECRETARY OF HOME
BANCORP, AT 2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806, HOME BANCORP WILL
PROVIDE FREE OF CHARGE TO ANY SHAREHOLDER HEREBY SOLICITED, AN ADDITIONAL COPY
OF HOME BANCORP'S 1995 ANNUAL REPORT ON FORM 10-K (WITHOUT EXHIBITS) FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. IF A SHAREHOLDER DESIRES COPIES OF THE
EXHIBITS TO THE REPORT, THEY WILL BE PROVIDED UPON PAYMENT BY THE SHAREHOLDER OF
THE REASONABLE EXPENSES OF HOME BANCORP INCURRED IN FURNISHING THE EXHIBITS. A
COPY OF HOME BANK'S ANNUAL DISCLOSURE STATEMENT PREPARED PURSUANT TO PART 350 OF
THE FEDERAL DEPOSIT INSURANCE CORPORATION'S RULES AND REGULATIONS WILL BE
FURNISHED UPON REQUEST BY WRITING HOME BANK AT THE ADDRESS SHOWN ABOVE OR BY
CALLING HOME BANK AT (310) 988-9691.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the shares
of CU Stock will be reviewed for CU Bancorp by Anita Y. Wolman, Esq., General
Counsel for CU Bancorp, and for Home Bancorp by Manatt, Phelps & Phillips, LLP.
EXPERTS
CU BANCORP. The audited financial statements and schedules of CU
Bancorp incorporated by reference in this Joint Proxy Statement/Prospectus and
elsewhere in the Registration Statement have been
115
<PAGE> 137
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.
HOME BANCORP. The audited financial statements and schedules of Home
Bancorp incorporated by reference in this Joint 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.
116
<PAGE> 138
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
HOME INTERSTATE BANCORP,
HOME BANK,
CU BANCORP AND
CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION
January 10, 1996
<PAGE> 139
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE I DEFINITIONS................................................................................. 1
ARTICLE II THE MERGER AND RELATED MATTERS.............................................................. 7
2.1. The Merger.................................................................................. 7
2.2. Fractional Shares........................................................................... 8
2.3. Exchange Procedures......................................................................... 8
2.4. Dissenting Shares........................................................................... 9
2.5. Effect of Merger. ......................................................................... 9
2.6. Name of Surviving Company................................................................... 9
2.7. Articles of Incorporation and Bylaws of Surviving Company................................... 9
2.8. Directors and Officers of Surviving Company. ............................................... 9
2.9. Options..................................................................................... 10
2.10. Warrant ................................................................................... 10
ARTICLE III THE CLOSING................................................................................. 11
3.1. Closing Date. ............................................................................. 11
3.2. Execution of Merger Agreements.............................................................. 11
3.3. Documents to be Delivered................................................................... 11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HOME AND HOME BANK........................................ 11
4.1. Incorporation, Standing and Power. ........................................................ 11
4.2. Capitalization.............................................................................. 12
4.3. Subsidiaries. ............................................................................. 12
4.4. Financial Statements. ..................................................................... 12
4.5. SEC/Regulatory Filings. ................................................................... 12
4.6. Authority of Home and Home Bank............................................................. 13
4.7. Insurance................................................................................... 13
4.8. Title to Assets. .......................................................................... 14
4.9. Real Estate. ............................................................................... 14
4.10. Litigation. ............................................................................... 14
4.11. Taxes....................................................................................... 14
4.12. Compliance with Laws and Regulations. ..................................................... 15
4.13. Performance of Obligations.................................................................. 15
4.14. Employees. ................................................................................ 16
4.15. Brokers and Finders. ...................................................................... 16
4.16. Material Contracts. ........................................................................ 16
</TABLE>
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TABLE OF CONTENTS (CONT'D.)
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
4.17. Absence of Material Change. .............................................................. 18
4.18. Licenses and Permits. ..................................................................... 18
4.19. No Material Liabilities; Environmental...................................................... 18
4.20. Employee Benefit Plans...................................................................... 18
4.21. Corporate Records. ........................................................................ 21
4.22. Offices and ATMs............................................................................ 21
4.23. Operating Losses............................................................................ 21
4.24. Loan Portfolio. .......................................................................... 21
4.25. Power of Attorney. ........................................................................ 22
4.26. Disclosure Documents and Applications. .................................................... 22
4.27. Accuracy and Currentness of Information Furnished. ........................................ 22
4.28. Loan Servicing Portfolio.................................................................... 22
4.29. Certain Interests........................................................................... 22
4.30. Investment Securities....................................................................... 22
ARTICLE V REPRESENTATIONS AND WARRANTIES OF CU AND CU BANK............................................ 23
5.1. Incorporation, Standing and Power........................................................... 23
5.2. Capitalization.............................................................................. 23
5.3. Subsidiaries. ............................................................................. 23
5.4. Financial Statements........................................................................ 24
5.5. SEC/Regulatory Filings...................................................................... 24
5.6. Authority of CU and CU Bank. .............................................................. 24
5.7. Insurance. ................................................................................ 25
5.8. Title to Assets............................................................................. 25
5.9. Real Estate................................................................................. 25
5.10. Litigation. ............................................................................... 25
5.11. Taxes....................................................................................... 26
5.12. Compliance with Laws and Regulations........................................................ 27
5.13. Performance of Obligations.................................................................. 27
5.14. Employees. ................................................................................ 27
5.15. Brokers and Finders......................................................................... 27
5.16. Material Contracts.......................................................................... 27
5.17. Absence of Material Change. .............................................................. 29
5.18. Licenses and Permits. ..................................................................... 29
5.19. No Material Liabilities; Environmental...................................................... 29
5.20. Employee Benefit Plans...................................................................... 30
5.21. Corporate Records........................................................................... 32
5.22. Offices and ATMs............................................................................ 32
5.23. Operating Losses. ......................................................................... 32
5.24. Loan Portfolio.............................................................................. 32
5.25. Power of Attorney........................................................................... 33
</TABLE>
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TABLE OF CONTENTS (CONT'D.)
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
5.26. Disclosure Documents and Applications....................................................... 33
5.27. Accuracy and Currentness of Information Furnished........................................... 33
5.28. Loan Servicing Portfolio.................................................................... 33
5.29. Certain Interests........................................................................... 33
5.30. Investment Securities. .................................................................... 34
ARTICLE VI COVENANTS OF HOME AND HOME BANK PENDING EFFECTIVE
TIME OF THE MERGERS......................................................................... 34
6.1. Limitation on Home's and Home Bank's Conduct Prior to Effective Time. ..................... 34
6.2. No Solicitation, etc........................................................................ 36
6.3. Affirmative Conduct of Home and Home Bank Prior to Effective Time........................... 36
6.4. Access to Information....................................................................... 38
6.5. Filings. .................................................................................. 38
6.6. Notices; Reports. ......................................................................... 38
6.7. Home Shareholders' Meeting. .............................................................. 39
6.8. Bank Merger. .............................................................................. 39
6.9. Filings; Applications....................................................................... 39
6.10. Certain Loans and Other Extensions of Credit. ............................................ 39
6.11. Termination of Home Stock Option Plan. ..................................................... 40
6.12. Environmental Audit. ...................................................................... 40
6.13. D&O Coverage. ............................................................................. 40
ARTICLE VII COVENANTS OF CU AND CU BANK PENDING EFFECTIVE TIME
OF THE MERGERS.............................................................................. 40
7.1. Limitation on CU's and CU Bank's Conduct Prior to Effective Time............................ 40
7.2. No Solicitation, etc........................................................................ 42
7.3. Affirmative Conduct of CU and CU Bank Prior to Effective Time............................... 43
7.4. Access to Information....................................................................... 45
7.5. Filings. .................................................................................. 45
7.6. Notices; Reports............................................................................ 45
7.7. CU Shareholders' Meeting.................................................................... 46
7.8. Bank Merger................................................................................. 46
7.9. Filings; Applications....................................................................... 46
7.10. Certain Loans and Other Extensions of Credit................................................ 46
7.11. CU Stock Option Plan........................................................................ 47
7.12. Dividends. ................................................................................ 47
7.13. Articles of Incorporation................................................................... 47
</TABLE>
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TABLE OF CONTENTS (CONT'D.)
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE VIII GENERAL COVENANTS........................................................................... 47
8.1. Best Efforts................................................................................ 47
8.2. Public Announcements........................................................................ 47
8.3. S-4 and the Proxy Statement................................................................. 47
8.4. Merger of Home Bank and CU Bank............................................................. 47
ARTICLE IX CONDITIONS PRECEDENT TO THE MERGERS......................................................... 48
9.1. Shareholder Approval........................................................................ 48
9.2. No Judgments or Orders...................................................................... 48
9.3. Regulatory Approvals........................................................................ 48
9.4. Tax Opinion................................................................................. 48
9.5. Pooling of Interests Accounting Treatment................................................... 48
9.6. S-4 and Proxy Statement..................................................................... 48
9.7. Dissenters.................................................................................. 48
ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF HOME AND
HOME BANK .................................................................................. 49
10.1. Legal Opinion............................................................................... 49
10.2. Representations and Warranties; Performance of Covenants.................................... 49
10.3. Authorization of Mergers; Option Plan....................................................... 49
10.4. Absence of Certain Changes.................................................................. 49
10.5. Officers' Certificate....................................................................... 49
10.6. Fairness Opinion............................................................................ 50
10.7. Directors' Voting Agreements................................................................ 50
10.8. Home Warrant Agreement...................................................................... 50
10.9. Appointment of Directors.................................................................... 50
10.10. Validity of Transactions.................................................................... 50
10.11. Third Party Consents........................................................................ 50
10.12. NASDAQ Listing.............................................................................. 50
10.13. CU Board.................................................................................... 50
10.14. Non-Performing Loans. ..................................................................... 50
ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATIONS OF CU AND CU BANK....................................... 50
11.1. Legal Opinion............................................................................... 51
11.2. Representations and Warranties; Performance of Covenants.................................... 51
11.3. Authorization of Mergers.................................................................... 51
11.4. Regulatory Approvals and Related Conditions................................................. 51
11.5. Third Party Consents........................................................................ 51
</TABLE>
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TABLE OF CONTENTS (CONT'D.)
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
11.6. Absence of Certain Changes.................................................................. 51
11.7. Officers' Certificate....................................................................... 51
11.8. Fairness Opinion............................................................................ 51
11.9. Validity of Transactions.................................................................... 52
11.10. Blue Sky Matters............................................................................ 52
11.11. Insurance Coverage.......................................................................... 52
11.12. Directors' Voting Agreements................................................................ 52
11.13. CU Warrant Agreement........................................................................ 52
11.14. Affiliate Agreements........................................................................ 52
11.15. Non-Performing Loans........................................................................ 52
11.16. Absence of Excess Remediation............................................................... 52
ARTICLE XII EMPLOYEE BENEFITS........................................................................... 52
12.1. Employee Benefits........................................................................... 52
ARTICLE XIII TERMINATION................................................................................. 53
13.1. Termination................................................................................. 53
13.2. Termination Date............................................................................ 53
13.3. Effect of Termination....................................................................... 54
ARTICLE XIV MISCELLANEOUS............................................................................... 54
14.1. Expenses.................................................................................... 54
14.2. Notices..................................................................................... 54
14.3. Successors and Assigns...................................................................... 55
14.4. Counterparts................................................................................ 55
14.5. Effect of Representations and Warranties.................................................... 55
14.6. Third Parties............................................................................... 55
14.7. Lists; Exhibits; Integration................................................................ 55
14.8. Knowledge................................................................................... 55
14.9. Governing Law............................................................................... 55
14.10. Schedules................................................................................... 55
14.11. Captions.................................................................................... 55
14.12. Severability................................................................................ 55
14.13. Waiver and Modification..................................................................... 56
14.14. Attorney's Fees............................................................................. 56
14.15. Jury Waiver................................................................................. 57
</TABLE>
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TABLE OF CONTENTS (CONT'D.)
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
EXHIBITS
Exhibit A Agreement of Merger
Exhibit B Bank Merger Agreement
Exhibit C CU Warrant Agreement
Exhibit D Home Warrant Agreement
Exhibit E CU Legal Opinion
Exhibit F CU Shareholders' Agreement
Exhibit G Manatt, Phelps & Phillips Legal Opinion
Exhibit H Home Shareholders' Agreement
Exhibit I Home Affiliate Letter
ANNEX I List of Home Directors Signing Affiliate Agreement
</TABLE>
vi
<PAGE> 145
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is
made and entered into as of the 10th day of January, 1996, by and between Home
Interstate Bancorp, a California corporation ("Home"), and Home Bank, a
California chartered commercial bank ("Home Bank"), and CU Bancorp, a California
corporation ("CU"), and California United Bank, National Association, a national
banking association ("CU Bank").
R E C I T A L S
WHEREAS, Home and CU desire to effect a merger (the "Merger")
in accordance with the terms of this Agreement and the Agreement of Merger (as
defined herein).
WHEREAS, the respective Boards of Directors of Home and CU
believe that the proposed Merger, on the terms and conditions set forth herein,
is in the best interests of their respective corporations and shareholders.
WHEREAS, Home and CU intend to cause the Merger (the "Bank
Merger") of Home Bank and CU Bank at the Effective Time (as hereinafter defined)
or as soon thereafter as practicable.
WHEREAS, Home, Home Bank, CU Bancorp and CU Bank desire to
make certain representations, warranties, covenants and agreements in connection
with the transactions contemplated by this Agreement.
NOW, THEREFORE, on the basis of the foregoing recitals and in
consideration of the mutual representations, warranties, covenants and
agreements contained herein, the parties hereto do agree as follows:
ARTICLE I
DEFINITIONS
Except as otherwise expressly provided for in this Agreement, or unless
the context otherwise requires, as used throughout this Agreement the following
terms shall have the respective meanings specified below:
1.1. "Affiliate" of, or a person "Affiliated" with, a specific
person is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified.
1.2. "Agreement of Merger" means the Agreement of Merger to be
entered into by and between Home and CU substantially in the form of Exhibit A
hereto, but subject to any changes that may be necessary to conform to any
requirements of any regulatory agency having authority over the Merger.
1.3. "Alternative Transaction" means any of the following involving
Home or Home Bank for purposes of Section 6.2 or CU or CU Bank for purposes of
Section 7.2: any merger, consolidation, share
<PAGE> 146
exchange or other business combination; a sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets of Home or Home Bank or CU or CU
Bank (as applicable) representing 10% or more of consolidated assets; a sale of
shares of capital stock (or securities convertible or exchangeable into or
otherwise evidencing, or any agreement or instrument evidencing, the right to
acquire capital stock), representing 10% or more of the voting power of Home or
Home Bank or CU or CU Bank (as applicable); a tender offer or exchange offer for
at least 10% of the outstanding shares of Home or CU (as applicable); a
solicitation of proxies in opposition to approval of the Merger by Home's
shareholders or CU's shareholders (as applicable); or a public announcement of a
proposal, plan, or intention to do any of the foregoing.
1.4. "Arthur Andersen" means Arthur Andersen, LLP.
1.5. "ATM" has the meaning set forth in Section 4.22.
1.6. "Average Price of CU Stock" means the average of the Closing
Price of CU Stock (as defined below) for the 10 consecutive trading days
immediately preceding the one trading day prior to the Effective Time (subject
to adjustment as provided below). The term "trading day" shall mean a day on
which trading generally takes place on the NASDAQ and on which trading in CU
Stock has not been halted or suspended. In the event CU pays, declares or
otherwise effects a stock split, reverse stock split, reclassification or stock
dividend or distribution with respect to the CU Stock between the date of this
Agreement and the Effective Time, appropriate adjustments will be made to the
Average Price of CU Stock.
1.7. "Bank Merger" means the merger of Home Bank with and into CU
Bank.
1.8. "Bank Merger Agreement" means the Agreement of Merger between
CU Bank and Home Bank, substantially in the form of Exhibit B hereto.
1.9. "BHC Act" means the Bank Holding Company Act of 1956, as
amended.
1.10. "Business Day" means any day other than Saturday, Sunday or a
day on which commercial banks in California are authorized or required to be
closed.
1.11. "California Secretary" means the Secretary of State of the
State of California.
1.12. "Closing" means the consummation of the Merger (as defined
herein) on the Closing Date (as defined herein) at the offices of Manatt, Phelps
& Phillips, 11355 West Olympic Boulevard, Los Angeles, California, or at such
other place as the parties may agree upon.
1.13. "Closing Date" means a Business Day to be designated by the
Parties.
1.14. "Closing Price of CU Stock" means the closing price of CU
Stock as reported on the NASDAQ and reprinted in the Western Edition of the Wall
Street Journal.
1.15. "Code" means the Internal Revenue Code of 1986, as amended.
1.16. "Conversion Ratio" has the meaning set forth in Section
2.1(c).
2
<PAGE> 147
1.17. "Corporate Bank Merger" means the proposed merger of Corporate
Bank, a California banking corporation, with and into CU Bank.
1.18. "Covered Loan" has the meaning set forth in Section 4.24.
1.19. "CU Bank Stock" means the common stock, $5.00 par value, of CU
Bank.
1.20. "CU Options" means options to purchase CU Stock pursuant to
the CU Stock Option Plan.
1.21. "CU Schedules" has the meaning set forth in Section 7.3(k).
1.22. "CU Scheduled Contracts" has the meaning set forth in Section
5.16.
1.23. "CU Shareholders' Meeting" means the meeting of CU's
shareholders referred to in Section 7.7 hereof.
1.24. "CU Stock" means the common stock, no par value, of CU.
1.25. "CU Stock Option Plan" means, collectively, the (i) the 1983
Employee Stock Option Plan, (ii) 1985 Employee Stock Option Plan, (iii) 1987
Special Stock Option Plan, (iv) 1993 Employee Stock Option Plan, (v) Non
Employee Director Stock Option Plan, and (vi) 1995 Restricted Stock Plan.
1.26. "CU Supplied Information" has the meaning set forth in Section
5.26.
1.27. "CU Warrant" means the warrant issued to CU pursuant to the CU
Warrant Agreement.
1.28. "CU Warrant Agreement" means the Warrant Agreement entered
into between CU and Home and attached hereto as Exhibit C, pursuant to which the
CU Warrant is issued.
1.29. "Dissenting Shares" means any shares of CU Stock or Home Stock
(as defined herein) that are (i) issued and outstanding immediately prior to the
Effective Time of the Merger and (ii) "dissenting shares" as that term is
defined in Section 1301 (b) of the California Corporations Code.
1.30. "Effective Time" means the date and time of the filing of the
Agreement of Merger with the California Secretary.
1.31. "Environmental Law" means 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,
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42 U.S.C. Section 7401 et seq.; (2) the Federal Water Pollution 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.
1.32. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
1.33. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1.34. "Exchange Agent" means the financial institution appointed by
CU with the consent of Home, to effect the exchange contemplated by Article II
hereof.
1.35. "FDIC" means the Federal Deposit Insurance Corporation.
1.36. "FDIC Filings of Home" means all reports, registration
statements, proxy statements or other filings made by Home or Home Bank with the
FDIC during the time period from January 1, 1992 through the date of this
Agreement.
1.37. "Financial Statements of CU" means (i) the audited
consolidated financial statements and notes thereto of CU and the related
opinions thereon included in CU's Annual Reports on Form 10-K for the years
ended December 31, 1992, 1993 and 1994, (ii) the unaudited consolidated interim
financial statements and notes thereto of CU included in CU's Quarterly Report
on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1995.
1.38. "Financial Statements of Home" means (i) the audited
consolidated financial statements and notes thereto of Home and the related
opinions thereon included in Home's Annual Reports on Form 10-K for the years
ended December 31, 1992, 1993 and 1994 and (ii) the unaudited consolidated
interim financial statements and notes thereto of Home included in Home's
Quarterly Reports on Form 1O-Q for the quarters ended March 31, June 30 and
September 30, 1995.
1.39. "FRB" means the Board of Governors of the Federal Reserve
System.
1.40. "FRB Filings of CU" means all reports, registration
statements, proxy statements or other filings made by CU or CU Bank with the FRB
during the time period from January 1, 1992 through the date of this Agreement.
1.41. "FRB Filings of Home" means all reports, registration
statements, proxy statements or other filings made by Home or Home Bank with the
FRB during the time period from January 1, 1992 through the date of this
Agreement.
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1.42. "Hazardous Substances" means (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.
1.43. "Home Bank Stock" means the common stock, $0.40 par value per
share, of Home Bank.
1.44. "Home Employee Plans" has the meaning set forth in Section
4.20.
1.45. "Home Options" means options to purchase Home Stock pursuant
to the Home Stock Option Plan.
1.46. "Home Real Property" has the meaning set forth in Section 4.9.
1.47. "Home Scheduled Contracts" has the meaning set forth in
Section 4.16.
1.48. "Home Schedules" has the meaning set forth in Section 6.3(k).
1.49. "Home Shareholders' Meeting" means the meeting of Home's
shareholders referred to in Section 6.7 hereof.
1.50. "Home Stock" means the common stock, no par value, of Home.
1.51. "Home Stock Option Plan" means the Home Interstate Bancorp
Stock Option Plan, which plan expired on March 12, 1995.
1.52. "Home Supplied Information" has the meaning set forth in
Section 4.26.
1.53. "Home Warrant" means the warrant issued to Home pursuant to
the Home Warrant Agreement.
1.54. "Home Warrant Agreement" means the Warrant Agreement entered
between Home and CU and attached hereto as Exhibit D, pursuant to which the Home
Warrant is issued.
1.55. "Immediate Family" means a person's spouse, parents, in-laws,
children and siblings.
1.56. "IRS" means the Internal Revenue Service.
1.57. "Montgomery" means Montgomery Securities.
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1.58. "NASDAQ" means the National Association of Securities Dealers
Automated Quotation System.
1.59. "New Stock Option Plan" means the CU Stock Option Plan to be
established in connection with the Merger.
1.60. "Non-Performing Loans" means loans or investments held by Home
Bank or CU Bank which are (i) more than ninety (90) days past due with respect
to any scheduled payment of principal or interest, (ii) classified as "loss,"
"doubtful," "substandard," "other assets especially mentioned" or "special
mention," or (iii) on non-accrual status in accordance with Home Bank's or CU
Bank's, as the case may be, loan review procedures.
1.61. "OCC" means the Office of the Comptroller of the Currency.
1.62. "OCC Filings of CU" means all reports, registration
statements, proxy statements or other filings made by CU or CU Bank with the OCC
during the time period from January 1, 1992 through the date of this Agreement.
1.63. "Operating Loss" has the meaning set forth in Section 4.23.
1.64. "Other Real Estate Owned" means any real property owned or
acquired by foreclosure or otherwise, in the ordinary course of collecting a
debt previously contracted for in good faith.
1.65. "Party" means either Home, Home Bank, CU or CU Bank and
"Parties" shall mean Home, Home Bank, CU and CU Bank.
1.66. "Person" means any individual, corporation, association,
partnership, joint venture, other entity, government or governmental department
or agency.
1.67. "Phase I Reports" has the meaning set forth in Sesction 6.12.
1.68. "Phase II Assessments" has the meaning set forth in Section
6.12.
1.69. "Proposed Retention Agreements" means the Retention Agreements
to be entered into between Home Bank and certain executive officers of Home
Bank, pursuant to which certain key employees of Home Bank shall receive certain
payments as a result of the transactions contemplated hereby.
1.70. "Proxy Statement" means the Joint Proxy Statement and
Prospectus that is used to solicit proxies for the Home Shareholders' Meeting
and CU Shareholders' Meeting and to offer and sell the shares of CU Stock to be
issued in connection with the Merger.
1.71. "Related Group of Persons" means Affiliates, members of an
Immediate Family or Persons the obligations of whom would be attributed to
another Person pursuant to the regulations promulgated by the SEC (as defined
herein).
1.72. "SEC" means the Securities and Exchange Commission.
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1.73. "SEC Filings of CU" means all reports, registration
statements, proxy statements or other filings made by CU with the SEC during the
time period from January 1, 1992 through the date of this Agreement.
1.74. "SEC Filings of Home" means all reports, registration
statements, proxy statements or other filings made by Home with the SEC during
the time period from January 1, 1992 through the date of this Agreement.
1.75. "Secured Loan" has the meaning set forth in Section 4.24.
1.76. "Securities Act" means the Securities Act of 1933, as amended.
1.77. "S-4" means the registration statement on Form S-4 to be filed
with the SEC relating to the registration under the Securities Act of the CU
Stock to be issued in connection with the Merger.
1.78. "Superintendent" means the Superintendent of Banks of the
State of California.
1.79. "Surviving Company" means the corporation surviving the
Merger.
1.80. "Transferred Employees" has the meaning set forth in Section
12.1.
1.81. "Understanding" means any contract, agreement, understanding,
commitment or offer, whether written or oral, which may become a binding
obligation if accepted by another Person.
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1. The Merger. The Merger shall become effective upon the filing
of the Agreement of Merger with the California Secretary in accordance with the
provisions of the California Corporations Code. At the Effective Time, the
following transactions will be deemed to have occurred simultaneously:
(a) Home shall be merged with and into CU, and the
separate corporate existence of Home shall cease.
(b) Subject to Section 2.4(a), each share of CU Stock
issued and outstanding immediately prior to the Effective Time shall
remain an issued and outstanding share of common stock of the Surviving
Company and shall not be converted or otherwise affected by the Merger.
(c) Subject to Sections 2.2 and 2.4(b), each share of
Home Stock issued and outstanding immediately prior to the Effective
Time shall, on and after the Effective Time, be automatically canceled
and cease to be an issued and outstanding share of Home Stock and shall
be converted into 1.409 shares of CU Stock (the "Conversion Ratio").
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2.2. Fractional Shares. No fractional shares of CU Stock shall be
issued in the Merger. In lieu thereof, each holder of Home Stock who would
otherwise be entitled to receive a fractional share shall receive an amount in
cash equal to the product (calculated to the nearest thousandth) obtained by
multiplying (a) the Average Price of CU Stock times (b) the fraction of the
share of CU Stock to which such holder would otherwise be entitled. No such
holder shall be entitled to dividends or other rights in respect of any such
fraction.
2.3. Exchange Procedures.
(a) On or before the Effective Time, CU will deliver to
the Exchange Agent certificates representing a sufficient number of
shares of CU Stock issuable in the Merger and funds representing a
sufficient amount of cash payable in lieu of fractional shares in the
Merger.
(b) Upon surrender for cancellation to the Exchange Agent
of one or more certificates for shares of Home Stock ("Old
Certificates"), accompanied by a duly executed letter of transmittal in
proper form, the Exchange Agent shall, promptly after the Effective
Time, deliver to each holder of such surrendered Old Certificates new
certificates representing the appropriate number of shares of CU Stock
("New Certificates"), together with checks for payment of cash in lieu
of fractional interests to be issued in respect of the Old
Certificates.
(c) Until Old Certificates have been surrendered and
exchanged as herein provided, each outstanding Old Certificate shall
represent, on and after the Effective Time, the right to receive the
shares of CU Stock and/or the cash into which the number of shares of
Home Stock shown thereon have been converted, as provided herein. No
dividends or other distributions that are declared on CU Stock will be
paid to Persons otherwise entitled to receive the same until the Old
Certificates have been surrendered in exchange for New Certificates in
the manner herein provided, but upon such surrender, such dividends or
other distributions, from and after the Effective Time, will be paid to
such Persons in accordance with the terms of such CU Stock. In no event
shall the Persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or
other distributions.
(d) No transfer taxes shall be payable by any shareholder
in respect of the issuance of New Certificates, except that if any New
Certificate is to be issued in a name other than that in which the Old
Certificate surrendered shall have been registered, it shall be a
condition of such issuance that the Person requesting such issuance
shall properly endorse the certificate or certificates and shall pay to
CU any transfer taxes payable by reason thereof, or of any prior
transfer of such surrendered certificate, or establish to the
satisfaction of CU that such taxes have been paid or are not payable.
(e) Any CU Stock or cash delivered to the Exchange Agent
(together with any interest or profits earned thereon) and not issued
pursuant to this Section 2.3 at the end of six months from the
Effective Time shall be returned to CU.
(f) Notwithstanding anything to the contrary set forth in
Sections 2.3(c) and 2.3(d) hereof, if any holder of Home Stock shall be
unable to surrender his Old Certificates because such certificates have
been lost or destroyed, such holder may deliver in lieu thereof an
indemnity bond in form and substance reasonably satisfactory to CU.
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(g) The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the shares of CU Stock
held by it from time to time hereunder, except that it shall receive
and hold all dividends or other distributions paid or distributed with
respect to such shares of CU Stock for the account of the Persons
entitled thereto.
2.4. Dissenting Shares.
(a) Notwithstanding anything to the contrary contained in
this Agreement, Dissenting Shares of CU Stock which have not
effectively withdrawn or lost their rights under Section 1309 shall
remain issued and outstanding shares of common stock of Surviving
Company after the Effective Time, subject to the right to receive such
consideration as shall be determined pursuant to Chapter 13 of the
California Corporations Code.
(b) Notwithstanding anything to the contrary contained in
this Agreement, Dissenting Shares of Home Stock which have not
effectively withdrawn or lost their rights under Section 1309 shall not
be converted pursuant to Section 2.1 (c), but shall be entitled to
receive such consideration as shall be determined pursuant to Chapter
13 of the California Corporations Code.
2.5. Effect of Merger. By virtue the Merger and at the Effective
Time, all of the rights, privileges, powers and franchises and all property and
assets of every kind and description of Home and CU shall be vested in and be
held and enjoyed by the Surviving Company, without further act or deed, and all
the estates and interests of every kind of Home and CU, including all debts due
to either of them, shall be as effectively the property of the Surviving Company
as they were of Home and CU, and the title to any real estate vested by deed or
otherwise in either Home or CU 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
Home and CU shall be preserved unimpaired and all debts, liabilities and duties
of Home and CU shall be debts, liabilities and duties of the Surviving Company
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.
2.6. Name of Surviving Company. The name of the Surviving Company
shall be mutually agreed upon by the Parties.
2.7. Articles of Incorporation and Bylaws of Surviving Company.
Subject to any changes in the Articles of Incorporation resulting from the
Parties' agreement as to the name of the Surviving Company as provided in
Section 2.6, the Articles of Incorporation and Bylaws of CU as in effect
immediately prior to the Effective Time shall continue to be the Articles of
Incorporation and Bylaws of the Surviving Company.
2.8. Directors and Officers of Surviving Company.
(a) At the Effective Time, the Board of Directors of the
Surviving Company will consist of the five directors designated by the
Board of Directors of Home and the five directors designated by the
Board of Directors of CU.
(b) At the Effective Time, Stephen Carpenter will become
the Chairman and Chief Executive Officer, James Staes will become Vice
Chairman and David Rainer will become President and Chief Operating
Officer of the Surviving Company.
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2.9. Options.
(a) Subject to Section 2.9(b), (c) and (d), each Home
Option issued and outstanding immediately prior to the Effective Time
shall, on and after the Effective Time, be assumed by and be deemed to
be options granted by the Surviving Company pursuant to the New Stock
Option Plan to purchase that number of shares of CU Stock equal to the
Conversion Ratio times the number of shares of Home Stock subject to
the option; provided, however, that no option shall be deemed granted
by the Surviving Company to acquire a fractional share of CU Stock.
(b) Assumption of such options shall be contingent upon
the Closing and upon the execution prior to the Closing by the
particular optionee, CU and Home of a new option agreement providing
for the assumption and conversion of the Home Options. Assumption by CU
of the Home Options will be pursuant to the terms of the New Stock
Option Plan providing for the assumption of such options, which plan
shall be contingent upon approval of the CU shareholders.
(c) To the extent that the assumption of a Home Option by
the Surviving Company would result in the issuance of an option to
purchase a fractional share of CU Stock, such fractional share option
shall be canceled, and the aggregate exercise price of the option to
purchase shares of CU Stock shall be reduced by the proportionate
amount of the aggregate exercise price attributable to the fractional
share.
(d) The assumption by the Surviving Company of Home
Options pursuant to the New Stock Option Plan shall be subject to the
following limitations:
(i) The excess of the aggregate fair market
value of the shares of CU Stock subject to an option
immediately after the assumption over the aggregate option
exercise price of such shares of CU Stock shall not be greater
than the excess of the aggregate fair market value of the
shares subject to the Home Option immediately before the
assumption over the aggregate option exercise price of such
shares of Home Stock.
(ii) For any option, on a share by share
comparison, the ratio of the option exercise price to the fair
market value of the CU Stock subject to the option immediately
after the assumption shall not be more favorable to the
optionee than the ratio of the Home Option exercise price to
the fair market value on the Home Stock subject to the option
immediately before the assumption.
(iii) The optionee shall not receive additional
benefits under the Surviving Company option which he did not
have under the Home Option.
(e) Each CU Option issued and outstanding immediately
prior to the Effective Time shall not be affected by the Merger.
2.10. Warrant. Concurrent with the execution of this Agreement, CU
and Home have executed each of the Home Warrant Agreement and the CU Warrant
Agreement, pursuant to which agreements CU has issued to Home the Home Warrant
and Home has issued to CU the CU Warrant, granting the holder of each such
warrant the right to purchase up to 19.9% of the issued and outstanding shares
of capital stock of
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the other party, on a fully diluted basis (as more specifically set forth in the
Home Warrant Agreement and CU Warrant Agreement), on the terms, and subject to
the conditions set forth in such agreements.
ARTICLE III
THE CLOSING
3.1. Closing Date. The Closing shall take place on the Closing
Date.
3.2. Execution of Merger Agreements. As soon as practicable after
execution of this Agreement, the Agreement of Merger shall be executed by Home
and CU. On the Closing Date, the Agreement of Merger, together with all
requisite certificates, shall be duly filed with the California Secretary as
required by applicable laws and regulations.
3.3. Documents to be Delivered. At the Closing, the parties hereto
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 contemplated by this Agreement. From and after the
Effective Time, each of the parties hereto hereby covenants and agrees, without
the necessity of any further consideration whatsoever, to execute, acknowledge
and deliver any and all other documents and instruments and take any and all
such other action as may be reasonably necessary or desirable to effectuate the
transactions set forth herein or contemplated hereby, and the officers and
directors of the parties hereto shall execute and deliver, or cause to be
executed and delivered, all such documents as may reasonably be required to
effectuate such transactions.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HOME AND HOME BANK
Home and Home Bank represent and warrant to CU as follows:
4.1. Incorporation, Standing and Power. Home has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of California and is registered as a bank holding company
under the BHC Act. Home Bank has been duly incorporated and is validly existing
as a state chartered Bank under the laws of the State of California and is a
member of the Federal Reserve System, and its deposits are insured by the FDIC
in the manner and to the extent provided by law. Home and Home Bank have all
requisite corporate power and authority to own, lease and operate their
respective properties and assets and to carry on their respective businesses as
presently conducted. Neither the scope of the business of Home or Home Bank nor
the location of any of their respective properties requires that Home or Home
Bank be licensed to do business in any jurisdiction other than the State of
California where the failure to be so licensed would, individually or in the
aggregate, have a materially adverse effect on the financial condition, results
of operation or business of Home on a consolidated basis.
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4.2. Capitalization.
(a) As of the date of this Agreement, the authorized
capital stock of Home consists of 20,000,000 shares of Home Stock, of
which 4,187,954 shares are outstanding, and 3,000,000 shares of serial
preferred stock, none of which is outstanding. All of the outstanding
shares of Home Stock are duly authorized, validly issued, fully paid
and nonassessable. As of the date of this Agreement, except for Home
Options covering 168,134 shares of Home Stock granted pursuant to the
Home Stock Option Plan, and 1,082,224 shares covered by the CU Warrant,
there were no outstanding options, warrants or other rights in or with
respect to the unissued shares of Home Stock or Home serial preferred
stock nor any securities convertible into such stock, and Home is not
obligated to issue any additional shares of Home Stock or preferred
stock or any additional options, warrants or other rights in or with
respect to the unissued shares of such stock or any other securities
convertible into such stock. Schedule 4.2 sets forth the name of each
holder of a Home Option, the number of shares of Home Stock covered by
each such Home Option, the exercise price per share and the expiration
date of each such Home Option.
(b) As of the date of this Agreement, the authorized
capital stock of Home Bank consists of 4,000,000 shares of Home Bank
Stock, of which1,938,746 shares are outstanding and all of which are
owned of record by Home. All the outstanding shares of Home Bank Stock
are duly authorized, validly issued, fully paid and nonassessable
(except for assessments that may be made by order of the Superintendent
pursuant to the Section 662 of the California Finance Code). There are
no outstanding options, warrants or other rights in or with respect to
the unissued shares of Home Bank Stock or any other securities
convertible into such stock, and Home Bank is not obligated to issue
any additional shares of its common stock or any options, warrants or
other rights in or with respect to the unissued shares of its common
stock or any other securities convertible into such stock.
4.3. Subsidiaries. Except for Home Bank, a wholly owned subsidiary
of Home, Home does not own, directly or indirectly (except as pledgee pursuant
to loans or upon acquisition in satisfaction of debt previously contracted), the
outstanding stock or other voting interest in any corporation, partnership,
joint venture or other entity.
4.4. Financial Statements. Home has previously furnished to CU a
copy of the Financial Statements of Home. The Financial Statements of Home: (a)
present fairly the consolidated financial condition of Home as of the respective
dates indicated and its consolidated results of operations and changes in
financial position/cash flow, as applicable, for the respective periods then
ended, subject, in the case of the unaudited consolidated interim financial
statements, to normal recurring adjustments; (b) have been prepared in
accordance with generally accepted accounting principles consistently applied
(except as otherwise indicated therein); (c) set forth as of the respective
dates indicated adequate reserves for all foreseeable loan losses and other
contingencies; and (d) are based on the books and records of Home and Home Bank.
4.5. SEC/Regulatory Filings. Since January 1, 1990, Home and Home
Bank have filed all reports, registrations and statements that were required to
be filed with the (i) FDIC; (ii) the FRB; (iii) the SEC; and (iv) any other
applicable federal, state or local governmental or regulatory authority. Home
has previously furnished to CU a copy of the SEC Filings, FDIC Filings and FRB
Filings of Home. As of their respective dates, the SEC Filings, FDIC Filings and
FRB Filings of Home complied in all material respects
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with the requirements of their respective forms 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.
4.6. Authority of Home and Home Bank. The execution and delivery by
Home and Home Bank of this Agreement, by Home of the Agreement of Merger and by
Home Bank of the Bank Merger Agreement and, subject to the requisite approval of
the shareholders of Home and the sole shareholder of Home Bank, the consummation
of the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Home and Home Bank,
and this Agreement is, and the Agreement of Merger and Bank Merger Agreement
will be upon execution by the respective parties thereto, a valid and binding
obligation of Home or Home Bank or both of them, as the case may be, enforceable
in accordance with their respective terms, except as the enforceability thereof
may be limited by bankruptcy, liquidation, receivership, conservatorship,
insolvency, moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles and by Section 8(b)(6)(D) of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b) (6) (D). Except as set
forth in Schedule 4.6, neither the (i) execution and delivery by Home and Home
Bank of this Agreement, by Home of the Agreement of Merger or by Home Bank of
the Bank Merger Agreement; (ii) the consummation of the Merger or Bank Merger or
the transactions contemplated herein or therein; nor (iii) compliance by Home
and Home Bank with any of the provisions hereof or thereof, will: (a) conflict
with or result in a breach of any provision of their respective Articles of
Incorporation, as amended, or Bylaws, as amended; (b) 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
Home or Home Bank is a party, or by which Home or Home Bank or any of their
respective properties or assets is bound, if in any such circumstances, such
event could have consequences materially adverse to Home on a consolidated
basis; or (c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Home or Home Bank or any of their respective properties
or assets, if such violation could have consequences materially adverse to Home
on a consolidated basis. Except as set forth in the Home Schedules, no consent
of, approval of, notice to or filing with any governmental authority having
jurisdiction over any aspect of the business or assets of Home or Home Bank, and
no consent of, approval of or notice to any other Person, is required in
connection with the execution and delivery by Home and Home Bank of this
Agreement, by Home of the Agreement of Merger, by Home and Home Bank of the Bank
Merger Agreement, or the consummation by Home and Home Bank of the Merger or
Bank Merger or the transactions contemplated hereby or thereby, except (i) the
approval of this Agreement and the transactions contemplated hereby by the
shareholders of Home and the sole shareholder of Home Bank; (ii) such approvals
as may be required by the FRB and the OCC; (iii) the filing of the Agreement of
Merger with the California Secretary; (iv) the filing of the Bank Merger
Agreement with the OCC; and (v) the filing with and the approval by the SEC of
the S-4 and Proxy Statement.
4.7. Insurance. Home and Home Bank have policies of insurance and
bonds with respect to their respective assets and businesses against such
casualties and contingencies and in such amounts, types and forms as are
appropriate for their respective businesses, operations, properties and assets.
All such insurance policies and bonds are in full force and effect. To the
knowledge of Home and Home Bank and except as set forth on Schedule 4.7, no
insurer under any such policy or bond has canceled or indicated an intention to
cancel or not to renew any such policy or bond or generally disclaimed liability
thereunder. To the knowledge of Home and Home Bank and except as set forth on
Schedule 4.7, neither Home nor Home Bank is in default under any such policy or
bond and all material claims thereunder have been filed in a timely
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fashion. Set forth on Schedule 4.7 is a list of all policies of insurance
carried and owned by Home or Home Bank, showing the name of the insurance
company, the nature of the coverage, the policy limit, the annual premiums and
the expiration dates. Home has delivered to CU a copy of each such policy of
insurance.
4.8. Title to Assets. Home and Home Bank have good and marketable
title to all their respective material properties and assets, other than real
property, owned or stated to be owned by Home or Home Bank, free and clear of
all mortgages, liens, encumbrances, pledges or charges of any kind or nature
except: (a) as set forth in the Financial Statements of Home; (b) for liens or
encumbrances for current taxes not yet due; (c) for liens or encumbrances
incurred in the ordinary course of business; (d) for liens that are not
substantial in character, amount or extent or that do not materially detract
from the value, or interfere with present use, of the property subject thereto
or affected thereby, or otherwise materially impair the conduct of business of
Home on a consolidated basis; or (e) as set forth on Schedule 4.8.
4.9. Real Estate. Schedule 4.9 sets forth a list of real property,
including leaseholds, owned or leased by Home or Home Bank (the "Home Real
Property"). Home or Home Bank has good and marketable title to the Home Real
Property, and valid leasehold interests in the leaseholds, described on Schedule
4.9, free and clear of all mortgages, covenants, conditions, restrictions,
easements, liens, security interests, charges, claims, assessments and
encumbrances, except (a) for rights of lessors, co-lessees or sublessees in such
matters that are reflected in the lease; (b) for current taxes not yet due and
payable; (c) for liens and encumbrances of public record; (d) for such
imperfections of title, liens and encumbrances, if any, as do not materially
detract from the value of or materially interfere with the present use of such
property; and (e) as described on Schedule 4.9.
4.10. Litigation. Except as set forth in the SEC Filings of Home or
Schedule 4.10, there is no private or governmental suit, claim, action or
proceeding pending, nor to Home's or Home Bank's knowledge, threatened against
Home or Home Bank 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 Home or Home Bank that has had or may
have a material adverse effect upon the business, financial condition or results
of operations of Home on a consolidated basis or the transactions contemplated
hereby or which may involve a payment by Home in excess of $50,000 of applicable
insurance coverage. Also, except as disclosed in the SEC Filings of Home or on
Schedule 4.10, there are no material judgments, decrees, stipulations or orders
against Home or Home Bank enjoining either of them or any of their 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. Home has previously provided to CU summary
reports of Home's and Home Bank's attorneys relating to all pending litigation
to which Home or Home Bank is a party and which names Home or Home Bank as a
defendant or cross- defendant and a true, correct and complete list of all
pending litigation in which Home or Home Bank is a named party.
4.11. Taxes.
(a) Home and/or Home Bank have filed all federal and
foreign income tax returns, all state and local franchise and income
tax, real and personal property tax, sales and use tax, premium tax,
excise tax and other tax returns of every character required to be
filed by it and have paid all taxes, together with any interest and
penalties owing in connection therewith, shown on such returns to be
due in respect of the periods covered by such returns, other than taxes
which are being contested in good faith and for which adequate reserves
have been established. Home and/or Home
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Bank have filed all required payroll tax returns, have fulfilled all
tax withholding obligations and have paid over to the appropriate
governmental authorities the proper amounts with respect to the
foregoing. The tax and audit positions taken by Home and/or Home Bank
in connection with the tax returns described in the preceding sentence
were reasonable and asserted in good faith. Adequate provision has been
made in the books and records of Home and/or Home Bank and, to the
extent required by generally accepted accounting procedures, reflected
in the Financial Statements of Home, for all tax liabilities, including
interest or penalties, whether or not due and payable and whether or
not disputed, with respect to any and all federal, foreign, state,
local and other taxes for the periods covered by such financial
statements and for all prior periods. Schedule 4.11 sets forth the date
or dates through which the IRS has examined the federal tax returns of
Home and/or Home Bank and the date or dates through which any foreign,
state, local or other taxing authority has examined any other tax
returns of Home and/or Home Bank. Schedule 4.11 also contains a
complete list of each year for which any federal, state, local or
foreign tax authority has obtained or has requested an extension of the
statute of limitations from Home and/or Home Bank and lists each tax
case of Home and/or Home Bank currently pending in audit, at the
administrative appeals level or in litigation. Schedule 4.11 further
lists the date and issuing authority of each statutory notice of
deficiency, notice of proposed assessment and revenue agent's report
issued to Home and/or Home Bank within the last twelve (12) months.
Except as set forth in Schedule 4.11, neither the IRS nor any foreign,
state, local or other taxing authority has, during the past three
years, examined or is in the process of examining any federal, foreign,
state, local or other tax returns of Home. To the knowledge of Home,
neither the IRS nor any foreign, state, local or other taxing authority
is now asserting or threatening to assert any deficiency or claim for
additional taxes (or interest thereon or penalties in connection
therewith) except as set forth on Schedule 4.11.
(b) Except as set forth on Schedule 4.11(b), neither Home
nor Home Bank is a party to any safe harbor lease within the meaning of
Section 168(f)(8) of the Code, as in effect prior to amendment by the
Tax Equity and Fiscal Responsibility Act of 1982. Neither Home nor Home
Bank is or has been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
Neither Home nor Home Bank is a "consenting corporation" under Section
341(f) of the Code. Neither Home nor Home Bank has agreed, nor is it
required to make, any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise.
4.12. Compliance with Laws and Regulations. To Home's and Home
Bank's knowledge, neither of them is in default under or in breach of any
provision of their respective Articles of Incorporation, as amended, or Bylaws,
as amended, or law, ordinance, rule or regulation promulgated by any
governmental agency having authority over either of them, where such default or
breach would have a material adverse effect on the business, financial condition
or results of operations of Home on a consolidated basis. No investigation or
review by any governmental entity or regulatory authority with respect to Home
or Home Bank is pending or, to the knowledge of Home or Home Bank, threatened,
nor has any such governmental entity or regulatory authority indicated to Home
or any Affiliate of Home any intention to conduct the same, other than those the
outcome of which would not have a material adverse affect on the business,
financial condition or results of operations of Home on a consolidated basis.
4.13. Performance of Obligations. Home and Home Bank have performed
in all material respects all of the obligations required to be performed by them
to date, and to the best of their knowledge, are not in default under or in
breach of any term or provision of any covenant, contract, lease, indenture or
any other
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covenant to which either of them is a party, is subject or is otherwise bound,
and no event has occurred that, 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 business, financial condition or
results of operations of Home on a consolidated basis. Except for loans and
leases made by Home Bank in the ordinary course of business, to Home's or Home
Bank's knowledge, no party with whom Home or Home Bank has an agreement that is
of material importance to the business of Home on a consolidated basis is in
default thereunder.
4.14. Employees. There are no controversies pending or threatened
between Home or Home Bank and any of their respective employees that are likely
to have a material adverse effect on the business, financial condition or
results of operation of Home on a consolidated basis. Neither Home nor Home Bank
is a party to any collective bargaining agreement with respect to any of their
respective employees or any labor organization to which their respective
employees or any of them belong. Except as previously disclosed in writing to
CU, there are no Understandings with respect to the employment of any officer or
employee of Home or Home Bank which are not terminable by Home or Home Bank
without liability on not more than thirty (30) days' notice. Except as disclosed
in the Home Financial Statements or as previously disclosed in writing to CU,
all material sums due for employee compensation have been paid or accrued and
all employer contributions for employee benefits, including deferred
compensation obligations, and any benefits under any Home Employee Plan have
been duly and adequately paid or provided for in accordance with plan documents.
Except for the Proposed Retention Agreements and as set forth on Schedule 4.14,
as of the date hereof, no director, officer or employee of Home or Home Bank is
entitled to receive any payment or any amount under any existing Home Employee
Plan, Understanding, severance plan or other benefit plan as a result of the
consummation of any transaction contemplated by this Agreement, the Agreement of
Merger or the Bank Merger.
4.15. Brokers and Finders. Except for any agreements among Home, CU
and Montgomery, and any fees payable thereunder, neither Home nor Home Bank is a
party to or obligated under any agreement with any broker or finder relating to
the transactions contemplated hereby, and neither the execution of this
Agreement nor the consummation of the transactions provided for herein or
therein will result in any liability to any broker or finder.
4.16. Material Contracts. Except as set forth on Schedule 4.16
hereto (all items listed or required to be listed on Schedule 4.16 being
referred to herein as "Home Scheduled Contracts"), neither Home nor Home Bank is
a party or otherwise subject to:
(a) any employment, deferred compensation, bonus or
consulting contract that requires payment by Home or Home Bank of
$50,000 or more per annum;
(b) any advertising, brokerage, licensing, dealership,
representative or agency relationship or contract not terminable by
Home on 30 days' or less notice and which requires payment by Home or
Home Bank of $10,000 or more per annum;
(c) any contract or agreement that restricts Home (or
would restrict any Affiliate of Home after the Effective Time) from
competing in any line of business with any Person or using or employing
the services of any Person;
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(d) any lease of real or personal property providing for
annual lease payments by or to Home or Home Bank in excess of $100,000
per annum other than (i) financing leases entered into in the ordinary
course of business in which Home or Home Bank is lessor and (ii) leases
of real property presently used by Home Bank as banking offices;
(e) any mortgage, pledge, conditional sales contract,
security agreement, option, or any other similar agreement with respect
to any interest of Home or Home Bank (other than as mortgagor or
pledgor in the ordinary course of their banking business or as
mortgagee, secured party or deed of trust beneficiary in the ordinary
course of their business) in personal property having a value of
$100,000 or more;
(f) any agreement to acquire equipment or any commitment
to make capital expenditures of $100,000 or more;
(g) other than agreements entered into in the ordinary
course of business, including sales of Other Real Estate Owned, any
agreement for the sale of any property or assets in which Home or Home
Bank has an ownership interest or for the grant of any preferential
right to purchase any such property or asset;
(h) any agreement for the borrowing of any money (other
than liabilities or interbank borrowings made in the ordinary course of
their banking business and reflected in the Financial Statements of
Home);
(i) any restrictive covenant contained in any deed to or
lease of real property owned or leased by Home or Home Bank (as lessee)
that materially restricts the use, transferability or value of such
property;
(j) any guarantee or indemnification which involves the
sum of $100,000 or more, other than letters of credit or loan
commitments issued in the normal course of business;
(k) any supply, maintenance or landscape contracts not
terminable by Home or Home Bank without penalty on 30 days' or less
notice and which provides for payments in excess of $25,000 per annum;
(l) any agreement which would be terminable other than by
Home or Home Bank as a result of the consummation of the transactions
contemplated by this Agreement;
(m) any contract of participation with any other bank in
any loan entered into by Home or Home Bank subsequent to December 31,
1994 in excess of $100,000 or any sales of assets of Home or Home Bank
with recourse of any kind to Home or Home Bank except the sale of
mortgage loans, servicing rights, repurchase or reverse repurchase
agreements, securities or other financial transactions in the ordinary
course of business;
(n) any other Understanding of any other kind not
terminable on 30 days' or less notice which involves future payments or
receipts or performances of services or delivery of items requiring
payment of $25,000 or more to or by Home or Home Bank other than
payments made
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under or pursuant to loan agreements, participation agreements and
other agreements for the extension of credit in the ordinary course of
their business; or
(o) any Understanding that is otherwise material to the
business, financial condition, results of operations or prospects of
Home or Home Bank.
Home has delivered to CU copies of all Home Scheduled Contracts, including all
amendments and supplements thereto.
4.17. Absence of Material Change. Since December 31, 1994, the
businesses of Home and Home Bank have been conducted, only in the ordinary
course, in the same manner as theretofore conducted and there has not occurred
any event that has had or may reasonably be expected to have a material adverse
effect on the business, financial condition or results of operation of Home on a
consolidated basis.
4.18. Licenses and Permits. Home and Home Bank have all material
licenses and permits that are necessary for the conduct of their respective
businesses, and such licenses are in full force and effect, except for any
failure to be in full force and effect that would not, individually or in the
aggregate, have a material adverse effect on the business, financial condition
or results of operations of Home on a consolidated basis. The properties and
operations of Home and Home Bank are and have been maintained and conducted, in
all material respects, in compliance with all applicable laws and regulations.
4.19. No Material Liabilities; Environmental.
(a) Schedule 4.19 sets forth all material liabilities of
Home and Home Bank, including liabilities for Hazardous Substances or
under any Environmental Law, contingent or otherwise, that are not
reflected or reserved against in the Home Financial Statements, except
for liabilities incurred or accrued since December 31, 1994 in the
ordinary course of business, none of which has had or could reasonably
be expected to have a material adverse effect on the business,
financial condition, results of operations or prospects of Home on a
consolidated basis. Except as set forth in Schedule 4.19, neither Home
nor Home Bank knows of any basis for the asserting against it of any
liability, obligation or claim that could reasonably be expected to
have a material adverse effect on the business, financial condition, or
results of operations of Home on a consolidated basis.
(b) Except as set forth on Schedule 4.19(b) or the Phase
I Reports or Phase II Assessments, to the actual knowledge of the
executive officers of Home and Home Bank, (i) there has not been any
generation, use, handling, transportation, treatment, storage, release,
or disposal of any Hazardous Substance in connection with the conduct
of business of Home or Home Bank that has resulted or is likely to
result in any liability under any Environmental Law in excess of
$1,000,000; (ii) there has never been a use of the Home Real Property
that has resulted, or is likely to result in any liability under any
Environmental Law in excess of $1,000,000; (iii) no underground storage
tanks or surface impoundments are on or in the Home Real Property; and
(iv) no Hazardous Substances are contained on, under or migrating from
or located on any of the Home Real Property.
4.20. Employee Benefit Plans.
(a) Schedule 4.20 sets forth and describes all employee
benefit plans and any collective bargaining agreements or labor
contracts in which Home or Home Bank participates, or by which
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they are bound, including, without limitation; (i) any profit sharing,
deferred compensation, bonus, stock option, stock purchase, pension,
retainer consulting, retirement, welfare or incentive plan or agreement
whether legally binding or not; (ii) any plan providing for "fringe
benefits" to its employees, including but not limited to vacation, sick
leave, medical, hospitalization, life insurance and other insurance
plans, and related benefits; (iii) any written employment agreement and
any other employment agreement not terminable at will; or (iv) any
other "employee benefit plan" (within the meaning of Section 3(3) of
ERISA) (collectively, the "Home Employee Plans"). Except as set forth
in Schedule 4.20, (i) there are no negotiations, demands or proposals
that are pending or threatened that concern matters now covered, or
that would be covered, by any employment agreements or employee benefit
plans other than amendments to plans qualified under Section 401 of the
Code that are required by the Tax Reform Act of 1986 and later
legislation; (ii) Home is in compliance with the material reporting and
disclosure requirements of Part 1 of Subtitle IB of ERISA and the
corresponding provisions of the Code to the extent applicable to all
such employee benefit plans; (iii) Home has performed all of its
obligations under all such employee benefit plans and employment
agreements required to be performed heretofore; and (iv) there are no
actions, suits or claims (other than routine claims for benefits)
pending or, to the best knowledge of Home and Home Bank, threatened
against any such employee benefit plans and employment agreements or
the assets of such plans, and to the best knowledge of Home, no facts
exist which could give rise to any actions, suits or claims (other than
routine claims for benefits) against such plans or the assets of such
plans.
(b) The "employee pension benefit plans" (within the
meaning of Section 3(2) of ERISA) described on Schedule 4.20 have been
duly authorized by the Board of Directors of Home. Except as set forth
in Schedule 4.20, each such plan and associated trust intended to be
qualified under Section 401(a) and to be exempt from tax under Section
501(a) of the Code, respectively, has either received a favorable
determination letter from the IRS, has applied for such a determination
letter or will apply for such a determination letter before the
expiration of the remedial amendment period set forth in Section 401(b)
of the Code, as the IRS may extend such period, and to the best
knowledge of Home and Home Bank, no event has occurred that will or
could give rise to disqualification of any such plan which is intended
to be qualified under Section 401(a) of the Code or loss of the
exemption from tax of any such trust which is intended to be exempt
from tax under Section 501(a) of the Code. No event has occurred that
will or could subject any such plans to tax under Section 511 of the
Code. None of such plans has engaged in a merger or consolidation with
any other plan or transferred assets or liabilities from any other
plan. No prohibited transaction (within the meaning of Section 409 or
502(i) of ERISA or Section 4975 of the Code) or party-in-interest
transaction (within the meaning of Section 406 of ERISA) has occurred
with respect to any of such plans which could subject Home or Home Bank
to an excise tax or penalty. To the best knowledge of Home and Home
Bank, no employee of Home or Home Bank has engaged in any transactions
which could subject Home or Home Bank to indemnify such person against
liability. All costs of plans have been provided for on the basis of
consistent methods in accordance with sound actuarial assumptions and
practices. No employee benefit plan has incurred any "accumulated
funding deficiency" (as defined in Section 302(2) of ERISA), whether or
not waived, taking into account contributions made within the period
described in Section 412(c)(10) of the Code; nor are there any unfunded
amounts under any employee benefit plan which is required to be funded
under Part 3 of Subtitle IB of ERISA and Section 412 of the Code); nor
has Home or Home Bank failed to make any contributions or pay any
amount due and owing as required by law or the terms of any employee
benefit plan or employment agreement. Subject to amendments that are
required by the
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Tax Reform Act of 1986 and later legislation, since the last valuation
date for each employee pension benefit plan, there has been no
amendment or change to such plan that would increase the amount of
benefits thereunder.
(c) Neither Home nor Home Bank sponsors or participates
in, or has sponsored or participated in, any employee benefit pension
plan to which Section 4021 of ERISA applies that would create a
liability under Title IV of ERISA.
(d) Neither Home nor Home Bank sponsors or participates
in, or has sponsored or participated in, any employee benefit pension
plan that is a "multi-employer plan" (within the meaning of Section
3(37) of ERISA) that would subject such Person to any liability with
respect to any such plan.
(e) All group health plans of Home or Home Bank
(including any plans of Affiliates of Home that must be taken into
account under Section 162(i) or (k) of the Code as in effect
immediately prior to the Technical and Miscellaneous Revenue Act of
1988 and Section 4980B of the Code) have been operated in compliance
with the group health plan continuation coverage requirements of
Section 4980B of the Code to the extent such requirements are
applicable.
(f) There have been no acts or omissions by Home or Home
Bank that have given rise to or may give rise to fines, penalties,
taxes, or related charges under Sections 502(c) or (i) or 4071 of ERISA
or Chapter 43 of the Code which could be imposed on Home or Home Bank.
(g) Except as described in Section 4.20(j), neither Home
or Home Bank maintains any employee benefit plan or employment
agreement pursuant to which any benefit plan or other payment will be
required to be made by Home or Home Bank or pursuant to which any other
benefit will accrue or vest in any director, officer or employee of
Home or Home Bank, in either case as a result of the consummation of
the transactions contemplated by the Agreement.
(h) No "reportable event," as defined in ERISA, has
occurred with respect to any of the employee benefit plans.
(i) All amendments required to bring each of the employee
benefit plans into conformity with all of the provisions of ERISA and
the Code and all other applicable laws, rules and regulations have been
made, or will be made before the expiration of the remedial amendment
period set forth under Section 401(b) of the Code, as such period may
be extended by the IRS.
(j) Schedule 4.20 sets forth the name of each director,
officer, employee, agent or representative of Home or Home Bank and
every other person entitled to receive any benefit or any payment of
any amount under any existing employment agreement, severance plan or
other benefit plan or Understanding as a result of the consummation of
any transaction contemplated in this Agreement, and with respect to
each such person, the nature of such benefit or the amount of such
payment, the event triggering the benefit or payment, and the date of,
and parties to, such employment agreement, severance or other benefit
plan or Understanding. Home has furnished CU with true and correct
copies of all documents with respect to the plans and agreements
referred to in Schedule 4.20 delivered as of the date of the Agreement,
including all amendments and supplements thereto, and all related
summary plan descriptions. For each of the employee pension
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benefit plans of Home and Home Bank referred to in Schedule 4.20
delivered as of the date of the Agreement, Home has furnished CU with
true and correct copies of (i) a copy of the Form 5500 which was filed
in each of the three most recent plan years, including without
limitation, all schedules thereto and all financial statements with
attached opinions of independent accountants to the extent required;
(ii) the most recent determination letter from the IRS; (iii) the
statement of assets and liabilities as of the most recent valuation
date; and (iv) the statement of changes in fund balance and in
financial position or the statement of changes in net assets available
for benefits under each of said plans for the most recently ended plan
year. The documents referred to in subdivisions (iii) and (iv) fairly
present the financial condition of each of said plans as of and at such
dates and the results of operations of each of said plans, all in
accordance with generally accepted accounting principles or on the cash
method of accounting applied on a consistent basis.
4.21. Corporate Records. The minute books of Home and Home Bank
accurately reflect all material actions taken to this date by the respective
shareholders, boards of directors and committees of Home and Home Bank and
contain true and complete copies of the Articles of Incorporation, Bylaws and
other charter documents, and all amendments thereto.
4.22. Offices and ATMs. Schedule 4.22 sets forth the headquarters of
Home and Home Bank (identified as such) and each of the offices and automated
teller machines ("ATMs") maintained and operated by Home Bank (including,
without limitation, representative and loan production offices and operations
centers) and the location thereof. Except as set forth on Schedule 4.22, neither
Home nor Home Bank maintains any other office or ATM nor conducts business at
any other location. Neither Home nor Home Bank has applied for or received
permission to open any additional branch or operate at any other location.
4.23. Operating Losses. Schedule 4.23 sets forth a list of any
Operating Loss (as herein defined) which has occurred at Home Bank during the
period after September 30, 1995. To the knowledge of Home or Home Bank, no
action has been taken or omitted to be taken by any employee of Home or Home
Bank that has resulted in the incurrence by Home Bank of an Operating Loss or
that might reasonably be expected to result in the incurrence of any individual
Operating Loss after September 30, 1995, which, net of any insurance proceeds
payable in respect thereof, would exceed $25,000. For purposes of this Agreement
"Operating Loss" means any loss resulting from cash shortages, lost or misposted
items, disputed clerical and accounting errors, forged checks, payment of checks
over stop payment orders, merchant credit card processing, counterfeit money,
wire transfers made in error, theft, robberies, defalcations, check kiting,
fraudulent use of credit cards or electronic teller machines or other similar
acts or occurrences.
4.24. Loan Portfolio. All loans or other extensions of credit, and
guaranties, security agreements or other agreements supporting any loans or
extensions of credit, and investments of Home or Home Bank 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
creditors generally and by general equitable principles. Except as previously
disclosed in writing to CU, no loans or investments held by Home Bank are, as of
September 30, 1995 (i) more than ninety (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 any federal or
state banking regulators; or (iii) on a non-accrual status in accordance with
Home Bank's loan review procedures. None of such investments are subject to any
restrictions, 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 any such investments under the Securities Act and
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the regulations thereunder or state securities laws and pledges or security
interests given in connection with government deposits. Except as previously
disclosed in writing to CU, Home Bank has no loans, leases or other extensions
of credit outstanding, or commitments to make any loans, leases or other
extensions of credit to any Affiliates of Home Bank which are not on
substantially the same terms (including interest rates, repayment terms and
collateral) as would be available for comparable transactions with persons of
similar creditworthiness who are not Affiliates of Home Bank. For each
outstanding loan or extension of credit or commitment to make a loan or
extension of credit where the original principal amount is in excess of $50,000
and which by its terms is either secured by collateral ("Secured Loan") or
supported by a guaranty or similar obligation ("Covered Loan"), in the case of
each Secured Loan, to the best knowledge of Home Bank, the security interest has
been perfected and, in the case of each Covered Loan, the guaranty or similar
obligation has been executed and delivered to Home Bank and is still in full
force and effect.
4.25. Power of Attorney. Neither Home nor Home Bank has granted any
Person a power of attorney or similar authorization that is presently in effect
or outstanding.
4.26. Disclosure Documents and Applications. None of the information
supplied or to be supplied by or on behalf of Home or Home Bank ("Home Supplied
Information") for inclusion in the documents to be filed with the SEC, FRB, the
FDIC, or any other governmental entity in connection with the transactions
contemplated in this Agreement will, at the respective times such documents are
filed or become effective, contain any untrue statement of a material fact, or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
4.27. Accuracy and Currentness of Information Furnished. The
representations and warranties made by Home or Home Bank hereby or in the
schedules hereto contain no statements of fact which are untrue or misleading,
or omit to state any material fact which is necessary under the circumstances to
prevent the statements contained herein or in such schedules from being
misleading.
4.28. Loan Servicing Portfolio. Except as set forth on Schedule
4.28, Home Bank services no loans owned in whole or in part by other parties.
4.29. Certain Interests. Schedule 4.29 sets forth a description of
each instance in which an executive officer or director of Home or Home Bank (a)
has any material interest in any property, real or personal, tangible or
intangible, used by or in connection with the business of Home or Home Bank; (b)
is indebted to Home or Home Bank except for normal business expense advances; or
(c) is a creditor (other than as a deposit holder of Home Bank) of Home or Home
Bank except for amounts due under normal salary and related benefits or
reimbursement of ordinary business expenses. Except as set forth in Schedule
4.29, all such arrangements are arm's length transactions pursuant to normal
commercial terms and conditions.
4.30. Investment Securities. Except as set forth on Schedule 4.30,
all investment securities held by Home or Home Bank are legal investments under
applicable law and regulations.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CU AND CU BANK
CU and CU Bank represent and warrant to Home and Home Bank as follows:
5.1. Incorporation, Standing and Power. CU has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of California and is registered as a bank holding company
under the BHC Act. CU Bank has been duly incorporated and is validly existing as
a national banking association under the laws of the United States, and is
authorized by the OCC to conduct a general banking business; CU Bank's deposits
are insured by the FDIC in the manner and to the extent provided by law. CU and
CU Bank have all requisite corporate power and authority to own, lease and
operate their respective properties and assets and to carry on their respective
businesses as presently conducted. Neither the scope of the business of CU or CU
Bank nor the location of any of their respective properties requires that CU or
CU Bank be licensed to do business in any jurisdiction other than the State of
California where the failure to be so licensed would, individually or in the
aggregate, have a materially adverse effect on the financial condition, results
of operation or business of CU on a consolidated basis.
5.2. Capitalization.
(a) As of the date of this Agreement, the authorized
capital stock of CU consists of 24,000,000 shares of CU Stock, of which
4,621,450 shares are outstanding, and 10,000,000 shares of serial
preferred stock, none of which are outstanding. All of the outstanding
shares of CU Stock are duly authorized, validly issued, fully paid and
nonassessable. As of the date of this Agreement, except for employee
stock options covering 729,240 shares of CU Stock granted pursuant to
the CU Stock Option Plan, outstanding warrants covering 7,500 shares of
CU Stock and 1,492,390 shares covered by the Home Warrant, there were
no outstanding options, warrants or other rights in or with respect to
the unissued shares of CU Stock or CU serial preferred stock nor any
securities convertible into such stock. Except with respect to the
approximately 648,871 shares of CU Stock to be issued in connection
with the Corporate Bank Merger, CU is not obligated to issue any
additional shares of CU Stock or preferred stock or any additional
options, warrants or other rights in or with respect to the unissued
shares of such stock or any other securities convertible into such
stock. Schedule 5.2 sets forth the name of each holder of a CU Option,
the number of shares of CU Stock covered by each such CU Option, the
exercise price per share and the expiration date of each CU Option.
(b) As of the date of this Agreement, the authorized
capital stock of CU Bank consists of 540,000 shares of CU Bank Stock,
of which 472,973 shares are outstanding and all of which are owned of
record by CU. All the outstanding shares of CU Bank Stock are duly
authorized, validly issued, fully paid and nonassessable (except as
provided for in 12 U.S.C. Section55). There are no outstanding options,
warrants or other rights in or with respect to the unissued shares of
CU Bank Stock or any other securities convertible into such stock, and
CU Bank is not obligated to issue any additional shares of its common
stock or any options, warrants or other rights in or with respect to
the unissued shares of its common stock or any other securities
convertible into such stock.
5.3. Subsidiaries. Except for CU Bank, a wholly owned subsidiary of
CU, CU does not own, directly or indirectly (except as pledgee pursuant to loans
or upon acquisition in satisfaction of debt
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previously contracted), the outstanding stock or other voting interest in any
corporation, partnership, joint venture or other entity.
5.4. Financial Statements. CU has previously furnished to Home a
copy of the Financial Statements of CU. The Financial Statements of CU: (a)
present fairly the consolidated financial condition of CU as of the respective
dates indicated and its consolidated results of operations and changes in
financial position/cash flow, as applicable, for the respective periods then
ended, subject, in the case of the unaudited consolidated interim financial
statements, to normal recurring adjustments; (b) have been prepared in
accordance with generally accepted accounting principles consistently applied
(except as otherwise indicated therein); (c) set forth as of the respective
dates indicated adequate reserves for all foreseeable loan losses and other
contingencies; and (d) are based on the books and records of CU and CU Bank.
5.5. SEC/Regulatory Filings. Since January 1, 1990, CU and CU Bank
have filed all reports, registrations, and statements that were required to be
filed with the (i) OCC; (ii) the FRB; (iii) the SEC; and (iv) any other
applicable federal, state or local or governmental or regulatory authority. CU
has previously furnished to Home a copy of the SEC Filings of CU, OCC Filings of
CU, and the FRB Filings of CU. As of their respective dates, the SEC Filings of
CU, the OCC Filings of CU and the FRB Filings of CU complied in all material
respects with the requirements of their respective forms 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.
5.6. Authority of CU and CU Bank. The execution and delivery by CU
and CU Bank of this Agreement, by CU of the Agreement of Merger and by CU Bank
of the Bank Merger Agreement and, subject to the requisite approval of the
shareholders of CU and the sole shareholder of CU Bank, the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of CU and CU Bank, and
this Agreement is, and the Agreement of Merger and Bank Merger Agreement will be
upon execution by the respective parties thereto, a valid and binding obligation
of CU or CU Bank or both of them, as the case may be, enforceable in accordance
with their respective terms, except as the enforceability thereof may be limited
by bankruptcy, liquidation, receivership, conservatorship, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles and by Section 8(b)(6)(D) of the Federal Deposit
Insurance Act, 12 U.S.C. Section 1818(b) (6) (D). Except as set forth in
Schedule 5.6, neither the (i) execution and delivery by CU and CU Bank of this
Agreement, by CU of the Agreement of Merger or by CU Bank of the Bank Merger
Agreement; (ii) the consummation of the Merger or Bank Merger or the
transactions contemplated herein or therein; nor (iii) compliance by CU and CU
Bank with any of the provisions hereof or thereof, will: (a) conflict with or
result in a breach of any provision of their respective Articles of
Incorporation or Association, as amended, as the case may be, or Bylaws, as
amended; (b) 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 CU or CU Bank is a party, or by which CU or CU
Bank or any of their respective properties or assets is bound, if in any such
circumstances, such event could have consequences materially adverse to CU on a
consolidated basis; or (c) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to CU or CU Bank or any of their respective
properties or assets, if such violation could have consequences materially
adverse to CU on a consolidated basis. Except as set forth in the CU Schedules,
no consent of, approval of, notice to or filing with any governmental authority
having jurisdiction over any aspect of the business or assets of CU or CU Bank,
and no consent of, approval of or notice to any other Person, is required in
connection with the
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execution and delivery by CU and CU Bank of this Agreement, by CU of the
Agreement of Merger, by CU Bank of the Bank Merger Agreement, or the
consummation by CU and CU Bank of the Merger or Bank Merger or the transactions
contemplated hereby or thereby, except (i) the approval of this Agreement and
the transactions contemplated hereby by the shareholders of CU and the sole
shareholder of CU Bank; (ii) such approvals as may be required by the FRB and
the OCC; (iii) the filing of the Agreement of Merger with the California
Secretary; (iv) the filing of the Bank Merger Agreement with the OCC; and (v)
the filing with and the approval by the SEC of the S-4 and the Proxy Statement.
5.7. Insurance. CU and CU Bank have policies of insurance and bonds
with respect to their respective assets and businesses against such casualties
and contingencies and in such amounts, types and forms as are appropriate for
their respective businesses, operations, properties and assets. All such
insurance policies and bonds are in full force and effect. To the knowledge of
CU and CU Bank and except as set forth on Schedule 5.7, no insurer under any
such policy or bond has canceled or indicated an intention to cancel or not to
renew any such policy or bond or generally disclaimed liability thereunder. To
the knowledge of CU and CU Bank and except as set forth on Schedule 5.7, neither
CU nor CU Bank is in default under any such policy or bond and all material
claims thereunder have been filed in a timely fashion. Set forth on Schedule 5.7
is a list of all policies of insurance carried and owned by CU or CU Bank,
showing the name of the insurance company, the nature of the coverage, the
policy limit, the annual premiums and the expiration dates. CU has delivered to
Home a copy of each such policy of insurance.
5.8. Title to Assets. CU and CU Bank have good and marketable title
to all their respective material properties and assets, other than real
property, owned or stated to be owned by CU or CU Bank, free and clear of all
mortgages, liens, encumbrances, pledges or charges of any kind or nature except:
(a) as set forth in the Financial Statements of CU; (b) for liens or
encumbrances for current taxes not yet due; (c) for liens or encumbrances
incurred in the ordinary course of business; (d) for liens that are not
substantial in character, amount or extent or that do not materially detract
from the value, or interfere with present use, of the property subject thereto
or affected thereby, or otherwise materially impair the conduct of business of
CU on a consolidated basis; or (e) as set forth on Schedule 5.8.
5.9. Real Estate. Schedule 5.9 sets forth a list of real property,
including leaseholds, owned or leased by CU or CU Bank (the "CU Real Property").
CU or CU Bank has good and marketable title to the CU Real Property, and valid
leasehold interests in the leaseholds, described on Schedule 5.9, free and clear
of all mortgages, covenants, conditions, restrictions, easements, liens,
security interests, charges, claims, assessments and encumbrances, except (a)
for rights of lessors, co-lessees or sublessees in such matters that are
reflected in the lease; (b) for current taxes not yet due and payable; (c) for
liens and encumbrances of public record; (d) for such imperfections of title,
liens and encumbrances, if any, as do not materially detract from the value of
or materially interfere with the present use of such property; and (e) as
described on Schedule 5.9.
5.10. Litigation. Except as set forth in the SEC Filings of CU or
Schedule 5.10, there is no private or governmental suit, claim, action or
proceeding pending, nor to CU's or CU Bank's knowledge, threatened against CU or
CU Bank 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 CU or CU Bank that has had or may have a material
adverse effect upon the business, financial condition or results of operations
of CU on a consolidated basis or the transactions contemplated hereby or which
may involve a payment by CU in excess of $50,000 of applicable insurance
coverage. Also, except as disclosed in the SEC Filings of CU or on Schedule
5.10, there are no material judgments, decrees, stipulations or orders against
CU or CU
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Bank enjoining either of them or any of their 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. CU has previously provided to Home summary reports of CU's and CU Bank's
attorneys relating to all pending litigation to which CU or CU Bank is a party
and which names CU or CU Bank as a defendant or cross-defendant and a true,
correct and complete list of all pending litigation in which CU or CU Bank is a
named party.
5.11. Taxes.
(a) CU and/or CU Bank have filed all federal and foreign
income tax returns, all state and local franchise and income tax, real
and personal property tax, sales and use tax, premium tax, excise tax
and other tax returns of every character required to be filed by it and
have paid all taxes, together with any interest and penalties owing in
connection therewith, shown on such returns to be due in respect of the
periods covered by such returns, other than taxes which are being
contested in good faith and for which adequate reserves have been
established. CU and/or CU Bank have filed all required payroll tax
returns, have fulfilled all tax withholding obligations and have paid
over to the appropriate governmental authorities the proper amounts
with respect to the foregoing. The tax and audit positions taken by CU
and/or CU Bank in connection with the tax returns described in the
preceding sentence were reasonable and asserted in good faith. Adequate
provision has been made in the books and records of CU and/or CU Bank
and, to the extent required by generally accepted accounting
procedures, reflected in the Financial Statements of CU, for all tax
liabilities, including interest or penalties, whether or not due and
payable and whether or not disputed, with respect to any and all
federal, foreign, state, local and other taxes for the periods covered
by such financial statements and for all prior periods. Schedule 5.11
sets forth the date or dates through which the IRS has examined the
federal tax returns of CU and/or CU Bank and the date or dates through
which any foreign, state, local or other taxing authority has examined
any other tax returns of CU and/or CU Bank. Schedule 5.11 also contains
a complete list of each year for which any federal, state, local or
foreign tax authority has obtained or has requested an extension of the
statute of limitations from CU and/or CU Bank and lists each tax case
of CU and/or CU Bank currently pending in audit, at the administrative
appeals level or in litigation. Schedule 5.11 further lists the date
and issuing authority of each statutory notice of deficiency, notice of
proposed assessment and revenue agent's report issued to CU and/or CU
Bank within the last twelve (12) months. Except as set forth in
Schedule 5.11, neither the IRS nor any foreign, state, local or other
taxing authority has, during the past three years, examined or is in
the process of examining any federal, foreign, state, local or other
tax returns of CU. To the knowledge of CU, neither the IRS nor any
foreign, state, local or other taxing authority is now asserting or
threatening to assert any deficiency or claim for additional taxes (or
interest thereon or penalties in connection therewith) except as set
forth on Schedule 5.11.
(b) Neither CU nor CU Bank is a party to any safe harbor
lease within the meaning of Section 168(f)(8) of the Code, as in effect
prior to amendment by the Tax Equity and Fiscal Responsibility Act of
1982. Neither CU nor CU Bank is or has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of
the Code during the applicable period specified in Section
897(c)(i)(A)(ii) of the Code. Neither CU nor CU Bank is a "consenting
corporation" under Section 341(f) of the Code. Neither CU nor CU Bank
has agreed, nor is it required to make, any adjustment under Section
481(a) of the Code by reason of a change in accounting method or
otherwise.
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5.12. Compliance with Laws and Regulations. To CU's and CU Bank's
knowledge, neither of them is in default under or in breach of any provision of
their respective Articles of Incorporation or Association, as amended, as the
case may be, or Bylaws, as amended, or law, ordinance, rule or regulation
promulgated by any governmental agency having authority over either of them,
where such default or breach would have a material adverse effect on the
business, financial condition or results of operations of CU on a consolidated
basis. No investigation or review by any governmental entity or regulatory
authority with respect to CU or CU Bank is pending or, to the knowledge of CU or
CU Bank, threatened, nor has any such governmental entity or regulatory
authority indicated to CU or any Affiliate of CU an intention to conduct the
same, other than those the outcome of which would not have a material adverse
affect on the business, financial condition or results of operation of CU on a
consolidated basis.
5.13. Performance of Obligations. CU and CU Bank have performed in
all material respects all of the obligations required to be performed by them to
date, and to the best of their knowledge, 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 either of them is a party, is subject or is otherwise
bound, and no event has occurred that, 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 business, financial condition
or results of operations of CU on a consolidated basis. Except for loans and
leases made by CU Bank in the ordinary course of business, to CU's or CU Bank's
knowledge, no party with whom CU or CU Bank has an agreement that is of material
importance to the business of CU on a consolidated basis is in default
thereunder.
5.14. Employees. There are no controversies pending or threatened
between CU or CU Bank and any of their respective employees that are likely to
have a material adverse effect on the business, financial condition or results
of operation of CU on a consolidated basis. Neither CU nor CU Bank is a party to
any collective bargaining agreement with respect to any of their respective
employees or any labor organization to which their respective employees or any
of them belong. Except as previously disclosed in writing to Home, there are no
understandings with respect to the employment of any officer or employee of CU
or CU Bank which are not terminable by CU or CU Bank without liability on not
more than thirty (30) days notice. Except as disclosed in the CU Financial
Statements or as previously disclosed in writing to CU, all material sums due
for employee compensation have been paid or accrued and all employer
contributions for employee benefits, including deferred compensation
obligations, and any benefits under any CU Employee Plan have been duly and
adequately paid or provided for in accordance with plan documents. Except as set
forth on Schedule 5.14, as of the date hereof, no director, officer or employee
of CU or CU Bank is entitled to receive any payment or any amount under any
existing CU Employee Plan, Understanding, agreement, severance plan or other
benefit plan as a result of the consummation of any transaction contemplated by
this Agreement, the Agreement of Merger or the Bank Merger.
5.15. Brokers and Finders. Except for any agreements among CU, Home
and Montgomery, and any fees payable thereunder, neither CU nor CU Bank is a
party to or obligated under any agreement with any broker or finder relating to
the transactions contemplated hereby, and neither the execution of this
Agreement nor the consummation of the transactions provided for herein or
therein will result in any liability to any broker or finder.
5.16. Material Contracts. Except as set forth on Schedule 5.16
hereto (all items listed or required to be listed on Schedule 5.16 being
referred to herein as "CU Scheduled Contracts"), neither CU nor CU Bank is a
party or otherwise subject to:
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(a) any employment, deferred compensation, bonus or
consulting contract that requires payment by CU or CU Bank of $50,000
or more per annum;
(b) any advertising, brokerage, licensing, dealership,
representative or agency relationship or contract not terminable by CU
on 30 days' or less notice and which requires payment by CU or CU Bank
of $10,000 or more per annum;
(c) any contract or agreement that restricts CU (or would
restrict any Affiliate of CU after the Effective Time) from competing
in any line of business with any Person or using or employing the
services of any Person;
(d) any lease of real or personal property providing for
annual lease payments by or to CU or CU Bank in excess of $100,000 per
annum other than (i) financing leases entered into in the ordinary
course of business in which CU or CU Bank is lessor and (ii) leases of
real property presently used by CU Bank as banking offices;
(e) any mortgage, pledge, conditional sales contract,
security agreement, option, or any other similar agreement with respect
to any interest of CU or CU Bank (other than as mortgagor or pledgor in
the ordinary course of their banking business or as mortgagee, secured
party or deed of trust beneficiary in the ordinary course of their
business) in personal property having a value of $100,000 or more;
(f) any agreement to acquire equipment or any commitment
to make capital expenditures of $100,000 or more;
(g) other than agreements entered into in the ordinary
course of business, including sales of Other Real Estate Owned, any
agreement for the sale of any property or assets in which CU or CU Bank
has an ownership interest or for the grant of any preferential right to
purchase any such property or asset;
(h) except for any subordinated debt that may be assumed
by CU Bank in connection with the Corporate Bank Merger, any agreement
for the borrowing of any money (other than liabilities or interbank
borrowings made in the ordinary course of their banking business and
reflected in the Financial Statements of CU);
(i) any restrictive covenant contained in any deed to or
lease of real property owned or leased by CU or CU Bank (as lessee)
that materially restricts the use, transferability or value of such
property;
(j) any guarantee or indemnification which involves the
sum of $100,000 or more, other than letters of credit or loan
commitments issued in the normal course of business;
(k) any supply, maintenance or landscape contracts not
terminable by CU or CU Bank without penalty on 30 days or less notice
and which provides for payments in excess of $25,000 per annum;
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(l) any agreement which would be terminable other than by
CU or CU Bank as a result of the consummation of the transactions
contemplated by this Agreement;
(m) any contract of participation with any other bank in
any loan entered into by CU or CU Bank subsequent to December 31, 1994
in excess of $100,000 or any sales of assets of CU or CU Bank with
recourse of any kind to CU or CU Bank except the sale of mortgage
loans, servicing rights, repurchase or reverse repurchase agreements,
securities or other financial transactions in the ordinary course of
business;
(n) any other Understanding of any other kind not
terminable on 30 days' or less notice which involves future payments or
receipts or performances of services or delivery of items requiring
payment of $25,000 or more to or by CU or CU Bank other than payments
made under or pursuant to loan agreements, participation agreements and
other agreements for the extension of credit in the ordinary course of
their business; or
(o) any Understanding that is otherwise material to the
business, financial condition, results of operations or prospects of CU
or CU Bank.
CU has delivered to Home copies of all Scheduled Contracts, including all
amendments and supplements thereto.
5.17. Absence of Material Change. Since December 31, 1994, the
businesses of CU and CU Bank have been conducted, only in the ordinary course,
in the same manner as theretofore conducted and there has not occurred any event
that has had or may reasonably be expected to have a material adverse effect in
the business, financial condition or results of operation of CU on a
consolidated basis.
5.18. Licenses and Permits. CU and CU Bank have all material
licenses and permits that are necessary for the conduct of their respective
businesses, and such licenses are in full force and effect, except for any
failure to be in full force and effect that would not, individually or in the
aggregate, have a material adverse effect on the business, financial condition
or results of operations of CU on a consolidated basis. The properties and
operations of CU and CU Bank are and have been maintained and conducted, in all
material respects, in compliance with all applicable laws and regulations.
5.19. No Material Liabilities; Environmental.
(a) Schedule 5.19 sets forth all material liabilities of
CU and CU Bank, including liabilities for Hazardous Substances or under
any Environmental Law, contingent or otherwise, that are not reflected
or reserved against in the CU Financial Statements, except for
liabilities incurred or accrued since December 31, 1994 in the ordinary
course of business, none of which has had or could reasonably be
expected to have had a material adverse effect on the business,
financial condition, results of operations or prospects of CU on a
consolidated basis. Except as set forth in Schedule 5.19, neither CU
nor CU Bank knows of any basis for the asserting against it of any
liability, obligation or claim that could reasonably be expected to
have a material adverse effect on the business, financial condition, or
results of operations of CU on a consolidated basis.
(b) Except as set forth on Schedule 5.19(b), to the
actual knowledge of the executive officers of CU and CU Bank, (i) there
has not been any generation, use, handling, transportation,
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treatment, storage, release, or disposal of any Hazardous Substance in
connection with the conduct of business of CU or CU Bank that has
resulted or is likely to result in any liability under any
Environmental Law in excess of $1,000,000; (ii) there has never been a
use of the CU Real Property that has resulted, or is likely to result
in any liability under any Environmental Law in excess of $1,000,000;
(iii) no underground storage tanks or surface impoundments are on or in
the CU Real Property; and (iv) no Hazardous Substances are contained or
located on any of the CU Real Property.
5.20. Employee Benefit Plans.
(a) Schedule 5.20 sets forth and describes all employee
benefit plans and any collective bargaining agreements or labor
contracts in which CU or CU Bank participates, or by which they are
bound, including, without limitation, (i) any profit sharing, deferred
compensation, bonus, stock option, stock purchase, pension, retainer
consulting, retirement, welfare or incentive plan or agreement whether
legally binding or not; (ii) any plan providing for "fringe benefits"
to its employees, including but not limited to vacation, sick leave,
medical, hospitalization, life insurance and other insurance plans, and
related benefits; (iii) any written employment agreement and any other
employment agreement not terminable at will; or (iv) any other
"employee benefit plan" (within the meaning of Section 3(3) of ERISA)
(collectively, the "CU Employee Plans"). Except as set forth in
Schedule 5.20, (i) there are no negotiations, demands or proposals that
are pending or threatened that concern matters now covered, or that
would be covered, by any employment agreements or employee benefit
plans other than amendments to plans qualified under Section 401 of the
Code that are required by the Tax Reform Act of 1986 and later
legislation; (ii) CU is in compliance with the material reporting and
disclosure requirements of Part 1 of Subtitle IB of ERISA and the
corresponding provisions of the Code to the extent applicable to all
such employee benefit plans; (iii) CU has performed all of its
obligations under all such employee benefit plans and employment
agreements required to be performed heretofore; and (iv) there are no
actions, suits or claims (other than routine claims for benefits)
pending or, to the best knowledge of CU and CU Bank, threatened against
any such employee benefit plans and employment agreements or the assets
of such plans, and to the best knowledge of CU, no facts exist which
could give rise to any actions, suits or claims (other than routine
claims for benefits) against such plans or the assets of such plans.
(b) The "employee pension benefit plans" (within the
meaning of Section 3(2) of ERISA) described on Schedule 5.20 have been
duly authorized by the Board of Directors of CU. Except as set forth in
Schedule 5.20, each such plan and associated trust intended to be
qualified under Section 401(a) and to be exempt from tax under Section
501(a) of the Code, respectively, has either received a favorable
determination letter from the IRS, has applied for such a determination
letter or will apply for such a determination letter before the
expiration of the remedial amendment period set forth in Section 401(b)
of the Code, as the IRS may extend such period, and to the best
knowledge of CU and CU Bank, no event has occurred that will or could
give rise to disqualification of any such plan which is intended to be
qualified under Section 401(a) of the Code or loss of the exemption
from tax of any such trust which is intended to be exempt from tax
under Section 501(a) of the Code. No event has occurred that will or
could subject any such plans to tax under Section 511 of the Code. None
of such plans has engaged in a merger or consolidation with any other
plan or transferred assets or liabilities from any other plan. No
prohibited transaction (within the meaning of Section 409 or 502(i) of
ERISA or Section 4975 of the Code) or party-in-interest transaction
(within the meaning of Section 406 of ERISA) has occurred with respect
to any of such
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plans which could subject CU of CU Bank to an excise tax or penalty. To
the best knowledge of CU and CU Bank, no employee of CU or CU Bank has
engaged in any transactions which could subject CU or CU Bank to
indemnify such person against liability. All costs of plans have been
provided for on the basis of consistent methods in accordance with
sound actuarial assumptions and practices. No employee benefit plan has
incurred any "accumulated funding deficiency" (as defined in Section
302(2) of ERISA), whether or not waived, taking into account
contributions made within the period described in Section 412(c)(10) of
the Code; nor are there any unfunded amounts under any employee benefit
plan which is required to be funded under Part 3 of Subtitle IB of
ERISA and Section 412 of the Code); nor has CU or CU Bank failed to
make any contributions or pay any amount due and owing as required by
law or the terms of any employee benefit plan or employment agreement.
Subject to amendments that are required by the Tax Reform Act of 1986
and later legislation, since the last valuation date for each employee
pension benefit plan, there has been no amendment or change to such
plan that would increase the amount of benefits thereunder.
(c) Neither CU nor CU Bank sponsors or participates in,
or has sponsored or participated in, any employee benefit pension plan
to which Section 4021 of ERISA applies that would create a liability
under Title IV of ERISA.
(d) Neither CU nor CU Bank sponsors or participates in,
or has sponsored or participated in, any employee benefit pension plan
that is a "multi-employer plan" (within the meaning of Section 3(37) of
ERISA) that would subject such Person to any liability with respect to
any such plan.
(e) All group health plans of CU or CU Bank (including
any plans of Affiliates of CU that must be taken into account under
Section 162(i) or (k) of the Code as in effect immediately prior to the
Technical and Miscellaneous Revenue Act of 1988 and Section 4980B of
the Code) have been operated in compliance with the group health plan
continuation coverage requirements of Section 4980B of the Code to the
extent such requirements are applicable.
(f) There have been no acts or omissions by CU or CU Bank
that have given rise to or may give rise to fines, penalties, taxes, or
related charges under Sections 502(c) or (i) or 4071 of ERISA or
Chapter 43 of the Code which could be imposed on CU or CU Bank.
(g) Except as described in Section 5.20(j), neither CU or
CU Bank maintains any employee benefit plan or employment agreement
pursuant to which any benefit plan or other payment will be required to
be made by CU or CU Bank or pursuant to which any other benefit will
accrue or vest in any director, officer or employee of CU or CU Bank,
in either case as a result of the consummation of the transactions
contemplated by the Agreement.
(h) No "reportable event," as defined in ERISA, has
occurred with respect to any of the employee benefit plans.
(i) All amendments required to bring each of the employee
benefit plans into conformity with all of the provisions of ERISA and
the Code and all other applicable laws, rules and regulations have been
made, or will be made before the expiration of the remedial amendment
period set forth under Section 401(b) of the Code, as such period may
be extended by the IRS.
