<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
/X/ For the Quarterly Period Ended March 31, 1997 or
Transition Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________.
Commission File Number 0-11008
CU BANCORP
(Exact name of registrant as specified in its charter)
California 95-3657044
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
818-907-9122
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal
year if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of March 31, 1997, the Registrant has 11,381,230 outstanding shares of its
Common stock, no par value.
1
<PAGE> 2
CU Bancorp
Quarter Ended March 31, 1997
Table of Contents - Form 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operation. 3
Consolidated Statements of Financial Condition:
-March 31, 1997, and December 31, 1996. 11
Consolidated Statements of Income: 12
-Three Month Periods Ended March 31, 1997, and March 31, 1996.
Consolidated Statements of Cash Flows:
-Three Month Periods Ended March 31, 1997 and March 31, 1996. 13
Notes to Consolidated Financial Statements 14
Signatures 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holder 19
Item 5. Other Information 19
Item 6. Exhibits and Filings on Form 8-K 19
</TABLE>
2
<PAGE> 3
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
In February 1997, the Company announced that it had signed a definitive
agreement to merge CU Bancorp into Pacific Century Financial Corporation
(formerly Bancorp Hawaii, Inc.), the parent of Bank of Hawaii. In the merger CU
Bancorp shareholders will have the right to receive $15.34 per share in cash or
shares of Pacific Century Financial Corporation common stock or a combination of
the two, for their shares of CU Bancorp common stock. The price is payable in a
combination of Bancorp Hawaii, Inc. common stock and cash, with the stock
portion being not more than 80% nor less than 60%. The purchase price is subject
to adjustment under certain circumstances.
On August 9, 1996, the merger between CU Bancorp, the holding company for
California United Bank, and Home Interstate Bancorp, the holding company for
Home Bank, became final. The merger was accomplished through a tax-free exchange
of stock, using the pooling method of accounting.
The Company reported a net income of $2.7 million, or $.23 per share for the
first quarter of 1997, compared to $1.4 million, or $.12 per share, during the
same period in 1996.
The Company's commitment to a conservative approach to valuing portfolios is
reflected in the asset quality ratios at March 31, 1997. Non performing assets
decreased to $1.1 million by the end of March, 1997, compared with $1.9 million
at December 31, 1996 and $10.2 million at March 31, 1996. There was no real
estate acquired through foreclosure at March 31, 1997, compared with $500
thousand at December 31, 1996 and $5.3 million at March 31, 1996. The Bank's
allowance for loan losses as a percent of nonperforming loans was 1,065% at
March 31, 1997, compared with 872% at December 31, 1996 and 231% at March 31,
1996.
Capital ratios continue to substantially exceed levels required for the "well
capitalized" category established by bank regulators. The Total Risk-Based
Capital Ratio was 17.1%, the Tier 1 Risk-Based Capital Ratio was 15.9%, and the
Leverage Ratio was 10.3% at March 31, 1997, compared to 15.6%, 14.4%, and 9.7%,
respectively, at year-end 1996. 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 Company has continued to successfully grow its core business through the
production of new loan commitments to middle market commercial customers. During
the first quarter of 1997, the Bank generated approximately $43 million in new
loan commitments.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
Total loans at March 31, 1997 decreased by $34 million compared with December
31, 1996. Loans decreased due to contractual payments and normal business
activity of the commercial customers. The composition of the Bank's loan
portfolio is summarized below in Table 1:
TABLE 1 LOAN PORTFOLIO COMPOSITION
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
March 31, 1997 December 31,1996 March 31,1996
------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial & Industrial Loans $236,154 53% $260,143 55% $253,161 56%
Real Estate Loans:
Construction 16,885 4 23,597 5 23,916 5
Other 150,722 34 152,479 32 134,892 30
-------- --- -------- --- -------- ---
Total Real Estate Loans 167,607 38 176,076 37 158,808 35
Consumer and Other Loans 38,462 9 40,481 8 39,547 9
-------- --- -------- --- -------- ---
Total loans net of unearned fees 442,223 100% 476,700 100% $451,516 100%
=== === ===
Less: Allowance for Loan Losses 11,798 12,119 11,433
-------- -------- --------
Total Net Loans $430,425 $464,581 $440,083
======== ======== ========
</TABLE>
3
<PAGE> 4
TABLE 1A LOAN PORTFOLIO MATURITIES AT MARCH 31, 1997
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
Remaining Maturity
----------------------------------------------
After One
Within but Within After
One Year, Five Years Five Years Total
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Commercial & Industrial Loans $148,023 $ 63,491 $24,640 $236,154
Real Estate loans 48,928 57,175 61,504 167,607
Consumer and other Loans 3,629 31,194 3,639 38,462
-------- -------- ------- --------
Total loans $200,580 $151,860 $89,783 $442,223
======== ======== ======= ========
Loans due after one year with predetermined interest rates $ 58,873 $56,156
Loans due after one year with floating or adjustable rates 92,987 33,627
-------- -------
Total loans $151,860 $89,783
======== =======
</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 are subject to the Bank's normal credit
approval process in order to establish a new maturity date.
