FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
/X/ For the Quarterly Period Ended June 30, 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 June 30, 1996, the Registrant has 5,296,583 outstanding shares of its
Common stock, no par value.
<PAGE> 1
CU Bancorp
Quarter Ended June 30, 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:
-June 30, 1996, and December 31, 1995. 15
Consolidated Statements of Income:
-Three and Six Month Periods Ended June 30, 1996, and
June 30, 1995. 16
Consolidated Statements of Cash Flows:
-Six Month Periods Ended June 30, 1996 and
June 30, 1995. 17
Notes to Consolidated Financial Statements 18
Signatures 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holder 24
Item 5. Other Information 24
Item 6. Exhibits and Filings on Form 8-K 25
<PAGE> 2
Management Discussion and Analysis
Overview
The Company earned $793 thousand or $.14 per share, during the second quarter
of 1996, compared to $699 thousand, or $.15 per share, during the same period
in 1995. Income for the current quarter was reduced by costs totaling $.03
per share related to merger activity. Net income for the quarter ended June
30, 1996 would have been $.17 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 $699 thousand, or $.15 per share
for the comparable quarter of last year. Earnings for the second 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 two
quarters of 1996 has had a number of effects on the Bank's financial
statements. Non performing assets, which had increased to $3.8 million at
March 31, 1996, decreased to $2.5 million by the end of June 1996. This
compares with $1 million at December 31, 1995 and $285 thousand at June 30,
1995. Real estate acquired through foreclosure totaled $298 thousand at June
30, 1996, compared with zero at December 31, 1995 and June 30, 1995. The
Bank's allowance for loan losses as a percent of nonperforming loans was 374%
at June 30, 1996, compared with 2648% 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 continue to substantially exceed levels required for the
"well capitalized" category established by bank regulators. The Total
Risk-Based Capital Ratio was 13.67%, the Tier 1 Risk-Based Capital Ratio was
12.40%, and the Leverage Ratio was 9.87% at June 30, 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 second quarter of 1996, the Bank generated
approximately $41 million in new loan commitments and $74 million in new
loan commitments for the six months ended June 30, 1996, compared with
about $64 million for the six month period ending June 30, 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 third quarter of 1996, will
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 June 30, 1996 has maintained the high standards
of credit quality that have been established as the commercial loan portfolio
has been built over the past four 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 June 30 ,1996 increased by $9 million during the quarter. The
Bank's internal generated loan growth continues to consist primarily of asset
based loans to middle market commercial customers and results from the Bank's
ongoing success at generating new commercial loan commitments.
<PAGE> 3
<TABLE>
<CAPTION>
Table 1 Loan Portfolio Composition
Amounts in thousands of dollars June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $188,110 77% $159,768 84% $ 144,361 81%
Real Estate Loans:
Commercial 38,217 16 20,190 11 24,870 14
Mortgages 7,109 3 5,470 3 4,777 3
Construction 3,196 1 0 0 0 0
Total Real Estate Loans 48,522 20 25,660 14 29,647 17
Other loans 8,186 3 5,198 2 3,360 2
Total loans net of unearned fees $244,818 100% $190,626 100% $177,368 100%
</TABLE>
<TABLE>
<CAPTION>
Table 1a Loan Portfolio Maturities
(in Millions)
Remaining Maturity
Within After One After
One but Within Five
Year Five Years Years Total
<S> <C> <C> <C> <C>
Commercial & Industrial Loans $147,512 $44,864 $3,920 $196,296
Real Estate - Commercial & Mortgage 16,458 26,912 5,152 48,522
Total loans $163,970 71,776 9,072 $244,818
Loans due after one year with
predetermined interest rates 19,842 2,883
Loans due after one year with floating
or adjustable rates 51,934 6,189
$71,776 $9,072
</TABLE>
Table 1a above summarizes the maturities of the loan portfolio based upon the
contractual terms of the loans. The Bank does not automatically rollover
any loans at maturity. Maturing loans must go through the Bank's normal
credit approval process in order to roll a loan over to a new maturity date.
The Bank lending effort is focused on business lending to middle
market customers. Current credit policy now permits commercial real estate
lending generally only as part of a complete commercial banking
relationship with a middle market customer. Commercial real estate loans
are secured by first or second liens on office buildings and other
structures. The loans are secured by real estate that had appraisals in
excess of loan amounts at origination.
Monitoring and controlling the Bank's allowance for loan losses is a
continuous process. All loans are assigned a risk grade, as defined by credit
policies, at origination and are monitored to identify changing
circumstances that could modify their inherent risks. These
classifications are one of the criteria considered in determining the
adequacy of the allowance for loan losses.
<PAGE> 4
The amount and composition of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Table 2 Allocation of Allowance for Loan Losses
Amounts in thousands of dollars June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
Commercial & Industrial Loans(1) $7,777 $6,594 $7,046
Real estate loans - Construction Loans 229 0 0
8,006 6,594 7,046
Unfunded commitments and letters of credit 349 336 502
Total Allowance for loan losses $8,355 $6,930 $7,548
(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 second quarter of 1996, the Bank had net recoveries of $130
thousand, compared to net recoveries of $44 thousand for the comparable
period of 1995. This follows net charge offs in the first quarter of 1996,
which were
the result of applying the Bank's aggressive and disciplined approach to credit
management to the portfolio acquired in the Corporate Bank transaction.
<PAGE> 5
Activity in the allowance, classified by type of loan, is as follows:
<TABLE>
<CAPTION>
Table 3 Analysis of the Changes in the Allowance for Loan Loss
Amounts in thousands of dollars For the Periods Ended
June 30, December 31, June30,
1996 1995 1995
<S> <C> <C> <C>
Balance at January 1 $6,930 $7,427 $7,427
Loans charged off:
Real estate secured loans 1,163 529 0
Commercial loans secured and unsecured 538 543 196
Loans to individuals, installment and other loans 114 17 11
Credit cards and related plans 1 0 0
Total charge-offs 1,816 1,089 207
Recoveries of loans previously charged off:
Real estate secured loans 29 58 31
Commercial loans secured and unsecured 347 522 286
Loans to individuals, installment and other loans 13 12 11
Total recoveries of loans previously charged off 389 592 328
Net charge-off (recovery) 1,427 497 (121)
Provision for loan losses 0 0 0
Allowance of acquired bank 2,852 0 0
Balance at end of period $8,355 $6,930 $7,548
Net loan charge-offs (recoveries) as a percentage of
average gross loans outstanding during the period
ended .60% .28% (.069)%
</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 June 30, 1996, nonperforming loans amounted to $2.2 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 June 30, 1996, therefore, the Bank had no
potential problem loans other than those disclosed in Table 4 as
nonperforming loans.
<PAGE> 6
<TABLE>
<CAPTION>
Table 4: Nonperforming Assets
Amounts in thousands of dollars June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
Loans not performing $2,232 $1,024 $285
Other real estate owned 298 0 0
Total nonperforming assets $2,530 $1,024 $285
Allowance for loan losses as a percent of:
Nonperforming loans 374% 677% 2,648%
Nonperforming assets 330% 677% 2,648%
Nonperforming assets as a percent of total
assets 0.7% 0.3% 0.1%
Nonperforming loans as a percent of total
loans 0.9% 0.5% 0.2%
</TABLE>
Securities
The Securities Held to Maturity portfolio totaled $77 million at June 30,
1996, compared with $67 million at year-end 1995.
Included in the Held to Maturity portfolio at June 30, 1996 is approximately
$14.8 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 June 30, 1996, there were unrealized losses of
$458 thousand and an unrealized gain of $61 in the securities held to
maturity portfolio.
The Securities Available for Sale portfolio totaled $4.3 million at June 30,
1996 with no investments being included in this category during the second
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. The June 30. 1996
balance had no net unrealized gains or losses, compared with a net 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 or the second quarter of 1996.
Additional information concerning securities is provided in the footnotes to
the accompanying financial statements.
Other Real Estate Owned
There was $298 thousand of Other Real Estate Owned on the Bank's
balance sheet at June 30, 1996. At December 31, 1995, and June 30, 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 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
<PAGE> 7
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 four 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 June 30,
1996 was $16 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
second quarter of 1996, and 7% at year end 1995.
The Bank had $59 million in certificates of deposit larger than $100
thousand dollars at June 30,1996. The maturity distribution of these
deposits is relatively short term, with $44 million maturing within 3
months and the $58 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.
Borrowings under repurchase agreements and fed funds purchased have averaged
less than $1.1 million during 1996. Balances borrowed were primarily the
result of periodic tests by the Bank of available borrowing arrangements.
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 June 30, 1996, the Bank had approximately $65 million of these
out of area deposits, compared to $83 million at December 31, 1995. The
decline in out of area deposits during 1996 has been the result of
carefully managing these balances to a lower level, as the acquisition of
Corporate Bank provided additional liquidity for the Bank.