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(j) Schedule 5.20 sets forth the name of each director,
officer, employee, agent or representative of CU or CU Bank and every
other person entitled to receive any benefit or any payment of any
amount under any existing employment agreement, severance plan or other
benefit plan or Understanding as a result of the consummation of any
transaction contemplated in this Agreement, and with respect to each
such person, the nature of such benefit or the amount of such payment,
the event triggering the benefit or payment, and the date of, and
parties to, such employment agreement, severance or other benefit plan
or Understanding. CU has furnished Home with true and correct copies of
all documents with respect to the plans and agreements referred to in
Schedule 5.20 delivered as of the date of the Agreement, including all
amendments and supplements thereto, and all related summary plan
descriptions. For each of the employee pension benefit plans of CU and
CU Bank referred to in Schedule 5.20 delivered as of the date of the
Agreement, CU has furnished Home with true and correct copies of (i) a
copy of the Form 5500 which was filed in each of the three most recent
plan years, including without limitation, all schedules thereto and all
financial statements with attached opinions of independent accountants
to the extent required; (ii) the most recent determination letter from
the IRS; (iii) the statement of assets and liabilities as of the most
recent valuation date; and (iv) the statement of changes in fund
balance and in financial position or the statement of changes in net
assets available for benefits under each of said plans for the most
recently ended plan year. The documents referred to in subdivisions
(iii) and (iv) fairly present the financial condition of each of said
plans as of and at such dates and the results of operations of each of
said plans, all in accordance with generally accepted accounting
principles or on the cash method of accounting applied on a consistent
basis.
5.21. Corporate Records. The minute books of CU and CU Bank
accurately reflect all material actions taken to this date by the respective
shareholders, boards of directors and committees of CU and CU Bank and contain
true and complete copies of the Articles of Incorporation or Association, Bylaws
and other charter documents, and all amendments thereto.
5.22. Offices and ATMs. Schedule 5.22 sets forth the headquarters of
CU and CU Bank (identified as such) and each of the offices and automated teller
machines ("ATMs") maintained and operated by CU Bank (including, without
limitation, representative and loan production offices and operations centers)
and the location thereof. Except as set forth on Schedule 5.22, neither CU nor
CU Bank maintains any other office or ATM nor conducts business at any other
location. Neither CU nor CU Bank has applied for or received permission to open
any additional branch nor operate at any other location.
5.23. Operating Losses. Schedule 5.23 sets forth a list of any
Operating Loss (as herein defined) which has occurred at CU Bank during the
period after September 30, 1995. To the knowledge of CU or CU Bank, no action
has been taken or omitted to be taken by any employee of CU Bank that has
resulted in the incurrence by CU Bank of an Operating Loss or that might
reasonably be expected to result in the incurrence of any individual Operating
Loss after September 30, 1995, which, net of any insurance proceeds payable in
respect thereof, would exceed $25,000. For purposes of this Agreement "Operating
Loss" means any loss resulting from cash shortages, lost or misposted items,
disputed clerical and accounting errors, forged checks, payment of checks over
stop payment orders, merchant credit card processing, counterfeit money, wire
transfers made in error, theft, robberies, defalcations, check kiting,
fraudulent use of credit cards or electronic teller machines or other similar
acts or occurrences.
5.24. Loan Portfolio. All loans or other extensions of credit, and
guaranties, security agreements or other agreements supporting any loans or
extensions of credit, and investments of CU or CU Bank are,
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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 creditors generally and by general equitable principles. Except as
previously disclosed in writing to Home, no loans or investments held by CU Bank
are, as of September 30, 1995 (i) more than ninety (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 any
federal or state banking regulators; or (iii) on a non-accrual status in
accordance with CU Bank's loan review procedures. None of such investments are
subject to any restrictions, 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 any such investments under the Securities Act and
the regulations thereunder or state securities laws and pledges or security
interests given in connection with government deposits. Except as previously
disclosed in writing to Home, CU Bank has no loans, leases or other extensions
of credit outstanding, or commitments to make any loans, leases or other
extensions of credit to any Affiliates of CU Bank which are not on substantially
the same terms (including interest rates, repayment terms and collateral) as
would be available for comparable transactions with persons of similar
creditworthiness who are not Affiliates of CU Bank. In the case of each Secured
Loan, to the best knowledge of CU Bank, the security interest has been perfected
and, in the case of each Covered Loan, the guaranty or similar obligation has
been executed and delivered to CU Bank and is still in full force and effect.
5.25. Power of Attorney. Neither CU nor CU Bank has granted any
Person a power of attorney or similar authorization that is presently in effect
or outstanding.
5.26. Disclosure Documents and Applications. None of the information
supplied or to be supplied by or on behalf of CU or CU Bank ("CU Supplied
Information") for inclusion in the documents to be filed with the SEC, FRB, the
OCC, or any other governmental entity in connection with the transactions
contemplated in this Agreement will, at the respective times such documents are
filed or become effective, contain any untrue statement of a material fact, or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
5.27. Accuracy and Currentness of Information Furnished. The
representations and warranties made by CU or CU Bank hereby or in the schedules
hereto contain no statements of fact which are untrue or misleading, or omit to
state any material fact which is necessary under the circumstances to prevent
the statements contained herein or in such schedules from being misleading.
5.28. Loan Servicing Portfolio. Except as set forth on Schedule
5.28, CU Bank services no loans owned in whole or in part by other parties.
5.29. Certain Interests. Schedule 5.29 sets forth a description of
each instance in which an executive officer or director of CU or CU Bank (a) has
any material interest in any property, real or personal, tangible or intangible,
used by or in connection with the business of CU or CU Bank; (b) is indebted to
CU or CU Bank except for normal business expense advances; or (c) is a creditor
(other than as a deposit holder of CU Bank) of CU or CU Bank except for amounts
due under normal salary and related benefits or reimbursement of ordinary
business expenses. Except as set forth in Schedule 5.29, all such arrangements
are arm's length transactions pursuant to normal commercial terms and
conditions.
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5.30. Investment Securities. Except as set forth on Schedule 5.30,
all investment securities held by CU or CU Bank are legal investments under
applicable law and regulations.
ARTICLE VI
COVENANTS OF HOME AND HOME BANK
PENDING EFFECTIVE TIME OF THE MERGERS
Home and Home Bank covenant and agree with CU and CU Bank as follows:
6.1. Limitation on Home's and Home Bank's Conduct Prior to
Effective Time. Between the date hereof and the Effective Time, except as
contemplated by this Agreement, Home and Home Bank agree to conduct their
respective businesses only in the normal and customary manner and in accordance
with sound banking practices, and Home and Home Bank shall not, without the
prior written consent of CU (which consent shall not be unreasonably withheld
and which consent (except with respect to subparagraph (h) of this Section 6.1)
shall be deemed granted if within five (5) business days of CU's receipt of
written notice of a request for prior written consent, written notice of
objection is not received by Home):
(a) issue any Home Stock (except pursuant to the exercise
of Home Options outstanding as of the date hereof), Home preferred
stock, Home Bank Stock, Home Bank preferred stock, any other securities
(including long term debt) of Home or Home Bank or any rights, options
or securities to acquire any Home Stock, Home preferred stock, Home
Bank Stock, Home Bank preferred stock or any other securities
(including long term debt) of Home or Home Bank;
(b) except in accordance with Home's customary and past
practice of paying dividends in an amount equal to $.085 per quarter,
declare, set aside or pay any dividend or make any other distribution
upon, or purchase or redeem any shares of, Home Stock;
(c) except as may be required to effect the transactions
contemplated herein, amend its respective Articles of Incorporation or
its Bylaws;
(d) grant any general or uniform increase in the rate of
pay of employees or employee benefits;
(e) grant any material increase in salary, incentive
compensation or employee benefits or pay any bonus to any Person except
for payments in the ordinary course of business consistent with past
practices or pursuant to the Proposed Retention Agreements or any
pre-existing contract, arrangement or bonus plan;
(f) make any capital expenditure in excess of $100,000,
except for ordinary repairs, renewals and replacements;
(g) compromise or otherwise settle or adjust any
assertion or claim of a deficiency in taxes (or interest thereon or
penalties in connection therewith), extend the statute of limitations
with
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any tax authority or file any pleading in court in any tax litigation
or any appeal from an asserted deficiency;
(h) grant or commit to grant any new extension of credit
or amend the terms of any such credit outstanding on the date hereof to
any executive officer, director or holder of ten percent (10%) or more
of the outstanding Home Stock, or to any corporation, partnership,
trust or other entity controlled by any such person, except consistent
with practices and policies in existence as of the date of this
Agreement;
(i) close or open any offices at which business is
conducted;
(j) adopt or amend any Home Employee Plan or other
benefit plan or arrangement of any such type except for such amendments
as are required by law or do not materially increase the costs or
benefits of such plan or arrangement, except for the Proposed Retention
Agreements;
(k) change any of Home's or Home Bank's policies and
practices with respect to liquidity management and cash flow planning,
lending, personnel practices, accounting or any other material aspect
of Home's business or operations on a consolidated basis, except such
changes as may be required in the opinion of Home's or Home Bank's
management to respond to economic or market conditions or as may be
required by the rules of the American Institute of Certified Public
Accountants or Financial Accounting Standards Board or by applicable
governmental authorities;
(l) grant any Person a power of attorney or similar
authority;
(m) make any material investment by purchase of stock or
securities, contributions to capital, property transfers or otherwise
in any other Person, except for investments made in the ordinary course
of business consistent with past practice;
(n) amend, modify or terminate, except in accordance with
its terms, any Home Scheduled Contract or enter into any agreement or
contract that would be a Home Scheduled Contract under Section 4.16;
(o) create or incur or suffer to exist any mortgage,
lien, pledge, security interest, charge, encumbrance or restraint of
any kind against or in respect of any property or right of Home and/or
Home Bank;
(p) sell, lease or otherwise dispose of any of its assets
which are material, individually or in the aggregate, to Home or Home
Bank, except in the ordinary course of business consistent with past
practice;
(q) make any extraordinary payment to any Person, other
than with respect to the Proposed Retention Agreements; or
(r) except as required by law, take or cause to be taken
any action which would prevent the transactions contemplated hereby
from qualifying as tax free reorganizations under Section 368 of the
Code.
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6.2. No Solicitation, etc.
(a) Home and Home Bank shall not, and shall cause each of
their respective officers, directors, employees, agents, legal and
financial advisors and Affiliates not to, directly or indirectly,
solicit, initiate or, except as contemplated by Section 6.2(b) hereof,
encourage, entertain or enter into any agreement or agreement in
principle, or announce any intention to do any of the foregoing, with
respect to any Alternative Transaction, other than the Alternative
Transaction contemplated by this Agreement.
(b) Home or Home Bank shall not, and shall cause each of
its officers, directors, employees, agents, legal and financial
advisors and Affiliates not to, directly or indirectly, participate in
any negotiations or discussions regarding, or furnish any information
with respect to, or otherwise cooperate in any way in connection with,
or assist or participate in, facilitate or encourage, any effort or
attempt to effect, any Alternative Transaction with or involving any
Person other than CU or CU Bank, unless Home or Home Bank shall have
received an unsolicited written offer from a Person other than CU or CU
Bank to effect an Alternative Transaction and the Board of Directors of
Home determines, based on an opinion of counsel, that in the exercise
of the fiduciary obligations of the Board of Directors such information
should be provided to or such discussions or negotiations undertaken
with the Person submitting such unsolicited written offer.
(c) Home will promptly communicate to CU the terms of any
proposal which it may receive in respect of any Alternative Transaction
and will keep CU informed as to the status of any actions, including
negotiations or discussions, taken pursuant to subsection (b) of this
Section 6.2.
6.3. Affirmative Conduct of Home and Home Bank Prior to Effective
Time. Between the date hereof and the Effective Time, Home and Home Bank
shall:
(a) use and devote their respective best efforts
consistent with this Agreement to maintain and preserve intact their
respective present business organizations and to maintain and preserve
their respective relationships and goodwill with account holders,
borrowers, employees and others having business relationships with Home
or Home Bank;
(b) use their respective best efforts to keep in full
force and effect all of the existing material permits and licenses of
Home or Home Bank;
(c) use their respective best efforts to maintain
insurance coverage at least equal to that now in effect on all
properties for which they are responsible and on their respective
business operations;
(d) perform their respective material contractual
obligations and not become in material default on any thereof;
(e) 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;
(f) duly observe and conform to all lawful requirements
applicable to their respective businesses that are material to the
business of Home on a consolidated basis;
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(g) maintain their respective assets and properties in
good condition and repair, normal wear and tear excepted;
(h) promptly advise CU in writing of any event or any
other transaction within Home's or Home Bank's knowledge whereby any
Person or Related Group of Persons acquires, directly or indirectly,
record or beneficial ownership or control (as defined in Rule 13d-3
promulgated by the SEC under the Exchange Act) of five percent (5%) or
more of the outstanding Home Stock prior to the record date fixed for
the Home Shareholders' Meeting or any adjourned meeting thereof to
approve this Agreement and the transactions contemplated herein;
(i) promptly notify CU regarding receipt from any tax
authority of any notification of the commencement of an audit, any
request to extend the statute of limitations, any statutory notice of
deficiency, any revenue agent's report, any notice of proposed
assessment, or any other similar notification of potential adjustments
to the tax liabilities of Home and/or Home Bank, or any actual or
threatened collection enforcement activity by any tax authority with
respect to tax liabilities of Home and/or Home Bank;
(j) furnish to CU, as soon as practicable, and in any
event within fifteen days after it is prepared, (i) a copy of any
report submitted to the board of directors of Home or Home Bank,
provided, however, that Home need not furnish to CU communications of
Home's legal counsel regarding Home's rights and obligations under this
Agreement or books, records and documents covered by the
attorney-client privilege, or which are attorneys' work product, (ii)
copies of all reports, filings, certificates, correspondence and other
documents filed with or received from the SEC, FRB, FDIC,
Superintendent or any other governmental or regulatory entity, and
(iii) monthly unaudited consolidated balance sheets and consolidated
statements of operations of Home;
(k) not later than the 25th day of each calendar month,
amend or supplement the Schedules prepared and delivered pursuant to
Article IV (the "Home Schedules") to ensure that the information set
forth in such Home Schedules accurately reflects the then-current
status of Home and Home Bank. Home shall further amend or supplement
the Home Schedules as of the Closing Date if necessary to reflect any
additional information that needs to be included in the Home Schedules;
(l) use their respective best efforts to obtain any third
party consent with respect to any contract, agreement, lease, license,
amendment, permit or release that is material to the business of Home
on a consolidated basis or that is contemplated or required in
connection with this Agreement, the Merger or Bank Merger;
(m) promptly notify CU of the filing of any material
litigation, or the filing of any governmental or regulatory action,
including any investigation or notice of investigation, or similar
proceeding or notice of any claim against Home or Home Bank or any of
their assets; and
(n) prepare and timely file all tax returns and
amendments thereto required to be filed by them on or before the
Closing Date. CU shall have a reasonable opportunity to review all such
returns and amendments thereto on a pre-filing basis. Home and Home
Bank shall discharge all taxes, assessments and governmental charges in
the nature of taxes upon or against it or any of its
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properties or assets, and all tax liabilities at any time existing,
before the same shall become delinquent and before penalties accrue
thereon, except to the extent and as long as: (i) the same are being
contested in good faith and by appropriate proceedings pursued
diligently and in such manner not to cause any material adverse effect
upon the condition (financial or otherwise) or operations of Home or
Home Bank; and (ii) Home and Home Bank shall have set aside on their
books appropriate reserves in the amount of the demanded principal
imposition together with interest and penalties relating thereto, if
any.
6.4. Access to Information. Home and Home Bank will afford CU and
its representatives, counsel, accountants, agents and employees access during
normal business hours to all of their respective businesses, operations,
properties, books, files and records and will do everything reasonably necessary
to enable CU and its representatives, counsel, accountants, agents and employees
to make a complete examination of the financial statements, businesses, assets
and properties of Home and Home Bank and the condition thereof and to update
such examination at such intervals as CU shall deem appropriate. Such
examination shall be conducted in cooperation with the officers of Home and Home
Bank and in such a manner as to minimize any disruption of, or interference
with, the normal business operations of Home and Home Bank. Upon the request of
CU, Home will request that Arthur Andersen provide reasonable access to
auditors' work papers with respect to the businesses and properties of Home and
Home Bank, including tax accrual work papers prepared for Home and/or Home Bank
during the preceding sixty (60) months, other than (a) books, records and
documents covered by the attorney-client privilege, or that are attorneys' work
product, and (b) books, records and documents that Home or Home Bank is legally
obligated to keep confidential. No examination or review conducted under this
section shall constitute a waiver or relinquishment on the part of CU of the
right to rely upon the representations and warranties made by Home and Home Bank
herein; provided, that CU shall disclose in writing to Home any fact or
circumstance it may discover which CU believes renders any representation or
warranty made by Home or Home Bank hereunder incorrect in any respect. CU
covenants and agrees that it and its representatives, counsel, accountants,
agents and employees will hold in strict confidence all documents and
information concerning Home and Home Bank so obtained (except to the extent that
such documents or information are a matter of public record or require
disclosure in the Proxy Statement or any of the public information of any
applications required to be filed with any governmental or regulatory agency to
obtain the approvals and consents required to effect the transactions
contemplated hereby), and if the transactions contemplated herein are not
consummated, such confidence shall be maintained and all such documents shall be
returned to Home and Home Bank.
6.5. Filings. Home and Home Bank agree that through the Effective
Time, each of their respective reports, registrations, statements and other
filings required to be filed with any applicable governmental or regulatory
authority will comply in all material respects with all the applicable statutes,
rules and regulations enforced or promulgated by the governmental or regulatory
body with which it will be filed and none will contain any untrue statement of
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. Any financial statement contained in any
such report, registration, statement or other filing that is intended to present
the financial position of the entity or entities to which it relates will fairly
present the financial position of such entities or entity and will be prepared
in accordance with generally accepted accounting principles consistently applied
during the periods involved.
6.6. Notices; Reports. Home and Home Bank will promptly notify CU
of any event of which Home or Home Bank obtains knowledge which has had or may
reasonably be expected to have a materially adverse effect on the financial
condition, operations, business or prospects of Home on a consolidated basis
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or in the event that Home or Home Bank determines that either is unable to
fulfill any of the conditions to the performance of CU's obligations hereunder,
as set forth in Articles IX or XI herein, and Home and Home Bank will furnish CU
(i) as soon as available, and in any event within thirty (30) days after it is
prepared, any report by Home or Home Bank for submission to the Board of
Directors of Home or Home Bank, (ii) as soon as available, all proxy statements,
information statements, financial statements, reports, letters and
communications sent by Home to its shareholders or other security holders, and
all reports filed by Home or Home Bank with the SEC, FRB or FDIC, and (iii) such
other existing reports as CU may reasonably request relating to Home or Home
Bank.
6.7. Home Shareholders' Meeting. Promptly after the execution of
this Agreement, Home will take all action necessary in accordance with
applicable law and its Articles of Incorporation and Bylaws to convene a meeting
of its shareholders to consider and vote upon this Agreement and the
transactions contemplated hereby. The Board of Directors of Home shall, subject
to its fiduciary duties, recommend that its shareholders approve this Agreement
and the transactions contemplated hereby, and the Board of Directors of Home
shall, subject to its fiduciary duties, use its best efforts to obtain the
affirmative vote of the holders of the largest possible percentage of the
outstanding Home Stock to approve this Agreement and the transactions
contemplated hereby.
6.8. Bank Merger. Home and Home Bank shall (i) take all necessary
corporate and other action, to effect the Bank Merger; (ii) execute, deliver
and, where appropriate, file any and all documents necessary or desirable to
effect the Bank Merger; and (iii) take and cause Home Bank to take any other
action to permit the consummation of any transactions contemplated in connection
with the Bank Merger. Neither Home nor Home Bank shall take any action that
would prevent the performance of the Bank Merger.
6.9. Filings; Applications. Home and Home Bank will cooperate with
CU in the preparation of the Proxy Statement and S-4 and the statements or
applications to be filed to obtain the necessary regulatory approvals to
consummate the transactions contemplated by this Agreement. Home and Home Bank
covenant and agree that all information furnished by Home or Home Bank for
inclusion in the Proxy Statement and S-4 and in all applications or statements
filed with the appropriate regulatory authorities for approval of, or consent
to, the Merger and the Bank Merger will comply in all material respects with the
provisions of applicable law, and will not contain any untrue statement of
material fact or omit to state a 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.
6.10. Certain Loans and Other Extensions of Credit. Home Bank will
promptly inform CU 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 Home or Home Bank as "Criticized," "Specially Mentioned,"
"Substandard," "Doubtful," "Loss" or any comparable classification ("Classified
Credits"). Home Bank will furnish CU, as soon as practicable, and in any event
within 15 days after the end of each calendar month, schedules, including the
following: (a) Classified Credits (including with respect to each credit its
classification category and the originating unit); (b) nonaccrual credits
(including the originating unit); (c) accrual exception credits that are
delinquent 90 or more days and have not been placed on nonaccrual status
(including its originating unit); (d) credits delinquent as to payment of
principal or interest (including its originating unit), including an aging into
30-89 and 90+ day categories; (e) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the originating unit; (f)
loans or leases (including any commitments) by Home or Home Bank to any Home or
Home Bank director, officer at or above the senior vice president level, or
shareholder holding ten percent (10%) or more of the capital stock
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of Home, including with respect to each such loan or lease the identity and, to
the knowledge of Home, the relation of the borrower to Home or Home Bank, and
the outstanding and undrawn amounts; (g) letters of credit (including the
originating unit); (h) loans or leases wholly or partially charged off during
the previous month (including with respect to each loan or lease, the
originating amount, the write-off amount and its originating unit); and (i)
other real estate or assets acquired in satisfaction of debt.
6.11. Termination of Home Stock Option Plan. Home will take all
steps necessary to cause the Home Stock Option Plan to be terminated as of or
prior to the Effective Time, and will cause any options outstanding thereunder
to be either exercised (accompanied with the payment provided for in such
exercised option) on or before the Effective Time, or for those options not so
exercised, to obtain at the earliest practicable date and prior to the Effective
Time a revised stock option contract with each holder of such unexercised
options, incorporating such terms as may be necessary in order to make such
option contracts consistent with the New Stock Option Plan.
6.12. Environmental Audit. Home shall deliver to CU a Phase I
Environmental Assessment Report with respect to the property listed on Schedule
4.9 (the "Phase I Reports"), in a form reasonably satisfactory to CU. The
Parties agree to share equally any and all costs incurred in obtaining the Phase
1 Reports requested after the date hereof in connection with this Section 6.12.
Based on the Parties' review of the Phase I Reports, the Parties shall
determine, in good faith based on a reasonable assessment of the results of the
Phase I Reports, whether to obtain Phase II Site Assessments ("Phase II
Assessments") for any Home Real Property. The Parties shall mutually agree on
the environmental consultant to prepare any such Phase II Assessment and shall
share equally any and all costs incurred in obtaining such Phase II Assessments.
If the amount of remediation expenses related to the Home Real Property, as set
forth in the Phase II Assessments, is estimated to exceed $1,000,000, then Home
shall have an additional ninety (90) days from the date of receipt of such Phase
II Assessments within which to cure the excessive remediation costs and to
reduce the estimated costs of remediation to an amount below $1,000,000.
6.13. D&O Coverage. Home shall obtain (i) coverage for a period of
36 months following the Effective Time for the directors and officers of Home
and Home Bank under a directors' and officers' liability insurance policy which
is no less protective in terms of coverage or limitations then now possessed by
Home covering acts or omissions occurring prior to the Effective Time and (ii)
coverage for a period of at least 36 months following the Effective Time under a
bankers' blanket bond which is no less protective in terms of coverage or
limitations then now possessed by Home which covers losses incurred prior to the
Effective Time and actions related to this Agreement.
ARTICLE VII
COVENANTS OF CU AND CU BANK
PENDING EFFECTIVE TIME OF THE MERGERS
CU and CU Bank covenant and agree with Home and Home Bank as follows:
7.1. Limitation on CU's and CU Bank's Conduct Prior to Effective
Time. Between the date hereof and the Effective Time, except as contemplated by
this Agreement, CU and CU Bank agree to conduct their respective businesses only
in the normal and customary manner and in accordance with sound banking
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practices, and CU and CU Bank shall not, without prior written consent of Home
(which consent shall not be unreasonably withheld and which consent (except with
respect to subparagraph (h) of this Section 7.1) shall be deemed granted if
within five (5) business days of Home's receipt of written notice of a request
for prior written consent, written notice of objection is not received by CU):
(a) except in connection with the Corporate Bank Merger,
issue any CU Stock (except pursuant to the exercise of CU Options
outstanding as of the date hereof), CU preferred stock, CU Bank Stock,
CU Bank preferred stock, any other securities (including long term
debt) of CU or CU Bank or any rights, options or securities to acquire
any CU Stock, CU preferred stock, CU Bank Stock, CU Bank preferred
stock or any other securities (including long term debt) of CU or CU
Bank;
(b) except in accordance with CU's customary and past
practice of paying dividends in an amount equal to $.02 per quarter,
declare, set aside or pay any dividend or make any other distribution
upon, or purchase or redeem any shares of, CU Stock;
(c) except as may be required to effect the transactions
contemplated herein, amend its Articles of Incorporation or
Association, as the case may be, or its Bylaws; provided, however, that
CU Bank shall be permitted to amend and restate its Articles of
Association in the form previously submitted to Home's counsel;
(d) grant any general or uniform increase in the rate of
pay of employees or employee benefits;
(e) grant any material increase in salary, incentive
compensation or employee benefits or pay any bonus to any Person except
for payments in the ordinary course of business consistent with past
practices or pursuant to any pre-existing contract, arrangement or
bonus plan;
(f) make any capital expenditure in excess of $100,000,
except for ordinary repairs, renewals and replacements;
(g) compromise or otherwise settle or adjust any
assertion or claim of a deficiency in taxes (or interest thereon or
penalties in connection therewith), extend the statute of limitations
with any tax authority or file any pleading in court in any tax
litigation or any appeal from an asserted deficiency;
(h) grant or commit to grant any new extension of credit
or amend the terms of any such credit outstanding on the date hereof to
any executive officer, director or holder of ten percent (10%) or more
of the outstanding CU Stock, or to any corporation, partnership, trust
or other entity controlled by any such person, except consistent with
practices and policies in existence as of the date of this Agreement;
(i) close or open any offices at which business is
conducted except in connection with Corporate Bank Merger;
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(j) adopt or amend any CU Employee Plan or other benefit
plan or arrangement of any such type except for such amendments as are
required by law or do not materially increase the costs or benefits of
such plan or arrangement;
(k) change any of CU's or CU Bank's policies and
practices with respect to liquidity management and cash flow planning,
lending, personnel practices, accounting or any other material aspect
of CU's business or operations on a consolidated basis, except such
changes as may be required in the opinion of CU's or CU Bank's
management to respond to economic or market conditions or as may be
required by the rules of the American Institute of Certified Public
Accountants or Financial Accounting Standards Board or by applicable
governmental authorities;
(l) grant any Person a power of attorney or similar
authority;
(m) make any material investment by purchase of stock or
securities, contributions to capital, property transfers or otherwise
in any other Person, except for investments made in the ordinary course
of business consistent with past practice;
(n) amend, modify or terminate, except in accordance with
its terms, any CU Scheduled Contract or enter into any agreement or
contract that would be a CU Scheduled Contract under Section 5.16;
(o) create or incur or suffer to exist any mortgage,
lien, pledge, security interest, charge, encumbrance or restraint of
any kind against or in respect of any property or right of CU and/or CU
Bank;
(p) sell, lease or otherwise dispose of any of its assets
which are material, individually or in the aggregate, to CU or CU Bank,
except in the ordinary course of business consistent with past
practice;
(q) make any extraordinary payment to any Person; or
(r) except as required by law, take or cause to be taken
any action which would prevent the transactions contemplated hereby
form qualifying as tax free reorganizations under Section 368 of the
Code.
7.2. No Solicitation, etc.
(a) CU and CU Bank shall not, and shall cause each of
their respective officers, directors, employees, agents, legal and
financial advisors and Affiliates not to, directly or indirectly,
solicit, initiate or, except as contemplated by Section 7.2(b) hereof,
encourage, entertain or enter into any agreement or agreement in
principle, or announce any intention to do any of the foregoing, with
respect to any Alternative Transaction, other than the Alternative
Transaction contemplated by this Agreement.
(b) CU or CU Bank shall not, and shall cause each of its
officers, directors, employees, agents, legal and financial advisors
and Affiliates not to, directly or indirectly, participate in any
negotiations or discussions regarding, or furnish any information with
respect to, or otherwise
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cooperate in any way in connection with, or assist or participate in,
facilitate or encourage, any effort or attempt to effect any
Alternative Transaction with or involving any Person other than Home or
Home Bank, unless CU or CU Bank shall have received an unsolicited
written offer from a Person other than Home or Home Bank to effect an
Alternative Transaction and the Board of Directors of CU determines,
based on an opinion of counsel, that in the exercise of the fiduciary
obligations of the Board of Directors such information should be
provided to or such discussions or negotiations undertaken with the
Person submitting such unsolicited written offer.
(c) CU will promptly communicate to Home the terms of any
proposal which it may receive in respect of any Alternative Transaction
and will keep Home informed as to the status of any actions, including
negotiations or discussions, taken pursuant to subsection (b) of this
Section 7.2.
7.3. Affirmative Conduct of CU and CU Bank Prior to Effective Time.
Between the date hereof and the Effective Time, CU and CU Bank shall:
(a) use and devote their respective best efforts
consistent with this Agreement to maintain and preserve intact their
respective present business organizations and to maintain and preserve
their respective relationships and goodwill with account holders,
borrowers, employees and others having business relationships with CU
or CU Bank;
(b) use their respective best efforts to keep in full
force and effect all of the existing material permits and licenses of
CU or CU Bank;
(c) use their respective best efforts to maintain
insurance coverage at least equal to that now in effect on all
properties for which they are responsible and on their respective
business operations;
(d) perform their respective material contractual
obligations and not become in material default on any thereof;
(e) 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;
(f) duly observe and conform to all lawful requirements
applicable to their respective businesses that are material to the
business of CU on a consolidated basis;
(g) maintain their respective assets and properties in
good condition and repair, normal wear and tear excepted;
(h) promptly advise Home in writing of any event or any
other transaction within CU's or CU Bank's knowledge whereby any Person
or Related Group of Persons acquires, directly or indirectly, record or
beneficial ownership or control (as defined in Rule 13d-3 promulgated
by the SEC under the Exchange Act) of five percent (5%) or more of the
outstanding CU Stock prior to the record date fixed for the CU
Shareholders' Meeting or any adjourned meeting thereof to approve this
Agreement and the transactions contemplated herein;
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(i) promptly notify Home regarding receipt from any tax
authority of any notification of the commencement of an audit, any
request to extend the statute of limitations, any statutory notice of
deficiency, any revenue agent's report, any notice of proposed
assessment, or any other similar notification of potential adjustments
to the tax liabilities of CU and/or CU Bank, or any actual or
threatened collection enforcement activity by any tax authority with
respect to tax liabilities of CU and/or CU Bank;
(j) furnish to Home, as soon as practicable, and in any
event within fifteen days after it is prepared (i) a copy of any report
submitted to the board of directors of CU or CU Bank, provided,
however, that CU need not furnish to Home communications of CU's legal
counsel regarding CU's rights and obligations under this Agreement or
books, records and documents covered by the attorney-client privilege,
or which are attorneys' work product, (ii) copies of all reports,
filings, certificates, correspondence and other documents filed with or
received from the SEC, FRB, FDIC, OCC or any other governmental or
regulatory entity, and (iii) monthly unaudited consolidated balance
sheets and consolidated statements of operations of CU;
(k) not later than the 25th day of each calendar month,
amend or supplement the Schedules prepared and delivered pursuant to
Article IV (the "CU Schedules") to ensure that the information set
forth in such CU Schedules accurately reflects the then-current status
of CU and CU Bank; provided, however, that any such amendment or
supplement required solely as a result of the Corporate Bank Merger
shall be due not later than the 60th day after the consummation of the
Corporate Bank Merger. CU shall further amend or supplement the CU
Schedules as of the Closing Date if necessary to reflect any additional
information that needs to be included in the CU Schedules;
(l) use their respective best efforts to obtain any third
party consent with respect to any contract, agreement, lease, license,
amendment, permit or release that is material to the business of CU on
a consolidated basis or that is contemplated or required in connection
with the Merger or Bank Merger;
(m) promptly notify Home of the filing of any material
litigation, or the filing of any governmental or regulatory action,
including any investigation or notice of investigation, or similar
proceeding, or notice of any claim against CU or CU Bank or any of
their assets; and
(n) prepare and timely file all tax returns and
amendments thereto required to be filed by them on or before the
Closing Date. Home shall have a reasonable opportunity to review all
such returns and amendments thereto on a pre-filing basis. CU and CU
Bank shall discharge all taxes, assessments and governmental charges in
the nature of taxes upon or against it or any of its properties or
assets, and all tax liabilities at any time existing, before the same
shall become delinquent and before penalties accrue thereon, except to
the extent and as long as: (i) the same are being contested in good
faith and by appropriate proceedings pursued diligently and in such
manner not to cause any material adverse effect upon the condition
(financial or otherwise) or operations of CU or CU Bank; and (ii) CU
and CU Bank shall have set aside on their books appropriate reserves in
the amount of the demanded principal imposition together with interest
and penalties relating thereto, if any.
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7.4. Access to Information. CU and CU Bank will afford Home and its
representatives, counsel, accountants, agents and employees access during normal
business hours to all of their respective businesses, operations, properties,
books, files and records and will do everything reasonably necessary to enable
Home and its representatives, counsel, accountants, agents and employees to make
a complete examination of the financial statements, businesses, assets and
properties of CU and CU Bank and the condition thereof and to update such
examination at such intervals as Home shall deem appropriate. Upon the
consummation of the Corporate Bank Merger, CU and CU Bank will afford Home and
its representatives everything reasonably necessary to evaluate and make a
complete examination of the Corporate Bank Merger. Such examination shall be
conducted in cooperation with the officers of CU and CU Bank and in such a
manner as to minimize any disruption of, or interference with, the normal
business operations of CU and CU Bank. Upon the request of Home, CU will request
that Arthur Andersen provide reasonable access to auditors' work papers with
respect to the businesses and properties of CU and CU Bank, including tax
accrual work papers prepared for CU and/or CU Bank during the preceding sixty
(60) months, other than (a) books, records and documents covered by the
attorney-client privilege, or that are attorneys' work product, and (b) books,
records and documents that CU or CU Bank is legally obligated to keep
confidential. No examination or review conducted under this section shall
constitute a waiver or relinquishment on the part of Home of the right to rely
upon the representations and warranties made by CU and CU Bank herein; provided,
that Home shall disclose in writing to CU any fact or circumstance it may
discover which Home believes renders any representation or warranty made by CU
or CU Bank hereunder incorrect in any respect. Home covenants and agrees that it
and its representatives, counsel, accountants, agents and employees will hold in
strict confidence all documents and information concerning CU and CU Bank so
obtained (except to the extent that such documents or information are a matter
of public record or require disclosure in the Proxy Statement or any of the
public information of any applications required to be filed with any
governmental or regulatory agency to obtain the approvals and consents required
to effect the transactions contemplated hereby), and if the transactions
contemplated herein are not consummated, such confidence shall be maintained and
all such documents shall be returned to CU and CU Bank.
7.5. Filings. CU and CU Bank agree that through the Effective Time,
each of their respective reports, registrations, statements and other filings
required to be filed with any applicable governmental or regulatory authority
will comply in all material respects with all the applicable statutes, rules and
regulations enforced or promulgated by the governmental or regulatory body with
which it will be filed and none will contain any untrue statement of 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. Any financial statement contained in any such report,
registration, statement or other filing that is intended to present the
financial position of the entity or entities to which it relates will fairly
present the financial position of such entities or entity and will be prepared
in accordance with generally accepted accounting principles consistently applied
during the periods involved.
7.6. Notices; Reports. CU and CU Bank will promptly notify Home of
any event of which CU or CU Bank obtains knowledge which has had or may
reasonably be expected to have a materially adverse effect on the financial
condition, operations, business or prospects of CU on a consolidated basis or in
the event that CU or CU Bank determines that either is unable to fulfill any of
the conditions to the performance of Home's obligations hereunder, as set forth
in Articles IX or XI herein, and CU and CU Bank will furnish Home (i) as soon as
available, and in any event within thirty (30) days after it is prepared, any
report by CU or CU Bank for submission to the Board of Directors of CU or CU
Bank, (ii) as soon as available, all proxy statements, information statements,
financial statements, reports, letters and communications sent by CU to
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its shareholders or other security holders, and all reports filed by CU or CU
Bank with the SEC, FRB or FDIC, and (iii) such other existing reports as Home
may reasonably request relating to CU or CU Bank.
7.7. CU Shareholders' Meeting. Promptly after the execution of this
Agreement, CU will take all action necessary in accordance with applicable law
and its Articles of Incorporation and Bylaws to convene a meeting of its
shareholders to consider and vote upon this Agreement and the transactions
contemplated hereby. The Board of Directors of CU shall, subject to its
fiduciary duties, recommend that its shareholders approve this Agreement and the
transactions contemplated hereby, and the Board of Directors of CU shall,
subject to its fiduciary duties, use its best efforts to obtain the affirmative
vote of the holders of the largest possible percentage of the outstanding CU
Stock to approve this Agreement and the transactions contemplated hereby.
7.8. Bank Merger. CU and CU Bank shall (i) take all necessary
corporate and other action to effect the Bank Merger; (ii) execute, deliver and,
where appropriate, file any and all documents necessary or desirable to permit
the Bank Merger; and (iii) take and cause CU Bank to take any other action to
permit the consummation of the Bank Merger. Neither CU nor CU Bank shall take
any action that would prevent performance of the Bank Merger.
7.9. Filings; Applications. CU and CU Bank will prepare promptly
and file the Proxy Statement, the S-4 and any statements or applications
necessary to obtain the regulatory approvals required to consummate the
transactions contemplated by this Agreement. CU and CU Bank covenant and agree
that all information included by CU or CU Bank in the Proxy Statement and S-4
and in all applications or statements filed with the appropriate regulatory
authorities for approval of, or consent to, the Merger and the Bank Merger, and
other transactions contemplated by this Agreement, will comply in all material
respects with the provisions of applicable law, and will not contain any untrue
statement of material fact or 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.
7.10. Certain Loans and Other Extensions of Credit. CU Bank will
promptly inform Home 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 CU or CU Bank as "Criticized," "Specially Mentioned,"
"Substandard," "Doubtful," "Loss" or any comparable classification ("Classified
Credits"). CU Bank will furnish Home, as soon as practicable, and in any event
within 15 days after the end of each calendar month, schedules including the
following: (a) Classified Credits (including with respect to each credit its
classification category and the originating unit); (b) nonaccrual credits
(including the originating unit); (c) accrual exception credits that are
delinquent 90 or more days and have not been placed on nonaccrual status
(including its originating unit); (d) credits delinquent as to payment of
principal or interest (including its originating unit), including an aging into
30-89, and 90+ day categories; (e) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the originating unit; (f)
loans or leases (including any commitments) by CU or CU Bank to any CU or CU
Bank director, officer at or above the senior vice president level, or
shareholder holding ten percent (10%) or more of the capital stock of CU,
including with respect to each such loan or lease the identity and, to the
knowledge of CU, the relation of the borrower to CU or CU Bank, and the
outstanding and undrawn amounts; (g) letters of credit (including the
originating unit); (h) loans or leases wholly or partially charged off during
the previous month (including with respect to each loan or lease, the
originating amount, the write-off amount and its originating unit); and (i)
other real estate or assets acquired in satisfaction of debt.
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7.11. CU Stock Option Plan. CU will take all steps necessary to
adopt the New Stock Option Plan and take any other actions necessary or
appropriate as of or prior to the Effective Time, in order to effect the
transactions contemplated by Section 2.9. CU shall recommend that its
shareholders approve the New Stock Option Plan and the Board of Directors of CU
shall, subject to its fiduciary duties, use its best efforts to obtain the
affirmative vote of the outstanding CU Stock to approve such New Stock Option
Plan.
7.12. Dividends. Subject to applicable law and regulations and the
good faith determination of the Surviving Company Board of Directors, it is the
intention of CU that the Surviving Company shall pay quarterly dividends to its
shareholders for each of the eight quarters following the Effective Time in an
amount per share which is no less than $.06 per share.
7.13. Articles of Incorporation. CU will take all steps necessary to
amend its Articles of Incorporation, including without limitation obtaining
shareholder approval at the CU Shareholders' meeting, to effect any name change
of the Surviving Company agreed upon by the Parties in accordance with Section
2.6.
ARTICLE VIII
GENERAL COVENANTS
The parties hereto hereby mutually covenant and agree with each other
as follows:
8.1. Best Efforts. Subject to the terms and conditions of this
Agreement, each party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement as promptly as practical.
8.2. Public Announcements. CU and Home will consult with each other
before any Party hereto issues any press release or makes any public statement
with respect to this Agreement or the transactions contemplated hereby, and
except as may be required by applicable law or any listing agreement, neither CU
nor Home will issue any such press release or make any such public statement
prior to such consultation.
8.3. S-4 and the Proxy Statement. Home and CU shall use their
respective best efforts to have the S-4 declared effective under the Securities
Act as promptly as practicable. CU shall take any action required to be taken
under any applicable state securities laws in connection with the issuance of CU
Stock in the Merger, and Home shall furnish all information concerning Home as
may be reasonably requested in connection with any such action. Each Party shall
immediately notify the other Party in writing in the event that such Party
becomes aware that the S-4 or Proxy Statement at any time contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading or that
the S-4 or the Proxy Statement otherwise is required to be amended or
supplemented, which notice shall specify, in reasonable detail, the
circumstances thereof.
8.4. Merger of Home Bank and CU Bank. The parties agree to use
their reasonable efforts between the date of this Agreement and the Closing to
take all actions necessary or desirable, including the filing of any regulatory
applications, so that the Bank Merger will occur substantially concurrently
with, or
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as soon as practicable after, the Effective Time. A copy of the Bank Merger
Agreement is attached hereto as Exhibit B. The original of such Bank Merger
Agreement shall be executed and delivered as soon as practicable after the
execution and delivery of this Agreement.
ARTICLE IX
CONDITIONS PRECEDENT TO THE MERGERS
The obligations of each of the Parties hereto to consummate the
transactions contemplated herein are subject to the satisfaction, on or before
the Closing Date, of the following conditions:
9.1. Shareholder Approval. The transactions contemplated hereby
shall have received all requisite approvals of the shareholders of CU, CU Bank,
Home and Home Bank.
9.2. No Judgments or Orders. No judgment, decree, injunction, order
or proceeding shall be outstanding or threatened by any governmental entity
which prohibits or restricts the effectuation of, or threatens to invalidate or
set aside, the Merger or the Bank Merger substantially in the form contemplated
by this Agreement, unless counsel to the party against whom such action or
proceeding was instituted or threatened renders to the other parties hereto a
favorable opinion that such judgment, decree, injunction, order or proceeding is
without merit.
9.3. 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 FRB and the OCC shall have been
obtained or granted for the Merger and Bank Merger and the transactions
contemplated hereby, and the applicable waiting period under all laws shall have
expired. All other statutory or regulatory requirements for the valid completion
of the transactions contemplated hereby shall have been satisfied.
9.4. Tax Opinion. CU and Home shall have received an opinion from
Manatt, Phelps & Phillips or Arthur Andersen that the Merger and the Bank Merger
will not result in the recognition of gain or loss for federal income tax
purposes to CU, CU Bank, Home or Home Bank, nor will the issuance of the CU
Stock result in the recognition of gain or loss by the holders of Home Stock who
receive such stock in connection with the Merger.
9.5. Pooling of Interests Accounting Treatment. Arthur Andersen
shall have confirmed in writing to CU and Home that the Merger and Bank Merger
will qualify for pooling of interests accounting treatment.
9.6. S-4 and Proxy Statement. The S-4 shall have become effective
under the Securities Act and shall not be subject to any stop order or
proceeding seeking a stop order and copies of the Proxy Statement shall have
been mailed to every shareholder of record of CU and Home on the record date not
less than 20 days prior to the date of the shareholders' meetings called to act
upon the Merger.
9.7. Dissenters. The sum of (i) the shares of Home Stock that will
not be converted into CU Stock due to the exercise of dissenters' rights granted
under the California Corporations Code and (ii) the shares of CU Stock that
become Dissenting Shares shall not exceed 10% of the aggregate number of issued
and outstanding shares of Home Stock and CU Stock.
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ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF HOME AND HOME BANK
All of the obligations of Home and Home Bank to effect the transactions
contemplated hereby shall be subject to the satisfaction, on or before the
Closing Date, of the following conditions, any of which may be waived in writing
by Home and Home Bank:
10.1. Legal Opinion. Home and Home Bank shall have received the
opinion of Anita Wolman, general counsel of CU and CU Bank, dated as of the
Closing Date, in substantially the form of Exhibit E hereto.
10.2. Representations and Warranties; Performance of Covenants. All
covenants, terms and conditions of this Agreement to be complied with and
performed by CU and CU Bank at or before the Closing Date shall have been
complied with and performed in all material respects; the representations and
warranties of CU and CU Bank contained in Article V hereof shall have been true
and correct in all material respects on and as of the date of this Agreement and
on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date. It
is understood and acknowledged that the representations being made on and as of
the Closing Date shall be made with respect to the CU Schedules as updated in
accordance with Section 7.3(k).
10.3. Authorization of Mergers; Option Plan.
(a) All actions necessary to authorize the execution,
delivery and performance of this Agreement, the Agreement of Merger and the Bank
Merger Agreement by CU and CU Bank, as the case may be, and the consummation of
the transactions contemplated hereby and thereby shall have been duly and
validly taken by the Board of Directors and shareholders of CU and CU Bank, as
the case may be, as required by applicable law, and CU and CU Bank shall have
full power and right to merge pursuant to the Agreement of Merger and Bank
Merger Agreement, respectively.
(b) The shareholders of CU shall have voted in favor of
the adoption of the New Stock Option Plan.
10.4. Absence of Certain Changes. Between the date of this Agreement
and the Effective Time, there shall not have occurred any event that has had or
could reasonably be expected to have a material adverse effect on the business,
financial condition, results of operations or prospects of CU on a consolidated
basis, whether or not such event, change or effect is reflected in the CU
Schedules as amended or supplemented after the date of this Agreement.
10.5. Officers' Certificate. There shall have been delivered to Home
and Home Bank on the Closing Date a certificate executed by the Chief Executive
Officer and the Chief Financial Officer of CU certifying , to the best of their
knowledge, compliance with all of the provisions of Sections 10.2, 10.3 and
10.4.
10.6. Fairness Opinion. Home shall have received a letter from Piper
Jaffray Inc., dated as of a date within five (5) days of the mailing of the
Proxy Statement and S-4 to the shareholders of Home, to the
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effect that the transactions contemplated by this Agreement are fair from a
financial point of view to the shareholders of Home.
10.7. Shareholder's Voting Agreements. Concurrently with the
execution of this Agreement, the CU directors shall have executed and delivered
to Home an agreement substantially in the form of Exhibit F.
10.8. Home Warrant Agreement. Concurrently with the execution of
this Agreement, CU shall have executed and delivered to Home the Home Warrant
and the Home Warrant Agreement.
10.9. Appointment of Directors. All necessary action shall have been
taken to have the five persons designated by Home elected or appointed to serve,
from and after the Effective Time, as directors of Surviving Company.
10.10. 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
Home or Home Bank hereunder, shall be subject to the approval, to be reasonably
exercised, of Manatt, Phelps & Phillips, special counsel for Home and Home Bank.
10.11. Third Party Consents. CU and CU Bank shall have obtained all
consents of other parties to their respective material mortgages, notes, leases,
franchises, agreements, licenses and permits as may be necessary to permit the
Merger and the Bank Merger and the transactions contemplated herein to be
consummated without a material default, acceleration, breach or loss of rights
or benefits thereunder.
10.12. NASDAQ Listing. The shares of CU Stock issuable pursuant to
this Agreement shall have been duly authorized for listing, subject to notice of
issuance, on the NASDAQ, National Market System or any other national exchange
on which the shares of CU Stock may be listed.
10.13. CU Board. All necessary action shall have been taken to have
the five persons designated by CU elected or appointed to serve, from and after
the Effective Time, as directors of the Surviving Company and CU shall have
delivered to Home the written resignations of those directors of CU who will not
be serving on the Surviving Company's Board of Directors.
10.14. Non-Performing Loans. CU Bank's Non-Performing Loans shall not
exceed 75% of (i) the shareholders' equity of CU Bank plus (ii) the loan loss
reserves of CU Bank.
ARTICLE XI
CONDITIONS PRECEDENT TO OBLIGATIONS OF CU AND CU BANK
All of the obligations of CU and CU Bank to effect the transactions
contemplated hereby shall be subject to the satisfaction, on or before the
Closing Date, of the following conditions, any of which may be waived in writing
by CU and CU Bank:
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11.1. Legal Opinion. CU and CU Bank shall have received the opinion
of Manatt, Phelps & Phillips., special counsel to Home and Home Bank, dated as
of the Closing Date, in substantially the form of Exhibit G hereto.
11.2. Representations and Warranties; Performance of Covenants. All
the covenants, terms and conditions of this Agreement to be complied with and
performed by Home or Home Bank at or before the Closing Date shall have been
complied with and performed in all material respects; the representations and
warranties of Home and Home Bank contained in Article IV hereof shall have been
true and correct in all material respects on and as of the date of this
Agreement and on and as of the Closing Date, with the same effect as though such
representations and warranties had been made on and as of the Closing Date. It
is understood and acknowledged that the representations being made on and as of
the Closing Date shall be made with respect to the Home Schedules as updated in
accordance with Section 7.3(j).
11.3. Authorization of Mergers. All actions necessary to authorize
the execution, delivery and performance of this Agreement, the Agreement of
Merger and the Bank Merger Agreement by Home and Home Bank, as the case may be,
and the consummation of the transactions contemplated hereby and thereby shall
have been duly and validly taken by the Boards of Directors and shareholders of
Home and Home Bank, as the case may be, as required by applicable law, and Home
and Home Bank shall have full power and right to merge pursuant to the Agreement
of Merger and Bank Merger Agreement, respectively.
11.4. Regulatory Approvals and Related Conditions. Any governmental
and regulatory approvals and consents which are referred to in this Agreement
and are required to consummate the Merger and the Bank Merger shall have been
granted without the imposition of conditions that are or would have become
applicable to CU or the Surviving Bank and that CU reasonably and in good faith
concludes would materially adversely affect the consolidated financial condition
or operations of CU or otherwise would be materially burdensome to CU on a
consolidated basis and all applicable waiting periods shall have expired.
11.5. Third Party Consents. Home and Home Bank shall have obtained
all consents of other parties to their respective material mortgages, notes,
leases, franchises, agreements, licenses and permits as may be necessary to
permit the Merger and Bank Merger and the transactions contemplated herein to be
consummated without a material default, acceleration, breach or loss of rights
or benefits thereunder.
11.6. Absence of Certain Changes. Between the date of this Agreement
and the Effective Time, there shall not have occurred any event that has had or
could reasonably be expected to have a material adverse effect on the business,
financial condition, results of operations or prospects of Home on a
consolidated basis, whether or not such event, change or effect is reflected in
the Home Schedules as amended or supplemented after the date of this Agreement.
11.7. Officers' Certificate. There shall have been delivered to CU
on the Closing Date a certificate executed by the President and the Chief
Financial Officer of each of Home and Home Bank certifying, to the best of their
knowledge, compliance with all of the provisions of Sections 11.2, 11.3, 11.5
and 11.6.
11.8. Fairness Opinion. CU shall have received a letter from Van
Kasper & Company dated as of a date within five (5) days of the mailing of the
Proxy Statement to the shareholders of CU, to the effect that the transactions
contemplated by this Agreement are fair from a financial point of view to the
shareholders of CU.
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11.9. 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 CU
hereunder, shall be subject to the approval, to be reasonably exercised, of
Anita Wolman, general counsel of CU.
11.10. Blue Sky Matters. The issuance of the CU Stock in the Merger
shall have been qualified or registered with the appropriate governmental entity
under state securities or Blue Sky laws, and such qualifications or
registrations are in effect on the Closing Date.
11.11. Insurance Coverage. Home shall have obtained (i) coverage for
a period of 36 months following the Effective Time for the directors and
officers of Home and Home Bank under a directors' and officers' liability
insurance policy covering acts or omissions occurring prior to the Effective
Time and (ii) coverage for a period of at least 36 months following the
Effective Time under a bankers' blanket bond which is no less protective in
terms of coverage or limitations than possessed by Home prior to the Effective
Time which covers losses incurred prior to the Effective Time and actions
related to this Agreement.
11.12. Shareholder's Voting Agreements. Concurrently with the
execution of this Agreement, the Home directors shall have executed and
delivered to CU an agreement substantially in the form of Exhibit H.
11.13. CU Warrant Agreement. Concurrently with the execution of this
Agreement, Home shall have executed and delivered to CU the CU Warrant and the
CU Warrant Agreement.
11.14. Affiliate Agreements. Those persons listed on Annex I hereto
shall have executed and delivered to CU an agreement in substantially the form
of Exhibit I.
11.15. Non-Performing Loans. Home Bank's Non-Performing Loans shall
not exceed 75% of (i) the shareholders' equity of Home Bank as of the month end
prior to the Effective Time plus (ii) the loan loss reserves of Home Bank.
11.16. Absence of Excess Remediation. Subject to Home's right to cure
pursuant to Section 6.12 hereto, the Home Real Property, based on a reasonable
analysis of the Phase II Assessments, shall not require remediation expenses in
excess of $1,000,000.
ARTICLE XII
EMPLOYEE BENEFITS
12.1. Employee Benefits. At and as of the Effective Time the former
officers and employees of Home and Home Bank who become officers and employees
of the Surviving Bank ("Transferred Employees") shall, in that capacity, be
entitled to participate in all employee benefits and benefit programs of the
Surviving Bank in accordance with the terms of such employee benefit programs.
Surviving Bank shall recognize such Transferred Employees' service with Home and
Home Bank for purposes of eligibility and vesting under all such benefit
programs. Surviving Bank shall also cover under its health plans, without the
application of any pre-existing limitation or exclusion, all Transferred
Employees and their covered dependents who are covered under similar Home or
Home Bank health plans as of the Closing Date and who
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change coverage to Surviving Bank's health plans at the time such Transferred
Employees are first provided the option to enroll in Surviving Bank's health
plans.
ARTICLE XIII
TERMINATION
13.1. Termination. This Agreement may be terminated at any time
prior to the Effective Time of the Merger upon the occurrence of any of the
following:
(a) By mutual agreement of the parties, in writing;
(b) By Home or CU immediately upon the failure of the
shareholders of Home or CU to approve this Agreement and the
transactions contemplated hereby;
(c) By Home immediately upon expiration of twenty (20)
days from delivery of written notice by Home to CU of CU's breach of or
failure to satisfy any covenant or agreement contained herein resulting
in a material impairment of the benefit reasonably expected to be
derived by Home from the performance or satisfaction of such covenant
or agreement (provided that such breach has not been waived by Home and
Home Bank or cured by CU prior to expiration of such twenty (20) day
period);
(d) By CU immediately upon expiration of twenty (20) days
from delivery of written notice by CU to Home of Home's or Home Bank's
breach of or failure to satisfy any covenant or agreement contained
herein resulting in a material impairment of the benefit reasonably
expected to be derived by CU and CU Bank from the performance or
satisfaction of such covenant or agreement (provided that such breach
has not been waived by CU or cured by Home or Home Bank, as the case
may be, prior to expiration of such twenty (20) day period);
(e) By Home or CU upon the expiration of thirty (30) days
after any governmental or regulatory authority denies or refuses to
grant any approval, consent or authorization required to be obtained in
order to consummate the transactions contemplated by this Agreement
unless, within said thirty (30) day period after such denial or
refusal, all parties hereto agree to submit the application to the
regulatory authority that has denied; or refused to grant the approval,
consent or qualification requested; or
(f) By Home, if any conditions set forth in Article X
shall not have been met, by CU if any conditions set forth in Article
XI shall not have been met, or by Home or CU, if any conditions set
forth in Article IX shall not have been met by September 30, 1996, or
such earlier time as it becomes apparent that such conditions cannot be
met.
13.2. Termination Date. This Agreement shall be terminated if the
Closing Date shall not have occurred by September 30, 1996, unless extended in
writing by the parties.
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13.3. Effect of Termination. No termination of this Agreement under
this Article XIII for any reason or in any manner shall release, or be construed
as so releasing, CU or CU Bank or Home or Home Bank from their respective
obligations under the CU Warrant Agreement or Home Warrant Agreement, the last
sentence of Section 6.4, Section 7.4 or under Section 14.1 hereof, or any party
hereto 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.
ARTICLE XIV
MISCELLANEOUS
14.1. 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, the Agreement of Merger, the Bank Merger and
the transactions covered and contemplated hereby and thereby. Notwithstanding
the foregoing, CU and Home shall share equally the cost of printing the Proxy
Statement and S-4.
14.2. Notices. Any notice, request, instruction or other document to
be given hereunder by any party hereto to another shall be in writing and
delivered personally or by facsimile transmission or sent by registered or
certified mail, postage prepaid, with return receipt requested, addressed as
follows:
To CU or CU Bank: 16030 Ventura Boulevard
Encino, California 91436-4487
Attention: Stephen G. Carpenter
Facsimile Number: (818) 907-5024
With a copy to: Anita Wolman, Esq.
16030 Ventura Boulevard
Encino, California 91436-4487
To Home or Home Bank: Home Bancorp
2633 Cherry Avenue
Signal Hill, California 90806
Attention: Jim Staes
Facsimile Number: (310) 426-4526
With copies to: Manatt, Phelps & Phillips
11355 West Olympic Boulevard
Los Angeles, California 90064
Attention: Barbara S. Polsky, Esq.
Facsimile Number: (310) 312-4224
Any such notice, request, instruction or other document shall be deemed
received on the date delivered personally or sent by facsimile transmission, or
on the third business day after it was sent by registered or certified mail,
postage prepaid. Any of the persons shown above may change its address for
purposes of this section by giving notice in accordance herewith.
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14.3. Successors and Assigns. All terms and conditions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective transferees, successors and assigns; provided,
however, that 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 hereto.
14.4. Counterparts. This Agreement may be executed in one or more
counterparts, all of which, taken together, shall constitute one original
document.
14.5. Effect of Representations and Warranties. The representations
and warranties contained in this Agreement or the Schedules shall terminate
immediately after the Effective Time.
14.6. Third Parties. Each party hereto intends that this Agreement
shall not benefit or create any right or cause of action to any person other
than parties hereto.
14.7. Lists; Exhibits; Integration. Each Schedule, exhibit and
letter delivered pursuant to this Agreement shall be in writing and shall
constitute a part of the Agreement, although Schedules and letters need not be
attached to each copy of this Agreement. This Agreement, together with such
Schedules, exhibits and letters, constitutes the entire agreement between the
parties pertaining to the subject matter hereof and supersedes all prior
agreements and understandings of the parties in connection therewith.
14.8. Knowledge. In all representations and warranties concerning
the knowledge of Home, Home Bank, CU or CU Bank, wherever included herein, the
only knowledge imputed to Home, Home Bank, CU or CU Bank shall be the knowledge
of their respective officers at the level of senior vice-president and above.
14.9. Governing Law. This Agreement is made and entered into in the
State of California, except to the extent that the provisions of federal law are
mandatorily applicable, and 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.
14.10. Schedules. The Schedules are an integral part of this
Agreement, and each Schedule shall be applicable as if set forth in full in the
text hereof. In the event there is any absolute unconditional representation
contained in this Agreement, said representation shall be modified by any
contrary information set forth in any Schedule. In the event there is any
representation contained in this Agreement that is modified by a Schedule, said
representation shall also be modified by any other applicable information
contained in any other Schedule.
14.11. Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement and shall
not affect the interpretation hereof.
14.12. Severability. If any portion of this Agreement shall be deemed
by a court of competent jurisdiction to be unenforceable, the remaining portions
shall be valid and enforceable only if, after excluding the portion deemed to be
unenforceable, the remaining terms hereof shall provide for the consummation of
the transactions contemplated herein in substantially the same manner as
originally set forth at the date this Agreement was executed.
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14.13. 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. Except as otherwise
required by law, this Agreement, the Agreement of Merger and Bank Merger
Agreement, when executed and delivered, may be modified or amended by action of
the Boards of Directors of CU, CU Bank, Home or Home Bank 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.
14.14. Attorney's 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).
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14.15. 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.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed
this Agreement as of the day and year first above written.
CU BANCORP
By:_______________________________
Name:
Title:
CALIFORNIA UNITED BANK,
NATIONAL ASSOCIATION
By:_______________________________
Name:
Title:
HOME INTERSTATE BANCORP
By:_______________________________
Name:
Title:
HOME BANK
By:_______________________________
Name:
Title:
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EXHIBIT A
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (the "Merger Agreement") is made and
entered into as of this _____ day of ___________, 1996, by and between CU
Bancorp, a California corporation ("CU") and Home Interstate Bancorp, a
California corporation ("Home"), with reference to the following facts:
RECITALS
1. CU is a California corporation duly organized,
validly existing and in good standing under the laws of the State of California,
with authorized capital of 24,000,000 shares of no par value common stock ("CU
Stock") of which, on the date hereof, there are [4,467,318] shares issued and
outstanding and 10,000,000 shares of serial preferred stock, none of which is
outstanding..
2. Home is a corporation duly organized, validly
existing and in good standing under the laws of the State of California with
authorized capital of 20,000,000 shares of common stock, no par value ("Home
Stock") of which, on the date hereof, there are [4,187,954] shares issued and
outstanding.
3. The respective Boards of Directors of CU and Home
deem it desirable and in the best interests of their respective corporations and
stockholders that Home be merged (the "Merger") with and into CU as provided in
this Merger Agreement pursuant to the laws of the State of California and that
CU be the surviving company (the "Surviving Company").
4. In connection with the Merger, CU and Home, and their
respective wholly-owned banking subsidiaries, entered into an Agreement and Plan
of Reorganization, dated as of January 10, 1996 (the "Reorganization
Agreement").
NOW THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein set forth and for the purpose of
prescribing the terms and conditions of such Merger, the parties hereto agree as
follows:
ARTICLE I
THE MERGER
Upon consummation of the Merger at the Effective Time (as
defined in Article IX hereof), Home shall be merged with and into CU which shall
thereupon be the Surviving Company, and the separate corporate existence of Home
shall cease.
ARTICLE II
NAME
The name of the Surviving Company shall be "_____________".
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ARTICLE III
ARTICLES OF INCORPORATION
The Articles of Incorporation of CU as in effect immediately
prior to the Effective Time shall, at and after the Effective Time, continue to
be the Articles of Incorporation of the Surviving Company.
ARTICLE IV
BYLAWS
The Bylaws of CU as in effect immediately prior to the
Effective Time shall, at and after the Effective Time, continue to be the Bylaws
of the Surviving Company.
ARTICLE V
DIRECTORS
The following persons shall, at and after the Effective Time,
serve as the Directors of the Surviving Company until its next annual meeting of
shareholders or until such time as their successors have been elected and
qualified:
[insert names of directors]
ARTICLE VI
RIGHTS AND DUTIES OF SURVIVING COMPANY
At and after the Effective Time, all rights, privileges,
powers and franchises and all property and assets of every kind and description
of CU and Home shall be vested in and be held and enjoyed by the Surviving
Company, without further act or deed, and all the estates and interests of every
kind of CU and Home, including all debts due to either of them, shall be as
effectively the property of the Surviving Company as they were of CU and Home,
and the title to any real estate vested by deed or otherwise in either CU or
Home 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 CU and Home shall be
preserved unimpaired and all debts, liabilities and duties of CU and Home shall
be debts, liabilities and duties of the Surviving Company and may be enforced
against it to the same extent as if said debts, liabilities and duties had been
incurred or contracted by it.
ARTICLE VII
CONVERSION OF SHARES
In and by virtue of the Merger and at the Effective Time,
pursuant to this Merger Agreement, the shares of CU Stock and Home Stock
outstanding at the Effective Time shall be converted as follows:
(a) Effect on the Home Stock. Each share of Home Stock
issued and outstanding immediately prior to the Effective Time shall, on and
after the Effective Time, be automatically canceled and cease to be an issued
and outstanding share of Home Stock and shall be converted into the right to
receive 1.409 shares of CU Stock. No fractional shares of CU Stock shall be
issued in the Merger. CU
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will pay or cause to be paid cash in lieu of fractional shares of CU Stock which
would otherwise be issuable as provided above.
(b) Effect on CU Stock. Each share of CU Stock issued and
outstanding immediately prior to the Effective Time shall, on and after the
Effective Time, remain outstanding and shall for all purposes be deemed to
represent, one share of common stock of the Surviving Company.
ARTICLE VIII
FURTHER ACTION
The parties hereto shall execute and deliver, or cause to be
executed and delivered, all such deeds and other instruments, and will take or
cause to be taken all further or other action as they may deem necessary or
desirable, in order to vest in and confirm to the Surviving Company title to and
possession of all of CU's and Home's property, rights, privileges, powers and
franchises hereunder, and otherwise to carry out the intent and purposes of this
Merger Agreement.
ARTICLE IX
EFFECTIVE TIME
The Merger will become effective upon the filing, in
accordance with Section 1103 of the California Corporations Code, of a copy of
this Merger Agreement and all other requisite accompanying certificates in the
office of the California Secretary of State (the "Secretary"). The date and time
of such filing with the Secretary is referred to herein as to the "Effective
Time."
ARTICLE X
SUCCESSORS AND ASSIGNS
This Merger Agreement shall be binding upon and enforceable by
the parties hereto and their respective successors, assigns and transferees, but
this Merger Agreement may not be assigned by either party without the written
consent of the other.
ARTICLE XI
GOVERNING LAW
This Merger Agreement has been executed in the State of
California, and the laws of the State of California shall govern the validity
and interpretation hereof and the performance by the parties hereto.
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ARTICLE XII
TERMINATION
This Merger Agreement may, by the mutual consent and action of
the Boards of Directors of CU and Home, be abandoned at any time before or after
approval thereof by the shareholders of CU and Home, but not later than the
filing of this Merger Agreement with the Secretary pursuant to Section 1103 of
the California Corporations Code.
IN WITNESS WHEREOF, CU and Home, pursuant to the approval and
authority duly given by resolution of their respective Board of Directors, have
caused this Merger Agreement to be signed by their respective Presidents and
Secretaries on the day and year first above written.
CU BANCORP
By:_________________________
President
____________________________
Secretary
HOME INTERSTATE BANCORP
By:__________________________
President
_____________________________
Secretary
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EXHIBIT B
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (the "Bank Merger Agreement") is made and
entered into as of this _____ day of ___________, 1996, by and between
California United Bank, National Association, a national banking association
("CU Bank") and Home Bank, a California corporation ("Home Bank"), with
reference to the following facts:
RECITALS
1. CU Bank is a national banking association duly organized, validly
existing and in good standing under the laws of the United States, with
authorized capital of 540,000 shares of $5.00 par value common stock ("CU Bank
Stock") of which, on the date hereof, there are [472,973] shares issued and
outstanding. CU Bank has surplus of $____ and undivided profits, including
capital reserves, of $______ as of _____________. CU Bank is the wholly owned
subsidiary of CU Bancorp, a California corporation.
2. Home Bank is a corporation duly organized, validly existing and in
good standing under the laws of the State of California with authorized capital
of [ ] shares of common stock, [ ] par value ("Home Stock") of which, on the
date hereof, there are [ ] shares issued and outstanding. Home Bank has surplus
of $______ and undivided profits, including capital reserves, of $_____ as of
_______. Home Bank is the wholly owned subsidiary of Home Interstate Bancorp, a
California corporation.
3. The respective Boards of Directors of CU Bank and Home Bank, each
acting 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 12 U.S.C. Section 215a, deem it desirable and
in the best interests of their respective corporations and shareholders that
Home Bank be merged (the "Bank Merger") with and into CU Bank as provided in
this Bank Merger Agreement pursuant to the laws of the United States of America
and that CU Bank be the surviving bank (the "Surviving Bank").
4. In connection with the Merger, CU Bank, CU Bancorp, a California
corporation ("CU"), Home Bank and Home Interstate Bancorp, a California
corporation ("Home"), entered into an Agreement and Plan of Reorganization,
dated as of January 10, 1996 (the "Reorganization Agreement").
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein set forth and for the purpose of prescribing the
terms and conditions of such Bank Merger, the parties hereto agree as follows:
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ARTICLE I
THE BANK MERGER
Upon consummation of the Bank Merger at the Effective Time of the Bank
Merger (as defined in Article XI hereof), Home Bank shall be merged with and
into CU Bank which shall thereupon be the Surviving Bank, and the separate
corporate existence of Home Bank shall cease.
ARTICLE II
SHAREHOLDER APPROVAL
This Agreement shall be ratified and approved by the written consent of
the shareholders of each of Home Bank and CU Bank owning at least two-thirds of
the outstanding capital stock.
ARTICLE III
NAME
The name of the Surviving Bank shall be "___________."
ARTICLE IV
ARTICLES OF ASSOCIATION
The Articles of Association of CU Bank as in effect immediately prior
to the Effective Time of the Bank Merger shall, at and after the Effective Time
of the Bank Merger, continue to be the Articles of Association of the Surviving
Bank.
ARTICLE V
BYLAWS
The Bylaws of CU Bank as in effect immediately prior to the Effective
Time of the Bank Merger shall, at and after the Effective Time of the Bank
Merger, continue to be the Bylaws of the Surviving Bank.
ARTICLE VI
DIRECTORS
The following persons shall, at and after the Effective Time of the
Bank Merger, serve as the Directors of the Surviving Bank until its next annual
meeting of shareholders or until such time as their successors have been elected
and qualified:
[insert names of directors]
ARTICLE VII
RIGHTS AND DUTIES OF SURVIVING BANK
At and after the Effective Time of the Bank Merger, all rights,
privileges, powers and franchises and all property and assets of every kind and
description of CU Bank and Home Bank shall be vested in and be held and enjoyed
by the Surviving Bank, without further act or deed, and all the estates
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and interests of every kind of CU Bank and Home Bank, including all debts due to
either of them, shall be as effectively the property of the Surviving Company as
they were of CU Bank and Home Bank, and the title to any real estate vested by
deed or otherwise in either CU Bank or Home Bank shall not revert or be in any
way impaired by reason of the Bank Merger; and all rights of creditors and liens
upon any property of CU Bank and Home Bank shall be preserved unimpaired and all
debts, liabilities and duties of CU Bank and Home Bank shall be debts,
liabilities and duties of the Surviving Bank and may be enforced against it to
the same extent as if said debts, liabilities and duties had been incurred or
contracted by it.
ARTICLE VIII
CONVERSION OF SHARES
In and by virtue of the Bank Merger and at the Effective Time of the
Bank Merger, pursuant to this Bank Merger Agreement, the shares of CU Bank Stock
and Home Bank Stock outstanding at the Effective Time of the Bank Merger shall
be converted as follows:
(a) Effect on the Home Bank Stock. Each share of Home Bank Stock issued
and outstanding immediately prior to the Effective Time of the Bank Merger,
except for shares as to which dissenters' rights are perfected pursuant to 12
U.S.C. 215a(b) ("Perfected Dissenting Shares") shall, on and after the Effective
Time of the Bank Merger, be automatically canceled and cease to be an issued and
outstanding share of Home Bank Stock.
(b) Effect on CU Bank Stock. Each share of CU Bank Stock issued and
outstanding immediately prior to the Effective Time of the Bank Merger, except
for Perfected Dissenting Shares, shall, on and after the Effective Time of the
Bank Merger, remain outstanding and shall for all purposes be deemed to
represent, one share of common stock of the Surviving Bank.
ARTICLE IX
CAPITAL STRUCTURE OF SURVIVING BANK
The amount of capital stock of the Surviving Bank shall be $_____,
divided into ____ shares of common stock, each of $___ par value, and at the
time the Bank Merger shall become effective the Surviving Bank shall have a
surplus of $____ and undivided profits of $______, including capital reserves,
which when combined with the Surviving Bank's capital and surplus will be equal
to the combined capital structures of Home Bank and CU Bank as stated in the
preamble of this Agreement, adjusted, however, for normal earnings and expenses
between ______ and the Effective Time of the Bank Merger.
ARTICLE X
FURTHER ACTION
The parties hereto shall execute and deliver, or cause to be executed
and delivered, all such deeds and other instruments, and will take or cause to
be taken all further or other action as they may deem necessary or desirable, in
order to vest in and confirm to the Surviving Bank title to and possession of
all of CU Bank's and Home Bank's property, rights, privileges, powers and
franchises hereunder, and otherwise to carry out the intent and purposes of this
Agreement.
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CU Bank and Home Bank agree that solely for the purpose of completing
the merger of Home Bank with and into CU Bank or obtaining any necessary
regulatory approval therefor or approving, signing, ratifying or confirming any
related Bank Merger Agreement or conferring any necessary or appropriate
corporate authority related thereto or taking any other corporate act or
satisfying any other corporate requirement necessary therefor, the board of
directors of the Surviving Bank, as it will be constituted upon the
effectiveness of the Bank Merger, may act as such in advance of such
effectiveness, and CU, the shareholder of the Surviving Bank upon such
effectiveness, may act as such in advance of such effectiveness.
ARTICLE XI
EFFECTIVE TIME OF THE BANK MERGER
The Bank Merger will become effective in accordance with 12 U.S.C. 215a
at the time specified in the approval to be issued by the Comptroller of the
Currency. The date and time of such approval specified by the Comptroller is
referred to herein as to the "Effective Time of the Bank Merger."
ARTICLE XII
SUCCESSORS AND ASSIGNS
This Bank Merger Agreement shall be binding upon and enforceable by the
parties hereto and their respective successors, assigns and transferees, but
this Bank Merger Agreement may not be assigned by either party without the
written consent of the other.
ARTICLE XIII
TERMINATION
This Bank Merger Agreement may, by the mutual consent and action of the
Boards of Directors of CU Bank and Home Bank, be abandoned at any time before or
after approval thereof by the shareholders of CU Bank and Home Bank, but not
later than the Effective Time of the Bank Merger. This Agreement shall
automatically be terminated and of no further force and effect if, prior to the
Effective Time of the Bank Merger, the Reorganization Agreement is terminated in
accordance with the terms thereof.
ARTICLE XIV
SATISFACTION OF CONDITION AND OBLIGATIONS
(a) The obligations of CU Bank to proceed with the Closing are subject
to the satisfaction at or prior to the Closing of all of the conditions to the
obligations of CU Bank and CU under the Reorganization Agreement, any one or
more of which, to the extent it is or they are waivable, may be waived, in whole
or in part, by CU Bank.
(b) The obligations of Home Bank to proceed with the Closing are
subject to the satisfaction at or prior to the Closing of all of the conditions
to the obligations of Home and Home Bank under the Reorganization Agreement, any
one or more of which, to the extent it is or they are waivable, may be waived,
in whole or in party, by Home Bank.
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IN WITNESS WHEREOF, CU Bank and Home Bank, pursuant to the approval and
authority duly given by resolution of their respective Board of Directors, have
caused this Bank Merger Agreement to be signed by their respective Presidents
and Secretaries on the day and year first above written.
CALIFORNIA UNITED BANK,
NATIONAL ASSOCIATION
By:
-------------------------
President
----------------------------
Secretary
DIRECTORS OF
CALIFORNIA UNITED BANK, N.A.
- ----------------------------
- ----------------------------
- ----------------------------
- ----------------------------
- ----------------------------
- ----------------------------
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HOME BANK
By:
--------------------------
President
-----------------------------
Secretary
DIRECTORS OF HOME BANK
- ----------------------------
- ----------------------------
- ----------------------------
- ----------------------------
- ----------------------------
- ----------------------------
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EXHIBIT C
WARRANT PURCHASE AGREEMENT
This WARRANT PURCHASE AGREEMENT (the "Agreement"), dated as of
January 10, 1996, between CU Bancorp, a California corporation ("CU"), and Home
Interstate Bancorp, a California corporation ("Home") is made with reference to
the following:
RECITALS
A. CU, California United Bank, National Association, a wholly owned
subsidiary of CU ("CU Bank"), Home and Home Bank, a wholly owned subsidiary of
Home ("Home Bank"), have entered into an Agreement and Plan of Reorganization
(the "Merger Agreement") whereby Home and Home Bank would be merged with and
into CU and CU Bank, respectively (collectively, the "Merger").
B. As partial consideration to Home for entering into the Merger
Agreement, CU has agreed to issue to Home a warrant entitling the holder thereof
to purchase up to 19.9% (or 1,492,390) of the outstanding common stock of CU
("Common Stock"), assuming the exercise of all Warrants (as hereafter defined),
and all other options, warrants or other securities convertible into Common
Stock, subject to such restrictions and conditions as may be imposed by bank
regulatory authorities having jurisdiction over Home and CU, respectively.
C. Concurrent with the execution of this Agreement, Home and CU shall
enter into a separate warrant agreement, with substantially identical terms and
conditions as are set forth in this Agreement, pursuant to which Home shall
issue to CU a warrant entitling the holder thereof, upon the occurrence of
certain events as set forth in such agreement, to purchase up to 19.9% (on a
fully diluted basis) of the outstanding common stock of Home.
D. Terms used herein and not otherwise defined shall have the
meanings ascribed to them in Article VI hereof.
In consideration of these premises and of the representations,
covenants and agreements hereinafter set forth, CU and Home hereby agree as
follows:
ARTICLE I
ISSUANCE AND SALE OF WARRANT
Section 1.1 Issuance and Sale of the Warrant. Subject to the
terms and conditions of this Agreement, and in reliance upon the representations
and warranties hereinafter set forth, and in consideration for the execution and
delivery of the Merger Agreement, CU hereby issues to Home one or more warrants
(such warrants, together with any warrants issued pursuant to Section 1.4, the
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"Warrants") entitling the holder thereof to purchase in the aggregate 1,492,390
duly authorized and newly issued shares of Common Stock, subject to adjustment
as provided below. The Warrants being issued at the time of the execution of
this Agreement will be evidenced by a single certificate in the form of Exhibit
A hereto. All Warrants issued pursuant to Section 1.4 will be evidenced by one
or, at Home's request, more certificates in the form of Exhibit A hereto, dated
the date of their issuance, exercisable at the adjusted exercise price at the
time in effect for the Warrants issued pursuant to this Section 1.1.
Section 1.2 Warrant Price. The initial exercise price at which
shares of Common Stock may be acquired pursuant to exercise of the Warrants
shall be $9.834 per share (the "Warrant Price"), subject to adjustment as
provided in Section 1.4.
Section 1.3 Exercise of Warrants.
(a) The Warrants may be exercised in whole or in part only after
the occurrence of an Acquisition Event.
(b) As used herein, an "Acquisition Event" means any of the
following events:
(i) any person (other than Home or an Affiliate of Home)
shall have commenced (as such term is defined in Rule 14d-2 under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), or shall have filed a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with
respect to, a tender offer or exchange offer to purchase any
shares of Common Stock such that, upon consummation of such offer,
such person would own or control 10% or more of the then
outstanding Common Stock;
(ii) CU or CU Bank, without having received Home's prior
written consent or except as permitted by the Merger Agreement,
shall have authorized, recommended, proposed or publicly announced
an intention to authorize, recommend or propose, or entered into,
an agreement with any person (other than Home or any Affiliate of
Home to (A) effect a merger, consolidation or similar transaction
involving CU or CU Bank, (B) sell, lease or otherwise dispose of
assets of CU or CU Bank representing 10% or more of the
consolidated assets of CU or CU Bank, or (C) issue, sell or
otherwise dispose of (including by way of merger, consolidation,
share exchange or any similar transaction) securities representing
10% or more of the voting power of CU or CU Bank (any of the
foregoing an "Acquisition Transaction");
(iii) any person (other than Home or Home Bank or CU or CU
Bank in a fiduciary capacity) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 under the
Exchange Act) or the right to acquire beneficial ownership of, or
any "group" (as such term is defined in the Exchange Act) shall
have been
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formed which beneficially owns or has the right to acquire
beneficial ownership of, 10% or more of the then outstanding
Common Stock; or
(iv) the holders of Common Stock shall not have approved the
Merger Agreement at the meeting of such stockholders held for the
purpose of voting on the Merger Agreement, such meeting shall not
have been held or shall have been canceled prior to termination of
the Merger Agreement or CU's Board of Directors shall have
withdrawn or modified in a manner adverse to Home the
recommendation of CU's Board of Directors with respect to the
Merger Agreement, in each case after any person (other than Home)
shall have (A) publicly announced a proposal, or publicly
disclosed an intention to make a proposal, to engage in an
Acquisition Transaction or (B) filed an application (or given a
notice), whether in draft or final form, under the BHC Act or the
Change in Bank Control Act for approval to engage in an
Acquisition Transaction.
As used in this Agreement, "person" shall have the meaning specified in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.
(c) In the event Home is entitled to and wishes to exercise the
Warrants, it shall send to CU a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three Business Days nor later than 60 Business Days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of the Federal Reserve Board or any other regulatory
agency is required in connection with such purchase, Home shall promptly file
the required notice or application for approval, shall promptly notify CU of
such filing, and shall expeditiously process the same and the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which any required notification periods have expired or been terminated
or such approvals have been obtained and any requisite waiting period or periods
shall have passed.
(d) At the closing referred to in subsection (c), Home shall pay
to CU the aggregate purchase price for the shares of Common Stock purchased
pursuant to the exercise of the Warrants in immediately available funds by wire
transfer to a bank account designated by CU, provided that failure or refusal of
CU to designate such a bank account shall not preclude Home from exercising the
Warrants.
(e) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (d), CU shall deliver to
Home a certificate or certificates representing the number of shares of Common
stock purchased by Home.
(f) Upon the giving by Home to CU of the written notice of
exercise of the Warrants provided for under subsection (c) and the tender of the
applicable purchase price in
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immediately available funds, Home shall be deemed to be the holder of record of
the shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of CU shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
Home. CU shall pay all expenses, and any and all federal, state and local taxes
or other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates hereunder in the name of Home.
Section 1.4 Additional Warrants; Adjustments to Warrant Price and
Number of Shares. The number of shares to which the Warrants may be exercised
and the Warrant Price shall be subject to adjustment as provided below:
(a) Additional Warrants. If CU shall, on one or more
occasions after the date hereof, issue additional shares of Common Stock, and
if, as a result of any such issuance the shares of Common Stock issued or
issuable upon the exercise of Warrants issued pursuant to Section 1.1 hereof
shall represent less than 19.9% of the outstanding Common Stock, assuming the
exercise of all Warrants and all other options, warrants or other securities
convertible into Common Stock, CU shall issue to Home, promptly upon Home's
demand, without further consideration, Warrants to purchase a number of
authorized but unissued shares of Common Stock which, when added to the shares
issued or issuable upon the exercise of such previously issued Warrants, would
represent 19.9% as the case may be of the outstanding Common Stock.
(b) Adjustment for Stock Splits and Combinations. If CU at
any time or from time to time after the date of this Agreement effects a
subdivision of the Common Stock, the Warrant Price then in effect immediately
before that subdivision shall be proportionately decreased, and conversely, if
CU at any time or from time to time after the date of this Agreement combines
the outstanding shares of Common Stock, the Warrant Price then in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this subsection (b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(c) Adjustment for Certain Dividends and Distributions. In
the event CU at any time or from time to time after the date of this Agreement
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event the Warrant Price then in
effect shall be decreased as of the time of such issuance or, in the event such
a record date is fixed, as of the close of business on such record date, by
multiplying the Warrant Price then in effect by a fraction (i) the numerator of
which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and (ii) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date plus the number of
shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date is fixed and such dividend is not
fully paid or if such distribution is not fully made on the date fixed therefor,
the Warrant Price shall be
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recomputed accordingly as of the close of business on such record date and
thereafter the Warrant Price shall be adjusted pursuant to this subsection (c)
as of the time of actual payment of such dividends or distributions.
(d) Adjustments for Other Dividends and Distributions. In the
event CU at any time or from time to time after the date of this Agreement
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in securities of CU
other than shares of Common Stock, then in each such event provision shall be
made so that the holders of Warrants shall receive upon exercise thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of securities of CU which they would have received had their Warrants
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
date of exercise of the Warrants, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 1.4.
(e) Adjustment for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon the exercise of the Warrants is
changed into the same or a different number of shares of any class or classes of
stock, whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere in this Section
1.4), then and in any such event each holder of Warrants shall have the right
thereafter to receive upon exercise of the Warrants the kind and amount of stock
and other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such Warrants might have been exercised immediately prior to
such reorganization, reclassification or change, all subject to further
adjustment as provided in this Section 1.4.
(f) Reorganization, Mergers, Consolidations and Sales of
Assets. If at any time or from time to time there is a capital reorganization of
the Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section
1.4), or a merger or consolidation of CU with or into another corporation, or
the sale of all or substantially all of CU's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the holders of the Warrants shall thereafter be
entitled to receive upon exercise of the Warrants the number of shares of stock
or other securities or property of CU, or of the successor corporation resulting
from such merger or consolidation or sale, to which a holder of Common Stock
deliverable upon exercise of the Warrants would have been entitled in such
capital reorganization, merger, consolidation or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 1.4 and the other terms and conditions with respect to the rights
of the holders of the Warrants after the reorganization, merger, consolidation
or sale to the end that the provisions of this Agreement, including this Section
1.4 (including adjustment of the Warrant Price then in effect and number of
shares purchasable upon exercise of the Warrants) shall be applicable after that
event and be as nearly equivalent to the provisions hereof as may be
practicable.
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(g) Sale of Shares Below Warrant Price.
(i) If at any time or from time to time after the date
of this Agreement, CU issues or sells, or is deemed by the express provisions of
this subsection (g) to have issued or sold, Additional Shares of Common Stock
(as hereinafter defined), other than as a dividend or other distribution on any
class of stock as provided in subsection (c) above and other than upon a
subdivision or combination of shares of Common Stock as provided in subsection
(b) above, for an Effective Price (as hereinafter defined) less than the Warrant
Price (or, if an adjusted Warrant Price shall be in effect by reason of a
previous adjustment, then less than such adjusted Warrant Price) then and in
each such case the then existing Warrant Price shall be reduced, as of the
opening of business on the date of such issuance or sale, to a price determined
by multiplying that Warrant Price by a fraction (i) the numerator of which shall
be (A) the number of shares of Common Stock Deemed Outstanding at the close of
business on the day next preceding the date of such issue or sale plus (B) the
number of shares of Common Stock which the aggregate consideration received (or
by express provision hereof deemed to have been received) by CU for the total
number of Additional Shares of Common Stock so issued would purchase at such
Warrant Price, and (ii) the denominator of which shall be the number of shares
of Common Stock Deemed Outstanding at the close of business on the date of such
issuance after giving effect to such issuance of Additional Shares of Common
Stock. For purposes of this paragraph (i), "Common Stock Deemed Outstanding" at
any given time shall mean the sum of (1) the number of shares of Common Stock
actually outstanding at that time, (2) the number of Additional Shares of Common
Stock then deemed to have been issued under paragraphs (iii) or (iv) of this
subsection (g) and (3) the number of shares of Common Stock then issuable upon
exercise of stock options to the extent not already deemed to have been issued
under paragraphs (iii) or (iv) of this subsection (g).
(ii) For the purpose of making any adjustment required
under this subsection (g), the consideration received by CU for any issuance or
sale of securities shall (i) to the extent it consists of cash be computed at
the net amount of cash received by CU after deduction of any expenses payable by
CU and any underwriting or similar commissions, compensation or concessions paid
or allowed by CU in connection with such issue or sale, (ii) to the extent it
consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Board and (iii) if Additional Shares
of Common Stock, Convertible Securities (as hereinafter defined) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
assets of CU for a consideration which covers both, be computed as the portion
of the consideration so received that may be reasonably determined in good faith
by the Board to be allocable to such Additional Shares of Common Stock,
Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under
this subsection (g), if at any time or from time to time after the date of this
Agreement CU issues or sells any rights or options for the purchase of, or stock
or other securities convertible into, Additional Shares of Common Stock (such
convertible stock or securities being hereinafter referred to as "Convertible
Securities"), then in each case CU shall be deemed to have issued at the time of
the
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issuance of such rights or options or Convertible Securities the maximum number
of Additional Shares of Common Stock issuable upon exercise or conversion
thereof and to have received as consideration for the issuance of such shares an
amount equal to the total amount of the consideration, if any, received by CU
for the issuance of such rights or options or Convertible Securities plus, in
the case of such options or rights, the amounts of consideration, if any,
payable to CU upon the exercise of such options or rights and, in the case of
Convertible Securities, the amounts of consideration, if any, payable to CU upon
conversion (other than by cancellation of liabilities or obligations evidenced
by such Convertible Securities). No further adjustment of the Warrant Price,
adjusted upon the issuance of such rights, options or Convertible Securities,
shall be made as a result of the actual issuance of Additional Shares of Common
Stock on the exercise of any such rights or options or the conversion of any
such Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire or be
canceled without having been exercised, the Warrant Price adjusted upon the
issuance of such options, rights or Convertible Securities shall be readjusted
to the Warrant Price which would have been in effect had an adjustment been made
on the basis that the only Additional Shares of Common Stock so issued were the
Additional Shares of Common Stock, if any, actually issued or sold on the
exercise of such rights or options or rights of conversion of such Convertible
Securities, and such Additional Shares of Common Stock, if any, were issued or
sold for the consideration actually received by CU upon such exercise, plus the
consideration, if any, actually received by CU for the granting of all such
rights or options, whether or not exercised, plus the consideration received for
issuing or selling the Convertible Securities actually converted plus the
consideration, if any, actually received by CU (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities) on the
conversion of such Convertible Securities.
(iv) For the purpose of the adjustment required under
this subsection (g), if at any time or from time to time after the date of this
Agreement CU issues or sells any rights or options for the purchase of
Convertible Securities, then in each such case CU shall be deemed to have issued
at the time of the issuance of such rights or options the maximum number of
Additional Shares of Common Stock issuable upon conversion of the total amount
of Convertible Securities covered by such rights or options and to have received
as consideration for the issuance of such Additional Shares of Common Stock an
amount equal to the amount of consideration, if any, received by CU for the
issuance of such rights or options, plus the minimum amounts of consideration,
if any, payable to CU upon the exercise of such rights or options and plus the
minimum amount of consideration, if any, payable to CU (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion of such Convertible Securities. No further
adjustment of the Warrant Price, adjusted upon the issuance of such rights or
options, shall be made as a result of the actual issuance of the Convertible
Securities upon the exercise of such rights or options or upon the actual
issuance of Additional Shares of Common Stock upon the conversion of such
Convertible Securities. The provisions of paragraph (iii) above for the
readjustment of the Warrant Price upon the expiration of rights or options or
the rights of conversion of Convertible Securities shall apply in like manner to
the rights, options and Convertible Securities referred to in this paragraph
(iv).
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(v) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by CU after the date of this Agreement whether or
not subsequently reacquired or retired by CU, other than (i) shares of Common
Stock issued upon exercise of the Warrants and (ii) shares issued by way of
dividend or other distribution on shares of Common Stock excluded from the
definition of Additional Shares of Common Stock by the foregoing clause or
shares of Common Stock resulting from any subdivision or combination of shares
of Common Stock so excluded, or shares issued by way of dividend or other
distribution on, or resulting from any subdivision or combination of, shares of
Common stock excluded from the definition of "Additional Shares of Common Stock"
by the foregoing provision. The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold by CU under this subsection (g), into the aggregate consideration
received or deemed to have been received by CU for such issue under this
subsection (i).
ARTICLE II
REPURCHASE OF WARRANTS AND LIMITATIONS ON SALE
Section 2.1 Repurchase of Warrants.
(a) Prior to the occurrence of an Acquisition Event, CU
shall have no right to repurchase the Warrants and Home shall have no right to
require CU to repurchase the Warrants.