Monitoring and controlling the Bank's allowance for loan losses is a continuous
process. All loans are assigned a risk grade, as defined by credit policies, at
origination and are monitored to identify changing circumstances that could
modify their inherent risks. These classifications are one of the criteria
considered in determining the adequacy of the allowance for loan losses.
The amount and composition of the allowance for loan losses is as follows:
TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
------- ------- -------
<S> <C> <C> <C>
Commercial & Real Estate Loans $ 7,190 $10,536 $ 8,638
Real estate loans - Construction 0 274 740
Other 4,608 1,309 2,055
------- ------- -------
Total Allowance for loan losses $11,798 $12,119 $11,433
======= ======= =======
</TABLE>
Adequacy of the allowance is determined using management's estimates of the risk
of loss for the portfolio and individual loans. Included in the criteria used to
evaluate credit risk are, wherever appropriate, the borrower's cash flow,
financial condition, management capabilities, and collateral valuations, as well
as industry conditions. A portion of the allowance is established to address the
risk inherent in general loan categories, historic loss experience, portfolio
trends, economic conditions, and other factors. Based on this assessment a
provision for loan losses may be charged against earnings to maintain the
adequacy of the allowance. The allocation of the allowance based upon the risks
by type of loan, as shown in Table 2, implies a degree of precision that is not
possible when using judgments. While the systematic approach used does consider
a variety of segmentations of the portfolio, management considers the allowance
a general reserve available to address risks throughout the entire loan
portfolio.
During the first quarter of 1997, the Bank had net charge offs of $321 thousand.
This compares with $1.8 million for the first quarter of 1996. Charge offs for
the current year include the impact of the Bank's aggressive and disciplined
approach to credit management applied to the portfolio acquired in the Corporate
Bank transaction.
4
<PAGE> 5
Activity in the allowance, classified by type of loan, is as follows:
TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
For the Periods Ended
-----------------------------------------
March 31, December 31, March 31,
1997 1996 1996
------- ------- -------
<S> <C> <C> <C>
Balance at January 1 $12,119 $10,043 $10,043
------- ------- -------
Loans charged off:
Real estate secured loans 295 2,194 1,166
Commercial loans secured and unsecured 408 4,041 619
Loans to individuals, installment and other loans 34 493 133
Credit Cards and Related Plans 33 0 23
------- ------- -------
Total charge-offs 770 6,728 1,941
------- ------- -------
Recoveries of loans previously charged off:
Real estate secured loans 281 272 25
Commercial loans secured and unsecured 149 1,246 150
Loans to individuals, installment and other loans 19 34 3
Credit Cards and Related Plans 0 0 1
------- ------- -------
Total recoveries of loans previously charged off 449 1,552 179
------- ------- -------
Net charge-offs (recovery) 321 5,176 1,762
Provision for loan losses 0 4,400 300
Reserve of acquired bank 0 2,852 2,852
------- ------- -------
Balance at end of period $11,798 $12,119 $11,433
======= ======= =======
Net loan charge-offs (recoveries) as a percentage of average
loans outstanding at the end of period .1% 1.16% .4%
Allowance for possible loan losses to loans at end of period 2.67% 2.54% 2.54%
</TABLE>
The Bank's policy concerning nonperforming loans is more conservative than is
generally required. It defines nonperforming assets as all loans ninety days or
more delinquent, loans classified nonaccrual, and foreclosed, or in substance
foreclosed real estate. Nonaccrual loans are those whose interest accrual has
been discontinued because the loan has become ninety days or more past due or
there exists reasonable doubt as to the full and timely collection of principal
or interest. When a loan is placed on nonaccrual status, all interest previously
accrued but uncollected is reversed against operating results. Subsequent
payments on nonaccrual loans are treated as principal reductions. At March 31,
1997, nonperforming loans amounted to $1.1 million compared with $1.9 million at
December 31, 1996.