The
Bank's experience with raising out of area deposits for the past three
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 June 30, 1996 this funding source was 18% of average
deposits, compared to 17% at December 31, 1995.
<PAGE> 8
<TABLE>
<CAPTION>
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities
at June 30, 1996
Amounts in thousands of dollars Amounts Maturing or Repricing in
More Than 3 More Than 6 More Than 9
Months But Months But Months But
Less Than Less Than Less Than Less than 12 Months
3 Months 6 Months 9 Months 12 Months & Over
Earning Assets
<S> <C> <C> <C> <C> <C>
Gross Loans $214,935 $2,702 $2,510 1,946 $22,726
Securities 23,518 5,212 5,057 6,339 41,567
Federal funds sold & other 15,500 99 0 0 0
Total earning assets 253,953 8,013 7,567 8,285 64,293
Interest-bearing deposits:
Now and money market 83,054
Savings 10,492
Time certificates of deposit:
Under $100 21,681 16,413 6,253 11,845 4,256
$100 or more 43,898 7,096 3,487 3,694 900
Non interest-bearing demand deposits 11,233 0 0 0 0
Total interest-bearing liabilities 170,358 23,509 9,740 15,539 5,156
Interest rate sensitivity gap 83,595 (15,496) (2,173) (7,254) 59,137
Cumulative interest rate sensitivity gap 83,595 68,099 51,052 43,798 102,935
Off balance sheet financial instruments 0 0 0 0 0
Net cumulative gap $83,595 $68,099 $51,052 $43,798 $102,935
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities (1) 1.49 1.35 1.25 1.20 1.46
</TABLE>
(1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios
less than 1.0 indicate a liability sensitive position. A ratio of 1.0
indicates a risk neutral position.
Assets and liabilities shown on Table 5 are categorized based on contractual
maturity dates. Maturities for those accounts without contractual maturities
are estimated based on the Bank's experience with these customers.
Noninterest bearing deposits of title and escrow companies, having no
contractual maturity dates, are considered subject to more volatility than
similar deposits from commercial customers. The net cumulative gap position
shown in the table above indicates that the Bank does not have a significant
exposure to interest rate fluctuations during the next twelve months.
Capital
Total shareholders' equity was $38 million at June 30, 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.
<TABLE>
<CAPTION>
Table 7 Capital Ratios
Regulatory Standards
June 30, December 31, Well
1996 1995 Capitalized Minimum
<S> <C> <C> <C> <C>
Total Risk Based Capital 13.67% 16.19% 10.0% 8.00%
Tier 1 Risk Based Capital 12.40 14.92 6.0 4.00
Equity to Average Assets 9.87 10.52 5.0 3.00
</TABLE>
<PAGE> 9
The Company declared an increase in the quarterly dividend to $.045 per share
payable August 31 to shareholders of record July 30, 1996. The Company
declared and paid cash dividends totaling of $.02 and $.03 per share in the
first and second quarter of 1996, respectively. The Company paid cash
dividends totaling $.02, for each of the four quarters of 1995. The dividend
payout ratio was 20% for the six month period ended June 30, 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 January, 1996, the Company completed the acquisition of
Santa Ana based Corporate Bank. This acquisition brought 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. Additionally,
during the second quarter of 1996, the Bank started two new business units to
serve its customer base. The Investment Services Group and the Private
Banking group were formed to meet the growing financial services needs of the
customers.
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 August 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 $4.9 million for the quarter ended June 30, 1996 compared to $ 3.9
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.
<PAGE> 10
<TABLE>
<CAPTION>
Table 8 Analysis of Changes in Net Interest Income (1)
Amounts in thousands of dollars Six months ended June 30, Six months ended June 30,
1996 compared to 1995 1995 compared to 1994
Increases(Decreases) Volume Rate Total Volume Rate Total
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Loans, net $3,269 $(471) $2,798 $1,733 $1,311 $3,044
Investments 411 (230) 181 50 434 484
Federal Funds Sold (211) (121) (332) 279 338 617
Total interest income 3,469 (822) 2,647 2,062 2,083 4,145
Interest Expense
Interest-bearing deposits:
Demand and Savings 350 (207) 143 (140) 200 60
Time Certificates of deposit:
Under $100 92 (322) (230) 1,326 401 1,727
$100 or more 528 (36) 492 507 389 896
Federal funds purchased / Repos 35 0 35 0 0 0
Other borrowings 29 34 63 (50) (34) (84)
Total interest expense 1,034 (531) 503 1,643 956 2,599
Net interest income $2,435 $(291) $2,144 $419 $1,127 $1,546
</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 8.6% for the second quarter
of 1996, compared to 8.9% yield for the same period of 1995. The decrease in
the prime rate from an average of 8.9% to an average of 8.3% in 1996 was
offset by an increasing percentage of assets being held in loans.
Rates on interest bearing liabilities resulted in an average cost of funds
of 4.2% for the second quarter of 1996, compared with 5.0% 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 5.7% for the second quarter of 1996,
compared to 5.7% 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.
<PAGE> 11
<TABLE>
<CAPTION>
Table 9 Average Balance Sheets and Analysis of Net Interest Income
Six months ended Six months ended
Amounts in thousands of dollars June 30, 1996 June 30, 1995
Interest Annual Interest Annual
Income or Yield or Income or Yield or
Balance Expense Rate Balance Expense Rate
Interest Earning Assets
<S> <C> <C> <C> <C> <C> <C>
Loans, Net $226,121 $11,885 10.51% $164,298 $9,087 11.06%
Investments 86,695 1,985 4.58 69,500 1,804 5.19
Certificates of Deposit
in other banks 99 2 4.04 96 2 4.17
Federal Funds Sold 26,935 684 5.08 34,796 1,016 5.84
Total Earning Assets 339,850 14,556 8.57 268,690 11,909 8.86
Non Earning Assets
Cash & Due From Banks 27,826 24,151
Other Assets 11,729 8,141
Total Assets 379,405 $300,982
Interest-bearing Liabilities
Demand and savings 92,026 1,082 2.35 $64,278 939 2.92
Time Certificates of Deposits
Less Than $100 69,095 1,846 5.34 66,071 2,076 6.28
More Than $100 55,883 1,664 5.96 38,197 1,172 6.14
Fed Funds Purchased/Repos 1,132 35 6.18 0 0 0.00
Total interest-bearing 218,136 4,627 4.24 168,546 4,187 4.97
Noninterest-bearing Deposits 111,434 92,499
Total Deposits 329,570 4,627 2.81 261,045 4,187 3.21
Other Borrowings 4,737 167 7.05 3,801 104 5.47
Total Funding Liabilities 334,307 4,794 2.87 264,846 4,291 3.24
Other Liabilities 6,597 5,915
Shareholders' Equity 38,501 30,221
Total Liabilities and Shareholders' $379,405 $300,982
Equity
Net Interest Income $9,762 5.74% $7,618 5.67%
Shareholders' Equity to Total Assets 10.15% 10.04%
</TABLE>
Other Operating Income
The Bank reported no gains on sale of servicing during 1996. The Bank reported
a gain of $197 and $186 thousand in the first quarter and second 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 June 30, 1996. Operating income for the first
quarter of 1996 includes a gain of $113 thousand on the sale of available for
sale securities.
<PAGE> 12
The trends and composition of other operating income are shown in the
following table.
<TABLE>
<CAPTION>
Table 10A Other operating income
Amounts in thousands of dollars
For three months ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Gain on sale of SBA Loans $25 $51
Documentation fees 40 10
Other service fees and charges 621 294
Gain on sale of securities 0 0
Gain on sale of mortgage servicing portfolio 0 186
Total $686 $541
</TABLE>
<TABLE>
<CAPTION>
Table 10B Other operating income
Amounts in thousands of dollars
For six months ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Gain on sale of SBA Loans $33 $151
Documentation fees 68 46
Other service fees and charges 1,104 581
Gain on sale of securities 113 0
Gain on sale of mortgage servicing portfolio 0 383
Total $1,318 $1,161
</TABLE>
Operating Expense
Total operating expenses for the Bank were $4.2 million for the quarter ended
June 30, 1996 , compared to $3.2 million for the same period in 1995. Included
in the first six months of 1996 totals is $491 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 $415 thousand, or $.075 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.
<PAGE> 13
Legal and Regulatory Matters
In the normal course of business, the Bank occasionally becomes party to
litigation. In the opinion of management, the Bank believes that pending or
threatened litigation involving the Bank will have no material adverse effect
on its financial condition or results of operations.
As a registered bank holding company, and a national banking association, the
Company and the Bank are subject to supervision and regulation by the Federal
Reserve Board, the Comptroller of the Currency and the Federal Deposit
Insurance Corporation, among others. Regulatory issues have not had a
significant impact on the Bank's operations for the past three years, apart
from the normal ongoing process of monitoring compliance with relevant federal
and state law. Management remains committed to maintaining a positive and
proactive relationship with its primary regulators.