(b) At any time after the occurrence of an Acquisition
Event, CU shall have the right to purchase (or to cause a person designated by
CU to purchase), and Home shall have the right to require that CU repurchase
(or, if CU shall so elect, cause a person designated by CU to purchase), (i) all
(but not fewer than all) the Warrants at the time beneficially owned by Home and
its Affiliates at the Warrant Call Price in effect for such Warrants on the date
of closing (as provided below) and (ii) all (but not fewer than all) of the
shares of Common Stock purchased by Home and its Affiliates pursuant to this
Agreement with respect to which Home has beneficial ownership at a price equal
to the aggregate market value for such shares as of the date of closing (as
provided below). Any purchase pursuant hereto shall take place on a Business Day
specified in a notice given by CU to Home or by Home to CU, as the case may be
(but in no event prior to the 30th day following the date of any such notice to
Home or later than the 30th day following the date of any such notice to CU).
(c) The closing of any repurchase of Warrants pursuant to
this Section 2.1 shall take place at 10:00 a.m. Los Angeles Time, on the date
set forth in the applicable notice given by CU or Home, as the case may be, at
the office of Home at the address set forth in Section 8.1. The amount payable
to Home and its Affiliates upon any repurchase of Warrants shall be paid in
lawful money of the United States by a federal funds check or a wire transfer of
immediately available funds to an account designated by Home. Upon receipt of
such payment, Home shall
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deliver or cause to be delivered to CU the certificates representing all the
Warrants being repurchased free and clear of any liens, security interests,
charges or encumbrances.
Section 2.2 Certain Determinations of Market Value. The calculation of
the Market Value, as required herein, shall be calculated in accordance with
this Section 2.2. In the event that Market Value is to be determined pursuant to
the terms hereof and there is not an established trading market for shares of
Common Stock, or more than 50% of the outstanding shares of Common Stock are
held beneficially or of record by persons, each of whom owns (individually or
together with members of any group of which such persons are members) 5% or more
of the outstanding shares of Common Stock, then Home may elect to have an
investment banking firm mutually agreeable to CU and Home determine (i) whether,
in the opinion of such investment banking firm, as a result of the absence of an
established trading market or the concentration of stock holdings, Market Value
(determined in accordance with the provisions of the definition of Market Value
in Article VI) does not accurately reflect the fair market value of a block of
1,000 shares of Common Stock on the date as of which Market Value is to be
determined, and (ii) if such investment banking firm determines that Market
Value (as so determined) does not accurately reflect such fair market value,
such investment banking firm shall make determination of the fair market value
of a share of Common Stock on the date as of which Market Value is to be
determined, based on whatever factors it deems relevant, as soon as possible and
shall promptly give written notice to Home and CU of its determination. The fees
of such investment banking firm in connection with such determination shall be
paid by Home. Such determination shall be final and binding on the parties
hereto and the fair market value so determined shall, if higher than the Market
Value that would otherwise apply, be the Market Value of a share of Common
Stock. In the event such determination is not transmitted to Home and CU prior
to the scheduled closing date with respect to any repurchase of Warrants or
Common Stock, the scheduled closing of such transaction shall not be postponed,
and CU shall make such payments on the closing date as are required based on the
Market Value of a share of Common Stock determined as if Home had not made an
election under this Section 2.4. Within three Business Days after such
investment banking firm's determination is made and conveyed to Home and CU in
writing, CU shall make a payment to Home, or Home shall make a payment to CU, as
the case may be, equal to the difference between the amount paid on the closing
date and the amount that would have been so payable had such amount been
determined on the basis of such investment banking firm's determination of the
Market Value of a share of Common Stock.
Section 2.3 Limit on Proceeds. Home agrees, as long as CU shall not
have defaulted in its obligations to repurchase Warrants pursuant to Section
2.1, to pay over to CU any amount by which the profits received by Home and its
Affiliates upon the sale or transfer of Warrants (net of all selling expenses,
underwriting discounts, and commissions and other expenses incurred by Home in
connection with such exercise and sale) shall exceed $5,000,000.
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ARTICLE III
RESTRICTIONS ON TRANSFERABILITY OF STOCK;
COMPLIANCE WITH SECURITIES ACT OF 1933
Section 3.1 Restrictions on Transferability. The Warrants acquired by
Home or any Affiliate of Home pursuant to this Agreement and the Common Stock
issuable upon exercise of such Warrants and any shares of capital stock received
or issued in respect thereof, including, without limitation, securities issued
upon any stock split, stock dividend, recapitalization, merger, consolidation or
similar event (such Warrants and all such shares of Common Stock and securities
being collectively called the "Restricted Stock") shall not be hypothecated, nor
shall any claim or liability exist, nor shall any agreement, written or oral, be
entered into by Home or any Affiliate of Home which would cause any claim or
liability to exist with respect to the Restricted Stock, and the Restricted
Stock shall not be transferred except upon the conditions, to the extent
applicable, specified in this Article III. Home will cause any proposed
transferee of Restricted Stock held by Home or any other Affiliate of Home to
agree to take ownership of such Restricted Stock subject to the provisions, to
the extent applicable, of this Article III; provided, however, that the
provisions of this Article shall cease to apply to any Restricted Stock which
shall have been sold in a registered public offering in accordance with the
provisions of this Article III. Home represents that it is purchasing the
Restricted Stock for its own account and not with a view to or for sale in
connection with any distribution of such Restricted Stock.
Section 3.2 Restrictive Legend; Notice of Proposed Transfers.
(a) Each certificate representing Restricted Stock shall (unless
otherwise permitted by the provisions of paragraph (b) of this Section) be
stamped or otherwise imprinted with a legend in substantially the following
form:
THESE SHARES/WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THESE SHARES/WARRANTS MAY NOT BE SOLD OR TRANSFERRED EXCEPT
PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH
IS EFFECTIVE UNDER SAID ACT OR (ii) AN OPINION OF COUNSEL THAT AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THESE
SHARES/ WARRANTS IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE
AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY OF WHICH IS AVAILABLE FOR
INSPECTION AT THE OFFICE OF THE SECRETARY OF CU BANCORP.
(b) Each holder of a certificate representing Restricted Stock
by acceptance thereof agrees to comply in all respects with the provisions of
this Section 3.2(b). Prior to any proposed transfer of any Restricted Stock
other than pursuant to a registration under the Securities Act, the holder
thereof shall give written notice to CU of such holder's intention to effect
such transfer. Each such notice shall describe the manner and circumstances of
the proposed transfer
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of the Restricted Stock to be transferred and shall be accompanied by an
unqualified written opinion of counsel reasonably satisfactory to CU to the
effect that such proposed transfer may be effected without registration under
the Securities Act. Subject to Section 3.11 hereof, upon delivery to CU of such
notice and such opinion of counsel, the holder of such Restricted Stock shall be
entitled to transfer such Restricted Stock in accordance with the terms of such
notice delivered by the holder to CU. Each certificate evidencing Restricted
Stock transferred as above provided shall bear the appropriate restrictive
legend set forth in paragraph (a) above, except that such certificate shall not
bear such restrictive legend if the opinion of counsel referred to above shall
be to the further effect that such legend is not required in order to establish
compliance with any provisions of the Securities Act.
Section 3.3 No Transfers Prior to Acquisition Event. Notwithstanding
anything to the contrary set forth in this Agreement or the Restricted Stock,
neither Home nor any Affiliate of Home shall sell, transfer or otherwise dispose
of all or any portion of the Warrants owned by it, other than to an Affiliate of
Home, except after the occurrence of an Acquisition Event; provided, however,
that following an Acquisition Event, if CU or Home shall give notice of its
election to exercise its rights under Section 2.1, then such right of Home and
its Affiliates to sell, transfer or otherwise dispose of the Restricted Stock
shall no longer be exercised unless CU shall have defaulted in its obligation to
repurchase such Restricted Stock on the date specified in any notice.
Section 3.4 Limitations on Transferees and Manner of Transfer.
(a) In the event that Home and its Affiliates become entitled
pursuant to the provisions of Section 3.3 to sell, transfer or otherwise dispose
of Restricted Stock, such Restricted Stock may be sold or transferred (subject
to Section 3.11 hereof) only (i) to a third party (or a third party and its
Affiliates) in a transaction which complies with the provisions of paragraph (b)
of this Section or (ii) to one or more underwriters or dealers in connection
with a broad public distribution complying with the provisions of paragraph (c)
of this Section of the shares of Common Stock issuable pursuant to the exercise
of the transferred Warrants (such shares being hereinafter referred to as the
"Underlying Shares"). The provisions of this Section shall only apply to sales,
transfers or dispositions by Home and its Affiliates, and shall not apply to
sales, transfers or dispositions by transferees of Home or its Affiliates
(except that any sale or disposition by dealers or underwriters shall be
conducted in accordance with the applicable provisions of this Section and
further except that all resales shall be made in accordance with the Securities
Act).
(b) Home and its Affiliates shall be entitled, subject to the
other applicable provisions of this Article III (including Section 3.11) and
Section 2.1, to sell or transfer Restricted Stock in one or more transactions
exempt from the registration requirements of Section 5 of the Securities Act;
provided, however, that the aggregate number of shares of Restricted Stock sold
or transferred to any single purchaser and persons known to Home to be
Affiliates of or persons acting in concert with such purchaser in any such
transaction shall be limited to that amount of Restricted Stock which, when
taken together with the Restricted Stock theretofore sold or transferred to such
purchaser and such Affiliates and persons, would not, upon the exercise in full
of the Warrants so
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transferred, permit the acquisition of more than 2% of the then outstanding
shares of Common Stock, determined as of the date of such sale or transfer. For
purposes of the immediately preceding sentence, it shall be assumed that all
Warrants, if any, that already have been sold or transferred by Home and its
Affiliates are still outstanding and have not been exercised in whole or in part
to purchase shares of Common Stock.
(c) Warrants owned by Home and its Affiliates, unless sold to CU
or an Affiliate of CU or in compliance with paragraph (b) of this Section, may
only be sold or transferred to one or more underwriters or dealers in accordance
with the provisions of this paragraph. Home and its Affiliates may, subject to
the terms and conditions set forth in this paragraph (c), sell or transfer
Warrants in whole or in part to one or more underwriters or dealers who agree in
writing with Home, prior to the effective time of any such sale or transfer, to
exercise such Warrants and offer and sell the Underlying Shares either (i) to
the public in a public offering registered under the Securities Act (or any
successor federal securities laws) pursuant to a distribution in which no single
purchaser and its Affiliates will, to the knowledge of such underwriters or
dealers, acquire Underlying Shares representing more than 2% of the then
outstanding shares of Common Stock or (ii) in other transactions complying with
the requirements of paragraph (b) above. Notwithstanding any other provision of
this Agreement to the contrary, the exercise of any Warrants transferred to
underwriters or dealers in accordance with this Section and the acquisition by
such underwriters or dealers of shares of Common Stock pursuant to such exercise
may be made simultaneously on the date of the closing of the sale or transfer by
Home or its Affiliates of the relevant Warrants to such underwriters or dealers,
provided CU is given written notice of the date of such closing at least five
Business Days prior thereto. At any such closing, against payment of the
exercise price for shares of Common Stock to be acquired pursuant to the
exercise of Warrants, CU will deliver or cause to be delivered certificates
representing the Underlying Shares to such underwriters or dealers, in such
names and denominations as it or they shall designate not fewer than two
Business Days prior to such closing.
Section 3.5 "Demand" Registration. From and after such date as Home and
its Affiliates become entitled pursuant to Section 3.4 to sell or transfer any
Restricted Stock, CU shall, if requested by Home, as expeditiously as possible,
use its best efforts to effect the registration of the Restricted Stock (which
CU has been requested to register on a form in general use under the Securities
Act (or any successor federal securities law) selected by CU, in order to permit
the sale or other disposition of such Restricted Stock in accordance with the
intended method of sale or other disposition set forth in the request (subject
to the provisions of Section 3.4(c)). The right to require registration of the
Restricted Stock under this Section 3.5 may only be exercised once unless Home
is advised in writing by its investment banking firm (a copy of which advice
shall be supplied to CU) that, in the opinion of such firm, an additional or two
additional registrations are appropriate to maximize the benefits to Home of the
proposed distribution of Restricted Stock, in which event Home may exercise once
or twice more, as applicable, its rights under this Section 3.5. Upon the
issuance of a stop order or injunction, CU may withdraw any such registration
statement and abandon the proposed offering which Home shall have demanded, in
which case Home's right shall be reinstated.
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Section 3.6 "Piggyback" Registration. From and after such date as Home
and its Affiliates become entitled pursuant to Section 3.4 to sell or transfer
any Restricted Stock, if at any time CU proposes to register any of its
securities under the Securities Act (or any successor federal securities law),
whether or not for sale for its own account (except with respect to registration
statements filed with respect to the issuance of securities under employee
benefit plans), it will give written notice to Home of its intention to do so.
Upon the written request of Home, given within 15 calendar days after receipt of
CU's notice, CU will use its best efforts to cause to be included in the shares
to be covered by the registration statement proposed to be filed by CU, in
accordance with the request of Home, the Restricted Stock to be sold by dealers
or underwriters in accordance with the provisions of Section 3.4; provided,
however, that CU need not include such Restricted Stock in such registration
statement if CU is advised in writing by its investment banking firm (a copy of
which advise shall be supplied to Home) that the inclusion of such securities
shall, in the opinion of such firm, materially interfere with the orderly sale
and distribution of the CU securities being sold by it. CU may, in its sole
discretion and without the consent of Home, withdraw any such registration
statement and abandon the proposed offering in which Home shall have requested
to participate pursuant to this Section.
Section 3.7 Registration Procedures and Expenses.
(a) If and whenever CU is required by the provisions of this
Article III to use its best efforts to effect the registration of any of the
Restricted Stock under the Securities Act (or any successor federal securities
law), Home and its Affiliates (including the underwriters in the case of a
registration of Underlying Shares) (individually referred to as a "selling
holder" or "holder" and collectively referred to as "selling holders" or
"holders") will furnish in writing such information as is reasonably requested
by CU for inclusion in the registration statement relating to such offering and
such other information and documentation as CU shall reasonably request, and CU
will, as expeditiously as possible:
(i) prepare and file with the SEC or any other federal
agency at the time administering the Securities Act (or a successor federal
securities law) a registration statement with respect to such securities and use
its best efforts to cause such registration statement to become and remain
effective for such period as may be necessary to permit the successful marketing
of such securities, but not exceeding 90 days;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act;
(iii) furnish to each selling holder of Restricted Stock
being registered such number of copies of a prospectus and preliminary
prospectus in conformity with the requirements of the Securities Act (or any
successor federal securities law), and such other
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documents as such seller may reasonably request in order to facilitate the
public sale or other disposition of the Restricted Stock being registered owned
by such seller;
(iv) furnish, at the request of any holder or holders of
securities being registered pursuant to this Article III, on the date that such
securities are delivered to the underwriters for sale pursuant to such
registration or if such securities are not being sold through underwriters, on
the date the registration statement with respect to such securities becomes
effective (A) an opinion dated such date of independent counsel representing CU
for the purposes of such registration, addressed to the underwriters, if any,
and to the holder or holders making such request, stating that such registration
statement has become effective under the Securities Act (or such successor law)
and that (a) to the best of the knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the Securities
Act (or such successor federal securities law); (b) the registration statement,
the related prospectus and each amendment or supplement thereto comply as to
form in all material respects with the requirements of the Securities Act (or
such successor law) and the applicable rules and regulations of the SEC
thereunder, except that such counsel need express no opinion as to financial
information or information provided by selling holders contained therein; (c)
such counsel (subject to such customary limitation on the scope of their
investigation as shall be set forth in such opinion) has no reason to believe
that either the registration statement or the prospectus, or any amendment or
supplement thereto, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading except that such counsel need express no
opinion as to financial information or information provided by selling holders
contained therein; (d) the descriptions in the registration statement and in the
prospectus, or any amendment or supplement thereto, of all legal and
governmental matters and all contracts and other legal documents or instruments
are accurate and fairly present the information required to be shown; and (e)
such counsel does not know of any legal or governmental proceedings, pending or
contemplated, required to be described in the registration statement or
prospectus, or any amendment or supplement thereto, or to be filed as exhibits
to the registration statement which are not described and filed as required; and
(B) a letter dated such date, from the independent certified public accountants
of CU, addressed to the underwriters, if any, and to the holder or holders by or
on behalf of whom a request is made, stating that they are independent certified
public accountants within the meaning of the Securities Act (or such successor
law) and that in the opinion of such accountants the financial statements and
other financial data of CU included in the registration statement or the
prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act (or such successor law). Such letter from the independent certified public
accountants shall additionally cover such other financial matters (including
information as to the period ending not more than five business days prior to
the date of such letter) with respect to the registration in respect of which
such letter is being given as the holder of Restricted Stock being registered
may reasonably request;
(v) use its best efforts to register or qualify the
Restricted Stock covered by such registration statement under such other
securities or blue sky laws of such
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jurisdictions as each such selling holder of such Restricted Stock shall
reasonably request and do any and all other acts and things which may be
necessary or reasonably desirable to enable such seller to consummate the public
sale or other disposition in such jurisdictions as may be requested by such
seller; provided, however, that CU shall have no obligation to qualify to do
business in any jurisdiction or to file a general consent to service of process
in any jurisdiction;
(vi) notify each selling holder of Restricted Stock covered
by such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act (or any successor Federal
securities law), of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing;
(vii) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act;
(viii) provide a transfer agent and registrar for all
Restricted Stock covered by such registration statement not later than the
effective date of such registration statement;
(ix) use its best efforts to list all Common Stock covered
by such registration statement on each securities exchange, if any, on which any
of the Common Stock is then listed (unless such Common Stock is already so
listed) if such listing is then permitted under the rules of such exchange or
with the NASDAQ, National Market System; and
(x) undertake to take such further actions as may be
reasonably requested by the underwriters.
(b) If any registration statement pursuant to Section 3.5 or 3.6
shall have been declared effective and, in the judgment of CU, (A) any event
shall occur or state of facts exist (other than as described in clause (B))
which requires a notice to the selling holders of Restricted Stock pursuant to
clause (vi) of paragraph (a) of this Section 3.7 or (B) the offering at the time
of Restricted Stock pursuant to such registration statement would adversely
affect, or would be improper in view of, a public offering, financing,
reorganization, recapitalization, merger, consolidation, acquisition, or other
similar transaction, or negotiations, discussions or pending proposals with
respect thereto, immediately upon receipt of notice to such effect from CU, Home
shall cease to offer or sell any Restricted Stock registered thereunder and
cease to deliver or use the prospectus in use thereunder. In the case of any
matter described in clause (A), CU shall, as promptly as practicable, furnish to
each selling holder a reasonable number of copies of a supple-
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ment to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchaser of such securities, such prospectus shall
not include an 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
not misleading in the light of the circumstances then existing. In the case of
any matter described in clause (B), CU shall promptly notify Home at such times
as, in CU's judgment, such offering may be recommended (which shall be no later
than 90 days following such suspension); provided that Home may, in its sole
discretion, discontinue such offering with respect to the Restricted Stock
covered thereby, in which event Home shall be entitled to "demand" registration
rights hereunder to the full extent as if such offering had not been requested.
All expenses incurred by CU in complying with Sections 3.5 and 3.6
hereof, including, without limitation, all registration and filing fees,
printing expenses, fees and disburse ments of counsel for CU and blue sky fees
and expenses are herein called "Registration Expenses," except for all
underwriting discounts and selling commissions applicable to the sales, all fees
and disbursements of counsel for any selling holder or holders (including
counsel designated by any seller for a "due diligence" investigation of CU) and
the expense of any special audits incident to or required by such registration,
all of which are herein called "Selling Expenses." CU shall pay all Registration
Expenses and the selling holder or holders of Restricted Stock being registered
shall pay all Selling Expenses.
Section 3.8 Indemnification. In the event of a registration of any of
the Restricted Stock under the Securities Act (or any successor Federal
securities law) pursuant to this Article III, CU will indemnify and hold
harmless each underwriter of such Restricted Stock, Home and its Affiliates as
the transferors of the Restricted Stock or any portion thereof to underwriters,
and each other person, if any, who controls such seller, assignor or underwriter
within the meaning of Section 15 of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter, assignor or controlling person may become subject under the
Securities Act (or such successor law) or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which such Restricted Stock
shall have been registered under the Securities Act (or such successor law), any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, 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; and will reimburse such
seller, transferor and underwriter and each such controlling person for any
legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that CU will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, said preliminary prospectus or said
prospectus or said amendment or supplement in reliance upon and in conformity
with written information furnished to CU through an instrument executed by such
seller, transferor or underwriter specifically for use in the preparation
thereof; and provided further that if any losses, claims, damages or liabilities
arise out of or are based
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upon an untrue statement, alleged untrue statement, omission or alleged omission
contained in any preliminary prospectus which did not appear in the final
prospectus, CU shall not have any such liability with respect thereto to such
seller, transferor or underwriter or any person who controls such seller,
transferor or underwriter within the meaning of Section 15 of the Securities Act
if such seller, transferor or underwriter or any person on their behalf
delivered a copy of the preliminary prospectus to the person alleging such
losses, claims, damages or liabilities and failed to deliver a copy of the final
prospectus, as amended or supplemented if it has been amended or supplemented,
to such person at or prior to the written confirmation of the sale to such
person.
In the event of any registration of any Restricted Stock under the
Securities Act (or a successor Federal securities law) pursuant to this Article
III, each seller of such Restricted Stock (other than any underwriter or dealer
purchasing Underlying Shares), and Home and its Affiliates, as transferors of
Restricted Stock, severally and not jointly, will indemnify and hold harmless
CU, each person, if any who controls CU within the meaning of Section 15 of the
Securities Act, each officer of CU who signs the registration statement and each
director of CU against any and all such losses, claims, damages, or liabilities
arising out of or based upon any untrue statement or alleged untrue statement in
or omission or alleged omission from any such registration statement,
prospectus, amendment or supplement, if the untrue statement or omission or
alleged untrue statement or omission in respect of which such loss, claim,
damage or liability is asserted was made in reliance upon and in conformity with
information furnished in writing to CU by or on behalf of such seller or
transferor specifically for use in connection with the preparation of such
registration statement, preliminary prospectus, prospectus, amendment or
supplement; provided, however, that, if any losses, claims, damages or
liabilities arise out of or are based upon an untrue statement, alleged untrue
statement, omission or alleged omission contained in any preliminary prospectus
which did not appear in the final prospectus, such seller or transferor shall
not have any such liability with respect thereto to CU, any person who controls
CU within the meaning of Section 15 of the Securities Act, any officer of CU who
signed the registration statement of any director of CU if CU or any person on
their behalf delivered a copy of the preliminary prospectus to the person
alleging such losses, claims, damages or liabilities and failed to deliver a
copy of the final prospectus, as amended or supplemented if it has been amended
or supplemented, to such person at or prior to the written confirmation of the
sale to such person; and provided further that the liability of any such seller
or transferor so to indemnify shall be limited to an amount equal to the amount
received by such seller upon the sale of such Restricted Stock pursuant to such
registration statement, or by such transferor from the seller, as the case may
be.
Payments in respect of indemnifications required by this Section 3.8
shall be made by periodic payments during the course of the investigation or
defense, as and when bills are received or expenses incurred. Any party which
proposes to assert the right to be indemnified under this Section 3.8 will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim is to be made against
an indemnifying party under this Section 3.8, notify each such indemnifying
party of the commencement of such action, suit or proceeding, enclosing a copy
of all papers served, but the omission so to notify such indemnifying party of
any such action, suit or proceeding shall not relieve it from any liability
which
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it may have to any indemnified party otherwise than under this Section 3.8. In
case any such action, suit or proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in, and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party, and after notice from such indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its own counsel in any such
action, but the fees and expenses of such counsel shall be at the expense of
such indemnified party, when and as incurred, unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying party, (ii) the indemnified party shall have reasonably concluded
that there may be a conflict of interest between the indemnifying party and the
indemnified party in the conduct of the defense of such action (in which case
the indemnifying party shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (iii) the indemnifying party shall
not in fact have employed counsel to assume the defense of such action. An
indemnifying party shall not be liable for employed counsel to assume the
defense of such action. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent. In no event
shall an indemnifying party be required to pay for more than one counsel for an
indemnified party, exclusive of local counsel.
Section 3.9 Obligations of CU with Respect to Underwritten Offering. In
the event that Restricted Stock shall be sold pursuant to a registration
statement in an underwritten offering pursuant to Section 3.5, CU agrees to
enter into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including, without limiting the generality of the
foregoing, customary provisions with respect to indemnification by CU of the
underwriters of such offering. CU shall have the right to approve the managing
underwriters for such offering (which in no event shall include an affiliate of
Home); provided, however, that such approval shall not be unreasonably withheld.
Section 3.10 Rule 144 Requirements. CU shall undertake to make publicly
available and available to the holders of Restricted Stock, pursuant to Rule 144
of the SEC under the Securities Act, such information as shall be necessary, and
to take such further action as any such holder may reasonably request, to enable
the holders of Restricted Stock to make sales of Restricted Stock pursuant to
the Rule. CU shall furnish to any holder of Restricted Stock upon request (after
the preceding sentences shall have become applicable), a written statement
executed by CU as to the steps it has taken to comply with the current public
information requirements of Rule 144.
Section 3.11 Rights of First Refusal.
(a) In the event Home or its Affiliates intend, at any time
after the occurrence of an Acquisition Event to sell, transfer or dispose of any
Restricted Stock (other than
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to an Affiliate of Home in a transaction not intended to circumvent the transfer
restrictions contained in this Agreement) other than (i) pursuant to a sale or
transfer of Warrants to one or more underwriters or dealers in accordance with
Section 3.4(c) (in which case Section 3.11(b) shall govern) or (ii) at any time
after CU has failed for any reason to repurchase such Restricted Stock pursuant
to Article II hereof on the closing date scheduled for such repurchase, then:
(i) Home shall notify CU in writing of its or its
Affiliate's intention to sell, transfer or dispose of such Restricted Stock
specifying the number of shares or amount of Warrants, as the case may be,
proposed to be disposed of, the identity or identities of the prospective
purchaser or purchasers thereof, the proposed purchase price therefor and the
material terms of any agreement relating thereto (the "Sale Notice"); and
(ii) CU shall have the right, by written notice of its
exercise of its right of first refusal given to Home within 15 calendar days
after CU's receipt of such notice of intention from Home, to purchase (or to
cause a Person designated by CU to purchase) all, but not less than all of, the
Restricted Stock specified in such notice of intention for cash at the gross
price set forth therein (including broker's commissions and other transaction
costs of Home or its Affiliate to be paid or absorbed by the prospective
purchaser) if the terms set forth in such notice of intention provide for a cash
sale. If the purchase price specified in such notice of intention include any
property other than cash, the purchase price at which CU shall be entitled to
purchase shall be (x) the amount of cash included in the purchase price
specified in such notice of intention plus (y) property, to the extent feasible,
substantially similar to the property described in such notice of intention and
in any case of equivalent value to such property (as agreed to by CU and Home,
or as determined by a nationally recognized investment banking firm selected by
Home and CU).
If CU shall have exercised its right of first refusal under this
paragraph (a) (including the designation of another purchaser as referred to in
the next subparagraph), the closing of the purchase of the Restricted Stock as
to which such right CU shall have been exercised shall take place as promptly as
practicable, but in no event more than 10 Business Days after CU gives notice of
such exercise, and if such closing does not occur within such 10 days, such
right of first refusal provided for herein (including any assignment thereof)
shall be null and void and of no further force and effect with respect to such
Restricted Stock and this Section 3.11 shall no longer apply to any sale or
dispo sition or proposed sale or disposition of such Restricted Stock; provided
that if prior notification to or approval of the Federal Reserve Board or any
other regulatory authority is required in connection with such purchase, CU
shall promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which, as the case
may be, (i) any required notification period has expired or been terminated, or
(ii) such approval has been obtained and, in either event, any requisite waiting
period shall have passed.
If CU elects not to exercise, or fails to exercise or cause to be
exercised, its right of first refusal provided in this paragraph (a) within the
time specified for such exercise or if the Federal Reserve Board or any other
regulatory authority disapproves of CU's proposed purchase, Home and
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its Affiliates shall be free thereafter for a period of 90 days to consummate
the sale, transfer or other disposition with any purchaser or purchasers of the
Restricted Stock who shall have been specified in the sale notice at the price
(or at any price in excess of such price) and on substantially the terms
specified therein.
The right of first refusal provided for in this paragraph (a) may only
be exercised with respect to the initial sale, transfer or other disposition of
the Restricted Stock by Home or an Affiliate (whether in blocks or as a whole)
to a person that is not an Affiliate of Home and not to subsequent sales,
transfers or other dispositions by purchasers of Restricted Stock.
(b) If Home or its Affiliates at any time propose to transfer
any Warrants to any underwriters or dealers pursuant to the provisions of
Section 3.4, other than at any time after CU has failed for any reason to
repurchase such Warrants pursuant to Article II hereof on the closing date
scheduled for such repurchase, then Home shall first notify CU in writing of
such intention, specifying the Warrants which it proposes to sell or transfer
and the name or names of the proposed dealers or of the proposed managing
underwriters in the underwriting syndicate to which the sale or transfer is
proposed to be made. CU shall have the right, exercisable by written notice
given to Home 15 calendar days after CU's receipt of notice from Home pursuant
to the immediately preceding sentence, to repurchase, or to cause a third party
designated by CU to purchase, all, but not fewer than all, the Warrants proposed
to be sold or transferred on the terms and conditions hereinafter set forth. Any
notice given by CU of exercise of its repurchase rights under this paragraph (b)
shall specify a place in Los Angeles and a Business Day not earlier than 10 days
and not later than 15 days after the date of such notice for the closing of the
repurchase of the Warrants being repurchased. The purchase price payable to CU
or its designee for the repurchase of Warrants pursuant to this paragraph (b)
shall be a cash price equal to the product of (x) the number of Underlying
Shares covered by the relevant Warrants (calculated as of the date of the
closing of the repurchase) and (y) the Share Price on such date. At the closing
of a sale of Warrants pursuant to the foregoing provisions, CU or its designee
will make payment to Home of the aggregate price for the Warrants to be
repurchased in one of the manners set forth in Section 2.1(c). At such closing,
Home shall deliver to CU or its designee the certificates representing the
Warrants to be repurchased and CU shall deliver to Home replacement certificates
representing the Warrants (if any) which are not to be repurchased but were
covered by the certificate or certificates surrendered by Home. Any election by
CU pursuant to this paragraph to exercise its repurchase rights in respect of
Warrants shall be irrevocable. In the event CU fails timely to exercise its
repurchase rights in respect of Warrants within the period specified above
during which it must do so or notifies Home in writing prior to the expiration
of such period that it does not intend to exercise such rights or its designee
fails to repurchase Warrants on the date set for the closing of such a purchase,
Home and its Affiliates shall be free thereafter to consummate the sale and
transfer of the Warrants specified in this notice to CU under this paragraph to
any underwriters or dealers who agree to exercise the Warrants and sell the
Underlying Shares in accordance with the provisions of Section 3.4(c), and this
Section 3.11 shall no longer apply to such sale or transfer of such Warrants.
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(c) Home shall have the right to withdraw any notice given by it
pursuant to this Section 3.11 at any time before CU shall have given notice of
its intention to exercise its right of first refusal hereunder (including by
designation of another purchaser).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CU
CU represents and warrants to Home that:
Section 4.1 Authorization of Agreement; No Conflicts.
(a) The execution and delivery of this Agreement by CU and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of CU. This Agreement has been
duly executed and delivered by CU and constitutes a valid and binding obligation
of CU, enforceable in accordance with its terms.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with, or
result in any violation of or default or loss of a material benefit under any
provision of the articles of incorporation, articles or association or bylaws of
CU or CU Bank or, except for the necessity of obtaining Requisite Regulatory
Approvals, any material mortgage, indenture, lease agreement or other material
instrument or any permit, concession, grant, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to CU or
CU Bank or their respective properties, other than any such conflict, violation,
default or loss which will not have a material adverse effect on CU or CU Bank.
No material consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority is required in connection
with the execution and delivery of this Agreement by CU and CU Bank or the
consummation by CU of the transactions contemplated hereby except for any
approvals required to be obtained pursuant to the BHC Act or the Policy State
ment of the Board of Governors of the Federal Reserve System on Nonvoting Equity
Investments by Bank Holding Companies, 12 C.F.R. Section 225.143 (the "FRB
Guidelines"), or any other applicable laws, for the execution and delivery of
this Agreement and the issuance of the Warrants by CU.
Section 4.2 Authorized Stock CU has taken all necessary corporate and
other action to authorize and reserve and, subject to obtaining the governmental
and other approvals and consents referred to herein, to permit it to issue, and,
at all times from the date hereof until the obligation to deliver Common Stock
upon the exercise of the Warrants terminates, will have reserved for issuance,
upon exercise of the Warrants, shares of Common Stock necessary for Home to
exercise the Warrants, and CU will take all necessary corporate action to
authorize and reserve for issuance all additional shares of Common Stock or
other securities which may be issued pursuant to this Agreement. The shares of
Common Stock to be issued upon due exercise of the Warrants, including all
additional shares of Common Stock or other securities which may be issuable
pursuant to this
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Agreement, upon issuance pursuant hereto, shall be duly and validly issued,
fully paid and nonassessable, and shall be delivered free and clear of all
liens, claims, charges and encumbrances of any kind or nature whatsoever,
including any preemptive rights of any stockholder of CU.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF HOME
Home represents and warrants to CU that:
Section 5.1 Due Execution of Agreement; No Conflicts.
(a) This Agreement has been duly executed and delivered by Home
and constitutes a valid and binding obligation of Home, enforceable in
accordance with its terms.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with, or
result in any violation of or default or loss of a material benefit under, any
provision of the certificate of incorporation or By-laws of Home or, except for
the necessity of obtaining Requisite Regulatory Approvals, any material
mortgage, indenture, lease, agreement or other material instrument, or any
permit, concession, grant, franchise, license, judgment, order decree, statute,
law, ordinance, rule or regulation applicable to Home or its respective
properties, other than any such conflict, violation, default or loss which (i)
will not have a material adverse effect on Home and its Subsidiaries taken as a
whole. No material consent, approval, order or authorization of, or
registration, declaration or filing with, any Govern mental Entity is required
in connection with the execution and delivery of this Agreement by Home or the
consummation by Home of the transactions contemplated hereby, except for (a)
filings required in order to obtain Requisite Regulatory Approvals, and (b) any
approvals required to be obtained pursuant to the BHC Act, or the FRB Guidelines
or any other applicable law for the execution and delivery of this Agreement by
CU, Home and the issuance of the Warrants.
ARTICLE VI
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth
below (in their singular and plural forms as applicable) shall have the meanings
set forth below.
"Affiliate" or "affiliate" shall mean, with respect to any corporation,
any person that, directly or indirectly, controls or is controlled by or is
under common control with such corporation.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
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"Business Day" shall mean any day, other than a Saturday, Sunday or
legal holiday in the State of California, on which banks are open for
substantially all their banking business in Los Angeles.
"Change in Bank Control Act" means the Change in Bank Control Act of
1978, as amended.
"Covered Shares" shall mean on any date, with respect to any Warrants,
the maximum number of shares of Common Stock that would be purchasable upon the
exercise on such date of such Warrants, assuming that such Warrants may be
exercised on such date to purchase the maximum number of shares of Common Stock
purchasable pursuant to the terms thereof (including the limitations contained
in the second paragraph of the certificate evidencing each such Warrant) without
regard to any provision therein (other than such limitations) or in this
Agreement or in any law limiting the right of any holder of such Warrants to
acquire shares otherwise purchasable thereunder.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"Governmental Entity" shall mean any court, administrative agency or
commission or other governmental authority or instrumentality.
"Market Value" shall mean, on any date, the average of the closing sale
prices of a share of Common Stock on the principal securities exchange on which
the Common Stock is traded, or, if the Common Stock is not at the time listed on
any national securities exchange, as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), on the 10 trading days
immediately preceding such date, (or such fewer number of trading days
immediately preceding such date for which shares of Common Stock have been
listed for trading on such exchange or quoted on NASDAQ); provided, however,
that if Home seeks a determination of the fair market value of a share of Common
Stock pursuant to the provisions of Section 2.2, Market Value shall, if required
pursuant to the terms of such Section, mean the fair market value of a share of
Common Stock on such date determined pursuant to such Section.
"Person" or "person" shall mean an individual, corporation,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Regulatory Authority" shall mean any United States federal or state
government or governmental authority the approval of which is legally required
for consummation of the Merger.
"Requisite Regulatory Approvals" shall mean all material permits,
approvals and consents required to be obtained, and all waiting periods required
to expire, prior to the consummation of the issuance of the Covered Shares under
applicable federal laws of the United States or applicable laws of any state
having jurisdiction over Home or CU.
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"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Share Price" shall mean, with respect to any Warrants, the amount by
which, on the date of the Acquisition Event triggering the exercisability of the
Warrants (i) the Warrant Price on such date is less than (ii) the greatest of:
(i) the Market Value of a share of Common Stock on such
date; and
(ii) the highest price paid on or prior to such date for a
share of Common Stock (including in any merger or consolidation) by a purchaser
or group of purchasers acting in concert of 50% or more of the outstanding
shares of Common Stock, or, in the case of a purchaser of 50% or more of the
consolidated assets of CU (as shown on the books of CU), the Market Value of a
share of Common Stock on the date of consummation of such asset acquisition.
"Subsidiary" shall mean, with respect to any corporation (the
"parent"), any other corporation, association or other business entity of which
more than 50% of the shares of the Voting Stock are owned or controlled,
directly or indirectly, by the parent or by one or more Subsidiaries of the
parent, or by the parent and one or more of its Subsidiaries.
"Voting Stock" shall mean the stock entitling the holders thereof to
vote in the election of the directors or trustees of the corporation,
association, or other business entity in question, except that it shall not
include any stock so entitling the holders thereof to vote only upon the
happening of a contingency, whether or not such contingency has occurred.
"Warrant Call Price" shall mean, when used with respect to any Warrant,
the product of (i) the number of Covered Shares on such date and (ii) the Share
Price on such date; provided that the Warrant Call Price with respect to any
Warrant shall in no event exceed (x) the quotient obtained by dividing
$5,000,000 by the number of Covered Shares subject to all the outstanding
Warrants multiplied by (y) the number of Covered Shares subject to such Warrant.
ARTICLE VII
TERMINATION
Section 7.1 Termination. Subject to Section 7.2, this Agreement may be
terminated in the following circumstances:
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(a) at the effective time of the Merger, as set forth in the
Merger Agreement;
(b) at the termination of the Merger Agreement prior to the
occurrence of an Acquisition Event; or
(c) two years after the occurrence of an Acquisition Event.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement pursuant to Section 7.1(c), the rights of the parties hereto shall
forthwith become void; provided that, if the Agreement shall terminate pursuant
to Section 7.1(c) and any party has filed an application to purchase securities
with any regulatory authority, the Agreement shall not terminate as provided in
Section 7.1(c), but shall remain in full force and effect until the day which is
30 Business Days (plus any applicable waiting periods) after the receipt or
denial of regulatory approval or consent, at which time the Agreement shall then
terminate.
Section 7.3 Indemnification for Breach. Each party to this Agreement
agrees to indemnify and hold harmless the other party against any loss, claim,
damage or liability arising out of or based upon a Default of this Agreement by
such defaulting party in accordance with the procedures set forth in the last
paragraph of Section 3.8 of this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or mailed
by registered or certified mail (return receipt requested) to the parties at the
following addresses (or any such other address for a party as shall be specified
by like notice):
(a) If to CU at:
16030 Ventura Boulevard
Encino, CA 91436
Attn: Stephen G. Carpenter
Fax: (818) 907-5024
with a copy to:
Anita Wolman, Esq.
16030 Ventura Boulevard
Encino, CA 91436
Fax: (818) 907-5024
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(b) If to Home at:
2633 Cherry Avenue
Signal Hill, CA 90806
Attn: James Staes
Phone: (310) 988-9600
Fax: (310) 426-4526
with a copy to:
Manatt, Phelps & Phillips
11355 West Olympic Boulevard
Los Angeles, California 90064
Attn: Barbara S. Polsky, Esq.
Fax: (310) 312-4224
Section 8.2 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.3 Amendment. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors or the duly
authorized committees thereof. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. The
parties hereto agree to make such amendments as may be necessary to respond to
the request of any Regulatory Authority with respect to this Agreement.
Section 8.4 Waiver. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof.
Section 8.5 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof; (b) except as
contemplated in this Agreement, is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder; and (c) except as
contemplated in this Agreement, shall not be assigned by operation of law or
otherwise. CU and Home agree that, except as required by law, it shall not issue
any press release with respect to the transactions contemplated by this
Agreement without consulting with each other party hereto.
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Section 8.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, CU and Home have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date first
above written.
CU BANCORP
By:
---------------------------------
HOME INTERSTATE BANCORP
By:
---------------------------------
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EXHIBIT A
WARRANT
No.
January 10, 1996 1,492,390 Shares
CU BANCORP
This is to certify that, for value received and subject to the terms
and conditions provided for in a Warrant Purchase Agreement dated as of January
10, 1996 (the "Agreement") by and between Home Interstate Bancorp, a California
corporation ("Home"), and CU Bancorp, a California corporation ("CU"), pursuant
to which Home and its assigns are entitled to purchase from CU, on the terms and
conditions set forth therein, 1,492,390 fully paid and nonassessable shares of
common stock of CU ("Common Stock"), subject to adjustment as provided in the
Agreement. Terms not otherwise defined herein shall have the meanings ascribed
to them in the Agreement.
This Warrant may be exercised by the holder (except any holder which
shall not be permitted by the Bank Holding Company Act of 1956, as amended ("BHC
Act"), or other applicable law to own, or shall not have obtained all regulatory
approvals required by such Act or other applicable law as a precondition to its
ownership of, the shares of Common Stock covered hereby) as to the whole or any
part of the shares of Common Stock covered hereby at any time when such exercise
shall be permitted under the terms of this Warrant, by surrender of this Warrant
at the principal office of CU or at the office of any transfer agent for the
Warrant and upon payment to CU of the Warrant Price for shares so purchased by
wire transfer to a bank account designated by CU. Thereupon, this Warrant shall
be deemed to have been exercised and the person exercising the same to have
become a holder of record of shares of Common Stock (or of the other securities
or property to which it is entitled upon such exercise) purchased hereunder for
all purposes, and certificates for shares so purchased shall be delivered to the
purchaser. If this Warrant shall be exercised in respect of a part of the shares
of Common Stock covered hereby, the holder shall be entitled to receive a new
Warrant covering the number of shares in respect of which this Warrant shall not
have been exercised, but otherwise identical hereto.
This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at such office or agency of CU, for new Warrants of this tenor
representing in the aggregate the right to
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subscribe for and purchase the number of shares which may be subscribed for and
purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase not less than 1,000 shares of Common Stock (except to
the extent necessary to round out the balance of the number of shares
purchasable hereunder).
CU covenants and agrees that all shares which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance, be fully
paid and non-assessable and free from all taxes, liens and charges with respect
to the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue). CU further covenants and agrees that during
the period within which the rights represented by this Warrant may be exercised,
CU will at all times have authorized, and reserved, a sufficient number of
shares of Common Stock to provide for the exercise of the rights represented by
this Warrant, and will at its expense expeditiously upon each such reservation
of shares use its best efforts to procure the listing thereof (subject to
issuance or notice of issuance) on all stock exchanges on which the shares of
Common Stock are then listed, or if CU Shares are not then listed on a stock
exchange on NASDAQ National Market System.
The rights of the holder of this Warrant shall be subject to the
following further terms and conditions:
Section 1.1 CU shall at all times reserve and keep available, free from
preemptive rights, out of its authorized and unissued Common Stock or shares of
Common Stock held in treasury, for the purpose of effecting the exercise of this
Warrant, the full number of shares of Common Stock then issuable upon the
exercise of this and all other outstanding Warrant, computed on the assumption
that the adjustments required by Section 1.11 hereof have become effective, in
the event such is not then the case.
Section 1.2 CU will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock upon exercise of this
Warrant. CU shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that of the holder of the Warrant or Warrants
to be exercised, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to CU the amount of any such tax, or
has established, to the satisfaction of CU, that such tax has been paid.
Section 1.3 This Warrant shall not entitle the holder of any rights of
a shareholder of CU, either at law or in equity, or to any notice of meetings of
shareholders or of any other proceedings of CU.
Section 1.4 Subject to Section 1.5 and the terms and conditions set
forth in the Agreement, this Warrant and all rights hereunder are transferable
(in whole or in part), on the books of CU by the registered holder thereof in
person or by duly authorized attorney, upon surrender of this Warrant, properly
endorsed, to CU (or if CU shall have notified the registered holder hereof of
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the appointment of an independent transfer agent for Warrants, then to such
transfer agent). As used herein the term "this Warrant" shall mean and include
any Warrant or Warrants hereafter issued in consequence of transfers of this
Warrant in whole or in part.
Section 1.5 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS WARRANT MAY NOT BE SOLD OR
TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO THIS
WARRANT WHICH IS EFFECTIVE UNDER THE SECURITIES ACT, OR (ii) AN OPINION OF
COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS
AVAILABLE. THE TRANSFERABILITY OF THIS WARRANT IS FURTHER SUBJECT TO THE
PROVISIONS OF A WARRANT PURCHASE AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY
OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF CU
BANCORP.
Section 1.6 The holder of this Warrant, by the acceptance hereof,
agrees that prior to the exercise of any Warrants, at a time when said Warrants
have not been registered under the Securities Act or any similar Federal
statute, it will, if it has not requested or is then not entitled to such
registration pursuant to the provisions of Article III of the Agreement, deliver
to CU a written representation that it is acquiring the shares of Common Stock
issuable upon the exercise of such Warrants for its own account for investment,
and not with a view to, or for sale in connection with, any distribution
thereof, and not with any present intention of distributing or selling the same.
Section 1.7 (a) This Warrant shall terminate and be of no further
force or effect as provided in Article VII of the Agreement.
(b) Notwithstanding any other provision contained herein,
this Warrant and the rights conferred hereby shall terminate, and the full
consideration paid by Home for this Warrant shall be immediately due and payable
to Home, if CU or Home receives written notice from the Federal Reserve Board to
the effect that the execution and delivery of the Agreement or the issuance of
the Warrants is not consistent with Section 3 of the BHC Act.
Section 1.8 This Warrant shall be governed by and construed in
accordance with the laws of the State of California.
Section 1.9 This Warrant incorporates by reference all of the terms and
conditions of the Agreement.
CU BANCORP
By:
---------------------------------
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EXHIBIT D
WARRANT PURCHASE AGREEMENT
This WARRANT PURCHASE AGREEMENT (the "Agreement"), dated as of January
10, 1996, between CU Bancorp, a California corporation ("CU"), and Home
Interstate Bancorp, a California corporation ("Home") is made with reference to
the following:
RECITALS
A. CU, California United Bank, National Association, a wholly owned
subsidiary of CU ("CU Bank"), Home and Home Bank, a wholly owned subsidiary of
Home ("Home Bank"), have entered into an Agreement and Plan of Reorganization
(the "Merger Agreement") whereby Home and Home Bank would be merged with and
into CU and CU Bank, respectively (collectively, the "Merger").
B. As partial consideration to CU for entering into the Merger
Agreement, Home has agreed to issue to CU a warrant entitling the holder thereof
to purchase up to 19.9% (or 1,082,224 shares) of the outstanding common stock of
Home ("Common Stock"), assuming the exercise of all Warrants (as hereafter
defined), and all other options, warrants or other securities convertible into
Common Stock, subject to such restrictions and conditions as may be imposed by
bank regulatory authorities having jurisdiction over CU and Home, respectively.
C. Concurrent with the execution of this Agreement, CU and Home shall
enter into a separate warrant agreement, with substantially identical terms and
conditions as are set forth in this Agreement, pursuant to which CU shall issue
to Home a warrant entitling the holder thereof, upon the occurrence of certain
events as set forth in such agreement, to purchase up to 19.9% (on a fully
diluted basis) of the outstanding common stock of CU.
D. Terms used herein and not otherwise defined shall have the
meanings ascribed to them in Article VI hereof.
In consideration of these premises and of the representations,
covenants and agreements hereinafter set forth, Home and CU hereby agree as
follows:
ARTICLE I
ISSUANCE AND SALE OF WARRANT
Section 1.1 Issuance and Sale of the Warrant. Subject to the terms and
conditions of this Agreement, and in reliance upon the representations and
warranties hereinafter set forth, and in consideration for the execution and
delivery of the Merger Agreement, Home hereby issues to CU one or more warrants
(such warrants, together with any warrants issued pursuant to Section 1.4, the
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"Warrants") entitling the holder thereof to purchase in the aggregate 1,082,224
duly authorized and newly issued shares of Common Stock, subject to adjustment
as provided below. The Warrants being issued at the time of the execution of
this Agreement will be evidenced by a single certificate in the form of Exhibit
A hereto. All Warrants issued pursuant to Section 1.4 will be evidenced by one
or, at CU's request, more certificates in the form of Exhibit A hereto, dated
the date of their issuance, exercisable at the adjusted exercise price at the
time in effect for the Warrants issued pursuant to this Section 1.1.
Section 1.2 Warrant Price. The initial exercise price at which shares
of Common Stock may be acquired pursuant to exercise of the Warrants shall be
$12.050 per share (the "Warrant Price"), subject to adjustment as provided in
Section 1.4.
Section 1.3 Exercise of Warrants.
(a) The Warrants may be exercised in whole or in part only after the
occurrence of an Acquisition Event.
(b) As used herein, an "Acquisition Event" means any of the following
events:
(i) any person (other than CU or an Affiliate of CU) shall have
commenced (as such term is defined in Rule 14d-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), or shall have
filed a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to, a tender offer or
exchange offer to purchase any shares of Common Stock such that, upon
consummation of such offer, such person would own or control 10% or
more of the then outstanding Common Stock;
(ii) Home or Home Bank, without having received CU's prior
written consent or except as permitted by the Merger Agreement, shall
have authorized, recommended, proposed or publicly announced an
intention to authorize, recommend or propose, or entered into, an
agreement with any person (other than CU or any Affiliate of CU to (A)
effect a merger, consolidation or similar transaction involving Home or
Home Bank, (B) sell, lease or otherwise dispose of assets of Home or
Home Bank representing 10% or more of the consolidated assets of Home
or Home Bank, or (C) issue, sell or otherwise dispose of (including by
way of merger, consolidation, share exchange or any similar
transaction) securities representing 10% or more of the voting power of
Home or Home Bank (any of the foregoing an "Acquisition Transaction");
(iii) any person (other than Home or Home Bank or CU or CU Bank
in a fiduciary capacity) shall have acquired beneficial ownership (as
such term is defined in Rule 13d-3 under the Exchange Act) or the right
to acquire beneficial ownership of, or any "group" (as such term is
defined in the Exchange Act) shall have been
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formed which beneficially owns or has the right to acquire beneficial
ownership of, 10% or more of the then outstanding Common Stock; or
(iv) the holders of Common Stock shall not have approved the
Merger Agreement at the meeting of such stockholders held for the
purpose of voting on the Merger Agreement, such meeting shall not have
been held or shall have been canceled prior to termination of the
Merger Agreement or Home's Board of Directors shall have withdrawn or
modified in a manner adverse to CU the recommendation of Home's Board
of Directors with respect to the Merger Agreement, in each case after
any person (other than CU) shall have (A) publicly announced a
proposal, or publicly disclosed an intention to make a proposal, to
engage in an Acquisition Transaction or (B) filed an application (or
given a notice), whether in draft or final form, under the BHC Act or
the Change in Bank Control Act for approval to engage in an Acquisition
Transaction.
As used in this Agreement, "person" shall have the meaning specified in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.
(c) In the event CU is entitled to and wishes to exercise the
Warrants, it shall send to Home a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three Business Days nor later than 60 Business Days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of the Federal Reserve Board or any other regulatory
agency is required in connection with such purchase, CU shall promptly file the
required notice or application for approval, shall promptly notify Home of such
filing, and shall expeditiously process the same and the period of time that
otherwise would run pursuant to this sentence shall run instead from the date on
which any required notification periods have expired or been terminated or such
approvals have been obtained and any requisite waiting period or periods shall
have passed.
(d) At the closing referred to in subsection (c), CU shall pay to
Home the aggregate purchase price for the shares of Common Stock purchased
pursuant to the exercise of the Warrants in immediately available funds by wire
transfer to a bank account designated by Home, provided that failure or refusal
of Home to designate such a bank account shall not preclude CU from exercising
the Warrants.
(e) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (d), Home shall deliver to CU a
certificate or certificates representing the number of shares of Common stock
purchased by CU.
(f) Upon the giving by CU to Home of the written notice of exercise
of the Warrants provided for under subsection (c) and the tender of the
applicable purchase price in
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immediately available funds, CU shall be deemed to be the holder of record of
the shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of Home shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
CU. Home shall pay all expenses, and any and all federal, state and local taxes
or other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates hereunder in the name of CU.
Section 1.4 Additional Warrants; Adjustments to Warrant Price and
Number of Shares. The number of shares to which the Warrants may be exercised
and the Warrant Price shall be subject to adjustment as provided below:
(a) Additional Warrants. If Home shall, on one or more occasions
after the date hereof, issue additional shares of Common Stock, and if, as a
result of any such issuance the shares of Common Stock issued or issuable upon
the exercise of Warrants issued pursuant to Section 1.1 hereof shall represent
less than 19.9% of the outstanding Common Stock, assuming the exercise of all
Warrants and all other options, warrants or other securities convertible into
Common Stock, Home shall issue to CU, promptly upon CU's demand, without further
consideration, Warrants to purchase a number of authorized but unissued shares
of Common Stock which, when added to the shares issued or issuable upon the
exercise of such previously issued Warrants, would represent 19.9% as the case
may be of the outstanding Common Stock.
(b) Adjustment for Stock Splits and Combinations. If Home at any time
or from time to time after the date of this Agreement effects a subdivision of
the Common Stock, the Warrant Price then in effect immediately before that
subdivision shall be proportionately decreased, and conversely, if Home at any
time or from time to time after the date of this Agreement combines the
outstanding shares of Common Stock, the Warrant Price then in effect immediately
before the combination shall be proportionately increased. Any adjustment under
this subsection (b) shall become effective at the close of business on the date
the subdivision or combination becomes effective.
(c) Adjustment for Certain Dividends and Distributions. In the event
Home at any time or from time to time after the date of this Agreement makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Warrant Price then in effect shall be
decreased as of the time of such issuance or, in the event such a record date is
fixed, as of the close of business on such record date, by multiplying the
Warrant Price then in effect by a fraction (i) the numerator of which is the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date, and
(ii) the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution; provided, however,
that if such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Warrant Price
shall be
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recomputed accordingly as of the close of business on such record date and
thereafter the Warrant Price shall be adjusted pursuant to this subsection (c)
as of the time of actual payment of such dividends or distributions.
(d) Adjustments for Other Dividends and Distributions. In the event
Home at any time or from time to time after the date of this Agreement makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in securities of Home other
than shares of Common Stock, then in each such event provision shall be made so
that the holders of Warrants shall receive upon exercise thereof, in addition to
the number of shares of Common Stock receivable thereupon, the amount of
securities of Home which they would have received had their Warrants been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
exercise of the Warrants, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 1.4.
(e) Adjustment for Reclassification, Exchange and Substitution. If
the Common Stock issuable upon the exercise of the Warrants is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 1.4),
then and in any such event each holder of Warrants shall have the right
thereafter to receive upon exercise of the Warrants the kind and amount of stock
and other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such Warrants might have been exercised immediately prior to
such reorganization, reclassification or change, all subject to further
adjustment as provided in this Section 1.4.
(f) Reorganization, Mergers, Consolidations and Sales of Assets. If
at any time or from time to time there is a capital reorganization of the Common
Stock (other than a recapitalization, subdivision, combination, reclassification
or exchange of shares provided for elsewhere in this Section 1.4), or a merger
or consolidation of Home with or into another corporation, or the sale of all or
substantially all of Home's properties and assets to any other person, then, as
a part of such reorganization, merger, consolidation or sale, provision shall be
made so that the holders of the Warrants shall thereafter be entitled to receive
upon exercise of the Warrants the number of shares of stock or other securities
or property of Home, or of the successor corporation resulting from such merger
or consolidation or sale, to which a holder of Common Stock deliverable upon
exercise of the Warrants would have been entitled in such capital
reorganization, merger, consolidation or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section
1.4 and the other terms and conditions with respect to the rights of the holders
of the Warrants after the reorganization, merger, consolidation or sale to the
end that the provisions of this Agreement, including this Section 1.4 (including
adjustment of the Warrant Price then in effect and number of shares purchasable
upon exercise of the Warrants) shall be applicable after that event and be as
nearly equivalent to the provisions hereof as may be practicable.
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(g) Sale of Shares Below Warrant Price.
(i) If at any time or from time to time after the date of this
Agreement, Home issues or sells, or is deemed by the express provisions of this
subsection (g) to have issued or sold, Additional Shares of Common Stock (as
hereinafter defined), other than as a dividend or other distribution on any
class of stock as provided in subsection (c) above and other than upon a
subdivision or combination of shares of Common Stock as provided in subsection
(b) above, for an Effective Price (as hereinafter defined) less than the Warrant
Price (or, if an adjusted Warrant Price shall be in effect by reason of a
previous adjustment, then less than such adjusted Warrant Price) then and in
each such case the then existing Warrant Price shall be reduced, as of the
opening of business on the date of such issuance or sale, to a price determined
by multiplying that Warrant Price by a fraction (i) the numerator of which shall
be (A) the number of shares of Common Stock Deemed Outstanding at the close of
business on the day next preceding the date of such issue or sale plus (B) the
number of shares of Common Stock which the aggregate consideration received (or
by express provision hereof deemed to have been received) by Home for the total
number of Additional Shares of Common Stock so issued would purchase at such
Warrant Price, and (ii) the denominator of which shall be the number of shares
of Common Stock Deemed Outstanding at the close of business on the date of such
issuance after giving effect to such issuance of Additional Shares of Common
Stock. For purposes of this paragraph (i), "Common Stock Deemed Outstanding" at
any given time shall mean the sum of (1) the number of shares of Common Stock
actually outstanding at that time, (2) the number of Additional Shares of Common
Stock then deemed to have been issued under paragraphs (iii) or (iv) of this
subsection (g) and (3) the number of shares of Common Stock then issuable upon
exercise of stock options to the extent not already deemed to have been issued
under paragraphs (iii) or (iv) of this subsection (g).
(ii) For the purpose of making any adjustment required under this
subsection (g), the consideration received by Home for any issuance or sale of
securities shall (i) to the extent it consists of cash be computed at the net
amount of cash received by Home after deduction of any expenses payable by Home
and any underwriting or similar commissions, compensation or concessions paid or
allowed by Home in connection with such issue or sale, (ii) to the extent it
consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Board and (iii) if Additional Shares
of Common Stock, Convertible Securities (as hereinafter defined) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
assets of Home for a consideration which covers both, be computed as the portion
of the consideration so received that may be reasonably determined in good faith
by the Board to be allocable to such Additional Shares of Common Stock,
Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under this
subsection (g), if at any time or from time to time after the date of this
Agreement Home issues or sells any rights or options for the purchase of, or
stock or other securities convertible into, Additional Shares of Common Stock
(such convertible stock or securities being hereinafter referred to as
"Convertible Securities"), then in each case Home shall be deemed to have issued
at the time of the
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issuance of such rights or options or Convertible Securities the maximum number
of Additional Shares of Common Stock issuable upon exercise or conversion
thereof and to have received as consideration for the issuance of such shares an
amount equal to the total amount of the consideration, if any, received by Home
for the issuance of such rights or options or Convertible Securities plus, in
the case of such options or rights, the amounts of consideration, if any,
payable to Home upon the exercise of such options or rights and, in the case of
Convertible Securities, the amounts of consideration, if any, payable to Home
upon conversion (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities). No further adjustment of the Warrant
Price, adjusted upon the issuance of such rights, options or Convertible
Securities, shall be made as a result of the actual issuance of Additional
Shares of Common Stock on the exercise of any such rights or options or the
conversion of any such Convertible Securities. If any such rights or options or
the conversion privilege represented by any such Convertible Securities shall
expire or be canceled without having been exercised, the Warrant Price adjusted
upon the issuance of such options, rights or Convertible Securities shall be
readjusted to the Warrant Price which would have been in effect had an
adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such rights or options or rights of conversion
of such Convertible Securities, and such Additional Shares of Common Stock, if
any, were issued or sold for the consideration actually received by Home upon
such exercise, plus the consideration, if any, actually received by Home for the
granting of all such rights or options, whether or not exercised, plus the
consideration received for issuing or selling the Convertible Securities
actually converted plus the consideration, if any, actually received by Home
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) on the conversion of such Convertible Securities.
(iv) For the purpose of the adjustment required under this
subsection (g), if at any time or from time to time after the date of this
Agreement Home issues or sells any rights or options for the purchase of
Convertible Securities, then in each such case Home shall be deemed to have
issued at the time of the issuance of such rights or options the maximum number
of Additional Shares of Common Stock issuable upon conversion of the total
amount of Convertible Securities covered by such rights or options and to have
received as consideration for the issuance of such Additional Shares of Common
Stock an amount equal to the amount of consideration, if any, received by Home
for the issuance of such rights or options, plus the minimum amounts of
consideration, if any, payable to Home upon the exercise of such rights or
options and plus the minimum amount of consideration, if any, payable to Home
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion of such Convertible Securities. No
further adjustment of the Warrant Price, adjusted upon the issuance of such
rights or options, shall be made as a result of the actual issuance of the
Convertible Securities upon the exercise of such rights or options or upon the
actual issuance of Additional Shares of Common Stock upon the conversion of such
Convertible Securities. The provisions of paragraph (iii) above for the
readjustment of the Warrant Price upon the expiration of rights or options or
the rights of conversion of Convertible Securities shall apply in like manner to
the rights, options and Convertible Securities referred to in this paragraph
(iv).
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(v) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued by Home after the date of this Agreement whether or not
subsequently reacquired or retired by Home, other than (i) shares of Common
Stock issued upon exercise of the Warrants and (ii) shares issued by way of
dividend or other distribution on shares of Common Stock excluded from the
definition of Additional Shares of Common Stock by the foregoing clause or
shares of Common Stock resulting from any subdivision or combination of shares
of Common Stock so excluded, or shares issued by way of dividend or other
distribution on, or resulting from any subdivision or combination of, shares of
Common stock excluded from the definition of "Additional Shares of Common Stock"
by the foregoing provision. The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold by Home under this subsection (g), into the aggregate consideration
received or deemed to have been received by Home for such issue under this
subsection (i).
ARTICLE II
REPURCHASE OF WARRANTS AND LIMITATIONS ON SALE
Section 2.1 Repurchase of Warrants.
(a) Prior to the occurrence of an Acquisition Event, Home shall
have no right to repurchase the Warrants and CU shall have no right to require
Home to repurchase the Warrants.
(b) At any time after the occurrence of an Acquisition Event,
Home shall have the right to purchase (or to cause a person designated by Home
to purchase), and CU shall have the right to require that Home repurchase (or,
if Home shall so elect, cause a person designated by Home to purchase), (i) all
(but not fewer than all) the Warrants at the time beneficially owned by CU and
its Affiliates at the Warrant Call Price in effect for such Warrants on the date
of closing (as provided below) and (ii) all (but not fewer than all) of the
shares of Common Stock purchased by CU and its Affiliates pursuant to this
Agreement with respect to which CU has beneficial ownership at a price equal to
the aggregate Market Value for such shares as of the date of closing (as
provided below). Any purchase pursuant hereto shall take place on a Business Day
specified in a notice given by Home to CU or by CU to Home, as the case may be
(but in no event prior to the 30th day following the date of any such notice to
CU or later than the 30th day following the date of any such notice to Home).
(c) The closing of any repurchase of Warrants pursuant to this
Section 2.1 shall take place at 10:00 a.m. Los Angeles Time, on the date set
forth in the applicable notice given by Home or CU, as the case may be, at the
office of CU at the address set forth in Section 8.1. The amount payable to CU
and its Affiliates upon any repurchase of Warrants shall be paid in lawful money
of the United States by a federal funds check or a wire transfer of immediately
available funds to an account designated by CU. Upon receipt of such payment, CU
shall deliver or cause to
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be delivered to Home the certificates representing all the Warrants being
repurchased free and clear of any liens, security interests, charges or
encumbrances.
Section 2.2 Certain Determinations of Market Value. The calculation of
the Market Value, as required herein, shall be calculated in accordance with
this section 2.2 In the event that Market Value is to be determined pursuant to
the terms hereof and there is not an established trading market for shares of
Common Stock, or more than 50% of the outstanding shares of Common Stock are
held beneficially or of record by persons, each of whom owns (individually or
together with members of any group of which such persons are members) 5% or more
of the outstanding shares of Common Stock, then CU may elect to have an
investment banking firm mutually agreeable to Home and CU determine (i) whether,
in the opinion of such investment banking firm, as a result of the absence of an
established trading market or the concentration of stock holdings, Market Value
(determined in accordance with the provisions of the definition of Market Value
in Article VI) does not accurately reflect the fair market value of a block of
1,000 shares of Common Stock on the date as of which Market Value is to be
determined, and (ii) if such investment banking firm determines that Market
Value (as so determined) does not accurately reflect such fair market value,
such investment banking firm shall make determination of the fair market value
of a share of Common Stock on the date as of which Market Value is to be
determined, based on whatever factors it deems relevant, as soon as possible and
shall promptly give written notice to CU and Home of its determination. The fees
of such investment banking firm in connection with such determination shall be
paid by CU. Such determination shall be final and binding on the parties hereto
and the fair market value so determined shall, if higher than the Market Value
that would otherwise apply, be the Market Value of a share of Common Stock. In
the event such determination is not transmitted to CU and Home prior to the
scheduled closing date with respect to any repurchase of Warrants or Common
Stock, the scheduled closing of such transaction shall not be postponed, and
Home shall make such payments on the closing date as are required based on the
Market Value of a share of Common Stock determined as if CU had not made an
election under this Section 2.4. Within three Business Days after such
investment banking firm's determination is made and conveyed to CU and Home in
writing, Home shall make a payment to CU, or CU shall make a payment to Home, as
the case may be, equal to the difference between the amount paid on the closing
date and the amount that would have been so payable had such amount been
determined on the basis of such investment banking firm's determination of the
Market Value of a share of Common Stock.
Section 2.3 Limit on Proceeds. CU agrees, as long as Home shall not
have defaulted in its obligations to repurchase Warrants pursuant to Section
2.1, to pay over to Home any amount by which the profits received by CU and its
Affiliates upon the sale or transfer of Warrants (net of all selling expenses,
underwriting discounts, and commissions and other expenses incurred by CU in
connection with such exercise and sale) shall exceed $5,000,000.
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ARTICLE III
RESTRICTIONS ON TRANSFERABILITY OF STOCK;
COMPLIANCE WITH SECURITIES ACT OF 1933
Section 3.1 Restrictions on Transferability. The Warrants acquired by
CU or any Affiliate of CU pursuant to this Agreement and the Common Stock
issuable upon exercise of such Warrants and any shares of capital stock received
or issued in respect thereof, including, without limitation, securities issued
upon any stock split, stock dividend, recapitalization, merger, consolidation or
similar event (such Warrants and all such shares of Common Stock and securities
being collectively called the "Restricted Stock") shall not be hypothecated, nor
shall any claim or liability exist, nor shall any agreement, written or oral, be
entered into by CU or any Affiliate of CU which would cause any claim or
liability to exist with respect to the Restricted Stock, and the Restricted
Stock shall not be transferred except upon the conditions, to the extent
applicable, specified in this Article III. CU will cause any proposed transferee
of Restricted Stock held by CU or any other Affiliate of CU to agree to take
ownership of such Restricted Stock subject to the provisions, to the extent
applicable, of this Article III; provided, however, that the provisions of this
Article shall cease to apply to any Restricted Stock which shall have been sold
in a registered public offering in accordance with the provisions of this
Article III. CU represents that it is purchasing the Restricted Stock for its
own account and not with a view to or for sale in connection with any
distribution of such Restricted Stock.
Section 3.2 Restrictive Legend; Notice of Proposed Transfers.
(a) Each certificate representing Restricted Stock shall (unless
otherwise permitted by the provisions of paragraph (b) of this Section) be
stamped or otherwise imprinted with a legend in substantially the following
form:
THESE SHARES/WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THESE SHARES/WARRANTS MAY NOT BE SOLD OR TRANSFERRED EXCEPT
PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH
IS EFFECTIVE UNDER SAID ACT OR (ii) AN OPINION OF COUNSEL THAT AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THESE
SHARES/ WARRANTS IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE
AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY OF WHICH IS AVAILABLE FOR
INSPECTION AT THE OFFICE OF THE SECRETARY OF HOME INTERSTATE BANCORP.
(b) Each holder of a certificate representing Restricted Stock
by acceptance thereof agrees to comply in all respects with the provisions of
this Section 3.2(b). Prior to any proposed transfer of any Restricted Stock
other than pursuant to a registration under the Securities Act, the holder
thereof shall give written notice to Home of such holder's intention to effect
such transfer. Each such notice shall describe the manner and circumstances of
the proposed transfer of the Restricted Stock to be transferred and shall be
accompanied by an unqualified written
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opinion of counsel reasonably satisfactory to Home to the effect that such
proposed transfer may be effected without registration under the Securities Act.
Subject to Section 3.11 hereof, upon delivery to Home of such notice and such
opinion of counsel, the holder of such Restricted Stock shall be entitled to
transfer such Restricted Stock in accordance with the terms of such notice
delivered by the holder to Home. Each certificate evidencing Restricted Stock
transferred as above provided shall bear the appropriate restrictive legend set
forth in paragraph (a) above, except that such certificate shall not bear such
restrictive legend if the opinion of counsel referred to above shall be to the
further effect that such legend is not required in order to establish compliance
with any provisions of the Securities Act.
Section 3.3 No Transfers Prior to Acquisition Event. Notwithstanding
anything to the contrary set forth in this Agreement or the Restricted Stock,
neither CU nor any Affiliate of CU shall sell, transfer or otherwise dispose of
all or any portion of the Warrants owned by it, other than to an Affiliate of
CU, except after the occurrence of an Acquisition Event; provided, however, that
following an Acquisition Event, if Home or CU shall give notice of its election
to exercise its rights under Section 2.1, then such right of CU and its
Affiliates to sell, transfer or otherwise dispose of the Restricted Stock shall
no longer be exercised unless Home shall have defaulted in its obligation to
repurchase such Restricted Stock on the date specified in any notice.
Section 3.4 Limitations on Transferees and Manner of Transfer.
(a) In the event that CU and its Affiliates become entitled
pursuant to the provisions of Section 3.3 to sell, transfer or otherwise dispose
of Restricted Stock, such Restricted Stock may be sold or transferred (subject
to Section 3.11 hereof) only (i) to a third party (or a third party and its
Affiliates) in a transaction which complies with the provisions of paragraph (b)
of this Section or (ii) to one or more underwriters or dealers in connection
with a broad public distribution complying with the provisions of paragraph (c)
of this Section of the shares of Common Stock issuable pursuant to the exercise
of the transferred Warrants (such shares being hereinafter referred to as the
"Underlying Shares"). The provisions of this Section shall only apply to sales,
transfers or dispositions by CU and its Affiliates, and shall not apply to
sales, transfers or dispositions by transferees of CU or its Affiliates (except
that any sale or disposition by dealers or underwriters shall be conducted in
accordance with the applicable provisions of this Section and further except
that all resales shall be made in accordance with the Securities Act).
(b) CU and its Affiliates shall be entitled, subject to the
other applicable provisions of this Article III (including Section 3.11) and
Section 2.1, to sell or transfer Restricted Stock in one or more transactions
exempt from the registration requirements of Section 5 of the Securities Act;
provided, however, that the aggregate number of shares of Restricted Stock sold
or transferred to any single purchaser and persons known to CU to be Affiliates
of or persons acting in concert with such purchaser in any such transaction
shall be limited to that amount of Restricted Stock which, when taken together
with the Restricted Stock theretofore sold or transferred to such purchaser and
such Affiliates and persons, would not, upon the exercise in full of the
Warrants so transferred, permit the acquisition of more than 2% of the then
outstanding shares of Common Stock,
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determined as of the date of such sale or transfer. For purposes of the
immediately preceding sentence, it shall be assumed that all Warrants, if any,
that already have been sold or transferred by CU and its Affiliates are still
outstanding and have not been exercised in whole or in part to purchase shares
of Common Stock.
(c) Warrants owned by CU and its Affiliates, unless sold to Home
or an Affiliate of Home or in compliance with paragraph (b) of this Section, may
only be sold or transferred to one or more underwriters or dealers in accordance
with the provisions of this paragraph. CU and its Affiliates may, subject to the
terms and conditions set forth in this para graph (c), sell or transfer Warrants
in whole or in part to one or more underwriters or dealers who agree in writing
with CU, prior to the effective time of any such sale or transfer, to exercise
such Warrants and offer and sell the Underlying Shares either (i) to the public
in a public offering registered under the Securities Act (or any successor
federal securities laws) pursuant to a distribution in which no single purchaser
and its Affiliates will, to the knowledge of such underwriters or dealers,
acquire Underlying Shares representing more than 2% of the then outstanding
shares of Common Stock or (ii) in other transactions complying with the
requirements of paragraph (b) above. Notwithstanding any other provision of this
Agreement to the contrary, the exercise of any Warrants transferred to
underwriters or dealers in accordance with this Section and the acquisition by
such underwriters or dealers of shares of Common Stock pursuant to such exercise
may be made simultaneously on the date of the closing of the sale or transfer by
CU or its Affiliates of the relevant Warrants to such underwriters or dealers,
provided Home is given written notice of the date of such closing at least five
Business Days prior thereto. At any such closing, against payment of the
exercise price for shares of Common Stock to be acquired pursuant to the
exercise of Warrants, Home will deliver or cause to be delivered certificates
representing the Underlying Shares to such underwriters or dealers, in such
names and denominations as it or they shall designate not fewer than two
Business Days prior to such closing.
Section 3.5 "Demand" Registration. From and after such date as CU and
its Affiliates become entitled pursuant to Section 3.4 to sell or transfer any
Restricted Stock, Home shall, if requested by CU, as expeditiously as possible,
use its best efforts to effect the registration of the Restricted Stock (which
Home has been requested to register on a form in general use under the
Securities Act (or any successor federal securities law) selected by Home, in
order to permit the sale or other disposition of such Restricted Stock in
accordance with the intended method of sale or other disposition set forth in
the request (subject to the provisions of Section 3.4(c)). The right to require
registration of the Restricted Stock under this Section 3.5 may only be
exercised once unless CU is advised in writing by its investment banking firm (a
copy of which advice shall be supplied to Home) that, in the opinion of such
firm, an additional or two additional registrations are appropriate to maximize
the benefits to CU of the proposed distribution of Restricted Stock, in which
event CU may exercise once or twice more, as applicable, its rights under this
Section 3.5. Upon the issuance of a stop order or injunction, Home may withdraw
any such registration statement and abandon the proposed offering which CU shall
have demanded, in which case CU's right shall be reinstated.
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Section 3.6 "Piggyback" Registration. From and after such date as CU
and its Affiliates become entitled pursuant to Section 3.4 to sell or transfer
any Restricted Stock, if at any time Home proposes to register any of its
securities under the Securities Act (or any successor federal securities law),
whether or not for sale for its own account (except with respect to registration
statements filed with respect to the issuance of securities under employee
benefit plans), it will give written notice to CU of its intention to do so.
Upon the written request of CU, given within 15 calendar days after receipt of
Home's notice, Home will use its best efforts to cause to be included in the
shares to be covered by the registration statement proposed to be filed by Home,
in accordance with the request of CU, the Restricted Stock to be sold by dealers
or underwriters in accordance with the provisions of Section 3.4; provided,
however, that Home need not include such Restricted Stock in such registration
statement if Home is advised in writing by its investment banking firm (a copy
of which advise shall be supplied to CU) that the inclusion of such securities
shall, in the opinion of such firm, materially interfere with the orderly sale
and distribution of the Home securities being sold by it. Home may, in its sole
discretion and without the consent of CU, withdraw any such registration
statement and abandon the proposed offering in which CU shall have requested to
participate pursuant to this Section.
Section 3.7 Registration Procedures and Expenses.
(a) If and whenever Home is required by the provisions of this
Article III to use its best efforts to effect the registration of any of the
Restricted Stock under the Securities Act (or any successor federal securities
law), CU and its Affiliates (including the underwriters in the case of a
registration of Underlying Shares) (individually referred to as a "selling
holder" or "holder" and collectively referred to as "selling holders" or
"holders") will furnish in writing such information as is reasonably requested
by Home for inclusion in the registration statement relating to such offering
and such other information and documentation as Home shall reasonably request,
and Home will, as expeditiously as possible:
(i) prepare and file with the SEC or any other federal
agency at the time administering the Securities Act (or a successor federal
securities law) a registration statement with respect to such securities and use
its best efforts to cause such registration statement to become and remain
effective for such period as may be necessary to permit the successful marketing
of such securities, but not exceeding 90 days;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act;
(iii) furnish to each selling holder of Restricted Stock
being registered such number of copies of a prospectus and preliminary
prospectus in conformity with the requirements of the Securities Act (or any
successor federal securities law), and such other
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documents as such seller may reasonably request in order to facilitate the
public sale or other disposition of the Restricted Stock being registered owned
by such seller;
(iv) furnish, at the request of any holder or holders of
securities being registered pursuant to this Article III, on the date that such
securities are delivered to the underwriters for sale pursuant to such
registration or if such securities are not being sold through underwriters, on
the date the registration statement with respect to such securities becomes
effective (A) an opinion dated such date of independent counsel representing
Home for the purposes of such registration, addressed to the underwriters, if
any, and to the holder or holders making such request, stating that such
registration statement has become effective under the Securities Act (or such
successor law) and that (a) to the best of the knowledge of such counsel, no
stop order suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or contemplated
under the Securities Act (or such successor federal securities law); (b) the
registration statement, the related prospectus and each amendment or supplement
thereto comply as to form in all material respects with the requirements of the
Securities Act (or such successor law) and the applicable rules and regulations
of the SEC thereunder, except that such counsel need express no opinion as to
financial information or information provided by selling holders contained
therein; (c) such counsel (subject to such customary limitation on the scope of
their investigation as shall be set forth in such opinion) has no reason to
believe that either the registration statement or the prospectus, or any
amendment or supplement thereto, contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading except that such counsel
need express no opinion as to financial information or information provided by
selling holders contained therein; (d) the descriptions in the registration
statement and in the prospectus, or any amendment or supplement thereto, of all
legal and governmental matters and all contracts and other legal documents or
instruments are accurate and fairly present the information required to be
shown; and (e) such counsel does not know of any legal or governmental
proceedings, pending or contemplated, required to be described in the
registration statement or prospectus, or any amendment or supplement thereto, or
to be filed as exhibits to the registration statement which are not described
and filed as required; and (B) a letter dated such date, from the independent
certified public accountants of Home, addressed to the underwriters, if any, and
to the holder or holders by or on behalf of whom a request is made, stating that
they are independent certified public accountants within the meaning of the
Securities Act (or such successor law) and that in the opinion of such
accountants the financial statements and other financial data of Home included
in the registration statement or the prospectus, or any amendment or supplement
thereto, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act (or such successor law). Such
letter from the independent certified public accountants shall additionally
cover such other financial matters (including information as to the period
ending not more than five business days prior to the date of such letter) with
respect to the registration in respect of which such letter is being given as
the holder of Restricted Stock being registered may reasonably request;
(v) use its best efforts to register or qualify the
Restricted Stock covered by such registration statement under such other
securities or blue sky laws of such
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jurisdictions as each such selling holder of such Restricted Stock shall
reasonably request and do any and all other acts and things which may be
necessary or reasonably desirable to enable such seller to consummate the public
sale or other disposition in such jurisdictions as may be requested by such
seller; provided, however, that Home shall have no obligation to qualify to do
business in any jurisdiction or to file a general consent to service of process
in any jurisdiction;
(vi) notify each selling holder of Restricted Stock covered
by such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act (or any successor Federal
securities law), of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing;
(vii) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act;
(viii) provide a transfer agent and registrar for all
Restricted Stock covered by such registration statement not later than the
effective date of such registration statement;
(ix) use its best efforts to list all Common Stock covered
by such registration statement on each securities exchange, if any, on which any
of the Common Stock is then listed (unless such Common Stock is already so
listed) if such listing is then permitted under the rules of such exchange or
with the NASDAQ, National Market System; and
(x) undertake to take such further actions as may be
reasonably requested by the underwriters.
(b) If any registration statement pursuant to Section 3.5 or 3.6
shall have been declared effective and, in the judgment of Home, (A) any event
shall occur or state of facts exist (other than as described in clause (B))
which requires a notice to the selling holders of Restricted Stock pursuant to
clause (vi) of paragraph (a) of this Section 3.7 or (B) the offering at the time
of Restricted Stock pursuant to such registration statement would adversely
affect, or would be improper in view of, a public offering, financing,
reorganization, recapitalization, merger, consolidation, acquisition, or other
similar transaction, or negotiations, discussions or pending proposals with
respect thereto, immediately upon receipt of notice to such effect from Home, CU
shall cease to offer or sell any Restricted Stock registered thereunder and
cease to deliver or use the prospectus in use thereunder. In the case of any
matter described in clause (A), Home shall, as promptly as practicable, furnish
to each selling holder a reasonable number of copies of a supple-
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ment to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchaser of such securities, such prospectus shall
not include an 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
not misleading in the light of the circumstances then existing. In the case of
any matter described in clause (B), Home shall promptly notify CU at such times
as, in Home's judgment, such offering may be recommended (which shall be no
later than 90 days following such suspension); provided that CU may, in its sole
discretion, discontinue such offering with respect to the Restricted Stock
covered thereby, in which event CU shall be entitled to "demand" registration
rights hereunder to the full extent as if such offering had not been requested.
All expenses incurred by Home in complying with Sections 3.5 and 3.6
hereof, including, without limitation, all registration and filing fees,
printing expenses, fees and disburse ments of counsel for Home and blue sky fees
and expenses are herein called "Registration Expenses," except for all
underwriting discounts and selling commissions applicable to the sales, all fees
and disbursements of counsel for any selling holder or holders (including
counsel designated by any seller for a "due diligence" investigation of Home)
and the expense of any special audits incident to or required by such
registration, all of which are herein called "Selling Expenses." Home shall pay
all Registration Expenses and the selling holder or holders of Restricted Stock
being registered shall pay all Selling Expenses.
Section 3.8 Indemnification. In the event of a registration of any of
the Restricted Stock under the Securities Act (or any successor Federal
securities law) pursuant to this Article III, Home will indemnify and hold
harmless each underwriter of such Restricted Stock, CU and its Affiliates as the
transferors of the Restricted Stock or any portion thereof to underwriters, and
each other person, if any, who controls such seller, assignor or underwriter
within the meaning of Section 15 of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter, assignor or controlling person may become subject under the
Securities Act (or such successor law) or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which such Restricted Stock
shall have been registered under the Securities Act (or such successor law), any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, 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; and will reimburse such
seller, transferor and underwriter and each such controlling person for any
legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that Home will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, said preliminary prospectus or said
prospectus or said amendment or supplement in reliance upon and in conformity
with written information furnished to Home through an instrument executed by
such seller, transferor or underwriter specifically for use in the preparation
thereof; and provided further that if any losses, claims, damages or liabilities
arise out of or are based
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upon an untrue statement, alleged untrue statement, omission or alleged omission
contained in any preliminary prospectus which did not appear in the final
prospectus, Home shall not have any such liability with respect thereto to such
seller, transferor or underwriter or any person who controls such seller,
transferor or underwriter within the meaning of Section 15 of the Securities Act
if such seller, transferor or underwriter or any person on their behalf
delivered a copy of the preliminary prospectus to the person alleging such
losses, claims, damages or liabilities and failed to deliver a copy of the final
prospectus, as amended or supplemented if it has been amended or supplemented,
to such person at or prior to the written confirmation of the sale to such
person.
In the event of any registration of any Restricted Stock under the
Securities Act (or a successor Federal securities law) pursuant to this Article
III, each seller of such Restricted Stock (other than any underwriter or dealer
purchasing Underlying Shares), and CU and its Affiliates, as transferors of
Restricted Stock, severally and not jointly, will indemnify and hold harmless
Home, each person, if any who controls Home within the meaning of Section 15 of
the Securities Act, each officer of Home who signs the registration statement
and each director of Home against any and all such losses, claims, damages, or
liabilities arising out of or based upon any untrue statement or alleged untrue
statement in or omission or alleged omission from any such registration
statement, prospectus, amendment or supplement, if the untrue statement or
omission or alleged untrue statement or omission in respect of which such loss,
claim, damage or liability is asserted was made in reliance upon and in
conformity with information furnished in writing to Home by or on behalf of such
seller or transferor specifically for use in connection with the preparation of
such registration statement, preliminary prospectus, prospectus, amendment or
supplement; provided, however, that, if any losses, claims, damages or
liabilities arise out of or are based upon an untrue statement, alleged untrue
statement, omission or alleged omission contained in any preliminary prospectus
which did not appear in the final prospectus, such seller or transferor shall
not have any such liability with respect thereto to Home, any person who
controls Home within the meaning of Section 15 of the Securities Act, any
officer of Home who signed the registration statement of any director of Home if
Home or any person on their behalf delivered a copy of the preliminary
prospectus to the person alleging such losses, claims, damages or liabilities
and failed to deliver a copy of the final prospectus, as amended or supplemented
if it has been amended or supplemented, to such person at or prior to the
written confirmation of the sale to such person; and provided further that the
liability of any such seller or transferor so to indemnify shall be limited to
an amount equal to the amount received by such seller upon the sale of such
Restricted Stock pursuant to such registration statement, or by such transferor
from the seller, as the case may be.
Payments in respect of indemnifications required by this Section 3.8
shall be made by periodic payments during the course of the investigation or
defense, as and when bills are received or expenses incurred. Any party which
proposes to assert the right to be indemnified under this Section 3.8 will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim is to be made against
an indemnifying party under this Section 3.8, notify each such indemnifying
party of the commencement of such action, suit or proceeding, enclosing a copy
of all papers served, but the omission so to notify such indemnifying party of
any such action, suit or proceeding shall not relieve it from any liability
which
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it may have to any indemnified party otherwise than under this Section 3.8. In
case any such action, suit or proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in, and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party, and after notice from such indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its own counsel in any such
action, but the fees and expenses of such counsel shall be at the expense of
such indemnified party, when and as incurred, unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying party, (ii) the indemnified party shall have reasonably concluded
that there may be a conflict of interest between the indemnifying party and the
indemnified party in the conduct of the defense of such action (in which case
the indemnifying party shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (iii) the indemnifying party shall
not in fact have employed counsel to assume the defense of such action. An
indemnifying party shall not be liable for employed counsel to assume the
defense of such action. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent. In no event
shall an indemnifying party be required to pay for more than one counsel for an
indemnified party, exclusive of local counsel.
Section 3.9 Obligations of Home with Respect to Underwritten Offering.
In the event that Restricted Stock shall be sold pursuant to a registration
statement in an underwritten offering pursuant to Section 3.5, Home agrees to
enter into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including, without limiting the generality of the
foregoing, customary provisions with respect to indemnification by Home of the
underwriters of such offering. Home shall have the right to approve the managing
underwriters for such offering (which in no event shall include an affiliate of
CU); provided, however, that such approval shall not be unreasonably withheld.
Section 3.10 Rule 144 Requirements. Home shall undertake to make
publicly available and available to the holders of Restricted Stock, pursuant to
Rule 144 of the SEC under the Securities Act, such information as shall be
necessary, and to take such further action as any such holder may reasonably
request, to enable the holders of Restricted Stock to make sales of Restricted
Stock pursuant to the Rule. Home shall furnish to any holder of Restricted Stock
upon request (after the preceding sentences shall have become applicable), a
written statement executed by Home as to the steps it has taken to comply with
the current public information requirements of Rule 144.
Section 3.11 Rights of First Refusal.
(a) In the event CU or its Affiliates intend, at any time after
the occurrence of an Acquisition Event to sell, transfer or dispose of any
Restricted Stock (other than to an Affiliate
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of CU in a transaction not intended to circumvent the transfer restrictions
contained in this Agreement) other than (i) pursuant to a sale or transfer of
Warrants to one or more underwriters or dealers in accordance with Section
3.4(c) (in which case Section 3.11(b) shall govern) or (ii) at any time after
Home has failed for any reason to repurchase such Restricted Stock pursuant to
Article II hereof on the closing date scheduled for such repurchase, then:
(i) CU shall notify Home in writing of its or its
Affiliate's intention to sell, transfer or dispose of such Restricted Stock
specifying the number of shares or amount of Warrants, as the case may be,
proposed to be disposed of, the identity or identities of the prospective
purchaser or purchasers thereof, the proposed purchase price therefor and the
material terms of any agreement relating thereto (the "Sale Notice"); and
(ii) Home shall have the right, by written notice of its
exercise of its right of first refusal given to CU within 15 calendar days after
Home's receipt of such notice of intention from CU, to purchase (or to cause a
Person designated by Home to purchase) all, but not less than all of, the
Restricted Stock specified in such notice of intention for cash at the gross
price set forth therein (including broker's commissions and other transaction
costs of CU or its Affiliate to be paid or absorbed by the prospective
purchaser) if the terms set forth in such notice of intention provide for a cash
sale. If the purchase price specified in such notice of intention include any
property other than cash, the purchase price at which Home shall be entitled to
purchase shall be (x) the amount of cash included in the purchase price
specified in such notice of intention plus (y) property, to the extent feasible,
substantially similar to the property described in such notice of intention and
in any case of equivalent value to such property (as agreed to by Home and CU,
or as determined by a nationally recognized investment banking firm selected by
CU and Home).
If Home shall have exercised its right of first refusal under this
paragraph (a) (including the designation of another purchaser as referred to in
the next subparagraph), the closing of the purchase of the Restricted Stock as
to which such right Home shall have been exercised shall take place as promptly
as practicable, but in no event more than 10 Business Days after Home gives
notice of such exercise, and if such closing does not occur within such 10 days,
such right of first refusal provided for herein (including any assignment
thereof) shall be null and void and of no further force and effect with respect
to such Restricted Stock and this Section 3.11 shall no longer apply to any sale
or disposition or proposed sale or disposition of such Restricted Stock;
provided that if prior notification to or approval of the Federal Reserve Board
or any other regulatory authority is required in connection with such purchase,
Home shall promptly file the required notice or application for approval and
shall expeditiously process the same and the period of time that otherwise would
run pursuant to this sentence shall run instead from the date on which, as the
case may be, (i) any required notification period has expired or been
terminated, or (ii) such approval has been obtained and, in either event, any
requisite waiting period shall have passed.
If Home elects not to exercise, or fails to exercise or cause to be
exercised, its right of first refusal provided in this paragraph (a) within the
time specified for such exercise or if the Federal Reserve Board or any other
regulatory authority disapproves of Home's proposed purchase,
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CU and its Affiliates shall be free thereafter for a period of 90 days to
consummate the sale, transfer or other disposition with any purchaser or
purchasers of the Restricted Stock who shall have been specified in the sale
notice at the price (or at any price in excess of such price) and on
substantially the terms specified therein.
The right of first refusal provided for in this paragraph (a) may only
be exercised with respect to the initial sale, transfer or other disposition of
the Restricted Stock by CU or an Affiliate (whether in blocks or as a whole) to
a person that is not an Affiliate of CU and not to subsequent sales, transfers
or other dispositions by purchasers of Restricted Stock.
(b) If CU or its Affiliates at any time propose to transfer any
Warrants to any underwriters or dealers pursuant to the provisions of Section
3.4, other than at any time after Home has failed for any reason to repurchase
such Warrants pursuant to Article II hereof on the closing date scheduled for
such repurchase, then CU shall first notify Home in writing of such intention,
specifying the Warrants which it proposes to sell or transfer and the name or
names of the proposed dealers or of the proposed managing underwriters in the
underwriting syndicate to which the sale or transfer is proposed to be made.