Potential problem loans are defined as loans as to which there are serious
doubts about the ability of the borrowers to comply with present loan repayment
terms. It is the policy of the Bank to place all potential problem loans on
nonaccrual status. At March 31, 1997, therefore, the Bank had no potential
problem loans other than those disclosed in Table 4 as nonperforming loans.
TABLE 4: NONPERFORMING ASSETS
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
------ ------ -------
<S> <C> <C> <C>
Nonaccrual loans $1,108 $1,389 $ 4,924
Loans 90 days or more past due and still accruing 0 0 26
------ ------ -------
Total nonperforming loans 1,108 1,389 4,950
Other real estate owned 0 500 5,250
------ ------ -------
Total nonperforming assets $1,108 $1,889 $10,200
====== ====== =======
Allowance for loan losses as a percent of:
Nonperforming loans 1,065% 872% 231%
Nonperforming assets 1,065% 642% 112%
Nonperforming assets as a percent of total assets 0.1% 0.2% 1.2%
Nonperforming loans as a percent of total loans 0.3% 0.3% 1.1%
</TABLE>
5
<PAGE> 6
SECURITIES
The Securities Held to Maturity portfolio totaled over $157 million at March 31,
1997, compared with $163 million at year-end 1996.
The Securities Available for Sale portfolio totaled almost $63 million at March
31, 1997 compared with over $70 million in investments being included in this
category at December 31, 1996. The March 31, 1997 balance had a $30 thousand net
unrealized gain, compared with a net unrealized gain of $204 thousand at
December 31, 1996.
In the first quarter of 1997, the Bank realized no gain on the sale of
securities available for sale. Gains realized for the comparable period of 1996
totaled $113 thousand.
Additional information concerning securities is provided in the footnotes to the
accompanying financial statements.
OTHER REAL ESTATE OWNED
There was no Other Real Estate Owned on the Bank's balance sheet at March 31,
1997, compared with $500 thousand and over $5 million at December 31, 1996 and
March 31, 1996, respectively. 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.
During the first quarter of 1997, the Bank recorded gains on other real estate
owned of $631 thousand. This compares with $340 thousand in losses recorded for
the three months ended March 31, 1996.
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 $40 million overnight federal funds line available from a
correspondent bank. Potential significant liquidity requirements are withdrawals
from noninterest bearing demand deposits and funding of commitments to loan
customers.
From time to time the Bank may experience liquidity shortfalls ranging from one
to several days. In these instances, the Bank will either purchase federal
funds, and/or sell securities under repurchase agreements. These actions are
intended to bridge mismatches between funding sources and requirements, and are
designed to maintain the minimum required balances. The Bank had no significant
borrowings under repurchase agreements and fed funds lines during the first
quarter 1997 or during 1996 or 1995. Any balances borrowed were primarily the
result of periodic tests by the Bank of available borrowing arrangements, and
securities repurchase agreements to accommodate customer needs.
As a part of the process of managing current liquidity and interest rate risk in
the balance sheet, the Bank maintains a portfolio of certificates of deposit
from customers from outside the Bank's normal service area. These out of area
deposits are certificates of deposit of $90,000 or greater, that are priced
competitively with similar certificates from other financial institutions
throughout the country. At March 31, 1997, the Bank had approximately $74
million of these out of area deposits, compared to $64 million at December 31,
1996. The level in out of area deposits during 1997 has been within the expected
range for the first quarter. 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 March 31, 1997 this funding source was 11% of average
deposits, compared to 11% at December 31, 1996. The Bank had $80 million in
certificates of deposit larger than $100 thousand dollars at March 31, 1997. The
maturity distribution of these deposits is relatively short term, with $53
million maturing within 3 months and $79 million maturing within 12 months.