<PAGE> 14
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
CU Bancorp and Subsidiary
June 30, December 31,
Amounts in thousands of dollars, except share data 1996 1995
Assets
<S> <C> <C>
Cash and due from banks $33,272 $28,376
Federal funds sold 15,500 32,500
Total cash and cash equivalents 48,772 60,876
Securities held to maturity (Market value of $77,026 and $67,114 at June 77,423 66,735
30, 1996 and December 31, 1995, respectively)
Securities available for sale, at market value 4,270 6,345
Total Securities 81,693 73,080
Loans, (Net of allowance for loan losses of $8,355 and $6,930 at June 30,
1996 and December 31, 1995, respectively) 236,463 183,696
Premises and equipment, net 1,551 1,111
Other real estate owned 298 0
Accrued interest receivable and other assets 12,342 6,546
Total Assets $381,119 $325,309
Liabilities and Shareholders' equity
Deposits:
Demand, non-interest bearing $117,655 $94,099
Savings and interest bearing demand 93,546 74,413
Time deposits under $100 60,448 70,866
Time deposits of $100 or more 59,075 45,132
Total deposits 330,724 284,510
Accrued interest payable and other liabilities 11,573 7,793
Total liabilities 342,297 292,303
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 32,030 27,264
Retained earnings 6,951 5,841
Unrealized gain on securities available for sale, net of taxes 1 83
Unearned Compensation (160) (182)
Total Shareholders' equity 38,822 33,006
Total liabilities and shareholders' equity $381,119 $325,309
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Consolidated Statements of Income
CU Bancorp and Subsidiary
For the three months For the six months
ended June 30, ended June 30,
Amounts in thousands of dollars, except per share data 1996 1995 1996 1995
Revenue from earning assets:
<S> <C> <C> <C> <C>
Interest and fees on loans $6,275 $4,674 $11,885 $9,087
Interest on taxable investment securities 762 879 1,985 1,779
Interest on tax exempt securities 0 10 0 25
Interest on time deposits with other financial institutions 2 0 2 2
Interest on federal funds sold 167 514 684 1,016
Total revenue from earning assets 7,206 6,077 14,556 11,909
Cost of funds:
Interest on savings and interest bearing demand 516 470 1,082 939
Interest on time deposits under $100 723 1,103 1,846 2,076
Interest on time deposits of $100 or more 902 590 1,664 1,172
Interest on fed funds sold & repos 35 0 35 0
Interest on other borrowings 61 46 122 104
Interest on subordinated notes 24 0 45 0
Total cost of funds 2,261 2,209 4,794 4,291
Net revenue from earning assets before provision for loan losses 4,945 3,868 9,762 7,618
Provision for loan losses 0 0 0 0
Net revenue from earning assets 4,945 3,868 9,762 7,618
Other operating revenue:
Other fees and charges 686 355 1,205 838
Gain on sale of mortgage servicing portfolio 0 186 0 323
Gain on sale of securities available for sale (before taxes of $47 in 1996) 0 0 113 0
Total other operating revenue 686 541 1,318 1,161
Other operating expenses:
Salaries and related benefits 2,244 1,673 4,734 3,325
Acquisition related expenses 161 0 491 0
Other operating expenses 1,793 1,490 3,422 2,948
Total operating expenses 4,198 3,163 8,647 6,273
Income before provision for income taxes 1,433 1,246 2,433 2,506
Provision for income taxes 640 547 1,073 1,097
Net income $793 $699 $1,360 $1,409
Earnings per common and equivalent share $0.14 $0.15 $0.25 $0.30
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows CU Bancorp and Subsidiary
Amounts in thousands of dollars For the six months ended
June 30,
1996 1995
Cash flows from operating activities
<S> <C> <C>
Net income $1,360 $1,409
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for depreciation and amortization 224 250
Amortization of goodwill 76 0
Amortization of deferred compensation 25 0
Net amortization of (discount)/premium on investment securities (352) 288
Provision for losses on loans and other real estate owned 0 0
Provision (benefit) of deferred taxes 577 137
Gain on sale of investment securities, net (113) 0
(Increase)/decrease in other assets (1,166) (723)
Increase/(decrease) in other liabilities (936) (1,028)
(Increase)/decrease in accrued interest receivable (577) (353)
Increase/(decrease) in deferred loan fees 145 (67)
Increase/(decrease) in accrued interest payable (129) 407
Accrued benefits from interest rate hedge transactions 0 0
Total adjustments (2,226) (1,089)
Net cash provided by operating activities (866) 320
Cash flows from investing activities
Proceeds from investment securities sold or matured 100,108 9,057
Purchase of investment securities (110,088) 0
Proceeds from held for sale securities sold 5,890 0
Net decrease in time deposits with other financial institutions 0 0
Purchase of business 18,316 0
Net (increase)/decrease in loans (7,291) (2,578)
Purchases of premises and equipment, net (330) (424)
Net cash provided (used in) by investing activities 6,605 6,055
Cash flows from financing activities
Net increase/(decrease) in demand and savings deposits (9,015) (19,429)
Net increase/(decrease) in time certificates of deposit (8,601) 23,894
Proceeds from exercise of stock options and director warrants 0 562
Cash dividend paid (251) (182)
Net cash provided (used) by financing activities (17,867) 4,845
Net increase (decrease) in cash and cash equivalents (12,128) 11,220
Cash and cash equivalents at beginning of year 60,876 55,397
Cash and cash equivalents at end of year $48,748 $66,617
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest $4,923 $1,860
Taxes 300 900
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 450 0
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE> 17
Notes to Consolidated Financial Statements
June 30, 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 and six
month periods ended June 30, 1996 were 5,587,695 and 5,536,575, compared
with 4,701,488 and 4,701,088 for the comparable periods of 1995.
NOTE C. SECURITIES
The Bank has the intent and ability to hold its Securities Held to
Maturity until maturity. Accordingly, these 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 $4.3 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.
The following tables set forth the book value and market value, of investment
securities at June 30, 1996.
A summary of Securities Held to Maturity at June 30, 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 $62,534 $61 $(458) $62,137
Commercial Paper 14,874 14,874
U.S. Government Agency Securities 15 -- -- 15
Total investment portfolio $77,423 $61 $(458) $77,026
</TABLE>
A summary of Securities Available for Sale for June 30, 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 $1,480 $18 $1,498
U.S. Agency securities 500 $(2) 498
Mortgage backed securities 1,447 (3) 1,444
Federal Reserve stock 433 433
Redevelopment bonds 410 0 (13) 397
$4,270 $18 $(18) $4,270
</TABLE>
At June 30, 1996, investment securities with a book value of $32,885 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 $3.5 million, $2.8 million, and $3.1 million for the
periods ending June 30, 1996, and December 31 and June 30, 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.
<PAGE> 18
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 $298 of other real estate owned as of June 30,
1996. There was no other real estate owned as of June 30, 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 June 30, 1996, the Bank had $2.2 million in impaired loans, against which
a loss allowance of $447 thousand has been provided. The recorded investment
in all impaired loans has been calculated based on the present value of
expected cash flows discounted at the loan's effective interest rate. All
impaired loans are included in nonaccrual status, and as such no interest
income is recognized. For the second quarter of 1996 and the six months ended
June 30, 1996, the Bank had an average investment in impaired loans of
approximately $3 million and $3.6 million.
<PAGE> 19
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 six months 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>
<CAPTION>
<S> <C>
Net interest income $14,302
Income before provision for income taxes 2,819
Net income 1,548
Earnings per common and equivalent share $.30
</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.
A settlement agreement between the bank and the representatives of
the various plaintiffs, which has now been
<PAGE> 20
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 and the officer/director's insurer agreed that as of May 10, 1996,
the insurance company would assume all future costs of defense to the officer/
director for the remainder of the litigation and would repay the Bank $75,000.
This agreement has not yet been finally documented. The Bank understands
that global settlement documentation is being prepared, although the Bank is
not a participant in such matters. Such a settlement is subject to a number
of contingencies and approvals.
<PAGE> 21
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CU BANCORP
August 13, 1996
By:___________________
Patrick Hartman
Chief Financial Officer
<PAGE> 22
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
<PAGE> 23
Item 6. Exhibits and Filings on Form 8-K
(a) Exhibits:
(10) Material Contracts - Data Processing Services Agreement
(b) Reports on Form 8-K: None
<PAGE> 24
INDEX TO EXHIBITS
Material Contracts
Page
10.1 Data Processing Services Agreement 26
<PAGE> 25
DATA PROCESSING SERVICES AGREEMENT
THIS DATA PROCESSING SERVICES AGREEMENT is made as of this day of
August, 1996, (the "Agreement") by and between M&I Data Services, a
division of the Marshall & Ilsley Corporation, a Wisconsin corporation
("M&I") and California United Bank, a national banking association, together
with its subsidiaries and affiliates (collectively referred to as the
"Customer").