Home shall have the right, exercisable by written notice given to CU 15 calendar
days after Home's receipt of notice from CU pursuant to the immediately
preceding sentence, to repurchase, or to cause a third party designated by Home
to purchase, all, but not fewer than all, the Warrants proposed to be sold or
transferred on the terms and conditions hereinafter set forth. Any notice given
by Home of exercise of its repurchase rights under this paragraph (b) shall
specify a place in Los Angeles and a Business Day not earlier than 10 days and
not later than 15 days after the date of such notice for the closing of the
repurchase of the Warrants being repurchased. The purchase price payable to Home
or its designee for the repurchase of Warrants pursuant to this paragraph (b)
shall be a cash price equal to the product of (x) the number of Underlying
Shares covered by the relevant Warrants (calculated as of the date of the
closing of the repurchase) and (y) the Share Price on such date. At the closing
of a sale of Warrants pursuant to the foregoing provisions, Home or its designee
will make payment to CU of the aggregate price for the Warrants to be
repurchased in one of the manners set forth in Section 2.1(c). At such closing,
CU shall deliver to Home or its designee the certificates representing the
Warrants to be repurchased and Home shall deliver to CU replacement certificates
representing the Warrants (if any) which are not to be repurchased but were
covered by the certificate or certificates surrendered by CU. Any election by
Home pursuant to this paragraph to exercise its repurchase rights in respect of
Warrants shall be irrevocable. In the event Home fails timely to exercise its
repurchase rights in respect of Warrants within the period specified above
during which it must do so or notifies CU in writing prior to the expiration of
such period that it does not intend to exercise such rights or its designee
fails to repurchase Warrants on the date set for the closing of such a purchase,
CU and its Affiliates shall be free thereafter to consummate the sale and
transfer of the Warrants specified in this notice to Home under this paragraph
to any underwriters or dealers who agree to exercise the Warrants and sell the
Underlying Shares in accordance with the provisions of Section 3.4(c), and this
Section 3.11 shall no longer apply to such sale or transfer of such Warrants.
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(c) CU shall have the right to withdraw any notice given by it
pursuant to this Section 3.11 at any time before Home shall have given notice of
its intention to exercise its right of first refusal hereunder (including by
designation of another purchaser).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HOME
Home represents and warrants to CU that:
Section 4.1 Authorization of Agreement; No Conflicts.
(a) The execution and delivery of this Agreement by Home and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Home. This Agreement has been
duly executed and delivered by Home and constitutes a valid and binding
obligation of Home, enforceable in accordance with its terms.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with, or
result in any violation of or default or loss of a material benefit under any
provision of the articles of incorporation, articles or association or bylaws of
Home or Home Bank or, except for the necessity of obtaining Requisite Regulatory
Approvals, any material mortgage, indenture, lease agreement or other material
instrument or any permit, concession, grant, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Home or
Home Bank or their respective properties, other than any such conflict,
violation, default or loss which will not have a material adverse effect on Home
or Home Bank. No material consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority is required
in connection with the execution and delivery of this Agreement by Home and Home
Bank or the consummation by Home of the transactions contemplated hereby except
for any approvals required to be obtained pursuant to the BHC Act or the Policy
Statement of the Board of Governors of the Federal Reserve System on Nonvoting
Equity Investments by Bank Holding Companies, 12 C.F.R. Section 225.143 (the
"FRB Guidelines"), or any other applicable laws, for the execution and
delivery of this Agreement and the issuance of the Warrants by Home.
Section 4.2 Authorized Stock Home has taken all necessary corporate and
other action to authorize and reserve and, subject to obtaining the governmental
and other approvals and consents referred to herein, to permit it to issue, and,
at all times from the date hereof until the obligation to deliver Common Stock
upon the exercise of the Warrants terminates, will have reserved for issuance,
upon exercise of the Warrants, shares of Common Stock necessary for CU to
exercise the Warrants, and Home will take all necessary corporate action to
authorize and reserve for issuance all additional shares of Common Stock or
other securities which may be issued pursuant to this Agreement. The shares of
Common Stock to be issued upon due exercise of the Warrants, including all
additional shares of Common Stock or other securities which may be issuable
pursuant to this
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Agreement, upon issuance pursuant hereto, shall be duly and validly issued,
fully paid and nonassessable, and shall be delivered free and clear of all
liens, claims, charges and encumbrances of any kind or nature whatsoever,
including any preemptive rights of any stockholder of Home.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CU
CU represents and warrants to Home that:
Section 5.1 Due Execution of Agreement; No Conflicts.
(a) This Agreement has been duly executed and delivered by CU
and constitutes a valid and binding obligation of CU, enforceable in accordance
with its terms.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with, or
result in any violation of or default or loss of a material benefit under, any
provision of the certificate of incorporation or By-laws of CU or, except for
the necessity of obtaining Requisite Regulatory Approvals, any material
mortgage, indenture, lease, agreement or other material instrument, or any
permit, concession, grant, franchise, license, judgment, order decree, statute,
law, ordinance, rule or regulation applicable to CU or its respective
properties, other than any such conflict, violation, default or loss which (i)
will not have a material adverse effect on CU and its Subsidiaries taken as a
whole. No material consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required in
connection with the execution and delivery of this Agreement by CU or the
consummation by CU of the transactions contemplated hereby, except for (a)
filings required in order to obtain Requisite Regulatory Approvals, and (b) any
approvals required to be obtained pursuant to the BHC Act, or the FRB Guidelines
or any other applicable law for the execution and delivery of this Agreement by
Home, CU and the issuance of the Warrants.
ARTICLE VI
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth
below (in their singular and plural forms as applicable) shall have the meanings
set forth below.
"Affiliate" or "affiliate" shall mean, with respect to any corporation,
any person that, directly or indirectly, controls or is controlled by or is
under common control with such corporation.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
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"Business Day" shall mean any day, other than a Saturday, Sunday or
legal holiday in the State of California, on which banks are open for
substantially all their banking business in Los Angeles.
"Change in Bank Control Act" means the Change in Bank Control Act of
1978, as amended.
"Covered Shares" shall mean on any date, with respect to any Warrants,
the maximum number of shares of Common Stock that would be purchasable upon the
exercise on such date of such Warrants, assuming that such Warrants may be
exercised on such date to purchase the maximum number of shares of Common Stock
purchasable pursuant to the terms thereof (including the limitations contained
in the second paragraph of the certificate evidencing each such Warrant) without
regard to any provision therein (other than such limitations) or in this
Agreement or in any law limiting the right of any holder of such Warrants to
acquire shares otherwise purchasable thereunder.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"Governmental Entity" shall mean any court, administrative
agency or commission or other governmental authority or
instrumentality.
"Market Value" shall mean, on any date, the average of the closing sale
prices of a share of Common Stock on the principal securities exchange on which
the Common Stock is traded, or, if the Common Stock is not at the time listed on
any national securities exchange, as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), on the 10 trading days
immediately preceding such date, (or such fewer number of trading days
immediately preceding such date for which shares of Common Stock have been
listed for trading on such exchange or quoted on NASDAQ); provided, however,
that if CU seeks a determination of the fair market value of a share of Common
Stock pursuant to the provisions of Section 2.2, Market Value shall, if required
pursuant to the terms of such Section, mean the fair market value of a share of
Common Stock on such date determined pursuant to such Section.
"Person" or "person" shall mean an individual, corporation,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Regulatory Authority" shall mean any United States federal or state
government or governmental authority the approval of which is legally required
for consummation of the Merger.
"Requisite Regulatory Approvals" shall mean all material permits,
approvals and consents required to be obtained, and all waiting periods required
to expire, prior to the consummation of the issuance of the Covered Shares under
applicable federal laws of the United States or applicable laws of any state
having jurisdiction over CU or Home.
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"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Share Price" shall mean, with respect to any Warrants, the amount by
which, on the date of the Acquisition Event triggering the exercisability of the
Warrants(i) the Warrant Price on such date is less than (ii) the greatest of:
(i) the Market Value of a share of Common Stock on such
date; and
(ii) the highest price paid on or prior to such date for a
share of Common Stock (including in any merger or consolidation) by a purchaser
or group of purchasers acting in concert of 50% or more of the outstanding
shares of Common Stock, or, in the case of a purchaser of 50% or more of the
consolidated assets of Home (as shown on the books of Home), the Market Value of
a share of Common Stock on the date of consummation of such asset acquisition.
"Subsidiary" shall mean, with respect to any corporation (the
"parent"), any other corporation, association or other business entity of which
more than 50% of the shares of the Voting Stock are owned or controlled,
directly or indirectly, by the parent or by one or more Subsidiaries of the
parent, or by the parent and one or more of its Subsidiaries.
"Voting Stock" shall mean the stock entitling the holders thereof to
vote in the election of the directors or trustees of the corporation,
association, or other business entity in question, except that it shall not
include any stock so entitling the holders thereof to vote only upon the
happening of a contingency, whether or not such contingency has occurred.
"Warrant Call Price" shall mean, when used with respect to any Warrant,
the product of (i) the number of Covered Shares on such date and (ii) the Share
Price on such date; provided that the Warrant Call Price with respect to any
Warrant shall in no event exceed (x) the quotient obtained by dividing
$5,000,000 by the number of Covered Shares subject to all the outstanding
Warrants multiplied by (y) the number of Covered Shares subject to such Warrant.
ARTICLE VII
TERMINATION
Section 7.1 Termination. Subject to Section 7.2, this Agreement may be
terminated in the following circumstances:
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(a) at the effective time of the Merger, as set forth in the
Merger Agreement;
(b) at the termination of the Merger Agreement prior to the
occurrence of an Acquisition Event; or
(c) two years after the occurrence of an Acquisition Event.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement pursuant to Section 7.1(c), the rights of the parties hereto shall
forthwith become void; provided that, if the Agreement shall terminate pursuant
to Section 7.1(c) and any party has filed an application to purchase securities
with any regulatory authority, the Agreement shall not terminate as provided in
Section 7.1(c), but shall remain in full force and effect until the day which is
30 Business Days (plus any applicable waiting periods) after the receipt or
denial of regulatory approval or consent, at which time the Agreement shall then
terminate.
Section 7.3 Indemnification for Breach. Each party to this Agreement
agrees to indemnify and hold harmless the other party against any loss, claim,
damage or liability arising out of or based upon a Default of this Agreement by
such defaulting party in accordance with the procedures set forth in the last
paragraph of Section 3.8 of this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or mailed
by registered or certified mail (return receipt requested) to the parties at the
following addresses (or any such other address for a party as shall be specified
by like notice):
(a) If to CU at:
16030 Ventura Boulevard
Encino, CA 91436
Attn: Stephen G. Carpenter
Fax: (818) 907-5024
with a copy to:
Anita Wolman, Esq.
16030 Ventura Boulevard
Encino, CA 91436
Fax: (818) 907-5024
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(b) If to Home at:
2633 Cherry Avenue
Signal Hill, CA 90806
Attn: James Staes
Phone: (310) 988-9600
Fax: (310) 426-4526
with a copy to:
Manatt, Phelps & Phillips
11355 West Olympic Boulevard
Los Angeles, California 90064
Attn: Barbara S. Polsky, Esq.
Fax: (310) 312-4224
Section 8.2 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.3 Amendment. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors or the duly
authorized committees thereof. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. The
parties hereto agree to make such amendments as may be necessary to respond to
the request of any Regulatory Authority with respect to this Agreement.
Section 8.4 Waiver. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof.
Section 8.5 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof; (b) except as
contemplated in this Agreement, is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder; and (c) except as
contemplated in this Agreement, shall not be assigned by operation of law or
otherwise. Home and CU agree that, except as required by law, it shall not issue
any press release with respect to the transactions contemplated by this
Agreement without consulting with each other party hereto.
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Section 8.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, Home and CU have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date first
above written.
CU BANCORP
By:
---------------------------------
HOME INTERSTATE BANCORP
By:
---------------------------------
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EXHIBIT A
WARRANT
No. 1
January 10, 1996 1,082,224 Shares
HOME INTERSTATE BANCORP
This is to certify that, for value received and subject to the terms
and conditions provided for in a Warrant Purchase Agreement dated as of January
10, 1996 (the "Agreement") by and between Home Interstate Bancorp, a California
corporation ("Home"), and CU Bancorp, a California corporation ("CU"), pursuant
to which CU and its assigns are entitled to purchase from Home, on the terms and
conditions set forth therein, 1,082,224 fully paid and nonassessable shares of
common stock of Home ("Common Stock"), subject to adjustment as provided in the
Agreement. Terms not otherwise defined herein shall have the meanings ascribed
to them in the Agreement.
This Warrant may be exercised by the holder (except any holder which
shall not be permitted by the Bank Holding Company Act of 1956, as amended ("BHC
Act"), or other applicable law to own, or shall not have obtained all regulatory
approvals required by such Act or other applicable law as a precondition to its
ownership of, the shares of Common Stock covered hereby) as to the whole or any
part of the shares of Common Stock covered hereby at any time when such exercise
shall be permitted under the terms of this Warrant, by surrender of this Warrant
at the principal office of Home or at the office of any transfer agent for the
Warrant and upon payment to Home of the Warrant Price for shares so purchased by
wire transfer to a bank account designated by Home. Thereupon, this Warrant
shall be deemed to have been exercised and the person exercising the same to
have become a holder of record of shares of Common Stock (or of the other
securities or property to which it is entitled upon such exercise) purchased
hereunder for all purposes, and certificates for shares so purchased shall be
delivered to the purchaser. If this Warrant shall be exercised in respect of a
part of the shares of Common Stock covered hereby, the holder shall be entitled
to receive a new Warrant covering the number of shares in respect of which this
Warrant shall not have been exercised, but otherwise identical hereto.
This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at such office or agency of Home, for new Warrants of this tenor
representing in the aggregate the right to
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subscribe for and purchase the number of shares which may be subscribed for and
purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase not less than 1,000 shares of Common Stock (except to
the extent necessary to round out the balance of the number of shares
purchasable hereunder).
Home covenants and agrees that all shares which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance, be fully
paid and non-assessable and free from all taxes, liens and charges with respect
to the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue). Home further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, Home will at all times have authorized, and reserved, a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant, and will at its expense expeditiously upon each
such reservation of shares use its best efforts to procure the listing thereof
(subject to issuance or notice of issuance) on all stock exchanges on which the
shares of Common Stock are then listed, or if Home Shares are not then listed on
a stock exchange on NASDAQ National Market System.
The rights of the holder of this Warrant shall be subject to the
following further terms and conditions:
Section 1.1 Home shall at all times reserve and keep available, free
from preemptive rights, out of its authorized and unissued Common Stock or
shares of Common Stock held in treasury, for the purpose of effecting the
exercise of this Warrant, the full number of shares of Common Stock then
issuable upon the exercise of this and all other outstanding Warrant, computed
on the assumption that the adjustments required by Section 1.11 hereof have
become effective, in the event such is not then the case.
Section 1.2 Home will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock upon exercise of this
Warrant. Home shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of shares
of Common Stock in a name other than that of the holder of the Warrant or
Warrants to be exercised, and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to Home the amount of any such
tax, or has established, to the satisfaction of Home, that such tax has been
paid.
Section 1.3 This Warrant shall not entitle the holder of any rights of
a shareholder of Home, either at law or in equity, or to any notice of meetings
of shareholders or of any other proceedings of Home.
Section 1.4 Subject to Section 1.5 and the terms and conditions set
forth in the Agreement, this Warrant and all rights hereunder are transferable
(in whole or in part), on the books of Home by the registered holder thereof in
person or by duly authorized attorney, upon surrender
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of this Warrant, properly endorsed, to Home (or if Home shall have notified the
registered holder hereof of the appointment of an independent transfer agent for
Warrants, then to such transfer agent). As used herein the term "this Warrant"
shall mean and include any Warrant or Warrants hereafter issued in consequence
of transfers of this Warrant in whole or in part.
Section 1.5 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS WARRANT MAY NOT BE SOLD OR
TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO THIS
WARRANT WHICH IS EFFECTIVE UNDER THE SECURITIES ACT, OR (ii) AN OPINION OF
COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS
AVAILABLE. THE TRANSFERABILITY OF THIS WARRANT IS FURTHER SUBJECT TO THE
PROVISIONS OF A WARRANT PURCHASE AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY
OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF HOME
INTERSTATE BANCORP.
Section 1.6 The holder of this Warrant, by the acceptance hereof,
agrees that prior to the exercise of any Warrants, at a time when said Warrants
have not been registered under the Securities Act or any similar Federal
statute, it will, if it has not requested or is then not entitled to such
registration pursuant to the provisions of Article III of the Agreement, deliver
to Home a written representation that it is acquiring the shares of Common Stock
issuable upon the exercise of such Warrants for its own account for investment,
and not with a view to, or for sale in connection with, any distribution
thereof, and not with any present intention of distributing or selling the same.
Section 1.7 (a) This Warrant shall terminate and be of no further
force or effect as provided in Article VII of the Agreement.
(b) Notwithstanding any other provision contained
herein, this Warrant and the rights conferred hereby shall terminate, and the
full consideration paid by CU for this Warrant shall be immediately due and
payable to CU, if Home or CU receives written notice from the Federal Reserve
Board to the effect that the execution and delivery of the Agreement or the
issuance of the Warrants is not consistent with Section 3 of the BHC Act.
Section 1.8 This Warrant shall be governed by and construed in
accordance with the laws of the State of California.
Section 1.9 This Warrant incorporates by reference all of the terms and
conditions of the Agreement.
HOME INTERSTATE BANCORP
By:
---------------------------------
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EXHIBIT E
FORM OF OPINION OF CU'S COUNSEL
The opinion of counsel required by section 10.1 of the Agreement and
Plan of Reorganization (the "Agreement") shall be dated as of the Closing Date,
shall be in form and substance reasonably satisfactory to CU and CU Bank, and
shall contain opinions substantially in the form set forth below. (All
capitalized terms not otherwise defined herein have the meaning specified in the
Agreement).
1. CU Bank is a national banking association duly incorporated, validly
existing and in good standing under the laws of the State of California and is
authorized by the OCC to conduct a general banking business. The deposits of the
Bank are insured by the FDIC in the manner and to the fullest extent permitted
by law.
2. CU is a California corporation duly incorporated, validly existing
and in good standing under the laws of the state of California. CU is
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended.
3. Each of CU and CU Bank have all necessary corporate power and
authority to own or lease its properties and assets, and to carry on its
business as now conducted. Neither the scope of the business of CU and CU Bank
nor the location of any of their respective properties requires that any of
them be licensed to do business in any jurisdiction other than the State of
California, where the failure to be so licensed would, individually or in the
aggregate, have a materially adverse effect on the financial condition, results
of operations, business, affairs, properties (collectively, the "Business
Condition") of CU on a consolidated basis.
4. The authorized capital of CU and CU Bank is as set forth in Sections
5.2(a) and 5.2(b), respectively, of the Agreement. All of the outstanding shares
of CU Bank Stock and CU Stock are duly authorized, validly issued, fully paid
and nonassessable (except, in the case of the CU Bank Stock, as provided for in
12 U.S.C. Section 55). To our knowledge, except for the CU Options and the
warrant referred to in section 5.2 of the Agreement the the Home Warrant, there
are no outstanding options, warrants or other rights in or with respect to the
unissued shares of CU Stock or CU Bank Stock or any other securities convertible
into CU Stock or CU Bank Stock and neither CU or CU Bank is obligated to issue
any additional shares of CU Stock or CU Bank Stock or any additional options,
warrants or other rights in or with respect to the unissued shares of such stock
or securities convertible into such stock.
5. The execution and delivery by each of CU and CU Bank of the
Agreement, the execution and delivery by CU of the Agreement of Merger, the
execution and delivery by CU Bank of the Bank Merger Agreement and the
consummation of the transactions contemplated thereby, have been duly and
validly authorized by all necessary action on the part of CU and CU
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Bank, as applicable. Each of the Agreement, the Agreement of Merger and the
Bank Merger Agreement, as applicable, constitutes a valid and binding obligation
of CU and CU Bank, enforceable in accordance with their terms, except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium
or other similar laws affecting the rights of creditors generally; (ii) general
equitable principles; or (iii) Section 8(b)(6)(D) of the Federal Deposit
Insurance Act, 12 U.S.C. Section 1818(b)(6)(D).
6. Neither the execution and delivery by CU of the Agreement or the
Agreement of Merger, or by CU Bank of the Agreement or the Bank Merger
Agreement, nor the consummation of the transactions contemplated thereby, nor
compliance by CU or CU Bank with any of the provisions thereof, will (i)
conflict with or result in the breach of, or default under any provision of the
articles of incorporation or bylaws of CU or CU Bank, (ii) to our 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 either CU or CU Bank is a party, or by which
either CU or CU Bank or any of their respective properties or assets is bound,
except where such breach or default would not have a material adverse effect on
the Business Condition of CU on a consolidated basis; or (iii) violate any law,
order, writ, injunction, decree, statute, rule or regulation applicable to
either CU or CU Bank or any of their respective properties or assets, except
where such violation would not have a material adverse effect on the Business
Condition of CU on a consolidated basis.
7. No consent or approval of, notice to or filling with, any
governmental authority having jurisdiction over any aspect of the business or
assets of either CU or CU Bank is required in connection with the execution and
delivery of the Agreement, the Agreement of Merger and the Bank Merger Agreement
and the consummation of the transactions contemplated thereby, except such
notices and approvals as may be required under federal and state securities
laws, by the FRB and the OCC.
8. Except as to those matters set forth on Schedule 5.10 of the
Agreement, to our knowledge, (i) there is no private or governmental suit,
claim, action or proceeding pending, nor private or governmental suit, claim,
action or proceeding threatened against either CU or CU Bank 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 either
CU or CU Bank; and (ii) there are no judgments, decrees stipulations or orders
against either CU or CU Bank enjoining either of them or any of their 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 of either CU or CU Bank in any area.
9. The Proxy Statement for use at the shareholders' meeting
required pursuant to Section 7.7 of the Agreement, as of the date of mailing and
the date of the shareholders'
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meeting, complied as to form in all material respects with the requirements of
the Exchange Act and all applicable rules and regulations thereunder.
Counsel shall further state that although counsel has necessarily
assumed the correctness and completeness of the statements made by CU or CU Bank
in the Proxy Statement and takes no responsibility therefor, such counsel has,
in the course of the preparation of the Proxy Statement, had conferences with
representatives of CU and CU Bank with respect thereto, and that its examination
of the Proxy Statement and its discussions in the above-mentioned conferences
did not disclose to it any information which has caused such counsel to believe
that the Proxy Statement at the time of mailing and at the time of the meeting
of CU's shareholders contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein not
misleading (except that such counsel need express no belief or opinion as to
financial statements, including any notes thereto, or other financial or
statistical data or as to any information supplied by CU).
In rendering its opinion, such counsel may rely, to the extent that such
counsel deems reliance necessary or appropriate, as to matters of fact, upon
certificates of government officials and of any officers or officers of CU or CU
Bank or CU's registrar and transfer agent. The opinion need refer only to
matters of California and federal law, and such counsel may expressly exclude
any opinions as to choice of law matters, antitrust matters and (except as set
forth in paragraph 9) securities law matters and may add other qualifications
and explanations of the basis of its opinion as may be reasonably acceptable to
CU.
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EXHIBIT F
CU SHAREHOLDER'S AGREEMENT
This SHAREHOLDER'S AGREEMENT (this "Agreement"), dated as of
January 10, 1996, is entered into by and among Home Bank, a California banking
corporation ("Home Bank"), Home Interstate Bancorp, a California corporation
("Home"), and ___________________________ (the "Shareholder").
R E C I T A L S
A. Home, Home Bank, CU Bancorp, a California corporation ("CU"), and
California United Bank, National Association, a national banking association,
entered into that certain Agreement and Plan of Reorganization dated as of
January 10, 1996 (the "Reorganization Agreement").
B. The Shareholder is a beneficial shareholder of shares of common
stock, no par value, of CU (the "CU Stock").
C. The Shareholder is a director of CU.
D. As an inducement to Home and Home Bank to enter into the
Reorganization Agreement, and in order to ensure pooling-of-interests accounting
treatment for the Merger contemplated by the Reorganization Agreement, the
Shareholder desires to enter into this Agreement.
E. Unless otherwise provided in this Agreement, capitalized terms
shall have the meanings ascribed to such terms in the Reorganization Agreement.
NOW, THEREFORE, in consideration of the premises and of the respective
representations, warranties and covenants, agreements and conditions contained
herein and in the Reorganization Agreement, and intending to be legally bound
hereby, Home, Home Bank and Shareholder agree as follows:
ARTICLE I
SHAREHOLDER'S AGREEMENT
1.1 Agreement to Vote. Shareholder shall vote or cause to be voted at
any meeting of shareholders of CU to approve the principal terms of the
Reorganization Agreement, the Merger and the transactions contemplated thereby
(the "Shareholders' Meeting"), all of the shares of CU Stock as to which
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Shareholder has sole or shared voting power (the "Shares") as of the record date
established to determine shareholders who have the right to vote at any such
Shareholders' Meeting (the "Record Date").
1.2 Legend. The Shareholder agrees to stamp, print or type on the
face of his certificates of CU Stock evidencing the Shares the following legend:
"THE VOTING, SALE, ASSIGNMENT, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER ENCUMBRANCE OR DISPOSITION OF THE SHARES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A SHAREHOLDER'S
AGREEMENT DATED AS OF THE 10TH DAY OF JANUARY, 1996 BY AND AMONG
HOME INTERSTATE BANCORP, HOME BANK AND (THE RECORD OWNER HEREOF),
COPIES OF WHICH ARE ON FILE AT THE OFFICES OF HOME BANK"
1.3 Restrictions on Dispositions. The Shareholder agrees that, from
and after the date of this Agreement and during the term of this Agreement, the
Shareholder will not take any action that will alter or affect in any way the
right to vote the Shares, except (i) with the prior written consent of Home or
(ii) to change such right from that of a shared right of the Shareholder to vote
the Shares to a sole right of the Shareholder to vote the Shares.
1.4 Shareholder Approval. The Shareholder, in his capacity as a
director, shall (i) recommend shareholder approval of the Reorganization
Agreement, the Agreement of Merger and the transactions contemplated thereby at
the Shareholders' Meeting and (ii) advise the CU shareholders to reject any
subsequent proposal or offer received by CU relating to any Alternative
Transaction or purchase, sale, acquisition, merger or other form of business
combination involving CU or any of its assets, equity securities or debt
securities and to proceed with the transactions contemplated by the
Reorganization Agreement; provided, however, that the Shareholder shall not be
obligated to take any action specified in clause (ii) if the Board of Directors
of CU is advised in writing by outside legal counsel (Loeb and Loeb, or such
other counsel that is reasonably acceptable to Home and Home Bank) that, in the
exercise of his fiduciary duties, a director of CU should not take such action.
1.5 Restrictions on Disposition of CU Stock After the Merger.
Notwithstanding any other provisions of this Agreement to the contrary, none of
the shares of CU Stock held by the undersigned at the Effective Time of 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 CU Stock so held by the undersigned until
financial results covering a period of at least thirty (30) days of combined
operations of CU and Home following the Effective Time of the Merger have been
published by CU (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 CU Stock except as provided
herein).
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
The Shareholder represents and warrants to Home and Home Bank that the
statements set forth below are true and correct as of the date of this
Agreement, except those that are specifically as of a different date:
2.1 Ownership and Related Matters.
(a) Schedule 2.1(a) hereto correctly sets forth the number of
Shares beneficially owned by Shareholder and the nature of Shareholder's voting
power with respect thereto. Within five Business Days after the Record Date, the
Shareholder shall amend said Schedule 2.1(a) to correctly reflect the number of
Shares and the nature of Shareholder's voting power with respect thereto as of
the Record Date.
(b) There are no proxies, voting trusts or other agreements or
understandings to or by which the Shareholder or the Shareholder's spouse is a
party or bound or that expressly requires that any of the Shares be voted in any
specific manner other than as provided in this Agreement.
2.2 Authorization and Binding Agreement. The Shareholder has the
legal right, power, capacity and authority to execute, deliver and perform this
Agreement, and this Agreement is the valid and binding obligation of the
Shareholder enforceable in accordance with its terms, except as the enforcement
thereof may be limited by general principles of equity.
2.3 Non-contravention. The execution, delivery and performance of
this Agreement by the Shareholder will not (a) conflict with or result in the
breach of, or default or actual or potential loss of any benefit under, any
provision of any agreement, instrument or obligation to which the Shareholder or
the Shareholder's spouse is a party or by which any of Shareholder's properties
or the Shareholder's spouse's properties are bound, or give any other party to
any such agreement, instrument or obligation a right to terminate or modify any
term thereof; (b) require the consent or approval of any third party; (c) result
in the creation or imposition of any lien, mortgage or encumbrance on any of the
Shares or any other assets of the Shareholder or the Shareholder's spouse; or
(d) violate any law, rule or regulation to which the Shareholder or the
Shareholder's spouse is subject.
ARTICLE III
GENERAL
3.1 Amendments. To the fullest extent permitted by law, this
Agreement and any schedule or exhibit attached hereto may be amended by
agreement in writing of the parties hereto at any time.
3.2 Integration. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof and (except for
other documents to be executed pursuant to the Reorganization Agreement)
supersedes all prior agreements and understandings of the parties in connection
therewith.
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3.3 Specific Performance. The Shareholder, Home and Home Bank each
expressly acknowledge that, in view of the uniqueness of the obligations of the
Shareholder contemplated hereby, Home and Home Bank would not have an adequate
remedy at law for money damages in the event that this Agreement has not been
performed by the Shareholder in accordance with its terms, and therefore the
Shareholder, Home and Home Bank agree that Home and Home Bank shall be entitled
to specific enforcement of the terms hereof in addition to any other remedy to
which it may be entitled at law or in equity.
3.4 Termination. This Agreement shall terminate automatically without
further action at the earlier of the Effective Time of the Merger or the
termination of the Reorganization Agreement in accordance with its terms. Upon
such termination of this Agreement, the respective obligations of the parties
hereto shall immediately become void and have no further force and effect.
3.5 No Assignment. Neither this Agreement nor any rights, duties or
obligations hereunder shall be assignable by Home, Home Bank or the Shareholder,
in whole or in part. Any attempted assignment in violation of this prohibition
shall be null and void. Subject to the foregoing, all of the terms and
provisions hereof shall be binding upon, and inure to the benefit of, the
successors of the parties hereto.
3.6 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
3.7 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to each party hereto.
3.8 Notices. Any notice or communication required or permitted
hereunder, shall be deemed to have been given if in writing and (a) delivered in
person, (b) delivered by confirmed facsimile transmission (c) sent by overnight
carrier, postage prepaid with return receipt requested or (d) mailed by
certified or registered mail, postage prepaid with return receipt requested,
addressed as follows:
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If to Home and Home Bank, addressed to:
Home Interstate Bancorp
2633 Cherry Avenue
Signal Hill, California 90806
Attention: James Staes
Telecopier Number: (310) 426-4526
With a copy addressed to:
Manatt, Phelps & Phillips
11355 West Olympic Blvd.
Los Angeles, CA 90064
Attention: Barbara S. Polsky, Esq.
Telecopier No: (310) 312-4224
If to Shareholder, addressed to:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
With a copy addressed to:
Anita Wolman, Esq.
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436-4224
Telecopier No: (818) 907-5024
or at such other address and to the attention of such other person as a party
may notice to the others in accordance with this Section 3.8. Any such notice or
communication shall be deemed received on the date delivered personally or
delivered by confirmed facsimile transmission, on the first Business Day after
it was sent by overnight carrier, postage prepaid with return receipt requested
or on the third Business Day after it was sent by certified or registered mail,
postage prepaid with return receipt requested.
3.9 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts between California parties made and
performed in such State.
3.10 Severability and the Like If any provision of this Agreement
shall be held by a court of competent jurisdiction to be unreasonable as to
duration, activity or subject, it shall be deemed to extend only over the
maximum duration, range of activities or subjects as to which such provision
shall be valid and enforceable under applicable law. If any provisions shall,
for any reason, be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable, such invalidity, illegality or unenforceability
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shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein.
3.11 Waiver of Breach. Any failure or delay by Home and Home Bank in
enforcing any provision of his Agreement shall not operate as a waiver thereof.
The waiver by Home and Home Bank of a breach of any provision of this Agreement
shall not operate as a waiver thereof. The waiver by Home and Home Bank of a
breach of any provision of this Agreement by the Shareholder shall not operate
or be construed as a waiver of any subsequent breach or violation thereof. All
waivers shall be in writing and signed by the party to be bound.
IN WITNESS WHEREOF, the parties to this Agreement have caused and duly
executed this Agreement as of the day and year first above written.
HOME INTERSTATE BANCORP
By:
---------------------------------
Title:
------------------------------
HOME BANK
By:
---------------------------------
Title:
------------------------------
SHAREHOLDER
------------------------------------
(Shareholder's Name)
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SPOUSAL CONSENT
I am the spouse of __________________, the Shareholder in the above
Agreement. I understand that I may consult independent legal counsel as to the
effect of this Agreement and the consequences of my execution of this Agreement
and, to the extent I felt it necessary, I have discussed it with legal counsel.
I hereby confirm this Agreement and agree that it shall bind my interest in the
Shares, if any.
------------------------------------
(Shareholder's Spouse's Name)
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EXHIBIT G
FORM OF OPINION OF HOME'S COUNSEL
The opinion of counsel required by section 11.1 of the Agreement and
Plan of Reorganization (the "Agreement") shall be dated as of the Closing Date,
shall be in form and substance reasonably satisfactory to CU and CU Bank, and
shall contain opinions substantially in the form set forth below. (All
capitalized terms not otherwise defined herein have the meaning specified in
the Agreement).
1. Home Bank is a California state-chartered bank duly
incorporated, validly existing and in good standing under the laws of the State
of California and is authorized by the Superintendent of Banks of the State
of California to conduct a general banking business. The deposits of the Bank
are insured by the FDIC in the manner and to the fullest extent permitted by
law.
2. Home is a California corporation duly incorporated, validly
existing and in good standing under the laws of the state of California. Home is
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended.
3. Each of Home and Home Bank have all necessary corporate power
and authority to own or lease its properties and assets, and to carry on its
business as now conducted. Neither the scope of the business of Home, Home
Bank nor the location of any of their respective properties requires that any
of them be licensed to do business in any jurisdiction other than the State
of California, where the failure to be so licensed would, individually or in
the aggregate, have a materially adverse effect on the financial condition,
results of operation, business, affairs, properties (collectively, the
"Business Condition") of Home on a consolidated basis.
4. The authorized capital of Home and Home Bank is as set forth in
Sections 4.2(a) and 4.2(b), respectively, of the Agreement. All of the
outstanding shares of Home Bank Stock and Home Stock are duly authorized,
validly issued, fully paid and nonassessable (except, in the case of the Home
Bank Stock, as provided for in Section 662 of the California Financial Code).
To our knowledge, except for the Home Options referred to in section 4.2 of the
Agreement and the CY Warrant, there are no outstanding options, warrants or
other rights in or with respect to the unissued shares of Home Bank Stock or
Home Bank Stock or any other securities convertible into Home Stock or Home
Bank Stock and neither Home or Home Bank is obligated to issue any additional
shares of Home Stock or Home Bank Stock or any additional options, warrants or
other rights in or with respect to the unissued shares of such stock or
securities convertible into such stock.
5. The execution and delivery by each of Home and Home Bank of the
Agreement, the execution and delivery by Home of the Agreement of Merger, the
execution and
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delivery by Home Bank of the Bank Merger Agreement and the consummation of the
transactions contemplated thereby, have been duly and validly authorized by all
necessary action on the part of Home and Home Bank, as applicable. Each of the
Agreement, the Agreement of Merger and the Bank Merger Agreement, as
applicable, constitutes a valid and binding obligation of Home and Home Bank,
enforceable in accordance with their terms, except as the enforceability
thereof may be limited by (i) bankruptcy, insolvency, moratorium or other
similar laws affecting the rights of creditors generally; (ii) general
equitable principles or; (iii) Section 8(b)(6)(D) of the Federal Deposit
Insurance Act, 12 U.S.C. Section 1818(b)(6)(D).
6. Neither the execution and delivery by Home of the Agreement or the
Agreement of Merger, or by Home Bank of the Agreement or the Bank Merger
Agreement, nor the consummation of the transactions contemplated thereby, nor
compliance by Home or Home Bank with any of the provisions thereof, will (i)
conflict with or result in the breach of, or default under any provision of the
articles of incorporation or bylaws of Home or Home Bank, (ii) to our
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 either Home or Home Bank is a party, or
by which either Home or Home Bank or any of their respective properties or
assets is bound, except where such breach or default would not have a material
adverse effect on the Business Condition of Home on a consolidated basis; or
(iii) violate any law, order, writ, injunction, decree, statute, rule or
regulation applicable to either Home or Home Bank or any of their respective
properties or assets, except where such violation would not have a material
adverse effect on the Business Condition of Home on a consolidated basis.
7. No consent or approval of, notice to or filing with, any
governmental authority having jurisdiction over any aspect of the business or
assets of either Home or Home Bank is required in connection with the execution
and delivery of the Agreement, the Agreement of Merger and the Bank Merger
Agreement and the consummation of the transactions contemplated thereby, except
such notices and approvals as may be required under federal and state
securities laws, by the FRB and the OCC.
8. Except as to those matters set forth on Section 4.10 of the
Agreement, to our knowledge, (i) there is no private or governmental suit,
claim, action or proceeding pending, nor private or governmental suit, claim,
action or proceeding threatened against either Home or Home Bank 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 either Home or Home Bank; and (ii) there are no judgments,
decrees, stipulations or orders against either Home or Home Bank enjoining
either of them or any of their 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 of either Home or Home
Bank in any area.
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9. The Proxy Statement for use at the shareholders' meeting
required pursuant to Section 6.7 of the Agreement, as of the date of mailing
and the date of the shareholders' meeting, complied as to form in all material
respects with the requirements of the Exchange Act and all applicable rules
and regulations thereunder.
Counsel shall further state that although counsel has necessarily
assumed the correctness and completeness of the statements made by Home or Home
Bank in the Proxy Statement and takes no responsibility therefor, such counsel
has, in the course of the preparation of the Proxy Statement, had conferences
with representatives of Home and Home Bank with respect thereto, and that its
examination of the Proxy Statement and its discussions in the above-mentioned
conferences did not disclose to it any information which has caused such
counsel to believe that the Proxy Statement at the time of mailing and at the
time of the meeting of Home's shareholders contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein not misleading (except that such counsel need express no
belief or opinion as to financial statements, including any notes thereto, or
other financial or statistical data or as to any information supplied by Home).
In rendering its opinion, such counsel may rely, to the extent that
such counsel deems reliance necessary or appropriate, as to matters of fact,
upon certificates of government officials and of any officer or officers of
Home or Home Bank or Home's registrar and transfer agent. The opinion need
refer only to matters of California and federal law, and such counsel may
expressly exclude any opinions as to choice of law matters, antitrust matters
and (except as set forth in paragraph 9) securities law matters and may add
other qualifications and explanations of the basis of its opinions as may be
reasonably acceptable to CU.
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EXHIBIT H
HOME SHAREHOLDER'S AGREEMENT
This SHAREHOLDER'S AGREEMENT (this "Agreement"), dated as of January
10, 1996, is entered into by and among California United Bank, National
Association, a national banking association ("CU Bank"), CU Bancorp, a
California corporation ("CU"), and ___________________________ (the
"Shareholder").
R E C I T A L S
A. CU Bank, CU, Home Interstate Bancorp, a California corporation
("Home"), and Home Bank, a California banking corporation ("Home Bank"), entered
into that certain Agreement and Plan of Reorganization dated as of January 10,
1996 (the "Reorganization Agreement").
B. The Shareholder is a beneficial shareholder of shares of common
stock, no par value, of Home (the "Home Stock").
C. The Shareholder is a director of Home.
D. As an inducement to CU Bank and CU to enter into the
Reorganization Agreement, and in order to ensure pooling-of-interests accounting
treatment for the Merger contemplated by the Reorganization Agreement, the
Shareholder desires to enter into this Agreement.
E. Unless otherwise provided in this Agreement, capitalized terms
shall have the meanings ascribed to such terms in the Reorganization Agreement.
NOW, THEREFORE, in consideration of the premises and of the respective
representations, warranties and covenants, agreements and conditions contained
herein and in the Reorganization Agreement, and intending to be legally bound
hereby, CU Bank, CU and Shareholder agree as follows:
ARTICLE I
SHAREHOLDER'S AGREEMENT
1.1 Agreement to Vote. Shareholder shall vote or cause to be voted at
any meeting of shareholders of Home to approve the principal terms of the
Reorganization Agreement, the Merger and the transactions contemplated thereby
(the "Shareholders' Meeting"), all of the shares
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of Home Stock as to which Shareholder has sole or shared voting power (the
"Shares") as of the record date established to determine shareholders who have
the right to vote at any such Shareholders' Meeting (the "Record Date").
1.2 Legend. The Shareholder agrees to stamp, print or type on the
face of his certificates of Home Stock evidencing the Shares the following
legend:
"THE VOTING, SALE, ASSIGNMENT, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER ENCUMBRANCE OR DISPOSITION OF THE SHARES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A SHAREHOLDER'S
AGREEMENT DATED AS OF THE 10TH DAY OF JANUARY, 1996 BY AND
BETWEEN CU BANCORP, CALIFORNIA UNITED BANK, N.A. AND (THE RECORD
OWNER HEREOF), COPIES OF WHICH ARE ON FILE AT THE OFFICES OF CU
BANCORP."
1.3 Restrictions on Dispositions. The Shareholder agrees that, from
and after the date of this Agreement and during the term of this Agreement, the
Shareholder will not take any action that will alter or affect in any way the
right to vote the Shares, except (i) with the prior written consent of CU or
(ii) to change such right from that of a shared right of the Shareholder to vote
the Shares to a sole right of the Shareholder to vote the Shares.
1.4 Shareholder Approval. The Shareholder shall, in his capacity as a
director, (i) recommend shareholder approval of the Reorganization Agreement,
the Agreement of Merger and the transactions contemplated thereby at the Home
Shareholders' Meeting and (ii) advise the Home shareholders to reject any
subsequent proposal or offer received by Home relating to any Alternative
Transaction or purchase, sale, acquisition, merger or other form of business
combination involving Home or any of its assets, equity securities or debt
securities and to proceed with the transactions contemplated by the
Reorganization Agreement; provided, however, that the Shareholder shall not be
obligated to take any action specified in clause (ii) if the Board of Directors
of Home is advised in writing by outside legal counsel (Manatt, Phelps &
Phillips, or such other counsel that is reasonably acceptable to CU and CU Bank)
that, in the exercise of his fiduciary duties, a director of Home should not
take such action.
1.5 Restrictions on Disposition of CU Stock Received Pursuant to the
Merger. Notwithstanding any other provisions of this Agreement to the contrary,
none of the shares of CU Stock to be 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 CU Stock so received by the undersigned until
financial results covering a period of at least thirty (30) days of combined
operations of CU and Home following the Effective Time of the Merger have been
published by CU (provided that the
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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 CU Stock except as provided herein).
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
The Shareholder represents and warrants to CU and CU Bank that the
statements set forth below are true and correct as of the date of this
Agreement, except those that are specifically as of a different date:
2.1 Ownership and Related Matters.
(a) Schedule 2.1(a) hereto correctly sets forth the number of
Shares beneficially owned by Shareholder and the nature of Shareholder's voting
power with respect thereto. Within five Business Days after the Record Date, the
Shareholder shall amend said Schedule 2.1(a) to correctly reflect the number of
Shares and the nature of Shareholder's voting power with respect thereto as of
the Record Date.
(b) There are no proxies, voting trusts or other agreements or
understandings to or by which the Shareholder or the Shareholder's spouse is a
party or bound or that expressly requires that any of the Shares be voted in any
specific manner other than as provided in this Agreement.
2.2 Authorization and Binding Agreement. The Shareholder has the
legal right, power, capacity and authority to execute, deliver and perform this
Agreement, and this Agreement is the valid and binding obligation of the
Shareholder enforceable in accordance with its terms, except as the enforcement
thereof may be limited by general principles of equity.
2.3 Non-contravention. The execution, delivery and performance of
this Agreement by the Shareholder will not (a) conflict with or result in the
breach of, or default or actual or potential loss of any benefit under, any
provision of any agreement, instrument or obligation to which the Shareholder or
the Shareholder's spouse is a party or by which any of Shareholder's properties
or the Shareholder's spouse's properties are bound, or give any other party to
any such agreement, instrument or obligation a right to terminate or modify any
term thereof; (b) require the consent or approval of any third party; (c) result
in the creation or imposition of any lien, mortgage or encumbrance on any of the
Shares or any other assets of the Shareholder or the Shareholder's spouse; or
(d) violate any law, rule or regulation to which the Shareholder or the
Shareholder's spouse is subject.
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ARTICLE III
GENERAL
3.1 Amendments. To the fullest extent permitted by law, this
Agreement and any schedule or exhibit attached hereto may be amended by
agreement in writing of the parties hereto at any time.
3.2 Integration. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof and (except for
other documents to be executed pursuant to the Reorganization Agreement)
supersedes all prior agreements and understandings of the parties in connection
therewith.
3.3 Specific Performance. The Shareholder, CU and CU Bank each
expressly acknowledge that, in view of the uniqueness of the obligations of the
Shareholder contemplated hereby, CU and CU Bank would not have an adequate
remedy at law for money damages in the event that this Agreement has not been
performed by the Shareholder in accordance with its terms, and therefore the
Shareholder, CU and CU Bank agree that CU and CU Bank shall be entitled to
specific enforcement of the terms hereof in addition to any other remedy to
which it may be entitled at law or in equity.
3.4 Termination. This Agreement shall terminate automatically without
further action at the earlier of the Effective Time of the Merger or the
termination of the Reorganization Agreement in accordance with its terms. Upon
such termination of this Agreement, the respective obligations of the parties
hereto shall immediately become void and have no further force and effect.
3.5 No Assignment. Neither this Agreement nor any rights, duties or
obligations hereunder shall be assignable by CU, CU Bank or the Shareholder, in
whole or in part. Any attempted assignment in violation of this prohibition
shall be null and void. Subject to the foregoing, all of the terms and
provisions hereof shall be binding upon, and inure to the benefit of, the
successors of the parties hereto.
3.6 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
3.7 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to each party hereto.
3.8 Notices. Any notice or communication required or permitted
hereunder, shall be deemed to have been given if in writing and (a) delivered in
person, (b) delivered by confirmed facsimile transmission (c) sent by overnight
carrier, postage prepaid with return receipt requested
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or (d) mailed by certified or registered mail, postage prepaid with return
receipt requested, addressed as follows:
If to CU and CU Bank, addressed to:
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436-4487
Attention: Stephen G. Carpenter
With a copy addressed to:
Anita Wolman, Esq.
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436-4487
Telecopier No: (818) 907-5024
If to Shareholder, addressed to:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
With a copy addressed to:
Manatt, Phelps & Phillips
11355 West Olympic Blvd.
Los Angeles, CA 90064
Attention: Barbara S. Polsky, Esq.
Telecopier No: (310) 312-4224
or at such other address and to the attention of such other person as a party
may notice to the others in accordance with this Section 3.8. Any such notice or
communication shall be deemed received on the date delivered personally or
delivered by confirmed facsimile transmission, on the first Business Day after
it was sent by overnight carrier, postage prepaid with return receipt requested
or on the third Business Day after it was sent by certified or registered mail,
postage prepaid with return receipt requested.
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3.9 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts between California parties made and
performed in such State.
3.10 Severability and the Like. If any provision of this Agreement
shall be held by a court of competent jurisdiction to be unreasonable as to
duration, activity or subject, it shall be deemed to extend only over the
maximum duration, range of activities or subjects as to which such provision
shall be valid and enforceable under applicable law. If any provisions shall,
for any reason, be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable, such invalidity, illegality or unenforceability shall
not affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
3.11 Waiver of Breach. Any failure or delay by CU and CU Bank in
enforcing any provision of his Agreement shall not operate as a waiver thereof.
The waiver by CU and CU Bank of a breach of any provision of this Agreement
shall not operate as a waiver thereof. The waiver by CU and CU Bank of a breach
of any provision of this Agreement by the Shareholder shall not operate or be
construed as a waiver of any subsequent breach or violation thereof. All waivers
shall be in writing and signed by the party to be bound.
IN WITNESS WHEREOF, the parties to this Agreement have caused and duly
executed this Agreement as of the day and year first above written.
CU BANCORP
By:
--------------------------------
Title:
-----------------------------
CALIFORNIA UNITED BANK,
NATIONAL ASSOCIATION
By:
--------------------------------
Title:
-----------------------------
SHAREHOLDER
-----------------------------------
(Shareholder's Name)
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SPOUSAL CONSENT
I am the spouse of __________________, the Shareholder in the above
Agreement. I understand that I may consult independent legal counsel as to the
effect of this Agreement and the consequences of my execution of this Agreement
and, to the extent I felt it necessary, I have discussed it with legal counsel.
I hereby confirm this Agreement and agree that it shall bind my interest in the
Shares, if any.
------------------------------------
(Shareholder's Spouse's Name)
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EXHIBIT I
to
APPENDIX A
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436-4487
Attention: Stephen G. Carpenter
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of
Reorganization, dated as of January 10, 1996 (the "Agreement"), by and among CU
Bancorp, a California corporation ("CU"), California United Bank, National
Association, a national banking association ("CU Bank"), Home Interstate
Bancorp, a California corporation ("Home"), and Home Bank, a California banking
corporation ("Home Bank"), which Agreement provides, among other things, for the
merger (the "Merger") of CU with and into Home in a transaction in which shares
of common stock of Home ("Home Stock") will be automatically canceled and shall
be converted into 1.409 shares of common stock of CU ("CU Stock"), as more fully
provided for in the Agreement.
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 Home within the meaning of Rule 145; and that, accordingly, the shares of CU
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 Agreement.
1. The undersigned, after inquiry of any agent with
discretionary power to transfer the undersigned's shares of Home 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 its obligations hereunder.
(b) The undersigned is currently the owner of that number
of shares of Home Stock set forth in Schedule 1 hereto (the "Home Shares") and
has held the Home Shares at all times since January 1, 1995 unless otherwise set
forth in Schedule 1.
(c) The undersigned shall not purchase, sell, transfer or
otherwise dispose of, or reduce the undersigned's risk of ownership or
investment in any of the Home Shares prior to the Merger. The undersigned agrees
to the placement of a restrictive legend on his or her certificates representing
Home Shares which legend shall set forth these restrictions. Such
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legend shall be placed on the certificates concurrently with the execution of
this Agreement or as soon thereafter as practicable.
(d) The undersigned will not sell, transfer or dispose of
any shares of CU 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 CU 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 CU Stock to be received by the undersigned pursuant to the
Merger.
(f) The undersigned has not engaged in a Sale of any
shares of Home Stock at any time since January 1, 1995 unless otherwise set
forth in Schedule 1.
(g) The undersigned has no present plan or intent to (i)
engage in a Sale of the Home Shares (other than in exchange for CU Stock
pursuant to the Merger), or (ii) exercise dissenters' rights in connection with
the Merger.
(h) The representations contained herein shall be true and
correct at all times from the date hereof through the Effective Time.
(i) 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. CU agrees to use its best efforts to file all reports and
data with the Securities and Exchange Commission necessary to permit the
undersigned to sell Restricted Securities pursuant to and otherwise in
conformity with Rule 145(d) under the Securities Act.
3. CU acknowledges that the provision 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 CU reasonably believes that the
provisions of Rule 145 have not been complied with, or if requested by CU in
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connection with a proposed disposition, the undersigned shall furnish to CU 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 CU 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 CU'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 CU'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."
CU agrees that such stop transfer instructions and legend
will be promptly removed if the provisions of Section 3 are complied with.
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 BY THIS AGREEMENT.
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IN WITNESS WHEREOF, the undersigned has executed the
foregoing Affiliate's Agreement as of the date first above written.
Very truly yours,
Agreed to and Accepted:
CU BANCORP
By:____________________________
Title:_________________________
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EXHIBIT 2.(C)
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF REORGANIZATION
By and Among
HOME INTERSTATE BANCORP,
HOME BANK,
CU BANCORP AND
CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION
This Amendment No. 1 (the "Amendment") to the Agreement and Plan of
Reorganization dated January 10, 1996 (the "Agreement") by and among Home
Interstate Bancorp ("Home"), Home Bank ("Home Bank"), CU Bancorp ("CU") and
California United Bank, National Association ("CU Bank") (collectively, the
"Parties"), is entered into as of March __, 1996 by and among the Parties.
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to such terms in the Agreement.
R E C I T A L S
WHEREAS, the Agreement provides, among other things, that the Parties
intend to cause the merger of Home Bank, a state bank, with and into CU Bank, a
national Bank, at the Effective Time or as soon as practicable thereafter;
WHEREAS, after discussions with various bank regulatory agencies and an
assessment of the relative costs and benefits of a state bank versus a national
bank, the Parties have decided to modify the original structure of the proposed
merger between Home Bank and CU Bank, as set forth in the Agreement, to provide
for the merger of CU Bank with and into Home Bank, with Home Bank surviving the
merger (the "Surviving Bank"); and
WHEREAS, the Surviving Bank, following the consummation of the merger
between CU Bank and Home Bank, will operate as a state bank;
WHEREAS, as a result of the revised structure of the proposed merger
between CU Bank and Home Bank, certain terms and provisions of the Agreement
require modification;
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing and other valuable
consideration the receipt and sufficiency of which is hereby acknowledged, the
Parties hereby agree as follows:
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1. Section 1.7 shall be amended to read in its entirety as
follows:
"'Bank Merger' means the merger of CU Bank with and into Home
Bank, with Home Bank surviving the Merger."
2. As a result of the foregoing amendment, Sections 1.79, 1.80 and
1.81, as originally set forth in the Agreement, shall become Sections 1.80,
1.81 and 1.82, respectively.
3. Section 1.79 shall be amended to read in its entirety as
follows:
"1.79 'Surviving Bank' means Home Bank, following the
consummation of the Bank Merger."
4. The last sentence of Section 4.6 shall be amended to read in
its entirety as follows:
"Except as set forth in the Home Schedules, no consent of,
approval of, notice to or filing with any governmental authority having
jurisdiction over any aspect of the business or assets of Home or Home Bank,
and no consent of, approval of or notice to any other Person, is required in
connection with the execution and delivery by Home and Home Bank of this
Agreement, by Home of the Agreement of Merger, by Home and Home Bank of the
Bank Merger Agreement, or the consummation by Home and Home Bank of the Merger
or Bank Merger or the transactions contemplated hereby or thereby, except (i)
the approval of this Agreement and the transactions contemplated hereby by the
shareholders of Home and the sole shareholder of Home Bank; (ii) such approvals
as may be required by the FRB and the Superintendent; (iii) the filing of the
Agreement of Merger with the California Secretary; (iv) the filing of the Bank
Merger Agreement with the Superintendent and the California Secretary; and (v)
the filing with and approval by the SEC of the S-4 and the Proxy Statement.
5. Section 4.26 shall be amended to read in its entirety as
follows:
"4.26 Disclosure Documents and Applications. None of the
information supplied or to be supplied by or on behalf of Home or Home Bank
("Home Supplied Information") for inclusion in the documents to be filed with
the SEC, FRB, the Superintendent, or any governmental entity in connection with
the transactions contemplated in this Agreement will, at the respective times
such documents are filed or become effective, contain any untrue statement of a
material fact, or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading."
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6. The last sentence of Section 5.6 shall be amended to read in
its entirety as follows:
"Except as set forth in the CU Schedules, no consent of,
approval of, notice to or filing with any governmental authority having
jurisdiction over any aspect of the business or assets of CU or CU Bank, and no
consent of, approval of or notice to any other Person, is required in
connection with the execution and delivery by CU and CU Bank of this Agreement,
by CU of the Agreement of Merger, by CU Bank of the Bank Merger Agreement, or
the consummation by CU and CU Bank of the Merger or Bank Merger or the
transactions contemplated hereby or thereby, except (i) the approval of this
Agreement and the transactions contemplated hereby by the shareholders of CU
and the sole shareholder of CU Bank; (ii) such approvals as may be required by
the FRB and the Superintendent; (iii) the filing of the Agreement of Merger
with the California Secretary; (iv) the filing of the Bank Merger Agreement
with the Superintendent and the California Secretary; and (v) the filing with
the approval by the SEC of the S-4 and the Proxy Statement."
7. Section 5.26 shall be amended to read in its entirety as
follows:
"5.26 Disclosure Documents and Applications. None of the
information supplied or to be supplied by or on behalf of CU or CU Bank ("CU
Supplied Information") for inclusion in the documents to be filed with the SEC,
FRB, the Superintendent, or any other governmental entity in connection with
the transactions contemplated in this Agreement will, at the respective times
such documents are filed or become effective, contain any untrue statement of a
material fact, or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading."
8. Section 6.3(j) shall be amended to read in its entirety as
follows:
"(j) furnish to CU, as soon as practicable, and in any event
within thirty days after it is prepared, (i) a copy of any report submitted to
the board of directors of Home or Home Bank, provided, however, that Home need
not furnish to CU communications of Home's legal counsel regarding Home's rights
and obligations under this Agreement or books, records and documents covered by
the attorney-client privilege, or which are attorneys' work product, (ii)
copies of all reports, filings, certificates, correspondence and other
documents filed with or received from the SEC, FRB, FDIC, Superintendent or any
other governmental or regulatory entity, (iii) monthly unaudited consolidation
balance sheets and consolidated statements of operations of Home; (iv) all
proxy statements, information statements, financial statements, reports, sent
by Home to its shareholders or other security holders, and (v) such other
existing reports as CU may reasonably request relating to Home or Home Bank."
9. Section 6.6 shall be amended to read in its entirety as follows:
"6.6 Notices; Reports. Home and Home Bank will promptly notify
CU of any event of which Home or Home Bank obtains knowledge which has had or
may
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reasonably be expected to have a materially adverse effect on the financial
condition, operations, business or prospects of Home on a consolidated basis or
in the event that Home or Home Bank determines that either is unable to fulfill
any of the conditions to the performance of CU's obligations hereunder, as set
forth in Articles IX or XI herein."
10. Section 7.3(j) shall be amended to read in its entirety as
follows:
"(j) furnish to Home, as soon as practicable, and in any event
within thirty days after it is prepared (i) a copy of any report submitted to
the board of directors of CU or CU Bank, provided, however, that CU need not
furnish to Home communications of CU's legal counsel regarding CU's rights and
obligations under this Agreement or books, records and documents covered by the
attorney-client privilege, or which are attorney's work product, (ii) copies of
all reports, filings, certificates, correspondence and other documents filed
with or received from the SEC, FRB, FDIC, OCC or any other governmental or
regulatory entity, (iii) monthly unaudited consolidated balance sheets and
consolidated statements of operations of CU, (iv) as soon as available, all
proxy statements, information statements, financial statements, reports,
letters and communications sent by CU to its shareholders or other security
holder, and (v) such other existing reports as Home may reasonably request
relating to CU or CU Bank."
11. Section 7.6 shall be amended to read in it entirety as follows:
"7.6 Notices; Reports. CU and CU Bank will promptly notify Home
of any event of which CU or CU Bank obtains knowledge which has had or may
reasonably be expected to have a materially adverse effect on the financial
condition, operations, business or prospects of CU on a consolidated basis or
in the event that CU or CU Bank determines that either is unable to fulfill any
of the conditions to the performance of Home's obligations hereunder, as set
forth in Articles IX or XI herein."
12. Section 9.3 shall be amended to read in its entirety as follows:
"9.3 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 FRB and the Superintendent shall
have been obtained or granted for the Merger and Bank Merger and the
transactions contemplated hereby, and the applicable waiting period under all
laws have expired. All other statutory or regulatory requirements for the valid
completion of the transactions contemplated hereby shall have been satisfied."
13. Section 9.4 shall be amended to read in its entirety as follows:
"9.4 Tax Opinion. CU and Home shall have received an opinion
from Arthur Andersen that the Merger and the Bank Merger will not result in the
recognition of gain or loss for federal income tax purposes to CU, CU Bank,
Home or Home Bank, nor will the issuance of the CU Stock result in the
recognition of gain or loss by the holders of Home Stock who receive such stock
in connection with the Merger."
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14. Section 10.5 shall be amended to read in its entirety as
follows:
"10.5 Officer's Certificate. There shall have been delivered to
Home on the Closing Date a certificate executed by the President and the Chief
Financial Officer of each of CU and CU Bank certifying, to the best of their
knowledge, compliance with all of the provisions of Sections 10.2, 10.3, 10.4
and 10.11."
15. Section 10.14 shall be amended to read in its entirety as
follows:
"10.14 Non-Performing Loans. CU Bank's Non-Performing Loans
shall not exceed 75% of (i) the shareholder's equity of CU Bank as of the month
end prior to the Effective Time plus (ii) the loan loss reserves of CU Bank."
16. The last sentence of Section 11.2 shall be amended to read in
its entirety as follows:
"It is understood and acknowledged that the representations
being made on and as of the Closing Date shall be made with respect to the Home
Schedules as updated in accordance with Section 6.3(k)."
17. Section 12.1 shall be amended to read in its entirety as
follows:
"At and as of the Effective Time, the former officers and
employees of Home and CU Bank who become officers and employees of the
Surviving Company or Surviving Bank ("Transferred Employees") shall, in that
capacity, be entitled to participate in all employee benefits and benefit
programs of the Surviving Company or Surviving Bank, as the case may be, in
accordance with the terms of such employee benefit programs. Surviving Company
or Surviving Bank, as the case may be, shall recognize such Transferred
Employees' service with Home and CU Bank for purposes of eligibility and
vesting under all benefit programs. Surviving Company or Surviving Bank, as the
case may be, shall also cover under its health plans, without the application
of any pre-existing limitation or exclusion, all Transferred Employees and
their covered dependents who are covered under similar Home or CU Bank health
plans as of the Closing Date and who change coverage to Surviving Company's or
Surviving Bank's health plans, as the case may be, at the time such Transferred
Employees are first provided the option to enroll in Surviving Company's or
Surviving Bank's health plans."
18. This Amendment may be executed in one or more counterparts, all
of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each party hereto
and delivered to each party hereto.
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IN WITNESS WHEREOF, the parties to this Amendment have duly executed
this Amendment as of the day and year first above written.
CU BANCORP
By:
-----------------------------------------
Name:
Title:
CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION
By:
-----------------------------------------
Name:
Title:
HOME INTERSTATE BANCORP
By:
-----------------------------------------
Name:
Title:
HOME BANK
By:
-----------------------------------------
Name:
Title:
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EXHIBIT B
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (the "Bank Merger Agreement") is made and entered
into as of this ___ day of ______, 1996, by and between Home Bank, a California
corporation ("Home Bank"), and California United Bank, National
ASSOCIATION, A NATIONAL BANKING ASSOCIATION ("CU BANK"), WITH REFERENCE TO THE
FOLLOWING FACTS:
RECITALS
1. CU Bank is a national banking association duly organized, validly
existing and in good standing under the laws of the United States, with
authorized capital of 540,000 shares of $5.00 par value common stock ("CU Bank
Stock") of which, on the date hereof, there are 472,973 shares issued and
outstanding. CU Bank is the wholly owned subsidiary of CU Bancorp, a California
corporation ("CU").
2. Home Bank is a corporation duly organized, validly existing and in good
standing under the laws of the State of California with authorized capital of
4,000,000 shares of common stock, $0.40 par value ("Home Bank Stock"), of which,
on the date hereof, there are 1,938,746 shares issued and outstanding. Home Bank
is the wholly owned subsidiary of Home Interstate Bancorp, a California
corporation ("Home").
3. The respective Boards of Directors of CU Bank and Home Bank, each acting
pursuant to a resolution of its board of directors, adopted by the vote of a
majority of its directors, deem it desirable and in the best interests of their
respective corporations and shareholders that CU Bank be merged (the "Bank
Merger") with and into Home Bank as provided in this Bank Merger Agreement
pursuant to the laws of the State of California and that Home Bank be the
surviving bank (the "Surviving Bank").
4. CU Bank, CU, Home Bank and Home entered into an Agreement and Plan of
Reorganization, dated as of January 10, 1996, as amended ___________, 1996 (the
"Reorganization Agreement"), which provides for the merger of CU Bank with and
into Home Bank (the "Bank Merger") in accordance with this Bank Merger
Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements herein set forth and for the purpose of prescribing the terms and
conditions of such Bank Merger, the parties hereto agree as follows:
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ARTICLE I
THE BANK MERGER
Upon consummation of the Bank Merger at the Effective Time of the Bank
Merger (as defined in Article IX hereof), CU Bank shall be merged with and into
Home Bank which shall thereupon be the Surviving Bank, and the separate
corporate existence of CU Bank shall cease.
ARTICLE II
NAME
The name of the Surviving Bank shall be "____________________."
ARTICLE III
ARTICLES OF INCORPORATION
The Articles of Incorporation of Home Bank as in effect immediately prior
to the Effective Time of the Bank Merger shall, at and after the Effective Time
of the Bank Merger, continue to be the Articles of Incorporation of the
Surviving Bank.
ARTICLE IV
BYLAWS
The Bylaws of Home Bank as in effect immediately prior to the Effective
Time of the Bank Merger shall, at and after the Effective Time of the Bank
Merger, continue to be the Bylaws of the Surviving Bank.
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ARTICLE V
DIRECTORS
The following persons shall, at and after the Effective Time of the Bank
Merger, serve as the Directors of the Surviving Bank until its next annual
meeting of shareholders or until such time as their successors have been elected
and qualified:
[INSERT NAMES OF DIRECTORS]
ARTICLE VI
RIGHTS AND DUTIES OF SURVIVING BANK
At and after the Effective Time of the Bank Merger, all rights, privileges,
powers and franchises and all property and assets of every kind and description
of CU Bank and Home Bank shall be vested in and be held and enjoyed by the
Surviving Bank, without further act or deed, and all the estates and interests
of every kind of CU Bank and Home Bank, including all debts due to either of
them, shall be as effectively the property of the Surviving Company as they were
of CU Bank and Home Bank, and the title to any real estate vested by deed or
otherwise in either CU Bank or Home Bank shall not revert or be in any way
impaired by reason of the Bank Merger; and all rights of creditors and liens
upon any property of CU Bank and Home Bank shall be preserved unimpaired and all
debts, liabilities and duties of CU Bank and Home Bank shall be debts,
liabilities and duties of the Surviving Bank and may be enforced against it to
the same extent as if said debts, liabilities and duties had been incurred or
contracted by it.
ARTICLE VII
CONVERSION OF SHARES
In and by virtue of the Bank Merger and at the Effective Time of the Bank
Merger, pursuant to this Bank Merger Agreement, the shares of Home Bank Stock
and CU Bank Stock outstanding at the Effective Time of the Bank Merger shall be
converted as follows:
(a) Effect on the Home Bank Stock. Each share of Home Bank Stock issued and
outstanding immediately prior to the Effective Time of the Bank Merger shall, on
and after
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the Effective Time of the Bank Merger, remain outstanding and shall for all
purposes be deemed to represent one share of common stock of the Surviving Bank.
(b) Effect on CU Bank Stock. Each share of CU Bank Stock issued and
outstanding immediately prior to the Effective Time of the Bank Merger shall, on
and after the Effective Time of the Bank Merger, be automatically canceled and
cease to be an issued and outstanding share of CU Bank Stock.
ARTICLE VIII
FURTHER ACTION
The parties hereto shall execute and deliver, or cause to be executed and
delivered, all such deeds and other instruments, and will take or cause to be
taken all further or other action as they may deem necessary or desirable, in
order to vest in and confirm to the Surviving Bank title to and possession of
all of CU Bank's and Home Bank's property, rights, privileges, powers and
franchises hereunder, and otherwise to carry out the intent and purposes of this
Agreement.
ARTICLE IX
EFFECTIVE TIME OF THE BANK MERGER
The Bank Merger will become effective upon the filing, in accordance with
Section 4887 of the California Financial Code, of a copy of this Bank Merger
Agreement (bearing the certification of the Secretary of State of the State of
California) and all other requisite accompanying certificates in the office of
the California Superintendent of Banks (the "Superintendent"). The date and time
of such filing with the Superintendent is referred to herein as to the
"Effective Time".
ARTICLE X
SUCCESSORS AND ASSIGNS
This Bank Merger Agreement shall be binding upon and enforceable by the
parties hereto and their respective successors, assigns and transferees, but
this Bank Merger Agreement may not be assigned by either party without the
written consent of the other.
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ARTICLE XI
TERMINATION
This Bank Merger Agreement may, by the mutual consent and action of the
Boards of Directors of CU Bank and Home Bank, be abandoned at any time before or
after approval thereof by the shareholders of CU Bank and Home Bank, but not
later than the Effective Time of the Bank Merger. This Agreement shall
automatically be terminated and of no further force and effect if, prior to the
Effective Time of the Bank Merger, the Reorganization Agreement is terminated in
accordance with the terms thereof.
ARTICLE XII
SATISFACTION OF CONDITION AND OBLIGATIONS
(a) The obligations of CU Bank to proceed with the Closing are subject to
the satisfaction at or prior to the Closing of all of the conditions to the
obligations of CU Bank and CU under the Reorganization Agreement, any one or
more of which, to the extent it is or they are waivable, may be waived, in whole
or in part, by CU Bank.
(b) The obligations of Home Bank to proceed with the Closing are subject to
the satisfaction at or prior to the Closing of all of the conditions to the
obligations of Home and Home Bank under the Reorganization Agreement, any one or
more of which, to the extent it is or they are waivable, may be waived, in whole
or in party, by Home Bank.
ARTICLE XIII
GOVERNING LAW
This Bank Merger Agreement has been executed in the State of California,
and the laws of the State of California shall govern the validity and
interpretation hereof and the performance by the parties hereto.
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IN WITNESS WHEREOF, CU Bank and Home Bank, pursuant to the approval and
authority duly given by resolution of their respective Board of Directors, have
caused this Bank Merger Agreement to be signed by their respective Presidents
and Secretaries on the day and year first above written.
CALIFORNIA UNITED BANK,
NATIONAL ASSOCIATION
By:_____________________________________
President
________________________________________
Secretary
HOME BANK
By:_____________________________________
President
________________________________________
Secretary
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APPENDIX B
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, 1995.
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, 1996: $53,134,221
-----------
Common Stock, no par value -
- ----------------------------
The number of shares outstanding of the issuer's classes of common stock as of
February 28, 1996:
Common Stock, no par value 5,285,333 shares
- -------------------------------------------
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DOCUMENTS INCORPORATED BY REFERENCE
Part III is hereby incorporated by reference from sections of the Registrant's
Definitive Proxy Statement which will be filed within 120 days of fiscal year
ended December 31, 1995.
This document contains 60 pages.
Exhibit Page begins on Page 61
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
Part Number Item Page
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
I 1. Business 4
I 2. Properties 21
I 3. Legal Proceedings 22
I 4. Submission of Matters to a Vote 22
of Security Holders
I 4.A. Executive Officers of the Registrant 22
II 5. Market for the Company's Common Stock 25
and Related Stockholder Matters
II 6. Selected Financial Data 25
II 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 26
II 8. Financial Statements and Supplementary
Data 38
II 9. Changes in and Disagreements with *
Accountants on Accounting and
Financial Disclosure
III 10. Directors and Executive Officers of **
the Company
III 11. Executive Compensation **
III 12. Security Ownership of Certain **
Beneficial Owners and Management
III 13. Certain Relationships and Related **
Transaction
IV 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 58
</TABLE>
* This item is omitted because it is either inapplicable or the answer
thereto is in the negative.
** Incorporated by reference from the Company's proxy statement which
will be filed within 120 days of fiscal year ended December 31, 1995.
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PART I
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 and the sole subsidiary of the Company.
DESCRIPTION OF BUSINESS
Commercial Banking Business
CU 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. The Company does not conduct any activities other than in
connection with its ownership of the Bank which is CU Bancorp's sole
subsidiary. The company functions primarily as the sole stockholder of the
Bank and establishes general policies and activities for the Bank. The Bank
was founded in April 1982 and provides an extensive range of commercial banking
services.
The Bank 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. The Bank offers lending, deposit, accounts receivable
financing, letters of credit, cash management, SBA and international trade
services from seven full -service offices. The Bank's primary focus is to
engage in middle market lending to businesses, professionals, the entertainment
industry, and high net-worth individuals. While the Bank does not actively
solicit retail or consumer banking business, it offers these services primarily
to owners, officers, and employees of its business customers, and customers of
accounting and business management firms with which the Bank regularly does
business.
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 variety of other related business activities. This
division offers certain specialty products aimed at the entertainment industry
and related individuals.
The SBA division offers financing alternatives to businesses in the
Bank's market through the use of government guaranteed loans. This division
offers both term and shorter term credit products.
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 facilitates
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.
The Bank attracts customers and deposits by offering a personalized
approach and a high degree of service. The key to the Bank's deposit
generation is personal contacts and services rather than rate competition. A
significant portion of its business is with business customers who conduct
substantially all of their banking business with the Bank.
Either alone or in concert with correspondent banks, the Bank offers a
wide variety of credit and deposit services to its customers. Management
believes that its current and prospective customers favorably respond to the
individualized tailored banking services that the Bank provides. Deposit
services,
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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 offers sophisticated on
line banking capabilities to customers through its electronic banking programs.
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 made arrangements with a number of trust companies to refer
prospective customers, in connection with which the Bank may receive a referral
fee.
Continued development of a diversified commercial oriented deposit and
lending base is the Bank's highest priority. Loans and time and demand
deposits are actively solicited by the directors, officers, and employees of
the Bank. The executive and senior officers of the Bank have had substantial
experience in soliciting bank deposits and in serving the comprehensive banking
needs of small and mid-size businesses.
During 1995, the Bank serviced the commercial banking business from
five offices including: its head office at 16030 Ventura Boulevard, in Encino,
California 91436, a suburb of Los Angeles; 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; a Ventura
County (Camarillo) Regional Office; a South Bay Regional office in Gardena,
California; and a San Gabriel Valley Regional Office, located in City of
Industry, which serves the San Gabriel Valley and northern Orange County. In
January 1996, the Bank added branches in Santa Ana and Anaheim in Orange
County as a result of its merger with Corporate Bank.
In January 1996, the Company completed the acquisition of Corporate
Bank of Santa Ana California which was merged into the Bank. Corporate Bank
served both small and mid market business entities, as well as offering certain
consumer based products such as home equity lines of credit and auto loans and
leases. It is contemplated that upon full integration of the Corporate Bank
business that the business of these offices will mirror those of the Bank as a
whole.
On January 10, 1996, the Bank announced an agreement to merge with
Home Interstate Bancorp, parent of Home Bank, based in the South Bay.
The merger with Home Bank is expected to be completed in mid - 1996, and
will create a Bank with 22 branches and over $800 million in assets.
Historical Regulatory Matters
In 1992, the Bank 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 The Bank 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. The Bank's capital ratios, as of December 31, 1995, are in
excess of all minimums imposed by law and regulation and qualify to rate the
Bank as a "well capitalized" bank. For further information see Note 16 to the
Financial Statements.
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.
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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. Sections 55 and 60; and (c) with the prior written
approval of the OCC Regional Administrator; 13) develop and implement a written
liquidity, asset and liability management policy; 14) document and support the
reasonableness of any management and other fees to any director or other party;
15) correct violations of law; and 16) provide reports to the OCC regarding
compliance.
The Company's Memorandum of Understanding ("MOU") with the Federal
Reserve 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.
The Company
Bancorp is a legal entity separate and distinct from the Bank. There
are various legal limitations on the ability of the Bank to finance or
otherwise supply funds to Bancorp. In particular, under federal banking law, a
national bank, such as the Bank, 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
the Bank may supply funds to Bancorp, whether through direct extensions of
credit or through purchases of securities or assets, issuance of guarantees or
the like. Generally, any loan made by the Bank to Bancorp must be secured by
certain kinds and amounts of collateral and is limited to 10% of the Bank's
capital and surplus (as defined), and all loans by the Bank to Bancorp are
limited to 20% of the Bank's capital and surplus. The Bank 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.
Mortgage Banking
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 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.
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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 Bank retained the mortgage servicing portfolio after the sale of
the division, although it retained the former division to service the loans.
At December 31, 1995 substantially all of the mortgage loan servicing portfolio
had been sold. See Management's Discussion and Analysis for further
amplification on operating contributions of this division and the effect of the
sale.
Entertainment Division
The Bank's entertainment division, based 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.
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 1995, the Bank
obtained approximately 7.2% of its deposits from companies associated with the
real estate business, primarily title and escrow companies. 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 area
encompassed in an approximately sixty mile radius from the downtown Los Angeles
area, including much of Ventura County, the San Fernando Valley, Beverly Hills,
West Los Angeles, the San Gabriel Valley, the South Bay area and metropolitan
areas of the City and County of Los Angeles. The Bank also serves Orange
County.
The banking and financial services business in California generally,
and in the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The
Bank competes for loans and deposits and customers for financial services with
other commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions and other nonbank financial service providers.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services than the Bank. In order to compete with the other financial services
providers, the Bank principally relies upon local promotional activities,
personal relationships established by officers, directors and employees with
its customers, and specialized services tailored to meet its customers' needs.
In those instances where the Bank is unable to accommodate a customer's needs,
the Bank will arrange for those services to be provided by its correspondents.
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.
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<PAGE> 316
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.
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.
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.
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
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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 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.
The FRB has determined, by regulation, that certain activities are so
closely related to banking as to be a proper incident thereto within the
meaning of the BHC Act. These activities include, but are not limited to:
opening an industrial loan company, industrial bank, Morris Plan Bank, mortgage
company, finance company, credit card company, or factoring company; performing
certain data processing operations; providing investment and financial advice;
operation as a trust company in certain instances; selling traveler's checks,
U.S. Savings Bonds, and certain money orders; providing certain courier
services; providing real estate appraisals; providing management consulting
advice to non affiliated depository institutions in some instances; acting as
an insurance agent for certain types of credit related insurance; leasing
property or acting as agent, broker, or advisor for leasing property on a "full
payout basis"; acting as a consumer financial counselor, including tax planning
and return preparation; performing futures, options, and advisory services,
check guarantee services and discount brokerage activities; operating a
collection or credit bureau; or performing personal property appraisals.
Recent amendments to this list allow bank holding companies to own
savings associations, arrange commercial real estate equity financing, engage
in certain securities brokerage activities, underwrite and deal in government
obligations and money market instruments, conduct foreign exchange advisory and
transactional services, act as a futures commission merchant, provide
investment advice on financial futures
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and options on futures, provide consumer financial counseling, provide tax
planning and preparation, operate a check guarantee service, operate a
collection agency, and operate a credit bureau. The Company has no present
intention to engage in any of such newly permitted activities.
The FRB has determined that certain other activities are not so
closely related to banking as to be a proper incident thereto within the
meaning of the BHC Act. Such activities include: real estate brokerage and
syndication; real estate development; property management; underwriting of life
insurance not related to credit transactions; and, with certain exceptions
previously noted, securities underwriting and equity funding. The area of
securities underwriting is under review and will likely be expanded. In the
future, the FRB may add or delete from the list of activities permissible for
bank holding companies.
Under 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.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank
The Bank, as a national banking association, is subject to primary
supervision, examination and regulation by the Comptroller of the Currency (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 enforced, to direct an 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 may 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
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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. Further, the Bank is required to
maintain certain levels of capital. See "Item 1. Business - Supervision and
Regulation - Capital Standards."
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. The Superintendent may
impose similar limitations on the conduct of California-chartered banks. 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.
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 and exercise of
options and warrants to purchase shares of the Company.
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). Additional
restrictions on transactions with 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 Action and Other Enforcement
Mechanisms."
Capital Standards
The Federal Reserve Board, the Comptroller and the FDIC 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
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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
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 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 risk-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 is
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.
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,
the Bank currently is unable to predict the impact of the proposal on the Bank
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 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.
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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, effective April 1, 1995,
which limit 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 the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends. The banking agencies
have issued a final rule which requires them to revise their risk based capital
guidelines to ensure that their standards take adequate account of interest
rate risk ("IRR"). These amendments to risk-based capital guidelines had not
been finalized for banks as of December 31, 1995.
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, 1995.
<TABLE>
<CAPTION>
December 31, 1995
-----------------
Minimum
Capital
Requirement Actual Ratio
----------- ------ -----
<S> <C> <C>
Leverage ratio 10.52% 4.0%
Tier 1 risk-based ratio 14.92 4.0
Total risk-based ratio 16.19 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% (3% if
the institution receives the
highest rating from its
primary regulator)
"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% (3% if the Leverage ratio less than 3%.
institution receives the highest rating
from its primary regulator)
"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
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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
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 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.
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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 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. On August 8, 1995, the FDIC announced that
the designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
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<PAGE> 325
Under the risk-based assessment system, a BIF member institution such
as the Bank 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 regulator
(in the Bank's case, the Comptroller). 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
Comptroller to define well-capitalized, adequately capitalized and
undercapitalized are the same in the Comptroller'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>
Assessment Rates Effective through 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>
Assessment Rates Effective January 1, 1996
<TABLE>
<CAPTION>
Group A Group B Group C
-------------------------------------
<S> <C> <C> <C>
Well Capitalized . . . . . . . . . . . . 0* 3 17
Adequately Capitalized . . . . . . . . . 3 10 24
Undercapitalized . . . . . . . . . . . . 10 24 27
</TABLE>
*Subject to a statutory minimum assessment of $1,000 per semi-annual
period (which also applies to all other assessment risk
classifications).
At December 31, 1995, the Bank was well capitalized (Group A).
A number of proposals have recently been introduced in Congress to
address the disparity in bank and thrift deposit insurance premiums. On
September 19, 1995, legislation was introduced and referred to the House
Banking Committee that would, among other things: (i) impose a requirement on
all SAIF member institutions to fully recapitalize the SAIF by paying a
one-time special assessment of approximately 85 basis points on all assessable
deposits as of March 31, 1995, which assessment would be due as of January 1,
1996; (ii) spread the responsibility for FICO interest payments across all
FDIC-insured institutions on a pro-rata basis, subject to certain exceptions;
(iii) require that deposit insurance premium assessment rates applicable to
SAIF member institutions be no less than deposit insurance premium assessment
rates applicable to BIF member institutions; (iv) provide for a merger of the
BIF and the SAIF as of January 1, 1998; (v) require savings associations to
convert to state or national bank charters by January 1, 1998; (vi) require
savings associations to divest any activities not permissible for commercial
banks within five years; (vii) eliminate the bad-debt reserve deduction for
17
<PAGE> 326
savings associations, although savings associations would not be required to
recapture into income their accumulated bad-debt reserves; (viii) provide for
the conversion of savings and loan holding companies into bank holding
companies as of January 1, 1998, although unitary savings and loan holding
companies authorized to engage in activities as of September 13, 1995 would
have such authority grandfathered (subject to certain limitations); and (ix)
abolish the OTS and transfer the OTS' regulatory authority to the other federal
banking agencies. The legislation would also provide that any savings
association that would become undercapitalized under the prompt corrective
action regulations as a result of the special deposit premium assessment could
be exempted from payment of the assessment, provided that the institution would
continue to be subject to the payment of semiannual assessments under the
current rate schedule following the recapitalization of the SAIF. The
legislation was considered and passed by the House Banking Committee's
Subcommittee on Financial Institutions on September 27, 1995, and has not yet
been acted on by the full House Banking Committee.
On September 20, 1995, similar legislation was introduced in the
Senate, although the Senate bill does not include a comprehensive approach for
merging the savings association and commercial bank charters. The Senate bill
remains pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget
bill, which was passed by both the House and Senate on November 17, 1995 and
vetoed by the President on December 6, 1995, would: (i) recapitalize the SAIF
through a special assessment of between 70 and 80 basis points on deposits held
by institutions as of March 31, 1995; (ii) provide an exemption to this rule
for weak institutions, and a 20% reduction in the SAIF-assessable deposits of
so-called "Oakar banks;" (iii) expand the assessment base for FICO payments to
include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January
1, 1998, only if no insured depository institution is a savings association on
that date; (v) establish a special reserve for the SAIF on January 1, 1998; and
(vi) prohibit the FDIC from setting semiannual assessments in excess of the
amount needed to maintain the reserve ratio of any fund at the designated
reserve ratio. The bill does not include a provision to merge the charters of
savings associations and commercial banks.
In light of ongoing debate over the content and fate of the budget
bill, the different proposals currently under consideration and the uncertainty
of the Congressional budget and legislative processes in general, management
cannot predict whether any or all of the proposed legislation will be passed,
or in what form. Accordingly, the effect of any such legislation on the Bank
cannot be determined.
Interstate Banking and Branching
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. 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.
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<PAGE> 327
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.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and
the California branching statute will likely increase competition from
out-of-state banks in the markets in which the Company operates, although it is
difficult to assess the impact that such increased competition may have on the
Company's operations.
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. The Bank's compliance with CRA is monitored by the
Comptroller, which assigns the Bank a publicly available CRA rating. An
assessment of CRA compliance is required by both the Comptroller and the
Federal Reserve Board in connection with applications for approval of certain
activities such as mergers with or acquisitions of other banks or bank holding
companies. In April of 1995, the federal regulatory agencies issued a
comprehensive revision to the rules governing CRA compliance. In assigning a
CRA rating to a bank, the new regulations place greater emphasis on
measurements of performance in the areas of lending (specifically the bank's
home mortgage, small business, small farm and community development loans),
investment (the bank's community development investments) and service (the
bank's community development services and the availability of its retail
banking services), although examiners are still given a degree of flexibility
in taking into account unique characteristics and needs of the bank's community
and its capacity and constraints in meeting such needs. The new regulations
also require increased collection and reporting of data regarding certain kinds
of loans. Although the new regulations became generally effective on July 1,
1995, various provisions have different effective dates, and the new CRA
evaluation criteria will go into effect for examinations beginning on July 1,
1997. Although management cannot predict the impact of the substantial changes
in the new rules on the Bank's CRA rating, it will continue to take steps to
comply with the requirements in all respects.
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 Comptroller has rated the
Bank "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
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<PAGE> 328
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 Taxes," which superseded SFAS No.
96 of the same title. SFAS No. 109, which was adopted by the Company effective
January 1, 1993, 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 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. The Company adopted SFAS No. 114 and No. 118 as of January 1, 1995.
The Bank had previously measured the allowance for loan losses using methods
similar to that prescribed in SFAS 114. As a result, no additional provision
was required by the adoption of this pronouncement.
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 1996.
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
20
<PAGE> 329
held to maturity or trading securities would be classified as securities
available for sale, and reported at fair value, with unrealized gains and
losses excluded from operations and reported as a separate component of
shareholders' equity. The Company adopted SFAS No. 115 in 1993. The adoption
of SFAS 115 did not have a material impact on the financial position or results
of operations of the Bank.
EMPLOYEES
As of December 31, 1995, the Company had three employees, its
President ,Chief Executive Officer and Chief Financial Officer. At December
31, 1995, the Bank had 115 full-time employees or equivalents. Of these
employees, 11 held titles of senior vice president or above. At December 31,
1995, 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.
Item 2. PROPERTIES
The principal offices of the Company are located in a
multi-story office building located at 16030 Ventura Boulevard, Encino,
California 91364 for which it pays a monthly rental of $60,000. The lease
contains a ceiling on cost on living adjustments of 5% per year. The lease is
renewable. The Bank also has certain month to month or short term leases for
offices in West Los Angeles, the South Bay, Ventura and the San Gabriel Valley.
Each of these leases is short term in nature and is not material to the
Company. Management believes that the existing leases will provide for their
space requirements for the foreseeable future, at least until the completion of
the proposed merger with Home Interstate Bancorp.
21
<PAGE> 330
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, pending or threatened litigation involving the Bank will
have no adverse material effect upon its financial condition, or results of
operations. For further information, see Note 15 to the Consolidated Financial
Statements of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were presented for a vote of shareholders during
fourth quarter 1995.
Item 4(A). EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are brief summaries of the background and business experience
of each of the directors and executive officers of the Company and the Bank as
of December 31, 1995:
<TABLE>
<CAPTION>
POSITION AND POSITION AND DIRECTOR OF
------------ ------------ -----------
OFFICE WITH CU OFFICE WITH THE COMPANY AND BANK
-------------- --------------- ----------------
NAME AGE BANCORP BANK SINCE:
---- --- ------- ---- ------
<S> <C> <C> <C> <C>
Kenneth L. Bernstein 53 Director Director 1994
Stephen G. Carpenter 56 Chairman, Chief Chairman, Chief 1992
Executive Officer Executive Officer
Richard H. Close 51 Director, Director, 1981
Secretary Secretary
Paul W. Glass 50 Director Director 1984
Ronald S. Parker 51 Director Director 1993
David I. Rainer 39 Director, Director, 1992
President, Chief President, Chief
Operating Officer Operating Officer
</TABLE>
None of the directors or officers of CU Bancorp or CU Bank were
selected pursuant to any arrangement or understanding other than with the
directors and officers of CU Bancorp and CU Bank acting in their capacities as
such. There are no family relationships between any two or more of the
directors, or officers.
Set forth below are brief summaries of the background and business
experience, including principal occupation, of the directors.
KENNETH L. BERNSTEIN, was elected to the Board of CU Bancorp and CU
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.
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<PAGE> 331
STEPHEN G. CARPENTER, joined CU Bank 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. He assumed the additional role of Chairman of CU Bank in February,
1994 and Chairman of CU Bancorp in 1995.
RICHARD H. CLOSE has been a principal in the law firm of Shapiro,
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.
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 CU Bank in
June 1992 and assumed the position of Chief Operating Officer in late 1992. He
assumed the additional title of President of CU Bank in February, 1994 and
President and Chief Operating Officer of CU Bancorp in 1995. He was elected to
the Board of Directors of CU Bancorp and California United Bank in 1993. 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 CU Bancorp or of CU Bank, no
owner of record or beneficially of more than five percent of any class of
voting securities of CU Bancorp or no associate of any such director, officer
or affiliate is a party adverse to CU Bancorp or CU Bank in any material
pending legal proceed
The following are officers of CU Bancorp and the Bank as of December
31, 1995:
<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 56 Director, Chief Chairman, Chief 1992
Executive Officer Executive Officer
DAVID I. RAINER 39 Director, Director, 1992
President, Chief President, Chief
Operating Officer Operating Officer
ANNE WILLIAMS 38 Chief Credit Chief Credit 1992
Officer Officer
PATRICK HARTMAN 46 Chief Financial Chief Financial 1992
Officer Officer
</TABLE>
23
<PAGE> 332
Set forth below are brief summaries of the background and business
experience, including principal occupation, of the executive officers of CU
Bancorp who have not previously been discussed herein.
PATRICK HARTMAN has been employed by CU 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 CU 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.
24
<PAGE> 333
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information relative to the market for
the Company's Common Stock.
Holders of Company's Common Stock
As of the close of business on December 31, 1995 there were 416 record
holders of the Company's issued and outstanding Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
CU BANCORP AND SUBSIDIARY
Amounts in thousands of dollars, except per share data and amounts expressed as
percentages
<TABLE>
<CAPTION>
AS OF THE YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Securities held to maturity $ 66,735 $ 74,153 $ 88,034 $ 84,724 $ 59,533
Securities available for sale 6,345
Net loans 183,696 167,175 134,148 193,643 273,126
Total earning assets 289,276 261,328 251,559 281,723 429,480
Total assets 325,309 304,154 279,206 353,923 516,762
Total deposits 284,510 264,181 238,928 318,574 473,125
Total shareholders' equity 33,006 29,744 26,990 24,632 32,598
Regulatory risk based capital ratio 16.19% 15.40% 16.71% 12.87% 12.31%
Regulatory capital leverage ratio 10.52% 10.44% 9.16% 6.12% 6.91%
Allowance for loan losses to:
Period end total loans 3.64% 4.25% 4.63% 6.28% 4.33%
Nonperforming loans 677% 20,631% 473% 95% 75%
Nonperforming assets 677% 20,631% 283% 95% 59%
CONSOLIDATED OPERATING RESULTS
Net interest income $ 15,536 $ 13,881 $ 14,431 $ 20,625 $ 25,681
Other operating income 2,065 5,408 26,423 21,499 10,537
Provision for loan losses 0 0 450 17,090 14,267
Operating expenses 12,554 14,735 36,883 37,493 27,843
Net income (loss) 2,894 2,574 2,098 (8,190) (3,637)
Fully diluted income/(loss) per $ .60 $ .56 $ 0.47 $ (1.90) $ (0.83)
common & equivalent share
Net interest margin 5.68% 5.99% 5.86% 6.07% 6.99%
Return on average shareholders' 9.38% 9.12% 8.12% (26.06)% (10.27)%
equity
Return on average assets 0.97% 0.97% 0.69% (1.89)% (0.76)%
Cash dividends per common share $ .08 ----- ----- ----- $ 0.150
</TABLE>
<PAGE> 334
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
The Company earned $2.9 million, or $0.60 per share, during in 1995, compared
to $2.6 million, or $0.56 per share, in 1994 and $2.1 million, or $.47 per
share in 1993. Composition of the earnings has changed substantially in 1995.