6
<PAGE> 7
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities at
March 31, 1997
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
Amounts Maturing or Repricing in
--------------------------------------------------------------
More Than 3 More Than 1
Months But Year But
Less Than Less Than Less Than More Than 5
3 Months 12 Months 5 Years Years
-------- --------- ------- -----
<S> <C> <C> <C> <C>
Earning Assets
Gross Loans $313,694 $ 12,392 $ 58,873 $ 56,156
Investments 19,135 45,373 68,117 87,684
Federal funds sold & other 48,900 0 0 0
-------- -------- -------- --------
Total earning assets 381,729 57,765 126,990 143,840
-------- -------- -------- --------
Interest-bearing deposits:
Savings and interest bearing demand 239,519 0 0 0
Time certificates of deposit: 0 0 0 0
Under $100 59,149 69,664 7,212 0
$100 or more 52,997 25,956 804 0
Other Borrowed money 1,000 0 0 0
-------- -------- -------- --------
Total interest-bearing liabilities 352,665 95,620 8,016 0
-------- -------- -------- --------
Interest rate sensitivity gap 29,064 (37,855) 118,974 143,840
-------- -------- -------- --------
Cumulative interest rate sensitivity gap 29,064 (8,791) 113,183 254,023
Off balance sheet financial instruments 0 0 0 0
-------- -------- -------- --------
Net cumulative gap $ 29,064 $ (8,791) $113,183 $254,023
======== ======== ======== ========
Cumulative ratio of rate sensitive assets to rate sensitive
liabilities (1) 1.08% 0.98% 1.24% 1.56%
======== ======== ======== ========
</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. 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 almost $91 million at March 31, 1997 compared to
almost $89 million at year-end 1996. This increase was due to the exercise of
stock options, the net income for the quarter, offset by dividends paid. The
Company 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 1997 and 1996, the Company's capital levels substantially exceeded the
"well capitalized" standards, the highest classification established by bank
regulators.
TABLE 6 CAPITAL RATIOS
<TABLE>
<CAPTION>
Regulatory Standards
-----------------------------
March 31, December 31, Well
1997 1996 Capitalized Minimum
---- ---- ----------- -------
<S> <C> <C> <C> <C>
Total Risk Based Capital 17.11% 15.6% 10.0% 8.0%
Tier 1 Risk Based Capital 15.86 14.4 6.0 4.0
Equity to Average Assets 10.25 9.7 5.0 4.0
</TABLE>
The Company declared a quarterly dividend of $.07 per share payable May 30, 1997
to shareholders of record May 10, 1997. The Company declared and paid cash
dividends totaling of $.07 for the quarter ended March 31, 1997. Dividends paid
for the comparable periods of 1996 were $0.04. The dividend payout ratio was 30%
for the first quarter 1997, compared with 32% for the comparable period of 1996.
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.
7
<PAGE> 8
MARKET EXPANSION AND ACQUISITIONS
The Company is committed to expanding the market penetration of the 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.
In February 1996, the Bank consummated a deposit purchase agreement with
Southern California Bank in which the Bank purchased the deposits of Southern
California Bank's Signal Hill office. The deposits purchased in the transaction
totaled $1.7 million.
On August 9, 1996, the merger between CU Bancorp, parent of California United
Bank, and Home Interstate Bancorp, parent of Home Bank, was completed. With the
completion of this merger, the Bank is now the eleventh largest independent bank
headquartered in Southern California, with twenty one branches in Westwood, the
San Gabriel and San Fernando valleys, the South Bay, and Ventura and Orange
counties.
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
$10.8 million for the quarter ended March 31, 1997 compared to $10.7 million for
the same period in 1996. The increased margin in 1997 is primarily due to
improved mix of earning assets with loans outstanding increasing by almost $18
million and investments increasing almost $6 million. This was offset in part by
the generally decreasing market rates for earning assets and interest bearing
deposit accounts.