RECITALS
WHEREAS, M&I provides data processing services to customers located
across the country; and
WHEREAS, M&I desires to provide data processing services to Customer,
and Customer desires to have M&I provide it with such services.
NOW, THEREFORE, in consideration of the recitals and for the good
and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Services. M&I shall provide Customer with the data processing
services requested by Customer utilizing the version of the banking system
software made available from time to time by M&I through the M&I
Service Bureau (the "Services"). The functionality of the software and a
further description of the Services is set forth in the User Manuals, copies
of which will be provided, or made available, to Customer. Customer
shall purchase the data processing services indicated on Exhibit A from
M&I. Unless otherwise agreed in writing between M&I and Customer, and
subject to the other provisions of the Agreement, M&I shall make the On-line
Services available to Customer, subject to normal downtime and
maintenance, at times indicated on the M&I On-line Availability Schedule, as
modified from time to time.
2. Fees and Taxes. Customer agrees to pay for the Services
received hereunder as follows:
a. Amount of Fees. Commencing on the Conversion Date (as defined
in SectionE3) and on the last day of each month thereafter through the end of
the term of this Agreement, Customer shall pay M&I a fixed monthly fee of
forty-one thousand three hundred thirty-six dollars ($41,336) per month
(the "Fixed Monthly Fee") for the Services described on ExhibitEA. For
Services requested by Customer in addition to those on ExhibitEA or for
usage of Services on Exhibit A in excess of stated maximums, Customer
shall pay in accordance with
M&IOs then-current standard published prices discounted ten percent
(10%), except for ATM Services which shall be discounted twenty percent
(20%). The
Fixed Monthly Fee will be adjusted in accordance with the provisions
of ExhibitEB. Customer also agrees to pay all communication
costs, telecommunication charges, printline charges and other output costs,
start-up fees, pass-through charges, out-of-pocket expenses, conversion
expenses and fees, workshop fees, training fees, and late fees or
charges billed as miscellaneous on Customer's invoice (the
"Miscellaneous Fees"). The M&I standard published prices as of the date of
this Agreement are set forth on the fee schedule attached as ExhibitEA.
b. Additional Charges. In addition to the charges described above
or set forth in ExhibitEA, Customer agrees to pay for any manufacturers,
sales, use, excise, personal property, or any other tax or charge, or
duty or assessment levied or assessed by any governmental authority upon or
as a result of the execution or performance of any service pursuant to this
Agreement or materials furnished with respect to the Agreement, except those
taxes based on M&I's net income. In no event shall Customer be liable for
payment of any tax based on M&IOs real estate or equipment.
c. Terms of Payment. Customer shall pay the Fixed Monthly Fee on
the last day of the month in which the Services are to be performed. Any
other amounts due hereunder shall be paid within thirty (30) days of invoice,
unless otherwise provided herein. To effect the payment of the Fixed Monthly
Fee, Customer hereby authorizes M&I to initiate debit entries from and, if
necessary, initiate credit entries and adjustments to Customer's account at
the depository designated in the ACH Authorization Agreement. Debit entries
for the Fixed Monthly Fee will be made on the last day of each month for which
Services will be rendered under the Agreement. In the event that a payment
day is a nonbusiness day, entries will be made on the first
<PAGE> 26
preceding business day. Customer shall authorize, on the attached
ACH Authorization Agreement, debits from and credits to its account for
payment for Services received under the Agreement. The Customer shall also
pay any collection fees and reasonable attorneys' fees incurred by M&I in
collecting payment of the charges and any other amounts for which Customer is
liable under the terms and conditions of this Agreement, except for amounts
disputed in good faith in accordance with the provisions of the following
paragraph.
Should Customer reasonably and in good faith dispute any fees
so billed, Customer may withhold payment for the disputed amount provided
Customer notifies M&I of such disagreements or objections within the
prescribed thirty (30) day period; however, the Fixed Monthly Fee and any
undisputed amounts shall be promptly paid as described above. The parties
agree to promptly attempt to resolve the dispute, and further agree if the
disputed invoice is not resolved within sixty (60) days of the invoice date,
the chief executive officers of the parties shall meet to resolve the
dispute..
d. Modification of Terms and Pricing. If Customer is in default
and M&I elects to continue to perform the Services, Customer agrees to pay
M&I all unamortized conversion expenses in advance of M&I performing any
additional Services. As of the date of the Agreement, unamortized
conversion expenses equals four hundred twelve thousand seven hundred
eighty dollars ($412,780). Amortization shall be on a straight line basis
over sixty (60) months.
In
addition, Customer agrees that all charges for Services shall be computed
using M&I's then-current standard published prices, paid in advance as
determined by M&I.
At M&I's option, such Services shall be provided on a month-to-month
basis. Following CustomerOs cure of such default, the pricing structure
shall revert to that in place prior to such default.
3. Term.
a. Initial Term. This Agreement shall be effective upon execution
by both parties, and both parties will promptly undertake the conversion
activities necessary to process Customer's data. Subject to Customer's
timely and satisfactory completion of its responsibilities described in the
M&I Conversion Manual and in the Conversion Schedule to be established by M&I
and Customer, all conversion activities will be completed on December 2,
1996, (the "Conversion Date").
The term of this Agreement shall continue for a period of seventy-two
(72) months from the Conversion Date.
b. Renewal Obligations. During any automatic renewal term
as provided for in Section 13, or for any Services provided after the end of
the initial term, whether or not the Agreement is renewed, Customer agrees
that the terms of this Agreement shall continue to apply, except that all
charges for Services shall be computed using M&I's then-current standard
published prices paid in advance as determined by M&I. At M&I's option,
such Services shall be provided by M&I on a month-to-month basis.
4. Affiliates. All processing for Customer and Customer's subsidiaries
and affiliates which M&I does shall be included as part of the Services
provided under this Agreement and shall be done in accordance with the
terms and conditions of this Agreement. Customer agrees that it is
responsible for assuring compliance with the Agreement by its affiliates
and subsidiaries. Customer agrees to be responsible for the submission of its
affiliates' data to M&I for processing and for the transmission to
Customer's affiliates of such data processed by and received from M&I.
Customer agrees to be responsible for any and all fees owed under this
Agreement for Services hereunder.
5. Confidentiality and Ownership. Both parties will, to the extent and
in accordance with their policies used to protect their own information of
similar importance, use their best efforts to refrain from and prevent the
use of or disclosure of any confidential information of the other party,
disclosed or obtained by such party while performing its obligations under
this Agreement, except when such use or disclosure is for the purpose of
providing the Services. Neither party will have an obligation of
confidentiality with regard to any information insofar as the same:
(1) was known to such party prior to disclosure; (2) is or becomes
publicly available other than as a result of a breach of this Agreement; or
(3) is disclosed to such party by a third party not subject to an
obligation of confidentiality. Nor shall the obligation of
confidentiality occur where disclosure is made pursuant to: (1) any law of
the United States or any state thereof; (2) the order of any court or
governmental agency; or (3) the rules and regulations of any governmental
agency.
Customer may reproduce and distribute any or all M&IOs
documentation, including User Manuals, solely for its own internal use.
Customer recognizes, however, that such documentation may be copyrighted,
trademarked, patented, or otherwise protected by M&I. Customer will not
undertake to reproduce for distribution or distribute such documentation to
any other third party. Any modifications made to such documentation by
Customer for the purpose of customization are acknowledged to be solely at the
risk of Customer, and M&I shall not be liable to Customer for any inaccuracies
arising therefrom. The distribution of modified documentation is subject to
the same restrictions and shall further contain an acknowledgement of M&IOs
copyright and other protected proprietary interests in such documentation.
<PAGE> 27
6. Programming. M&I reserves the right to determine the
programming (whether hardware or software) utilized with the equipment used
in fulfilling its duties under this Agreement. All programs (including ideas
and know-how and concepts) developed by M&I are and remain its sole property.
7. Equipment. Customer shall obtain and maintain at its own expense
such data processing and communications equipment as may be necessary or
appropriate to facilitate the CustomerOs proper use and receipt of the
Services. Customer shall pay all installation, monthly, and other
charges relating to the installation and use of communications lines in
connection with the Services.
M&I shall not be responsible for the continued availability of
the
communications lines used by Customer in accessing the Services. M&I
will review the proposed network configuration (attached hereto as Exhibit
D) to insure its adequacy based on information provided by Customer, as of
the date of the Agreement for CustomerOs proper use and receipt of the
Services. M&I will monitor the communications lines used to access the
Services for the purpose of informing Customer or CustomerOs communications
vendor of any problems with such lines.