Prior to that, a substantial portion of the Bank's earnings had been
attributable to the Mortgage Banking operation, which was sold in November
1993. The Mortgage origination operation contributed about two thirds of the
earnings for 1993, and approximately 56% of the earnings in 1994 were
attributable to a gain on the sale of mortgage servicing rights retained when
the origination operation was sold. Since then, the earnings of the core
commercial bank have grown steadily as the mortgage related income has been
eliminated. For the year ended December 31, 1995, income related to sales of
mortgage servicing was less than 8% of the Bank's earnings.
The Bank's asset quality ratios continue to be exceptionally strong. At
December 31, 1995, nonperforming assets were $1 million, compared with $36
thousand in 1994. The Bank did not have any real estate acquired through
foreclosure at December 31, 1995 or December 31, 1994. The Bank's allowance for
loan losses as a percent of both nonperforming loans and nonperforming assets
at December 31, 1995 was 677%, compared to 1994 levels of 20,631%.
Capital ratios are strong, substantially exceeding levels required for the
"well capitalized" category established by bank regulators. The Total
Risk-Based Capital Ratio was 16.19%, the Tier 1 Risk-Based Capital Ratio was
14.92%, and the Leverage Ratio was 10.52% at December 31, 1995, compared to
15.40%, 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 allows the Bank to
continue to grow its core business which provides relationship based services
to middle market customers and positions the Bank for its acquisition
strategy. During the year ended December 31, 1995, the Bank generated
approximately $135 million in new loan commitments, compared with about $121
million and $101 million for the comparable periods of 1994 and 1993.
The Bank announced actions taken in 1995 and early 1996 that supplement the
Bank's successful internal growth with strategically selected mergers and
acquisitions. In March of 1995, the Bank had announced the signing of an
agreement to acquire Corporate Bank, a Santa Ana based community bank with
approximately $70 million in assets. This purchase was completed in January of
1996. In January 1996, the Bank also announced the signing of an agreement to
merge with Home Interstate Bancorp, the parent of Home Bank, based in the South
Bay. This merger, targeted to be completed near the end of the second quarter
of 1996, would create a combined bank with over $800 million in assets and 22
branches.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
The Bank's loan portfolio at December 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 three years. Non performing assets have
been reduced to insignificant levels 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 as a secondary part of their total
business relationship.
Total loans at December 31, 1995 increased by $16 million during the year.
Portfolio growth in the last three quarters 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, with Entertainment related loans declining
$7 million as a number of project related loans paid off, combined with
normal payoffs and seasonality in the commercial portfolio.
26
<PAGE> 335
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 $34 million during 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.
TABLE 1 LOAN PORTFOLIO COMPOSITION
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $164,966 87% $142,885 82% $ 93,549 67% $ 87,999 43% $127,553 45%
Real Estate Loans:
Commercial 20,190 10 26,528 15 28,901 21 35,751 17 38,437 1
Held for Sale 0 0 10,426 7 40,167 19 40,350 14
Mortgages 5,470 3 4,773 3 6,559 5 36,320 18 52,785 19
Construction 0 416 1,226 2,392 1 14,368 5
Term federal funds sold 0 0 0 4,000 2 12,000 4
-------- --- -------- --- -------- --- -------- --- -------- ---
Total loans net of unearned
fees $190,626 100% $174,602 100% $140,661 100% $206,629 100% $285,493 100%
======== === ======== === ======== === ======== === ======== ===
</TABLE>
TABLE 1A: LOAN PORTFOLIO MATURITIES AT DECEMBER 31, 1995
(in Thousands)
<TABLE>
<CAPTION>
WITHIN AFTER ONE AFTER
ONE BUT WITHIN FIVE
YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ------ --------
<S> <C> <C> <C> <C>
Commercial & Industrial Loans $126,834 $33,029 $5,103 $164,966
Real Estate - Commercial & Mortgage 6,918 15,797 2,945 25,660
-------- ------- ------ --------
Total loans $133,752 $48,826 $8,048 $190,626
======== ======= ====== ========
Loans due after one year with
predetermined interest rates $3,911 $1,464
Loans due after one year with
floating or adjustable rates 44,915 6,584
------- ------
$48,826 $8,048
======= ======
</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 receive a new maturity date.
The Bank lending effort is focused on business lending to middle market
customers. Current credit policy 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.
27
<PAGE> 336
The amount and composition of the allowance for loan losses is as follows:
TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Amounts in thousands of dollars
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amounts in thousands of dollars
Commercial & Industrial Loans $6,594 $7,096 $5,699 $11,597 $11,147
Real estate loans - Held for Sale 0 0 67 368 90
Real estate loans - Mortgages 0 0 225 249 28
Real estate loans - Construction 0 0 10 62 100
Other loans 0 0 0 19 0
------ ------- ------ ------- -------
Loans 6,594 7,096 6,001 12,295 11,365
Unfunded commitments and letters of
credit 336 331 512 691 1,002
------ ------ ------ ------- -------
Total Allowance for loan losses $6,930 $7,427 $6,513 $12,986 $12,367
====== ====== ====== ======= =======
</TABLE>
Adequacy of the allowance is determined using management's estimates of the
risk of loss for the portfolio and individual loans. Included in the criteria
used to evaluate credit risk are, wherever appropriate, the borrower's cash
flow, financial condition, management capabilities, and collateral valuations,
as well as industry conditions. A portion of the allowance is established to
address the risk inherent in general loan categories, historic loss experience,
portfolio trends, economic conditions, and other factors. Based on this
assessment a provision for loan losses may be charged against earnings to
maintain the adequacy of the allowance. The allocation of the allowance based
upon the risks by type of loan, as shown in Table 2, implies a degree of
precision that is not possible when using judgments. While the systematic
approach used does consider a variety of segmentations of the portfolio,
management considers the allowance a general reserve available to address risks
throughout the entire loan portfolio.
Activity in the allowance, classified by type of loan, is as follows:
TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at January 1 $7,427 $6,513 $12,986 $12,367 $4,128
----- ----- ------ ------ -----
Loans charged off:
Real estate secured loans 529 486 3,266 4,425 1,220
Commercial loans secured and unsecured loans 543 820 6,582 12,562 5,422
Loans to individuals, installment and other loans 17 107 901 813 258
-- --- --- --- ---
Total charge-offs 1,089 1,413 10,749 17,800 6,900
----- ----- ------ ------ -----
Recoveries of loans previously charged off:
Real estate secured loans 58 586 393 249 15
Commercial loans secured and unsecured 522 1,735 3,189 1,001 819
Loans to individuals, installment and 12 6 244 79 38
-- - --- ---- ----
Total recoveries of loans previously charged off 592 2,327 3,826 1,329 872
--- ----- ----- ----- ----
Net charge-offs 497 (914) 6,923 16,471 6,028
Provision for loan losses 0 0 450 17,090 14,267
-- - --- ------ ------
Balance at December 31 $6,930 $7,427 $6,513 $12,986 $12,367
===== ===== ===== ====== ======
Net loan charge-offs (recoveries) as a percentage
of average gross loans outstanding during the
year ended December 31 .28% (0.61)% 3.49% 6.70% 2.36%
==== ======= ===== ===== =====
</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. In addition, it includes loans where there exists reasonable doubt
as to
28
<PAGE> 337
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, 1995, nonperforming loans
amounted to $1 million 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 December 31, 1995, therefore, the Bank had no potential
problem loans other than those disclosed in Table 4 as nonperforming loans.
TABLE 4: NONPERFORMING ASSETS
Amounts in thousands of dollars
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans not performing (1) $1,024 $36 $ 378 $ 8,978 $14,955
Insubstance foreclosures 0 0 1,000 4,652 1,512
------ --- ------- ------- -------
Total nonperforming loans 1,024 36 1,378 13,630 16,467
Other real estate owned 0 0 920 0 4,564
------ --- ------- ------- -------
Total nonperforming assets $1,024 $36 $2,298 $13,630 $21,031
====== ==== ====== ======= =======
Allowance for loan losses as a percent of:
Nonperforming loans 677% 20,631% 473% 95% 75%
Nonperforming assets 677 20,631 283 95 59
Nonperforming assets as a percent of total assets 0.3 0 0.8 3.8 4.2
Nonperforming loans as a percent of total loans 0.5 0 1.0 6.6 5.8
Note 1:
Loans not performing $1,024 $36 $ 9 $ 2,895 $4,783
Performing as agreed 0 0 369 1,075 1,531
Partial performance 0 0 0 5,008 8,641
------ --- ------- ------- --------
Not performing $1,024 $36 $ 378 $ 8,978 $14,955
====== === ======= ======= ========
Nonaccrual:
Loans $1,024 $36 $ 378 $ 7,728 $11,357
Troubled debt restructurings 0 0 0 1,250 1,326
Loans past due ninety or more days(a): 0 0 0 0 2,272
</TABLE>
(a) Past due with respect to principal and/or interest and continuing to
accrue interest.
SECURITIES
The Securities Held to Maturity portfolio totaled $67 million at December 31,
1995, compared with $74 million at year-end 1994. In the fourth quarter of
1995, the Bank performed a one-time reassessment of the designations of
securities as held to maturity or available for sale, in accordance with a
special report issued by the Financial Accounting Standards Board on the
subject of investments. As a result of this assessment, $5.9 million of
collateralized mortgage obligations were transferred out of the held to
maturity portfolio into the available for sale portfolio.
The Securities Available for Sale portfolio totaled $6.3 million at December
31, 1995, with no investments being included in this category in 1994.
Included in the December 31, 1995 balance is an unrealized gain of $143
thousand.
There have been no realized gains or losses on securities in 1995 or 1994.
Gains of $77 thousand were realized in 1993. At December 31, 1995, there were
unrealized gains of $623 thousand and losses of $244 thousand in the securities
held to maturity portfolio.
Additional information concerning securities is provided in the footnotes to
the accompanying financial statements.
29
<PAGE> 338
OTHER REAL ESTATE OWNED
There was no Other Real Estate Owned on the Bank's balance sheet at December
31, 1995 and 1994. The Bank's policy is to carry properties acquired in
foreclosure at fair value less estimated selling costs, which is determined
using recent appraisal values adjusted, if necessary, for other market
conditions. Loan balances in excess of fair value are charged to the allowance
for loan losses when the loan is reclassified to other real estate. Subsequent
declines in fair value are charged against a valuation allowance for other 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. In 1993, expenses related to Other Real Estate Owned
totaled $234 thousand.
DEPOSIT CONCENTRATION
Prior to 1992, the Bank's focus on real estate-related activities resulted in a
concentration of deposit accounts from title insurance and escrow companies.
As the Bank has changed its focus to commercial lending, the amounts of title
and escrow related deposits has declined for the past three years. 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 deposit courier services, will be limited or charged back to
the customer if the deposit relationship profitability does not meet the Bank's
expectations.
Noninterest bearing deposits represent nearly the entire title and escrow
relationship. These balances have been reduced substantially as the Bank
focused on middle market business loans. The balance at December 31, 1995, was
$20 million compared to $44 million at December 31, 1994. The bank has
greatly reduced their reliance on title and escrow deposits, with these
relationships representing approximately 7% of deposits in 1995, and 17% at
year end 1994.
TABLE 5 REAL ESTATE ESCROW AND TITLE
INSURANCE COMPANY DEPOSITS AMOUNTS IN
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
AVERAGE BALANCE
YEAR ENDED 12 MONTHS ENDED
DECEMBER 31, 1995 DECEMBER 31, 1995
----------------- -----------------
PERCENT OF PERCENT PERCENT OF PERCENT
TOTAL OF TOTAL OF
AMOUNT DEPOSITS CLASS AMOUNT DEPOSITS CLASS
-------- --------------- ------ ------ --------------- --------
<S> <C> <C> <C> <C> <C> <C>
1995 Balances
Noninterest bearing demand deposits $19,633 6.9% 20.9% $21,747 7.6% 23.1%
Interest-bearing demand & savings deposits 877 .3 .5 1,274 .5 .7
------- --- -------
Total deposit concentration $20,510 7.2% $23,021 8.1%
======= ==== ======= ====
1994 Balances $45,645 17.3% $46,171 19.8%
======= ===== ======= =====
</TABLE>
The Bank had $45 million in certificates of deposit larger than $100 thousand
dollars at December 31, 1995. The maturity distribution of these deposits is
relatively short term, with $31 million maturing within 3 months and $43
million maturing within 12 months.
30
<PAGE> 339
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the Bank's ability to meet
cash requirements. The liquidity position is managed giving consideration to
both on and off-balance sheet sources and demands for funds.
Sources of liquidity include cash and cash equivalents (net of Federal Reserve
requirements to maintain reserves against deposit liabilities), securities
eligible for pledging to secure borrowings from dealers pursuant to repurchase
agreements, loan repayments, deposits, and borrowings from a $25 million
overnight federal funds line available from a correspondent bank. Potential
significant liquidity requirements are withdrawals from noninterest bearing
demand deposits and funding of commitments to loan customers.
From time to time the Bank may experience liquidity shortfalls ranging from one
to several days. In these instances, the Bank will either purchase federal
funds, and/or sell securities under repurchase agreements. These actions are
intended to bridge mismatches between funding sources and requirements, and are
designed to maintain the minimum required balances. The Bank has had no Fed
Funds purchased or borrowings under repurchase agreements during 1994 or 1995.
During 1994 and 1995, loan growth for the Bank outpaced growth of deposits from
the Banks commercial customers. The Bank funded this growth, combined with the
Bank's reduced concentration in title and escrow deposits, in part with
certificates of deposit from customers from outside the Bank's normal service
area. These out of area deposits are certificates of deposit of $90,000 or
greater, that are priced competitively with similar certificates from other
financial institutions throughout the country. At December 31, 1995, the Bank
had approximately $83 million of these out of area deposits, up from $55
million at December 31, 1994. The Bank's experience with raising out of area
deposits for the past two years indicates that the balances are quite stable
when priced to the current market.
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 December 31, 1995 this funding source was 17% of average
deposits, compared to 16% at December 31, 1994.
TABLE 6 INTEREST RATE MATURITIES OF EARNING ASSETS AND FUNDING LIABILITIES AT
DECEMBER 31, 1995
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
3 MONTHS 6 MONTHS 9 MONTHS 12 MONTHS & OVER
Amounts in thousands of dollars ----------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans $184,535 $ 421 $ 294 $ 82 $ 5,293
Investments 6,973 4,505 5,049 5,109 51,444
Federal funds sold & other 32,500 0 0 0 0
-------- -------- ------- ------- -------
Total earning assets 224,008 4,926 5,343 5,191 56,738
-------- -------- ------- ------- -------
Interest bearing deposits:
Savings and interest bearing demand 74,413 0 0 0 0
Time certificates of deposit:
Under $100 33,766 17,141 5,451 7,390 7,118
$100 or more 31,164 8,233 1,100 2,351 2,284
Non interest bearing demand deposits 13,920 0 0 0 0
-------- -------- ------- ------- -------
Total interest bearing liabilities 153,263 25,374 6,551 9,741 9,402
-------- -------- ------- ------- -------
Interest rate sensitivity gap 70,745 (20,448) (1,208) (4,550) 47,336
-------- -------- ------- ------- -------
Cumulative interest rate sensitivity gap 70,745 50,297 49,089 44,539 91,875
Off balance sheet financial instruments 0 0 0 0 0
- - -- - -
Net cumulative gap $ 70,745 $ 50,297 $49,089 $44,539 $91,875
======== ======== ======= ======= =======
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities(1) 1.46% 1.28% 1.27% 1.23% 1.45%
===== ===== ===== ==== =====
</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.
31
<PAGE> 340
Assets and liabilities shown on Table 5 are categorized based on contractual
maturity dates. Maturities for those accounts without contractual maturities
are estimated based on the Bank's experience with these customers. Noninterest
bearing deposits of title and escrow companies, having no contractual maturity
dates, are considered subject to more volatility than similar deposits from
commercial customers. The net cumulative gap position shown in the table above
indicates that the Bank does not have a significant exposure to interest rate
fluctuations during the next twelve months.
CAPITAL
Total shareholders' equity was $33 million at December 31, 1995, compared to
$30 million at year-end 1994. This increase was due to earnings, plus the
exercise of stock options and warrants. 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 substantially 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 -
1995 1994 CAPITALIZED MINIMUM
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Total Risk Based Capital 16.19% 15.40% 10.00% 8.00%
Tier 1 Risk Based Capital 14.92 14.12 6.00 4.00
Equity to Average Assets 10.52 10.44 5.00 3.00
</TABLE>
In February of 1995, the Company 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. During
the third quarter, the company declared a dividend $.02 per share, payable
November 27 to shareholders of record November 13. For the fourth quarter of
1995, the company declared a dividend of $.02 per share, payable February 28 to
shareholders of record January 31. The dividend payout ratio was 13% for the
year ending December 31, 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.
TABLE 8 STOCK PRICES - UNAUDITED
<TABLE>
<CAPTION>
1995 1994
------------------- ------------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter $7.50 $6.75 $7.50 $6.50
Second Quarter 7.50 6.88 7.00 5.75
Third Quarter 8.75 6.94 7.50 6.00
Fourth Quarter 10.25 8.38 8.00 6.75
</TABLE>
32
<PAGE> 341
EARNINGS BY LINE OF BUSINESS
Prior to the sale of the mortgage origination operation in November, 1993, the
Bank operated a commercial bank and a mortgage bank as two distinct business
segments. Since 1994, real estate lending is generally only done as part of a
commercial banking relationship. After 1993, therefore, the Bank operates as
only a single segment, the commercial banking operation. Table 9 shows the
pre-tax operating contributions.
TABLE 9 PRE-TAX OPERATING CONTRIBUTION BY LINE OF BUSINESS (i)
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ --------------------------------------------
COMMERCIAL MORTGAGE
CONSOLIDATED CONSOLIDATED CONSOLIDATED BANKING BANKING
------------ ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Net interest income $15,536 $13,881 $14,431 $13,844 $587
Provisions for loan losses 0 0 450 200 250
- - --- --- ---
Risk adjusted net interest income 15,536 13,881 13,981 13,644 337
Noninterest revenue 1,682 2,836 24,940 1,032 23,908
----- ----- ------ ----- ------
Total revenues 17,218 16,717 38,921 14,676 24,245
------ ------ ------ ------ ------
Salaries and related benefits 6,834 6,335 11,020 6,151 4,869
Other operating expenses 5,720 7,800 25,416 7,738 17,678
----- ----- ------ ----- ------
Total operating expenses 12,554 14,135 36,436 13,889 22,547
------ ------ ------ ------ ------
Operating income 4,664 2,582 2,485 787 1,698
Gain on sale of mortgage origination 1,483
operation
Gain on sale of mortgage servicing 383 2,572
portfolio
Restructuring charge (600)
Reserve for branch relocation - - (447)
------ ------ ------
Income before taxes $5,047 $4,554 $3,521 $787 $1,698
====== ====== ====== ==== ======
</TABLE>
(i) Inter-divisional transactions for 1993 have been eliminated at the
division level.
33
<PAGE> 342
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 $15.5 million for the year ended December 31, 1995 compared to $13.9
million in 1994 and $14.4 million in 1993. The change in 1995 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, and the increase in certificates of
deposit. The change in 1994 is primarily attributable to lower levels of
average loans and deposits in 1994 being offset by favorable rate variations.
TABLE 10 ANALYSIS OF CHANGES IN NET INTEREST INCOME (1)
Amounts in thousands of dollars
Increases(Decreases)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 COMPARED TO 1994 1994 COMPARED TO 1993
--------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------ ----- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, net $3,032 $1,625 $4,657 $(4,466) $2,015 $(2,451)
Investments 124 691 815 1,149 175 1,324
Federal Funds Sold 531 444 975 213 251 464
----- ------ ------ ------- ------ ------
Total interest income 3,687 2,760 6,447 (3,104) 2,441 (663)
----- ------ ------ ------- ------ ------
Interest Expense
Interest bearing deposits:
Demand 341 (457) (116) 185 (49) 136
Savings (22) 40 18 (73) 13 (60)
Time Certificates of deposit:
Under $100 2,761 531 3,292 (179) 197 18
$100 or more 1,129 557 1,686 (177) 166 (11)
Federal funds purchased/Repos 0 0 0 (79) (0) (79)
Other borrowings (70) (18) (88) (135) 18 (117)
----- ------ ------ ------- ------ ------
Total interest expense 4,139 653 4,792 (458) 345 (113)
----- ------ ------ ------- ------ ------
Net interest income $(452) $2,107 $1,655 $(2,646) $2,096 $ (550)
====== ====== ====== ======== ====== ========
</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 8.9% for the year ended December
31, 1995, compared to 7.8% in 1994 and 7.6% in 1993. The higher average yield
on earning assets in 1995 is the result of both an increase in the prime rate
from an average of 7.1% in 1994 to an average of 8.8% in 1995, and an
increasing percentage of assets being held in loans.
The higher average yield on earning assets in 1994 is largely due to the higher
yield on loans as the prime rate began to rise in 1994. The average prime rate
of 7.1% compares with 6% for 1993. Through October 8, 1993, net interest
income continued to benefit from an interest rate swap agreement, discussed
below.
Rates on interest bearing liabilities resulted in an average cost of funds of
4.2% in 1995, compared with 3.0% for the comparable period of 1994 and 2.9% for
1993. 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 5.66% for 1995, compared to 5.99% in 1994
and 5.85% for 1993. The Bank's margin is strong because it has funded itself
with a
34
<PAGE> 343
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. Margin in 1994 was higher than 1993 as the
benefits of rising interest rates offset the maturing of the interest rate swap
agreement 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 amount 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 and 1995, compared to
$1.7 million in 1993.
TABLE 11 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------ ------------------------------ ------------------------------
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) $170,511 $18,693 10.96% $141,878 $14,036 9.89% $188,967 $16,487 8.72%
Investments(2) 70,569 3,818 5.41 66,891 2,966 4.43 37,534 1,558 4.15
Certificates of Deposit
in other banks 48 2 4.17 1,010 39 3.88 4,102 123 3.00
Federal Funds Sold 32,614 1,893 5.80 22,100 918 4.15 15,927 454 2.85
-------- ------- ----- -------- ------- ----- -------- ------- ----
Total Earning Assets 273,742 24,406 8.92 231,879 17,959 7.74 246,530 18,622 7.55
------- ----- ------- ---- ------- ----
Non Earning Assets
Cash & Due From Banks 22,294 29,559 41,243
Other Assets 7,774 7,351 15,645
-------- -------- --------
Total Assets $303,810 $268,789 $303,418
======== ======== ========
Interest Bearing Liabilities
Demand $ 87,815 1,614 1.84 $ 71,821 1,730 2.41 $ 64,179 1,594 2.48
Savings 9,101 273 3.00 9,893 255 2.58 12,741 315 2.47
Time Certificates of Deposits
Less Than $100 68,103 4,289 6.30 22,144 997 4.50 26,577 979 3.68
More Than $100 40,959 2,459 6.00 19,713 773 3.92 24,737 784 3.17
Federal Funds Purchased/
Repos 0 0 0 0 0 0 2,712 79 2.91
-------- ------- ----- -------- ------- ---- -------- ------- ----
Total Interest Bearing
Liabilities 205,978 8,635 4.19 123,571 3,755 3.04 130,945 3,751 2.86
Non Interest Bearing Deposits 58,088 0 0 109,004 0 0 137,485 0 0
-------- ------- ----- -------- ------- ---- -------- ------- ----
Total Deposits 264,066 8,635 3.27 232,575 3,755 1.61 268,431 3,751 1.40
Other Borrowings 3,791 235 6.20 4,909 323 6.58 6,964 440 6.32
-------- ------- ----- -------- ------- ---- -------- ------- ----
Total Funding Liabilities 267,857 8,870 3.31 237,484 4,078 1.72 275,395 4,191 1.52
------- ----- ------- ---- ------- ----
Other Liabilities 5,085 3,264 2,175
Shareholders' Equity 30,868 28,006 25,848
-------- -------- --------
Total Liabilities and
Shareholders' Equity $303,810 $268,754 $303,418
======== ======== ========
Net Interest Income $15,536 5.68% $13,881 5.99% $14,431 5.85%
======= ==== ======= ==== ======= ====
Shareholders' Equity to
Total Assets 10.16% 10.42% 8.52%
===== ===== ====
</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.
OTHER OPERATING INCOME
A significant portion of other operating income in 1994 was earned as mortgage
servicing rights were sold for a gain of $2.6 million. The Bank reported a gain
of $383 thousand on the sale of mortgage servicing in 1995, representing final
35
<PAGE> 344
settlement payments received related to open issues on servicing sales from
prior quarters. At year end 1995, the Bank did not own any further servicing
rights.
The majority of other operating income for 1993 was earned as the Mortgage
Banking Operation originated and sold mortgage loans.
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 was no longer a
qualified seller/servicer of such loans. During 1994, the bank sold the
retained servicing rights realizing gains of $2.6 million in 1994 and $383
thousand in 1995.
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>
1995 1994 1993
---- ---- ----
COMMERCIAL MORTGAGE
CONSOLIDATED CONSOLIDATED BANKING BANKING CONSOLIDATED
------------ ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Documentation fees $104 $99 $104 $826 $930
Gain on sale of SBA loans 262 65
Other service fees and charges 1,177 1,100 851 399 1,250
Gain on sale of mortgage servicing 383 2,572
Gain on sale of other real estate owned 139 585
Gain on sale of mortgage origination operation 1,483 1,483
Processing fees 1,143 1,143
Capitalization of excess servicing rights 207 207
Fees on loans sold 15 1,182 1,182
Premium on sales of mortgage loans (8) 18,022 18,022
Gain on sale of securities 77 77
Service income 980 2,129 2,129
------ ------ ------ ------- -------
Total $2,065 $5,408 $1,032 $25,391 $26,423
====== ====== ====== ======= =======
</TABLE>
OPERATING EXPENSE
Total operating expenses for the Bank were $12.6 million year ended December
31, 1995 , compared to $14.7 million in 1994 and $36.9 million for 1993. The
year ended December 31, 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.
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
36
<PAGE> 345
$12.6 million in 1995, compared to $14.1 million in 1994 and $13.9 million in
1993. Operating expenses for the consolidated Bank declined in 1994, primarily
due to the sale of the mortgage origination operation at the end of 1993.
Expenses for the Mortgage Banking Division were $22.5 million in 1993. 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.
PROVISION FOR LOAN LOSSES
The Bank has made no provision for loan losses in 1995 or 1994 , compared with
$450 thousand for 1993. No loan loss provision has been deemed necessary for
1995 and 1994, due to the declining levels of nonperforming assets, net
recoveries received in 1994, and the strong reserve position. 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
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.
Since June 1992, the Bank has developed a very positive and proactive
relationship with its primary regulators. Results of regular safety and
soundness examinations have documented the progress the Bank has achieved.
Management is committed to the continuation of this process and maintaining our
high standing with our regulators. The following comments refer to regulatory
situations that existed in prior years that are reflected in the prior period
financial statements provided herein. All of these situations have been
successfully resolved and repaired as management transitioned the Bank to its
present condition and performance.
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.
MARKET EXPANSION AND ACQUISITIONS
The Bank is committed to expanding the market penetration of the commercial
bank, including the creation of new branches and pursuing acquisition
opportunities. During 1995, the Bank converted its former loan production
offices in Ventura County, the San Gabriel Valley and the South Bay to full
service banking offices in improved facilities. This expanded the Bank's
branch system to five full service locations serving the greater Los Angeles
area.
37
<PAGE> 346
In March, 1995, the Company entered into an agreement to acquire Santa Ana
based Corporate Bank. The agreement was subsequently amended in October 1995
and the transaction was completed on January 12, 1996 for stock and cash. This
acquisition brings two Orange County branches to the Bank, representing an
important geographic expansion.
Table 13 is an approximation of how the Bank's balance sheet would have
appeared had the acquisition of Corporate Bank closed by December 31, 1995:
On January 10, 1996, the Bank announced an agreement to merge with Home
Interstate Bancorp, parent of Home Bank, based in the South Bay. The merger
with Home Bank is expected to be completed in mid - 1996, and will create a
Bank with 22 branches and over $800 million in assets.
Table 13: Pro Forma Balance Sheet
<TABLE>
<CAPTION>
Pro Forma
California United Corporate Bank Combined
----------------- --------------- --------
Bank
----
<S> <C> <C> <C>
Cash and due from banks $28,376 $ 4,479 $ 32,855
Federal funds sold 32,500 13,000 45,500
------ ------ ------
Total cash and cash equivalents 60,876 17,479 78,355
Securities held to maturity 66,735 66,735
Securities available for sale 6,345 4,336 10,681
Loans, net 183,696 46,079 228,675
Other real estate owned 0 0 0
Premises and other assets 7,657 1,635 13,186
----- ----- ------
Total Assets $325,309 $69,529 $397,632
======== ======= ========
Demand deposits $ 94,099 $26,354 $120,453
Savings and interest bearing demand 74,413 22,511 96,924
Time deposits 115,998 12,258 128,256
------- ------ -------
Total deposits 284,510 61,123 345,633
Other Liabilities 7,796 1,628 12,504
Shareholders' equity 33,003 6,778 39,495
------ ----- -------
Total Liabilities and shareholders' equity $325,309 $69,529 $397,632
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page
- --------------------------------------------------- ----
<S> <C>
1. Report of Independent Public Accountants dated January 19, 1996 39
2. Consolidated Statements of Financial Condition as of December 31, 1995 and 1994; 40
3. Consolidated Statements of Income for the Years Ended December 31, 1995, 1994, and 1993, 41
4. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31,
1995, 1994, and 1993; 42
5. Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994, and 1993; 43
6. Notes to Consolidated Financial Statements - December 31, 1995 44
</TABLE>
38
<PAGE> 347
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of CU Bancorp and Subsidiary:
We have audited the accompanying consolidated statements of financial
condition of CU Bancorp and Subsidiary (the Company) as of December 31, 1995
and 1994, 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, 1995. 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 financial statements referred to above present fairly, in
all material respects, the financial position of CU Bancorp and Subsidiary as
of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 19, 1996
39
<PAGE> 348
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
Amounts in thousands of dollars, except share data 1995 1994
----- -----
<S> <C> <C>
ASSETS
Cash and due from banks $28,376 $35,397
Federal funds sold 32,500 20,000
------ ------
Total cash and cash equivalents 60,876 55,397
Securities held to maturity (Market value of $67,114 and $71,423 66,735 74,153
at December 31, 1995 and 1994, respectively)
Securities available for sale, at market value 6,345 0
----- -
Total Securities 73,080 74,153
Loans, (Net of allowance for loan losses of $6,930 and
$7,427 at December 31, 1995 and 1994, respectively) 183,696 167,175
Premises and equipment, net 1,111 996
Other real estate owned, net 0 0
Accrued interest receivable and other assets 6,546 6,433
----- -----
Total Assets $325,309 $304,154
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $94,099 $112,034
Savings and interest bearing demand 74,413 67,896
Time deposits under $100 70,866 47,836
Time deposits of $100 or more 45,132 36,415
------ ------
Total deposits 284,510 264,181
Accrued interest payable and other liabilities 7,793 10,229
----- ------
Total liabilities 292,303 274,410
------- -------
Commitments and contingencies
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 - 24,000,000 shares
Issued and outstanding - 4,636,462 in 1995, and 4,467,318 in 1994 27,264 26,430
Retained earnings 5,841 3,314
Unrealized gain on securities available for sale, net of taxes 83 --
Unearned Compensation (182) --
----- ---
Total Shareholders' equity 33,006 29,744
------ ------
Total liabilities and shareholders' equity $325,309 $304,154
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
40
<PAGE> 349
CONSOLIDATED STATEMENTS OF INCOME CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
Amounts in thousands of dollars, except per share data 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $18,693 $14,036 $14,761
Benefits of interest rate hedge transactions 0 0 1,726
Interest on taxable investment securities 3,781 2,947 1,525
Interest on tax exempt securities 37 19 33
Interest on time deposits with other financial institutions 2 39 123
Interest on federal funds sold 1,893 918 454
------ ------ ------
Total revenue from earning assets 24,406 17,959 18,622
------ ------ ------
COST OF FUNDS:
Interest on savings and interest bearing demand 1,887 1,985 1,909
Interest on time deposits under $100 4,289 997 979
Interest on time deposits of $100 or more 2,459 773 784
Interest on federal funds purchased & securities sold under 0 0 79
agreements to repurchase
Interest on other borrowings 235 323 440
------ ------ ------
Total cost of funds 8,870 4,078 4,191
------ ------ ------
Net revenue from earning assets before provision for loan 15,536 13,881 14,431
losses
PROVISION FOR LOAN LOSSES 0 0 450
------ ------ ------
Net revenue from earning assets 15,536 13,881 13,981
------ ------ ------
OTHER OPERATING REVENUE:
Capitalization of excess servicing rights 0 0 207
Servicing income - mortgage loans sold 0 980 2,129
Service charges and other fees 1,682 1,121 955
Fees on loans sold 0 15 1,182
Premium on sales of mortgage loans 0 (8) 18,022
Other fees and charges - mortgage 0 143 2,368
Gain on sale of mortgage servicing portfolio 383 2,572 0
Gain on sale of mortgage origination operation 0 0 1,483
Gain on sale of other real estate owned 0 585 0
Gain on sale of investment securities (before taxes of $11 in 1993) 0 0 28
Gain on sale of securities available for sale (before taxes of $20 in 0 0 49
1993) - - --
Total other operating revenue 2,065 5,408 26,423
----- ------ ------
OTHER OPERATING EXPENSES:
Salaries and related benefits 6,834 6,335 11,020
Selling expenses - mortgage loans 0 333 12,193
Restructuring Charge 0 600 0
Other operating expenses 5,720 7,467 13,670
------ ------ ------
Total operating expenses 12,554 14,735 36,883
------ ------ ------
Income before provision for income taxes 5,047 4,554 3,521
Provision for income taxes 2,153 1,980 1,423
------ ------ ------
NET INCOME $2,894 $2,574 $2,098
====== ====== ======
EARNINGS PER COMMON AND EQUIVALENT SHARE $0.60 $0.56 $ 0.47
===== ===== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 350
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CU BANCORP AND SUBSIDIARY
COMMON STOCK
----------------------------------------------------------------------------
Amounts in thousands of dollars except share data UNREALIZED GAIN
NUMBER RETAINED ON SECURITIES UNEARNED
OF SHARES AMOUNT EARNINGS AVAILBLE FOR SALE COMPENSATION TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 4,366,850 $25,990 $(1,358) $24,632
Exercise of stock options 57,456 260 0 260
Net income for the year 0 0 2,098 2,098
--------- ------- ------- --- ----- -------
Balance at December 31, 1993 4,424,306 26,250 740 26,990
Exercise of stock options 1,000 5 0 5
Exercise of director warrants 42,012 175 0 175
Net Income for the year 0 0 2,574 2,574
--------- ------- ------- --- ----- -------
Balance at December 31, 1994 4,467,318 26,430 3,314 29,744
Exercise of stock options 15,120 87 87
Exercise of director warrants 135,024 562 562
Cash dividend declared ($.08 per share) (367) (367)
Restricted stock issued 19,000 185 $(185) 0
Compensation expense 3 3
Unrealized gains on securities available
of sale, net of tax $83 83
Net Income for the year 0 0 2,894 0 0 2,894
--------- ------- ------- --- ----- -------
Balance at December 31, 1995 4,636,462 $27,264 $ 5,841 $83 $(182) $33,006
========= ======= ======= === ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements
42
<PAGE> 351
CONSOLIDATED STATEMENTS OF CASH FLOWS
CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
Amounts in thousands of dollars FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
----- ----- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,894 $2,574 $2,098
------ ------ ------
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization 553 459 821
Amortization of real estate mortgage servicing rights 0 15 983
Provision for losses on loans and other real estate owned 0 0 450
Provision (benefit) of deferred taxes 1,138 (1,180) 1,510
Gain on sale of investment securities, net 0 0 (77)
Increase/(decrease) in other assets (785) 3,781 2,628
Increase/(decrease) in other liabilities (2,845) (3,035) 2,582
(Increase)/decrease in accrued interest receivable (526) (766) 494
Increase/(decrease) in deferred loan fees (130) 160 48
Capitalization of excess mortgage servicing rights 0 0 (207)
Increase/(decrease) in accrued interest payable 412 (24) (11)
Net amortization of (discount)/premium on investment securities 610 972 48
Accrued benefits from interest rate hedge transactions 0 0 485
------ ------ ------
Total adjustments (1,573) 382 9,754
------ ------ ------
Net cash provided by operating activities 1,321 2,956 11,852
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investment securities sold or matured 17,782 52,882 78,545
Purchase of investment securities (17,176) (39,973) (81,826)
Net decrease in time deposits with other financial institutions 0 1,377 1,979
Net (increase)/decrease in loans (16,391) (33,187) 58,997
Purchases of premises and equipment, net (668) (531) 290
------ ------ ------
Net cash provided (used in) by investing activities (16,453) (19,432) 57,985
-------- -------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in demand and savings deposits (11,418) (11,949) (81,848)
Net increase/(decrease) in time certificates of deposit 31,747 37,202 2,202
Proceeds from exercise of stock options and director warrants 649 180 260
Cash dividend paid (367) 0 0
------ ------ ------
Net cash provided (used) by financing activities 20,611 25,433 (79,386)
------ ------ --------
Net increase (decrease) in cash and cash equivalents 5,479 8,957 (9,549)
Cash and cash equivalents at beginning of year 55,397 46,440 55,989
------ ------ -------
Cash and cash equivalents at end of year $60,876 $55,397 $46,440
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $8,457 $4,102 $4,179
Taxes 2,400 2,201
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 0 700 1,503
</TABLE>
The accompanying notes are an integral part of these consolidated statements
43
<PAGE> 352
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CU BANCORP AND SUBSIDIARY
DECEMBER 31, 1995
(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, Securities Held
to Maturity 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
115 in 1993 did not have a material impact on the financial position or results
of operations of the Bank.
The Bank has the intent and ability to hold Securities Held to Maturity 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 shareholders' equity in the statement of financial
condition.
(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 is recorded on non-accrual 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
the nature of the portfolio, 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 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
44
<PAGE> 353
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.
(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, the Bank capitalized $207 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. Amortization
for 1995, 1994, and 1993, was $0, $15, and $983 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. The Bank had
no real estate owned at December 31, 1995, and at December 31, 1994.
(g) Interest Rate Derivatives --
The Company enters into interest rate hedge agreements which involve the
exchange of fixed and floating rate interest payments periodically over the
life of the agreement without the exchange of the underlying principal amounts.
The differential to be paid or received is accrued as interest rate change and
recognized over the life of the agreements as an adjustment to interest
expense.
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 period.
45
<PAGE> 354
(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 of 4,857,221 in 1995,
4,593,103 in 1994, and 4,489,861 in 1993, 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) Statements 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) Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation". SFAS 123 requires all companies to change what they disclose
about their employee stock-based compensation plans, recommends that they
change how they account for these plans and requires those companies who do not
change their accounting to disclose what their earnings and earnings per share
would have been if they had changed their method of accounting pursuant to this
pronouncement. The Company has elected to continue to account for their
Stock-Based Compensation in accordance with Accounting Principles Board Opinion
(APBO 25) and to adopt only the disclosure requirements of SFAS 123. As a
result, the adoption of SFAS 123 will not have an impact on the financial
position or results of operations of the company.
(m) Reclassifications --
Certain amounts have been reclassified in the prior years to conform to
classifications followed in 1995.
(n) Accounting Estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
2. NATURE OF OPERATIONS --
The Bank engages in the commercial banking business serving the greater
Southern California metropolitan area, with offices located in the San Fernando
Valley, West Los Angeles, the San Gabriel Valley , the South Bay portion of
the County of Los Angeles, and Ventura County. The Bank's primary focus is to
engage in middle market lending to businesses, professionals, the entertainment
industry and high net-worth individuals. Retail or consumer banking business
is generally limited to the owners, officers and employees of its commercial
customers, and customers of accounting and business management firms with which
the Bank regularly does business. Deposit services which the Bank offers
include personal and business checking accounts and savings accounts, insured
money market deposit accounts, NOW accounts, and time certificates of
deposits, along with IRA and Keogh accounts. The Bank also provides other
customary banking services incidental to maintaining the commercial customer
relationships.
46
<PAGE> 355
3. AVERAGE FEDERAL RESERVE BALANCES --
The average cash reserve balances required to be maintained at the Federal
Reserve Bank, under the Federal Reserve Act and Regulation D, were
approximately $2.4 million and $6.0 million for the years ended December 31,
1995 and 1994, respectively.
4. INVESTMENT PORTFOLIO --
A summary of Securities Held to Maturity at December 31, 1995 and 1994, is as
follows:
<TABLE>
<CAPTION>
HELD TO MATURITY GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
----- ----- ------ -----
<S> <C> <C> <C> <C>
1995
U.S. Treasury securities $66,704 $623 $ (244) $67,083
U.S. Government agency securities 31 -- 31
------- ---- ------- -------
Total investment portfolio $66,735 $623 $ (244) $67,114
======= ==== ======= =======
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
======= ==== ======= =======
</TABLE>
A summary of Securities Available for Sale for December 31, 1995 is as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------ ---- -- ------
<S> <C> <C> <C> <C>
1995
Mortgage -backed securities $5,769 $143 $5,912
Federal Reserve Bank stock 433 -- -- 433
------ ---- -- ------
$6,202 $143 $0 $6,345
====== ==== == ======
</TABLE>
Investments with a book value of $27,900 and $29,200 were pledged as of
December 31, 1995 and 1994, respectively, to secure court deposits and for
other purposes as required or permitted by law. Included in interest on
investments in 1995, 1994, and 1993, is $0, $19, and $33, respectively, of
interest from tax-exempt securities.
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
The amortized cost and market value of Securities Held to Maturity as of
December 31, 1995, by maturity, are shown below.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST YIELD VALUE
---- ----- -----
<S> <C> <C> <C>
Due in one year or less $21,714 5.3% $21,691
Due after one through five years 45,021 5.6 45,423
------- -------
$66,735 $67,114
======= =======
</TABLE>
47
<PAGE> 356
At December 31, 1995, the securities available for sale portfolio consisted of
Federal Reserve Bank stock and mortgage backed securities. The Federal Reserve
Bank stock, with a 6% yield, has no stated maturity. The actual maturity of
the mortgage-backed securities is determined by the rate of repayment of the
loan pools collateralizing the securities. Actual cash maturities of the
Bank's mortgage-backed securities, with an approximate yield of 7%, are
expected to be from one to five years.
In December 1995, as permitted by a Special report of the Financial Accounting
Standards Board "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", the Bank made a one time
transfer of investment securities into the Available for Sale portfolio. These
securities had an amortized cost and market value of $5,769 and $5,912,
respectively.
At December 31, 1994, there were no Securities Available for Sale.
Proceeds from the sales and maturities of debt securities during 1995, 1994,
and 1993 were $17,722, $52,882, and $78,545, respectively. Gains of $0, $0,
and $77 were realized on those transactions. There were no realized losses on
sales in 1995, 1994, and 1993.
5. LOANS --
The loan portfolio, net of unamortized deferred fees of $522 at December 31,
1995, and $652 at December 31, 1994, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------------ --------
<S> <C> <C>
Commercial and industrial loans $164,966 $142,885
Commercial real estate loans 20,190 26,528
Real estate loans -- mortgages 5,470 4,773
Real estate loans -- construction 0 416
-------- --------
Gross Loans 190,626 174,602
Less - Allowance for loan losses (6,930) (7,427)
-------- --------
Net loans $183,696 $167,175
======== ========
</TABLE>
At December 31, 1995, the Bank had $1,000 in impaired loans, against which a
loss allowance of $318 has been provided. The recorded loss allowance
for 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 on nonaccrual status, and as such no interest income is
recognized. The Bank had an average investment in impaired loans of
approximately $352 for the year ended December 31, 1995.
Total non-performing loans were $1,024 and $36 at December 31, 1995 and 1994,
respectively. The interest income, which would have been recognized had
non-accrual loans been current, amounted to $ 82, $6, and $469, in 1995, 1994,
and 1993, respectively. No interest income has been reported on non-accrual
loans for the years 1995, 1994, or 1993.
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ -------- --------
<S> <C> <C> <C>
Balance, beginning of period $ 7,427 $ 6,513 $ 12,986
Loans charged off (1,089) (1,413) (10,749)
Recoveries on loans previously charged off 592 2,327 3,826
Provision for loan losses 0 0 450
------- ------- --------
Balance, end of period $ 6,930 $ 7,427 $ 6,513
======= ======= ========
</TABLE>
48
<PAGE> 357
6. LOANS TO RELATED PARTIES --
There were no loans to directors and their affiliates for the years ended 1995
and 1994.
7. PREMISES AND EQUIPMENT --
Book value of premises and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
------ ------
<S> <C> <C>
Furniture, fixtures and equipment $4,056 $3,796
Leasehold improvements 834 690
------ ------
Cost 4,890 4,486
Less - accumulated depreciation and amortization 3,779 3,490
------ ------
Net Book Value $1,111 $ 996
====== ======
</TABLE>
The amounts of depreciation and amortization included in noninterest expense
were $553, $459, and $821 for the years ended December 31, 1995, 1994 and 1993,
respectively, and are based on estimated lives of 1 to 10 years for furniture,
fixtures and equipment, and leasehold improvements.
The Bank leases facilities under renewable operating leases. Rental expense for
premises included in occupancy expenses were $833 in 1995, $741 in 1994,
$1,133 in 1993. As of December 31, 1995, the approximate future lease payable
under the lease commitments is as follows:
<TABLE>
<S> <C>
Year ended December 31,--
1996 $ 851
1997 851
1998 811
1999 790
2000 215
Thereafter 0
------
$3,518
======
</TABLE>
8. 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.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash, Due From Banks and Federal Funds Sold
For these short term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
Quoted market prices are available for substantially all of the securities
owned by the Bank, both in the Held to Maturity and Available for Sale
portfolios. These market quotes have been used to estimate fair value.
49
<PAGE> 358
Loans
The fair value of loans was estimated by discounting the future cash flows
using current market rates adjusted for approximated credit risk, operating
costs and interest rate risk inherent in the portfolios. Future cash flows are
aggregated based upon the payment terms and maturities of the loans. The
discount rate is calculated as the sum of the risk-free rate, a credit quality
factor, an operating expense factor and a prepayment option price. The
risk-free rate is based on the U.S. treasury curve for the stated maturity.
The credit quality factor is based on a combination of the Bank's loss
experience and industry standards for various categories of loans. The
operating expense factor is based on an internal analysis of the Bank's costs
to deliver and service products.
Deposit Liabilities
Fair value for deposit liabilities without contractual maturities is equal to
the carrying value of those liabilities. This includes the bank's demand
deposits, NOW, savings and money market accounts. Fair value for certificates
of deposit are calculated by discounting the future cash flows using a current
market rate. The Bank's certificate of deposit portfolio has a fair value
which reasonably approximates carrying value, due to the short duration of the
portfolio.
Off Balance Sheet Items
The Bank's loan commitments are generally for variable rate loans representing
current market rates of interest. The Bank's letters of credit are generally
short term and are at terms consistent with the current market. Current
valuation of these off balance sheet instruments is immaterial. See footnote
11 for further description of these commitments.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
BOOK VALUE, ESTIMATED BOOK VALUE, ESTIMATED
NET FAIR VALUE NET FAIR VALUE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Cash & Due From Banks $ 28,376 $ 28,376 $ 35,397 $ 35,397
Federal Funds Sold 32,500 32,500 20,000 20,000
Securities 72,937 73,459 74,153 71,423
Loans 183,696 191,352 167,175 175,023
Certificates of Deposit 115,998 116,798 84,251 84,251
Other Deposit Liabilities 168,512 168,512 179,930 179,930
Other Borrowed Money 3,768 3,768 3,794 3,794
Off Balance Sheet Items 0 0 0 0
</TABLE>
Estimations of fair value of financial instruments are subject to significant
uncertainty because active and liquid markets do not exist for a majority of
them. The estimates include assumptions concerning 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.
9. INCOME TAXES -
The provisions (benefits) for income taxes for the years ended December 31,
1995, 1994 and 1993 for financial reporting were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current -
Federal $ 614 $ 2,876 $ (89)
State 401 284 2
------ ------ ------
Total current provision 1,015 3,160 (87)
------ ------ ------
Deferred -
Federal 891 (1,404) 1,268
State 247 224 242
------ ------ ------
Total deferred provisions 1,138 (1,180) 1,510
------ ------ ------
Total provisions for income taxes $2,153 $1,980 $1,423
====== ====== ======
</TABLE>
50
<PAGE> 359
As of December 31, 1995 and 1994, 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,
1995 1994
------------ ------------
<S> <C> <C>
Allowance for loan losses $ 3,084 $ 3,348
Deferred loan fees 0 294
Depreciation 138 196
Other expense accruals 898 1,631
-------- -------
Total deferred tax assets 4,120 5,469
-------- -------
Accretion of discounts on securities (140) 0
Unrealized gain on securities available for sale (60) 0
State tax expense (188) (353)
Other (1) (1)
-------- -------
Total deferred tax liabilities (389) (354)
Valuation allowance (1,218) (1,404)
-------- -------
Net deferred tax asset $ 2,513 $ 3,711
======== =======
</TABLE>
The Bank maintains a valuation reserve against net deferred tax assets to
reflect the inherent uncertainty of the ultimate realization of those assets.
The value of the Bank's largest deferred tax assets represent expenses, such
as the loan loss provision, which will become deductible on a future tax
return when an actual loss is incurred. Realization of deferred tax assets
are dependent on the availability of taxable income in the future or prior
years to offset these deductions. Because the State of California does not
currently allow net operating loss carrybacks, realization of deferred tax
assets related to California Franchise Taxes is subject to a greater degree of
uncertainty.
The provisions (benefits) for income taxes varied from the Federal statutory
rate of 34% for 1995, 1994, and 1993, for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------- ------------------ ----------------------
Amount Rate Amount Rate Amount Rate
------ ----- ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Provisions (benefit) for income at $1,716 34.0% $1,548 34.0% $1,198 34.0 %
statutory rate
Interest on state and municipal bonds
and other tax exempt transactions (22) (.5%) (25) (.5%) (25) (.7)%
State franchise taxes, net of federal
income tax benefit 428 8.5% 335 7.3% 256 7.3 %
Other, net 31 .6% 122 2.7% (6) (0.2)%
------ ---- ------ ---- ------ ----
$2,153 42.6% $1,980 43.5% $1,423 40.4 %
====== ==== ====== ==== ====== ====
</TABLE>
The total net deferred tax of $2,513 in 1995 and $3,711 in 1994 is included in
Other Assets in the Consolidated Statements of Financial Condition.
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. The Bank had no operating loss carryforwards at December 31, 1994 or
1995.
10. SHAREHOLDERS' EQUITY -
The Company has three employee stock option plans. The 1983 plan, which
authorized the issuance of 400,075 shares of common stock, and the 1985 plan,
which authorized the issuance of 350,000 shares of common stock, expired in
1993 and 1995 respectively. The 1993 plan, authorizing the issuance of
400,000 shares of common stock, expires in 2003. Options are granted at a
price not less than the fair market value of the stock at the date of grant.
Options under these
51
<PAGE> 360
plans expire up to ten years after the date of grant. The options granted
under the 1983 and 1985 plans are incentive stock options, as defined in the
Internal Revenue Code. Options under the 1993 plan can be either incentive
stock options or non- qualified options. No shares remain available for future
grants for the 1983 and 1985 plans, although outstanding options remain and are
exercisable over the period designated by those plans.
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. During 1995, 27,500 options
were granted at $6.88 per share. Options expire 10 years from the date of grant
The following table summarizes information on stock options outstanding for the
years ended December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Average Average
Price Shares Price Shares
----- ------ ----- ------
<S> <C> <C> <C> <C>
Options outstanding beginning of year $5.98 629,410 $5.55 355,906
Granted $7.07 125,500 $6.59 289,500
Exercised $5.78 (15,120) $4.75 (1,000)
Canceled $8.91 (8,270) $7.78 (14,996)
------- -------
End of year $6.14 731,520 $5.98 629,410
======= =======
</TABLE>
During 1994, 1,000 non-qualified stock options under the 1985 plan were
exercised at $4.75 per share. In 1995, 15,120 non-qualified stock options under
the 1987 plan were exercised at $5.78 per share. No other stock options were
exercised in 1994 or 1995.
The following information is presented concerning the stock option plans as of
December 31, 1995:
<TABLE>
<CAPTION>
SHARES SUBJECT TO NUMBER OF SHARES
OPTION RANGE OF EXERCISE PRICES EXERCISABLE
----------------- ------------------------ ----------------
<S> <C> <C> <C>
Employee plans
1983 Plan 49,030 $5.00 29,418
1985 Plan 243,250 $4.75 - $15.21 139,690
1993 Plan 256,000 $6.63 - $7.13 68,603
Non employee directors plan
1987 Plan 30,240 $5.78 30,240
1994 Plan 153,000 $6.25 - $6.85 6,875
</TABLE>
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, and had a maturity date
of February 15, 1995. During 1995, all outstanding warrants were exercised.
During 1995 and 1994, warrants for 135,024 and 57,012 shares were
52
<PAGE> 361
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, with an expiration date
of February 1, 1999 , were issued to the former chairman of the board.
On June 29, 1995, the Company's shareholders approved adoption of a CU Bancorp
1995 Restricted Stock Plan, providing for the issuance of Common Stock to
employees, subject to restrictions on sale or transfer. The restrictions on
sale or transfer expire over a period of five years. During 1995, 19,000
restricted shares were issued with a market value of $185. This amount
was recorded as unearned compensation and is shown as a separate component of
shareholders' equity. Unearned compensation is being amortized to expense over
the five year vesting period, with expense of $3 recorded for 1995.
11. 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. These instruments include commitments to extend credit,
standby and commercial letters of credit, and interest rate floor and swap
agreements. Management does not anticipate that the settlement of these
financial instruments will have a material adverse effect on the Bank's
financial position.
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 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, 1995 and 1994 there were $1.0 million and $1.5
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.
53
<PAGE> 362
The following is a summary of various financial instruments with off-balance
sheet risk at December 31,1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
AMOUNTS IN MILLIONS OF DOLLARS 1995 1994
---- ----
<S> <C> <C>
Standby letters of credit $ 3 $ 7
Undisbursed loans 87 69
</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
in 1993, and are included in interest income. 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 15.
12. OTHER OPERATING EXPENSES --
Other operating expenses included the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Promotional expenses $273 $264 $393
Data processing for customers 564 737 920
Director and advisory fees 104 107 146
Legal fees 109 455 1,370
Other professional fees 356 419 495
Messenger services 357 408 583
Other data processing fees 438 301 455
Regulatory assessments 357 648 1,036
Expenses for other real estate owned 1 22 234
Amortization of mortgage servicing rights 0 15 983
Occupancy expense 1,840 1,710 2,488
Reserve for branch relocation 0 58 447
Other 1,321 2,323 4,120
------ ------ -------
Total operating expenses $5,720 $7,467 $13,670
====== ====== =======
</TABLE>
13. CONDENSED FINANCIAL INFORMATION OF CU BANCORP --
At December 31, 1995 and 1994, the condensed unconsolidated balance sheets of
the Company are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
<S> <C> <C>
Balance Sheets
Cash $ 590 $ 426
Prepaid expenses 0 0
Investment in California United Bank N.A. 32,681 29,507
------ ------
Total assets $33,271 $29,933
======= =======
Other liabilities $268 $189
Shareholders' equity 33,003 29,744
------ ------
Total liabilities and shareholders' equity $33,271 $29,933
======= =======
</TABLE>
54
<PAGE> 363
For the years ended December 31, 1995, 1994, and 1993, the condensed
unconsolidated statements of income of the Company are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statements of Income
Equity in earnings of the Bank $3,090 $2,785 $2,265
Operating expenses 210 221 167
Interest Income 14 9 0
------ ------ ------
Net income $2,894 $2,573 $2,098
====== ====== ======
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, the condensed
unconsolidated statements of cash flows are as follows:
Amounts in thousands of dollars
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,894 $ 2,573 $ 2,098
Equity in undistributed earnings of subsidiaries (3,090) (2,785) (2,265)
Other, net 78 115 85
------- ------- -------
Net cash (used) by operations (118) (97) (82)
Cash flows from financing activities
Proceeds from exercise of stock options and director warrants 649 180 260
Cash dividend paid (367) -- --
------- ------- -------
Net cash provided by financing activities 282 180 260
Net increase in cash and cash equivalents 164 83 178
Cash and cash equivalents at beginning of the year 426 343 165
------- ------- -------
Cash and cash equivalents at end of year $ 590 $ 426 $ 343
======= ======= =======
</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 was to preclude the bank from
declaring any dividends at December 31, 1994 and 1993. The Bank has received
permission from the OCC to pay dividends to the Company in 1995, in
anticipation of the cash dividends paid by the Company. No dividends were
actually paid by the Bank in 1995,1994 or 1993.
14. SUBSEQUENT EVENTS
In March of 1995, the Bank had announced the signing of an agreement to acquire
Corporate Bank, a Santa Ana based community bank with approximately $70 million
in assets. This purchase was completed in January 1996, with Corporate Bank
being acquired in exchange for the issuance of approximately 649 thousand
shares of CU Bancorp common stock and $1.7 million cash. The acquisition of
Corporate Bank will be reflected using the purchase method of accounting in the
first quarter of 1996. Also in January 1996, the Bank announced the signing of
an agreement to merge with Home Interstate Bancorp, the parent of Home Bank,
based in the South Bay. Home Bank provides retail and business banking from
its principal office in Signal Hill and fourteen additional branch locations.
The agreement with Home Bank provides for the combination to be effected
through the exchange of common stock, and is expected to be accounting for as a
pooling of interests. This merger, which is targeted to be completed near the
end of the second quarter of 1996, would create a combined bank with over $800
million in assets and 22 branches.
55
<PAGE> 364
15. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, the Bank believes that pending or threatened litigation involving the
Bank will have no adverse material effect upon its financial condition, or
results of operations.
Until third quarter 1995, the Bank was a defendant in multiple lawsuits related
to the failure of two real estate investment companies, Property Mortgage
Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consisted of
a federal action by investors in PMC and SLGH (the "Federal Investor Action"),
at least three state court actions by groups of Investors (the "State Investor
Actions"), and an action filed by the Resolution Agent for the combined and
reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An
additional action was filed by an individual investor and his related pension
and profit sharing plans (the "Individual Investor Action"). Other defendants
in these multiple actions and in related actions include financial
institutions, title companies, professionals, business entities and
individuals, including the principals of PMC and SLGH. The Bank was a
depository bank for PMC, SLGH and related companies and was a lender to certain
principals of PMC and SLGH ("Individual Loans"). Plaintiffs alleged that
PMC/SLGH was or purported to be engaged in the business of raising money from
investors by the sale and issuance of interests in loans evidenced by
promissory notes secured by real property. Plaintiffs alleged that false
representations were 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 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 appear to 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.
16. REGULATORY MATTERS
Since June 1992, the Bank has developed a very positive and proactive
relationship with its primary regulators. Results of regular safety and
soundness examinations have documented the progress the Bank has achieved.
Management is committed to the continuation of this process and maintaining a
high standing with the regulators. The following comments refer to regulatory
situations that existed in prior years that are reflected in the prior period
financial statements provided herein. All of these situations have been
successfully resolved and repaired as management transitioned the Bank to its
present condition and performance.
56
<PAGE> 365
On November 2, 1993, the Office of the Comptroller of the Currency
("OCC"), after completion of their annual examination of the Bank, terminated
the Formal Agreement entered into in June, 1992. In December 1993, the Fed
terminated the Memo of Understanding entered into in August, 1992.
The Formal Agreement had been entered into in June 1992 and required the
implementation of certain policies and procedures for the operation of the Bank
to improve lending operations and management of the loan portfolio. The Formal
Agreement required the Bank to maintain a Tier 1 Risk Weighted Capital ratio of
10.5% and a 6.0% Tier 1 Leverage Ratio. The Formal Agreement mandated the
adoption of a written program to essentially reduce criticized assets, maintain
adequate loan loss reserves and improve bank administration, real estate
appraisal, asset review management and liquidity policies, and restricted the
payment of dividends.
The agreement specifically required the Bank to: 1) create a compliance
committee; 2) have a competent chief executive officer and senior loan
officer, satisfactory to the OCC, at all times; 3) develop a plan for
supervision of management; 4) create and implement policies and procedures for
loan administration; 5) create a written loan policy; 6) develop and implement
an asset review program; 7) develop and implement a written program for the
maintenance of an adequate Allowance for Loan and Lease Losses, and review the
adequacy of the Allowance; 8) eliminate criticized assets; 9) develop and
implement a written real estate appraisal policy; 10) obtain and improve
procedures regarding credit and collateral documentation; 11) develop a
strategic plan; 12) develop a capital program to maintain adequate capital
(this provision also restricts the payment of dividends by the Bank unless (a)
the Bank is in compliance with its capital program; (b) the Bank is in
compliance with 12 U.S.C. Section 55 and 60 and (c) the Bank receives the
prior written approval of the OCC District Administrator); 13) develop and
implement a written liquidity, asset and liability management policy; 14)
document and support the reasonableness of any management and other fees to any
director or other party; 15) correct violations of law; and 16) provide reports
to the OCC regarding compliance.
The Memorandum of Understanding was executed in August 1992 and required
1) a plan to improve the financial condition of CU Bancorp and the Bank; 2)
development of a formal policy regarding the relationship of CU Bancorp and the
Bank, with regard to dividends, inter-company transactions, tax allocation and
management or service fees; 3) a plan to assure that CU Bancorp has sufficient
cash to pay its expenses; 4) ensure that regulatory reporting is accurate and
submitted on a timely basis; 5) prior approval of the Federal Reserve Bank
prior to the payment of dividends; 6) prior approval of the Federal Reserve
Bank prior to CU Bancorp incurring any debt and 7) quarterly reporting
regarding the condition of the Company and steps taken regarding the Memorandum
of Understanding.
57
<PAGE> 366
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
NONE.
Part III
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of fiscal year ended December 31, 1995.
Part IV. Exhibits, Financial Statement Schedules and Reports on Form 8 K.
(A)
(1) and (2) Financial Statements and Financial Statement
Schedules - See index at Item 8 of this report.
(3) Exhibits
2. Plan of Acquisition, Reorganization
arrangement, liquidation or succession.
a) Amended and Restated Agreement and Plan
of Reorganization between CU Bancorp,
California United Bank, N.A. and Corporate
Bank dated October 11, 1995 -- incorporated
by reference from Registrant's Registration
Statement on Form S-4 dated October 26,
1995 (33-63729).
b) Agreement and Plan of Reorganization
dated January 10, 1996 between CU Bancorp
and California United Bank, N.A. and Home
Interstate Bancorp and Home Bank and
Exhibits thereto.
c) Amendment Number One to Agreement and
Plan of Reorganization between CU Bancorp
and California United Bank, N.A. and Home
Interstate Bancorp and Home Bank.
10. Material Contracts
a) CU Bancorp Restricted Stock Plan
11. Statements re computation of per share
earnings
See footnote 1(i) to the financial
statements included at Item 8 of this
report.
21. Subsidiaries of the Registrant
27. Financial Data Schedule
58
<PAGE> 367
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, 1996 C U BANCORP
STEPHEN G. CARPENTER
By
Stephen G. Carpenter
President and Chief
Executive Officer
PATRICK HARTMAN
By
Patrick Hartman
Chief Financial Officer
59
<PAGE> 368
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, 1996
_________________
Kenneth Bernstein
STEPHEN G. CARPENTER
__________________________________ Director, March 28, 1996
Stephen G. Carpenter Chairman/
Chief Executive
Officer
________________________________ Director March 28, 1996
Richard H. Close Secretary
PAUL W. GLASS
___________________________________ Director March 28, 1996
Paul W. Glass
RONALD S. PARKER Director March 28, 1996
____________________
Ronald S. Parker
DAVID I. RAINER
____________________ Director, March 28, 1996
David I. Rainer President, Chief
Operating Officer
</TABLE>
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrant Which Have Not Registered Securities Pursuant
to Section 12 of the Act.
The proxy statement with respect to the annual meeting of the shareholders
shall be furnished to shareholder subsequent to the filing of this Form 10-K
and shall also be furnished to the Securities and Exchange Commission.
60
<PAGE> 369
EXHIBIT INDEX
2. Plan of Acquisition, Reorganization arrangement, liquidation or
succession.
a) Amended and Restated Agreement and Plan of
Reorganization between CU Bancorp,
California United Bank, N.A. and Corporate
Bank dated October 11, 1995 --
incorporated March 28, 1996 by reference
from Registrant's Registration Statement
on Form S-4 dated October 26, 1995
(33-63729).
b) Agreement and Plan of Reorganization dated
January 10, 1996 between CU Bancorp and
California United Bank, N.A. and Home
Interstate Bancorp and Home Bank and
Exhibits thereto.
c) Amendment Number One to Agreement and Plan
of Reorganization between CU Bancorp and
California United Bank, N.A. and Home
Interstate Bancorp and Home Bank.
10. Material Contracts
a) CU Bancorp Restricted Stock Plan
11. Statements re computation of per share earnings
See footnote 1(i) to the financial statements
included at item 8 to this report.
21. Subsidiaries of the Registrant
27. Financial Data Schedule
61
<PAGE> 370
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, 1995.
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 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: $ 53,134,221 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 5,285,333 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
This document contains 20 pages.
1
<PAGE> 371
The undersigned 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, 1995 is hereby amended to include Part
III, Items 10,11,12 and 13.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
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 25, 1996
2
<PAGE> 372
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information as of the April 8, 1996 with
respect to Director of the Company. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" for information pertaining to stock ownership
of the directors.
<TABLE>
<CAPTION>
POSITION AND POSITION AND DIRECTOR OF
OFFICE WITH CU OFFICE WITH THE COMPANY AND
NAME AGE BANCORP BANK BANK SINCE:
- ---- --- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Kenneth L. Bernstein 53 Director Director 1994
Stephen G. Carpenter 56 Chairman, Chief Chairman, Chief 1992
Executive Officer Executive Officer
Richard H. Close 51 Director, Secretary Director, Secretary 1981
Paul W. Glass 50 Director Director 1984
Ronald S. Parker 51 Director Director 1993
David I. Rainer 39 Director, President, Director, 1992
Chief Operating President, Chief
Officer Operating Officer
</TABLE>
None of the directors or officers of CU Bancorp or CU Bank were
selected pursuant to any arrangement or understanding other than with the
directors and officers of CU Bancorp and CU Bank acting in their capacities as
such. There are no family relationships between any two or more of the
directors, or officers and none serve as directors of any company required to
report under the Exchange Act, 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 CU Board of Directors.
KENNETH L. BERNSTEIN, was elected to the Board of CU Bancorp and CU
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 services for both the
finance industry and clients of that industry.
STEPHEN G. CARPENTER, joined CU Bank 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. He
assumed the additional role of Chairman of CU Bank in February, 1994 and
Chairman of CU Bancorp in 1995.
RICHARD H. CLOSE has been a principal in the law firm of Shapiro,
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
3
<PAGE> 373
Glass & Rosen, in Encino, California, since 1980.
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 CU Bank in
June 1992 and assumed the position of Chief Operating Officer in late 1992. He
assumed the additional title of President of CU Bank in February, 1994 and
President and Chief Operating Officer of CU Bancorp in 1994. He was elected to
the CU Board and Bank Board in 1993. 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 CU Bancorp or of CU Bank, no owner
of record or beneficially of more than five percent of any class of voting
securities of CU Bancorp or no associate of any such director, officer or
affiliate is a party adverse to CU Bancorp or CU Bank in any material pending
legal proceedings to which CU Bancorp or CU Bank is a party.
EXECUTIVE OFFICERS
Set forth below is certain information as of April 8, 1996 with respect
to each of the executive officers of CU Bancorp.
<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 56 Director, Chief Chairman, Chief 1992
Executive Officer Executive Officer
DAVID I. RAINER 39 Director, President, Director, President, 1992
Chief Operating Chief Operating
Officer Officer
PATRICK HARTMAN 45 Chief Financial Chief Financial 1992
Officer Officer
ANNE WILLIAMS 37 Chief Credit Officer Chief Credit Officer 1992
</TABLE>
Set forth below are brief summaries of the background and business
experience, including principal occupation, of the executive officers of CU
Bancorp who have not previously been discussed herein.
PATRICK HARTMAN has been employed by CU 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.
4
<PAGE> 374
ANNE WILLIAMS joined CU 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.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following information is furnished with respect to (i) the chief
executive officer of CU Bancorp and (ii) each of the other executive officers of
CU Bancorp (including officers of CU Bank who may be deemed to be executive
officers of CU Bancorp), who served as executive officers during 1995 and earned
over $100,000 (the "Named Executives").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------------------------------- -----------------------------------------------------
Award Payouts
-------------------------- -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Award(s) Options/SAR's Payouts Compensation
--------------------------- ---- ------ ----- ------------ ---------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(4)
Stephen G. Carpenter - Chief 1993 $250,000 $ 50,000 $12,000(2) 0 25,000 0 $1,882(3)
Executive Officer / Chief 1994 $256,250 $ 50,000 $13,440(2) 100,000 $2,250(3)
Executive Officer - CU 1995 $263,937 $100,000(5) $14,250(2) 0 $2,250(3)
Bank(1)
David I. Rainer - Chief 1993 $200,000 $100,000 $12,000(2) 0 25,000 0 $3,000(3)
Operating Officer / 1994 $205,000 $ 50,000 $12,330(2) 0 75,000 $2,250(3)
President and Chief 1995 $211,150 $100,000(5) $12,330(2) 0 0 $2,250(3)
Operating Officer - CU Bank
(1)
Patrick Hartman - Senior 1993 $138,000 $ 0 $ 8,450(2) 0 20,000 0 0
Vice President Chief 1994 $140,021 $ 13,000 $ 8,653(2) 0 10,000 0
Financial Officer / Chief 1995 $143,452 $ 25,000(5) $ 8,668(2) $14,595 12,500 $ 450(3)
Financial Officer - CU Bank
Anne Williams- Executive 1993 $103,400 $ 25,000 $ 7,800(2) 0 5,000 0 $1,439(3)
Vice President Chief Credit 1994 $124,000 $ 15,000 $ 8,092(2) 0 10,000 $2,085(3)
Officer / Chief Credit 1995 $128,960 $ 37,500(5) $ 8,095(2) $14,595 12,500 $2,250(3)
Officer - CU Bank
</TABLE>
(1) CU Bancorp provides memberships in certain clubs for certain executives,
the use of which primarily relates to CU Bancorp 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.
5
<PAGE> 375
(3) Consists of CU Bancorp's matching portion of 401-K Plan contributions.
(4) Grants pursuant to CU Bancorp 1995 Restricted Stock Plan. 25% of any grant
of Restricted Stock vests at the second anniversary of the grant. At each
anniversary thereafter, an additional 25% of the grant becomes vested.
Dividends are payable on the Restricted Stock, at the amount and times
payable to all holders of CU Stock. The Restricted Stock does not have any
preferential or special dividend provisions. At December 31, 1995, 19,000
shares of Restricted Stock had been granted at an aggregate market value at
December 31, 1995 of $194,750 or $10.25 per share and at date of grant at
an aggregate market value of $185,000 or $9.73 per share. The holders named
in the table above at December 31, 1995, held an aggregate of 3000 shares
of Restricted Stock at an aggregate market value of $30,750 or $10.25 per
share or $15,375 for each of Mr. Hartman and Ms. Williams. The vesting of
the Restricted Stock is not subject to performance based conditions, other
than lapse of time and continued service.
(5) In addition, discretionary bonuses paid in 1995 with regard to services in
1994 of Messrs. Carpenter, Rainer, and Hartman and Ms. Williams were
$60,000, $60,000, $25,000 and $30,000, respectively.
6
<PAGE> 376
STOCK OPTIONS
The table on the following page contains information concerning the grant of
stock options during the fiscal year ended December 31, 1995 to the Named
Executives:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
INDIVIDUAL STOCK PRICE APPRECIATION FOR
GRANTS THE OPTION TERM
% OF TOTAL
OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED EMPLOYEES IN PRICE EXPIRATION
Name (1)(2)(3)(4) FISCAL YEAR ($ / SH) DATE 5% 10%
- ----------------- ------------ ------------ -------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Stephen Carpenter 0 0 -- -- -- --
David Rainer 0 0 -- -- -- --
Patrick Hartman 12,500 12.4% $7.125 2/28/05 $56,011 $141,943
Anne Williams 12,500 12.4% $7.125 2/28/05 $56,011 $141,943
</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 certain options shall vest fully
upon the occurrence of certain significant events that include
a merger or dissolution of CU Bancorp where CU Bancorp is not
the surviving corporation, or sale of substantially all CU
Bancorp's assets. As of April 8, 1996 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 CU 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 CU Bancorp are increased, decreased or changed into or
exchanged for, a different number or kind of shares or
securities of CU Bancorp, without receipt of consideration by
CU Bancorp, 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 CU Bancorp.
(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) 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 CU 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 CU
Stock underlying the option at December 31, 1995. These amounts
represent
7
<PAGE> 377
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 CU 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 CU Stock underlying the
options granted to the Named Executives during the year. Each
of the options was granted pursuant to CU Bancorp's 1985, or
1993 Plans.
No options were exercised during 1995 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 1995.
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/95 AT 12/31/95
--------------------------- ---------------------------
NAME EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- --------------- --------------------------- ---------------------------
<S> <C> <C>
S. Carpenter 87,253 / 111,747 $409,142 / $466,983
D. Rainer 66,179 /88,821 $316,495 / $372,803
Patrick Hartman 10,499 / 32,001 $37,809 / $109,378
Anne Williams 13,500 / 29,000 $66,188 / $ 110,687
</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 CU Bank
or its parent company (including a change of more than 50% of the current
shareholders of CU Bancorp), Mr. Carpenter and Mr. Rainer will each be entitled
to any accrued but unpaid bonus at that time. THIS ARRANGEMENT WAS ENTERED INTO
IN 1992. Additionally, in the event of a Change of Control, if a position
commensurate with either of their current positions with CU Bank is not offered
and either elects to resign, CU Bank will pay the resigning party, subject to
non-disapproval by the regulators, 12 months' compensation.
During 1993, CU 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
CU 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 CU Bank concurrently with the sale of the mortgage
origination network, to be employed by the purchaser of the network.
8
<PAGE> 378
COMPENSATION OF DIRECTORS
Directors of CU Bancorp receive no compensation for attending meetings
of the CU Board. However, the directors of CU Bancorp also serve as directors of
CU Bank. CU Bank paid the sum of between $3,800 and $1,600 per month during 1995
to each director of CU Bank, depending on the number and type of 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 CU Bank do not receive any
additional compensation for activities as directors. Eligible directors receive:
(i) $1,000 per regular monthly board meeting; and (ii) $200 per committee
meeting (for committees for which they are members). During 1995, director
compensation ranged from $23,400 at the highest to $22,000 at the least, for the
entire year, and totaled $100,400 in the aggregate for the year 1995. In
addition to attendance at Board and committee meetings, directors discharge
their responsibilities throughout the year by personal meetings and telephone
contact with CU Bancorp and CU Bank executive officers and others regarding the
business and affairs of CU Bancorp and CU Bank. Current Directors also
participate in the CU Bancorp 1994 Non-Employee Director Stock Option Plan as
more fully set forth below. The CU Board does not have a mandatory retirement
policy, nor are any retirement benefits paid.
ADDITIONAL DIRECTOR COMPENSATION
CU Bancorp has two director stock option plans, one of which has no
options available for grant. In addition, in the past, as more fully described
below, CU Bancorp has issued and sold warrants to purchase CU Stock to certain
directors.
1987 SPECIAL (DIRECTOR) STOCK OPTION PLAN
On October 20, 1987, the shareholders of CU Bancorp approved the 1987
Special Stock Option Plan ("Special Plan") for CU Bancorp's directors, to
encourage them to continue as directors, give them additional incentive as
directors and reward them for past services. This Special Plan was limited to
directors of CU Bancorp and CU Bank and provided for the issuance of 120,960
authorized but previously unissued shares of CU Stock. Only options which do not
qualify as "incentive stock options" ("Non- qualified 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 options, pursuant to the
Special Plan. Options terminate 90 days after a director ceases being a
director.
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
which was not less than fair market value on such date. The options have an
exercise period of ten years and are currently fully vested.
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 CU Stock previously owned by the optionee (to
the extent legally permissible), or (c) in a combination of CU Stock and cash.
The Special Plan also enables an optionee the possibility to satisfy tax
withholding amounts due upon exercise with shares of CU Stock rather than cash,
by either delivering already owned shares of CU Stock or withholding from the
shares of CU Stock to be issued upon exercise that number of shares which, based
on the value of the CU Stock, would satisfy the tax withholding amounts due.
Since CU Stock is listed on NASDAQ, the value of the CU Stock delivered as
payment
9
<PAGE> 379
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 CU Stock occurred.
Directors hold options under the Special Plan at December 31, 1995 as
follows:
<TABLE>
<CAPTION>
Number of Shares Termination
Director Number of Shares Exercisable Price Date
- -------- ---------------- ---------------- ----- -----------
<S> <C> <C> <C> <C>
Close 15,120 15,120 $5,791 10/20/97
Glass 15,120 15,120 $5,791 10/20/97
</TABLE>
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 CU Stock, over a ten-year period as compensation for the personal
guarantees of a capital note of CU Bancorp 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 CU Bancorp's additional asset growth, CU
Bancorp 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
CU 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 these warrants had been exercised and there are currently no
warrants from this program outstanding.
In January 1994, the CU Board 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 CU Bancorp,
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.
CU BANCORP 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On April 27, 1994, the CU Board adopted and approved, subject to
shareholder approval, the 1994 Plan, which was approved by the shareholders of
CU Bancorp 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 CU Bancorp are eligible to participate in the 1994 Non-Employee
Director Plan. The following discussion summarizes the principal features of the
1994 Plan. This description is qualified in its entirety by reference to the
full text of the 1994 Plan, copies of which are available for review at CU
Bancorp's principal office.
The 1994 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 Exchange Act. The CU Board 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
10
<PAGE> 380
Plan. Options issued under the 1994 Plan are Non-Qualified Stock Options.
Under the 1994 Plan, non-employee directors of CU Bancorp on the date
of each annual meeting receives Non-Qualified Stock Options. The 1994 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: (i)
each person who was a director of CU Bancorp on July 1, 1994 received
Non-Qualified Stock Options to acquire 5,000 shares of CU stock. The Chairman of
the Board on July 1, 1994 received options to purchase an additional 2,500
shares of CU Stock; (ii) each person who is a director of CU Bancorp on the day
following an Annual Meeting of Shareholders after 1994 receives Non-Qualified
options to acquire 5,000 shares of CU Stock, provided that the person who is
then the Chairman of the Board receives options to purchase an additional 2,500
shares of CU Stock (in the event the shares available under the 1994 Plan are
insufficient to make any such grant, all grants made thereunder on such date
shall be prorated); (iii) none of the options will be exercisable until the
March 31 next following the date of grant. Each option becomes 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;
(iv) subject to earlier termination as provided elsewhere in the 1994 Plan, each
option shall expire ten (10) years from the date the option was granted or
twelve months following the termination of directorship (except for termination
for cause), whichever is first; and (v) 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.
The exercise price of CU Stock acquired pursuant to an option shall be
paid in cash, in whole shares of CU Stock 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, equal in the aggregate to
the option price of the shares being purchased.
The 1994 Plan will terminate upon the occurrence of a terminating
event, including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp with another corporation in which CU Bancorp is not
the surviving corporation or resulting corporation, or a sale of substantially
all the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property (a "Terminating Event"). The CU Board 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 1994
Plan. The CU Board or the Committee (as the case may be) may also suspend or
terminate the 1994 Plan at any time. Unless sooner terminated, the 1994 Plan
shall terminate ten (10) years from the effective date, of the 1994 Plan. No
options may be granted under the 1994 Plan while the 1994 Plan is suspended or
after the 1994 Plan is terminated. Rights and obligations under any option
granted pursuant to the 1994 Plan, while in effect, shall not be altered or
impaired by suspension or termination of the 1994 Plan, except with the consent
of the person to whom the stock option was granted.
11
<PAGE> 381
Directors hold options under the 1994 Plan at December 31, 1995 as
follows:
<TABLE>
<CAPTION>
Number of Shares Termination
Director Number of Shares Exercisable Price Date
- --------- ---------------- ---------------- ----- -----------
<S> <C> <C> <C> <C>
$6.25- 7/1/04-
Bernstein 10,000 1,250 $6.88 6/30/05
$6.25- 7/1/04-
Close 10,000 1,250 $6.88 6/30/05
$6.25- 7/1/04-
Glass 15,000 1,875 $6.88 6/30/05
$6.25- 7/1/04-
Parker 10,000 1,250 $6.88 6/30/05
</TABLE>
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLANS
CU Bancorp has three stock option plans, pursuant to which options have
in the past been granted to employees. Two of the plans have terminated and no
further grants may be made pursuant to these plans, although options granted
under such plans continue to vest and are eligible to be exercised over the
period specified in the stock option agreements. Each of the plans is
substantially similar as to the material provisions thereof, as described below.
The three plans were adopted at intervals of two and eight years and were
designed to augment options available after substantial depletion of the prior
plan through grants and exercises of options.
1983 EMPLOYEE STOCK OPTION PLAN
In April 1983, CU Bancorp adopted the CU Bancorp 1983 Employee Stock
Option Plan ("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
Non-Qualified Stock Options. The number of shares of CU Stock reserved for
issuance under the 1983 Plan was 400,075. As of December 1, 1995, there were
49,030 shares subject to outstanding options under the 1983 Plan . 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 AND IN INDIVIDUAL STOCK OPTION AGREEMENTS. Options
are generally exercisable in equal increments over a five year period and are
outstanding for a total of ten years.
The exercise price of options under the 1983 Plan was equal to at least
100% of the fair market value of the CU 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 CU 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 CU Stock. The value
of the CU 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 CU Stock occurred.
Upon the occurrence of a terminating event, including, but not limited
to, liquidation, reorganization, merger or consolidation of CU Bancorp with
another corporation in which CU Bancorp is not the surviving corporation or
12
<PAGE> 382
resulting corporation, or a sale of substantially all the assets of CU Bancorp
to another person, or a reverse merger in which CU Bancorp is the surviving
corporation but the shares of CU Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property (a "Terminating
Event"), 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 1983 Plan.
The sole holder of options under the 1988 Plan is David Rainer,
Director and President of CU Bancorp who holds options to purchase 49,030
shares, of which 29,418 are currently exercisable at a purchase price of $5.00.
This option will expire in June 2002.
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 CU Bancorp 1985 Employee Stock Option Plan ("1985 Plan") which provides
for the issuance of Incentive Options or Non-Qualified Stock Options to full
time employees of CU Bancorp and its subsidiaries. The 1985 Plan provides for
the issuance of options to purchase 350,000 shares of CU Stock. As of December
31, 1995, there were 243,250 shares subject to outstanding options, 62,828
shares had been issued upon exercise of options, and no shares were available
for future grants. The 1985 Plan expired during 1995, although options granted
pursuant to the 1995 Plan continue to be outstanding and options continue to be
exercisable pursuant to the provisions of the 1985 Plan and individual stock
option agreements.
The exercise price of options under the 1985 Plan is due in full upon
exercise and may be paid (a) in cash, (b) by delivering shares of CU 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 CU Stock. The value of the CU 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 CU
Stock occurred.
Upon the occurrence of a terminating event, including, but not limited
to, liquidation, reorganization, merger or consolidation of CU Bancorp with
another corporation in which CU Bancorp is not the surviving corporation or
resulting corporation, or a sale of substantially all the assets of CU Bancorp
to another person, or a reverse merger in which CU Bancorp is the surviving
corporation but the shares of CU Stock outstanding under the 1985 Plan
immediately preceding the merger are converted by virtue of the merger into
other property (a "Terminating Event"), any option outstanding under the 1985
Plan 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 1985 Plan.
13
<PAGE> 383
Information as to options granted pursuant to the 1985 Plan to
executive officers is contained in the section "Compensation of Directors and
Executive Officers". At December 31, 1995 the following options issued under the
1985 Plan were outstanding:
<TABLE>
<CAPTION>
Number of Shares
Director Number of Shares Exercisable Price Term
- ----------------- ---------------- ---------------- ----- ----
<S> <C> <C> <C> <C>
$4.88- 6/2/02-
Stephen Carpenter 99,000 54,000 $5.13 2/16/03
$6.00- 4/8/03-
Patrick Hartman 20,000 8,000 $6.88 8/4/03
$5.00- 6/16/02-
David Rainer 30,970 13,581 $6.88 4/8/03
$4.75- 8/31/02-
Anne Williams 20,000 11,000 $6.00 8/4/03
All employees as 8/90-
a group 243,250 139,690 $5.42* 4/8/03
* Average Price
</TABLE>
1993 EMPLOYEE STOCK OPTION PLAN
In October, 1993, the CU Board 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 reserved for option issuances under
the 1993 Plan. At December 31, 1995 options for 360,000 shares had been granted
under the 1993 Plan, there were 354,000 shares outstanding under the 1993 Plan
and there were 46,000 shares available for grant under the 1993 Plan. All full
time employees of CU Bancorp and its subsidiary are eligible to participate.
Options issued under the 1993 Plan shall, in the discretion of a
committee appointed by the CU Board (as described below), be either Incentive
Stock Options or options which do not qualify as incentive stock options
("Non-Qualified Stock Options").
The 1993 Plan is administered by a committee (the "Committee")
appointed by the CU Board, which shall consist of not less than two members of
the CU Board. Each member of the Committee shall be a disinterested person as
provided in Rule 16b-3(c)(2) promulgated pursuant to the Exchange Act. 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.
Under the 1993 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 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 CU Bancorp) shall
14
<PAGE> 384
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 are exercisable within the first 12 months from the
date of the grant. Each option becomes 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 CU Stock acquired pursuant to an option granted
under the 1993 Plan shall be paid in cash, in whole shares of CU Stock owned by
the optionee having a fair market value on the exercise date equal to the option
price of the shares being purchased, or a combination of stock and cash.
Under the 1993 Plan, no option may extend more than ten (10) years from
the date of grant. 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 CU Bancorp or its
subsidiaries, unless the options by their terms were scheduled to terminate
earlier.
The 1993 Plan will terminate upon the occurrence of a terminating
event, including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp with another corporation in which CU Bancorp is not
the surviving corporation or resulting corporation, or a sale of substantially
all the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU 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.
1995 RESTRICTED STOCK PLAN
In March 1995 the CU Board adopted, and the shareholders approved on
June 29, 1995, the CU Bancorp Restricted 1995 Stock Plan (the "1995 Restricted
Stock Plan"). During 1995, 19,000 shares in the aggregate of the 75,000 shares
subject to the 1995 Restricted Stock Plan were issued to 26 of CU Bank's
employees.
The only executive officers to receive Restricted Stock were Ms.
Williams and Mr. Hartman who each received 1,500 shares.
15
<PAGE> 385
The issuance of restricted stock is intended to provide a vehicle
through which CU Bancorp can reward employees for their past service and
encourage their continued service and their stock ownership in CU Bancorp.
Restricted Stock is common stock issued by CU Bancorp, subject to restrictions
on sale or transfer (more fully described below) which continue until such time
as may be specified in the 1995 Restricted Stock Plan or the granting documents.
An employee holding Restricted Stock is entitled to receive cash dividends when
and as declared, and to vote the shares. At such time as the conditions set
forth in the 1995 Restricted Stock Plan or the granting documents are satisfied,
the restrictions lapse. The primary conditions set forth in the 1995 Restricted
Stock Plan are the lapse of time and continued employment by or its
subsidiaries. If the employee's employment is terminated before the restrictions
lapse, or if any conditions are not fulfilled, the restricted stock ( or that
portion of it as to which the restrictions have not lapsed) must be returned to
CU Bancorp.
The number of shares of CU Stock reserved for issuance under the 1995
Restricted Stock Plan is 75,000. All employees of CU Bancorp and its
subsidiaries are eligible to participate in the Plan.
Under the 1995 Restricted Stock Plan, the employees of CU Bancorp are
eligible to receive Restricted Stock. The Committee will determine which
employees and the amount of Restricted Stock to be granted to each. Subject to
the rights of the Committee to vary the restrictions under the 1995 Restricted
Stock Plan, each grant shall conform to the following:
Restrictions with regard to 25% of any award 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.
The restrictions on the common stock issued pursuant to the 1995
Restricted Stock Plan will terminate upon the occurrence of a terminating event,
including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp (or its principal subsidiary) with another
corporation in which CU Bancorp (or its principal subsidiary) is not the
surviving corporation or resulting corporation, or a sale of substantially all
the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU 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"). The CU Board or the
Committee (as the case may be) may also suspend or terminate the 1995 Restricted
Stock Plan at any time. No grants may be made under the 1995 Restricted Stock
Plan after the third anniversary of the date of adoption of the 1995 Restricted
Stock Plan. Rights and obligations under any Restricted Stock granted pursuant
to the 1995 Restricted Stock Plan, while in effect, shall not be altered or
impaired by suspension or termination of the 1995 Restricted Stock Plan, except
with the consent of the person to whom the Restricted Stock was granted.
16
<PAGE> 386
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the April 8,
1996 pertaining to beneficial ownership of CU Bancorp Common Stock ("CU Stock")
by persons known to CU Bancorp to own five percent or more of such stock,
current directors of CU Bancorp, and all directors and officers of CU Bancorp as
a group. The information contained herein has been obtained from CU Bancorp's
records, from information furnished directly by the individual or entity to CU
Bancorp, or from various filings made by the named individuals with the
Commission.
CU Bancorp 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 CU Bancorp, 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(1)(2)(3) CLASS(4)
------------------------ ------------------------- -------------------- ----------
<S> <C> <C> <C>
Kenneth L. Bernstein Director, Nominee 25,980 0.49
Stephen G. Carpenter Director, Nominee, President, 93,253 1.73
Chief Executive Officer
Richard H. Close Director, Nominee 118,913 2.24
Paul W. Glass Chairman, Director Nominee 100,653 1.89
Ronald S. Parker Director, Nominee 7,250 0.14
David I. Rainer Director, Nominee, Chief 66,179 1.27
Operating Officer
Anne Williams Chief Credit Officer 16,500 0.31
Patrick Hartman Chief Financial Officer 13,499 0.25
FBL Investment Advisory Beneficial Owner of More Than 5% 536,100 11.6
Services, Inc.
Dimensional Fund Advisors Inc.(6) Beneficial Owner of More Than 5% 262,796(6) 4.97
All directors and nominees as a
group (6 in number) Directors/Nominees 414,228 7.55
ALL CURRENT EXECUTIVE OFFICERS
AND DIRECTORS AS A GROUP
(8 IN NUMBER)(7)(8)(9) 447,227 8.00
- -------------------------------------- --------
</TABLE>
(1) 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.
17
<PAGE> 387
(2) Includes as if currently outstanding the following shares subject to
options which are exercisable within 60 days.
<TABLE>
<CAPTION>
OPTIONS
DIRECTOR EXERCISABLE
----------------- -----------
<S> <C>
Kenneth Bernstein 1,250
Stephen Carpenter 87,253
Richard Close 16,370
Paul Glass 16,995
Ronald Parker 1,250
David Rainer 66,179
Anne Williams 15,000
Patrick Hartman 11,999
</TABLE>
(3) Shares issuable pursuant to options which may be exercised within 60
days are deemed to be issued and outstanding in calculating the
percentage ownership of those individuals possessing such interest, but
not for any other individuals.
(4) Only common stock is outstanding.
(5) FBL Investment Advisory Services, Inc. 5400 University Avenue, West Des
Moines, IA is an Investment Advisor registered under the Investment
Advisors Act of 1940 and was deemed to have beneficial ownership of
536,100 shares or (11.86%) of CU Stock as of December 31, 1995.
According to a Schedule 13-g, the shares are owned on behalf various
investment advisory clients of the reporting person which have the
right to receive or the power to direct the receipt of dividends from,
or the proceeds from a sale of such securities. None of such clients
individually own more than five percent except for FBL Series Fund,
Inc. - Growth Common Stock Portfolio, Md. Corp.; which through
ownership of 251,000 common shares had a pecuniary interest of 5.47 at
December 31, 1995.