TABLE 8 ANALYSIS OF CHANGES IN NET INTEREST INCOME (1)
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
Three months ended March 31, Three months ended March 31,
Increases(Decreases) 1997 compared to 1996 1996 compared to 1995
--------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------ ----- ----- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, net $ 461 $(468) $ (27) $ 1,761 $(260) $ 1,501
Investments 86 128 214 (182) (30) (212)
Federal Funds Sold (306) (14) (320) 243 (66) 177
----- ----- ----- ------- ----- -------
Total interest income 241 (374) (133) 1,823 (357) 1,466
----- ----- ----- ------- ----- -------
Interest Expense
Interest-bearing deposits:
Demand & Savings (9) (36) (45) 122 (55) 67
Time Certificates of deposit:
Less than $100 (191) (44) (235) 106 121 227
More Than $100 89 (18) 71 301 (16) 285
Federal Funds Purchased/Repos 0 (1) (1) (9) (1) (10)
Other borrowings (12) 10 (2) 16 8 24
----- ----- ----- ------- ----- -------
Total interest expense (123) (89) (212) 536 57 593
----- ----- ----- ------- ----- -------
Net interest income $ 364 $(285) $ 79 $ 1,287 $(414) $ 873
===== ===== ===== ======= ===== =======
</TABLE>
(1) The change in interest income or interest expense that is attributable to
both change in average balance and average rate has been allocated to the
changes due to (i) average balance and (ii) average rate in proportion to
the relationship of the absolute amounts of the changes in each.
Yields on earning assets were approximately 8.5% for the three months ended
1997, compared to 8.6% yield for the same period of 1996. The slight decrease in
the prime rate from an average of 8.34% during the first quarter of 1996 to an
average of 8.27% in the first quarter of 1997 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
3.6% for the three months ended 1997, compared with 3.7% for the comparable
period of 1996. The decline in rates on certificates of deposit reflected the
lower interest rate environment in 1997.
8
<PAGE> 9
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin was 6.1% for the year to date in 1997, compared to
6.1% for the same period in 1996. 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.
TABLE 9 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
---------------------------------- -----------------------------------
Interest Annual Interest Annual
Income or Yield or Income or Yield or
Balance Expense Rate Balance Expense Rate
------- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans, Net (1) $445,210 $11,242 10.10% $427,367 $11,269 10.55%
Investments (2) 228,486 3,374 5.91% 222,528 3,160 5.68%
Certificates of Deposit
in other banks 99 1 4.04% 99 1 4.04%
Federal Funds Sold 30,452 383 5.03% 54,780 703 5.13%
-------- ------- ----- -------- ------- -----
Total Earning Assets 704,247 15,000 8.52% 704,774 15,133 8.59%
Non Earning Assets
Cash & Due From Banks 62,447 65,603
Other Assets 43,904 38,809
-------- --------
Total Assets $810,598 $809,186
======== ========
Interest-bearing Liabilities
Demand & Savings $249,146 $1,371 2.20% $250,743 $1,416 2.26%
Time Certificates of Deposits
Less Than $100 127,535 1,662 5.21% 142,089 1,897 5.34%
More Than $100 80,375 1,070 5.33% 73,730 999 5.42%
Fed Funds Purchased/Repos 0 0 0% 76 1 5.26%
-------- ------- ----- --------- ------- -----
Total interest-bearing Liabilities 457,056 4,103 3.59% 466,638 4,313 3.70%
Non interest-bearing Deposits 251,305 0 0% 241,101 0 0%
Other Borrowing & Capital Notes 4,083 80 7.84% 4,760 82 6.89%
-------- ------- ----- -------- ------- -----
Total Funding Liabilities 712,444 4,183 2.35% 712,499 4,395 2.47%
Other Liabilities 8,468 12,015
Shareholders' Equity 89,686 84,672
-------- --------
Total Liabilities and
Shareholders' Equity $810,598 $809,186
======== ========
Net Interest Income $10,817 6.14% $10,738 6.09%
======= ===== ======= =====
Shareholders' Equity to Total Assets 11.06% 10.46%
======== ========
</TABLE>
(1) Non-accrual Loans are included in average loan balances, and loan fees
earned have been included in interest income on loans.
(2) Tax exempt securities do not materially affect reported yields.
OTHER OPERATING INCOME
Total non interest income was $2.9 million for the three month period ended
March 31, 1997, and $1.9 million for the comparable period of 1996. Service
charges and other fees have decreased in 1997, due to accommodations made to
customers during the recent product conversion process. These decreases in 1997
are offset by gains on the sale of other real estate in the first quarter of
1997 of $625 thousand and settlement of a claim under the blanket bond of
Corporate Bank (acquired in January 1996) of $438 thousand and gain on the sale
of a branch location of $392 thousand.
Operating income for the first quarter of 1997 includes no gain on the sale of
available for sale securities. This compared with a gain of $113 thousand for
the first quarter of 1996.