8. Supplies. Customer shall pay for all supplies used in connection
with the Services. All forms, supplies, or materials used in processing
Customer's items and input data shall meet M&I's specifications.
9. Systems Modification; Amendment of Services. M&I may modify,
amend, enhance, update, or provide the appropriate replacement for any of the
Services, the software used to provide the Services, or any element of its
systems at any time to: (a) improve the Services or (b) facilitate the
continued economic provisions of the Service. M&I may, at any time,
withdraw any of the Services upon providing two hundred seventy (270) days'
prior written notice to Customer. Either party may also terminate any of
the Services immediately upon any regulatory, legislative, or judicial
determination that providing such Services is inconsistent with applicable
law or regulation or upon imposition by any such authority of restrictions or
conditions which would detract from the economic or other benefits to M&I or
Customer to any element of the Services. In the event of the termination or
withdrawal of a Service, Customer shall not suffer any material diminution
in the functionality of the core elements of M&IOs Integrated Banking
System software (Deposit System, Loan System, Customer Information
System).
10. Disaster Recovery. M&I maintains, and shall continue to
maintain throughout the term of this Agreement, off-site disaster recovery
capabilities which permit M&I to recover from a disaster and continue
providing Services to Customers within a commercially reasonable period. An
executive summary of the current disaster recovery plan, which may change
from time to time, is available upon request from M&I at no charge. M&I
shall test the operation and effectiveness of its disaster recovery plan
at least annually. M&I maintains, and shall continue to maintain throughout
the term of this Agreement, a backup power supply system to guard against
electrical outages.
11. Events of Default. It shall be an Event of Default on the part of
the Customer if: (a)ECustomer is insolvent, or a receiver or conservator shall
be appointed with respect to the Customer; or (b)ECustomer shall fail to pay
any sum due M&I within the prescribed time except for any sums disputed in
good faith as provided for in Section 2(c); or (c)Eif the Customer shall
fail to perform any of its other covenants or obligations under this
Agreement where such failure to perform has a material adverse impact on
M&I. It shall be an Event of Default on the part of M&I if M&I shall fail
to perform any of its obligations under this Agreement where the failure
of M&I to perform has a material adverse impact on Customer and is
material to the provision of the Services. The defaulting party shall
have ten (10) days from the date of receipt of notice from the
nondefaulting party of nonpayment or nonperformance to cure such an Event of
Default, before the nondefaulting party may exercise any remedies it may have
as a result of the Event of Default.
12. Remedies Upon Default; Limitation of Liabilities. If an Event of
Default occurs on the part of the Customer, and is not cured within the ten
(10) day period prescribed in SectionE11, M&I may (a) terminate this
Agreement; (b) terminate access to its central processing unit by the
Customer; and (c) declare all amounts payable under this Agreement to be
immediately due payable and file suit for or otherwise obtain payment from the
Customer of any fees or other sums due it pursuant to this Agreement, plus any
actual damages to its equipment or systems caused by the Customer's actions,
failures to act, equipment, systems, or communication facilities. If an Event
of Default occurs on the part of M&I, and is not cured within the ten (10) day
period prescribed in Section 11, the Customer may only: (a) terminate this
Agreement without payment of any buyout amount, deconversion expense, or
penalty of any kind and (b) file suit or
otherwise obtain payment of an aggregate amount of fees paid by the Customer
to M&I hereunder during the six (6) months immediately preceding the Event of
Default plus any reasonable attorneyOs fees incurred as a result of any action
taken to collect such fees. Either party may also seek equitable remedies,
including, without limitation, specific performance and injunctive relief, for
a breach of Section 5 of this Agreement. M&I and the Customer agree that
these damage provisions are reasonable in light of all present predictable
circumstances (including
<PAGE> 28
expectable actual damages in that the fees to be charged by M&I hereunder
do not include amounts sufficient to insure against greater claims). M&I and
Customer expressly waive all claims for additional, incidental, consequential,
compensatory, or punitive damages and agree that the remedies set forth in
this Agreement shall be the sole and exclusive remedies of the parties. No
lawsuit or other action may be brought by either party hereto or on any claim
or controversy based upon or arising in any way out of this Agreement after
one (1) year from the date of the discovery of the occurrence allegedly giving
rise to the action. M&I agrees that except in the case of an Event of Default
relating to a breach by the Customer of its confidentiality obligations under
Section 5 of this Agreement, M&I will not exercise its remedy to terminate
Customer's access to the M&I central processing unit so long as: (a)ECustomer
is current in the payment of all amounts due M&I as reflected on M&I's last
invoice to Customer; and (b)Eonly exercise such remedy after providing
Customer with sixty (60) days' prior written notice.
13. Termination.
a. End of Initial Term. This Agreement shall automatically be
extended at the end of the initial seventy-two (72) month term for an
additional twelve (12) month renewal term, unless the Customer gives M&I at
least one hundred eighty (180) days' prior written notice of its intent to
terminate, which notice may be given during the initial term of the Agreement.
<PAGE> 29
b. Renewal Term. During the renewal term, this Agreement shall be
automatically extended for an additional one (1) month on each monthly
anniversary date so that the term shall always be not less than one (1) month
less than twelve (12) months, unless either party gives written notice to the
other party of intent to terminate, in which event the automatic monthly
renewals will end and the Agreement will terminate at the end of the unexpired
portion of the term in existence on the date notice to terminate is given.
c. Termination Upon Default. This Agreement may also terminate
upon an Event of Default and failure to cure beyond applicable cure periods
at the option of the nondefaulting party as set forth in Section 12 hereof.
d. Termination by Customer. Customer may terminate this Agreement
at any time, and without cause, by giving M&I at least one hundred eighty
(180) days' prior written notice and paying M&I the then-applicable buyout
amount set forth in SectionE21.
e. Termination for Acquisition Event of Customer. As used herein,
an OAcquisition EventO means any of the following events:
i. any person shall have completed a tender offer or exchange
offer to purchase any shares of Common Stock of the CustomerOs parent, such
that, upon consummation, such person would own or control fifty percent (50%)
or more of the then outstanding Common Stock of such parent or have the
ability to elect at least fifty percent (50%) of the directors of CustomerOs
parent; or
ii. any person shall have acquired beneficial ownership (such term
is defined in Rule 13d-3 under the Exchange Act) or the right to acquire
beneficial ownership of, or any OgroupO (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, fifty percent (50%) or more of the then outstanding
Common Stock;
As used in this Agreement, OpersonO shall have the meaning
specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
14. Regulatory Assurances. M&I and Customer acknowledge and agree that
the performance of these Services will be subject to regulation and
examination by Customer's regulatory agencies to the same extent as if such
Services were being performed by Customer. Upon request, M&I agrees to
provide any appropriate assurances to such agency and agrees to
subject itself to any required examination or regulation. Customer agrees
to reimburse M&I for reasonable costs actually incurred due to any such
examination or regulation that is performed solely for the purpose of
examining data processing services used by Customer.
a. Notice Requirements. The Customer shall be responsible
for
complying with all regulatory notice provisions to any applicable
governmental agency, which shall include providing timely and adequate notice
to the Chief Examiner of the Federal Home Loan Bank Board, the Office of
Thrift Supervision, the Office of the Comptroller of the Currency, The
Federal Deposit Insurance Corporation, the Federal Reserve Board, or their
successors, as applicable (collectively, the "Federal Agency"), as of the
effective date of Services under this Agreement, identifying those records to
which this Agreement shall apply and the location at which such Services are
to be performed.
b. Examination of Records. The parties agree that the
records
maintained and produced under this Agreement shall, at all times, be
available for examination and audit by governmental agencies having
jurisdiction over the Customer's business, including (without limitation)
the Federal Agency. The Director of Examinations of the Federal Agency or
his designated representative shall have the right to ask for and to receive
directly from M&I any reports, summaries, or information contained in or
derived from data in the possession of M&I related to the Customer. M&I
shall notify Customer as soon as possible of any formal request by an
authorized governmental agency to examine Customer's records maintained by
M&I, if M&I is permitted to make such a disclosure to Customer under
applicable law or regulations. Customer agrees that M&I is authorized to
provide all such described records when formally required to do so by this
authorized governmental agency.
c. Fidelity Bonds. Throughout the term of the Agreement, M&I
shall
maintain fidelity bond coverage for M&I and its employees in amounts
reasonable for providers of data processing services similar to the Services.
d. Notice of Changes. Customer shall give to the Director of
Examinations of the Federal Agency at least thirty (30) days' notice
<PAGE> 30
of the termination of this Agreement or of any material changes in
the Services to be provided hereunder.
e. Insurance. Throughout the term of this Agreement, M&I
shall
maintain insurance coverage (or shall be self-insured) in amounts reasonable
for providers of data processing services similar to the Services for losses
from fire, disaster, and other causes contributing to interruption of the
Services. The proceeds of such insurance shall be payable to M&I.