(6) Dimensional Fund Advisors, Inc., a registered investment advisor is
deemed to have sole voting power over 203,356 shares and sole
dispositive power over 262,796 shares of CU Stock as of December 31,
1995. Persons who are officers of Dimensional Fund Advisors, Inc. also
serve as officers of DFA Investment Dimensions Group Inc. (the "Fund")
and The DFA Investment Trust Company (the "Trust") each an open-end
management investment company registered under the Investment Company
Act of 1940. In their capacities as officers of the Fund and the Trust,
these persons vote 38,000 additional shares which are owned by the Fund
and 21,440 shares which are owned by the Trust. All Securities are
owned by advisory clients of Dimensional Fund Advisors, Inc., no one to
the knowledge of DFA owns more than 5%. Dimensional Fund Advisors, Inc.
disclaims beneficial ownership of all such shares.
(7) The listing of individuals as executive officers in this table or
elsewhere in this Joint Proxy Statement/Prospectus should not be
interpreted as an indication that such individuals are considered to be
executive officers of CU Bancorp or CU Bank for any other purposes.
(8) Includes as if currently outstanding 216,296 shares subject to options
held by directors and executive officers which are exercisable within
60 days from the CU Record Date.
18
<PAGE> 388
(9) The address of all listed individuals, with the exception of
Dimensional Fund Advisers, Inc. and FBL Investment 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. The address of FBL Investment Advisory
Securities, Inc. is 5400 University Avenue, West Des Moines, IA.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
Some of CU Bancorp's directors and executive officers, as well as their
immediate family and associates, are customers of, and have had banking
transactions with, CU Bank in the ordinary course of CU Bank's business, and CU
Bank expects to have such limited ordinary banking transactions with such
persons in the future. CU 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 CU 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 CU
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 CU Bank's respective lending policies and statutory
lending limits, and prior approval of the CU Board is required for these loans.
There were no loans to directors, executive officers or their immediate
family or associates as of December 31, 1995.
OTHER MATERIAL TRANSACTIONS
Except as set forth below, there are no other existing or proposed
material transactions between CU Bancorp and CU Bank and any of CU Bancorp's
directors, executive officers, or beneficial owners of five percent or more of
CU Stock, or the immediate family or associates of any of the foregoing persons.
In 1993, prior to his election as a director of CU Bancorp, Kenneth
Bernstein entered into an agreement with CU Bank to assist in collection of a
large charged off credit. In exchange for Mr. Bernstein's assistance, CU Bank
agreed to pay him 50% of amounts recovered on such credit (after deduction of
legal fees). Although CU Bank, with Mr. Bernstein's assistance, located the
debtor, the debtor subsequently filed bankruptcy and no amounts have been
recovered.
REGULATORY AGREEMENTS
In November 1993, CU 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
CU 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 CU Bancorp, originally entered into In
August, 1992. The termination of the MOU was taken
19
<PAGE> 389
in recognition of CU Bancorp's compliance with these requirements.
20
<PAGE> 390
APPENDIX C
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
MARK ONE:
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee required)
For the transition period _____ to _____.
Commission File No. 0-11160
HOME INTERSTATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3657758
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806
(address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (310) 988-9600
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 (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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 the Form 10-K or any amendment to this
Form 10-K. / /
As of JANUARY 26, 1996, the aggregate market value of the voting shares
held by non-affiliates (all persons other than executive officers, directors or
greater than 10% shareholders) of the Registrant was approximately
$47,023,976.
An aggregate of 4,212,280 shares of common stock were
outstanding at JANUARY 26, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
1996 Proxy Statement Part III
================================================================================
<PAGE> 391
PART I
ITEM 1. BUSINESS
THE COMPANY
Home Interstate Bancorp (the "Company") is a corporation which was
organized under the laws of the State of California on September 17, 1979 and
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). The Company's principal asset is the capital stock of
Home Bank (the "Bank"), which became its wholly-owned subsidiary on November 8,
1982.
The Company's principal business is to serve as a holding company for the
Bank and its principal source of income is derived from dividends paid by the
Bank. The payment of dividends to the Company by the Bank is subject to
restrictions that could limit the Company's payment of dividends to its
shareholders. As of December 31, 1995, the Company had total consolidated assets
of approximately $424,000,000, total consolidated net loans and leases of
approximately $208,000,000 and total consolidated deposits of approximately
$369,000,000.
THE BANK
The Bank is a corporation which was organized under the laws of the State
of California on February 10, 1950. The Bank was licensed by the California
State Banking Department and commenced operations as a state-chartered bank on
October 28, 1950. The Bank is a member of the Federal Reserve System. The
deposits of each of the Bank's clients are insured up to the maximum extent
permitted by law. The Bank provides a wide range of banking services to
individuals and business concerns located in and around its primary service
areas. Those services include personal and business checking accounts, NOW and
savings accounts and time certificates of deposit. The Bank offers a variety of
special banking and financial services to its customers, which include
collection accounting, telephone transfers between accounts, travelers' checks,
money orders, safe deposit boxes, discount stock brokerage and notary services.
The Bank acts as a merchant depository for cardholder drafts. The Bank also has
walk-up, drive-through and ATM facilities with extended hours for customers'
convenience.
The Bank's primary service areas are southern Los Angeles County and
certain portions of Orange County. The Bank's service areas encompass a diverse
economy which includes commercial, retail, manufacturing, agricultural, health
care, recreational and governmental sectors. The Bank conducts its business
through fifteen full service branches in Los Angeles County and Orange County.
Ten of those offices are located in Los Angeles County in the cities of Signal
Hill, Redondo Beach, Paramount, Hacienda Heights, Lynwood, Manhattan Beach,
Torrance, Lomita and two in San Pedro. The other five offices are located in
Orange County in the cities of Los Alamitos, Westminster, Fountain Valley, Brea
and Irvine. The Bank's main office is located in Signal Hill, California.
Most of the Bank's deposits are obtained from small and medium-sized
businesses, professionals and individuals. As of December 31, 1995, the Bank had
approximately 44,763 deposit accounts, representing 23,331 non-interest bearing
(demand) accounts with balances totaling approximately $132,208,000, for an
average balance per account of approximately $5,667; 17,407 savings,
interest-bearing demand and money market accounts with balances totaling
approximately $153,891,000 for an average balance per account of approximately
$8,841; and 4,025 time certificate of deposit accounts with balances totaling
approximately $82,932,000 for an average balance per account of approximately
$20,604.
The Bank's lending activities are concentrated in four primary areas:
commercial loans, real estate construction loans, other real estate loans and
installment loans. At December 31, 1995, these four categories accounted for
approximately 37%, 8%, 39% and 16%, respectively, of the Bank's loan portfolio.
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY -- Financial Condition --
Loans."
2
<PAGE> 392
The Bank's commercial loan department provides personalized financial
services to the diverse commercial and professional businesses in its primary
service areas. However, it does not concentrate on any single industry. The
Bank's commercial credit services include accounts receivable financing,
equipment financing, working capital and growth loans, SBA loans and letters of
credit. Significant emphasis is placed on the borrower's earning history,
capitalization, secondary sources of financing repayment (e.g., accounts
receivable) and highly liquid collateral (e.g., time deposits or marketable
securities).
The Bank makes real estate construction loans and a variety of other real
estate loans. The primary focus of the Bank's real estate construction activity
is to provide short-term loans (less than one year) to local individuals and
developers for the construction of single family residences and small commercial
developments in the Bank's primary service areas. The Bank also provides limited
short term real estate financing to individuals and corporations in its primary
service areas. The Bank further offers home improvement and real estate equity
loans to individuals in its primary service areas. Also, the Bank's installment
and consumer loans include automobile, home improvement, home equity loans and
other secured and unsecured lines of credit.
Although the Bank does not directly offer trust or international banking
services, such services are offered by the Bank indirectly through correspondent
institutions.
Neither the Company nor the Bank holds any patents, licenses (other than
licenses obtained by the Bank from bank regulatory authorities), franchises or
concessions.
RECENT EVENTS
On January 10, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") by and among the Company, the Bank, CU Bancorp
("CU") and California United Bank, National Association ("CUB"), a wholly-owned
subsidiary of CU pursuant to which the Company will merge (the "Merger") with
and into CU. Under the terms of the Agreement, shareholders of the Company will
receive 1.409 shares of CU common stock for each share of the Company's common
stock. It is anticipated that the Merger will qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code and will be
accounted for as a pooling of interests. The exchange of stock is expected to
result in the Company's shareholders owning approximately 52% of the combined
company, and CU shareholders owning approximately 48%.
The combined company will be under the management of the current CU
Chairman and Chief Executive Officer, Stephen G. Carpenter, as Chairman and
Chief Executive Officer, the Company's President and Chief Executive Officer,
James P. Staes, as Vice Chairman, and current CU President, David I. Rainer, as
President. It is anticipated that the Board of Directors of the combined company
will be comprised of five of the current directors from each of the Company and
CU. At December 31, 1995, CU had total assets of $325,309,000 and total
shareholders' equity of $33,006,000.
COMPETITION
The banking and financial services business in California generally,
and in the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The Bank
competes for loans and deposits and customers for financial services with other
commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions and other nonbank financial service providers. Many
of these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader array of financial
services than the Bank. In order to compete with the other financial services
providers, the Bank principally relies upon local promotional activities,
personal relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs. In
those instances where the Bank is unable to accommodate a customer's needs, the
Bank will arrange for those services to be provided by its correspondents.
3
<PAGE> 393
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 Board of Governors of the Federal Reserve System (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 merge the deposit
insurance funds applicable to commercial banks and savings associations and
impose a one-time assessment on savings associations to recapitalize the deposit
insurance fund applicable to savings associations. In addition, legislation has
been proposed 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 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 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
4
<PAGE> 394
requirements on such debt. Under certain circumstances, the Company must file
written notice 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.
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
subsidiary are subject to examination by, and may be required to file reports
with, the California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
5
<PAGE> 395
THE BANK
The Bank, as a California state chartered bank and a member of the
Federal Reserve System, is subject to primary supervision, periodic examination
and regulation by the California Superintendent of Banks ("Superintendent") and
the Federal Reserve Board. If, as a result of an examination of a bank, the
Federal Reserve Board 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 Federal Reserve Board. 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 money 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 the Bank are insured by the Federal Deposit Insurance
Corporation (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." Because
the Bank's deposits are insured by the FDIC, the Bank is also subject to certain
FDIC rules and regulations.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal 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 and capital requirements. Further, the Bank is
required to maintain certain levels of capital. See "ITEM 1. BUSINESS -
Supervision and Regulation - Capital Standards."
RESTRICTIONS ON DIVIDENDS BY THE COMPANY AND 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. California law restricts
the amount available for cash dividends by state-chartered banks to the lesser
of retained earnings or the bank's net income for its last three fiscal years
(less any distributions to shareholders made during such period).
Notwithstanding this restriction, a bank may, with the prior approval of the
Superintendent, pay a cash dividend in an amount not exceeding the greater of
the retained earnings of the Bank, the net income for such bank's last preceding
fiscal year, and the net income of the bank for its current fiscal year.
As a Federal Reserve Board member bank, there are separate limitations
imposed under applicable Federal Reserve Board regulations with respect to the
Bank's ability to pay dividends to the Company. In particular, the prior
approval of the Federal Reserve Board is required if the total of all dividends
declared by a Federal Reserve Board member 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
or to a fund for the retirement of preferred stock. Such authority may be
delegated to the local Federal Reserve Bank under certain circumstances.
The Federal Reserve Board also has the authority to prohibit the Bank
from engaging in activities that, in the Federal Reserve Board'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 Federal Reserve Board could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice. Further, the Federal Reserve Board has established
guidelines with respect to the maintenance of appropriate levels of capital by
banks or bank holding
6
<PAGE> 396
companies under its 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. The Superintendent may impose similar
limitations on the conduct of California-chartered banks. 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 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 also imposes certain
restrictions with respect to transactions involving the Company and other
controlling persons of the Bank. Additional restrictions on transactions with
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 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 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 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 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 risk-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 is
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.
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
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<PAGE> 397
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, the Bank currently is unable to predict
the impact of the proposal on the Bank 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 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.
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.
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, 1995.
<TABLE>
<CAPTION>
December 31, 1995
-----------------
Minimum
Actual Capital
------
(In thousands) Amount Ratio Requirement
------ ----- -----------
<S> <C> <C> <C>
Leverage ratio ..................... $44,793 10.69% 4.0%
------- -----
Tier 1 risk-based ratio ............ $44,793 16.42% 4.0%
------- -----
Total risk-based ratio ............. $47,906 17.56% 8.0%
------- -----
</TABLE>
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<PAGE> 398
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% (3% if the institution receives
the highest rating from its primary regulator)
"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% (3% if the Leverage ratio less than 3%.
institution receives the highest rating
from its primary regulator)
"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
9
<PAGE> 399
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
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by Federal Deposit
Insurance Corporation Improvement Act ("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
10
<PAGE> 400
address problems at insured depository 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, 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 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. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as
the Bank 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 regulator (in the Bank'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.
11
<PAGE> 401
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>
Assessment Rates Effective through 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>
Assessment Rates Effective January 1, 1996
<TABLE>
<CAPTION>
Group A Group B Group C
<S> <C> <C> <C>
Well Capitalized .......... 0* 3 17
Adequately Capitalized .... 3 10 24
Undercapitalized .......... 10 24 27
</TABLE>
*Subject to a statutory minimum assessment of $1,000 per semi-annual
period (which also applies to all other assessment risk
classifications).
A number of proposals have recently been introduced in Congress to
address the disparity in bank and thrift deposit insurance premiums. On
September 19, 1995, legislation was approved by the House Banking Committee that
would, among other things: (i) impose a requirement on all Savings Association
Insurance Fund ("SAIF") member institutions to fully recapitalize the SAIF by
paying a one-time special assessment of approximately 85 basis points on all
assessable deposits as of March 31, 1995, which assessment would be due as of
January 1, 1996, (ii) spread the responsibility for Financing Corporation
("FICO") interest payments across all FDIC-insured institutions on a pro-rata
basis, subject to certain exceptions, (iii) require that deposit insurance
premium assessment rates applicable to SAIF member institutions be no less than
deposit insurance premium assessment rates applicable to BIF member
institutions, (iv) provide for a merger of the BIF and the SAIF as of January 1,
1998, (v) require savings associations to convert to state or national bank
charters by January 1, 1998, (vi) require savings associations to divest any
activities not permissible for commercial banks within five years, (vii)
eliminate the bad-debt reserve deduction for savings associations, although
savings associations would not be required to recapture into income their
accumulated bad-debt reserves, (viii) provide for the conversion of savings and
loan holding companies into bank holding companies as of January 1, 1998,
although unitary savings and loan holding companies authorized to engage in
activities as of September 13, 1995 would have such authority grandfathered
(subject to certain limitations) and (ix) abolish the Office of Thrift
Supervision ("OTS") and transfer the OTS's regulatory authority to the other
federal banking agencies. The legislation would also provide that any savings
association that would become undercapitalized under the prompt corrective
action regulations as a result of the special deposit premium assessment could
be exempted from payment of the assessment, provided that the institution would
continue to be subject to the payment of semiannual assessments under the
current rate schedule following the recapitalization of the SAIF.
On September 20, 1995, similar legislation was introduced in the Senate.
The Senate proposal would similarly impose a one-time special assessment on
savings associations in order to recapitalize the SAIF, and includes provisions
similar to certain others contained in the House legislation. Unlike the House
legislation,
12
<PAGE> 402
however, the Senate bill does not include a comprehensive approach for merging
the savings association and commercial bank charters. The Senate bill remains
pending before the Senate Banking Committee.
The future of both of these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act (the
"Reconciliation Act"). The Reconciliation Act, which was passed by both the
House and Senate on November 17, 1995 and vetoed by the President on December 6,
1995, would: (i) recapitalize the SAIF through a special assessment of between
70 and 80 basis points on deposits held by SAIF member institutions as of March
31, 1995; (ii) provide an exemption from this requirement for certain weaker
institutions and a 20% reduction in the SAIF-assessable deposits of so-called
"Oakar banks"; (iii) expand the assessment base for FICO payments to include all
FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1, 1998, but
only if no insured depository institution is a savings association on that date;
(v) establish a special reserve for the SAIF on January 1, 1998; and (vi)
prohibit the FDIC from setting semiannual assessments in excess of the amount
needed to maintain the reserve ratio of any fund at the designated reserve
ratio. The Reconciliation Act does not include a provision to merge the charters
of savings associations and commercial banks.
In light of the different proposals currently under consideration and
the uncertainty of the legislative process generally, management cannot predict
whether the proposed legislation will be passed or in what form. Accordingly,
the effect of any such legislation on the Bank cannot be determined.
INTERSTATE BANKING AND BRANCHING
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. 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.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which the Company operates, although it is difficult to
assess the impact that such increased competition may have on the Company's
operations.
13
<PAGE> 403
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. The Federal Reserve Board has rated
the Bank "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.
ACCOUNTING CHANGES
In October 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments." This
statement addresses additional disclosure requirements for derivatives and other
complex financial instruments. The Company adopted SFAS No. 119 on December 31,
1994. The disclosure required by SFAS No. 119 at December 31, 1995 is presented
in Note 3 to the Company's Consolidated Financial Statements. SEE "ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
COMPLIANCE WITH ENVIRONMENTAL REGULATION
Management of the Company and its subsidiary is unaware of any material
effect upon the Company's and the Bank's capital expenditures, earnings or
competitive position as a result of compliance with Federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment. Based on current Federal, state and local environmental laws and
regulations, the Company does not intend to make any material capital
expenditures for environmental control facilities for either the remainder of
its current fiscal year or its succeeding fiscal year.
EMPLOYEES
As of December 31, 1995, the Company and its wholly-owned subsidiary had a
total of 198 full-time employees and 58 part-time/flex employees. The management
of the Company believes that its employee relations are satisfactory.
14
<PAGE> 404
ITEM 2. PROPERTIES
The Bank owns both the land and the buildings at its office facilities at
the following locations:
<TABLE>
<CAPTION>
LOCATION USE OF FACILITIES SQUARE FEET OF OFFICE SPACE
- -------- ----------------- ---------------------------
<S> <C> <C>
Redondo Beach Branch Office 7,774
1217 North Catalina Avenue
Redondo Beach, California
Paramount Branch Office 9,706
15943 Paramount Boulevard
Paramount, California
Paramount Warehouse 12,353
15625 Lakewood Boulevard
Paramount, California
Hacienda Heights Branch Office 7,623
2040 South Hacienda Boulevard
Hacienda Heights, California
Fountain Valley Branch Office 6,978
17010 Magnolia Avenue
Fountain Valley, California
Lynwood Branch Office 8,134
3645 Imperial Highway
Lynwood, California
Signal Hill Branch Office/Administration 36,369
2633 Cherry Avenue
Signal Hill, California
Los Alamitos Branch Office 7,915
10942 Pine Street
Los Alamitos, California
Torrance Branch Office 6,112
2860 W. Sepulveda Boulevard
Torrance, California
Lomita Branch Office 2,160
2270 Pacific Coast Highway
Lomita, California
San Pedro Branch Office 7,318
740 S. Gaffey Street
San Pedro, California
</TABLE>
The Bank owns in fee the buildings and leases the land at its office
facilities at the following locations:
<TABLE>
<CAPTION>
MONTHLY RENT OF
SQUARE FEET GROUND LEASE TERM OF
LOCATION USE OF FACILITIES OF OFFICE SPACE AS OF 12/31/95 GROUND LEASE
- -------- ----------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Brea Branch Office 6,483 $ 1,556 2/9/76 to 2/9/2001
1643 East Imperial Highway with two ten year
Brea, California options
Manhattan Beach Branch Office 6,050 $ 6,541 5/1/80 to 4/30/2000
3300 North Sepulveda Boulevard with two ten year
Manhattan Beach, California options
Westminster Branch Office 8,094 $ 1,902 1/1/74 to 12/31/2011
535 Westminster Mall with two ten year
Westminster, California options
</TABLE>
15
<PAGE> 405
The Bank leases its office facilities at the following locations:
<TABLE>
<CAPTION>
MONTHLY RENT OF
SQUARE FEET GROUND LEASE TERM OF
LOCATION USE OF FACILITIES OF OFFICE SPACE AS OF 12/31/95 LEASE
- -------- ----------------- --------------- -------------- -----
<S> <C> <C> <C> <C>
Irvine Branch Office 6,278 $14,031 11/1/80 to 11/1/2009
4180 Barranca Parkway
Irvine, California
North San Pedro Branch Office 4,000 $ 7,970 7/15/94 to 2/12/99
1090 N. Western Ave with three five year
San Pedro, California options
</TABLE>
The Company does not directly own or lease any property. Its
administrative offices are located at the Bank's headquarters in Signal
Hill.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of doing business, the Company and the Bank
occasionally becomes a party to litigation. Currently, there are two cases
pending against the Bank which relate to certain depository accounts that
were opened for varying periods from twenty-nine days to four months. In the
opinion of management, and the Bank's legal counsel, the disposition of all
pending litigation involving the Company and the Bank will have no adverse
material effect upon its financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE> 406
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded in the over-the-counter market, but is
not included for quotation on the National Association of Securities Dealers
Automated Quotation System, nor is it listed on any exchange. Trading in the
Company's Common Stock has been infrequent, and such trades cannot be
characterized as constituting an active trading market. Management is aware of
six securities dealers which make a market for the Company's Common Stock: (1)
Burford Capital/GBS, La Crescenta, California; (2) Crowell Weedon & Co., Los
Angeles, California; (3) Dean Witter Reynolds, Inc., Long Beach, California;
(4) Hoefer & Arnett, Inc., San Francisco, California; (5) Ryan, Beck & Co., West
Orange, New Jersey; and (6) Smith Barney, Harris Upham & Co., Inc., Los Angeles,
California.
The information set forth in the table below summarizes high and low bid
prices as reported by Crowell Weedon & Co., a market maker for the Company's
Common Stock and the volume of trading as reported by Bloomberg, for the periods
indicated. The prices below do not include retail markups, mark-downs or
commissions and may not necessarily have represented actual transactions.
Additionally, there may have been transactions at prices other than those shown
during that time.
<TABLE>
<CAPTION>
HIGH LOW TRADING VOLUME
---------- --------- ----------------
<S> <C> <C> <C>
1995
First Quarter 9.625 9.625 27,720
Second Quarter 9.75 9.625 83,265
Third Quarter 12.00 9.75 165,690
Fourth Quarter 12.25 11.25 32,175
1994
First Quarter 10.25 9.50 70,311
Second Quarter 10.25 9.50 70,000
Third Quarter 10.50 9.875 82,700
Fourth Quarter 10.75 9.625 66,600
</TABLE>
On December 31, 1995, there were approximately 1,067 shareholders of record
of the Company's Common Stock.
DIVIDENDS
During 1995 the Company declared cash dividends in the aggregate of
$1,654,754 or $.41 per share and paid cash dividends in the aggregate of
$1,298,778 or $.325 per share. In January 1996, the Company paid cash dividends
in the aggregate of $358,008 or $.085 per share. During 1994 the Company paid
cash dividends of $1,141,305 or $.30 per share. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Capital Resources." All per share amounts disclosed in this Annual
Report, except cash dividends per share, are adjusted to give effect to five
percent stock dividends declared in the fourth quarters of 1995, 1994 and 1991.
As a bank holding company without significant assets other than its equity
interest in the Bank, the Company's ability to pay dividends primarily depends
upon the dividends it receives from the Bank which, in turn, are subject to
certain limitations. The Company's ability to pay dividends is also limited by
state corporation law. See "ITEM 1. BUSINESS-- Supervision and Regulation --
Restrictions on Dividends by the Company and Transfers of Funds to the Company
by the Bank."
17
<PAGE> 407
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial data
for the Company as of and for each of the years in the five-year period ended
December 31, 1995. This table is qualified in its entirety by the detailed
information and financial statements presented elsewhere herein and should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes related thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained herein (dollars in thousands,
except per share data).
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF INCOME DATA
Interest income $ 31,651 $ 28,983 $ 27,118 $ 31,851 $ 38,895
Interest expense 7,155 6,415 6,736 10,054 16,607
---------- ---------- ---------- ---------- ----------
Net interest income before loss provision 24,496 22,568 20,382 21,797 22,288
Provision for possible loan losses 2,100 800 750 6,000 2,150
Non-interest income 5,213 4,507 7,758 5,636 5,644
Non-interest expense 21,872 21,299 20,341 20,466 25,646
Net gain (loss) on other real estate owned (614) (488) (1,209) (337) 0
----------- ----------- ---------- ---------- ----------
Earnings before income taxes 5,123 4,488 5,840 630 136
Provision (benefit) for income taxes 1,359 1,169 2,215 188 (879)
----------- ----------- ---------- ---------- ----------
Net income $ 3,764 $ 3,319 $ 3,625 $ 442 $ 1,015
=========== =========== ========== ========== ==========
SUMMARY BALANCE SHEET DATA (YEAR END)
Net loans $ 208,110 $ 195,831 $ 196,471 $ 233,290 $ 255,757
Allowance for loan losses 3,113 2,818 3,573 4,011 3,782
Investment securities:
Taxable 125,814 166,055 108,501 79,968 55,887
Non-Taxable 7,082 6,881 10,685 17,979 39,055
Unrealized gains (losses), net 990 (5,056) 1,935 0 0
Earning assets 358,719 378,485 333,230 344,647 354,680
Total assets 423,792 439,632 391,300 408,974 422,956
Interest-bearing deposits 236,823 256,860 229,725 252,108 273,389
Total deposits 369,031 392,269 335,800 361,907 375,123
Shareholders' equity (6) 51,416 45,654 47,411 43,649 45,156
PER SHARE DATA
Net Income (1) $ .90 $ .80 $ .87 $ .10 $ .24
Book value (1)(2) 12.28 10.93 11.35 10.35 10.59
Cash dividends declared .41 .30 .225 .30 .60
Weighted average shares outstanding (1) 4,177,865 4,175,207 4,175,084 4,214,630 4,272,609
SELECTED FINANCIAL RATIOS
Return on average shareholders' equity 7.78% 7.14% 8.04% 1.01% 2.21%
Return on average assets .89% .77% .90% .11% .23%
Net interest spread (3) 5.76% 5.37% 5.20% 5.17% 4.31%
Net interest yield (4) 6.76% 6.18% 5.98% 6.13% 5.80%
Nonaccrual loans to total loans 1.53% 3.32% 2.05% 1.29% .73%
Nonperforming assets (5) to average
total assets 1.94% 2.26% 2.00% 2.84% 3.09%
Net charge-offs to average loans .87% .78% .55% 2.32% .46%
Tier 1 Capital to risk weighted assets 16.96% 16.25% 16.07% 13.28% 12.32%
Total capital to risk weighted assets 18.09% 17.30% 17.32% 14.53% 13.51%
Leverage ratio (Tier 1 Capital to
total average assets) 11.05% 10.17% 10.38% 9.21% 8.94%
Average total shareholders' equity to
average total assets 11.38% 10.82% 11.23% 10.49% 10.46%
Total interest expense to gross
interest income 22.61% 22.13% 24.84% 31.57% 42.70%
Loans to deposits at period end 56.39% 49.92% 58.51% 64.46% 68.18%
Cash dividends declared to net income 43.97% 34.38% 23.50% 258.22% 221.52%
</TABLE>
- --------------------------
(footnotes on the following page)
18
<PAGE> 408
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the Company's consolidated financial condition
and results of operations should be read in conjunction with the consolidated
financial statements of the Company and the notes related thereto presented
elsewhere in this Annual Report.
FINANCIAL CONDITION
GENERAL
The Company's consolidated assets were approximately $423,792,000 at
December 31, 1995, a decrease of 3.60% or $15,840,000 from December 31, 1994,
which had consolidated assets of approximately $439,632,000. Cash and cash
equivalents increased 8.98% or $4,401,000, of which federal funds sold increased
$7,800,000 and cash and due from banks decreased $3,399,000. Securities held to
maturity at December 31, 1995, totaled $13,131,000, as compared to $-0- at
December 31, 1994. Securities available for sale, net of unrealized gains
(losses) decreased 28.07% or $47,125,000 and net loans increased 6.27% or
$12,279,000 when comparing December 31, 1995 to December 31, 1994. Deposits
decreased 5.92% or $23,238,000 when comparing the same periods. The reduction in
securities available for sale reflects the sale of such securities to fund the
contraction in deposits, primarily in the area of savings and interest bearing
demand deposits as deposit customers sought alternatives for higher yields on
their investment dollars. Securities available for sale were also utilized to
expand the loan portfolio and to replenish overnight federal funds that had
experienced a drop earlier in the year as a result of the contraction in
deposits. Management utilizes overnight federal funds as a vehicle that allows
immediate funding for loan commitments and potentially large deposit withdrawals
while earning interest income. Real estate owned at December 31, 1995 increased
126.11% or $2,743,000 compared to December 31, 1994. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Financial Condition -- Nonperforming Loans and Real Estate Owned."
The allowance for possible loan losses at December 31, 1995 increased 10.47% or
$295,000 compared to December 31, 1994. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Financial Condition -- Allowance for Possible Loan Losses." At December 31,
1994, assets increased 12.35% or $48,332,000 from December 31, 1993, which had
total assets of $391,300,000. The increase in total assets for the year ended
December 31, 1994 compared to December 31, 1993, was primarily in securities
available for sale which increased 38.61%, loans decreased 0.70% and deposits
increased 16.82%. As the demand for loans remained low in 1994, the cash flow
from the increase in deposits was used to purchase securities. The significant
increase in deposits was a result of two purchase and assumption agreements with
the FDIC in 1994. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --
Note 15 Purchase and Assumption of Certain Assets and Liabilities."
- ----------------------------
(footnotes from the previous page)
(1) Net income per share and book value per share were restated to reflect the
effect of a 5% stock dividend issued in 1995, 1994 and 1991.
(2) Represents common shareholders' equity divided by the number of shares
outstanding at period end without giving effect to the possible dilutive
effect of the exercise of outstanding stock options which is deemed by
management to be immaterial.
(3) 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 basis.
(4) Represents net interest income as a percentage of average interest-earning
assets. The net interest yield is not computed on a tax equivalent basis.
(5) Nonperforming assets consist of non-accrual loans, loans past due 90 days
or more, restructured loans, non-accrual securities and real estate owned.
(6) Shareholders' equity includes $580,000, $(2,956,000) and $989,000 of
unrealized gains (losses), net of deferred taxes at December 31, 1995, 1994
and 1993, respectively.
19
<PAGE> 409
Shareholders' equity was $51,416,000 at December 31, 1995, which reflects
an increase of 12.62% or $5,762,000 from December 31, 1994. This increase
includes a change of $3,536,000 in net unrealized gains on securities available
for sale, net of deferred taxes. Shareholders' equity was $45,654,000 at
December 31, 1994, which reflects a decrease of 3.71% or $1,757,000 from
December 31, 1993. This decrease includes a change of $3,945,000 in net
unrealized losses on securities available for sale, net of deferred taxes. The
Company's regulatory capital to assets ratios at December 31, 1995 continued to
remain at levels well above regulatory requirements. The Company's capital to
asset ratios at December 31, 1995 and December 31, 1994, were 16.96% and 16.25%
for tier 1 capital to risk weighted assets, 18.09% and 17.30% for total capital
to risk weighted assets and 11.05% and 10.17% for the leverage ratio (tier 1
capital to total average assets), respectively.
MERGERS AND ACQUISITIONS
On January 10, 1996, the Company entered into a definitive agreement to
merge with and into CU Bancorp, a California corporation and parent of
California United Bank, National Association. Under the terms of the definitive
agreement, shareholders of the Company will receive 1.409 shares of CU Bancorp
stock for each share of the Company's stock. The definitive agreement is subject
to shareholder and regulatory approval and is expected to be completed by the
end of the second quarter 1996. At December 31, 1995 CU Bancorp had total assets
of $325,309,000 and total shareholders' equity of $33,006,000.
In October 1995, the Bank entered into a deposit purchase agreement with
Southern California Bank to purchase the deposits of their Signal Hill office.
Upon regulatory approval the Bank consummated the purchase on February 20, 1996.
The deposits purchased in the transaction totaled in aggregate $1,656,000 which
reflects less than 1% of total deposits and assets of the Bank.
In April and July of 1994, the Bank entered into Purchase and Assumption
Agreements (P & A Agreements) with the FDIC. See "ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- Note 15 Purchase and Assumption of Certain Assets and
Liabilities." Under the terms of the P & A Agreement for the Mechanics National
Bank (MNB) and the FDIC Consortium Agreement effective April 1, 1994, the Bank
was named as lead bank. As lead bank, a fee was paid to the Bank and the Bank
was allowed to collect certain other administrative fees from the other
Consortium Members. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of
Operations -- Other Operating Revenue." Two branch operations of MNB were
acquired creating a new Paramount office facility into which the Bank then
merged its existing Paramount office and the MNB Torrance office was merged into
the Bank's existing Torrance office. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Results of Operations -- Other Operating Expense." The Bank's old Paramount
office is currently being used as a warehouse facility and the Bank opted not to
keep the Torrance facility of MNB.
Under the terms of the P & A Agreement for the Bank of San Pedro effective
July 15, 1994, the Bank was the sole institution involved. The Bank of San Pedro
originally had six branch locations of which the Bank opted to keep two
facilities open and merged the other four into other offices depending on their
location. Some of the employees of the Bank of San Pedro were hired to staff the
two new locations.
LOANS
Net loans totaled $208,110,000 at December 31, 1995, an increase of 6.27%
or $12,279,000 from December 31, 1994, which totaled $195,831,000. This modest
increase is primarily in the areas of real estate construction and other real
estate loans. Other real estate loans primarily consists of commercial loans
secured by first trust deeds on commercial real estate. Due to the easing of
interest rates by the Federal Reserve Board in 1995 loan requests shifted into
real estate commercial and construction loans. Some commercial customers felt
that it was the right time to purchase their own facility or expand into larger
facilities. Notwithstanding the purchase of loans under the P & A Agreement for
the Bank of San Pedro, net loans decreased 0.33% or $640,000 from December 31,
1994 to December 31, 1993. The decrease from December 31, 1993 to December 31,
1994 reflected a slow demand for loans. Net loans to total assets comprised
49.11%, 44.54% and 50.21% at December 31, 1995, 1994 and 1993, respectively. The
ratio of total
20
<PAGE> 410
average loans to total average deposits was 55.58%, 52.55% and 61.72% for the
years ended December 31, 1995, 1994 and 1993, respectively.
Commercial loans totaled approximately $79,600,000 at December 31, 1995, a
decrease of 17.85% or $17,300,000, which totaled approximately $96,900,000 at
December 31, 1994. Commercial loans increased 9.99% or $8,800,000 at December
31, 1994 from December 31, 1993, which totaled approximately $88,100,000.
Commercial lending is on a non-speculative basis primarily to professionals and
companies with sales from less than $1,000,000 to $15,000,000 or more annually.
The commercial loan portfolio is diversified with no major concentration in any
specific industry. The decrease of commercial loans in 1995, is primarily due to
an apparent shifting of loan demand to real estate commercial. Management cannot
predict what effect new regulatory issues, Federal Reserve Board's monetary
policies or consumer confidence in the economy will have on the loan portfolio.
Accounts receivable loans, (which are included in commercial loans),
totaled approximately $7,100,000 at December 31, 1995, a decrease of 16.47% or
$1,400,000 from December 31, 1994, which had accounts receivable loans of
approximately $8,500,000. These loans increased 88.89% or $4,000,000 from
December 31, 1993, which had accounts receivable loans of approximately
$4,500,000. The decrease in 1995 was due to payments on outstanding balances
exceeding the advances on available lines. The increase in 1994 was primarily
due to the lifting of a self imposed moratorium in the fourth quarter of 1993
which allowed for new accounts receivable lending. Accounts receivable loans are
administered by a separate department of professionals who periodically audit
and examine each borrower.
Real estate construction loans totaled approximately $16,900,000 at
December 31, 1995, an increase of 69.00% or $6,900,000 from December 31, 1994,
which totaled approximately $10,000,000. Real estate construction loans
decreased 58.51% or $14,100,000 at December 31,1994 from December 31, 1993,
which totaled approximately $24,100,000. The increase in 1995 was due to new
construction lending stimulated by lower interest rates. The decrease in 1994
was due primarily to the decline in demand for construction loans reflecting the
weak real estate market in Southern California in 1994 and 1993. The Company's
real estate construction loans are primarily for single family homes located
within its market area. The majority of these homes are designed for first time
and middle income buyers. The Company provides interim construction financing
for both residential and commercial projects.
Other real estate loans totaled approximately $83,000,000 at December 31,
1995, an increase of 27.30% or $17,800,000 from December 31, 1994, which totaled
approximately $65,200,000. Other real estate loans increased 2.68% or $1,700,000
at December 31, 1994 from December 31, 1993, which had other real estate loans
that totaled approximately $63,500,000. This category of loans includes
commercial loans secured by first trust deeds on commercial real estate. Such
loans totaled approximately $66,000,000 and $43,700,000 or 79.52% and 67.02% of
all other real estate loans at December 31, 1995 and 1994, respectively. The
increase in 1995 was primarily due to the desire of commercial customers to own
their facility or expand into larger facilities. These loans are not intended as
permanent financing of real estate, but are secured by commercial real estate
with maturity dates normally running from three to seven years with certain
exceptions for exceptional borrowers, properties and purposes. At the conclusion
of the term of these loans, approximately 50% of them are refinanced for short
terms after reevaluating the loan to ensure that it meets the Bank's current
lending and pricing standards.
Another segment of the real estate loan portfolio is home equity lines of
credit tied to the prime rate which totaled approximately $8,400,000 or 10.12%
of other real estate loans at December 31, 1995. This is a decrease of 6.66% or
$600,000 from December 31, 1994, which totaled approximately $9,000,000 or
13.80%. Home equity lines of credit decreased 19.64% or $2,200,000 at December
31, 1994 from December 31, 1993, which had home equity lines of credit that
totaled approximately $11,200,000 or 17.64%. The decreases in 1995 and 1994 were
due to payoffs from refinances as consumers took advantage of the lower interest
rate environment. The interest rates began to rise in March 1994 and then began
to drop in 1995, as a direct result of Federal Reserve Board's monetary policy
which has influenced the amount of refinancing activity. These lines of credit
are to individuals secured by first or second deeds of trust on their primary
single family residences. The Bank uses third party appraisers who are either
state licensed or certified to appraise such properties. The Bank
21
<PAGE> 411
does not make long term conventional real estate mortgage loans and as such does
not offer adjustable rate mortgages.
The Company is subject generally to the fluctuations in the California
residential and commercial real estate market and in particular to the markets
in Los Angeles and Orange County. Current general economic conditions and, more
specifically, real estate market conditions could have a significant impact on
the Company's real estate and construction loan portfolio. A continued decline
in real estate values and/or the demand for residential and commercial real
estate in California or in the Los Angeles and Orange County areas could have an
adverse impact upon the financial condition and results of operations of the
Company. The Company has underwriting procedures designed to identify what it
believes to be acceptable levels of risk.
Installment loans totaled approximately $33,600,000 at December 31, 1995,
an increase of 24.44% or $6,600,000 from December 31, 1994, which totaled
approximately $27,000,000. Installment loans increased 9.31% or $2,300,000 at
December 31, 1994 from December 31, 1993, which had installment loans that
totaled approximately $24,700,000. Dealer originated automobile loans totaled
approximately $21,400,000 at December 31, 1995, an increase of 57.35% or
$7,800,000 from December 31, 1994, which had loans of $13,600,000. December 31,
1994 dealer originated automobile loans showed an increase of 24.77% or
$2,700,000 from December 31, 1993. The Company attributes the increase of these
loans to improved efficiencies of the centralized consumer loan department and
increased focus on dealer financing. The Company offers a wide variety of direct
new and used automobile financing whose loan terms vary depending upon the
length and amount of the loan, the type and value of the automobile and the
creditworthiness of the borrower.
In addition, the Company offers other types of consumer installment loans
such as personal loans, fixed rate home equity loans and home improvement loans.
These loans are made on a direct simple interest basis and totaled approximately
$12,200,000 at December 31, 1995, compared with approximately $13,400,000 at
December 31, 1994, a decrease of 8.96% or $1,200,000. At December 31, 1994,
these loans decreased 2.19% or $300,000 compared with approximately $13,700,000
at December 31, 1993. These decreases were attributed to the interest rate
environment and significant amounts of home mortgage refinancing activities.
Under regulations governing California state-chartered banks, the Bank may
lend up to 15% of its adjusted capital on an unsecured basis and 25% of its
adjusted capital on a secured basis to any one borrower; however, the total of
such secured and unsecured loans cannot exceed 25% of the Bank's adjusted
capital. As of December 31, 1995, the Bank's loan limits under these regulations
were $7,935,000 on an unsecured basis and $13,225,000 on a secured basis. As of
December 31, 1994, the Bank's loan limits under these regulations were
$6,800,000 on an unsecured basis and $11,400,000 on a secured basis.
In the ordinary course of doing business, the Bank has granted loans to
certain officers, directors and their affiliates. 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. They did not involve more than the normal risk of
collectibility or present other unfavorable features. All loans to insiders are
submitted to the Loan Committee prior to being presented to the Bank's Board of
Directors for their approval. The Bank's Board of Directors has adopted a policy
that all director loans must be collateralized to the extent of the amount of
credit approved. The outstanding balances of such loans totaled approximately
$1,100,000, $1,200,000 and $1,300,000 at December 31, 1995, 1994 and 1993,
respectively. All present loans are current as to interest and principal.
The Company had standby and commercial letters of credit aggregating
$2,800,000 at December 31, 1995 compared with $5,000,000, $5,200,000, $5,200,000
and $6,200,000 at December 31, 1994, 1993, 1992 and 1991, respectively. In
addition, the Bank had commitments to grant real estate construction loans and
commercial loans plus the undisbursed portions of existing construction loans,
lines of credit and optional advance notes totaling $49,500,000 and $38,900,000
at December 31, 1995 and 1994, respectively.
22
<PAGE> 412
The following table sets forth the amount of total loans outstanding in
each category at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial $ 79,567 $ 96,900 $ 88,138 $106,154 $121,241
Real estate-- construction 16,933 10,000 24,133 34,018 28,067
Real estate-- other 82,992 65,174 63,540 63,397 59,151
Installment 33,588 27,007 24,659 34,735 52,486
All other loans (including overdraft) 1,635 1,771 1,640 1,707 1,682
-------- -------- -------- -------- --------
Total gross loans 214,715 200,852 202,110 240,011 262,627
Less: Unearned discounts and fees 3,492 2,203 2,066 2,710 3,088
Less: Allowance for possible loan losses 3,113 2,818 3,573 4,011 3,782
-------- -------- -------- -------- --------
Total net loans $208,110 $195,831 $196,471 $233,290 $255,757
======== ======== ======== ======== ========
</TABLE>
23
<PAGE> 413
NONPERFORMING LOANS AND REAL ESTATE OWNED
Nonperforming loans totaled $3,338,000 at December 31, 1995, a decrease of
49.77% or $3,307,000 compared to $6,645,000 at December 31, 1994. The $3,338,000
represents 1.58% of total loans. Of the $6,645,000 at December 31, 1994,
$579,000 was charged-off, $3,526,000 was transferred to real estate owned and
$2,228,000 was received in payments. The $3,338,000 includes $3,232,000 in
non-accrual loans and $106,000 in loans past due 90 days or more and still
accruing interest. The $3,232,000 in non-accrual on December 31, 1995, includes
$2,972,000 added since December 31, 1994. Of the $3,232,000 in non-accrual
loans, $3,207,000 is secured by deeds of trust and $25,000 is secured by other
collateral. Of loans in non-accrual status $1,910,000 is represented by loans to
related entities which are secured by real estate, having an approximate loan to
value ratio of 70% (based on appraisals of various dates which have been
discounted to reflect current market condition and/or actual pending sales
transactions). Management has set a specific reserve of $251,000 on the
$1,910,000 and it is believed to be sufficient to absorb any anticipated loss.
The next largest non-accrual loan had a balance of $466,000 at December 31, 1995
with a specific reserve of $50,000. This loan is participated with another
financial institution and it is secured by a deed of trust. Loans 90 days or
more past due and still accruing increased $54,000 compared to December 31,
1994.
The Company considers a loan to be nonperforming when any one of the
following events occur: (a) any installment of principal or interest is 90 days
past due; or (b) the loan is placed on non accrual status. The Company's policy
is to classify loans which are delinquent in interest or principal for a period
of 90 days as non-accrual 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
collectable. 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. Interest income is subsequently recognized
on non-accrual loans only to the extent cash payments are received or 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.
Under the provisions of SFAS No. 114, 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.
The Bank has defined impaired loans as individual loans or relationships of
$250,000 or more and not currently accruing interest. As permitted by these new
standards, the Bank excludes from its calculations smaller balance, homogeneous
loans such as consumer installment loans and lines of credit, and direct finance
leases. In determining whether a loan is impaired or not, the Bank applies its
normal loan review procedures in making that judgment. Loans which the Bank
expects to collect in full and for which an insignificant delay, i.e., 45 days
past due, or an insignificant shortfall in amount of payments is anticipated are
not considered impaired. The Bank 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.
At December 31, 1995, the Bank had $2,868,000 in impaired loans and a
related loss allowance of $356,000. Of the $2,868,000 of impaired loans, all of
which were non-accruing, $200,000 was measured using the present value method
and $2,668,000 was measured using the fair value of the collateral. The average
balance of impaired loans for the year ended December 31, 1995 was $4,626,000.
No income was recognized in 1995 on impaired loans.
Problem loans and nonperforming loans are monitored on a regular basis by
Credit Administration. In addition, a Special Assets Committee, which includes
members of senior management and the Board of Directors, reviews these loans as
does the Bank's Directors Audit Committee. Periodic review is also performed by
a third party auditor.
24
<PAGE> 414
Real estate owned totaled $4,918,000 at December 31, 1995, an increase of
126.11% or $2,743,000 from the $2,175,000 at December 31, 1994. The increase is
primarily due to the foreclosure of five properties. Three of the these
foreclosure actions resulted in properties representing 66% of the total real
estate owned balance at December 31, 1995. One is a 60 unit manufactured housing
complex valued at $2,300,000, the second is made up of two theaters valued at
$675,000 and the third is a gas station valued at $250,000. During 1995, seven
other properties were transferred to real estate owned and subsequently sold.
They included a theater in Newport Beach, Ca., an auto repair facility in San
Pedro, Ca., a single family residence in Long Beach, Ca., an unimproved lot in
Cota de Caza, an office complex in Lawndale, Ca., a single family residence in
Westchester and a four unit condominium project in Venice Beach. The proceeds
from the sales were approximately $2,964,000. Additionally, the office complex
in Torrance, Ca. which was contained in real estate owned at December 31, 1994,
was sold during 1995. The proceeds from its sale was $381,000 with its related
loss of approximately $94,000. Writedowns due to deterioration in value of
certain properties totaled approximately $605,000 for the year ended December
31, 1995. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of Operations -- Other
Operating Expense." Other real estate owned properties in the amount of
$1,693,000 consists of 161 acres of unimproved land in Orange County, a
condominium in Lomita, Ca. and office condominiums in Lawndale, Ca. Real estate
owned is carried at the lower of cost or fair market value less estimated
carrying costs and cost of disposition. Cost is determined at the date of
acquisition as the result of a foreclosure sale and is equal to the receivable
balance at that date. If the cost (plus any liabilities assumed at foreclosure)
exceeds the appraised value, the carrying value of the property is written down
to its fair value. During the time the property is held, all related carrying
costs and losses on revaluation are expensed as incurred. Gains or losses on
sales are recorded in conformity with standards that apply to the accounting for
sales of real estate.
All properties transferred into real estate owned are marketed aggressively
but prudently in order to reduce exposure to unnecessary loss.
The following table provides information with respect to the components of
the Company's nonperforming loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1)
Commercial $1,412 $1,665 $ 319 $1,448 $ 328
Real estate - construction 0 1,595 3,261 1,282 1,200
Real estate - other 1,795 3,322 512 334 88
Installment and other 25 11 4 0 282
------ ------ ------ ------ ------
Total 3,232 6,593 4,096 3,064 1,898
------ ------ ------ ------ ------
Loans 90 days or more past
due and still accruing (2):
Commercial 0 0 506 118 1,626
Real estate - construction 0 0 0 199 803
Real estate - other 79 0 0 194 131
Installment and other 27 52 92 159 377
------ ------ ------ ------ ------
Total 106 52 598 670 2,937
------ ------ ------ ------ ------
Total nonperforming loans $3,338 $6,645 $4,694 $3,734 $4,835
====== ====== ====== ====== ======
Nonperforming loans as a
percentage
of total loans 1.58% 3.35% 2.35% 1.57% 1.86%
====== ====== ====== ====== ======
</TABLE>
- -----------------------------------
(1) During the fiscal year ended December 31, 1995, 1994 and 1993,
approximately $103,000, $292,000 and $240,000, respectively, of interest
income related to these loans was included in net income. Additional
interest income of $221,700, $412,600 and $170,400 would have been recorded
for the year ended December 31, 1995, 1994 and 1993, respectively, 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 fiscal year ended December 31, 1995, 1994 and 1993,
approximately $126,000, $1,500 and $18,300, respectively, of interest
income related to these loans was included in net income.
25
<PAGE> 415
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses was $3,113,000 at December 31, 1995,
compared to $2,818,000, $3,573,000, $4,011,000 and $3,782,000 at December 31,
1994, 1993, 1992 and 1991, respectively. The ratio of the allowance to total
loans was 1.47% at December 31, 1995, compared to 1.42%, 1.79%, 1.69% and 1.46%
at December 31, 1994, 1993, 1992 and 1991, respectively. Net charge-offs to
average loans, averaged 1.01% over the same five year period. The ratio of
allowance to nonperforming loans ("coverage ratio") was 93.26% at December 31,
1995, compared to 42.41%, 76.12%, 107.42% and 78.22% at December 31, 1994, 1993,
1992 and 1991, respectively. The improved coverage ratio reflects both the
decline in nonperforming loans from $6,645,000 at December 31, 1994 to
$3,338,000 at December 31, 1995, and an increase in the provision for loan loss
of $1,300,000 in 1995, compared to 1994. See "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Financial Condition -- Nonperforming Loans and Real Estate Owned."
Management maintains a problem loan list. This list includes those loans
that are identified as having varying degrees of risk in excess of loans having
a normal amount of risk. It is the policy of the Company to put a loan on the
problem loan list if the loan develops any weakness in cash flow or security
regardless of whether the loan is in a current status or not. The Company's
grading system drives the loan loss reserve calculation on these loans.
Nonperforming loans are contained in the problem loan list. As of December 31,
1995, the allowance for possible loan losses represented 23% of total problem
loans as compared to 19% at December 31, 1994. The following table details the
category distribution of management's problem loan list as of December 31, 1995
and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,1995 DECEMBER 31,1994
---------------- ----------------
<S> <C> <C>
Commercial $ 7,555,000 $ 3,887,000
Real estate - construction 2,952,000 3,269,000
Real estate - other 2,416,000 7,184,000
Installment and other 584,000 369,000
----------- -----------
Total $13,507,000 $14,709,000
=========== ===========
</TABLE>
The Company has approximately $52,300,000 in commitments to make loans and
extend additional credit under lines of credit it does not generally consider
these items as a group in the analysis of the allowance for possible loan loss
adequacy. Of this $52,300,000, approximately $45,500,000 is cancelable
immediately or have maturities of one year or less. These commitments are
conditional upon the continued financial strength of the borrower or defined
collateral values in the case of accounts receivable, construction loans, or
home equity loans.
All loans in the portfolio are graded as to quality when the loan is made,
each time it is renewed and when it is reviewed by the Company's external
examiners. Any loan not falling into the highest quality grouping is
specifically reviewed for loss potential and is given a specific dollar amount
reserve. Only on loans with the highest quality rating is a historical
perspective used to give a general allowance percentage.
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 against earnings in the periods in which
they become known. The allowance is increased by a provision charged to
operating expense and reduced by net charge-offs. The Company's current
allowance 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.
Management believes that the current level of the allowance is adequate.
The Company'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
26
<PAGE> 416
pay and the underlying current collateral values. Secured loans are internally
classified as a 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 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 possible loan 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 relating to the allowance for
possible loan losses (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES:
Average loans during period $207,577 $199,036 $217,150 $248,357 $268,385
Loans at end of period 211,223 198,649 200,044 237,301 259,539
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at beginning of period $ 2,818 $ 3,573 $ 4,011 $ 3,782 $ 2,872
-------- -------- -------- -------- --------
ACTUAL CHARGE-OFFS:
Commercial 704 1,351 2,718 7,736 920
Real estate - construction 232 421 809 100 104
Real estate - other 1,146 0 20 0 140
Installment 349 172 297 506 217
Other (including overdrafts) 52 81 47 66 40
-------- -------- -------- -------- --------
Total 2,483 2,025 3,891 8,408 1,421
RECOVERIES ON LOANS PREVIOUSLY CHARGED-OFF:
Commercial 160 249 2,628 2,572 116
Real estate - construction 24 175 0 0 0
Real estate - other 454 0 0 0 0
Installment 31 42 73 60 60
Other (including overdrafts) 9 4 2 5 5
-------- -------- -------- -------- --------
Total 678 470 2,703 2,637 181
Net loan charge-offs 1,805 1,555 1,188 5,771 1,240
Provision charged to operating expense 2,100 800 750 6,000 2,150
-------- -------- -------- -------- --------
Balance at end of period $ 3,113 $ 2,818 $ 3,573 $ 4,011 $ 3,782
======== ======== ======== ======== ========
RATIOS:
Net loan charge-offs to average loans .87% .78% .55% 2.32% .46%
Allowance for possible loan losses to
loans at end of period 1.47 1.42 1.79 1.69 1.46
Allowance for possible loan losses to
nonperforming loans 93.26 42.41 76.12 107.42 78.22
Net loan charge-offs to allowance for
possible loan losses 57.98 55.18 33.25 143.88 32.79
Net loan charge-offs to provision
charged to operating expense 86.00 194.38 158.40 96.18 57.67
</TABLE>
27
<PAGE> 417
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
loans loans loans loans loans
to to to to to
Dollar total Dollar total Dollar total Dollar total Dollar total
Amount loans Amount loans Amount loans Amount loans Amount loans
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 488 37.0% $ 334 48.0% $1,248 44.0% $2,218 45.0% $2,451 47.0%
Real estate -
construction 256 8.0% 371 5.0% 600 12.0% 425 14.0% 43 11.0%
Real estate -
other 221 39.0% 889 33.0% 900 32.0% 43 26.0% 20 23.0%
Installment
and other 63 16.0% 50 14.0% 145 12.0% 15 15.0% 56 19.0%
Unallocated 2,085 N/A 1,174 N/A 680 N/A 1,310 N/A 1,212 N/A
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $3,113 100.0% $2,818 100.0% $3,573 100.0% $4,011 100.0% $3,782 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Although management believes the allowance is adequate to absorb losses as
they arise, there can be no assurance that the Company will not sustain losses
in any given period which could be substantial in relation to the size of the
allowance.
28
<PAGE> 418
SECURITIES PORTFOLIO
The Company complies with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". The Company holds securities in two categories,
available for sale and held to maturity. Securities available for sale may be
held for indefinite periods of time and may be sold in response to changes in
interest rates and/or other economic conditions. These securities are, in the
aggregate, carried at market value. Unrealized gains or losses are calculated
based on adjusted cost as described below. Unrealized gains or losses, net of
deferred taxes, are recorded as a separate component of shareholders' equity.
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and accounted for at cost, adjusted
for amortization of premium and accretion of discount. During 1995, $13,158,916
of securities were purchased and added to the held to maturity portfolio.
The Company's calculation of cost is increased by accretion of discounts
and decreased by amortization of premiums, which are computed on the
straight-line method that 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
adjusted cost and computed on the specific identification method and are
classified in other operating revenue, securities gains or losses, net.
At December 31, 1995, securities totaled $133,886,000 or 31.59% of assets,
a decrease of 20.25% or $33,994,000 from December 31, 1994, which totaled
$167,880,000 or 38.19% of assets. The $133,886,000 is made up of $13,131,000
classified as held to maturity and $120,755,000 classified as available for
sale. At December 31, 1994, securities increased 38.61% from December 31, 1993,
which totaled $121,121,000 or 30.95% of assets. The proceeds from the sale of
securities in 1995 was utilized to fund a contraction in deposits, expand the
loan portfolio and replenish overnight federal funds that had experienced a drop
earlier in the year as a result of the contraction in deposits. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Financial Condition -- Deposits." The increase in 1994,
was primarily due to funds made available from the acquisition of two banks in
1994, see "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- Note 15 --
Purchase and Assumption of Certain Assets and Liabilities," and decreased loan
demand.
Proceeds from sales of securities available for sale during 1995, 1994 and
1993 were $30,336,537, $5,392,285 and $7,501,774 and the proceeds from calls of
securities during 1995, 1994 and 1993 were $3,970,276, $2,224,550 and
$6,117,249, respectively. Gross gains on sales for 1995, 1994 and 1993 were
$162,639, $-0- and $3,181,894 and gross gains on calls were $17,898, $14,550 and
$66,193 for 1995, 1994 and 1993, respectively. Gross losses on sales were
$127,947, $144,819 and $377 for 1995, 1994 and 1993, respectively.
Included in states and political subdivisions securities at December 31,
1992 were $8,625,000 par value of eight separate issues of taxable municipal
securities (the Bonds) purchased at $8,356,728. At the time of purchase, the
Bonds were rated "Triple-A" by a nationally recognized rating agency and issued
by Executive Life of California (Executive Life). Executive Life was seized by
the California Insurance Commission on April 11, 1991 and placed in
conservatorship. Executive Life subsequently defaulted on payments due the
issuers because of a moratorium on all payments imposed by the California
Insurance Commission. In turn, since April 15, 1991, all issues defaulted on
regular interest payments. The Company placed all issues on non-accrual in 1991.
At December 31, 1992 and 1991, the reported market values of the Bonds were
approximately $4,416,850 and $3,450,000, respectively. Management concluded that
the value of the Bonds could remain impaired for an uncertain period of time due
to the possibility of potential extended litigation. Accordingly, at December
31, 1991, management elected to charge-off that portion of the Bonds which
exceeded the approximate market value of $3,450,000. The amount charged-off in
1991 was $5,027,441, reducing the bonds from their book value of $8,477,441, to
their market value. During 1993, the Company sold all of the Bonds for
$6,623,124, resulting in a gain on sale of $3,173,124.
29
<PAGE> 419
Market values vary due to current interest rate fluctuations, resulting in
increases and/or decreases in the underlying market price. Market values may
also fluctuate due to changes in a security's credit rating or insurance
backing. The Federal Reserve Bank's active management of monetary policy
resulted in one increase in February 1995 and two decreases during the remainder
of 1995 in the Federal Fund rates. These rates increased five times in 1994. The
impact of changes in the Federal Fund rates has created broad swings in the
market valuation of securities. The resulting changes in unrealized gains
(losses) as mandated under SFAS No. 115 positively impacted the carrying value
of securities available for sale in 1995 and negatively impacted the carrying
value of securities available for sale in 1994. Capital has been impacted by
these changes as well. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial
Condition -- General." Management's philosophy during this period has been to
keep additions to the securities available for sale portfolio relatively short
in maturity and additions with longer maturities added to held to maturity to
minimize long term effects of interest rate fluctuations. Gross unrealized gains
and losses in the securities portfolio at December 31, 1995 and 1994, were as
follows:
<TABLE>
<CAPTION>
HELD TO MATURITY 1995 1994
---------------- ----------- -----------
<S> <C> <C>
Unrealized gains $ 73,000 $ 0
Unrealized losses (25,000) 0
----------- -----------
Net unrealized gains (losses) $ 48,000 $ 0
=========== ===========
AVAILABLE FOR SALE 1995 1994
------------------ ----------- -----------
Unrealized gains $ 1,183,000 $ 238,000
Unrealized losses (193,000) (5,295,000)
----------- -----------
Net unrealized gains (losses) $ 990,000 $(5,057,000)
=========== ===========
</TABLE>
The tables below summarizes the cost and market value, and the distribution
of the Company's investment securities as of the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
MARKET MARKET MARKET
COST VALUE COST VALUE COST VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury securities $ 2,094 $ 2,114 $ 0 $ 0 $ 0 $ 0
Obligations of other U.S.
government agencies (1) 3,253 3,295 0 0 0 0
-
Obligations of states and
political sub-divisions 6,414 6,394 0 0 0 0
Corporate securities 653 658 0 0 0 0
Equity securities 718 718 0 0 0 0
-------- -------- -------- -------- -------- --------
Total securities held to maturity $ 13,132 $ 13,179 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======== ======== ========
AVAILABLE FOR SALE
U.S. Treasury securities $ 70,108 $ 70,876 $112,183 $109,155 $ 69,280 $ 70,395
Obligations of other U.S.
government agencies (1) 22,971 23,080 24,690 23,758 16,566 16,647
-
Obligations of states and
political sub-divisions 7,165 7,158 13,625 13,456 20,384 21,050
Corporate securities 19,140 19,216 22,059 21,121 12,576 12,602
Equity securities 380 424 380 390 380 427
-------- -------- -------- -------- -------- --------
Total securities available for sale $119,764 $120,754 $172,937 $167,880 $119,186 $121,121
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------------------------
(footnotes on the following page)
30
<PAGE> 420
The following tables summarizes the contractual maturity of the Company's
securities and their weighted average yields at December 31, 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL
--------------- ----------------- ---------------- --------------- -----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury
securities $ 0 0% $ 2,094 5.76% $ 0 0% $ 0 0% $ 2,094 5.76%
Obligations of
other U.S.
government
agencies (1) 0 0 2,006 5.76 1,247 6.85 0 0 3,253 6.17
_
Obligations of
states and
political
subdivisions (2) 0 0 1,000 6.12 840 4.76 4,574 3.94 6,414 4.39
_
Corporate
securities 0 0 653 5.17 0 0 0 0 653 5.17
Equity securities 0 0 0 0 0 0 718 0 718 0
-------- -------- -------- -------- --------
Total securities
held to maturity $ 0 0% $ 5,753 5.75% $ 2,087 6.01% $ 5,292 3.94% $ 13,132 5.13%
======== ======== ======== ======== ========
AVAILABLE FOR SALE
U.S. Treasury
securities $ 34,275 5.48% $ 35,833 6.32% $ 0 0% $ 0 0% $ 70,108 5.91%
Obligations of
other U.S.
government
agencies (1) 4,035 5.54 16,635 5.75 180 8.02 2,121 7.87 22,971 5.93
_
Obligations of
states and
political
subdivisions (2) 3,935 6.06 2,153 5.58 974 5.72 103 10.25 7,165 5.93
_
Corporate
securities 8,306 5.83 10,728 6.02 106 6.18 0 0 19,140 5.94
Equity securities 0 0 0 0 0 0 380 0 380 0
-------- -------- -------- -------- --------
Total securities
available
for sale $ 50,551 5.59% $ 65,349 6.10% $ 1,260 6.08% $ 2,604 7.98% $119,764 5.92%
======== ======== ======== ======== ========
</TABLE>
- -----------------------------------
(1) Included in Obligations of other U.S. government agencies are $3,661,000
and $5,217,000 of mortgage backed securities at December 31, 1995 and 1994
and $0 at December 31, 1993, respectively.
(2) Yields on tax-exempt obligations have not been computed on a tax equivalent
basis.
31
<PAGE> 421
DEPOSITS
Average deposits were $373,470,000 during the year ended December 31, 1995,
which was a decrease of 1.43% or $5,420,000 from average deposits during 1994,
which were $378,890,000. During 1994, average deposits increased 7.68% or
$27,031,000 over 1993, when average deposits were $351,859,000. The composition
of deposit accounts as a percent of total average deposits for December 31,
1995, 1994 and 1993 were (i) demand deposits, non-interest bearing: 36%, 34%,
and 31%, respectively, (ii) interest-bearing demand deposits: 27%, 29% and 28%,
respectively, (iii) savings deposits: 15%, 16% and 17%, respectively, (iv) time
certificates deposit of $100,000 and over: 4%, 3% and 5%, respectively, and (v)
other time deposits: 18%, 18% and 19%, respectively. Deposits totaled
$369,031,000 at December 31, 1995, a decrease of 5.92% or $23,238,000 from
December 31, 1994, which totaled $392,269,000. Strong growth in the equities
markets and related strength in the mutual funds markets attracted customer
deposits away from financial institutions as evidenced by the outflow of
$19,963,000 from savings and interest bearing demand deposits. During 1995, the
Bank offered slightly higher rates in time certificates of deposit of $100,000
and over which was attractive to some deposit customers as indicated by an
increase of $5,452,000 when compared to December 31, 1994. Other time deposits
decreased $5,527,000 and demand deposits, non-interest bearing decreased
$3,201,000 compared to December 31, 1994. Total deposits at December 31, 1994
increased $56,469,000 from December 31, 1993, which totaled $335,800,000. The
increase in 1994 was primarily due to the assumed deposits from Mechanics
National Bank and the Bank of San Pedro, see "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- Note 15 -- Purchase and Assumption of Certain Assets and
Liabilities." During 1994, time certificates of deposit of $100,000 and over
customers sought other alternatives for their investment dollars such as mutual
funds and equity securities as interest rates remained low from their decline in
1993.
The Company still enjoys a substantial base of non interest-bearing demand
and savings and interest bearing demand accounts which help to maintain the net
interest margin at an acceptable level, although no assurances can be given that
the Company will maintain such levels of non interest-bearing deposits in the
future.
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993
--------------------- ----------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits, non-interest
bearing $132,922 $129,186 $107,977
Interest bearing demand deposits 102,769 2.13% 107,875 2.13% 99,268 2.40%
Savings deposits 55,215 2.23 61,562 2.28 61,963 2.51
Time certificates of deposit of
$100,000 and over 14,962 4.80 12,644 3.16 16,762 2.90
Other time deposits 67,602 4.42 67,623 3.42 65,889 3.49
-------- -------- --------
Total deposits $373,470 1.91% $378,890 1.69% $351,859 1.91%
======== ======== ========
</TABLE>
The scheduled maturity of the Company's time deposits in denominations of
$100,000 and over as of December 31, 1995 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DEPOSITS MATURING IN 1995
-------------------- ----
<S> <C>
Three months or less $10,839
Over three months through six months 5,571
Over six months through twelve months 1,540
Over twelve months 155
-------
Total $18,105
=======
</TABLE>
32
<PAGE> 422
RESULTS OF OPERATIONS
NET INCOME
For the year ended December 31, 1995, net income totaled $3,764,000, which
was an increase of 13.41% or $445,000 compared to the year ended December 31,
1994, which had net income of $3,319,000. During 1994, net income decreased
8.44% or $306,000 compared to the year ended December 31, 1993, which had net
income of $3,625,000. In 1995, the increase was primarily due to the increase in
net interest income of $1,928,000. Total other operating revenue increased
$647,000, provision for possible loan losses increased $1,300,000, total other
operating expenses increased $640,000 and provision for income taxes increased
$190,000. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition --
Allowance for Possible Loan Losses and Results of Operations -- Net Revenue from
Earning Assets." In 1994, the decrease in net income was primarily due to
securities gains (losses), net of ($130,000) compared to $3,248,000 in 1993.
This negative effect was partially offset by an increase in net interest income
of approximately $2,200,000 and a decrease in provision for income taxes of
$1,100,000. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition --
Securities Available for Sale and Results of Operations -- Net Revenue from
Earning Assets."
The Company, while experiencing an increase in net interest income of 8.54%
from December 31, 1994 to December 31, 1995, also improved its net interest
spread and net interest yield to 5.76% and 6.76% at December 31, 1995 from 5.37%
and 6.18% at December 31, 1994, respectively. In 1995, the increase in net
interest income was a result of improved yields in most loan categories. This
improvement was based upon reductions in non-accrual loans, focus on collection
of loan related fees and a shift to more fixed rate loans that provide sustained
earnings in a declining rate environment. Additionally some improvements in
overall investment portfolio yields were realized during 1995. Interest rates on
savings and interest bearing demand accounts remained virtually unchanged from
the prior year. While the rates on time deposits increased over 1994, the
overall increase in interest bearing liabilities did not overshadow the gains
made in yields on earning assets. In 1994, the increase in net interest income
was primarily due to the increase in volume of average earning assets of 7.15%
compared to the increase in volume of average interest bearing liabilities of
2.33%. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition --
Securities Available for Sale."
The average yield on earning assets and average cost of funds on interest
bearing liabilities was 8.73% and 2.97% compared to 7.94% and 2.57% for the
years ended December 31, 1995 and 1994, respectively.
Earnings per share for the year ended December 31, 1995, 1994 and 1993 was
$.90, $.80 and $ .87, respectively. Earnings per share for 1994 and 1993 have
been restated to reflect the effect of a five percent stock dividend issued in
1995 and 1994.
NET REVENUE FROM EARNING ASSETS
Net revenue from earning assets (net interest income), which constitutes
the principal source of income for the Company, 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, the Company's ability to manage its
earning asset portfolio and the availability of particular sources of funds.
For the period ending December 31, 1995, net interest income increased
8.54% or $1,928,000 compared to the period ending December 31, 1994. Average
earning assets decreased only .68 % or $2,479,000 with its related interest
income increasing 9.21% or $2,668,000 when comparing the same periods. Average
interest bearing liabilities decreased 3.57% or $8,923,000 with its related
interest expense increasing 11.54% or $740,000. The annualized yield on average
earning assets increased to 8.73% from 7.94% while annualized
33
<PAGE> 423
cost of funds on average interest bearing liabilities increased to 2.97% from
2.57%. The net interest margin or yield increased to 6.76% from 6.18%. Average
non-interest bearing demand deposits increased 2.89% or $3,736,000 along with
its portion of total deposits increasing to 35.59% from 34.09%. During 1995,
while rates were declining based upon actions of the Federal Reserve Board,
yields actually rose as the Bank improved levels of non-accrual loans and booked
more fixed rate loans (increased from 27% of portfolio to 43% of the portfolio)
which held their yield in the declining interest rate environment. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Financial Condition -- Net Income." The purchase and
assumption agreements of the two banks during 1994 enabled the Company to
increase earning assets, primarily securities, and the liabilities assumed were
primarily in non-interest demand deposits with little impact on interest bearing
deposits.
A portion of the Company's net interest income is derived from fees on
loans. The Company defers these fees and their associated origination costs over
the life of the loan. These amounts are amortized on the interest yield method.
The interest yield method mirrors the interest recognition on the loan itself
and provides a more constant yield over the life of the loan. Since in excess of
eighty percent (80%) of all loan fees collected are related to commercial loans
and real estate construction loans with a duration of one year or less, the
amortization of the related fees also corresponds to a period of 12 months or
less.
34
<PAGE> 424
The following table shows the Company's consolidated daily average balances
of assets, liabilities and shareholders' 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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- ----------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Net Loans (1)(2):
Commercial $ 87,527 $ 9,669 11.05% $ 89,872 $ 8,836 9.83% $ 95,656 $ 8,451 8.83%
Real estate and construction 87,500 9,910 11.33 84,807 8,441 9.95 92,050 8,624 9.37
Installment 30,856 2,775 8.99 22,770 2,375 10.43 27,845 3,314 11.90
Other 1,694 289 17.06 1,669 276 16.54 1,599 282 17.64
Taxable securities 139,982 8,099 5.79 136,975 7,532 5.50 86,325 4,762 5.52
Tax-exempt securities (3) 4,162 290 6.97 9,400 717 7.63 17,297 1,143 6.61
Federal funds sold 10,788 618 5.73 19,405 801 4.13 19,882 542 2.73
Interest-bearing deposits 22 1 4.55 112 5 0 0 0 0
-------- -------- -------- -------- -------- --------
Total earning assets 362,531 31,651 8.73% 365,010 28,983 7.94% 340,654 27,118 7.96%
-------- -------- -------- -------- -------- --------
Non-interest-earning assets:
Cash and due from banks 39,560 41,995 38,381
Premises and equipment, net 14,364 11,486 10,820
Other assets 12,048 14,507 15,520
-------- -------- --------
Total non-interest-earning
assets 65,972 67,988 64,721
-------- -------- --------
Less allowance for possible
loan and investment
securities losses 3,372 3,285 4,055
-------- -------- --------
Total assets $425,131 $429,713 $401,320
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $102,769 2,188 2.13% $107,875 2,296 2.13% $99,268 2,386 2.40%
Savings 55,215 1,230 2.23 61,562 1,404 2.28 61,963 1,556 2.51
Time certificates of deposit
of $100,000 and over 14,962 718 4.80 12,644 399 3.16 16,762 486 2.90
Other time deposits 67,602 2,991 4.42 67,623 2,311 3.42 65,889 2,299 3.49
Federal funds purchased and
securities sold under
agreements to repurchase 460 28 6.09 227 5 2.20 353 9 2.55
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 241,008 7,155 2.97% 249,931 6,415 2.57% 244,235 6,736 2.76%
-------- -------- -------- -------- -------- --------
Non-interest-bearing liabilities:
Demand deposits 132,922 129,186 107,977
Other liabilities 2,840 4,118 4,020
-------- -------- --------
Total non-interest-
bearing liabilities 135,762 133,304 111,997
-------- -------- --------
Shareholders' equity 48,361 46,478 45,088
-------- -------- --------
Total liabilities and
shareholders' equity $425,131 $429,713 $401,320
======== ======== ========
Net interest income $24,496 $22,568 $ 20,382
======= ======= ========
Net interest spread 5.76% 5.37% 5.20%
==== ==== ====
Net interest yield 6.76% 6.18% 5.98%
==== ==== ====
</TABLE>
- -----------------------------
(Footnotes on following page)
35
<PAGE> 425
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 (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31, Year ended December 31, Year ended December 31,
1995 vs. 1994 1994 vs. 1993 1993 vs. 1992
--------------------------- --------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
Due to changes in Due to changes in Due to changes in
--------------------------- --------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS -- INTEREST INCOME:
Net Loans (1)(2):
- -
Commercial $ (245) $ 1,078 $ 833 $ (569) $ 954 $ 385 $(1,518) $ (503) $(2,021)
Real estate and construction 287 1,182 1,469 (721) 538 (183) (185) (575) (760)
Installment 785 (385) 400 (604) (335) (939) (1,495) (70) (1,565)
Other 4 9 13 12 (18) (6) (20) 8 (12)
Taxable securities 174 393 567 2,794 (24) 2,770 1,448 (722) 726
Non-taxable securities (3) (400) (27) (427) (602) 176 (426) (965) (232) (1,197)
-
Federal funds sold (425) 242 (183) (16) 275 259 165 (69) 96
Interest-bearing deposits (4) 0 (4) 5 0 5 0 0 0
------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 176 $ 2,492 $ 2,668 $ 299 $ 1,566 $ 1,865 $(2,570) $(2,163) $(4,733)
======= ======= ======= ======= ======= ======= ======= ======= =======
DEPOSITS AND BORROWED FUNDS--
INTEREST EXPENSE:
Interest-bearing demand
deposits $ (109) $ 1 $ (108) $ 207 $ (297) $ (90) $ 50 $ (621) $ (571)
Savings deposits (142) (32) (174) (9) (143) (152) 229 (598) (369)
Time deposits of $100,000 and over 73 246 319 (130) 43 (87) (457) (237) (694)
Other time deposits (1) 681 680 61 (49) 12 (735) (955) (1,690)
Federal funds purchased and
securities sold under
agreements to repurchase 14 9 23 (3) (1) (4) 8 (2) 6
------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ (165) $ 905 $ 740 $ 126 $ (447) $ (321) $ (905) $(2,413) $(3,318)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ----------------------
(Footnotes for the table above and on the previous page)
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,559,000, $1,604,000, and $1,712,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
(2) Net of unamortized deferred fees and discounts. Non-accrual loans have been
included for the purposes of this table.
(3) Yields on tax-exempt income have not been computed on a tax equivalent
basis.
36
<PAGE> 426
PROVISION FOR POSSIBLE LOAN LOSSES
Provisions are made to the allowance for possible loan losses in amounts
necessary to maintain the allowance at a level considered by management to be
sufficient to provide for risks of loss inherent in the loan portfolio. To
establish an adequate reserve, the evaluation of collectibility of loans is, for
the most part, based upon consideration of the financial condition of the
borrowers and the current general economic conditions rather than viewing loan
loss potential from a historical perspective. For the year ended December 31,
1995, the provision totaled $2,100,000 compared to $800,000 for the year ended
December 31, 1994. Management remained guardedly optimistic regarding the
Southern California economy but it still has concerns in light of defense
cutbacks and housing industry during 1995. Management will continue to review
the economic conditions for Southern California and will monitor and adjust the
provision for loan losses accordingly. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Financial Condition -- Loans; Nonperforming Loans and Real Estate Owned;
Allowance for Possible Loan Losses and Results of Operations -- Net Income."
OTHER OPERATING REVENUE
Other operating revenue (other income) is comprised mainly of service
charges and other types of fees on deposit accounts. Competitive pressures in
the area of deposit account pricing have been significant since deregulation
and, while service charges are the major portion of this income category, their
annual increase has been modest. Management further believes that this trend
will continue for the foreseeable future. Net gains and losses on the sale of
securities, gross gains on the sale of real estate owned and fees on non-deposit
account services comprise the remaining portion of this category.
For the year ended December 31, 1995, other income totaled $5,226,000 which
reflects an increase of 14.13% or $647,000 from December 31, 1994, which totaled
$4,579,000. Service charges increased 18.67% or $763,000, securities gains
(losses) increased $183,000 and other income decreased $300,000. Service charges
increased due to restructuring of fees on deposit services and a 7.5% increase
in check processing volumes and other transactions volumes. Other income
decreased due to the nonrecurring fees collected under a contractual arrangement
with the consortium members of the Mechanics National Bank acquisition. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Mergers and
Acquisitions."
For the year ended December 31, 1994, other income totaled $4,579,000 which
reflects a decrease of 40.98% or $3,179,000 from December 31, 1993, which
totaled $7,758,000. Securities gains (losses), net decreased $3,378,000. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Securities
Portfolio." All other income totaling $623,000 increased 40.63% or
$180,000 compared to 1993, primarily due to fees collected under a contractual
arrangement with the consortium members of the Mechanics National Bank
acquisition. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Mergers
and Acquisitions." Service charges and fees only increased 0.47% or $19,000 due
to three months free service charges initially given to the customers of the
Mechanics National Bank and the Bank of San Pedro when the Bank assumed their
insured deposits from the FDIC.
OTHER OPERATING EXPENSE
Other operating expenses (other expense) are comprised of several
categories: salaries and employee benefits, net occupancy, legal and
professional services, outside data processing, other outside services,
stationery and supplies, gross losses on real estate owned and other operating
expenses.
For the year ended December 31, 1995, other expense totaled $22,499,000
which represented an increase of 2.93% or $640,000 from the year ended December
31, 1994. The primary increase was related to occupancy expense increases of
14.35% or $377,000 and salaries and employee benefits increases of 2.52% or
$254,000 when comparing the same periods. These increases are related to the
depreciation for the new building of the Torrance office as well as a full year
of operation for the two San Pedro locations. During September the Bank
37
<PAGE> 427
completed a restructuring program designed to improve productivity. Through
further centralization of repetitive tasks the Bank eliminated 41 full time
equivalent positions of the 277 full time equivalent positions at December 31,
1994. Approximately $1,500,000 in annual salaries and employee benefits savings
are projected for 1996, with a restructuring cost of less than $250,000 taken in
the third quarter of 1995. Gross losses on real estate owned totaled $627,000
compared to $560,000 at December 31, 1994. The $627,000 of gross losses on real
estate owned is comprised of $605,000 in writedowns on property values and
$22,000 of actual losses on sales transactions of real estate owned. See "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Financial Condition -- Loans; Nonperforming Loans and
Real Estate Owned". Transactional activity levels such as ATM activity was up by
16.7% and telephone response activity was up 33% from the prior year as examples
of increase processing activity.
For the year ended December 31, 1994, other expense totaled $21,859,000
which was an increase of 1.43% or $309,000 from the year ended December 31,
1993. The primary increase was related to salaries and employee benefits
increase of 4.01% or $389,000 and occupancy expense increase of 5.63% or
$140,000 when comparing the same periods. These increases are directly related
to the purchase and assumption the Mechanics National Bank and the Bank of San
Pedro. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Mergers
and Acquisitions." Losses on real estate owned decreased 53.68% or $649,000 in
1994, compared to 1993, however, future amounts cannot be determined with
certainty. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-- Note 11 --
Other operating expenses" for further detail of other expenses.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes rather than amounts currently payable under tax
laws. Deferred taxes, which arise from temporary differences between the period
in which certain income and expenses are recognized for financial accounting
purposes and the period in which they affect taxable income, are included in the
amounts provided for income taxes. See "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA-- Note 1 -- Summary of Significant Accounting Policies --
Income Taxes."
For the year ended December 31, 1995, a provision of $1,359,000 in taxes
was accrued resulting in an effective tax rate for the Company 26.5% as compared
to 26.0% at December 31, 1994. Tax exempt income decreased 59.55% at December
31, 1995, compared to December 31, 1994. The Company's percentage of tax exempt
income generated from the state and municipal bonds in the securities portfolio
to gross revenue decreased to .79% from 2.14% when comparing the same periods.
The Company actively managed the utilization of California State Enterprise Zone
credits as they related to State tax benefits. Net income before taxes totaled
$5,123,000 at December 31, 1995, compared to $4,488,000 at December 31, 1994.
For the year ended December 31, 1994, a provision of $1,169,000 in taxes
was accrued resulting in an effective tax rate for the Company of 26.0% as
compared to 37.9% at December 31, 1993. The reduction in the effective rate from
1993 to 1994 is primarily due to the utilization of AMT credits in 1994. Tax
exempt income decreased 37.27% at December 31, 1994, compared to December 31,
1993. The Company's percentage of tax exempt income generated from the state and
municipal bonds in the securities portfolio to gross revenue decreased to 2.14%
from 3.28% when comparing the same periods. Net income before taxes totaled
$4,488,000 at December 31, 1994, compared to $5,840,000 at December 31, 1993.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The asset/liability management process determines the size and composition
of the balance sheet and focuses on the management of liquidity and interest
rate exposures. The purpose of liquidity and balance sheet management is to
reflect the Company's ability to provide funds for day-to-day operations, meet
customer needs, take advantage of interest rate market opportunities and meet
the financial commitments of the Company. Funding of loan requests and
commitments, purchase of attractive securities opportunities,
38
<PAGE> 428
providing for liability outflow and management of interest rate risk requires
continuous analysis in order to match the maturities of categories of loans and
securities with the maturities of deposits and bank-related borrowings. The
Company's ability to obtain funds to replace maturing liabilities and to finance
asset growth depends upon its reputation as well as the diversity and liquidity
of the markets in which it participates. The Company's liquidity is normally
viewed in terms of the nature and composition of the Company's sources and uses
of funds. Cash, maturing securities, reductions in Federal funds sold and loan
maturities and repayments provide liquidity. Purchase of Federal funds, sale of
securities, sale of loan participations or sale of the Company's loans on the
secondary market and utilization of other short-term borrowing facilities are
all available to provide additional liquidity vehicles. Liquid assets comprised
of cash and cash equivalent assets (cash, cash due from other financial
institutions and Federal funds sold), U.S. Treasury securities and U.S.
Government agencies securities comprised 36.03%, 41.38% and 34.88%, of total
assets for the years ended December 31, 1995, 1994 and 1993, respectively.
In addition to the foregoing, liquidity management must address any
unfunded commitments to make loans, the undisbursed amounts under lines of
credit and contingent liabilities under letter of credit arrangements. The
commitments for unfunded loans and the undisbursed amounts under lines of credit
were $49,539,000 and $38,916,000 for the years ended December 31, 1995 and 1994,
respectively. Contingent liabilities under standby and commercial letter of
credit arrangements were $2,806,000 and $4,950,000, for the years ended December
31, 1995 and 1994, respectively.
In order to meet liquidity needs should normal funding sources not be
readily available, the Company has established unsecured lines of credit for the
purchase of Federal funds from other financial institutions. See "ITEM 1.
BUSINESS -- Effect of Governmental Policies and Recent Legislation." In
addition, the Company may borrow funds at the Federal Reserve Board discount
window, subject to the Company's ability to supply collateral.
As shown in the December 31, 1995, 1994 and 1993 Consolidated Statements of
Cash Flows the Company's primary source of funds are deposits. Average total
deposits decreased 1.43% or $5,420,000 for the year ended December 31, 1995,
compared to an increase of 7.67% or $26,978,000 at December 31, 1994 and a
decrease of 5.38 % or $19,998,000 at December 31, 1993. Average core deposits,
the least volatile funding source (total deposits less time deposits of $100,000
and over) decreased 2.11% or $7,738,000 for the year ended December 31, 1995,
compared to an increase of 9.28% or $31,096,000 for the year ended December 31,
1994 and a decrease of 1.92% or $6,575,000 for the year ended December 31, 1993.
Average time deposits of $100,000 and over increased 18.33% or $2,318,000 for
the year ended December 31, 1995 and decreased 24.57% or $4,118,000 for the year
ended December 31, 1994, compared to a decrease 44.47% or $13,423,000 for the
year ended December 31, 1993.
The asset/liability management process involves structuring the amount,
composition and repricing periods of the rate sensitive assets and rate
sensitive liabilities to minimize the impact of interest rate changes on the
Company's earnings. The Company places emphasis on maintaining a rate sensitive
position within its guidelines to avoid broad swings in spreads and to minimize
risk due to changes in interest rate. At December 31, 1995, approximately 57.06%
of the Company's loans were tied to the Company's base lending rate, prime rate
or were maturing within one year.
The following table shows the amounts of gross commercial loans, real
estate loans-construction, real estate loans-other and installment loans
outstanding as of December 31, 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 WITHIN FIVE MORE THAN FIVE
ONE YEAR YEARS YEARS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial $ 33,521 $ 29,751 $ 14,884 $ 78,156
Real estate - construction 16,933 0 0 16,933
Real estate - other 10,497 38,830 31,869 81,196
Installment 1,186 28,046 4,331 33,563
Other loans 1,635 0 0 1,635
-------- -------- -------- --------
Total $ 63,772 $ 96,627 $ 51,084 $211,483
======== ======== ======== ========
</TABLE>
39
<PAGE> 429
The following table sets forth the sensitivity of the amounts due after one
year to changes in interest rates as of December 31, 1995. (dollars in
thousands):
<TABLE>
<CAPTION>
MATURING
---------------------------------------------
AFTER ONE BUT
WITHIN FIVE MORE THAN FIVE
YEARS YEARS TOTAL
----- ----- -----
Loans:
<S> <C> <C> <C>
With fixed rate interest $ 59,897 $ 21,046 $ 80,943
With floating rate interest 36,730 30,038 66,768
-------- -------- ---------
Total $ 96,627 $ 51,084 $147,711
======== ======== ========
</TABLE>
The following table sets forth the rate sensitivity of the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
1995, the interest rate sensitivity gap (interest rate sensitive assets less
interest rate sensitive liabilities), cumulative interest rate sensitivity gap
and the Company's interest rate sensitivity gap ratio (interest rate sensitive
assets less interest rate sensitive liabilities divided by total earning assets)
and the Company's 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 can be repriced or matures within
such period in accordance with its contractual terms (dollars in thousands):
<TABLE>
<CAPTION>
AFTER THREE AFTER SIX AFTER ONE
MONTHS BUT MONTHS BUT YEAR BUT
WITHIN WITHIN SIX WITHIN ONE WITHIN FIVE AFTER
THREE MONTHS MONTHS YEAR YEARS FIVE YEARS TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 128,331 $ 2,634 $ 4,728 $ 59,276 $ 16,514 $ 211,483
Securities 15,240 7,115 32,387 68,322 9,831 132,895
Federal funds sold 14,600 0 0 0 0 14,600
--------- --------- --------- --------- --------- ---------
Total $ 158,171 $ 9,749 $ 37,115 $ 127,598 $ 26,345 $ 358,978
========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits $ 98,935 $ 0 $ 0 $ 0 $ 0 $ 98,935
Savings deposits 52,492 0 45 0 0 52,537
Time deposits of $100,000
and over 10,839 5,572 1,539 155 0 18,105
Other time deposits 28,117 16,994 13,568 6,167 0 64,846
--------- --------- --------- --------- --------- ---------
Total $ 190,383 $ 22,566 $ 15,152 $ 6,322 $ 0 $ 234,423
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap (32,212) (12,817) 21,963 121,276 26,345 124,555
Cumulative interest rate
sensitivity gap $ (32,212) $ (45,029) $ (23,066) $ 98,210 $ 124,555 $ 0
Interest rate sensitivity
gap ratio (8.97)% (3.57)% 6.12% 33.78% 7.34% 34.70%
Cumulative interest rate
sensitivity gap ratio (8.97)% (12.54)% (6.43)% 27.36% 34.70% 0
</TABLE>
As of December 31, 1995, the Company was asset sensitive overall and
liability sensitive for periods of less than one year. Asset sensitive means
that rate sensitive assets exceed rate sensitive liabilities. An asset sensitive
position will result in enhanced earnings in a rising interest rate environment
and declining earnings in a falling interest rate environment because larger
volumes of assets than liabilities will reprice. Conversely, a liability
sensitive position will be detrimental to earnings in a rising interest rate
environment and enhance earnings in a falling interest rate environment. The
preceding table does not necessarily indicate the impact of general interest
rate movement on the Company's net interest rate yield because the repricing of
various asset and liability categories are discretionary, subject to competition
from other financial and non-financial institutions as well as other outside
pressures. Consequently, various assets and liabilities reflected may not be
subject to repricing within the same period, but may in fact reprice at
different times and rate levels.
40
<PAGE> 430
CAPITAL RESOURCES
Shareholders' equity increased 12.62% or $5,762,000 when comparing December
31, 1995 to December 31, 1994 and decreased 3.71% or $1,757,000 when comparing
December 31, 1994 to December 31, 1993. The increase in shareholders' equity in
1995, was primarily due to an increase in net unrealized gains (losses) on
securities related to SFAS No. 115 of $3,536,000. The decrease in 1994, was
primarily due to the decrease of 398.89% in net unrealized gains (losses) on
securities available for sale, net of deferred taxes. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Financial Condition -- General; and Results of Operations -- Net
Income."
As a bank holding company, the Company is subject to capital requirements
adopted by the Federal Reserve Board. The Bank, a state-chartered, member bank,
is also subject to the capital requirements of the Federal Reserve Board. See
"ITEM 1. BUSINESS -- Supervision and Regulation." During 1991, the Federal
Reserve Board adopted capital guidelines that, among other things, established a
new minimum leverage ratio for tier 1 Capital to total average assets of 3.0%
for institutions with a composite CAMEL rating of 1 and 4-5% for all other
institutions. The Company's leverage ratio was 11.05%, 10.17% and 10.38% at
December 31, 1995, 1994 and 1993, respectively. The Bank's leverage ratio was
10.69%, 9.93% and 10.21% at December 31, 1995, 1994 and 1993, respectively. See
"ITEM 1. BUSINESS -- Supervision and Regulation -- The Company; -- The Bank."
In December 1988, the Federal Reserve Board adopted final guidelines for
"risk-based capital" which apply to banks and bank holding companies. Effective
December 31, 1992, the guidelines consist of a definition of capital and a
system of assigning assets and off-balance sheet items to risk categories. See
"ITEM 1. BUSINESS -- Supervision and Regulation." Under the guidelines, the
Company and the Bank are required to have a minimum ratio of total capital to
risk-weighted assets of 8.0% and tier 1 Capital must equal 4.0% of total
risk-weighted assets. At December 31, 1995, 1994 and 1993, the Company's tier 1
Capital was 16.96%, 16.25% and 16.07% and total capital was 18.09%, 17.30% and
17.32%, respectively. At December 31, 1995, 1994 and 1993, the Bank's tier 1
Capital was 16.42%, 15.89% and 15.83% and total capital was 17.56%, 16.94% and
17.08%, respectively. See "ITEM 1. BUSINESS -- Supervision and Regulation -- The
Company; -- The Bank."
Effective November 1995, the Bank became a member of the Federal Reserve
System and, thereby became subject to regulation by the Federal Reserve Board in
addition to the California State Banking Department. Prior to becoming a member
of the Federal Reserve System, the Bank was subject to supervision and
regulation by the FDIC and the California State Banking Department. As a result
of the examination completed by the representatives of the FDIC in the fourth
quarter of 1992, the FDIC and the Bank agreed to enter into an informal
agreement in the form of a memorandum of understanding (the Memorandum),
effective March 1993. Pursuant to the Memorandum, the Bank, among other things
agreed to maintain a minimum ratio of tier 1 Capital to total average assets of
7.5%. Additionally, in regards to the other items which will be required under
the Memorandum, the Bank undertook steps to implement certain actions or
restrictions with respect to its lending and dividend activities and to adopt or
revise certain internal policies and procedures. The FDIC released the Bank of
the Memorandum on February 9, 1994. See "ITEM 1. BUSINESS -- Supervision and
Regulation -- The Bank."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following pages contain the Company's consolidated financial
statements, the accompanying notes and the Report of Independent Public
Accountants.