OPERATING EXPENSE
Total operating expenses for the Bank were $ 9.3 million for the quarter ended
March 31,1997, compared to $9.8 million for the same period in 1996. A charge of
$350 thousand was included in the first quarter 1997 for operating losses
resulting from the conversion of deposit accounts which was completed in the
first quarter of 1997.
9
<PAGE> 10
PROVISION FOR LOAN LOSSES
The Bank has made no provision for loan losses in the first quarter of 1997. In
the similar period of 1996, the Bank provided $300 thousand in the first
quarter.
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 California state chartered bank, the
Company and the Bank are subject to supervision and regulation by the Federal
Reserve Board, the Superintendent of Banks of the State of California 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.
10
<PAGE> 11
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
Amounts in thousands of dollars, except share data 1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 82,694 $ 81,443
Federal funds sold 48,900 24,000
-------- --------
Total cash and cash equivalents 131,594 105,443
Securities held to maturity (Market value of $155,012 and $162,175 at March 31, 1997 and 157,422 163,002
December 31, 1996, respectively)
Securities available for sale, at market value 62,887 70,242
-------- --------
Total Securities 220,309 233,244
Loans, (Net of allowance for loan losses of $11,798 and $12,119 at March 31, 1997 and
December 31, 1996, respectively) 430,425 464,581
Premises and equipment, net 17,535 17,784
Other real estate owned, net 0 500
Accrued interest receivable and other assets 19,736 22,658
-------- --------
Total Assets $819,599 $844,210
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $258,421 $275,126
Savings and interest bearing demand 239,520 253,180
Time deposits under $100 135,624 127,861
Time deposits of $100 or more 79,757 81,193
-------- --------
Total deposits 713,322 737,360
Accrued interest payable and other liabilities 15,670 18,337
-------- --------
Total liabilities 728,992 755,697
-------- --------
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1997 or 1996 --- ---
Common stock, no par value:
Authorized - 24,000,000 shares
Issued and outstanding -11,381,230 in 1997, and 11,341,690 in 1996 76,066 75,790
Retained earnings 14,521 12,600
Unrealized gain on securities available for sale, net of taxes 20 123
-------- --------
Total Shareholders' equity 90,607 88,513
-------- --------
Total liabilities and shareholders' equity $819,599 $844,210
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
11
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
Amounts in thousands of dollars, except per share data 1997 1996
------- -------
<S> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $11,242 $11,269
Interest on investment securities 3,374 3,161
Interest on time deposits with other financial institutions 1 0
Interest on federal funds sold 383 703
------- -------
Total revenue from earning assets 15,000 15,133
------- -------
COST OF FUNDS:
Interest on savings and interest bearing demand 1,371 1,416
Interest on time deposits under $100 1,070 1,795
Interest on time deposits of $100 or more 1,662 1,101
Interest on federal funds purchased & securities sold under agreements
to repurchase and other borrowings 80 83
------- -------
Total cost of funds 4,183 4,395
------- -------
Net revenue from earning assets before provision for loan losses 10,817 10,738
PROVISION FOR LOAN LOSSES 0 300
------- -------
Net revenue from earning assets 10,817 10,438
------- -------
OTHER OPERATING REVENUE:
Service charges and other fees 1,338 1,545
Gain on sale of other real estate owned 631 0
Gain (loss) on sale of investment securities 0 113
Other revenue 993 275
------- -------
Total other operating revenue 2,962 1,933
------- -------
OTHER OPERATING EXPENSES:
Salaries and related benefits 4,873 4,788
Occupancy expense, net 1,907 682
Other operating expenses 3,545 4,387
------- -------
Total other operating expenses 9,325 9,857
------- -------
Income before provision for income taxes 4,454 2,514
Provision for income taxes 1,737 1,097
------- -------
NET INCOME $ 2,717 $ 1,417
======= =======
EARNINGS PER COMMON AND EQUIVALENT SHARE $ 0.23 $ 0.12
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
CU BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
Amounts in thousands of dollars FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,717 $ 1,417
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization 465 314
Provision for losses on loans 0 300
Provision (benefit) of deferred taxes 0 654
Loss (gain) on sale of investment securities, net 0 (113)
(Increase)/decrease in accrued interest receivable and other assets 2,922 (1,368)