Nothing in this Agreement shall be construed as to permit Customer to
receive any of such proceeds, or to be named as an additional loss payee
under any insurance policy.
f. Financial Information. Upon request, Customer agrees to
provide
M&I with financial information as M&I may reasonably request.
15. Transportation and/or Transmission of Data. The responsibility
and expense for transportation and/or transmission of and risk of loss of
data and media to and from M&I's datacenters shall be borne by Customer. M&I
will notify Customer of the time by which Customer's data and media must be
delivered to M&I
for processing for M&I to provide Customer's processed data within the
time period agreed to by the parties.
16. Responsibility.
a. General. M&I agrees to perform the Services in a commercially
reasonable manner, which is similar to the services provided to other
M&I customers including member banks of the Marshall and Ilsley Corporation,
and no other or higher degree of care. Except as otherwise described
herein, M&I assumes no other obligation as to performance or quality
of the Services provided, all other risks of error being expressly assumed
by Customer. M&I shall not be responsible for loss or damage due to delays
in processing or in the delivery of processed data as a result of any
of the causes excused by Section 19 hereof.
M&I WILL IN NO EVENT BE LIABLE FOR ANY INDIRECT,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES INCURRED BY CUSTOMER INCLUDING, BUT NOT
LIMITED TO, LOST PROFITS OR BUSINESS OPERATION LOSS, REGARDLESS OF WHETHER
M&I WAS ADVISED OF THE POSSIBLE OCCURRENCE OF SUCH DAMAGES.
b. Reliance on Data Supplied. M&I will process items and data and
perform those Services described in this Agreement on the basis of
information furnished by Customer. M&I shall be entitled to rely upon
any such data, information, or instructions as provided by Customer. If any
error results from incorrect input supplied by Customer, Customer shall
be responsible for discovering and reporting such error and supplying the
data necessary to correct such error to M&I for processing at the earliest
possible time. Customer will indemnify and hold M&I harmless from any
cost, claim, damage, or liability (including attorneys' fees) whatsoever
arising out of such data, information or
instructions, or any inaccuracy or inadequacy therein. Customer assumes
all risk of loss, delay, and miscommunication in the transportation or
transmission by electronic means of data and information from any terminal
or remote unit unless the same is caused by or attributable to any act or
omission on M&I's part, which act or omission does not meet the standard of
care in Section 16(a), or was caused by or attributable to any gross
negligence or willful failure on
M&I's part to comply with its obligations under this Agreement.
c. Data Backup. Customer shall maintain adequate records in
accordance with prudent banking practice from which reconstruction of lost
or damaged items or data can be made. Customer assumes all responsibility
and liability for any loss or damage resulting from failure to maintain
such records.
d. Audit. M&I shall cause a third-party review of its data
processing systems and Services to be conducted annually by its
independent auditors. M&I shall provide Customer one copy of the report
resulting from such review.
e. Regulatory Compliance. Customer is responsible for determining
that the Services performed on its behalf, any forms which are used with
its customers, and all records it retains, comply with all applicable laws.
When used properly by Customer, M&IOs systems and software used to
provide the Services will provide Customer with information necessary to
comply with Federal law applicable to the transactions or accounts
processed by M&I. Should Customer need information from the Services
M&I provides in order to comply with applicable state laws
and regulations, CustomerOs sole remedy, and M&IOs sole
obligation shall be for M&I to provide the ability to process the
information requested from the Customer as promptly as is commercially
practicable. M&I agrees that with respect to changes required as a result
of changes in state law, such changes shall be undertaken as a priority
project based on the regulatory deadline imposed for compliance.
f. Balancing and Controls. On a daily basis, Customer shall review
all input and output, controls, reports, and documentation, to ensure
the integrity of data processed by M&I. In addition, Customer shall, on
a daily basis, check exception reports to verify that all file maintenance
entries and nondollar transactions were correctly entered. Customer is
responsible for initiating timely remedial action to correct any improperly
processed data which these reviews would disclose.
<PAGE> 31
<PAGE> 32
g. Service Deficiencies. If Customer is aware that a defect exists
in a Service, Customer shall be responsible for making whatever appropriate
adjustments may thereafter be necessary until M&I corrects the defect and, if
requested by Customer, M&I will, at M&I's expense, assist Customer in making
such corrections through the most cost-effective means, whether manual, by
system reruns, or program modifications. M&I will, where reasonable, make
every effort to correct any known material defect as soon as commercially
reasonable at M&I's expense. In the event M&I becomes aware of any defect in
a Service, M&I will promptly notify Customer.
17. Ownership of Data. Customer is the owner of all of its data
supplied by Customer to M&I for processing hereunder. Customer acknowledges
that it has no rights in any of the software, systems documentation,
guidelines, procedures, and similar related materials or any modifications
thereof except with respect to M&I's use of the same during the term of
this Agreement to process data. Upon termination of this Agreement, M&I
shall provide Customer with all copies of Customer's data in a format that
is being used by M&I at that time for processing such data. Prior to the
release of the Customer's data: (a) all amounts owed under this Agreement
by Customer to M&I shall be current and paid in full except for any
disputed sums as provided for in Section 2(c), and (b) Customer shall pay M&I
its "Estimated Deconversion Expenses" as described below. Customer agrees to
pay M&I for M&I's work in providing such data at M&I's rates then in effect
for computer and personnel time, supplies, and other items as required, and
Customer further agrees to pay M&I for any and all charges associated
with the deconversion of Customer's data based on M&I's then-current charges
for such Services. M&I shall make a good faith estimate of all of such
costs, expenses, and charges which shall be paid by Customer in advance
(the "Estimated Deconversion Expenses"). The difference, if any, between the
actual expenses and the prepaid Estimated Deconversion Expenses shall be
promptly paid or refunded, as appropriate, after determination.
18. Warranties. M&I represents and warrants that:
a. Capability of Computer Systems and Software. M&I's
computer systems (hardware and software) are capable of performing the
Services in accordance with the provisions of this Agreement. The software
used to provide the Services will operate substantially in accordance with
the specifications and documentation for the software as modified from time
to time to incorporate enhancements or modifications of the software to
provide the Services.
b. Quality of Service. The reports and Services made available
to Customer shall be in substantial conformity with the User Manuals, as
amended from time to time, copies of which have been, or will be, provided to
Customer.
c. Property Rights. M&I has the right to provide the
Services hereunder, using all computer software required for that purpose.
d. Organization and Approvals. M&I is a validly organized
corporate entity with valid authority to enter into this Agreement. This
Agreement has been duly authorized by all necessary corporate action.
e. Disclaimer of Warranties. EXCEPT AS DESCRIBED IN THIS
AGREEMENT, M&I DISCLAIMS ALL OTHER WARRANTIES, WHETHER WRITTEN, ORAL,
EXPRESSED OR IMPLIED INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
19. Force Majeure. M&I shall not be liable to Customer if M&I's
fulfillment or performance of any terms or provisions of this Agreement
is delayed or prevented by revolution or other civil disorders, wars,
acts of enemies, strikes, electrical equipment or availability failure, labor
disputes, fires, floods, acts of God, federal, state, or municipal action,
statute, ordinance or regulation, or, without limiting the foregoing, any
other causes not within its reasonable control, and which by the exercise
of reasonable diligence it is unable to prevent, whether of the class of
causes hereinbefore enumerated or not.
20. IRS Filing. Customer has complied with all laws,
regulations, procedures, and requirements in attempting to secure correct tax
identification numbers (TINs) for Customer's payees and agrees to attest to
this compliance by an affidavit provided annually. Customer authorizes M&I
to act as Customer's agent and sign on Customer's behalf the Affidavit
required by the Internal Revenue Service on Form 4804, or any successor
form. Customer acknowledges that M&I's execution of the Form 4804 Affidavit on
Customer's behalf does not relieve Customer of responsibility to provide
accurate TINs or liability for any penalties which may be assessed for failure
to comply with TIN requirements. Customer agrees to hold M&I harmless from
any liabilities, claims, expenses, penalties, or damages (including attorneys'
fees) which may be assessed or incurred as a result of the failure to comply
with TIN requirements.