41
<PAGE> 431
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF HOME INTERSTATE BANCORP AND
SUBSIDIARY:
We have audited the accompanying consolidated statements of financial
condition of HOME INTERSTATE BANCORP (a California Corporation) and subsidiary
(the Company) as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of Home
Interstate Bancorp and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
January 26, 1996
42
<PAGE> 432
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
HOME INTERSTATE BANCORP AND SUBSIDIARY
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS: Cash and due from banks $ 38,797,333 $ 42,196,448
Federal funds sold 14,600,000 6,800,000
------------ ------------
Total of cash and cash equivalents 53,397,333 48,996,448
Securities held to maturity
(Approximate market value at December 31,
1995 was $13,179,412) 13,131,498 0
Securities available for sale at market value 120,754,575 167,879,862
------------ ------------
Total Securities 133,886,073 167,879,862
Loans 211,222,744 198,649,133
Allowance for possible loan losses 3,112,544 2,818,078
------------ ------------
Loans, net 208,110,200 195,831,055
Real estate owned 4,918,150 2,175,000
Premises, furniture and equipment, net 14,365,244 13,533,471
Accrued interest receivable and other assets 9,114,621 11,216,160
------------ ------------
TOTAL ASSETS $423,791,621 $439,631,996
============ ============
LIABILITIES: Deposits:
Demand deposits, non-interest bearing $132,208,231 $135,408,787
Savings and interest bearing demand deposits 153,891,411 173,853,766
Time certificates of deposit of $100,000
and over 18,104,735 12,652,699
Other time deposits 64,826,978 70,353,992
------------ ------------
Total Deposits 369,031,355 392,269,244
Securities sold under agreements to
repurchase 0 100,000
Accrued interest payable and other
liabilities 3,344,304 1,609,126
------------ ------------
TOTAL LIABILITIES 372,375,659 393,978,370
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY: Common stock (no par value)
Authorized 20,000,000 shares; issued and
outstanding 4,187,954 shares in 1995 and
3,976,722 shares in 1994 42,858,814 40,454,004
Retained earnings 7,977,308 8,156,001
Unrealized gains (losses) on securities
available for sale, net of deferred taxes 579,840 (2,956,379)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 51,415,962 45,653,626
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $423,791,621 $439,631,996
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
43
<PAGE> 433
CONSOLIDATED STATEMENTS OF INCOME
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE FROM EARNING Interest and fees on loans $22,642,694 $19,928,454 $20,671,245
ASSETS: Interest on securities 8,388,656 8,248,956 5,905,304
Interest on federal funds sold 618,072 800,807 542,157
Interest on time deposits with
other financial institutions 1,112 4,547 0
----------- ----------- -----------
TOTAL REVENUE FROM
EARNING ASSETS 31,650,534 28,982,764 27,118,706
----------- ----------- -----------
COST OF FUNDS: Interest on savings and interest
bearing demand deposits 3,418,623 3,699,676 3,941,414
Interest on time certificates of
deposit of $100,000 and over 717,921 398,959 486,441
Interest on other time deposits 2,990,712 2,310,616 2,299,093
Interest on securities sold
under agreements to repurchase 27,755 5,625 9,290
----------- ----------- -----------
TOTAL COST OF FUNDS 7,155,011 6,414,876 6,736,238
----------- ----------- -----------
Net revenue from earning assets before
provision for possible loan losses 24,495,523 22,567,888 20,382,468
Provision for possible loan losses 2,100,000 800,000 750,000
----------- ----------- -----------
Net revenue from earning assets 22,395,523 21,767,888 19,632,468
----------- ----------- -----------
OTHER OPERATING REVENUE: Service charges and fees 4,849,974 4,086,949 4,067,524
Securities gains (losses), net 52,590 (130,269) 3,247,710
Other operating revenue 323,163 622,538 442,643
----------- ----------- -----------
TOTAL OTHER
OPERATING
REVENUE 5,225,727 4,579,218 7,757,877
----------- ----------- -----------
OTHER OPERATING EXPENSES: Salaries and employee benefits 10,340,576 10,087,384 9,697,957
Occupancy expense, net 3,005,437 2,628,039 2,487,745
Other operating expenses 9,152,531 9,143,185 9,363,914
----------- ----------- -----------
TOTAL OTHER OPERATING
EXPENSES 22,498,544 21,858,608 21,549,616
----------- ----------- -----------
Income before provision for
income taxes 5,122,706 4,488,498 5,840,729
Provision for income taxes 1,358,950 1,169,100 2,215,300
----------- ----------- -----------
NET INCOME $ 3,763,756 $ 3,319,398 $ 3,625,429
=========== =========== ===========
EARNINGS PER SHARE $.90 $.80 $.87
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
44
<PAGE> 434
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
COMMON STOCK SECURITIES
------------------------ AVAILABLE FOR TOTAL
NUMBER OF RETAINED SALE, NET OF SHAREHOLDERS'
SHARES AMOUNT EARNINGS DEFERRED TAXES EQUITY
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 3,786,925 $ 38,556,034 $ 5,093,255 $ 0 $ 43,649,289
Net income 0 0 3,625,429 0 3,625,429
Cash dividends declared ($.225) 0 0 (852,066) 0 (852,066)
Unrealized gains on securities available for sale,
net of deferred taxes 0 0 0 988,834 988,834
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1993 3,786,925 38,556,034 7,866,618 988,834 47,411,486
Net income 0 0 3,319,398 0 3,319,398
Exercise of stock options 926 9,260 0 0 9,260
Cash dividends declared ($.30) 0 0 (1,141,305) 0 (1,141,305)
Stock dividend issued 188,871 1,888,710 (1,888,710) 0 0
Unrealized losses on securities available for sale,
net of deferred taxes 0 0 0 (3,945,213) (3,945,213)
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1994 3,976,722 40,454,004 8,156,001 (2,956,379) 45,653,626
Net income 0 0 3,763,756 0 3,763,756
Exercise of stock options 12,302 117,115 0 0 117,115
Cash dividends declared ($.41) 0 0 (1,654,754) 0 (1,654,754)
Stock dividend issued 198,930 2,287,695 (2,287,695) 0 0
Unrealized gains on securities available
for sale, net of deferred taxes 0 0 0 3,536,219 3,536,219
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1995 4,187,954 $ 42,858,814 $ 7,977,308 $ 579,840 $ 51,415,962
========= ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
45
<PAGE> 435
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS Net income $ 3,763,756 $ 3,319,398 $ 3,625,429
----------- ------------ ------------
FROM OPERATING Adjustments to reconcile net income to
net cash provided by operating
activities:
ACTIVITIES: Provision for depreciation and amortization 897,162 713,201 740,670
Provision for possible loan losses 2,100,000 800,000 750,000
Amortization of securities premiums 1,625,676 1,415,114 668,506
Accretion of securities discounts (101,984) (104,438) (210,789)
Amortization of deferred loan fees and costs (964,401) (977,666) (1,018,539)
Net (gain) loss on sale of securities
available for sale (52,590) 130,269 (3,247,710)
Net loss on sale of premises, furniture
and equipment 26,156 1,965 4,137
Net loss on sale of real estate owned 614,217 487,828 1,209,340
Net (increase) decrease in accrued
interest receivable and other assets 2,101,539 (1,421,095) 1,534,931
Net increase (decrease) in accrued
interest payable and other liabilities (775,755) 566,266 (2,077,475)
----------- ------------ ------------
Total adjustments 5,470,020 1,611,444 (1,646,929)
----------- ------------ ------------
Net cash provided by operating activities 9,233,776 4,930,842 1,978,500
----------- ------------ ------------
CASH FLOWS Proceeds from sales of securities
available for sale 30,336,537 5,392,285 7,501,774
FROM INVESTING Proceeds from maturities / calls of
ACTIVITIES: securities available for sale 30,962,510 29,126,421 39,639,602
Purchase of securities held to maturity (13,158,916) 0 0
Purchase of securities available for sale (9,570,292) (89,710,019) (65,590,863)
Net (increase) decrease in loans (20,292,613) (192,770) 33,885,924
Proceeds from sale of real estate owned 3,520,503 1,693,411 3,298,010
Proceeds from sale of premises,
furniture and equipment 11,434 502 2,908
Purchase of premises, furniture and equipment (1,766,526) (3,130,911) (339,924)
----------- ------------ ------------
Net cash provided by (used in) investing activities $20,042,637 $(56,821,081) $ 18,397,431
----------- ------------ ------------
</TABLE>
46
<PAGE> 436
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Continued)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS Net increase (decrease) in demand deposits
FROM FINANCING and savings $(23,162,911) $ 46,125,752 $ (4,456,136)
ACTIVITIES: Net increase (decrease) in time certificates
of deposit of $100,000 and over 5,452,036 459,587 (9,699,638)
Net increase (decrease) in other time deposits (5,527,014) 9,884,212 (11,951,737)
Net increase (decrease) in securities
sold under agreements to repurchase (100,000) (3,900,000) 4,000,000
Proceeds from stock options exercised 117,115 9,260 0
Cash dividends declared (1,654,754) (1,141,305) (852,066)
------------ ------------ ------------
Net cash provided by (used in)
financing activities (24,875,528) 51,437,506 (22,959,577)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 4,400,885 (452,733) (2,583,646)
Cash and cash equivalents at beginning of year 48,996,448 49,449,181 52,032,827
------------ ------------ ------------
Cash and cash equivalents at end of year $ 53,397,333 $ 48,996,448 $ 49,449,181
============ ============ ============
Supplemental disclosure of non-cash investing
activities:
Adjustment for SFAS No. 109:
Increase in land and improvements $ 0 $ 0 $ (1,803,542)
Increase in deferred tax liabilities 0 0 1,803,542
Real estate acquired in settlement of loans 6,877,870 1,009,945 3,201,627
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 7,156,031 $ 6,304,019 $ 6,869,153
Income taxes 2,880,500 1,583,700 2,169,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
47
<PAGE> 437
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HOME INTERSTATE BANCORP AND SUBSIDIARY
DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Home Interstate Bancorp (HIB), a bank holding company (the Company) is a
California corporation, and parent of Home Bank (the Bank) which is a state
chartered financial institution. The Bank primarily accepts deposits from and
makes loans to individuals and businesses in Orange County and Los Angeles
County, California.
On January 10, 1996, the Company entered into a definitive agreement (the
Agreement) to merge with CU Bancorp, a California corporation and parent of
California United Bank, National Association. Under the terms of the Agreement,
shareholders of the Company will receive 1.409 shares of CU Bancorp stock for
each share of the Company's stock. The Agreement is subject to shareholder and
regulatory approval and is expected to be completed by the end of the second
quarter 1996.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practice within the banking industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The following are descriptions of the more significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
HIB and its subsidiary, the Bank. All material intercompany balances and
transactions have been eliminated in the consolidated financial statements.
SECURITIES
The Company complies with the Financial Accounting Standards Board SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
Company holds securities in two categories, available for sale and held to
maturity. Securities available for sale may be held for indefinite periods of
time and may be sold in response to changes in interest rates and/or other
economic conditions. These securities are, in the aggregate, carried at market
value. Unrealized gains or losses are calculated based on adjusted cost as
described below. Unrealized gains or losses, net of deferred taxes, are recorded
as a separate component of shareholders' equity. Securities that the Company has
the positive intent and ability to hold to maturity are classified as held to
maturity and accounted for at cost, adjusted for amortization of premium and
accretion of discount. During 1995, $13,158,916 of securities were purchased and
added to the held to maturity portfolio.
The Company's calculation of cost is increased by accretion of discounts
and decreased by amortization of premiums, of which both are computed on the
straight-line method that 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
adjusted cost and computed on the specific identification method and are
classified in other operating revenue, securities gains or losses, net.
48
<PAGE> 438
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
LOANS
Loans are stated at face amount, less payments collected, the allowance for
possible loan losses, unearned discounts and unamortized deferred fees. Interest
on commercial, real estate and simple interest loans is computed on the
principal balance outstanding. Interest on discounted installment loans is
computed on the rule of 78's method over the outstanding periods of the related
loans. Such methods of interest recognition generally result in level rates of
return on principal balances outstanding. The general policy of the Bank is to
discontinue the accrual of interest and transfer loans to non-accrual
(cash-basis) status when loans become 90 days past due or when reasonable doubt
exists with respect to the timely collectibility of interest or principal.
Loan origination 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. As unearned revenue, the net unrecognized fees and
costs are reported as reductions of the loan balance.
The allowance for possible loan 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 portfolio and considers current
economic conditions, historical loan loss experience, assessments of future
potential problem loans and other factors in determining the adequacy of the
allowance. The allowance is based on estimates, and 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.
On January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", which was amended by SFAS No. 118, in October 1994.
Under the new standards, the allowance for credit losses for loans that are
impaired as defined, is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for collateral
dependent loans. Prior to the adoption of these new standards, the Bank
established reserves for impaired loans based on undiscounted cash flows or
based on the fair value of collateral for collateral dependent loans. The
adoption of these new standards did not have a significant impact on the level
of allowances allocated to impaired loans.
As permitted by these new standards, the Bank excludes from their
calculations smaller balance, homogeneous loans such as consumer installment
loans and lines of credit, and direct finance leases. In determining whether a
loan is impaired or not, the Bank applies its normal loan review procedures in
making that judgment. Loans which the Bank expects to collect in full and for
which an insignificant delay, i.e., 45 days past due, or an insignificant
shortfall in amount of payments is anticipated are not considered impaired. The
Bank 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.
REAL ESTATE OWNED
Real estate owned represents real estate acquired through foreclosure or
deed in lieu of foreclosure. Real estate owned is carried at the lower of cost
or fair value less estimated carrying costs and costs of disposition. Cost is
determined at the date of acquisition as the result of a foreclosure sale and is
equal to the receivable balance at that date. If the cost (plus any liabilities
assumed at foreclosure) exceeds the appraised value, the carrying value of the
property is written down to its fair value. During the time the property is
held, all related carrying costs and losses on revaluation are expensed as
incurred. Gains or losses on sales are recorded in conformity with standards
that apply to the accounting for sales of real estate.
49
<PAGE> 439
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are calculated on
the straight-line method over the estimated useful life of the asset or the term
of the related lease, whichever is shorter. Maintenance and repairs are charged
directly to other operating expense. Construction costs, including remodeling,
improvements and the cost of funds to finance major projects are capitalized.
INTANGIBLE ASSETS
On October 19, 1990, HIB consummated a merger which was accounted for as a
purchase transaction, in which The Torrance National Bank (TTNB), a nationally
chartered bank, was merged with and into the Bank. Goodwill resulting from the
acquisition represents the excess purchase price over the fair market value of
net assets acquired. Under generally accepted accounting principles, goodwill is
recorded as an asset and will be amortized to expense using the straight-line
method over 15 years. The total amount of goodwill resulting from this
acquisition was approximately $6,562,000. The balance of $4,374,360 and
$4,811,796 is included in accrued interest receivable and other assets at
December 31, 1995 and 1994, respectively. Amortization of approximately $437,000
is reflected in other operating expenses for the years ended 1995, 1994 and
1993, respectively.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes rather than amounts currently payable under tax
laws. Deferred taxes, which arise from temporary differences between the period
in which certain income and expenses are recognized for financial accounting
purposes and the period in which they affect taxable income, are included in the
amounts provided for income taxes. The Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes", which 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. The Company adopted SFAS No. 109 in 1993. Adoption of SFAS No.
109 did not have a material impact on the Company's consolidated statement of
operations; however, adoption of SFAS No. 109 did result in a reclassification
of deferred taxes related to real estate acquired in the 1990 merger. Under APB
11, the real estate was recorded net of its associated deferred tax liability.
Under SFAS No. 109, the real estate is required to be booked at full value with
the associated deferred tax liability included with other deferred tax items.
POSTRETIREMENT HEALTH BENEFITS
The Company provides certain health care benefits for retirees. Effective
July 15, 1992, the Company made significant changes to the benefits including
decreases in the benefits provided and elimination of all benefits for employees
who retire after December 31, 1994. The benefits require that retirees make
contributions that vary by years of service and are adjusted annually. Prior to
1993, the Company recognized the cost of providing the benefits on a cash basis
by expensing the insurance premiums less the required retiree contributions.
In December of 1990, the FASB issued SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions". Under SFAS No. 106, the
Company must recognize the cost of postretirement health benefits on an accrual
basis instead of the current cash basis. During 1993, the Company adopted SFAS
No. 106. Adoption of SFAS No. 106 did not have a material impact on the 1993
results of operations of the Company.
50
<PAGE> 440
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number
of shares of common stock outstanding during the period. The weighted average
number of shares have been retroactively adjusted to reflect a stock dividend in
1995 and 1994. 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 4,177,865, 4,175,207 and 4,175,084 for 1995, 1994 and 1993,
respectively.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior years to conform to the
current year presentation.
NOTE 2. AVERAGE FEDERAL RESERVE BALANCES:
The average cash reserve balances required to be maintained by the Federal
Reserve Bank were approximately $10,879,000 and $10,255,000 for the years ended
December 31, 1995 and 1994, respectively.
51
<PAGE> 441
NOTE 3. SECURITIES:
A summary of securities held to maturity at December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 5,347,290 $ 61,718 $ 0 $ 5,409,008
Obligations of states and political
subdivisions 6,413,525 5,661 (25,109) 6,394,077
Corporate securities 652,783 5,644 0 658,427
Equity securities 717,900 0 0 717,900
----------- ----------- ----------- -----------
Total securities held to maturity $13,131,498 $ 73,023 $ (25,109) $13,179,412
=========== =========== =========== ===========
</TABLE>
A summary of securities available for sale at December 31, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 93,078,552 $ 963,359 $ (85,794) $ 93,956,117
Obligations of states and political
subdivisions 7,165,362 32,694 (39,792) 7,158,264
Corporate securities 19,139,801 121,280 (44,700) 19,216,381
Equity securities 380,391 66,143 (22,721) 423,813
------------ ------------ ------------ ------------
Total securities available for sale $119,764,106 $ 1,183,476 $ (193,007) $120,754,575
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $136,872,468 $ 19,473 $ (3,979,188) $132,912,753
Obligations of states and political
subdivisions 13,624,894 169,515 (338,159) 13,456,250
Corporate securities 22,058,793 0 (938,371) 21,120,422
Equity securities 380,391 49,143 (39,097) 390,437
------------ ------------ ------------ ------------
Total securities available for sale $172,936,546 $ 238,131 $ (5,294,815) $167,879,862
============ ============ ============ ============
</TABLE>
Included in U. S. Treasury securities and obligations of U. S. government
agencies and corporations available for sale at December 31, 1995 and 1994 are
several mortgage backed securities which have a cost of $3,661,375 and
$5,217,111 and a market value of $3,689,384 and $4,954,170 with gross unrealized
gains of $35,264 and $10,384 and gross unrealized losses of $7,255 and $273,325,
respectively.
52
<PAGE> 442
NOTE 3. SECURITIES: (Continued)
The cost and market value of securities at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY COST MARKET VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 0 $ 0
Due after one year through
five years 5,753,118 5,794,683
Due after five years through
ten years 2,086,591 2,106,150
Due after ten years 5,291,789 5,278,579
----------- -----------
Total securities held to maturity $13,131,498 $13,179,412
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE COST MARKET VALUE
------------ ------------
<S> <C> <C>
Due in one year or less $ 50,551,232 $ 50,637,772
Due after one year through
five years 65,349,127 66,146,258
Due after five years through
ten years 1,259,484 1,256,776
Due after ten years 2,604,263 2,713,769
------------ ------------
Total securities available for sale $119,764,106 $120,754,575
============ ============
</TABLE>
Proceeds from sales of securities during 1995, 1994 and 1993 were
$30,336,537, $5,392,285 and $7,501,774 and the proceeds from calls of securities
during 1995, 1994 and 1993 were $3,970,276, $2,224,550 and $6,117,249,
respectively. Gross gains on sales for 1995, 1994 and 1993 were $162,639, $-0-
and $3,181,894 and gross gains on calls were $17,898, $14,550 and $66,193 for
1995, 1994 and 1993, respectively. Gross losses on sales were $127,947, $144,819
and $377 for 1995, 1994 and 1993, respectively.
As of December 31, 1995 and 1994, securities carried at $17,075,620 and
$18,089,066, respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
Included in interest on securities in 1995, 1994 and 1993 is $290,114,
$717,161 and $1,142,785, respectively, from obligations of states and political
subdivisions which are exempt from federal tax.
Included in states and political subdivisions securities at December 31,
1992 were $8,625,000 par value of eight separate issues of taxable municipal
securities (the Bonds) purchased at $8,356,728. At the time of purchase, the
Bonds were rated "Triple-A" by a nationally recognized rating agency and issued
by Executive Life of California (Executive Life). Executive Life was seized by
the California Insurance Commission on April 11, 1991 and placed in
conservatorship. Executive Life subsequently defaulted on payments due the
issuers because of a moratorium on all payments imposed by the California
Insurance Commission. In turn, since April 15, 1991, all issues defaulted on
regular interest payments. The Company placed all issues on non-accrual in 1991.
At December 31, 1992 and 1991, the reported market values of the Bonds were
approximately $4,416,850 and $3,450,000, respectively. Management concluded that
the value of the Bonds could remain impaired for an uncertain period of time due
to the possibility of potential extended litigation. Accordingly, at December
31, 1991, management elected to charge-off that portion of the Bonds which
exceeded the approximate market value of $3,450,000. The amount charged-off in
1991 was $5,027,441, reducing the bonds from their book value of $8,477,441, to
their market value. During 1993, the Company sold all of the Bonds for
$6,623,124, resulting in a gain on sale of $3,173,124.
53
<PAGE> 443
NOTE 4. LOANS:
The loan portfolio at December 31, 1995 and 1994, consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Commercial loans $ 78,155,048 $ 95,235,410
Real estate loans - construction 16,933,018 8,404,509
Real estate loans - other 81,196,881 61,851,756
Installment loans 33,562,662 26,996,400
Other loans 1,634,602 1,771,182
Non-accrual loans 3,232,288 6,592,877
------------ ------------
214,714,499 200,852,134
Less: Unearned discounts and fees 3,491,755 2,203,001
------------ ------------
Total loans 211,222,744 198,649,133
Less: Allowance for possible loan losses 3,112,544 2,818,078
------------ ------------
Loans, net $208,110,200 $195,831,055
============ ============
</TABLE>
The Company has concentrated its lending activity almost exclusively to
customers within the Los Angeles, Orange, Riverside and San Bernardino counties
of California. Commercial and industrial loans to small and medium size
companies in widely diversified industries and commercial real estate loans
represent the largest component of the portfolio. These groupings of loans are
followed by loans to individuals for household, family and other personal
expenditures. It is judged that none of these lending activities expose the Bank
to undue credit risk; however, economic conditions and real estate markets in
Southern California may affect the Company's loan portfolio and underlying
collateral values.
The Company has various types of real estate loans both for development and
long term financing. As of December 31, 1995 and 1994, the Company's real estate
loan portfolio, excluding non-accrual loans of $1,632,355 and $4,971,000,
respectively, is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Construction and land development $16,933,018 $ 8,404,509
Mortgage - commercial 65,273,064 43,687,269
Mortgage - residential 15,923,817 18,164,487
---------- ----------
Total $98,129,899 $70,256,265
=========== ===========
</TABLE>
The construction sector of the loan portfolio is widely diversified in a
number of projects with an emphasis on loans for the construction of single
family residential properties in the Los Angeles Basin. Substantially all the
construction loans are concentrated within a close proximity to the Company's 15
locations.
Within the diversified commercial and industrial loan portfolio there
exists approximately $15,525,000 of loan commitments which are secured by
accounts receivable lending loan arrangements of which approximately $7,050,000
represents the balance outstanding at December 31, 1995. These loans are closely
monitored on a monthly basis by a trained asset-lending group with periodic
audits performed by the Company's internal audit staff under agreements which
require additional lending disciplines should any credit weakness be detected.
Non-accruing loans totaled approximately, $3,232,288 and $6,592,877 at
December 31, 1995 and 1994, respectively. Interest income that would have been
recognized on non-accrual loans if they had performed in accordance with the
terms of the loans was approximately $221,700 and $412,600, respectively. At
December 31, 1995 and 1994, the Bank had $106,000 and $52,000 loans past due 90
days or more in interest or principal and still accruing interest.
54
<PAGE> 444
NOTE 4. LOANS: (Continued)
An analysis of the activity in the allowance for possible loan losses for
the years ended December 31, 1995, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 2,818,078 $ 3,573,446 $ 4,011,176
Provision for possible loan
losses 2,100,000 800,000 750,000
Loans charged-off (2,483,502) (2,026,835) (3,891,205)
Recoveries on loans previously
charged-off 677,968 471,467 2,703,475
----------- ----------- -----------
Balance at end of year $ 3,112,544 $ 2,818,078 $ 3,573,446
=========== =========== ===========
</TABLE>
At December 31, 1995, the recorded investment in loans that are considered
to be impaired was $2,867,862, all of which were non-accruing, with a related
loss allowance of $355,563. Of the $2,867,862 of impaired loans, $200,001 was
measured using the present value method and $2,667,861 was measured using the
fair value of the collateral.
NOTE 5. LOANS TO RELATED PARTIES:
An analysis of the activity with respect to aggregate loan balances of
$60,000 or more involving related parties (Officers, Directors and their
affiliates) is as follows:
<TABLE>
<CAPTION>
BALANCE AT NEW LOANS BALANCE AT
DECEMBER 31, 1994 AND ADDITIONS REPAYMENTS DECEMBER 31, 1995
----------------- ------------- ---------- -----------------
<S> <C> <C> <C>
$1,211,017 $0 $(151,806) $1,059,211
</TABLE>
All related party loans were current as to principal and interest as of
December 31, 1995. In management's opinion, these loans were made in the
ordinary course of business at prevailing rates and terms.
55
<PAGE> 445
NOTE 6. PREMISES, FURNITURE AND EQUIPMENT:
Premises, furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Land and improvements $ 7,701,241 $ 7,630,658
Building and improvements 8,561,109 8,388,387
Furniture, fixtures and equipment 7,351,654 6,814,443
Leasehold improvements 273,937 257,151
----------- -----------
23,887,941 23,090,639
Less: Accumulated depreciation and
amortization 9,522,697 9,557,168
----------- -----------
$14,365,244 $13,533,471
=========== ===========
</TABLE>
The amounts of depreciation and amortization included in net occupancy
expense were $897,162, $713,201 and $740,670 in 1995, 1994 and 1993,
respectively, and are based on the following estimated useful lives:
Building and improvements 5 to 40 years
Furniture, fixtures and equipment 5 to 10 years
Leasehold improvements 10 to 30 years
NOTE 7. INCOME TAXES:
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT
Federal $ 1,417,700 $ 976,900 $ 1,923,800
State 497,900 174,700 784,400
----------- ----------- -----------
1,915,600 1,151,600 2,708,200
----------- ----------- -----------
DEFERRED
Federal (320,300) 15,000 (390,600)
State (236,400) 2,500 (102,300)
----------- ----------- -----------
(556,700) 17,500 (492,900)
----------- ----------- -----------
$ 1,358,900 $ 1,169,100 $ 2,215,300
=========== =========== ===========
</TABLE>
The provision for income taxes includes tax of $21,600, $(54,200) and
$1,342,300, related to net securities gains (losses) for 1995, 1994 and 1993,
respectively. At December 31, 1995, there are no accrued federal and state
income taxes. Accrued federal and state income taxes at December 31, 1994, are
approximately $279,500.
56
<PAGE> 446
NOTE 7. INCOME TAXES: (Continued)
Deferred taxes arise from temporary differences in the recognition of the
revenues, expenses and tax credits for tax and financial reporting purposes. The
tax effects of principal temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Allowance for possible loan losses $(117,000) $ 391,500 $ 137,100
Real estate owned (145,300) (187,900) (246,100)
Mark to market, IRC Section 475 (65,700) (65,800) 263,000
Accretion/amortization of discounts/premiums
on securities (30,700) 61,000 (88,800)
Depreciation (43,700) (24,700) (6,300)
Vacation accrual 7,300 4,900 (102,700)
Pension cost (55,700) (167,300) 52,900
Depreciation of leverage leases (18,100) (15,000) (263,400)
State franchise taxes (79,200) 256,100 (231,400)
Other (8,600) (235,300) (7,200)
--------- --------- ---------
$(556,700) $ 17,500 $(492,900)
========= ========= =========
</TABLE>
The provisions for income taxes varied from the Federal statutory rate of
34% for 1995, 1994 and 1993 for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ---------------------- ------------------------
AMOUNT % Amount % Amount %
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Provision for income
taxes at statutory rate $ 1,741,800 34.0 % $ 1,526,100 34.0 % $ 1,985,800 34.0 %
Tax exempt interest (125,500) (2.5) (233,400) (5.2) (369,000) (6.3)
State franchise taxes,
net of federal tax benefit 172,600 3.4 83,900 1.9 450,200 7.7
Goodwill 153,000 3.0 149,800 3.3 148,700 2.5
AMT 0 0 (367,000) (8.2) 0 0
California enterprise
zone exclusion (200,000) (3.9) 0 0 0 0
Reversal of contingent
reserve (377,000) (7.4) 0 0 0 0
Other, net (6,000) (0.1) 9,700 0.2 (400) 0
----------- ---- ----------- ---- ----------- ----
$ 1,358,900 26.5% $ 1,169,100 26.0 % $ 2,215,300 37.9 %
=========== ==== =========== ==== =========== ====
</TABLE>
The cumulative temporary differences comprising the net deferred tax asset
and (liability) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Allowance for possible loan losses $ 547,000 $ 430,000
Real estate owned 717,700 572,400
Mark to market, IRC Section 475 (131,500) (197,200)
Accretion/amortization of discounts/premiums
on securities 0 (30,700)
Depreciation (87,700) (131,400)
Vacation accrual 91,300 98,600
Pension cost 0 (55,700)
Safe harbor leases (157,200) (175,300)
State franchise taxes 200,000 120,800
Step-up of land acquired in TTNB merger (1,814,400) (1,819,300)
Other 35,100 31,400
----------- -----------
(599,700) (1,156,400)
Unrealized (gains) losses on securities
available for sale (410,700) 2,100,300
----------- -----------
$(1,010,400) $ 943,900
=========== ===========
</TABLE>
57
<PAGE> 447
NOTE 8. EMPLOYEE BENEFIT PLANS:
PROFIT SHARING
The Bank offers a trusteed profit sharing plan to employees with one year
of continuous service. Contributions are determined by the Board of Directors
based upon annual profits. Contributions were $496,600, $441,200 and $150,000 in
1995, 1994 and 1993, respectively.
RETIREMENT
The Company has a non-contributory pension plan covering all employees over
21 years of age with one year of continuous service. Pension benefits are
payable upon normal or early retirement and in accordance with the appropriate
payment option as defined in the plan. Benefits are based on the participant's
salary and years of service. Effective January 31, 1994, the Company
discontinued further accrual of benefits. In January 1995, the Company notified
all participants of the intent to terminate the plan effective April 13, 1995.
Plan assets are currently invested in an immediate participation guarantee
contract (fixed dollar account) with an insurance company.
The pension costs for the years ended December 31, 1995, 1994 and 1993
included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Service cost -- benefits earned during the period $ 0 $ 0 $197,316
Interest cost on projected benefits obligation 162,864 130,044 221,318
Actual return on plan assets (370,451) 26,945 (691,145)
Net amortization and deferral 136,661 (239,827) 451,425
-------- -------- --------
Total pension costs $(70,926) $(82,838) $178,914
======== ======== ========
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated statements of financial condition at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Actuarial present value of benefits
obligations:
Accumulated benefit obligation $ 2,507,907 $ 2,253,501
=========== ===========
Vested benefit obligation $ 2,432,675 $ 2,166,804
=========== ===========
Plan assets at fair value 3,734,847 3,419,862
Projected benefit obligation 2,507,907 2,253,501
----------- -----------
Plan assets in excess of projected
benefit obligation 1,226,940 1,166,361
Unrecognized net (gain) loss 143,078 140,564
Unrecognized prior service cost 0 0
Unrecognized net transition asset
existing at the date of initial
application of SFAS 87 (38,002) (45,835)
----------- -----------
Prepaid pension cost included in plan assets $ 1,332,016 $ 1,261,090
=========== ===========
The principal assumptions were:
Discount rates 7.25% 7.25%
Rates of increase in compensation levels 5.76% 5.76%
Expected long-term rate of return on plan assets 7.50% 7.50%
</TABLE>
58
<PAGE> 448
NOTE 8. EMPLOYEE BENEFIT PLANS: (Continued)
STOCK OPTIONS
The Bank adopted a stock option plan in 1985. The 1985 plan authorized the
issuance of up to 566,549 shares of common stock at the discretion of the Board
of Directors, and has an expiration date of March 12, 1995. On May 16, 1989, the
shareholders approved an amendment to the 1985 plan providing the addition of
220,500 shares for future grants. Options are granted at a price not less than
the fair market value of the stock at the date of grant. Options expire five
years from the date granted and become exercisable at the date of grant. There
were no options canceled in 1995, 1994 or 1993. The plan provides for the
retroactive adjustments of options granted for the effect of stock dividends and
stock splits. Stock options have been adjusted to reflect the five percent stock
dividend declared in 1995 and 1994. A summary of stock option activity during
1993, 1994 and 1995 for the plan is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
----------------------------
NUMBER RANGE OF
OF PRICES PER
SHARES OPTION SHARE
------- ---------------
<S> <C> <C>
Shares under option and excercisable at December 31, 1992 196,737 $10.00 - $13.82
Options forfeited (22,167) 10.00 - 13.82
Options exercised 0
Options granted 0
-------
Shares under option and exercisable at December 31, 1993 174,570 10.00
Options forfeited (6,841) 10.00
Options exercised (926) 10.00
Options granted(1) 13,340 9.52 - 9.88
-------
Shares under option and exercisable at December 31, 1994 180,143 9.52 - 9.88
Options forfeited (7,713) 9.52 - 9.53
Options exercised (12,302) 9.52
Options granted(2) 8,006 9.06 - 9.40
-------
Shares under option and exercisable at December 31, 1995,
with expiration dates ranging from
July 17, 1997 through August 18, 1997 168,134 $ 9.06 - $9.40
=======
Shares available for future grant at December 31, 1995 0
</TABLE>
(1) Grant of 5,000 shares, new options at $9.875 and 8,340 as a result of 5%
stock dividend in 1994.
(2)All shares granted were as a result of the 5% stock dividend in 1995.
NOTE 9. SHAREHOLDERS' EQUITY:
On November 15, 1995 and October 19, 1994, the Company declared a five
percent stock dividend to all shareholders of record as of December 1, 1995 and
1994 payable on December 20, 1995 and 1994. As a result of the dividend, the
Company issued 198,930 and 188,871 shares of common stock (fractional shares
were paid in the form of cash dividends) and capitalized retained earnings of
$2,287,695 and $1,888,710 which is equal to the number of shares issued at a
market value of $11.50 and $10.00 per share as of the declaration dates,
respectively. No stock dividends were declared to shareholders of record during
the year ended December 31, 1993. During 1995, the Company declared cash
dividends in the aggregate of $1,654,754 or $.41 per share and paid cash
dividends in the aggregate of $1,298,778 or $.325 per share. In January 1996,
the Company paid cash dividends in the aggregate of $358,008 or $.085 per share.
Under the Federal Reserve Board's capital guidelines, the Company is
required to have a minimum ratio of total capital to risk-weighted assets of
8.0%, tier 1 capital to total risk-weighted assets of 4.0% and a leverage ratio
of 3.0%. At December 31, 1995 and 1994, the Company's ratios were 18.09%, 16.96%
and 11.05% and 17.30%, 16.25% and 10.17%, respectively.
59
<PAGE> 449
NOTE 10. COMMITMENTS AND CONTINGENCIES:
In order to meet the financing needs of its customers in the normal course
of business, the Company is a party to financial instruments with "off-balance
sheet" risk. Those financial instruments consist of 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. Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. The
Company does not enter into any interest rate swaps or caps or forward or
futures contracts.
The off-balance sheet risk inherent in these instruments is the possibility
of loss 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, the Company
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.
Loan commitments are not usually made for more than 30 days. If rates are
quoted, they are generally stated in relation to the prime rate.
These financial instruments involve, to varying degrees, exposure to credit
risk in excess of the amounts recognized in the statement of financial
condition. This exposure is represented by the contractual notional amount of
those instruments. As of December 31, 1995 and 1994, the contractual notional
amount of these instruments was as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Standby and commercial letters of credit $ 2,806,000 $ 4,950,000
Unused consumer loans secured by real estate 6,625,000 7,376,000
Unused commercial loans secured by real estate 18,959,000 7,894,000
Other loan commitments 23,955,000 23,646,000
----------- -----------
Total commitments $52,345,000 $43,866,000
=========== ===========
</TABLE>
Since many of the commitments are expected to expire without being drawn
upon, the amounts above do not necessarily represent future cash requirements.
In the normal course of doing business, the Company occasionally becomes a
party to litigation. Currently, there are two cases pending against the Company
which relate to certain depository accounts that were opened for varying periods
from twenty-nine days to four months. In the opinion of management, and the
Company's legal counsel, the disposition of all pending litigation involving the
Company will have no adverse material effect upon its financial condition and
results of operations.
The Company is committed through June 1998 for payments under a data
processing service agreement and through March 1997 for payments under a service
center processing agreement. Minimum annual payments are approximately
$1,335,360 and $1,123,000, escalating over the term of the agreements to
approximately $1,729,000 and $1,265,000, respectively.
60
<PAGE> 450
NOTE 11. OTHER OPERATING EXPENSES:
Other operating expenses include the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Legal and professional services $ 641,343 $ 579,793 $ 606,451
Other data processing expense 1,807,308 1,819,979 1,804,829
Service center processing expense 1,233,847 1,165,701 1,111,355
Other outside services 73,295 521,679 258,952
Stationery and supplies 386,607 477,545 413,996
Operating losses 396,124 280,412 214,343
Losses on real estate owned 626,944 559,634 1,209,340
Other operating expense 3,987,063 3,738,442 3,744,648
---------- ---------- ----------
$9,152,531 $9,143,185 $9,363,914
========== ========== ==========
</TABLE>
NOTE 12. REGULATORY MATTERS:
The Bank is subject to regulation by the Federal Reserve Board, Federal
Deposit Insurance Corporation (FDIC) and the California State Banking
Department. As a result of the examination completed by the representatives of
the FDIC in the fourth quarter of 1992, the FDIC and the Bank agreed to enter
into an informal agreement in the form of a memorandum of understanding (the
Memorandum), effective March 1993. Pursuant to the Memorandum, the Bank, among
other things agreed to maintain a minimum ratio of tier 1 capital to total
average assets of 7.5%. Additionally, in regards to the other items which were
required under the Memorandum, the Bank undertook steps to implement certain
actions or restrictions with respect to its lending and dividend activities and
to adopt or revise certain internal policies and procedures. The FDIC released
the Bank of the Memorandum on February 9, 1994.
NOTE 13. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values for its financial
instruments.
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instruments.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
current economic conditions, risk characteristics of various financial
instruments, prepayment assumptions, future expected loss experience and other
such factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Additionally, the Company intends to hold the majority of its assets and
liabilities to their stated maturities. Therefore, the Company does not intend
to realize any significant differences between carrying value and fair value
through sale or other disposition. No attempt should be made to adjust
shareholders' equity to reflect the following fair value disclosures required by
the standard as management believes them to be inconsistent with their
philosophies and the operations of this Company.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of existing and anticipated future customer relationships and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include the branch network, deferred tax assets and liabilities,
real estate owned, land, furniture, fixtures and equipment and goodwill.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments as of December 31, 1995 and 1994.
61
<PAGE> 451
NOTE 13. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: (Continued)
CASH AND FEDERAL FUNDS SOLD (SHORT-TERM INVESTMENTS)
For cash and federal funds sold (short-term investments), the carrying
amount (book value) is a reasonable estimate of fair value.
SECURITIES
For securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices of similar securities.
LOANS
For certain homogeneous categories of loans, such as loans secured by real
estate, auto loans and other consumer loans, fair value is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. For loans which are immediately repriceable, the carrying
value is a reasonable estimate of fair value. The allowance for possible loan
losses, plus additional discounts on certain classified loans are estimated to
be a market discount of the credit risks inherent in the portfolio based upon a
bulk sale concept.
DEPOSITS
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity certificates of deposit is estimated by discounting the
future cash flows using the rates currently offered for deposits of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (SHORT-TERM BORROWINGS)
The carrying amount (book value) of securities sold under agreements to
repurchase is a reasonable estimate of fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments and standby letters of credit is estimated
using the fees currently charged to enter into similar agreements, taking into
account remaining terms of the agreements. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates. The fair value of these unrecorded financial instruments is
not material to the Company's financial position or fair value disclosures at
December 31, 1995 and 1994. (See Note 10. Commitments and Contingencies, for
contractual notional amounts of the instruments, contained herein).
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 December 31, 1994
--------------------------------- ----------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and federal funds sold $ 53,397,000 $ 53,397,000 $ 48,996,000 $ 48,996,000
Securities 133,886,000 133,934,000 167,880,000 167,880,000
Loans, net 208,110,000 207,116,000 195,831,000 191,691,000
------------ ------------ ------------ ------------
$395,393,000 $394,447,000 $412,707,000 $408,567,000
============ ============ ============ ============
Financial Liabilities:
Deposits $369,031,000 $369,230,000 $392,269,000 $391,620,000
Securities sold under agreements to repurchase 0 0 100,000 100,000
------------ ------------ ------------ ------------
$369,031,000 $369,230,000 $392,369,000 $391,720,000
============ ============ ============ ============
</TABLE>
62
<PAGE> 452
NOTE 14. CONDENSED FINANCIAL INFORMATION OF HOME INTERSTATE BANCORP (PARENT
COMPANY ONLY):
At December 31, 1995 and 1994, the condensed unconsolidated Statements of
Financial Condition of the Parent Company are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,011,446 $ 224,687
Securities available for sale 932,563 892,687
Investment in the Bank 49,784,997 44,536,588
Other assets 6,850 6,850
------------ ------------
TOTAL ASSETS $ 51,735,856 $ 45,660,812
============ ============
LIABILITIES:
Dividends payable and other liabilities $ 319,894 $ 7,186
------------ ------------
SHAREHOLDERS' EQUITY:
Contributed capital 42,858,814 40,454,004
Retained earnings 7,977,308 8,156,001
Unrealized gains (losses) on
securities available for sale, net of
deferred taxes, and equity in
unrealized gains (losses) on
securities of the Bank 579,840 (2,956,379)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 51,415,962 45,653,626
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 51,735,856 $ 45,660,812
============ ============
</TABLE>
For years ended December 31, 1995, 1994 and 1993, the condensed
unconsolidated Statements of Income are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Dividends from the Bank $2,125,000 $1,281,659 $600,000
Securities gains 0 0 2,307
Interest and other income 75,218 78,438 65,458
---------- ---------- --------
Total Income 2,200,218 1,360,097 667,765
Legal and other expenses 271,283 163,791 151,181
---------- ---------- --------
Income before income taxes and equity in
undistributed income of subsidiary 1,928,935 1,196,306 516,584
Allocated income tax benefit 96,400 41,600 40,800
Equity in undistributed income of
subsidiary 1,738,421 2,081,492 3,068,045
---------- ---------- ----------
NET INCOME $3,763,756 $3,319,398 $3,625,429
========== ========== ==========
</TABLE>
63
<PAGE> 453
NOTE 14. CONDENSED FINANCIAL INFORMATION OF HOME INTERSTATE BANCORP (PARENT
COMPANY ONLY): (Continued)
For the years ended December 31, 1995, 1994 and 1993, the condensed
unconsolidated Statements of Cash Flows are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,763,756 $ 3,319,398 $ 3,625,429
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of securities premiums 4,926 4,927 5,711
Net gain on sale of securities 0 0 (2,307)
Equity in affiliated subsidiary (1,738,421) (2,081,492) (3,068,045)
Net decrease other assets 0 0 99,307
Net increase (decrease) in dividends
payable and other liabilities 294,137 (642) (41,300)
----------- ----------- -----------
Total adjustments (1,439,358) (2,077,207) (3,006,634)
----------- ----------- -----------
Net cash provided by operating activities 2,324,398 1,242,191 618,795
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities 0 0 104,895
----------- ----------- -----------
Net cash provided by investing activities 0 0 104,895
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from stock options exercised 117,115 9,260 0
Cash dividends declared (1,654,754) (1,141,305) (852,066)
----------- ----------- -----------
Net cash used in financing activities (1,537,639) (1,132,045) (852,066)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 786,759 110,146 (128,376)
Cash and cash equivalents at beginning of year 224,687 114,541 242,917
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,011,446 $ 224,687 $ 114,541
=========== =========== ===========
Supplemental disclosure of non-cash investing and
financing activities:
Adjustment for SFAS No. 115:
(Increase) decrease in unrealized
gains on securities available for sale $ (44,802) $ 68,511 $ (72,824)
(Increase) decrease in investment in
the Bank for unrealized gains
(losses) on securities available for sale, net (3,509,988) 3,910,511 (951,610)
Increase (decrease) in deferred tax
liabilities related to unrealized
gains on securities available for sale 18,571 (33,809) 35,600
Increase (decrease) in shareholders'
equity for unrealized gains (losses),
net of deferred taxes 3,536,219 (3,945,213) 988,834
</TABLE>
Under California banking law, the Bank is limited in its ability to declare
dividends to the Company to the lesser of the retained earnings of the Bank or
the net income of the Bank for its last three fiscal years, less distributions
made by the Bank to the Company during such period. The effect of this law is to
limit the dividends the Bank may declare at December 31, 1995 to approximately
$6,841,000.
Federal law also restricts the Bank from extending credit to the Company
since any such extensions of credit are subject to strict collateral
requirements.
64
<PAGE> 454
NOTE 15. PURCHASE AND ASSUMPTION OF CERTAIN ASSETS AND LIABILITIES:
On April 1, 1994, the Bank entered into an Insured Deposit Purchase and
Assumption Agreement (P&A Agreement) with the FDIC for the purchase and
assumption of certain assets and liabilities of Mechanics National Bank,
Paramount, California. Mechanics National Bank was declared insolvent and closed
by the Office of the Comptroller of the Currency on April 1, 1994 and the FDIC
was appointed the receiver thereof. Concurrent with the execution of the P & A
Agreement, the Bank entered into a FDIC Consortium Agreement with the FDIC and
California United Bank, N.A., Pacific Western National Bank, Foothill
Independent Bank, Landmark Bank, Cerritos Valley Bank and De Anza National Bank
(Consortium Members).
The Bank, as agent for the Consortium Members, purchased approximately
$22,535,000 of certain assets consisting principally of cash and cash
equivalents, securities and Fed funds sold and assumed approximately $99,355,000
of certain liabilities consisting of deposit liabilities and accrued interest
from the FDIC. The Bank purchased approximately $21,700,000 of such assets and
assumed $17,100,000 of such deposits of two former Mechanics National Bank
branches located in Torrance and Paramount, California. All remaining acquired
assets and assumed liabilities were transferred to the Consortium Members.
On July 15, 1994, the Bank entered into a P & A Agreement with the FDIC for
certain assets and liabilities of the Bank of San Pedro (San Pedro), San Pedro,
California. San Pedro was closed by the California Superintendent of Banks on
July 15, 1994 and the FDIC was appointed the receiver thereof.
The Bank purchased $12,884,000 of certain assets consisting principally of
loans, cash and cash equivalents and investment securities, and assumed
approximately $74,200,000 of certain liabilities consisting of insured deposit
liabilities and accrued interest from the FDIC.
65
<PAGE> 455
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors and Executive
Officers of the Registrant is contained in the Company's definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders under the
heading Directors, Nominees and Executive Officers of the Company which the
Company intends to file with the Commission within 120 days following the end of
the Company's 1995 fiscal year pursuant to the Commission's Rule 14A promulgated
under the Securities Exchange Act of 1934, as amended. Such information is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item regarding Executive Compensation is
contained in the Company's definitive Proxy Statement for the Company's 1996
Annual Meeting of Shareholders under the heading Directors, Nominees and
Executive Officers of the Company which the Company intends to file with the
Commission within 120 days following the end of the Company's 1995 fiscal year
pursuant to the Commission's Rule 14A promulgated under the Securities Exchange
Act of 1934, as amended. Such information is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item regarding Security Ownership of
Certain Beneficial Owners and Management is contained in the Company's
definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders
under the heading Principal Shareholders and Election of Directors which the
Company intends to file with the Commission within 120 days following the end of
the Company's 1995 fiscal year pursuant to the Commission's Rule 14A promulgated
under the Securities Exchange Act of 1934, as amended. Such information is
incorporated herein by this reference.
66
<PAGE> 456
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required by this Item regarding Certain Relationships and
Transactions is contained in the Company's definitive Proxy Statement for the
Company's 1996 Annual Meeting of Shareholders under the heading Certain
Transactions which the Company intends to file with the Commission within 120
days following the end of the Company's 1995 fiscal year pursuant to the
Commission's Rule 14A promulgated under the Securities Exchange Act of 1934, as
amended. Such information is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company, the
accompanying notes and the Report of Independent Public Accountants are included
in Item 8 of this Annual Report on Form 10-K at the pages referenced below:
<TABLE>
<CAPTION>
ITEM PAGE NO.
---- --------
<S> <C>
1. Report of Independent Public Accountants................................................................... 42
2. Consolidated Statements of Financial Condition as of December 31, 1995 and 1994............................ 43
3. Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993..................... 44
4. Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993....................................................... 45
5. Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.................. 46
6. Notes to Consolidated Financial Statements................................................................. 48
</TABLE>
(a)(2) SCHEDULES.
No Schedules are listed because they are not applicable, not material or
because the information required by such schedules is included in the
consolidated financial statements or the notes thereto.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the last
quarter of the Company's fiscal year ended December 31, 1995.
(c) EXHIBITS.
Exhibits required to be filed hereunder are indexed on sequentially
numbered page 70 hereof.
The following is a list of management contracts and compensatory plans and
arrangements required to be filed hereunder:
1. The Company's 1985 Stock Option Plan, as amended; form of Incentive
Stock Option Agreement; and form of Non-Qualified Stock Option
Agreement, at Exhibit 4 to Registration Statement on Form S-8, No.
33-30573.
2. Change of Control Agreement, James P. Staes.
3. Change of Control Agreement, Bill Neal.
4. Change of Control Agreement, Keith W. Barnes.
67
<PAGE> 457
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 AND TITLE DATE
- -------------------------------------------------------------------- -----------------
<S> <C>
/s/ Ruth A. Martin February 21, 1996
- --------------------------------------------------------------------
Ruth A. Martin, Director
Chairman of the Board
/s/ James P. Staes February 21, 1996
- --------------------------------------------------------------------
James P. Staes, Director
President
/s/ D. A. Buschenfield February 21, 1996
- --------------------------------------------------------------------
D. A. Buschenfield, Director
Vice President
/s/ J. Richard Denham February 21, 1996
- --------------------------------------------------------------------
J. Richard Denham, Director
Vice President
/s/ Randall G. Elston February 21, 1996
- --------------------------------------------------------------------
Randall G. Elston, Director
/s/ Roger K. Freeman February 21, 1996
- --------------------------------------------------------------------
Roger K. Freeman, Director
/s/ Bill Neal February 21, 1996
- --------------------------------------------------------------------
Bill Neal, Director
/s/ Donald G. Martin February 21, 1996
- --------------------------------------------------------------------
Donald G. Martin, Director
/s/ George W. Post February 21, 1996
- --------------------------------------------------------------------
George W. Post, Director
/s/ Keith W. Barnes February 21, 1996
- --------------------------------------------------------------------
Keith W. Barnes, Senior Vice President,
Chief Financial Officer, Controller and Principal Accounting Officer
</TABLE>
68
<PAGE> 458
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.
Home Interstate Bancorp by
<TABLE>
<S> <C>
/s/ Keith W. Barnes
- --------------------------------------------------------------------
Keith W. Barnes, Senior Vice President, Dated February 21, 1996
Chief Financial Officer, Controller and Principal Accounting Officer
</TABLE>
69
<PAGE> 459
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE NUMBER IN
SEQUENTIALLY
EXHIBIT DESCRIPTION OF DOCUMENT NUMBERED SYSTEM
- ---------------- ------------------------------------------------------------------------------- ----------------
<S> <C> <C>
1.1 Agreement and Plan of Reorganization by and among the Company, the Bank, CU
Bancorp and California United Bank, National Association dated January 10,
1996 (1) .
3.1 Articles of Incorporation of the Company filed with the Secretary of State
of the State of California on September 17, 1979, as amended by Certificate
of Amendment of Articles of Incorporation filed May 20, 1988 (2). In
addition, Certificate of Amendment of Articles of Incorporation of the
Bancorp filed with the Secretary of State of the State of
California on November 9, 1981 (2).
3.2 Bylaws of the Company, adopted November 17, 1987 (amended and restated) (3).
4. Specimen of Common Stock Certificate (4).
10.1 The Company's 1985 Stock Option Plan, as amended, form of
Incentive Stock Option Agreement, and form of
Non-Qualified Stock Option Agreement (5).
10.2 Ground Lease dated February 9, 1976, by and between Brea Plaza Development
Company, a partnership, and the Bank, for the land upon
which the Brea Branch Office of the Bank is located (3).
10.3 Ground Lease dated May 16, 1980, by and between Manhattan
Beach Commercial Properties, a California general
partnership, and Bank of Manhattan, for the land upon
which the Manhattan Beach Branch Office of the Bank is
located (3).
10.4 Lease dated December 13, 1973, by and between Homart Development Co., a
Delaware corporation, and the Bank for the land upon which
the Westminster Branch Office of the Bank is located (3).
10.5 Lease dated December 10, 1979, by and between Margaret Hills Land and
Exploration Company, as Lessor, and Irvine National Bank, as Lessee,
assigned in February 1980 to Heritage Bank, as Lessee, and assigned on March
9, 1984 to the Bank, as Lessee, for the lease of office
facilities for the Irvine Branch Office (3).
10.6 Reserved
10.7 Remote Outsourcing Agreement dated September 14, 1993, by
and between Systematics, Inc., an Arkansas corporation,
and the Bank (6).
10.8 Item Processing Agreement dated March 9, 1992, by and
between Systematics, Inc., an Arkansas corporation, and
the Bank (6).
10.9 Lease, proposed to be assigned to the Bank, dated July 1,
1978, by and between Lanikai Investment Company, LTD., as
Lessor, and Bank of San Pedro, as Lessee, and assumed on
July 15, 1994 by the FDIC, as Lessee, for the lease of
office facilities for the North San Pedro Branch Office
(7).
10.10 Change of Control Agreement, James P. Staes (8).
10.11 Change of Control Agreement, Bill Neal (8).
10.12 Change of Control Agreement, Keith W. Barnes (8).
21.0 Subsidiary of the Registrant (7).
23.0 Consent of Arthur Andersen LLP 72
27.0 Financial Data Schedule 73
</TABLE>
- ------------------------------
(footnotes on following page)
- -----------------------------
70
<PAGE> 460
- ------------------------------
(footnotes on from the previous page)
- -------------------------------------
(1) Incorporated by reference to the Exhibits to the Registrant's Form 8-K as
filed with the Commission on February 9, 1996.
(2) Incorporated by reference to the Exhibits to the Registrant's S-4
Registration Statement, Registration No. 33-35622, as filed with the
Commission on June 28, 1990.
(3) Incorporated by reference to the Registrant's 1989 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 31, 1990.
(4) Incorporated by reference to Exhibit 7 to Registrant's Registration
Statement on Form S-14, Registration No. 2-75660, as filed with the
Commission on January 12, 1982 and amended on August 6, 1982
(5) Incorporated by reference to Exhibit 4 to Registrant's Registration
Statement on Form S-8, Registration No. 33-30573, as filed with the
Commission on August 17, 1989.
(6) Incorporated by reference to the Registrant's 1993 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 29, 1994.
(7) Incorporated by reference to the Registrant's 1994 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 31, 1995.
(8) Incorporated by reference to the Exhibits 10.10, 10.11 and 10.12 to
Registrant's June 30, 1995 Quarterly Report on Form 10-Q, File No. 0-11160,
as filed with the Commission on July 31, 1995.
71
<PAGE> 461
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
MARK ONE:
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required) For the fiscal year ended DECEMBER
31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee required)
For the transition period ______ to ______
Commission File No. 0-11160
HOME INTERSTATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3657758
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806
(address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (310) 988-9600
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 (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 ben 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 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 the Form 10-K or any
amendment to this Form 10-K. / /
As of APRIL 18, 1996, the aggregate market value of the voting shares
held by non-affiliates (all persons other than executive officers, directors or
greater than 10% shareholders) of the Registrant was approximately
$45,095,956
An aggregate of 4,213,280 shares of common stock were
outstanding at APRIL 18, 1996
<PAGE> 462
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to the Agreement and Plan of Reorganization dated January 10,
1996, as amended March 29, 1996 (the "Merger Agreement") by and among CU
Bancorp, California United Bank, National Association ("CU Bank"), a national
banking association and wholly owned subsidiary of CU Bancorp, Home Interstate
Bancorp ("Home Bancorp") and Home Bank ("Home Bank"), a California state
chartered bank and wholly owned subsidiary of Home Bancorp, Home Bancorp will
merge with and into CU Bancorp (the "Merger"), with CU Bancorp surviving the
Merger (the "Surviving Company") and CU Bank will merge with and into Home Bank
under the name "California United Bank." Upon consummation of the Merger, each
outstanding share of Common Stock, no par value, of Home Bancorp ("Home Stock")
will be converted into the right to receive 1.409 shares of CU Bancorp Common
Stock, without par value. Upon consummation of the Merger, the Board of
Directors of the Surviving Company will be comprised of five members from each
of the current Boards of Directors of CU Bancorp and Home Bancorp. The five
members from the Board of Directors of Home Bancorp (the "Home Board") are
expected to be Donald A. Buschenfield, J. Richard Denham, Randall G. Elston,
Donald G. Martin and James P. Staes. The following table sets forth certain
information as of April 18, 1996, with respect to the directors, nominees for
election as directors and executive officers of Home Bancorp.
<TABLE>
<CAPTION>
Name Age Biographical Information
- ---- --- ------------------------
<S> <C> <C>
Keith W. Barnes 50 Keith W. Barnes has been Senior Vice President and Chief Financial Officer of
Home Bancorp from May 1988 to present and of Home Bank from July 1986
to present. He served as Vice President and Chief Financial Officer of Home
Bancorp from July 1986 to May 1988 and as Senior Vice President, Cashier of
Home Bank from July, 1982 to June 1986. Mr. Barnes has been with Home
Bank since 1974 and has been in banking industry for 27 years.
Donald A. Buschenfield 80 Donald A. Buschenfield has been a Vice President of Home Bancorp since 1982
and a director of Home Bancorp since 1981. Mr. Buschenfield is also the Vice
Chairman of Home Bank and a former Home Bank executive officer. He has
been a director of Home Bank since 1970. Mr. Buschenfield has served as a
consultant to Home Bank since 1985. (See "Director Compensation").
J. Richard Denham 63 J. Richard Denham has been a Vice President of Home Bancorp since 1982 and
has been a director of Home Bank and Home Bancorp since 1981. Mr. Denham
is the owner of Cement Tool Co./D & G Manufacturing Company, which is
engaged in industrial development. He served as Chief of Police for the City of
Signal Hill, California from 1967 to 1979. Mr. Denham became a rancher and
industrial developer after leaving the Signal Hill Police Department in 1979.
Since January, 1984, Mr. Denham has been breeding and training Andalusian
horses.
Randall G. Elston, MAI 42 Randall G. Elston has been a director of Home Bancorp since 1987, and of
Home Bank since March, 1992. He is a real estate appraiser and has, since 1982,
owned Elston Enterprises, Inc., a corporation doing business under the name
Pacific Real Estate Appraisal.
</TABLE>
2
<PAGE> 463
<TABLE>
<CAPTION>
Name Age Biographical Information
- ---- --- ------------------------
<S> <C> <C>
Roger K. Freeman, MD 61 Roger K. Freeman, MD, has been a director of Home Bancorp and Home Bank
since August 19, 1992. Dr. Freeman has been a Professor of Obstetrics and
Gynecology at UC Irvine since 1975. He was the Medical Director of Women's
Services at Long Beach Memorial Medical Center from 1975 to 1990, and has
been a Senior Fellow with Memorial Health Service since 1990. He also served
as Senior Vice President of Women's Services at Long Beach Memorial
Hospital from January 1992 through December 1992.
Donald G. Martin, CPA 48 Donald G. Martin has been a director of Home Bancorp since December, 1993
and of Home Bank since February, 1994. Since 1970, Mr. Martin has been
involved in the agricultural industry in South Dakota where he maintains an
interest in cattle ranching. He has also been a practicing Certified Public
Accountant since 1980. Mr. Martin is the son of Ruth A. Martin, Chairman of
the Board of Home Bancorp and Home Bank.
Ruth A. Martin 81 Ruth A. Martin has been the Chairman of the Home Board since 1986 and
served as its President from 1986 to February, 1993. She has also been
Chairman of the Board of Home Bank since 1986. Mrs. Martin has been a
director of Home Bank and Home Bancorp since 1983. She formerly served as
Area Administrator for the State Department of Mental Health from which
position she retired in January, 1981. Mrs. Martin is the mother of Donald G.
Martin, a director of Home Bancorp and Home Bank.
Susan Monsoor 40 Susan Monsoor has been Vice President/Corporate Secretary of Home Bank
since February 1989 and Corporate Secretary of Home Bancorp and Home Bank
since April 1987. She was appointed Vice President/Corporate Secretary of
Home Bancorp in February 1993. Prior to joining Home Bank, Ms. Monsoor was
employed in the legal field for 12 years.
Bill Neal 65 Bill Neal has been a director of Home Bancorp since May, 1993, and of Home
Bank since August 1992. He has served as the Executive Vice President and
Chief Operating Officer of Home Bank since January 1989. He has been with
Home Bank since 1974 and has been in the banking industry for 36 years.
George W. Post 71 George W. Post retired as Executive Vice President of Home Bank in October
1992, a position he held from October 1990. He has been and continues to serve
as a director of Home Bancorp and Home Bank since October 1990. Prior to the
acquisition of The Torrance National Bank ("TTNB") by Home Bank, Mr. Post
had served as President and Chief Executive Officer of TTNB from 1973 to
October 1990. Mr. Post had also served as a director and Chairman of the
Board of TTNB from 1973 to October 1990.
James P. Staes 57 James P. Staes served as Home Bancorp's Chief Executive Officer and Vice
Chairman from 1985 to 1987. He served as Home Bancorp's President from
1986 to 1987 and from February 1993 to present. Mr. Staes served as a director
of Home Bancorp since 1985 (except from May 1987 to May 1988). Mr. Staes
has also served as a director of Home Bank and its President since 1984 and as
Chief Executive Officer of Home Bank since 1985. Previously, Mr. Staes
served as President and Chief Executive Officer of the Bank of Manhattan from
1982 to 1983. Mr. Staes has been in the banking industry for 28 years.
</TABLE>
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16
Under Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), Home Bancorp's directors, executive officers and any
persons holding ten percent or more of Home Stock are required to report their
ownership of
3
<PAGE> 464
Home Stock and any changes in that ownership to the Securities and Exchange
Commission (the "Commission") and to furnish Home Bancorp with copies of such
reports. Specific due dates for these reports have been established and Home
Bancorp is required to report in this Amendment No. 1 to Home Bancorp's Annual
Report on Form 10-K ("Amendment No. 1") any failure to file on a timely basis by
such persons. Based solely upon a review of copies of reports filed with the
Commission during the fiscal year ended December 31, 1995, all persons subject
to the reporting requirements of Section 16(a) filed all required reports on a
timely basis, with the exception of one Form 5, which was filed on February 8,
1996 for Roger K. Freeman, MD.
ITEM 11. EXECUTIVE COMPENSATION.
No executive officer of Home Bancorp received cash compensation during
the year ended December 31, 1995, except in his or her capacity as an executive
officer of Home Bank, and except for directors' fees paid by Home Bancorp and
Home Bank to members of their respective Boards of Directors. The following
table sets forth the aggregate cash compensation that Home Bancorp and its
subsidiaries paid to or accrued on behalf of each of (i) the Chief Executive
Officer of Home Bank during 1995 (the principal executive officer of Home
Bancorp does not receive any compensation for serving in such capacity), and
(ii) the four most highly compensated individuals, other than the Chief
Executive Officer, whose aggregate cash compensation exceeded $100,000 (two
persons), ("named executive officers") in each case, for fiscal 1993, 1994 and
1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- --------------------------------------------
(a) (b) (c) (d) (e)(3) STOCK OPTIONS/ LTIP ALL OTHER
NAME & PRINCIPAL BONUS OTHER COMP
---------------- ----- ----- ----
POSITION YEAR SALARY ($) ($) COMP ($) AWARDS S A R'S PAYOUTS (5)
-------- ---- ---------- --- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAMES P. STAES 1995 201,066 3,820 21,154 N / A N / A N / A 11,792
(1)(2)(4)
PRESIDENT & CEO, 1994 201,066 30,000 20,959 N / A N / A N / A 9,560
HOME BANK
1993 187,923 12,000 21,378 N / A N / A N / A 4,220
BILL G. NEAL (1)(4) 1995 119,474 2,270 22,396 N / A N / A N / A 9,433
EVP & COO, 1994 119,474 5,496 22,398 N / A N / A N / A 8,612
HOME BANK
1993 107,508 10,000 21,692 N / A N / A N / A 2,486
KEITH W. BARNES 1995 92,926 1,766 4,993 N / A N / A N / A 7,382
(1)(4)
SR. V P & C F O, 1994 92,926 7,209 3,956 N / A N / A N / A 6,604
HOME BANCORP
1993 86,419 3,000 4,257 N / A N / A N / A 1,964
</TABLE>
- ------------------------------------
(FOOTNOTES ON FOLLOWING PAGE)
4
<PAGE> 465
(1) 1995 Bonus numbers represent compensation accrued in 1995 and paid in
1996.
(2) 1994 Bonus number includes $30,000 for Staes accrued in 1994 and paid in
1995.
(3) Represents personal compensation recognized for the use of vehicles
provided by Home Bancorp. Other compensation for Messrs. Staes and Neal
also includes $14,400 for 1995, 1994 and 1993 which represents Directors'
Fees paid in each of those years.
(4) 1993 Bonus numbers represent compensation accrued in 1993 and paid in
1994.
(5) Represents Annual Profit Sharing Contribution.
RETENTION AGREEMENTS
Effective June 30, 1995, Mr. Staes, President and Chief Executive
Officer of Home Bank, entered into an agreement (the "Staes Retention
Agreement") with Home Bank pursuant to which Mr. Staes would become entitled to
receive two years base annual salary (or $402,132) payable in 48 substantially
equal installments over a two-year period upon the occurrence of a "change of
control" of Home Bancorp or Home Bank (as defined in such agreement). Ten other
key employees of Home Bancorp or Home Bank, including Messrs. Neal and Barnes,
entered into similar agreements (the "Employee Retention Agreements" and
together with the Staes Retention Agreement, the "Original Retention
Agreements") with Home Bank effective June 30, 1995. Pursuant to the Employee
Retention Agreements, each of the ten employees would be entitled to receive the
equivalent of one year's base annual salary, payable in 24 substantially equal
installments over a one-year period, upon a "change of control" of Home Bancorp
or Home Bank. Accordingly, Messrs. Neal and Barnes would become entitled to
receive $119,474 and $92,926, respectively, under the Employee Retention
Agreements.
The purpose of the Original Retention Agreements was to (i) minimize
the distraction to senior managers occasioned by threats of abrupt changes in
control of Home Bancorp or Home Bank and to permit such managers to concentrate
on the business and operation of Home Bancorp and Home Bank and (ii) enhance
the ability of Home Bank to retain the services of such managers. The Original
Retention Agreements did not contemplate the Merger, and the payment terms set
forth in such agreements will not be triggered by the consummation of the
Merger. The spirit of the Original Retention Agreements, however, was to
compensate the aforementioned persons in the event of a substantial change of
control of Home Bancorp or Home Bank. As such, the Home Board believes the
parties to the Original Retention Agreements should be compensated upon the
consummation of the Merger on the terms set forth in such agreements. Based
on this belief, Home Bank intends to enter into new agreements (the "Retention
Agreements") with the aforementioned persons prior to the consummation of the
Merger. The Retention Agreements, when executed, will supersede the Original
Retention Agreements. The terms and provisions of the Retention Agreements are
substantially similar to those of the Original Retention Agreements, except that
the Retention Agreements are effective only upon the consummation of the Merger
or some similar transaction between CU Bancorp and Home Bancorp (rather than
upon a "change of control") and,
5
<PAGE> 466
with respect to Mr. Staes, his Retention Agreement includes provisions requiring
Mr. Staes to provide certain consulting services for a one-year period after the
48 month payment term and prohibits Mr. Staes for a three-year period after
the Effective Time from serving as a director or executive officer of another
bank, savings and loan association, credit union or thrift and loan which has an
office within five miles of a branch office of Home Bank. Total payments to be
made by the Surviving Company under the Retention Agreements are approximately
$1.2 million. Payments under the Retention Agreements will be made whether or
not the recipient is employed by the Surviving Company.
STOCK OPTION EXERCISES AND HOLDINGS
The following table contains information on stock option exercises in
fiscal 1995 by the named executive officers and the number and value of their
respective unexercised options at December 31, 1995:
AGGREGATED OPTION/SAR EXERCISES IN 1995
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/
Acquired Value Options / SAR's at 12/31/95 SAR's at 12/31/95
-------------------------------- ------------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James P. Staes N / A N / A 13,785 N / A $40,390 N / A
President & CEO
Bill Neal 1,500 $1,470 9,655 N / A $28,289 N / A
EVP & COO
Keith W. Barnes N / A N / A 4,901 N / A $14,360 N / A
Sr. VP & CFO
</TABLE>
PENSION PLAN
Salaried employees of Home Bancorp and Home Bank over 21 years of age
are also eligible to participate in Home Bancorp's Pension Plan (the "Pension
Plan"). As of January 1, 1990, employees must complete one (1) consecutive year
of service to Home Bancorp with a minimum of 1,000 hours worked per
6
<PAGE> 467
year in order to become eligible to participate in the Pension Plan. (Between
January 1, 1989 and December 31, 1989 employees had to complete two (2) such
years of continuous service and prior to January 1, 1989 employees had to
complete three (3) such years of continuous service.)
The normal annual retirement benefit under the Pension Plan at age 65
is based upon an annual accrued amount over the career of the participant. The
annual amount accrued for individuals for each year after 1988 is calculated as
the sum of (i) 1.15% of annual pay over $10,000; (ii) l.75% of annual pay over
$10,000 for each year of benefit service through 35 years; (iii) l.50% of annual
pay for each year of benefit service over 35 years; and (iv) any earned benefit
under the Pension Plan on December 30, 1988.
Effective January 31, 1994, Home Bancorp terminated the accrual of
pension benefits for Pension Plan participants, and all funding for the Pension
Plan was terminated effective on such date. In December, 1994, the Home Board
voted to terminate the Pension Plan effective April 3, 1995. Accrued benefits
will be transferred to employees participating in the Pension Plan in the form
of either an annuity or a rollover into the employee's 401(k) savings account,
at the option of the employee.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
Pension Benefits Available At
Normal Retirement Age
-----------------------------------------
<S> <C>
James P. Staes
President & CEO $26,923
Bill Neal
EVP & COO $21,332
Keith W. Barnes
Sr. VP & CFO $16,951
</TABLE>
DIRECTOR COMPENSATION
Directors of Home Bancorp are currently paid fees of $300 for monthly
Home Board meetings, with the exception of the Chairman of the Board who is paid
$900. Directors also receive $200 for attending any special meetings of the Home
Board. In addition, non-salaried directors receive $200 for attendance at each
meeting of a joint Board committee of which they are a member. The Chairman of
the Board receives the use of an automobile. No other agreements or arrangements
exist with respect to remuneration for services as a director of Home Bancorp.
Home Bancorp paid aggregate compensation of $46,000 to its directors during 1995
pursuant to the foregoing arrangements.
Directors of Home Bank are currently paid fees of $900 for monthly Home
Bank Board meetings, with the exception of the Chairman of the Board who is paid
$1,500. Directors also receive $200 for attending any special meetings of the
Home Board. In addition, non-salaried
7
<PAGE> 468
directors receive $200 for attendance at each meeting of a joint Board committee
of which they are a member. The Vice Chairman of the Board receives the use of
an automobile. No other agreements or arrangements exist with respect to
remuneration for services as a director of Home Bank. Home Bank paid aggregate
compensation of $117,400 to its directors during 1995 pursuant to the foregoing
arrangements.
During 1995, Home Bank contracted with Donald A. Buschenfield, Vice
Chairman of Home Bank and a Director of Home Bancorp, to act as a consultant to
Home Bank. Under the terms of the Consulting Agreement, Mr. Buschenfield advises
Home Bank on insurance, loan, investment and shareholder matters. Mr.
Buschenfield was paid a sum of $2,000 per month, for an aggregate of $24,000
during 1995.
THE BOARD OF DIRECTORS AND COMMITTEES
In July 1994, the Boards of Directors of Home Bancorp and Home Bank
formed joint committees of their respective Boards of Directors. Therefore, Home
Bancorp and Home Bank have a Joint Executive Committee, Joint Long Term Planning
Committee, Joint Audit Committee and Joint Personnel/Compensation Committee.
The Joint Personnel/Compensation Committee consists of Roger K.
Freeman, MD, (Chairman), Donald A. Buschenfield, J. Richard Denham, Donald G.
Martin, Ruth A. Martin and James P. Staes (as an ex-officio, non-voting member).
This committee reviews the performance of all executive officers of Home Bank
and makes compensation recommendations to the Board of Directors of Home Bank.
REPORT OF THE PERSONNEL/COMPENSATION COMMITTEE OF HOME BANK
The executive officers of Home Bancorp do not receive compensation
except in their capacities as employees of Home Bank or as directors of Home
Bancorp or Home Bank.
Home Bank applies a consistent philosophy to compensation for all
employees, including senior management. This philosophy is based on the premise
that the achievements of Home Bank result from the coordinated efforts of all
individuals working toward common objectives. Home Bank strives to achieve those
objectives through teamwork that is focused on meeting the expectations of
customers and shareholders.
COMPENSATION PHILOSOPHY
The goals of the executive compensation program are to align
compensation with business objectives and performance and to enable Home Bank to
attract, retain and reward executive officers who contribute to the long-term
success of Home Bank. Home Bank's compensation program for executive officers is
based on the same four principles applicable to compensation decisions for all
of Home Bank's employees:
8
<PAGE> 469
Home Bank pays competitively. Home Bank is committed to providing a pay
program that helps attract and retain the best people in the industry. To ensure
that pay is competitive, Home Bank regularly compares its pay practices with
those of other banks and sets its pay parameters based on this review. Home
Bank's primary source for competitive pay rates is the California Bankers
Association yearly Compensation Survey.
Home Bank pays for relative sustained performance. Executive officers
are rewarded based upon both corporate performance and individual performance.
Corporate performance is evaluated by reviewing the extent to which strategic
and business plan goals are met, including such factors as operating profits and
performance relative to competitors. Individual performance is evaluated by
reviewing progress in organizational and management areas against set objectives
and the degree to which teamwork and Bank values are fostered.
Home Bank strives for fairness in the administration of pay. Home Bank
strives to achieve a balance with respect to the compensation paid to a
particular individual and the compensation paid to other executives both inside
Home Bank and by others employed within the banking industry and performing
similar functions.
Home Bank believes that employees should understand the performance
evaluation and pay administration process. The process of assessing performance
is as follows:
1. At the beginning of the performance cycle, the
evaluating manager sets objectives and key goals.
2. The evaluating manager gives the employee ongoing
feedback on performance.
3. At the end of the performance cycle, the manager
evaluates the accomplishments of the objectives/key
goals.
4. The manager compares the results to the results of
peers within Home Bank.
5. The manager communicates the comparative results to
the employee.
6. The comparative results affect decisions on salary
options.
COMPENSATION PROGRAMS
Home Bank has had a long and successful history employing a simple
total compensation program that consists of cash and equity-based compensation.
Having a compensation program that allows Home Bank to successfully attract and
retain key employees permits Home Bank to provide useful products and services
to customers, enhance shareholder value, foster teamwork and adequately reward
employees. The programs are:
Salary. Home Bank sets the base salary for employees.
9
<PAGE> 470
Home Bank Profit Sharing and Retirement Savings Plan. Home Bank has a
profit-sharing plan (the "Profit Sharing Plan") under which it distributes to
all employees, including executive officers, a percentage of profits before
taxes and other adjustments. Home Bank believes that all employees share the
responsibility of achieving profits. Accordingly, it shares a portion of these
profits with all eligible employees. The same profit-sharing percentage applies
to each employee, with the payment determined by applying this percentage to the
individual's salary level. Contributions to the profit-sharing plan are
discretionary on the part of the Home Board. For 1995, the Home Board committed
to contributing 10% of pre-tax profits to the Profit Sharing Plan. The dollar
amount contributed for 1995 was $496,585.
In addition to the Profit Sharing Plan, Home Bank has a 401(k) savings
plan for employees. This retirement savings plan allows eligible employees to
set aside pre-tax salary dollars toward their retirement. To increase employee
participation in the plan, in 1994 the Home Board voted to contribute a matching
dollar amount up to $200 for each $l that an employee contributed to their
individual 401(k) plan. For the 1995 plan year, this match equaled $35,763 which
was deducted from the overall profit sharing contribution prior to the year end
allocation of profit sharing.
Home Bank Stakeholders (R) Incentive Compensation Plan. One of the
components of Home Bank's mission statement is the focus on long-term
shareholder value. Home Bank has adopted a Stakeholders (R) Incentive
Compensation Plan, hereinafter referred to as "Plan", to reward employees for
increases in long-term shareholder value. The goal is to balance profit and
growth with productivity and quality. The incentive program consists of
incentive payments tied to specific goals established and communicated to
participants before the start of the performance period. At the outset, Home
Bank and team budget goals are established then rewards are linked to the
success at meeting and exceeding these goals at the end of the performance
period.
Plan rewards initially consist of funding Home Bank's Profit Sharing
Plan based on meeting an established bankwide budget goal. Additional cash
bonuses are rewarded for any profits generated by performance levels above those
specified for in Home Bank's and the individual team's budgeted goals. All
employees of Home Bank are eligible to participate in the Plan, and rewards are
linked not only to Home Bank's overall results, but the team contributions to
those results. The total cash incentive pay earned for 1995 was $209,065.
Stock Option Program. Home Bank believes that stock-based performance
compensation arrangements are beneficial in aligning employees' and
shareholders' interest. The stock option program is also utilized to encourage
employees to continue in the employ of Home Bank. To facilitate these
objectives, Home Bank has, since 1950, granted stock options to employees
through various stock option plans. Stock options have been granted at the
discretion of the Board of Directors based on the recommendations of the
Personnel/Compensation Committee. Home Bancorp's Stock Option Plan expired on
March 12, 1995; however, options already granted and outstanding may still be
exercised in the future in accordance with their terms.
10
<PAGE> 471
CEO COMPENSATION
As with each of the other executive officers, the compensation paid to
Mr. Staes as Chief Executive Officer of Home Bank is a combination of salary and
equity-based incentive compensation. To determine his salary, the
Personnel/Compensation Committee considered information regarding the salaries
paid to CEOs of banks and thrift institutions with assets of between
$250,000,000 and $500,000,000, both in and outside the State of California. To
determine incentive compensation, the Personnel/Compensation Committee measured
Mr. Staes' performance against the goals set for him by the Board. The Committee
evaluated Mr. Staes' performance on factors which focused on the long-term
health and growth of Home Bank. The continued attention given to Home Bancorp's
quality of service, including actions taken under Mr. Staes' leadership were
also considered by the Personnel/Compensation Committee in determining Mr.
Staes' compensation.
The foregoing report shall not be deemed incorporated by reference by
any general statement incorporating by reference this Amendment No. 1 into any
filing under the Securities Act of 1933,as amended (the "Securities Act"), or
the Exchange Act, except to the extent that Home Bancorp specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
11
<PAGE> 472
JOINT PERSONNEL/COMPENSATION COMMITTEE
Roger Freeman, MD, Chairman
Donald A. Buschenfield
J. Richard Denham
Donald G. Martin
Ruth A. Martin
James P. Staes (ex-officio, non-voting)
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of Home Bank's Personnel/Compensation Committee served as an
officer or employee of Home Bank in 1995, except James P. Staes (who became an
ex-officio member of the Committee in January 1993, with no voting rights.) Each
member of the Personnel/Compensation Committee, other than Messrs. Donald G.
Martin and Roger K. Freeman, MD, served as an officer of Home Bancorp during
1995. However, none of such individuals received any compensation from Home
Bancorp or Home Bank for serving in such capacities, other than Committee fees.
PERFORMANCE GRAPH
Set forth on the following page is a line graph comparing the yearly
percentage in cumulative total shareholder return on Home Stock since December
31, 1990 with the cumulative total return of the Standard & Poor's 500 Stock
Index and of a selected financial peer group index consisting of Southern
California banks and bank holding companies ranging in asset size from
$140,000,000 to $2,050,000,000.
12
<PAGE> 473
[GRAPH 1]
Source: Montgomery Securities WESTERN BANK MONITOR
The following table sets forth the data points for the above graph.
<TABLE>
<CAPTION>
DECEMBER 31,
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
HOME BANCORP 100 105.22 62.70 74.65 76.44 109.66
S&P 500 100 130.37 140.30 154.46 156.50 215.32
SO. CA PROXY 100 100.98 100.50 122.83 140.19 177.81
</TABLE>
The graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Amendment No. 1 into any filing under
the Securities Act or the Exchange Act, except to the extent that Home Bancorp
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
13
<PAGE> 474
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Management knows of no person who, as of April 18, 1996, owned
beneficially more than five percent (5%) of the outstanding Home Stock, except
for Ruth A. Martin, who is a nominee for director.
The following table sets forth certain information, as of April 18,
1996, with respect to the persons to be nominated by the Home Board for election
as directors, the named executive officers(1) and for the directors and
executive officers(2) of Home Bancorp as a group:
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED PERCENT
NAME ON APRIL 18, 1996(3) OF CLASS (4)
- ---- -------------------- ------------
<S> <C> <C>
Keith W. Barnes 8,978(5) *
Donald A. Buschenfield 103,339(6) 2.37%
J. Richard Denham 11,422(7) *
Randall G. Elston 28,725(8) *
Roger K. Freeman, MD 12,664 *
Donald G. Martin (9) 130,027 2.90%
Ruth A. Martin(10) (11) 370,917 8.51%
Susan Monsoor 6,000(12) *
Bill Neal 20,661(13) *
George W. Post 60,026(14) 1.37%
James P. Staes 56,631(15) 1.30%
Directors and Executive Officers as a
Group (10 persons) 809,500(16) 19.21%
</TABLE>
- ---------------------------------------
* Less than 1%
(1) As used throughout this Amendment No. 1, the term "named executive
officers" means the Chief Executive Officer of Home Bank and the two
most highly compensated executive officers of Home Bancorp or Home
Bank, other than the Chief Executive Officer, who received salary and
bonus compensation of more than $100,000 during 1995. The principal
executive officer of Home Bancorp does not receive any compensation for
serving in such capacity and she is, therefore, not treated herein as a
named executive officer. Home Bancorp's named executive officers are
James P. Staes, Bill Neal and Keith W. Barnes.
(2) As used throughout this Amendment No. 1, the term "executive officer"
means, with respect to Home Bancorp, the Chairman of the Board,
President, Senior Vice President/Chief Financial Officer and Vice
President/Corporate Secretary of Home Bancorp and the Executive Vice
President/Chief Operating Officer of Home Bank.
(3) Except as otherwise noted, includes shares held by such person's spouse
(except where legally separated) and minor children, and by any other
relative of such person who has the same home, shares held in a family
trust and shares held in Individual Retirement Accounts. Such persons
have sole voting and investment power with respect to all shares shown
as beneficially owned by them, subject to community property laws where
applicable and the information set forth in the other footnotes to this
table.
(4) Percentage ownership figures are computed by dividing the total number
of shares beneficially owned (including shares which the individual (or
group) has the right to acquire within 60 days of April 18, 1996) by
14
<PAGE> 475
the sum of the total number of shares outstanding on April 18, 1996
plus the number of shares the individual (or group) has the right to
acquire within 60 days of April 18, 1996.
(5) Includes 4,901 shares which Mr. Barnes has the right to acquire within
sixty (60) days of April 18, 1996 by the exercise of stock options
vested pursuant to Home Bancorp's stock option plans (the "Stock Option
Plans").
(6) Includes 1,106 shares which Mr. Buschenfield has the right to acquire
within sixty (60) days of April 18, 1996 by the exercise of stock
options vested pursuant to the Stock Option Plans.
(7) Includes 5,106 shares which Mr. Denham has the right to acquire within
sixty (60) days of April 18, 1996 by the exercise of stock options
vested pursuant to the Stock Option Plans.
(8) Includes 5,106 shares which Mr. Elston has the right to acquire within
sixty (60) days of April 18, 1996 by the exercise of stock options
vested pursuant to the Stock Option Plans.
(9) Donald G. Martin is the son of Home Bancorp's Chairman Ruth A. Martin.
(10) Mrs. Martin's business address is 2633 Cherry Avenue, Signal Hill,
California 90806.
(11) Mrs. Martin is the mother of director Donald G. Martin.
(12) Includes 6,000 shares which Mrs. Monsoor has the right to acquire
within sixty (60) days of April 18, 1996 by the exercise of stock
options vested pursuant to the Stock Option Plans.
(13) Includes 7,655 shares which Mr. Neal has the right to acquire within
sixty (60) days of April 18, 1996 by the exercise of stock options
vested pursuant to the Stock Option Plans.
(14) Includes 4,863 shares which Mr. Post has the right to acquire within
sixty (60) days of April 18, 1996 by the exercise of stock options
vested pursuant to the Stock Option Plans.
(15) Includes 13,785 shares which Mr. Staes has the right to acquire within
sixty (60) days of April 18, 1996 by the exercise of stock options
vested pursuant to the Stock Option Plans
(16) Includes 48,522 shares which the directors and executive officers of
Home Bancorp have the right to acquire within sixty (60) days of April
18, 1996 by the exercise of stock options vested pursuant to the Stock
Option Plans.
ITEM 13. CERTAIN TRANSACTIONS.
Some of the directors and officers of Home Bancorp and Home Bank and
the companies with which they are associated have financial dealings with, or
customers of, and have banking transactions with Home Bank in the ordinary
course of Home Bank's business. Home Bank expects to have banking transactions
with such persons in the future. All loans and commitments to lend included in
such transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons of similar creditworthiness and, in the opinion
of management of Home Bank, did not involve more than a normal risk of repayment
or present other unfavorable features.
15
<PAGE> 476
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of Home Bancorp, the
accompanying notes and the Report of Independent Public Accountants are included
in Item 8 of Home Bancorp's Annual Report on Form 10-K, filed on March 27, 1996,
at the pages referenced below:
<TABLE>
<CAPTION>
PAGE
ITEM NO.
- ---- ----
<S> <C>
1. Report of Independent Public Accountants....................... 42
2. Consolidated Statements of Financial Condition................. 43
3. Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993............................... 44
4. Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993........... 45
5. Consolidated Statement of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993............................... 46
6. Notes to Consolidated Financial Statements..................... 48
</TABLE>
(a)(2) SCHEDULES.
No Schedules are listed because they are not applicable, not material
or because the information required by such schedules is included in the
consolidated financial statements or the notes thereto.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by Home Bancorp during the last
quarter of Home Bancorp's fiscal year ended December 31, 1995.
(c) EXHIBITS.
Exhibits required to be filed hereunder are indexed on sequentially
numbered page 18 hereof.
The following is a list of management contracts and compensatory plans
and arrangements required to be filed hereunder:
16
<PAGE> 477
1. Home Bancorp's 1985 Stock Option Plan, as amended; form of Incentive
Stock Option Agreement; and form of Non-Qualified Stock Option Agreement, at
Exhibit 4 to Home Bancorp's Registration Statement on Form S-8, Registration No.
33-30573.
2. Change of Control Agreement, James P. Staes, at Exhibit 10.10 to
Home Bancorp's June 30, 1995 Quarterly Report on Form 10-Q, File No. 0-11160.
3. Change of Control Agreement, Bill Neal, at Exhibit 10.11 to Home
Bancorp's June 30, 1995 Quarterly Report on Form 10-Q, File No. 0-11160.
4. Change of Control Agreement, Keith W. Barnes, at Exhibit 10.12 to
Home Bancorp's June 30, 1995 Quarterly Report on Form 10-Q, File No. 0-11160.
5. Form of Agreements between Home Bank and certain senior officers of
Home Bancorp or Home Bank regarding retention of said officers, at Exhibit 10.5
to CU Bancorp's Registration Statement on Form S-4, Registration No. 333-02777.
17
<PAGE> 478
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.
Home Interstate Bancorp
/s/ Keith W. Barnes April 29, 1996
- -------------------------------------------------
Keith W. Barnes, Senior Vice President
Chief Financial Officer, Controller and Principal
Accounting Officer
18
<PAGE> 479
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE NUMBER IN
SEQUENTIALLY
EXHIBIT DESCRIPTION OF DOCUMENT NUMBERED SYSTEM
------- ----------------------- ---------------
<S> <C> <C>
1.1 Agreement and Plan of Reorganization by and among Home Bancorp, Home Bank, CU
Bancorp and California united Bank, National Association dated January 10, 1996, as
amended on March 29, 1996 by amendment No. 1, and Exhibits thereto. (1)
3.1 Articles of Incorporation of Home Bancorp filed with the Secretary
of State of the State of California on September 17, 1979, as
amended by Certificate of Amendment of Articles of Incorporation
filed May 20, 1988 (2). In addition, Certificate of Amendment of
Articles of Incorporation of the Bancorp filed with the Secretary of
State of the State of California on November 9, 1981. (2)
3.2 Bylaws of Home Bancorp, adopted November 17, 1987 (amended and restated). (3)
4. Specimen of Common Stock Certificate. (4)
10.1 Home Bancorp's 1985 Stock Option Plan, as amended, form of Incentive Stock Option
Agreement, and form of Non-Qualified Stock Option Agreement. (5)
10.2 Ground Lease dated February 9, 1976, by and between Brea Plaza Development Company,
a partnership, and Home Bank, for the land upon which the Brea Branch Office of Home
Bank is located. (3)
10.3 Ground Lease dated May 16, 1980, by and between Manhattan Beach
Commercial Properties, a California general partnership, and Bank of
Manhattan, for the land upon which the Manhattan Beach Branch Office
of Home Bank is located. (3)
10.4 Lease dated December 13, 1979, by and between Margaret Hills Land
and Expiration Company, as Lessor, and Irvine National Bank, as
Lessee, assigned in February 1980 to Heritage Bank, as Lessee, and
assigned on March 9, 1984 to Home Bank, as lessee, for the lease of
office facilities for the Irvine Branch Office. (3)
10.5 Lease dated December 10, 1979, by and between Margaret Hills Land
and Exploration Company, as Lessor, and Irvine National Bank, as
Lessee, assigned in February 1980 to Heritage Bank, as Lessee, and
assigned on March 9, 1984 to Home Bank, as Lessee, for the lease of
office facilities for the Irvine Branch Office. (3)
10.6 Reserved.
10.7 Remote Outsourcing Agreement dated September 14, 1993, by and between Systematics, Inc.,
an Arkansas corporation and Home Bank. (6)
10.8 Item Processing Agreement dated March 9, 1992, by and between Systematics, Inc., an
Arkansas corporation, and Home Bank. (6)
10.9 Lease, proposed to be assigned to Home Bank, dated July 1, 1978, by
and between Lanikai Investment Company, LTD., as Lessor, and Bank of
San Pedro, as Lessee, and assumed on July 15, 1994 by the FDIC, as
Lessee, for the lease of office facilities for the North San Pedro
Branch Office. (7)
10.10 Change of Control Agreement, James P. Staes. (8)
10.11 Change of Control Agreement, Bill Neal. (8)
10.12 Change of Control Agreement, Keith W. Barnes. (8)
10.13 Form of Agreements between Home Bank and certain senior officers of Home Bancorp or
Home Bank regarding retention of said officers. (9)
</TABLE>
19
<PAGE> 480
21.0 Subsidiary of the Registrant. (7)
23.0 Consent of Arthur Andersen LLP. (10)
27.0 Financial Data Schedule. (11)
- ---------------------------
(1) Incorporated by reference to Exhibit 2.0 to CU Bancorp's Registration
Statement on Form S-4, Registration No. 333-02777, as filed with the
Commission on April 24, 1996.