Increase/(decrease) in accrued interest payable and other liabilities (2,602) (813)
Amortization of deferred loan fees and costs (488) (251)
Amortization of deferred compensation 0 9
Net (gain) loss on sale of premises, furniture and equipment (392) (3)
Net (gain) loss on sale of other real estate owned (631) 340
Net amortization of (discount)/premium on investment securities 251 160
--------- ---------
Total adjustments (475) (762)
--------- ---------
Net cash provided by operating activities 2,242 655
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investment securities sold or matured 12,515 63,358
Purchase of investment securities 0 (78,676)
Purchase of business 0 18,316
Proceeds from sale of other real estate owned 1,131 0
Proceeds from sale of premises, furniture and equipment 666 3
Purchases of premises and equipment, net (490) (449)
Net (increase)/decrease in loans 34,644 (3,041)
--------- ---------
Net cash provided (used) by investing activities 48,466 (489)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in demand , savings and interest bearing deposits (30,365) (2,443)
Net increase/(decrease) in time certificates of deposit 6,327 (2,625)
Net increase/ (decrease) in securities sold under agreements to repurchase 0 0
Proceeds from exercise of stock options and director warrants 276 231
Restricted stock retired
Cash dividend paid or declared (795) (452)
--------- ---------
Net cash provided (used) by financing activities (24,557) (5,289)
--------- ---------
Net increase (decrease) in cash and cash equivalents 26,151 (5,123)
Cash and cash equivalents at beginning of year 105,443 114,273
--------- ---------
Cash and cash equivalents at end of period $ 131,594 $ 109,150
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 4,128 $ 4,489
Taxes 900 2
Supplemental disclosure of noncash investing activities:
Loans transferred to OREO 0 672
</TABLE>
The accompanying notes are an integral part of these consolidated statements
13
<PAGE> 14
Notes to Consolidated Financial Statements
March 31, 1997
UNAUDITED
Note A. BASIS OF PRESENTATION
The accounting and reporting policies of CU Bancorp ("the Company") and its
wholly owned subsidiary, California United Bank, (the "Bank"), are prepared in
accordance with generally accepted accounting principles used in the banking
industry. All material inter company balances have been eliminated and all
material interim period adjustments which, in the opinion of management, are
necessary for a fair presentation of financial condition, results of operations,
and cash flow have been made. All interim period adjustments that have been made
have been of a normal and recurring nature.
Note B. EARNINGS PER SHARE
Net income per share is computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods
presented, except when the effect of the latter would be anti-dilutive. Weighted
average shares outstanding for the three month period ended March 31, 1997 was
11,820,667, compared with 11,440,139 for the comparable period of 1996.
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 $63 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 March 31,1997. A summary of Securities Held to Maturity at March
31, 1997 is as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY GROSS GROSS
(AMOUNTS IN THOUSANDS OF DOLLARS) BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
----- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 67,790 $ 41 $ 614 $ 67,217
U.S. Government Agency Securities 80,151 0 1,712 78,439
Obligations of state and political subdivisions 8,930 4 124 8,810
Corporate Securities 551 0 4 547
-------- -------- -------- --------
Total portfolio $157,422 $ 45 $ 2,454 $155,012
======== ======== ======== ========
</TABLE>
A summary of Securities Available for Sale for March 31, 1997 is as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE GROSS GROSS
(AMOUNTS IN THOUSANDS OF DOLLARS) AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 33,781 $ 83 $ 14 $ 33,850
U.S. Agency securities 15,433 94 78 15,449
Corporate Bonds 9,218 14 51 9,181
Equity Securities 380 53 3 435
Federal Reserve stock 1,151 0 0 1,151
Municipal securities 2,889 1 69 2,821
-------- -------- -------- --------
Total portfolio $ 61,852 $ 245 $ 215 $ 62,887
======== ======== ======== ========
</TABLE>
At March 31, 1997, investment securities with a book value of $ 44 million were
pledged to secure court deposits and for other purposes as required or permitted
by law.
14
<PAGE> 15
Note D. PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold improvements is
also computed using the straight-line method over the shorter of the useful life
of the improvement or the term of the lease.