<PAGE> 33
21. Contract Buyout.
a. Customer may terminate this Agreement in accordance with
the provisions of Section 13(d) at any time by giving M&I at least one
hundred eighty (180) days' prior written notice and paying M&I fifty percent
(50%) of the total estimated remaining unpaid monthly processing
fees, plus any unamortized conversion expenses. For the purpose of this
computation, total estimated remaining unpaid monthly processing fees shall
be equal to the mean average of the total monthly fees paid in the three
(3) months preceding the termination notice, multiplied by the number
of months remaining in the Agreement.
b. Customer may terminate this Agreement in accordance with
the special provisions of Section 13(e) by giving M&I at least one hundred
eighty (180) daysO prior written notice and paying M&I a percentage of
the total estimated remaining unpaid monthly processing fees [calculated
as above in Section 21(a)] according to the Schedule which follows:
If Termination Occurs In Buyout Percentage
Months 1-36 35%
Month 37 or thereafter 40%
<PAGE> 34
22. Expense Reimbursements. Customer agrees to reimburse M&I for the
conversion-related and out-of-pocket expenses (travel, lodging, meals, long
distance telephone calls, and printing and copying charges) reasonably
incurred in connection with the conversion of Customer's accounts to the M&I
system as further described on Exhibit B. The reimbursement of such expenses
is in addition to conversion charges which may arise after the conversion, or
with respect to accounts which are not currently customer accounts which are
to be converted to the M&I system. M&I shall estimate such expenses in
advance, and Customer shall pay such expenses upon execution of this
Agreement. M&I shall provide Customer with a summary invoice of actual
expenses, and any adjustments shall be paid or refunded, as appropriate, upon
delivery of the invoice.
23. Conversion Obligations. Both parties agree to make a good faith
effort to convert Customer's data in a timely fashion and to perform the
conversion in accordance with the responsibilities set forth in the M&I
Conversion Manual, the Conversion Schedule, and this Agreement.
Customer agrees to maintain an adequate staff of persons who are
knowledgeable with the systems currently
used by Customer to process data. Customer further agrees to provide such
Services and perform such obligations as are contemplated by the M&I
Conversion Manual and the Conversion Schedule, and as necessary for
Customer to timely and adequately perform its obligations herein and
therein. Customer shall pay or reimburse M&I for all out-of-pocket
expenses and on a time-and-materials basis for any of its personnel, or any
independent contractors, who perform conversion or related services
identified as Customer Responsibilities in the Conversion Manual.
Customer and M&I further agree to cooperate fully with all reasonable
requests necessary to effect the conversion in a timely and efficient
manner. Customer agrees to reimburse M&I for all conversion charges whether
for the initial conversion, or for the subsequent conversion of additional
accounts as they are incurred or for the conversion of products not
identified in the Proposal.
24. Use of the Services. (a) Customer assumes exclusive responsibility for
the consequences of any instructions Customer may give M&I, for
Customer's failure to properly access the Services in the manner prescribed by
M&I, and for Customer's failure to supply accurate input information; (b)
Customer agrees that it will use the Services in accordance with such
reasonable policies as may be established by M&I from time to time as set
forth in any materials furnished by M&I to Customer; (c) Customer agrees
that, except as otherwise permitted by M&I, Customer will use the Services
only for its own internal business purposes and will not sell or otherwise
provide, directly or indirectly, any of the Services or any portion thereof
to any third party; and (d) Customer agrees and represents to the best of
its knowledge that (1) this Agreement has been approved by its board of
directors, or that the officer executing this Agreement has been
specifically authorized by Customer's board of directors to execute this
Agreement, (2) the performance of this Agreement by the Customer will not
affect the safety or soundness of the Customer or any of its affiliates, and
(3) this Agreement, and the obligations evidenced hereby, will be properly
reflected on the books and records of the Customer.
25. Finders Fees.
If Customer introduces a lead to M&I, which M&I was not previously
working, and Customer assists M&I by introducing the prospect to M&I,
followed by Customer assistance and involvement in the selling process
(not limited to Customer site visits, referrals, presentations, etc.) for
the purpose of selling M&I Services, and the financial institution signs a
processing agreement with M&I, M&I will credit Customer an amount equal to
one (1) month's processing fees, which may be used to offset data
processing fees for Services (excluding Miscellaneous Fees) provided M&I
agrees in advance to pay such compensation to Customer. The finder's fee, as
described above, shall be based upon and payable after the first month's use
of the ordinary Services following the completion of all conversions of the
new financial institution as proposed. The credit shall not exceed fifty
thousand dollars ($50,000) for any individual bank, or more than fifty
thousand dollars ($50,000) for any group of banks or bank holding company.
26. Miscellaneous.
a. Governing Law. This Agreement shall be construed and governed
by the laws of the state of Wisconsin.
b. Amendment. This Agreement, including the Schedules hereto, may
be amended only by an instrument in writing executed by the parties or
their permitted assignees.
c. Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party, which such
consent shall not be unreasonably withheld, provided that M&I may freely
assign this Agreement to any company that is directly or indirectly (1) in
control of M&I, (2) under the control of M&I, or (3) under common control
with M&I.
d. Section Headings. Section headings are for reference
purposes only and shall not affect the interpretation or meaning of this
Agreement.
<PAGE> 35
e. Notices. All communications or notices required or permitted by
this Agreement shall be in writing and may be given by personal delivery or by
mailing (in a postpaid, certified or registered wrapper), or by depositing the
same with Federal Express or a similar recognized courier service (all charges
prepaid), or by telex or telecopier provided a confirmation copy is also sent
by one of the other approved methods, addressed as follows (or as subsequently
designated in writing):
To M&I: M&I Data Services
4900 West Brown Deer Road
P.O. Box 23528
Brown Deer, WI 53223-0528
Attention: Patrick C. Foy, President
Outsourcing Business
Group FAX number: (414)
357-9797
To CUB: California United Bank, N.A.
16030 Ventura Boulevard
Encino, CA 91436
Attention: Patrick Hartman, Chief Financial
Officer FAX number: (818) 907-5008
<PAGE> 36
With a mandatory copy to:
California United Bank, N.A. 16030 Ventura
Boulevard Encino, CA 91436
Attention: Anita Y. Wolman, Esq.,
General Counsel FAX number: (818) 907-
5024
The date of giving such notice shall be deemed the earliest of
the following: (i) the date of actual receipt, (ii) three (3) business days
after the date of deposit in the United States mail, (iii) two (2) business
days after the date of deposit with Federal Express or another courier
service, or (iv) the date of personal or telecopy delivery.
f. No Waiver of Performance. Failure by either party at any time
to require performance by the other party to claim a breach of any
provision of this Agreement will not be construed as a waiver of any right
accruing under this Agreement, nor affect any subsequent breach, nor affect
the effectiveness of this Agreement or any part hereof, nor prejudice either
party as regards any subsequent action.
g. Entire Agreement; Conflicting Provisions. This
Agreement, together with the Schedules hereto, constitutes the entire
agreement between the Customer and M&I with respect to the subject matter
hereof. There are no restrictions, promises, warranties, covenants, or
undertakings other than those expressly set forth herein and therein. This
Agreement supersedes all prior negotiations, agreements, and undertakings
between the parties with respect to such subject matter. In the event of
any conflict between the terms of the main body of this Agreement and any
of the Schedules hereto, the terms of the Schedules to this Agreement
shall govern.
h. Execution in Counterparts. This Agreement may be
executed simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which shall together constitute one and the
same Agreement.
i. Enforceability. The invalidity or enforceability of any
provision hereof shall not affect or impair any other provisions.
j. Scope of Agreement. If the scope of any of the provisions of
the Agreement is unenforceable or too broad in any respect whatsoever to
permit enforcement to its full extent, then such provisions shall be enforced
to the maximum extent permitted by law and the parties hereto consent and
agree that such scope may be judicially modified accordingly and that the
whole of such provisions of this Agreement shall not thereby fail, but that
the scope of such provisions shall be curtailed only to the extent necessary
to conform to law.
k. Confidentiality of Terms. Customer agrees that neither it,
its directors, officers, employees, or agents will disclose this Agreement,
or any of the terms or provisions of this Agreement, to any other party.
<PAGE> 37
l. Regulatory Approval. In the event Customer fails to obtain
regulatory approval for the acquisition/merger of Home Bank by October 1,
1996, this Agreement shall be null and void ab initio, and, except for
CustomerOs obligation to pay for Services rendered by M&I, neither party shall
have further liability to the other hereunder.
m. Issues List. A listing of the issues that have been or will
be resolved during the conversion process is attached hereto as Exhibit C.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in their names as of the date first above written.
M&I DATA SERVICES, A DIVISION OF THE MARSHALL &
ILSLEY CORPORATION ("M&I")
4900 W. Brown Deer Road
Brown Deer, WI 53223
By: ________________________
Name:Patrick C. Foy
Title: President, Outsourcing Business Group
By: ________________________
Name:Thomas R. Mezera
Title: Vice President
CALIFORNIA UNITED BANK, A NATIONAL
BANKING ASSOCIATION ("Customer")
16030 Ventura Boulevard
Encino, CA 91436-4487
By: ________________________
Name:________________________
Title:________________________
<PAGE> 38
AUTHORIZATION AGREEMENT
The undersigned ("Customer") hereby authorizes M&I
Data Services, a division of the Marshall & Ilsley Corporation
("M&I") to initiate debit entries and to initiate, if
necessary, credit entries and adjustments for any excess
debit entries or debit entries made in error, to Customer's
account indicated below and the depository named below, to
debit and/or credit the same such account.