(2) Incorporated by reference to the Exhibits to the Registrant's S-4
Registration Statement, Registration No. 38-35622, as filed with the
Commission on June 28, 1990.
(3) Incorporated by reference to the Registrant's 1989 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 31, 1990.
(4) Incorporated by reference to Exhibit 7 to the Registrant's Registration
Statement on Form S-14, Registration No. 2-75660, as filed with the
Commission on January 12, 1982 and amended on August 6, 1982.
(5) Incorporated by reference to Exhibit 4 to the Registrant's Registration
Statement on Form S-8 Registration No. 33-30573, as filed with the
Commission on August 17, 1989.
(6) Incorporated by reference to the Registrant's 1993 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 29, 1994.
(7) Incorporated by reference to the Registrant's 1994 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 31, 1995.
(8) Incorporated by reference to Exhibits 10.10, 10.11 and 10.12 to
Registrant's June 30, 1995 Quarterly Report on Form 10-Q, File No.
0-11160, as filed with the Commission on July 31, 1995.
(9) Incorporated by reference to Exhibit 10.5 to CU Bancorp's Registration
Statement on Form S-4, Registration No. 333-02777, as filed with the
Commission on April 24, 1996.
(10) Incorporated by Reference to Exhibit 23.0 to the Registrant's 1995 Annual
Report on Form 10-K, File No. 0-11160, as filed with the Commission on
March 27, 1996.
(11) Incorporated by Reference to Exhibit 27.0 to the Registrant's 1995 Annual
Report on Form 10-K, File No. 0-11160, as filed with the Commission on
March 27, 1996.
20
<PAGE> 481
APPENDIX D
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
D-1
<PAGE> 482
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
D-2
<PAGE> 483
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.
D-3
<PAGE> 484
(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:
D-4
<PAGE> 485
(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.
\\
D-5
<PAGE> 486
OPINION
-------
APPENDIX G
May 3, 1996
Board of Directors
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436
Members of the Board:
We understand that CU Bancorp and Home Interstate Bancorp ("Home Bancorp") have
entered into an Agreement and Plan of Reorganization dated as of January 10,
1996, as amended on March 29, 1996 (the "Merger Agreement"), by and among CU
Bancorp and California United Bank, National Association, a national banking
association and a wholly-owned subsidiary of CU Bancorp, Home Interstate Bancorp
("Home Bancorp") and Home Bank, a California state-chartered bank and a
wholly-owned subsidiary of Home Bancorp, pursuant to which, among other things,
Home Bancorp will be merged with and into CU Bancorp (the "Merger") and
California United Bank, National Association will be merged with and into Home
Bank (the "Bank Merger"). Upon consummation of the Merger, each outstanding
share of Common Stock of Home Bancorp ("Home Stock") will be converted into the
right to receive 1.409 shares (the "Conversion Ratio") of CU Bancorp Common
Stock, without par value ("CU Stock"), in a tax-free exchange.
You have requested our opinion as investment bankers, as to the fairness, from a
financial point of view, to the shareholders of CU Bancorp of the Conversion
Ratio.
We have acted for CU Bancorp and for the Board of Directors as financial advisor
in connection with this transaction and will receive a fee for our services. Our
fee is not contingent upon consummation of the Merger. We have not previously
provided investment banking and financial advisory services to CU Bancorp.
In connection with our opinion, we have reviewed and analyzed, among other
things, the following: (i) the Joint Proxy Statement/Prospectus; (ii) the Merger
Agreement; (iii) the Annual Reports to Shareholders and Annual Reports on Form
10-K of CU Bancorp and Home Bancorp for the four years in the period ended
December 31, 1995; (iv) Quarterly Reports on Form 10-Q of CU Bancorp and Home
Bancorp for each of the first three quarters of 1995 and the first quarter of
1996; (v) certain other publicly available financial and other information
concerning CU
<PAGE> 487
Board of Directors
May 3, 1996
Page 2
Bancorp and Home Bancorp and the trading markets for the publicly traded
securities of CU Bancorp and Home Bancorp; and (vi) publicly available
information concerning other banks and bank holding companies, the trading
markets for their securities and the nature and terms of certain other merger
transactions we believe relevant to our inquiry. Additionally, we have held
discussions with senior management of CU Bancorp and of Home Bancorp concerning
their past and current operations, financial condition and prospects, the
proposed Merger, as well as the results of regulatory examinations. We have also
discussed with the independent auditors of each institution their review of such
institution's financial and accounting affairs.
We have reviewed with the senior management of CU Bancorp earnings projections
for 1996 through 2000 for CU Bancorp as a stand-alone entity, assuming the
Merger does not occur, prepared by CU Bancorp, as well as projected operating
cost savings and certain margin enhancements expected to be achieved in each
such year resulting from the Merger. We reviewed with the senior management of
Home Bancorp earnings projections for 1996 through 2000 for Home Bancorp as a
stand-alone entity, prepared by Home Bancorp. Such earnings projections were
prepared by Home Bancorp based upon assumptions by senior management of Home
Bancorp. Certain pro forma financial projections for the years 1996 through 2000
for the combined entity were mathematically derived by us based upon the
projections discussed above. In certain cases, such combined pro forma financial
projections included the projected operating cost savings and margin
enhancements expected by CU Bancorp to be realizable in the Merger.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of such information. We have relied upon the
managements of CU Bancorp and Home Bancorp as to the reasonableness of the
financial and operating forecasts, projections and projected operating cost
savings and margin enhancements (and the assumptions and bases therefor)
provided to us, and we have assumed that such forecasts, projections and
projected operating cost savings and margin enhancements reflect the best
currently available estimates and good faith judgments of the applicable
managements as to the expected future operating and financial performance of
their respective companies, consistent with historical data, and assumed that
the benefits contemplated by the Merger, as reflected in such forecasts, will be
achieved. We are not experts in the evaluation of loan portfolios for purposes
of assessing the
<PAGE> 488
Board of Directors
May 3, 1996
Page 3
adequacy of the allowances for losses with respect thereto and have assumed,
with your consent, that such allowances for each of CU Bancorp and Home Bancorp
are in the aggregate adequate to cover such losses. We have not reviewed any
individual credit files. In addition, we have not made an independent
evaluation, appraisal or physical inspection of the assets or individual
properties of CU Bancorp or Home Bancorp, nor have we been provided with any
such appraisal and assumed, with the consent of the Board of Directors of CU
Bancorp, that all material assets and liabilities (including contingent or
unknown liabilities) of CU Bancorp and Home Bancorp are as set forth in the
financial statements of CU Bancorp and Home Bancorp, respectively. For purposes
of this opinion, we have assumed that the Merger will have the tax, accounting
and legal effects (including, without limitation, that the Merger will be
accounted for as a pooling of interests) described in the Merger Agreement, and
have relied, as to legal matters, exclusively on counsel to CU Bancorp and Home
Bancorp, as to the accuracy of the disclosures set forth in the Merger
Agreement. We have assumed that the documents to be prepared and used to effect
the Merger will do so on the terms set forth in the Merger Agreement, without
material modification.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the historical and
current financial position and results of operations of CU Bancorp and Home
Bancorp.
Our opinion is based upon an analysis of the foregoing in light of our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
thereof and the information made available to us through the date hereof. In
this regard, we have assumed that there has been no material change of business,
condition (financial or other) or prospects of CU Bancorp or Home Bancorp since
the respective dates of the information provided to us. We have not participated
in the negotiation of the Merger or the basic business decision to proceed with
or to effect the Merger.
It is understood that this letter is for the information of the Board of
Directors of CU Bancorp and may not be reproduced without our prior written
consent, with the exception of submission to bank regulatory and securities
agencies as part of regulatory applications and inclusion in the Joint Proxy
Statement/Prospectus. This letter and the opinion set forth herein is not
intended to be and does not
<PAGE> 489
Board of Directors
May 3, 1996
Page 4
constitute a recommendation to the Board of Directors or to any shareholder of
CU Bancorp with respect to how the Board of Directors or any such shareholder
should vote with respect to the Merger.
Our opinion as expressed herein is limited to the fairness, from a financial
point of view, to the holders of the CU Stock of the Conversion Ratio in the
Merger and does not address CU Bancorp's underlying business decision to proceed
with the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Conversion Ratio is fair to the holders
of CU Stock from a financial point of view.
Very truly yours,
/S/ VAN KASPER & COMPANY
VAN KASPER & COMPANY
<PAGE> 490
APPENDIX H
[PIPER JAFFRAY COMPANIES INC. LETTERHEAD]
June 4, 1996
The Board of Directors
Home Interstate Bancorp
2633 Cherry Avenue
Signal Hill, CA 90806
Members of the Board:
In connection with the proposed merger transaction ("Merger") whereby Home
Interstate Bancorp ("Home") shall be merged with and into CU Bancorp ("Issuer")
pursuant to an Agreement and Plan of Reorganization by and among Home, Home
Bank, Issuer and California United Bank, National Association (the
"Agreement"), you have requested our opinion as to the fairness, from a
financial point of view, to the shareholders of Home of the consideration to be
received pursuant to the Agreement.
Piper Jaffray Inc., as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwriting and secondary distributions of
securities, private placements and valuations for estate, corporate and other
purposes. For our services in rendering this opinion, Home has paid us a fee
and has indemnified us against certain liabilities. In the ordinary course of
its business, we and our affiliates may actively trade securities of Home and
Issuer for our own account or the account of our customers and, accordingly,
may at any time hold a long or short position in such securities. Additionally,
from time to time, we and our affiliates may produce research materials
regarding Home and Issuer.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have reviewed (i) the Agreement dated January 10, 1996, and
the amendment thereto dated March 29, 1996, (ii) publicly available information
relative to Home, (iii) certain internal financial information of Home prepared
for financial planning purposes and furnished by the management of Home,
(iv) certain financial and securities data of Home and companies deemed
similar to Home, (v) to the extent publicly available, the financial terms of
certain merger transactions deemed similar to the Merger, (vi) publicly
available information relative to Issuer, (vii) certain internal financial
information of Issuer prepared for financial planning purposes and furnished
by the management of Issuer, (viii) certain internal financial information of
the combined company resulting from the Merger (the "Combined Company")
prepared for financial planning purposes and furnished by the
<PAGE> 491
Home Interstate Bancorp
June 4, 1996
Page 2
management of Issuer, and (ix) certain financial and securities data of Issuer
and companies deemed similar to Issuer. We visited the headquarters of Home in
Los Angeles, California and had discussions with members of the management of
Home concerning the financial condition, current operating results and business
outlook for Home and the Combined Company and Home's plans relating to the
Combined Company. We visited the headquarters of Issuer in Los Angeles,
California and had discussions with members of the management of Issuer
concerning the financial condition, current operating results and business
outlook for Issuer and the Combined Company and Issuer's plans relating to the
Combined Company.
We have relied upon and assumed the accuracy, completeness and fairness of the
financial statements and other information provided to us by Home and Issuer or
otherwise made available to us, and have not attempted independently to verify
such information. We have relied further upon the assurances of the managements
of Home and Issuer that the information provided to us by Home and Issuer has
been prepared on a reasonable basis, and, with respect to financial planning
data and other business outlook information, reflects the best currently
available estimates, and that they are not aware of any information or facts
that would make the information provided to us incomplete or misleading. We
have assumed, with your consent, the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and as a pooling of interests transaction under generally accepted
accounting principles.
In arriving at our opinion, we have not performed any appraisals or valuations
of specific assets of Home or Issuer, and we express no opinion regarding the
liquidation value of any entity. We have not been authorized by the Board of
Directors of Home to solicit, and did not solicit, other entities for purposes
of a business combination with Home. This opinion is based upon the information
available to us and facts and circumstances as they exist and are subject to
evaluation on the date hereof; events occurring after the date hereof could
materially affect the assumptions used in preparing this opinion. We are not
expressing any opinion herein as to the price at which shares of Home or Issuer
Common Stock have traded or may trade at any future time.
This opinion is directed to the Board of Directors of Home and is not intended
to be and does not constitute a recommendation to any shareholder as to how
such shareholder should vote with respect to the Merger. We were not requested
to opine as to, and this opinion does not address, the basic business decision
to proceed with or effect the Merger. This opinion shall not be published or
otherwise used, nor shall any public reference to us be made, without our prior
written approval, except that we hereby approve of the reference to this letter
in, and its inclusion as an appendix or exhibit to a proxy statement to be sent
to the shareholders of Home seeking approval of the Merger.
<PAGE> 492
Home Interstate Bancorp
June 4, 1996
Page 3
Based upon and subject to the foregoing and based upon such other factors as we
consider relevant, it is our opinion that the consideration to be received by
the shareholders of Home pursuant to the Agreement is fair, from a financial
point of view, to such shareholders as of the date hereof.
Sincerely,
PIPER JAFFRAY INC.
/s/ PIPER JAFFRAY INC.
<PAGE> 493
APPENDIX I
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, 1996 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, 1996, the Registrant has 5,296,583 outstanding shares of its
Common stock, no par value.
1
<PAGE> 494
CU Bancorp
Quarter Ended March 31, 1996
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, 1996, and December 31, 1995. 14
Consolidated Statements of Income:
-Three Month Periods Ended March 31, 1996, and
March 31, 1995. 15
Consolidated Statements of Cash Flows:
-Three Month Periods Ended March 31, 1996 and
March 31, 1995. 16
Notes to Consolidated Financial Statements 17
Signatures 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holder 23
Item 5. Other Information 23
Item 6. Exhibits and Filings on Form 8-K 24
2
<PAGE> 495
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
The Company earned $567 thousand or $.10 per share, during the first quarter of
1996, compared to $710 thousand, or $.15 per share, during the same period in
1995. Income for the current quarter was reduced by costs totaling $.05 per
share related to merger activity. Net income for the quarter ended March 31,
1996 would have been $.15 per share without the direct expenses incurred in the
period related to the acquisition of Corporate Bank and the proposed merger with
Home Bank. This compares with $710 thousand, or $.15 per share for the
comparable quarter of last year. Earnings for the first quarter of 1995 included
approximately $.02 per share attributable to a sale of mortgage servicing
rights.
On January 12, 1996, the Bank completed the acquisition of Santa Ana based
Corporate Bank. Inclusion of the Corporate Bank balances for the first time had
a number of effects on the Bank's financial statements. Non performing assets
increased to $3.8 million at March 31, 1996, up from $1 million at December 31,
1995 and $66 thousand at the end of the first quarter of 1995. Real estate
acquired through foreclosure totaled $450 thousand at March 31, 1996, compared
with zero at December 31, 1995 and March 31, 1995. The Bank's allowance for loan
losses as a percent of loans was 243% at March 31, 1996, compared with 11503% at
the comparable quarter of 1995. These asset quality ratios, even after the
inclusion of the non performing assets from Corporate Bank's portfolio, remain
strong.
Capital ratios are strong, substantially exceeding levels required for the "well
capitalized" category established by bank regulators. The Total Risk-Based
Capital Ratio was 13.60%, the Tier 1 Risk-Based Capital Ratio was 12.33%, and
the Leverage Ratio was 9.41% at March 31, 1996, compared to 16.19%, 14.92%, and
10.52%, respectively, at year-end 1995. 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 allows the Bank to continue
to grow its core business which provides relationship based services to middle
market customers and positions the Bank for its acquisition strategy. During the
first quarter of 1996, the Bank generated approximately $33 million in new loan
commitments, compared with about $31 million for the comparable period of 1995.
In January 1996, the Bank announced the signing of an agreement to merge with
Home Interstate Bancorp, the parent of Home Bank, based in the South Bay. This
merger, targeted to be completed in the second or third quarter of 1996, would
create a combined bank with over $800 million in assets and 22 branches.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
The Bank's loan portfolio at March 31, 1996 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 are at manageable
levels 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 as a secondary part of their total business relationship.
Total loans at March 31 ,1996 increased by $45 million from December 31, 1995. A
significant part of the change in the loan portfolio was due to the acquisition
of Corporate Bank in January 1996. Approximately $43 million of the March 31,
1996 loan balances relate to loans acquired in the Corporate Bank transaction.
The remaining small increase in outstandings represents new business production
more than offsetting the usual seasonal declines that occur in the first quarter
in the commercial portfolio.
3
<PAGE> 496
Table 1 Loan Portfolio Composition
<TABLE>
<CAPTION>
Amounts in thousands of dollars March 31, December 31, March 31,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $177,754 75% $159,768 84% $136,884 78%
Real Estate Loans:
Commercial 39,907 17 20,190 11 26,528 15
Mortgages 7,108 3 5,470 3 4,773 3
Construction 3,113 2 0 0 416 1
-------- --- -------- --- -------- ---
Total Real Estate Loans 50,128 22 25,660 14 31,717 19
Other loans 7,724 3 5,198 2 6,001 3
-------- --- -------- --- -------- ---
Total loans net of unearned fees $235,606 100% $190,626 100% $174,602 100%
======== ==== ======== ==== ======== ====
</TABLE>
Table 1a Loan Portfolio Maturities
(in Millions)
<TABLE>
<CAPTION>
Remaining Maturity
------------------
Within After One but After
One Within Five Five
Year Years Years Total
---- ----- ----- -----
<S> <C> <C> <C> <C>
Commercial & Industrial Loans $135,237 $47,139 $ 6,215 $188,591
Real Estate - Commercial & Mortgage 11,245 30,531 5,239 47,015
------ ------- ------- --------
Total loans $146,482 77,670 11,454 $235,606
======== ======= ======= ========
Loans due after one year with predetermined
interest rates 21,318 3,419
Loans due after one year with floating or
adjustable rates 56,352 8,035
------- ------
$77,670 $11,454
======= =======
</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> 497
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 March 31, December 31, March 31,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Commercial & Industrial Loans(1) $7,923 $6,594 $6,392
Real estate loans - Mortgages 0 0 277
Real estate loans - Construction Loans 222 0 5
------ ------ ------
8,145 6,594 6,674
Unfunded commitments and letters of credit 80 336 551
------ ------ ------
Total Allowance for loan losses $8,225 $6,930 $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.
During the first quarter of 1996, the Bank had net charge offs of $1.6 million,
compared to net recoveries of $165 thousand for the comparable period of 1995.
The charge offs in 1996 are the result of applying the Bank's aggressive and
disciplined approach to credit management to the portfolio acquired in the
Corporate Bank transaction.
5
<PAGE> 498
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
March 31, December 31, March 31,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $6,930 $7,427 $7,427
------ ------ ------
Loans charged off:
Real estate secured loans 1058 529 0
Commercial loans secured and unsecured 537 543 0
Loans to individuals, installment and other loans 115 17 4
------ ------ ------
Total charge-offs 1,710 1,089 4
------ -----
Recoveries of loans previously charged off:
Real estate secured loans 16 58 20
Commercial loans secured and unsecured 136 522 144
Loans to individuals, installment and other loans 1 12 5
------ ------ ------
Total recoveries of loans previously charged off 153 592 169
------ ------ ------
Net charge-off (recovery) 1,557 497 (165)
Provision for loan losses 0 0 0
Allowance of acquired bank 2,852 0 0
------ ------ ------
Balance at end of period $8,225 $6,930 $7,592
====== ====== ======
Net loan charge-offs (recoveries) as a percentage of
average gross loans outstanding during the period ended
.67% .28% (0.98)%
====== ====== =======
</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,
1996, nonperforming loans amounted to $3.4 million compared with $1.0 million at
December 31, 1995. The increase in nonperforming assets, both loans and other
real estate owned, is due to the acquisition of Corporate Bank.
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 March 31, 1996, therefore, the Bank had no potential
problem loans other than those disclosed in Table 4 as nonperforming loans.
6
<PAGE> 499
Table 4: Nonperforming Assets
<TABLE>
<CAPTION>
Amounts in thousands of dollars March 31, December 31, March 31,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Loans not performing $3,379 $1,024 $66
Other real estate owned 450 0 0
------ ------ ---
Total nonperforming assets $3,829 $1,024 $66
====== ====== ===
Allowance for loan losses as a percent of:
Nonperforming loans 243% 677% 11,503%
Nonperforming assets 215% 677% 11,503%
Nonperforming assets as a percent of total
assets 1.0% 0.3% 0%
Nonperforming loans as a percent of total loans
1.6% 0.5% 0%
</TABLE>
SECURITIES
The Securities Held to Maturity portfolio totaled $89 million at March 31, 1996,
compared with $67 million at year-end 1995. In the fourth quarter of 1995, the
Bank performed a one-time reassessment of the designations of securities as held
to maturity or available for sale, in accordance with a special report issued by
the Financial Accounting Standards Board on the subject of investments. As a
result of this assessment, $5.9 million of collateralized mortgage obligations
were transferred out of the held to maturity portfolio into the available for
sale portfolio. The collateralized mortgage obligations were subsequently sold
in the first quarter of 1996 at a gain of $113 thousand.
Also included in the Held to Maturity portfolio at March 31, 1996 is
approximately $20 million in commercial paper. The Bank has invested in high
quality, short term commercial paper as a diversification from Federal Funds
sold. Commercial paper held is less than six months in maturity, and is rated
A1/P1 by Standard and Poors. At March 31, 1996, there were unrealized gains of
$1 thousand and no losses in the securities held to maturity portfolio.
The Securities Available for Sale portfolio totaled $5 million at March 31, 1996
with no investments being included in this category during the first quarter of
1995. The investment portfolio of the Corporate Bank, acquired in January, 1996,
was classified as available for sale at the purchase date. The securities
acquired in this transaction may be sold as needed to match the investment
strategies and balance sheet needs of the Bank. There was an unrealized gain of
$16 thousand included in the March 31, 1996 balance, compared with an unrealized
gain of $143 thousand at December 31, 1995.
In the first quarter of 1996, the Bank realized a gain of $113 thousand on the
sale of securities available for sale. There were no gains or losses realized in
1995.
Additional information concerning securities is provided in the footnotes to the
accompanying financial statements.
OTHER REAL ESTATE OWNED
There was $450 thousand of Other Real Estate Owned on the Bank's balance
sheet at March 31, 1996. At December 31, 1995, and March 31, 1995 the Bank had
no Other Real Estate Owned. The Bank's policy is to carry properties acquired in
foreclosure at fair value less estimated selling costs, which is determined
using recent appraisal values adjusted, if necessary, for other market
conditions. Loan balances in excess of fair value are charged to the allowance
for loan losses when the loan is reclassified to other real estate. Subsequent
declines in fair value are charged against a valuation allowance for other real
7
<PAGE> 500
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
1996 or 1995.
DEPOSIT CONCENTRATION
Prior to 1992, the Bank's focus on real estate-related activities resulted in a
concentration of deposit accounts from title insurance and escrow companies. As
the Bank has changed its focus to commercial lending, the amounts of title and
escrow related deposits has declined for the past three years. 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 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, 1996 was $17 million
compared to $20 million at December 31, 1995. The bank has greatly reduced their
reliance on title and escrow deposits, with these relationships representing
approximately 5% of deposits in the first quarter of 1996, and 7% at year end
1995.
The Bank had $55 million in certificates of deposit larger than $100 thousand
dollars at March 31,1996. The maturity distribution of these deposits is
relatively short term, with $37 million maturing within 3 months and the $47
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), investments in
commercial paper, 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 1995 or 1996.
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 March 31, 1996, the Bank had
approximately $81 million of these out of area deposits, compared to $83 million
at December 31, 1995. The Bank's experience with raising out of area deposits
for the past two years indicates that the balances are quite stable when priced
to the current market.
8
<PAGE> 501
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 March 31, 1996 this funding source was 17% of average
deposits, compared to 17% at December 31, 1995.
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at
March 31, 1996
<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 6 Months 9 Months 12 Months 12 Months
3 Months -------- -------- --------- & Over
-------- ---------
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans $204,906 $ 2,445 $ 2,945 $ 573 $ 24,737
Securities 27,409 6,018 5,397 5,082 45,577
Federal funds sold & other 22,000 99 0 0 0
-------- -------- -------- -------- --------
Total earning assets 254,315 8,562 8,342 5,655 70,314
-------- -------- -------- -------- --------
Interest-bearing deposits:
Now and money market 81,511
Savings 11,070
Time certificates of deposit:
Under $100 30,367 11,574 11,999 5,975 7,627
$100 or more 39,186 5,406 4,432 3,448 2,374
Non interest-bearing demand deposits 12,183 0 0 0 0
-------- -------- -------- -------- --------
Total interest-bearing liabilities 174,317 16,980 16,431 9,423 10,001
-------- -------- -------- -------- --------
Interest rate sensitivity gap 79,998 (8,418) (8,089) 3,768 60,313
-------- -------- -------- -------- --------
Cumulative interest rate sensitivity gap 79,998 71,580 43,582 39,814 100,127
Off balance sheet financial instruments 0 0 0 0 0
-------- -------- -------- -------- --------
Net cumulative gap $ 79,998 $ 71,580 $ 43,582 39,814 100,127
======== ======== ======== ======== ========
Adjusted cumulative ratio of rate sensitive assets to
rate sensitive liabilities (1) 1.45 1.37 1.21 1.18 1.44
-------- -------- -------- -------- --------
</TABLE>
(1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios
less than 1.0 indicate a liability sensitive position. A ratio of 1.0
indicates a risk neutral position.
Assets and liabilities shown on Table 5 are categorized based on contractual
maturity dates. Maturities for those accounts without contractual maturities are
estimated based on the Bank's experience with these customers. Noninterest
bearing deposits of title and escrow companies, having no contractual maturity
dates, are considered subject to more volatility than similar deposits from
commercial customers. The net cumulative gap position shown in the table above
indicates that the Bank does not have a significant exposure to interest rate
fluctuations during the next twelve months.
CAPITAL
Total shareholders' equity was $38 million at March 31, 1996, compared to $33
million at year-end 1995. This increase was due to the issuance of stock to
acquire Corporate Bank, and earnings and 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 1996 and 1995, the Bank's capital levels substantially exceeded the "well
capitalized" standards, the highest classification established by bank
regulators.
9
<PAGE> 502
Table 7 Capital Ratios
<TABLE>
<CAPTION>
Regulatory Standards
--------------------
March 31, December 31, Well
1996 1995 Capitalized Minimum
---- ---- ----------- -------
<S> <C> <C> <C> <C>
Total Risk Based Capital 13.60% 16.19% 10.0% 8.00%
Tier 1 Risk Base Capital 12.33 14.92 6.0 4.00
Equity to Average Assets 9.41 10.52 5.0 3.00
</TABLE>
The Company declared and paid cash dividends totaling of $.02 per share in the
first quarter of 1996. The Company paid cash dividends totaling $.02, for each
of the four quarters of 1995. Subsequent to the end of the first quarter of
1996, the Company declared a dividend of $.03 per share, payable June 10, 1996
to shareholders of record May 10, 1996. The dividend payout ratio was 20% for
the first quarter of 1996, compared with 13% for the comparable period of 1995.
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 AND ACQUISITIONS
The Bank is committed to expanding the market penetration of the commercial
bank, including the creation of new branches and pursuing acquisition
opportunities. In March, 1995, the Company entered into an agreement to acquire
Santa Ana based Corporate Bank. The agreement was subsequently amended in
October 1995 and the transaction was completed on January 12, 1996 for stock and
cash. This acquisition brings two Orange County branches to the Bank,
representing an important geographic expansion. During 1995, the Bank converted
its former loan production offices in Ventura County, the San Gabriel Valley and
the South Bay to full service banking offices in improved facilities. These
moves expanded the Bank's branch system to seven full service locations serving
the greater Los Angeles area. See footnote I to the financial statements.
On January 10, 1996, the Bank announced an agreement to merge with Home
Interstate Bancorp, parent of Home Bank, based in the South Bay. The merger with
Home Bank is expected to be completed in mid - 1996, and will create a Bank with
22 branches and over $800 million in assets.
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
$4.8 million for the quarter ended March 31, 1996 compared to $ 3.8 million for
the same period in 1995. The increased margin in 1996 is primarily due to the
increased volumes of loans and deposits, due to both the acquisition of
Corporate Bank, and the commercial loan growth generated over the past year. The
change in 1995 is attributable to changes in volume and deposit mix. The Bank's
net interest income 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, and the increase
in certificates of deposit.
10
<PAGE> 503
Table 8 Analysis of Changes in Net Interest Income (1)
<TABLE>
<CAPTION>
Amounts in thousands of dollars Three months ended March 31, Three months ended March 31,
1996 compared to 1995 1995 compared to 1994
--------------------- ---------------------
Increases(Decreases) Volume Rate Total Volume Rate Total
-------------------- ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, net $1,504 $ 307 $1,197 $751 $ 830 $1,581
Investments 235 70 305 5 254 260
Federal Funds Sold 78 (62) 16 162 192 354
------ ----- ------ ---- ------ ------
Total interest income 1,817 (299) 1,518 918 1,276 2,195
------ ----- ------ ---- ------ ------
Interest Expense
Interest-bearing deposits:
Demand and Savings 199 (102) 97 (37) 100 63
Time Certificates of deposit:
Under $100 194 (44) 150 539 200 759
$100 or more 231 (51) 180 236 203 439
Federal funds purchased / Repos 0 0 0 0 0 0
Other borrowings 16 8 24 (42) (22) (64)
------ ----- ------ ---- ------ ------
Total interest expense 640 (189) 451 696 501 1,197
------ ----- ------ ---- ------ ------
Net interest income $1,177 $(110) $1,067 $222 $ 775 $ 998
====== ===== ====== ==== ====== ======
</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 8.5 % for the first quarter of 1996,
compared to 8.7% yield for the same period of 1995. The lower average yield on
earning assets in 1995 is the result of both a decrease in the prime rate from
an average of 8.8% to an average of 8.3% in 1996, and an increasing percentage
of assets being held in loans.
Rates on interest bearing liabilities resulted in an average cost of funds of
3.0 % for the first quarter of 1996, compared with 3.2% for the comparable
period of 1995. The decline in rates on certificates of deposit reflected the
lower interest rate environment in 1996.
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin was 5.6 % for the first quarter of 1996, compared
to 5.6% for the same period in 1995. The Bank's margin is strong because it has
funded itself with a significant amount of noninterest bearing deposits. The
deposit portfolio of Corporate Bank, which is included in the first quarter 1996
totals, was similar in composition to the Bank's deposits, resulting in very
little change in the Bank's margin.
11
<PAGE> 504
Table 9 Average Balance Sheets and Analysis of Net Interest Income
<TABLE>
<CAPTION>
Three months ended Three months ended
------------------ ------------------
Amounts in thousands of dollars March 31, 1996 March 31, 1995
-------------- --------------
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 $218,873 $5,610 10.25% $160,816 $4,413 10.98%
Investments 88,452 1,222 5.53 71,129 915 5.15
Certificates of Deposit
in other banks 99 1 4.04 149 3 6.71
Federal Funds Sold 40,233 517 5.14 34,489 501 5.81
------- ------ ----- -------- ------ -----
Total Earning Assets 347,657 7,350 8.46 266,583 5,832 8.75
Non Earning Assets
Cash & Due From Banks 23,947 23,985
Other Assets 10,932 8,397
-------- --------
Total Assets $382,536 $298,965
-------- --------
Interest-bearing Liabilities
Demand and savings 95,002 566 2.38 $ 63,740 469 2.94
Time Certificates of Deposits
Less Than $100 76,743 1,123 5.85 63,599 973 6.12
More Than $100 54,951 762 5.55 38,545 582 6.04
Fed Funds Purchased/Repos 0 0 0.00 0 0 0.00
-------- ------ ----- -------- ----- -----
Total interest-bearing 226,696 2,451 4.32 165,884 2,024 4.88
Noninterest-bearing Deposits 109,157 92,797
-------- --------
Total Deposits 335,853 2,451 2.92 258,681 2,024 3.13
Other Borrowings 4,760 82 6.89 3,798 58 6.11
-------- ------ ----- -------- ------ -----
Total Funding Liabilities 339,613 2,533 2.97 262,479 2,082 3.17
Other Liabilities 10,058 6,630
Shareholders' Equity 32,865 29,859
-------- -------
Total Liabilities and Shareholders'
Equity $382,536 $298,968
======== ========
Net Interest Income $4,817 5.54% $3,750 5.63%
====== ===== ====== =====
Shareholders' Equity to Total Assets
8.59% 9.99%
-------- --------
</TABLE>
OTHER OPERATING INCOME
The Bank reported a gain of $197 thousand in the first quarter of 1995 on the
sale of mortgage servicing rights, representing final settlement payments
received related to open issues on servicing sales from prior quarters. No
servicing sales have been made in 1996, and no further servicing rights are
owned at March 31, 1996. Operating income for the first quarter of 1996 includes
a gain of $113 thousand on the sale of available for sale securities.
12
<PAGE> 505
The trends and composition of other operating income are shown in the following
table.
Table 10 Other operating income
Amounts in thousands of dollars
<TABLE>
<CAPTION>
For three months ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Gain on sale of SBA Loans $ 8 $100
Documentation fees 28 19
Other service fees and charges 483 304
Gain on sale of securities 113
Gain on sale of mortgage servicing portfolio 0 197
---- ----
Total $632 $620
==== ====
</TABLE>
OPERATING EXPENSE
Total operating expenses for the Bank were $4.4 million for the quarter ended
March 31, 1996 , compared to $3.1 million for the same period in 1995. Included
in the first quarter 1996 totals is $330 thousand of direct expenses related to
the Corporate Bank acquisition and the planned merger with Home Bank. These
expenses include severance payments, investment banker fees and expenses of
integrating Corporate Bank's operations. Because a portion of the acquisition
costs are not tax deductible, the after tax effect of these expenses is
approximately $260 thousand, or $.05 per share. Other increases in operating
expenses relate to the additional staff and facilities acquired in the Corporate
Bank transaction.
PROVISION FOR LOAN LOSSES
The Bank has made no provision for loan losses in 1996 or 1995. No loan loss
provision has been deemed necessary , due to the low levels of nonperforming
assets, and the strong reserve position. 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 (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.
13
<PAGE> 506
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
Amounts in thousands of dollars, except share data 1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 30,883 $ 28,376
Federal funds sold 22,000 32,500
-------- --------
Total cash and cash equivalents 52,883 60,876
Securities held to maturity (Market value of $84,561 and $67,114 at March 31, 1996 and 84,560 66,735
December 31, 1995, respectively)
Securities available for sale, at market value 4,923 6,345
-------- --------
Total Securities 89,483 73,080
Loans, (Net of allowance for loan losses of $8,225 and $6,930 at March 31, 1996 and
December 31, 1995, respectively) 227,381 183,696
Premises and equipment, net 1,512 1,111
Other real estate owned 450 0
Accrued interest receivable and other assets 11,962 6,546
-------- --------
Total Assets $383,671 $325,309
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $119,026 $ 94,099
Savings and interest bearing demand 92,581 74,413
Time deposits under $100 67,542 70,866
Time deposits of $100 or more 54,846 45,132
-------- --------
Total deposits 333,995 284,510
Accrued interest payable and other liabilities 11,495 7,793
-------- --------
Total liabilities 345,491 292,303
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1996 or 1995 -- --
Common stock, no par value:
Authorized - 24,000,000 shares
Issued and outstanding - 5,296,583 in 1996, and 4,636,462 in 1995 32,148 27,264
Retained earnings 6,317 5,841
Unrealized gain on securities available for sale, net of taxes 9 83
Unearned Compensation (294) (182)
-------- --------
Total Shareholders' equity 38,180 33,006
-------- --------
Total liabilities and shareholders' equity $383,671 $325,309
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
14
<PAGE> 507
CONSOLIDATED STATEMENTS OF INCOME CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
Amounts in thousands of dollars, except per share data 1996 1995
---- ----
<S> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $5,610 $4,413
Interest on taxable investment securities 1,223 900
Interest on tax exempt securities 0 15
Interest on time deposits with other financial institutions 0 3
Interest on federal funds sold 517 501
------ ------
Total revenue from earning assets 7,350 5,832
------ ------
COST OF FUNDS:
Interest on savings and interest bearing demand 566 469
Interest on time deposits under $100 1,021 973
Interest on time deposits of $100 or more 864 582
Interest on other borrowings 61 58
Interest on subordinated notes 21 0
------ ------
Total cost of funds 2,533 2,082
------ ------
Net revenue from earning assets before provision for loan losses 4,817 3,750
PROVISION FOR LOAN LOSSES 0 0
------ ------
Net revenue from earning assets 4,817 3,750
------ ------
OTHER OPERATING REVENUE:
Other fees and charges 519 423
Gain on sale of mortgage servicing portfolio 0 197
Gain on sale of securities available for sale (before taxes of $47 in 1996) 113 0
------ ------
Total other operating revenue 632 620
------ ------
OTHER OPERATING EXPENSES:
Salaries and related benefits 2,490 1,652
Acquisition related expenses 330 0
Other operating expenses 1,629 1,458
------ ------
Total operating expenses 4,449 3,110
------ ------
Income before provision for income taxes 1,000 1,260
Provision for income taxes 433 550
------ ------
NET INCOME $ 567 $ 710
====== ======
EARNINGS PER COMMON AND EQUIVALENT SHARE $ 0.10 $ 0.15
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 508
CONSOLIDATED STATEMENTS OF CASH FLOWS CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
Amounts in thousands of dollars FOR THE QUARTER
ENDED MARCH 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 567 $ 710
-------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization 98 120
Amortization of goodwill 38 0
Amortization of deferred compensation 9 0
Net amortization of (discount)/premium on investment securities (184) 145
Provision for losses on loans and other real estate owned 0 0
Provision (benefit) of deferred taxes 654 298
Gain on sale of investment securities, net (113) 0
(Increase)/decrease in other assets (1,196) (374)
Increase/(decrease) in other liabilities (1,032) (1,809)
(Increase)/decrease in accrued interest receivable (358) (188)
Increase/(decrease) in deferred loan fees 49 81
Increase/(decrease) in accrued interest payable (110) 202
Accrued benefits from interest rate hedge transactions 0 0
-------- --------
Total adjustments (2,145) (1,525)
-------- --------
Net cash provided by operating activities (1,578) (815)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investment securities sold or matured 49,835 6,023
Purchase of investment securities (61,875) 0
Net decrease in time deposits with other financial institutions 0 (200)
Purchase of business 18,316 0
Net (increase)/decrease in loans 1,773 6,093
Purchases of premises and equipment, net (165) (124)
-------- --------
Net cash provided (used in) by investing activities 7,884 11,792
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in demand and savings deposits (8,570) (10,783)
Net increase/(decrease) in time certificates of deposit (5,736) 23,881
Proceeds from exercise of stock options and director warrants 0 562
Cash dividend paid (92) (90)
-------- --------
Net cash provided (used) by financing activities (14,398) 13,570
-------- --------
Net increase (decrease) in cash and cash equivalents (8,092) 24,547
Cash and cash equivalents at beginning of year 60,876 55,397
-------- --------
Cash and cash equivalents at end of year $ 52,784 $ 79,944
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 2,643 $ 1,880
Taxes 0 1,500
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 450 0
</TABLE>
The accompanying notes are an integral part of these consolidated statements
16
<PAGE> 509
Notes to Consolidated Financial Statements
March 31, 1996
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 month period ended March 31, 1996 were
5,481,705, compared with 4,700,688 for the comparable period of 1995.
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 $5 million in securities classified as "Available for sale",
indicating the willingness to sell these securities under certain conditions.
These securities are 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.
17
<PAGE> 510
The following tables set forth the book value and market value, of investment
securities at March 31, 1996.
A summary of Securities Held to Maturity at March 31, 1996 is as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $64,630 $ 1 -- $64,631
Commercial Paper 19,909 -- -- 19,909
U.S. Government Agency Securities 21 -- -- 21
------- ------- ------- -------
Total investment portfolio $84,560 $ 1 $ 0 $84,561
======= ======= ======= =======
</TABLE>
A summary of Securities Available for Sale for March 31, 1996 is as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,482 $ 14 $1,496
U.S. Agency securities 1,000 2 -- 1,002
Mortgage backed securities 1,583 0 1,582
Federal Reserve stock 433 0 433
Redevelopment bonds 410 0 410
------ ------ -- ------
$4,908 $ 16 $0 $4,923
====== ====== == ======
</TABLE>
At March 31, 1996, investment securities with a book value of $28,558 were
pledged to secure court deposits and for other purposes as required or permitted
by law.
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.
Note D. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve required to be maintained at the Federal Reserve Bank
was approximately $4.5 million, $2.8 million, and $3 million for the periods
ending March 31, 1996, and December 31 and March 31, 1995, 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.
18
<PAGE> 511
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 $450 of other real estate owned as of March 31, 1996. There was no
other real estate owned as of March 31, 1995, or December 31, 1995.
Note G. INCOME TAXES
Effective January 1, 1993, the Bank implemented the provisions of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." 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 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 March 31, 1996, the Bank had $3.8 million in impaired loans, against which a
loss allowance of $590 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 first quarter of 1996, the Bank had an average investment in impaired
loans of approximately $4.1 million.
19
<PAGE> 512
Note I. Acquisitions
On January 12, 1996, the Company completed the acquisition of Corporate Bank, a
Santa Ana, California based commercial bank. The acquisition was accounted for
as a purchase. The Company issued 649 thousand shares of common stock, and paid
$1.7 million in cash, for a total purchase price of $6.5 million. The acquired
operations of Corporate Bank have been included in the Statement of Income from
the acquisition date of January 12, 1996. The Company's income for the first
quarter of 1996 would not have been materially different if the combination had
been completed as of January 1, 1996. The pro forma results of operations for
the first quarter of 1995, had the acquisition been completed on January 1,
1995, would have been as follows:
<TABLE>
<S> <C>
Net interest income $7,025
Income before provision for income taxes 1,309
Net income 713
Earnings per common and equivalent share $ .13
</TABLE>
The fair value of assets acquired from Corporate Bank was $72.7 million, with
liabilities assumed of $68.6 million. Cash and cash equivalents acquired, net of
cash paid, totaled $20 million. Goodwill of $2.4 million generated by the
purchase transaction is being amortized on a straight line basis over a ten year
period.
Note J. 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 K. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, the Bank believes that pending or threatened litigation involving the
Bank will have no adverse material effect upon its financial condition, or
results of operations. Until third quarter 1995, the Bank was a defendant in
multiple lawsuits related to the failure of two real estate investment
companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH").
The lawsuits, consisted of a federal action by investors in PMC and SLGH (the
"Federal Investor Action"), at least three state court actions by groups of
Investors (the "State Investor Actions"), and an action filed by the Resolution
Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the
"Neilson" Action). An additional action was filed by an individual investor and
his related pension and profit sharing plans (the "Individual Investor Action").
Other defendants in these multiple actions and in related actions include
financial institutions, title companies, professionals, business entities and
individuals, including the principals of PMC and SLGH. The Bank was a depository
bank for PMC, SLGH and related companies and was a lender to certain principals
of PMC and SLGH ("Individual Loans"). Plaintiffs alleged that PMC/SLGH was or
purported to be engaged in the business of raising money from investors by the
sale and issuance of interests in loans evidenced by promissory notes secured by
real property. Plaintiffs alleged that false representations were made, and the
investment merely constituted a "Ponzi" scheme. Other charges related to the
Bank's conduct with regard to the depository accounts, the lending relationship
with the principals and certain collateral taken, pledged by PMC and SLGH in
conjunction with the Individual Loans. The lawsuits alleged inter alia
violations of federal and state securities laws, fraud, negligence, breach of
fiduciary duty, and conversion as well as 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
20
<PAGE> 513
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. As of May 10, 1996, the Bank and
the Insurer orally agreed that the Insurer would assume all future costs of
defense of the former director/employee, and would repay the Bank $75,000 for
certain of the prior costs expended. The agreement has not yet been finalized.
Also during May 1996, the Bank was informed that an oral agreement for global
resolution of these matters had been reached. However such a settlement is
subject to a number of contingencicies and approvals.
Note L. REGULATORY MATTERS
On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"),
after completion of their annual examination of the Bank, terminated the Formal
Agreement entered into in June, 1992. In December 1993, the Fed terminated the
Memo of Understanding entered into in August, 1992.
The Formal Agreement had been entered into in June 1992 and required the
implementation of certain policies and procedures for the operation of the Bank
to improve lending operations and management of the loan portfolio. The Formal
Agreement required the Bank to maintain a Tier 1 Risk Weighted Capital ratio of
10.5% and a 6.0% Tier 1 Leverage Ratio. The Formal Agreement mandated the
adoption of a written program to essentially reduce criticized assets, maintain
adequate loan loss reserves and improve bank administration, real estate
appraisal, asset review management and liquidity policies, and restricted the
payment of dividends.
The agreement specifically required the Bank to: 1) create a compliance
committee; 2) have a competent chief executive officer and senior loan officer,
satisfactory to the OCC, at all times; 3) develop a plan for supervision of
management; 4) create and implement policies and procedures for loan
administration; 5) create a written loan policy; 6) develop and implement an
asset review program; 7) develop and implement a written program for the
maintenance of an adequate Allowance for Loan and Lease Losses, and review the
adequacy of the Allowance; 8) eliminate criticized assets; 9) develop and
implement a written real estate appraisal policy; 10) obtain and improve
procedures regarding credit and collateral documentation; 11) develop a
strategic plan; 12) develop a capital program to maintain adequate capital (this
provision also restricts the payment of dividends by the Bank unless (a) the
Bank is in compliance with its capital program; (b) the Bank is in compliance
with 12 U.S.C. Section 55 and 60 and (c) the Bank receives the prior written
approval of the OCC District Administrator); 13) develop and implement a written
liquidity, asset and liability management policy; 14) document and support the
reasonableness of any management and other fees to any director or other party;
15) correct violations of law; and 16) provide reports to the OCC regarding
compliance.
The Memorandum of Understanding was executed in August 1992 and required 1) a
plan to improve the financial condition of CU Bancorp and the Bank; 2)
development of a formal policy regarding the relationship of CU Bancorp and the
Bank, with regard to dividends, inter-company transactions, tax allocation and
management or service fees; 3) a plan to assure that CU Bancorp has sufficient
cash to pay its expenses; 4) ensure that regulatory reporting is accurate and
submitted on a timely basis; 5) prior approval of the Federal Reserve Bank prior
to the payment of dividends; 6) prior approval of the Federal Reserve Bank prior
to CU Bancorp incurring any debt and 7) quarterly reporting regarding the
condition of the Company and steps taken regarding the Memorandum of
Understanding.
21
<PAGE> 514
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 14, 1996
By:___________________
Patrick Hartman
Chief Financial Officer
22
<PAGE> 515
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
23
<PAGE> 516
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 March 27,
1996, the Company reported the completion of the acquisition of
Corporate Bank.
24
<PAGE> 517
APPENDIX J
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
MARK ONE:
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended MARCH 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-11160
HOME INTERSTATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3657758
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806 - 2033
(address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (310) 988-9600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed the 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
--- ---
Applicable only to Corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock -- Authorized 20,000,000 shares of non par value; issued and
outstanding 4,216,780 at May 10, 1996.
================================================================================
<PAGE> 518
PART I
Item 1. Financial Statements
Following are the unaudited consolidated statements of financial condition
of Home Interstate Bancorp (the "Company") and its wholly owned subsidiary, Home
Bank (the "Bank") as of March 31, 1996 and December 31, 1995, and the
consolidated statements of income for the quarters ended March 31, 1996 and
March 31, 1995 and cash flows for the quarters ended March 31, 1996 and March
31, 1995. It is management's opinion that these statements present fairly, in
all material respects, the consolidated financial condition, result of
operations and cash flows of Home Interstate Bancorp and its subsidiary in
conformity with generally accepted accounting principles. The accompanying notes
are considered an integral part of these financial statements.
2
<PAGE> 519
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS: Cash and due from banks $ 43,766 $ 38,797
Federal funds sold 12,600 14,600
-------- ---------
Total of cash and cash equivalents 56,366 53,397
Securities held to maturity
(Approximate market value at
March 31, 1996 and December 31, 1995 were
$28,257,488 and $13,179,412, respectively.) 28,634 13,131
Securities available for sale 107,488 120,755
-------- ---------
Securities, net 136,122 133,886
Loans 215,910 211,223
Less: Allowance for possible loan losses 3,208 3,113
-------- ---------
Loans, net 212,702 208,110
Real estate owned 4,800 4,918
Premises, furniture and equipment, net 14,434 14,366
Accrued interest receivable and other assets 8,966 9,115
-------- ---------
TOTAL ASSETS $433,390 $ 423,792
======== ========
LIABILITIES: Deposits:
Demand deposits, non-interest bearing $133,049 $ 132,208
Savings and interest bearing demand deposits 159,178 153,891
Time certificates of deposit of $100,000
and over 18,904 18,105
Other time deposits 67,139 64,827
-------- ---------
Total Deposits 378,270 369,031
Securities sold under agreements to repurchase 0 0
Accrued interest payable and other liabilities 3,383 3,345
-------- ---------
TOTAL LIABILITIES 381,653 372,376
-------- ---------
Commitments and contingencies
SHAREHOLDERS' Common stock (no par value)
EQUITY: Authorized 20,000,000 shares; issued and
outstanding 4,213,280 shares in 1996 and
4,187,954 shares in 1995 43,099 42,859
Retained earnings 8,467 7,977
Unrealized gains on securities available for sale,
net of deferred taxes 171 580
-------- ---------
TOTAL SHAREHOLDERS' EQUITY
51,737 51,416
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $433,390 $423,792
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
financial condition.
3
<PAGE> 520
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands except for earnings per share)
For the three months ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUE FROM Interest and fees on loans $ 5,659 $ 5,355
EARNING ASSETS: Interest on securities:
taxable 1,843 2,339
non-taxable 95 116
Interest on Federal funds sold 186 25
-------- --------
TOTAL REVENUE FROM EARNING ASSETS 7,783 7,835
-------- --------
COST OF FUNDS: Interest on savings and interest bearing demand
deposits 850 880
Interest on time certificates of deposit of
$100,000 and over 237 132
Interest on other time deposits 774 697
Interest on securities sold under agreements to
repurchase 1 11
-------- --------
TOTAL COST OF FUNDS 1,862 1,720
-------- --------
Net revenue from earning assets before
provision for possible loan losses 5,921 6,115
Provision for possible loan losses 300 625
-------- --------
Net revenue from earning assets 5,621 5,490
-------- --------
OTHER OPERATING Service charges and fees 1,026 991
REVENUE: Securities gains, net 0 11
Other operating revenue 275 278
-------- --------
TOTAL OTHER OPERATING REVENUE 1,301 1,280
-------- --------
OTHER OPERATING Salaries and employee benefits 2,298 2,746
EXPENSES: Occupancy expense, net 682 725
Other operating expenses 2,428 2,243
-------- --------
TOTAL OTHER OPERATING EXPENSES 5,408 5,714
-------- --------
Income before provision for income taxes 1,514 1,056
Provision for income taxes 664 333
-------- --------
NET INCOME $ 850 $ 723
======== ========
EARNINGS PER SHARE $ .20 $ .17
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 521
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Periods Ended March 31, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM Net income $ 850 $ 723
---------- ---------
OPERATING ACTIVITIES: Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 216 198
Provision for possible loan losses 300 625
Amortization of securities premiums 365 431
Accretion of securities discounts (21) (40)
Amortization of deferred loan fees and costs (300) (170)
Net gain on sale of securities 0 (11)
Net (gain) loss on sale of premises, furniture
and equipment (3) 31
Net loss on real estate owned 340 165
Tax benefit from stock options exercised 9 0
Net decrease in accrued interest receivable
and other assets 148 197
Net increase in accrued interest payable and
other liabilities 329 14
---------- ---------
Total adjustments 1,383 1,440
---------- ---------
Net cash provided by operating activities 2,233 2,163
---------- ---------
CASH FLOWS FROM Proceeds from sales of securities 0 8,076
INVESTING ACTIVITIES: Proceeds from maturities of securities 13,523 2,142
Purchase of securities (16,801) (188)
Net increase in loans (4,814) (11,145)
Proceeds from sale of real estate owned 0 461
Proceeds from sale of premises, furniture and
equipment 3 5
Purchase of premises, furniture and equipment (284) (867)
---------- ---------
Net cash used in investing activities (8,373) (1,516)
---------- ---------
CASH FLOWS FROM Net increase (decrease) in demand deposits
FINANCING ACTIVITIES: non-interest bearing, savings and interest
bearing demand deposits 6,127 (10,353)
Net increase in time certificates of deposit of
$100,000 and over 799 1,198
Net increase (decrease) in other time deposits 2,312 (2,358)
Net decrease in securities sold under agreements
to repurchase 0 (100)
Proceeds from stock options exercised 231 0
Cash dividends declared (360) (636)
---------- ---------
Net cash provided by (used in) financing
activities 9,109 (12,249)
---------- ---------
Net increase (decrease) in cash and cash
equivalents 2,969 (11,602)
Cash and cash equivalents at beginning of period 53,397 48,996
---------- ---------
Cash and cash equivalents at end of period $ 56,366 $ 37,394
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 522
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Continued
(Unaudited)
For the Periods Ended March 31, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES: Supplemental disclosure of non-cash investing
and financing activities:
Adjustment of FASB 115:
(Increase) decrease in unrealized gains /
losses on securities available for sale $ 698 $ (2,858)
Increase (decrease) in deferred tax
liabilities related to unrealized gains /
losses on securities available for sale (289) 1,189
Increase (decrease) in shareholders' equity
for unrealized gains / losses, net of
deferred taxes (409) 1,669
Real estate acquired in settlement of loans 222 1,843
Supplemental disclosure of cash flow
information Cash paid during the year for:
Interest expense $ 1,846 $ 1,710
Income taxes 2 320
</TABLE>
6
<PAGE> 523
HOME INTERSTATE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
Principles of Consolidation
The consolidated financial statements of Home Interstate Bancorp include
the accounts of the Company and its wholly-owned subsidiary, the Bank. All
material intercompany balances and transactions have been eliminated in the
consolidation.
Principles of Presentment
The accompanying unaudited consolidated financial statements have been
prepared in condensed format and, therefore do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been reflected in the
financial statements.
Accounting Changes
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No.
118. These standards require that impaired loans be measured based on the
present value of expected future cash flows, the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. The
statement was adopted as of January 1, 1995.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of ". These standards
requires that impairment losses on long-lived assets to be recognized when an
asset's book value exceeds its expected future cash flows (undiscounted). The
statement was adopted as of January 1, 1996, and it does not have a material
effect on the Company's financial statements.
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation".
Under SFAS No. 123, companies have the option to implement a fair value-based
accounting method or continue to account for employee stock options and stock
purchase plans as prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees". The Company has not assessed the
impact on net income of adopting the new fair value accounting rules.
Earnings per Share
Earnings per share are based upon the weighted average number of shares
outstanding during each period. The effect of stock options outstanding are not
materially diluting and are not, therefore, included for the purpose of earnings
per share calculations. The average weighted number of shares used were
4,209,027 at March 31, 1996, 4,177,865 at December 31, 1995 and 4,175,207 at
March 31, 1995.
Statement of Cash Flows
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. The Company made cash payments of $2,000 and $320,000
for income taxes and $1,846,000 and $1,710,000 for interest paid on deposit
accounts for the periods ending March 31, 1996 and 1995, respectively.
7
<PAGE> 524
ITEM 2. Management Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
General
The Company's consolidated assets of $433,390,000 at March 31, 1996
increased 2.26% from December 31, 1995, when consolidated assets totaled
$423,792,000. Cash and cash equivalents increased 5.56% or $2,969,000.
Securities held to maturity increased 118.06% or $15,503,000 and securities
available for sale, net of unrealized loss decreased 10.99% or $13,267,000.
Loans increased 2.22% or $4,687,000 while the allowance for loan losses
increased 3.05% or $95,000. Real estate owned decreased 2.40% or $118,000.
Deposits increased 2.50% or $9,239,000 when comparing the same periods. The
increase in deposits was primarily due to an increase in yields on interest
bearing deposits and partially utilized in the funding of loans. During the
first quarter of 1996 loan demand increased slightly from December 31, 1995.
Mergers and Acquisitions
On January 10, 1996, the Company entered into a definitive agreement to
merge with and into CU Bancorp, a California corporation and parent of
California United Bank, National Association. Under the terms of the definitive
agreement, shareholders of the Company will receive 1.409 shares of CU Bancorp
stock for each share of CU Bancorp's stock. The definitive agreement is subject
to shareholder and regulatory approval and the merger is expected to be
completed during the third quarter 1996. At December 31, 1995, CU Bancorp had
total assets of $325,309,000 and total shareholders' equity of $33,006,000.
In February 1996, the Bank consummated a deposit purchase agreement with
Southern California Bank in which the Bank purchased the deposits of Southern
California Bank's Signal Hill branch office. The deposits purchased in the
transaction totaled in aggregate $1,656,000, which reflects less than 1% of
total deposits and assets of the Bank.
Capital Resources
The Company's internal growth rate of capital was .62% while assets
increased by 2.26% from year-end December 31, 1995. The following schedule
reflects specific capital-related information and ratios:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 December 31, 1995 % Change
-------------- ----------------- --------
<S> <C> <C> <C>
Ending total capital $51,737 $51,416 .62
Risk based capital-to-assets
ratios:
<CAPTION>
Regulatory
Requirement
-----------
<S> <C> <C> <C>
Tier 1 capital 17.06 16.96 4.00
Total capital 18.22 18.09 8.00
Leverage ratio 11.19 11.05 3.00 -- 5.00
</TABLE>
Liquidity and Balance Sheet Management
The asset/liability management process determines the size and composition
of the balance sheet and focuses on the management of liquidity and interest
rate exposures. The purpose of liquidity and balance sheet management is to
reflect the Company's ability to provide funds for day-to-day operations, meet
customer needs, take advantage of interest rate market opportunities and meet
the financial commitments of the Company. Funding of loan requests and
commitments, purchase of attractive securities opportunities, providing for
liability outflow, and management of interest rate risk requires continuous
analysis in order to match the maturities of categories of loans and securities
with the maturities of deposits and bank-related borrowings. The Company's
ability to obtain funds to replace maturing liabilities and to finance asset
growth depends upon its reputation as well as the diversity and liquidity of the
markets in which it participates. The Company's liquidity is normally viewed in
terms of the nature and composition of the Company's sources and
8
<PAGE> 525
uses of funds. Cash, maturing securities, reductions in Federal funds sold and
loan maturities and repayments provide liquidity. Purchase of Federal funds,
sale of securities, sale of loan participations or sale of the Company's loans
on the secondary market and utilization of other short-term borrowing facilities
are all available to provide additional liquidity vehicles. Liquid assets are
comprised of cash and cash equivalent assets (cash, cash due from other
financial institutions and Federal funds sold), U.S. Treasury securities and
U.S. Government agencies securities. The increase in cash and cash equivalents
was due to an increase in deposits which management believes was due to an
increase in yields on interest bearing deposits (see "General" herein). The
following schedule reflects specific liquidity information and ratios:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 December 31, 1995 % Change
-------------- ----------------- --------
<S> <C> <C> <C>
Gross loans $215,910 $211,223 2.22
Total deposits $378,270 $369,031 2.50
Gross loan-to-deposit
ratio 57.08 57.24
Gross loan-to-total assets
ratio 49.82 49.84
Cash and cash equivalent
assets as a percentage
of total assets 13.01 12.60
</TABLE>
Securities Portfolio
The Company complies with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". The Company holds securities in two categories,
available for sale and held to maturity. Securities available for sale may be
held for indefinite periods of time and may be sold in response to changes in
interest rates and/or other economic conditions. These securities are, in the
aggregate, carried at market value. Unrealized gains or losses are calculated
based on adjusted cost as described below. Unrealized gains or losses, net of
deferred taxes, are recorded as a separate component of shareholders' equity.
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and accounted for at cost, adjusted
for amortization of premium and accretion of discount.
The Company's calculation of cost is increased by accretion of discounts
and decreased by amortization of premiums, which are computed on the
straight-line method that 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
adjusted cost and computed on the specific identification method and are
classified in other operating revenue, securities gains or losses, net.
The unrealized gains (losses) on securities available for sale, net of
deferred taxes, were $171,000 at March 31, 1996, compared to $580,000 at
December 31, 1995. The activity in the available for sale portfolio had
securities matured/called of $12,273,000 during the three months ended March 31,
1996. The proceeds from these securities were used primarily to fund the
purchase of securities held to maturity during the same period. There were no
gains or losses recognized from the proceeds of these securities and no
purchases were added to the available for sale portfolio during the same period.
The activity in the held to maturity portfolio during the three months
ended March 31, 1996, consisted of $1,250,000 matured/called and $16,801,000
purchased. There were no gains or losses recognized from the proceeds of these
securities.
9
<PAGE> 526
Nonperforming Loans and Real Estate Owned
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 December 31, 1995 % Change
-------------- ----------------- --------
<S> <C> <C> <C>
Non-accrual loans $ 1,545 $ 3,232 (52.20)
Loans 90 days past due 26 106 (75.47)
Real estate owned 4,800 4,918 (2.40)
</TABLE>
The Bank's non-accrual loans showed a decrease of 52.20% for the three
months ended March 31, 1996. Of the $3,232,000 at December 31, 1995, $175,000
was charged off, $222,000 was transferred to real estate owned, $1,345,000 was
received in payments and $79,000 was brought current and removed from
non-accrual status. Additions to non-accrual since December 31, 1995 total
$134,000. Of the $1,545,000 in non-accrual loans at March 31, 1996, $1,450,000
is secured by deeds of trust and $95,000 is secured by other collateral. The
largest group of loans in non-accrual status is to one borrower and its related
entities and total in aggregate $725,000 of which all are secured by real
estate, having an approximate loan to value ratio of 53%. Management has set a
specific reserve of $72,500 on the $725,000 and it is believed to be sufficient
to absorb any anticipated loss. The next largest non-accrual loan had a balance
of $292,000 and is secured by real estate and has a loan to value ratio of
approximately 99%. This loan has a specific reserve of $44,000. Two other
significant non-accrual loans in the amounts of $200,000 and $183,000,
respectively, were removed from non-accrual status in May 1996. The $200,000
loan was transferred to real estate owned and the $183,000 loan was paid in
full. Management feels that the current allowance for loan loss is adequate.
The Company considers a loan to be nonperforming when any one of the
following events occur: (a) any installment of principal or interest is 90 days
past due; or (b) the loan is placed on non-accrual status. The Company's policy
is to classify loans which are delinquent in interest or principal for a period
of 90 days as non-accrual 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
collectable. 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. Interest income is subsequently recognized
on non-accrual loans only to the extent cash payments are received or 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.
Under the provisions of SFAS No. 114, 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.
The Bank has defined impaired loans as individual loans or relationships of
$250,000 or more and not currently accruing interest. As permitted by these
standards, the Bank excludes from its calculations smaller balance, homogeneous
loans such as consumer installment loans, lines of credit, and direct finance
leases. In determining whether a loan is impaired or not, the Bank applies its
normal loan review procedures. Loans which the Bank expects to collect in full
and for which an insignificant delay, i.e., 45 days past due, or an
insignificant shortfall in amount of payments is anticipated are not considered
impaired. The Bank 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.
At March 31, 1996, the Bank had $1,016,000 in impaired loans and a related
loss allowance of $117,000. Of the $1,016,000 of impaired loans, $0 was measured
using the present value method and $1,016,000 was measured using the fair value
of collateral. The approximate average balance of impaired loans for the period
ended March 31, 1996 was $1,942,000. No income was recognized during the period
on impaired loans.
Loans that are 90 days or more past due decreased 75.47% during the three
months ended March 31, 1996. The total comprises one installment loan in the
amount of $5,000 and 14 overdraft protection lines totaling $20,000.
The Bank's total real estate owned decreased 2.40% to $4,800,000 at March
31, 1996, from $4,918,000 at December 31, 1995. Four related properties were
foreclosed and added to real estate owned in the aggregate
10
<PAGE> 527
amount of $222,000 and subsequently sold in April 1996. No gains or losses were
recognized on this one transaction. A 60 unit manufactured housing complex
valued at $2,300,000 is in escrow. Other real estate owned properties total in
the aggregate $3,078,000 and consist of 161 acres of unimproved land in Orange
County, a commercial property in Lawndale, Ca., a gas station in Chino, Ca., two
theaters in Oceanside, Ca., and a condominium in Lomita, Ca. Reductions in real
estate owned during the first quarter came from the writedowns of $340,000
recognized due to additional anticipated closing costs. Real estate owned is
carried at the lower of cost or fair market value less estimated carrying costs
and costs of disposition. Cost is determined at the date of acquisition as the
result of a foreclosure sale and is equal to the receivable balance at that
date. If the cost (plus any liabilities assumed at foreclosure) exceeds the
appraised value, the carrying value of the property is written down to its fair
value. During the time the property is held, all related carrying costs and
losses on revaluation are expensed as incurred. Gains or losses on sales are
recorded in conformity with standards that apply to the accounting for sales of
real estate.
RESULTS OF OPERATIONS
Net Income
Net income increased 17.57% or $127,000 for the three months ended March
31, 1996 compared to the same period in 1995. Revenue from earning assets
decreased $52,000 for the three months ended March 31, 1996 compared to the
three months ended March 31, 1995 with the annualized yield increasing from
8.50% to 8.71%. Interest expense increased $142,000 with the annualized cost of
funds increasing from 2.80% to 3.12% comparing the three months ended March 31,
1996 to same period in 1995. Provision for loan losses decreased 52.00% or
$325,000, total other expenses decreased 5.36% or $306,000 and provision for
income taxes increased 43.37% or $458,000 when comparing the three months ended
March 31, 1996 to the same period in 1995.
Interest Income
Interest income decreased 0.66% while the annualized yield on average
earning assets increased to 8.71% from 8.50% when comparing March 31, 1996 to
March 31, 1995. The decrease in interest income is primarily due to the decrease
in average earning assets of 3.92%. Interest income on securities decreased
$517,000 which was directly related to the decrease in volume of securities
available for sale, as the Company sold securities from the available for sale
portfolio to offset the contraction of deposits experienced during 1995.
Interest income on loans increased $304,000 due to a slight increase in loan
volume and interest income on federal funds sold increased $161,000 due to the
increase in average federal funds sold during the three months ended March 31,
1996 compared to the same period in 1995. The following schedule provides
specific information regarding the components of interest income from earning
assets:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
- ---------------------- -------------- -------------- --------
<S> <C> <C> <C>
Average earning assets $359,263 $373,916 (3.92)
Interest income $ 7,783 $ 7,835 (0.66)
Annualized yield on average
earning assets 8.71% 8.50%
</TABLE>
11
<PAGE> 528
Interest Expense
Interest expense increased 8.26% or $142,000 for the three months ended
March 31, 1996 compared to the same period in 1995. Cost of funds increase is
primarily due to an increase in rates on time deposits that was used to curb the
contraction of deposits during 1995 and remain competitive. Average
interest-bearing liabilities decreased in the area of savings and
interest-bearing demand deposits as well as time deposits under $100,000.
Average time deposits of $100,000 and over increased when comparing the period
ended March 31, 1996 to March 31, 1995. The percent of lower cost non-interest
bearing demand deposits, savings deposits and interest-bearing demand deposits
to total deposits at March 31, 1996 was 77.25% compared to 78.50% at March 31,
1995. The Bank continues to maintain a favorable net interest margin. The
following schedule provides specific information regarding the components of
interest expense from interest-bearing liabilities:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
<S> <C> <C> <C>
Average interest-bearing
liabilities $ 239,942 $ 248,893 (3.60)
Interest expense $ 1,862 $ 1,720 8.26
Annualized cost of funds for
average interest-bearing
liabilities 3.12% 2.80%
Net interest margin
(net interest income divided by
average earning assets) 6.63% 6.63%
</TABLE>
Provision for Loan Losses
The purpose of the provision for possible loan losses is to maintain
reserves at a level sufficient to cover possible future loan losses. Management
exercises its judgment in establishing loss reserves for loans which borrowers
may not be able to repay in the future. The Bank's current provision for loan
losses reflects an ongoing detailed evaluation of the known risks in the
portfolio and the risks inherent in the present general economic outlook. The
Bank maintains a problem loan list in order to better monitor these risks. This
list includes those loans that are identified as having varying degrees of risk
in excess of loans having a normal amount of risk (including watch credits). As
of March 31, 1996, the problem loan list contained loans totaling $11,850,000
compared to $20,113,000 at March 31, 1995. Management has a grading system that
designates a grade for each loan depending on the degree of risk and possibility
of loss inherent in each class of loan. This grading system drives the loan loss
reserve calculations. A percentage allocation of each loan balance is reserved
depending on the designated grade. Nonperforming loans (those loans on
non-accrual status and 90 days or more past due) are contained in the problem
loan list. As of March 31, 1996, the allowance for loan loss represented 204% of
nonperforming loans and 27% of total problem loans as compared to 45% and 18% at
March 31, 1995, respectively (see "Nonperforming Loans and Real Estate Owned"
herein).
SFAS No. 114, which was adopted January 1, 1995, requires that certain
calculations be prepared with respect to impaired loans. No additional provision
was required under SFAS No. 114 during the first quarter of 1996. The aggregate
total provision for loan loss on impaired loans was $116,000 for the quarter
ending March 31, 1996.
Management decreased the provision for possible loan losses during the
first quarter of 1996 compared to the same period in 1995 due to an adequate and
improved coverage ratio of nonperforming loans at March 31, 1996 (see
"Nonperforming Loans and Real Estates Owned" herein). Gross loan loss recoveries
for the quarter ending March 31, 1996 totaled $26,000 with gross loan charge
offs totaling $231,000 resulting in a net charge off of $205,000.
12
<PAGE> 529
The following schedule provides more specific information relative to the
provision and allowance for possible loan loss:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
<S> <C> <C> <C>
Net charge-offs / (recoveries) $ 205 $ (256) 180.08
Provision for possible loan
losses 300 625 (52.00)
Allowance for possible loan losses
3,208 3,699 (13.27)
Allowance for possible loan
losses as a percentage of gross
loans 1.49% 1.78%
Allowance for possible loan
losses to nonperforming loans 204.20% 44.79%
Provision as a percentage of net
interest income 5.07% 10.22%
</TABLE>
The following table displays the stratification of the $3,208,000 contained
in allowance for possible loan losses at March 31, 1996:
(dollars in thousands)
<TABLE>
<CAPTION>
Loan Category March 31, 1996
------------- --------------
<S> <C>
Real estate - construction and other $ 518
Commercial 715
Installment 89
General loan reserves 1,886
-------
Total $ 3,208
=======
</TABLE>
Other Revenue
Other operating revenue is comprised of income from service charges and
other types of fees on deposit accounts, net gains on the sale of securities
available for sale, gross gains on the sale of real estate owned, and fees on
non-deposit account services. Service charges and fees increased due to an
increase in the charges assessed on certain deposit account activities. The
following schedule reflects the composition of other income and its percent of
change from the same period in 1995:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
<S> <C> <C> <C>
Service charges and fees $ 1,026 $ 991 3.53
Securities gains 0 11 --
Other operating revenue 275 278 (1.08)
--------- ---------
Total other revenue $ 1,301 $ 1,280 1.64
========= =========
</TABLE>
13
<PAGE> 530
Other Expenses
Other expenses are primarily non-interest expenses and are comprised of
several major categories: salaries and employee benefits, net occupancy expense,
furniture, fixtures and equipment expense and various other operating expenses.
Salaries and benefits decreased due to the restructuring program designed to
improve productivity which took place in September 1995. The Bank eliminated 41
full time positions and the result is a 16.31% decrease in salaries and employee
benefits. Occupancy expenses, net, decreased 5.93% due to a decrease in
furniture, fixture and equipment repairs and furniture, fixture and equipment
not capitalized. Other operating expenses increased 8.25% primarily due to the
merger costs incurred during the first quarter of 1996 of $214,000 (see "Mergers
and Acquisitions" herein), and an increase of $180,000 in real estate owned
costs compared to the same period in 1995. Conversely, federal deposit insurance
premiums decreased $207,000 due to the new rate schedule set during the end of
1995. The following schedule reflects the composition of other expenses and its
percent of change from the same period in 1995:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
<S> <C> <C> <C>
Salaries and employee benefits $ 2,298 $ 2,746 (16.31)
Occupancy, net 682 725 (5.93)
Other operating expenses 2,428 2,243 8.25
-------- --------
Total other expenses $ 5,408 $ 5,714 (5.36)
======== ========
</TABLE>
Provision for Income Taxes
The provision for income taxes increased 99.40% primarily due to the
increase in net income before provision of 43.37%. The increase in the effective
tax rate for the three months ended March 31, 1996 was 43.86% compared to 31.53%
at March 31, 1995. This increase is due to the nondeductible expenses related to
merger costs and tax exempt income reductions. The following schedule provides
specific information on the provision for income taxes:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
<S> <C> <C> <C>
Provision for income taxes $ 664 $ 333 99.40
Net income before provision $1,514 $1,056 43.37
Effective tax rate (3 months) 43.86% 31.53%
</TABLE>
Performance Ratios
There are three key ratios which are indications of earnings performance,
which are presented as follows:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
-------------- --------------
Annualized Period to date Annualized Period to date
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Return on average
assets .80% .20% .68% .17%
Return on average
equity 6.60% 1.64% 6.41% 1.58%
Dividends as a
percentage of
net income -- 42.35% -- 88.01%
</TABLE>
14
<PAGE> 531
PART II
Item 1. Legal Proceeding
Home Interstate Bancorp and its subsidiary are subject to legal actions
threatened or filed which arise from the normal course of business. Management
believes that the eventual outcome of all currently pending legal proceedings
against the Company or its subsidiary will not be material to the Company's or
the subsidiary's financial position or results of operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of matters to a vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Not applicable.
15
<PAGE> 532
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this form to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated May 14, 1996 HOME INTERSTATE BANCORP (Registrant)
By /s/ Keith W. Barnes
-----------------------------
Keith W. Barnes
Senior Vice President and
Chief Financial Officer
Chief Accounting Officer
16
<PAGE> 533
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CU Bancorp'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 the
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 CU
Bancorp through: 1) a majority vote of a quorum of the CU Board 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 CU
Bancorp 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 may be permitted to directors, officers or persons controlling CU
Bancorp, pursuant to the foregoing provisions or otherwise, CU Bancorp
understands that in the opinion of the Commission such indemnification is
against the public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by CU Bancorp of expenses incurred or paid
by a directors, officer or controlling person of CU Bancorp 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, CU
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 a public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT
NO. EXHIBIT
--- -------
2.0 Agreement and Plan of Reorganization by and among
CU Bancorp, California United Bank, National
Association, Home Interstate Bancorp and Home
Bank, dated January 10, 1996, as amended
March 29, 1996, and Exhibits thereto; contained
herein at Appendix A and incorporated herein by
reference.
<PAGE> 534
3(i).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(i).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(i).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(i).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(i).5 Certificate of Amendment of Articles of
Incorporation dated June 22, 1988; Filed as an
Exhibit to Form S-4 dated October 11, 1995;
Registration Number 33-63729 and incorporated by
reference herein.
3(i).6 Certificate of Amendment of Articles of
Incorporation dated May 14, 1990; Filed as an
Exhibit to Form S-4 dated October 11, 1995;
Registration Number 33-63729 and incorporated by
reference herein.
3(i).7 Certificate of Amendment of Articles of
Incorporation dated June 19, 1990; Filed as an
Exhibit to Form S-4 dated October 11, 1995;
Registration Number 33-63729 and incorporated by
reference herein.
3(ii).1 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.
3(ii).2 Bylaws of the Registrant; Filed as an Exhibit to
Form S-4 dated October 11, 1995; Registration
Number 33-63729 and incorporated by reference
herein.
4.1 Specimen Certificate evidencing shares of
Registrant's Common Stock; Filed as an Exhibit to
Form S-4 dated October 11, 1995; Registration
Number 33-63729 and incorporated by reference
herein.
5.1 Opinion of Anita Y. Wolman, Esq; Filed as Exhibit
5.1 to Registrant's Amendment No. 1 to Form S-4
dated May 24, 1996; Registration No. 333-02777 and
incorporated herein by reference.
8.1 Opinion of Arthur Andersen LLP, re tax matters
dated April 23, 1996; Filed as Exhibit 8.1 to
Registrant's form S-4 on April 24, 1996;
Registration No. 333-0277 and incorporated herein
by reference
10.1 Amended and Restated Agreement and Plan of
Reorganization dated as of October 11, 1995 by and
among California United Bank, National Association,
CU Bancorp, and Corporate Bank, a California
banking corporation; Filed as Appendix A to Form
S-4 dated October 11, 1995; Registration Number
33-63729 and incorporated herein by reference.
10.2 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 December 31, 1993, and incorporated
herein by reference.
10.3 CU Bancorp 1995 Restricted Stock Plan; Filed as
Exhibit 10c to Form 10-K for year ended December
31, 1995, incorporated by reference herein.
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.
10.5 Form of Agreements between Home Bank and certain
senior officers of Home Bancorp or Home Bank
regarding retention of said officers; Filed as
Exhibit 10.5 to Registrants form S-4 on April 24,
1996; Registration No. 333-02777 and incorporated
herein by reference.
10.6 CU Bancorp 1996 Non-Employee Director Stock Option
Plan, Amendment Number One, Non-Employee Director
Agreement; Filed as Exhibit 10.6 to Registrant's
Form S-4 on April 24, 1996; Registration
No. 333-02777 and incorporated herein by reference.
10.7 CU Bancorp 1996 Employee Stock Option Plan,
Incentive Option Agreement, Non- Qualified Option
Agreement; Filed as Exhibit 10.7 to Registrant's
Form S-4 on April 24, 1996; Registration
No. 333-02777 and incorporated herein by reference.
<PAGE> 535
10.8 CU Bancorp 1996 Restricted Stock Plan;
Filed as Exhibit 10.9 to Registrant's Form S-4
on April 24, 1996; Registration No. 333-02777
and incorporated herein by reference.
10.9 CU Bancorp Conversion Option Plan; Filed as
Exhibit 10.9 to Registrant's Form S-4 on
April 24, 1996; Registration No. 333-02777
and incorporated herein by reference.
13.1 CU Bancorp Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996; Filed May 14, 1996
and incorporated herein by reference.
13.2 CU Bancorp Annual Report on Form 10-K for the
year ended December 31, 1995; Filed March 29,
1996 and incorporated herein by reference.
13.3 Amendment No. 1 to CU Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1995;
Filed April 25, 1996 and incorporated herein by
reference.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Anita Y. Wolman, Esq, included in
Exhibit 5.1 to Registrant's Amendment No. 1 to
Form S-4 dated May 24, 1996; Registration No.
333-02777 and incorporated herein by reference.
23.3 Consent of Piper Jaffray Inc (included in the
Piper Jaffray Inc Fairness Opinion at Appendix H to
this Joint Proxy Statement/Prospectus).
23.4 Consent of Van Kasper & Company (included in the
Van Kasper & Company Fairness Opinion at Appendix G
to this Joint Proxy Statement/Prospectus).
24.0 POWER OF ATTORNEY -- included with signature
herein.
99.1 CU Bancorp Proxy Card.
99.2 Home Interstate Bancorp Proxy Card.
(b) Financial Statement Schedules.
All schedules are omitted because the required
information is not applicable or is included in the Financial Statements of the
Registrant and the related notes.
(c) Not applicable.
<PAGE> 536
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 2 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 7th day of
June, 1996.
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, David I. Rainer,
Anita Y. Wolman and Patrick Hartman, and each or any one of them, his true and
lawful attorney-in-fact and agent, 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> 537
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 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, June 7, 1996
- ---------------------------------
Stephen G. Carpenter Chief Executive Officer June 7, 1996
DAVID I. RAINER* President and Director June 7, 1996
- ---------------------------------
David I. Rainer
Director, Secretary
- ---------------------------------
Richard H. Close
KENNETH BERNSTEIN* Director June 7, 1996
- ---------------------------------
Kenneth Bernstein
RON PARKER* Director June 7, 1996
- ---------------------------------
Ron Parker
PAUL W. GLASS* Director June 7, 1996
- ---------------------------------
Paul W. Glass
*By ANITA Y. WOLMAN
--------------------------------------- June 7, 1996
Anita Y. Wolman, Attorney in Fact
PATRICK HARTMAN
--------------------------------------- June 7, 1996
Patrick Hartman, Attorney in Fact
</TABLE>
<PAGE> 538
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT
--- -------
2.0 Agreement and Plan of Reorganization by and among
CU Bancorp, California United Bank, National
Association, Home Interstate Bancorp and Home Bank,
dated January 10, 1996, as amended March 29, 1996,
and Exhibits thereto; contained herein at Appendix
A and incorporated herein by reference.
3(i).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(i).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(i).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(i).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(i).5 Certificate of Amendment of Articles of
Incorporation dated June 22, 1988; Filed as an
Exhibit to Form S-4 dated October 11, 1995;
Registration Number 33-63729 and incorporated by
reference herein.
3(i).6 Certificate of Amendment of Articles of
Incorporation dated May 14, 1990; Filed as an
Exhibit to Form S-4 dated October 11, 1995;
Registration Number 33-63729 and incorporated by
reference herein.
3(i).7 Certificate of Amendment of Articles of
Incorporation dated June 19, 1990; Filed as an
Exhibit to Form S-4 dated October 11, 1995;
Registration Number 33-63729 and incorporated by
reference herein.
3(ii).1 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.
3(ii).2 Bylaws of the Registrant; Filed as an Exhibit to
Form S-4 dated October 11, 1995; Registration
Number 33-63729 and incorporated by reference
herein.
4.1 Specimen Certificate evidencing shares of
Registrant's Common Stock; Filed as an Exhibit to
Form S-4 dated October 11, 1995; Registration
Number 33-63729 and incorporated herein by
reference.
5.1 Opinion of Anita Y. Wolman, Esq; Filed as Exhibit
5.1 to Registrant's Amendment No. 1 to Form S-4
dated May 24, 1996, Registration No. 333-02777
and incorporated herein by reference.
8.1 Opinion of Arthur Andersen LLP, re tax matters
dated April 23, 1996; Filed as Exhibit 8.1 to
Registrant's Form S-4 on April 24, 1996;
Registration No. 333-02777 and incorporated
herein by reference.
10.1 Amended and Restated Agreement and Plan of
Reorganization dated as of October 11, 1995 by and
among California United Bank, National Association,
CU Bancorp, and Corporate Bank, a California
banking corporation; filed as Appendix A to Form
S-4 dated October 11, 1995; Registration Number
33-63729 and incorporated herein by reference.
10.2 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 December 31, 1993, and incorporated
herein by reference.
<PAGE> 539
10.3 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 on Form 10-K
for the year ended December 31, 1995 and
incorporated herein by reference.
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.
10.5 Form of Agreements between Home Bank and certain
senior officers of Home Bancorp or Home Bank
regarding retention of said officers; Filed as
Exhibit 10.5 to Registrant's Form S-4 on April 24,
1996; Registration No. 333-02777 and incorporated
herein by reference.
10.6 CU Bancorp 1994 Non-Employee Director Stock Option
Plan, Amendment Number One, Non-Employee Director
Agreement; Filed as Exhibit 10.6 to Registrant's
Form S-4 on April 24, 1996; Registration No.
333-02777 and incorporated herein by reference.
10.7 CU Bancorp 1996 Employee Stock Option Plan,
Incentive Option Agreement, Non- Qualified Option
Agreement; Filed as Exhibit 10.7 to Registrant's
Form S-4 on April 24, 1996; Registration No.
333-02777 and incorporated herein by reference.
10.8 CU Bancorp 1996 Restricted Stock Plan; Filed as
Exhibit 10.8 to Registrant's Form S-4 on April 24,
1996; Registration No. 333-02777 and incorporated
herein by reference..
10.9 CU Bancorp Conversion Option Plan; Filed as
Exhibit 10.9 to Registrant's Form S-4 on April 24,
1996; Registration No. 333-02777 and incorporated
herein by reference..
13.1 CU Bancorp Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996; Filed May 14,
1996 and incorporated herein by reference.
13.2 CU Bancorp Annual Report on Form 10-K for the year
ended December 31, 1995; Filed March 29, 1996 and
incorporated herein by reference
13.3 Amendment No. 1 to CU Bancorps Annual Report on
Form 10-K for the year ended December 31, 1995;
Filed on April 25, 1996 and incorporated herein
by reference.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Anita Y. Wolman, Esq; included in
Exhibit 5.1 to Registrant's Amendment No. 1 to
Form S-4 dated May 24, 1996; Registration No.
333-02777 and incorporated herein by reference.
23.3 Consent of Piper Jaffray Inc (included in the
Piper Jaffray Inc Fairness Opinion at Appendix H to
this Joint Proxy Statement/Prospectus).
23.4 Consent of Van Kasper & Company (included in the
Van Kasper & Company Fairness Opinion at Appendix G
to this Joint Proxy Statement/Prospectus).
24.0 POWER OF ATTORNEY -- included with signature
herein.
99.1 CU Bancorp Proxy Card.
99.2 Home Interstate Bancorp Proxy Card.
<PAGE> 1
EXHIBIT 23.1
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated January 19, 1996
and January 26, 1996, included in CU Bancorp's Form 10-K for the year ended
December 31, 1995 and Home Interstate Bancorp's Form 10-K for the year ended
December 31, 1995, respectively, and to all references to our Firm included in
this Registration Statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 7, 1996
<PAGE> 1
EXHIBIT 99.1
PROXY CU BANCORP
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned appoints Stephen G. Carpenter, Ronald Parker and Paul Glass,
as proxies, each with the power to appoint his substitute, and authorizes them
to represent and to vote as designated below, all the shares of common stock of
CU Bancorp held of record by the undersigned as of June 6, 1996, at the 1996
Annual Meeting of Shareholders of CU Bancorp (the "Meeting") to be held on July
18, 1996, and any adjournment thereof.
1. To approve the principal terms of the Agreement and Plan of Reorganization
dated as of January 10, 1996, as amended on March 29, 1996, by and among CU
Bancorp, California United Bank, National Association, Home Interstate
Bancorp and Home Bank
/ / FOR / / AGAINST / / ABSTAIN
2. To amend the Bylaws of CU Bancorp to decrease the authorized number of
Directors to not less than six and not more than eleven
/ / FOR / / AGAINST / / ABSTAIN
3. To elect as Directors the nominees set forth below:
<TABLE>
<S> <C>
/ / FOR ALL NOMINEES LISTED / / WITHHOLD AUTHORITY
(Except as marked to the contrary). Discretionary authority to cumulate votes is granted. To vote for all nominees.
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
cross out the nominee's name).
Kenneth L. Bernstein, Stephen G. Carpenter, Richard H. Close,
Paul W. Glass, Ronald S. Parker and David I. Rainer.
4. To approve the CU Bancorp 1996 Employee Stock Option Plan
/ / FOR / / AGAINST / / ABSTAIN
5. To ratify the appointment of Arthur Andersen LLP as CU Bancorp's Independent
Accountants for the fiscal year ending December 31, 1996
/ / FOR / / AGAINST / / ABSTAIN
6. To amend the Bylaws of CU Bancorp effective at the effective time to
increase the authorized number of Directors to not less than seven and
not more than thirteen
/ / FOR / / AGAINST / / ABSTAIN
7. To approve the CU Bancorp Conversion Stock Option Plan
/ / FOR / / AGAINST / / ABSTAIN
8. To amend the CU Bancorp 1996 Employee Stock Option Plan, effective
immediately following the effective time, to increase the number of
shares of CU Stock which can be issued pursuant thereto
/ / FOR / / AGAINST / / ABSTAIN
<PAGE> 2
(REVERSE OF CARD)
9. To approve the CU Bancorp 1996 Restricted Stock Plan effective immediately
following the effective time, to replace the CU Bancorp 1995 Restricted
Stock Plan
/ / FOR / / AGAINST / / ABSTAIN
10. To amend the CU Bancorp 1994 Non-Employee Director Stock Option Plan,
effective immediately following the effective time
/ / FOR / / AGAINST / / ABSTAIN
11. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting
The undersigned hereby ratifies and confirms all that said proxies, or any of
them, or their substitutes, shall lawfully do or cause to be done by virtue
hereof, and hereby revokes any and all proxies heretofore given by the
undersigned to vote at the Meeting. The undersigned acknowledges receipt of the
notice of the Meeting and the joint proxy statement/prospectus accompanying said
notice.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this proxy will be
voted FOR proposals 1 through 11.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
-------------------------
Number of shares
Dated: , 1996
-------------
-------------------------
(Signature of
Shareholder(s))
-------------------------
(Signature of
Shareholder(s))
When signing as attorney,
executor, administrator,
trustee or guardian,
please give full title as
such. If a corporation,
please sign in full
corporate name by
president or other
authorized officer. If a
partnership, please sign
in partnership name by
authorized person.
<PAGE> 1
EXHIBIT 99.2
REVOCABLE PROXY
HOME INTERSTATE BANCORP
ANNUAL MEETING OF SHAREHOLDERS -- JULY 17, 1996
The undersigned shareholder(s) of Home Interstate Bancorp (the "Home
Bancorp") hereby nominates, constitutes and appoints Ruth A. Martin, Donald A.
Buschenfield and James P. Staes, and each of them, the attorney, agent and proxy
of the undersigned, with full power of substitution, to vote all stock of Home
Bancorp which the undersigned is entitled to vote at the Annual Meeting of
Shareholders of Home Bancorp (the "Meeting") to be held in the Grand Ballroom,
at the Long Beach Airport Marriott Hotel, 4700 Airport Plaza Drive, Long Beach,
California 90815 on Wednesday, July 17, 1996 at 10:00 a.m., and any and all
adjournments thereof, as fully and with the same force and effect as the
undersigned might or could do if personally present thereat, as follows:
1. APPROVAL OF MERGER AGREEMENT. To approve the principal terms of the Agreement
and Plan of Reorganization dated January 10, 1996, as amended March 29, 1996, by
and among CU Bancorp, California United Bank, National Association, Home Bancorp
and Home Bank.
/ / FOR / / AGAINST / / ABSTAIN
2. ELECTION OF DIRECTORS. Authority to elect the nine (9) persons named in the
Joint Proxy Statement/Prospectus dated June 10, 1996, to the Board of Directors
to serve until the next Annual Meeting of Shareholders and until their
successors are elected and have qualified.
/ / AUTHORITY GIVEN to vote for all nominees
/ / WITHHOLD AUTHORITY to vote for all nominees
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike a
line through such nominee's name in the list below.)
Donald A. Buschenfield Roger K. Freeman, MD Bill Neal
J. Richard Denham Donald G. Martin George W. Post
Randall G. Elston Ruth A. Martin James P. Staes
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS. To ratify the
appointment of Arthur Andersen LLP as Home Bancorp's independent accountants for
the fiscal year ending December 31, 1996.
/ / FOR / / AGAINST / / ABSTAIN
4. To transact such other business as may properly come before the Meeting and
any adjournment or adjournments thereof. Management at present knows of no other
business to be presented by or on behalf of Home Bancorp or its Board of
Directors at the Meeting.
This Proxy is solicited on behalf of the Board of Directors and may be revoked
prior to its exercise. Please sign on the reverse side.
<PAGE> 2
PLEASE SIGN AND DATE BELOW
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1, A VOTE FOR "AUTHORITY
GIVEN" FOR PROPOSAL 2 AND A VOTE "FOR" PROPOSAL 3. THE PROXY CONFERS AUTHORITY
TO AND SHALL BE VOTED "FOR" PROPOSAL 1, "AUTHORITY GIVEN" FOR PROPOSAL 2 AND
"FOR" PROPOSAL 3 UNLESS "WITHHOLD AUTHORITY," "AGAINST" OR "ABSTAIN" IS
INDICATED, IN WHICH CASE THE PROXY SHALL BE VOTED IN ACCORDANCE WITH SUCH
INSTRUCTIONS.
IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY SHALL BE VOTED IN
ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
Dated:
-------------------------
(Number of Shares)
-------------------------
(Please Print Name)
-------------------------
(Signature of
Shareholder)
-------------------------
Please Print Name)
-------------------------
(Signature of
Shareholder)
(Please date this Proxy
and sign your name as it
appears on your stock
certificates. Executors,
administrators, trustees,
etc., should give their
full titles. All joint
owners should sign.)
I (We) do / / do not / /
expect to attend the
Meeting. Number of
Persons:______.