This authority is to remain in full force and effect for
the period coinciding with the term (and any renewals thereof)
of the Data Processing Services Agreement made the day of
August, 1996, and any addenda thereto (the "Agreement"),
pursuant to the
terms and conditions specified in the Agreement.
DEPOSITORY NAME: ________________________________
ADDRESS: ________________________________
CITY/STATE/ZIP: ________________________________
TELEPHONE NUMBER: ________________________________
ROUTING TRANSIT NUMBER: ________________________________
ACCOUNT NUMBER: ________________________________
M&I DATA SERVICES, A DIVISION OF
THE MARSHALL & ILSLEY CORPORATION
("M&I")
By: ________________________
Name:Patrick C. Foy
Title: President, Outsourcing
Business Group
By: ________________________
Name:Thomas R. Mezera
Title: Vice President
CALIFORNIA UNITED BANK, A NATIONAL
BANKING ASSOCIATION ("Customer")
By: ________________________
Name:________________________
Title: ________________________
<PAGE> 39
ATTORNEY-IN-FACT APPOINTMENT
Customer hereby appoints M&I Data Services, a division
of the Marshall & Ilsley Corporation ("M&I") as: (1)
customer's attorney-in-fact and empowers M&I to authorize
the Internal Revenue Service (IRS) to release information
return documents supplied to the IRS by M&I to states which
participate in the "Combined Federal/State Program"; and
(2) CustomerOs agent to sign on CustomerOs behalf the
Affidavit required by the Internal Revenue Service on
Form 4804, or any successor form. Customer agrees to hold
M&I harmless from any liabilities, claims, expenses,
penalties, or damages (including attorneys' fees) which
may be assessed or incurred as a result of the release of
information.
CALIFORNIA UNITED BANK, A NATIONAL
BANKING ASSOCIATION ("Customer")
By: ________________________
<PAGE> 40
AFFIDAVIT
STATE OF ---------------------------------)
---------------------------------) SS.
COUNTY OF ---------------------------------)
I, , being first duly sworn, on oath, depose
Customer's Representative
and say:
1. I am an employee of California United Bank, a
national banking association. I have personal knowledge of my
employer's practices with regard to procuring and
reporting tax identification numbers (TINs) and authority
to execute this Affidavit on my employer's behalf.
2. California United Bank, a national banking
association, has complied with all laws, regulations,
procedures, and requirements in attempting to secure correct
TINs for its payees. This compliance has been pursued with
due diligence, and any failure to secure correct TINs is due
to reasonable cause.
Customer's Representative
Subscribed and sworn to before me
this --------- day of ---------------, 1996.
- --------------------------------------
- --------------------------------------Notary Public
My Commission expires: ------------------------
<PAGE> 41
ON-LINE AVAILABILITY SCHEDULE
Hours available for data entry inquiry:
Monday - Friday (Pacific Standard Time)7:00 a.m. - 8:00 p.m.
Saturday and Sunday (Pacific Standard Time)7:00 a.m. - 4:00 p.m.
Hours available for ATMs and Audio Response Units Twenty-four
(24) hours per day, seven (7) days per week *
* M&I requires one (1) to two (2) hours per week for file organization.
<PAGE> 42
EXHIBIT A
<PAGE> 43
EXHIBIT A-1
<PAGE> 44
EXHIBIT A-1
Services not included in the Fixed Monthly Fee but which must be
obtained from M&I:
Information Desktop Estimated Monthly Fees*
Management Data Warehouse $ 8,582
Report Edge (Ad Hoc Reports)
Total Deposit Reports
Total Loan Reports
Call Report Interface
Asset/Liability Interface
Treasury Connection $ 4,397
Balance Reporting
Fax Reporting
PC-ACH
Money Talks (Voice Response) $ 1,058
Inquiries
ATM/EFT Services $ 10,537
Cardholders
Terminals
Transactions switched and routed
Positive Balance Authorization
PIN/Card Production
Optical Storage (STAR View) $ 958
On-line Report/Statement Viewing 2 days
Branch Automation $ 2,200
Salespartner/PCTeller Maintenance
Marketing Customer Information System $ 815
MCIF Quarterly Updates
IPS Maintenance $ 203
Fixed Assets/Accounts Payable/Investments (@ $810 each/year)
CFI LaserPro $ 100
Monthly Maintenance
Test Bank $ 1,000
CIS, Deposits, Loans
*These are estimates only, based on
information provided to M&I by
Customer. Actual monthly fees may
be substantially different. Figures
are net of discount (except Branch
Automation which shall not be
discounted).
<PAGE> 45
EXHIBIT B
<PAGE> 46
EXHIBIT
B
I.The Fixed Monthly Fee may be adjusted as follows:
A. Commencing March 1, 1998, and each March 1 thereafter
throughout the term of the Agreement, the Fixed Monthly
Fee shall be increased by the lesser of (a) the
increase over the prior year in the Consumer Price Index
(CPI, all items-U) as published by the United States
Department of Labor, or any successor index; or (b) five
percent (5%).
B. The Initial Fixed Monthly Fee provides for processing a
maximum account volume and maximum usage levels as
described in Exhibit A and in the schedule which follows
this Section. Usage above the maximum levels listed on
Exhibit A shall be charged according to M&IOs then-
current standard published prices discounted in
accordance with the provisions of Section 2(a) of the
Agreement. In addition, Total Account Volume increases
in excess of the initial Total Account Volume described
below shall be charged according to the stated price.
Application
Deposit Accounts 58,352
Loan Notes 8,039
General Ledger Accounts 11,930
CIS Accounts 92,313
Total Account Volume 170,634
Account Volume Price per Each
Account*
170,635 and above $.23
* Subject to the increase in A above.
<PAGE> 47
II.The following are estimated one-time conversion-
related fees payable to M&I by Customer:
Telecommunications
Telecommunications equipment purchase $ 70,682
Telecommunications data line installation $ 11,031
Total $ 81,713
Interfaces
Precision Payroll $ 3,465
CTR On-Line 12 monthsO history $ 24,750
CTR 5-Year Conversion History
(estimate $4,950 to $14,850) $ 14,850
M&I Programming/Product Support and Download N/A
to ProtoCorp already included in startup($13,275)
Three Months of Fiche $ 11,433
CFI Laser Pro $ 3,000
Stuckey Asset-Based Lending $ #
SBA Loans $ #
Dabco Interface Testing $ #
Olson Asset Liability Interface Testing $ #
Standard Register Interface Testing $ #
Total $ 57,498
# Information incomplete. A quote will be provided when
available.
Platform Automation
Unlimited Use License for Salespartner and $ 165,000
PC Teller for 22 locations @$7,500 per location
Upgrade to Financial Desktop for 22 locations $ 66,000
Salespartner Software Customization (750 hours) $ 82,500
Hardware (*Please refer to Hardware Services Proposal$ *
dated 5/28/96.)
Total Software Purchase $ 313,500
Pass Through costs
CIS scrubbing (@$.26 per account) $ 21,405
Information Desktop License Fees $ 13,000
ATM Setup and Interface $ 12,500
IPS Setup for Financial Accounting, $ 1,200
Accounts Payable and Investments
IPS License Fees for Financial Accounting, $ 9,405
Accounts Payable, and Investments
MCIF License $ 9,500
Voice Response $ 2,000
Total $ 69,010
Conversion Programming & Training
Conversion Programming $104,819
Conversion training and product support $138,388
Conversion travel (Estimate, billed at actual) $125,430
Total $368,637**
**Payable at contract signing.
<PAGE> 48
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 33173
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 15500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4270
<INVESTMENTS-CARRYING> 77423
<INVESTMENTS-MARKET> 81693
<LOANS> 244818
<ALLOWANCE> 8355
<TOTAL-ASSETS> 381119
<DEPOSITS> 330724
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11573
<LONG-TERM> 0
0
0
<COMMON> 32030
<OTHER-SE> 6951
<TOTAL-LIABILITIES-AND-EQUITY> 381119
<INTEREST-LOAN> 11885
<INTEREST-INVEST> 2671
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14556
<INTEREST-DEPOSIT> 4592
<INTEREST-EXPENSE> 4794
<INTEREST-INCOME-NET> 9762
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 113
<EXPENSE-OTHER> 8647
<INCOME-PRETAX> 2433
<INCOME-PRE-EXTRAORDINARY> 1360
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1360
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 5.74
<LOANS-NON> 2232
<LOANS-PAST> 0
<LOANS-TROUBLED> 2144
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6930
<CHARGE-OFFS> 1816
<RECOVERIES> 389
<ALLOWANCE-CLOSE> 8355
<ALLOWANCE-DOMESTIC> 8355
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2852
</TABLE>