Note E. OTHER REAL ESTATE OWNED
Real estate owned, acquired either through foreclosure or deed in lieu of
foreclosure, is recorded at the lower of the loan balance or estimated fair
market value. When acquired, any excess of the loan balance over the estimated
fair value is charged to the allowance for loan losses. Subsequent write-downs,
if any, are charged to operation expenses in the periods that they become known.
There was no other real estate owned as of March 31, 1997. There was $500
thousand and about $5 million of other real estate owned as of December 31, 1996
and March 31, 1996, respectively.
Note F. 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 G. 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 collection 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.
15
<PAGE> 16
At March 31, 1997, the Bank had $1.1 million in impaired loans, against which a
loss allowance of $151 thousand has been provided. The recorded investment in
all impaired loans has been calculated based on the present value of expected
cash flows discounted at the loan's effective interest rate. All impaired loans
are included in nonaccrual status, and as such no interest income is recognized.
For the first quarter of 1997 the Bank had an average investment in impaired
loans of approximately $1.3 million.
Note H. Mergers and Acquisitions
On August 9, 1996, Home Interstate Bancorp, the holding company of Home Bank,
was merged into CU Bancorp, the holding company of California United Bank. Each
share of Home Interstate Stock was converted into 1.409 shares of CU Bancorp
stock. Simultaneously with the merger of the two holding companies, California
United Bank was merged into Home Bank, with the surviving Bank being renamed
California United Bank. The merger of the two holding companies was accomplished
in an all stock transaction, except for the effect of fractional shares, and has
been accounted for using the pooling-of-interests method. A total of 5,955,000
shares of CU Bancorp stock were issued in this transaction.
Using the pooling-of-interests method of accounting, the assets, liabilities,
equity and results of operations for all prior periods have been restated to
include CU Bancorp and Home Interstate Bancorp as if they had been combined from
the beginning of the earliest period presented. There were no intercompany
eliminations or adjustments for accounting changes that were required in
presenting the combined history for the two companies. 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 nine
months of 1996 would not have been materially different if the combination had
been completed as of January 1, 1996.
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 I. RECLASSIFICATIONS
Certain items have been reclassified in the prior period financial statements
presented herein, in order to conform to classifications followed for March 31,
1997.
Note J. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with legal
counsel, the Bank believes that pending or threatened litigation involving the
Bank will have no adverse material effect upon its financial condition, or
results of operations.
Note K. MERGER WITH PACIFIC CENTURY FINANCIAL CORPORATION
In February 1997, the Company announced that it had signed a definitive
agreement to merge CU Bancorp into Pacific Century Financial Corporation
(formerly Bancorp Hawaii, Inc.), the parent of Bank of Hawaii. In the merger CU
Bancorp shareholders will have the right to receive $15.34 per share in cash or
shares of Pacific Century Financial Corporation common stock or a combination of
the two, for their shares of CU Bancorp common stock. The price is payable in a
combination of Bancorp Hawaii, Inc. common stock and cash, with the stock
portion being not more than 80% nor less than 60%. The purchase price is subject
to adjustment under certain circumstances.
16
<PAGE> 17
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CU BANCORP
May 12, 1997
By:_______________________________
Patrick Hartman
Chief Financial Officer
17
<PAGE> 18
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Note J , on page 18 above, for a 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
18
<PAGE> 19
Item 6. Exhibits and Filings on Form 8-K
(a) Exhibits:
(10) Material Contracts
(b) Reports on Form 8-K: Form 8-K, Item 2, Acquisition or Disposition
of Assets, was filed August 23, 1996 concerning the merger between CU Bancorp
and Home Interstate Bancorp.
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 82,595
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 48,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,887
<INVESTMENTS-CARRYING> 157,422
<INVESTMENTS-MARKET> 155,012
<LOANS> 442,223
<ALLOWANCE> 11,798
<TOTAL-ASSETS> 819,599
<DEPOSITS> 713,322
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 14,670
<LONG-TERM> 0
0
0
<COMMON> 76,066
<OTHER-SE> 14,541
<TOTAL-LIABILITIES-AND-EQUITY> 819,599
<INTEREST-LOAN> 11,242
<INTEREST-INVEST> 3,374
<INTEREST-OTHER> 384
<INTEREST-TOTAL> 15,000
<INTEREST-DEPOSIT> 4,103
<INTEREST-EXPENSE> 4,183
<INTEREST-INCOME-NET> 10,817
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,325
<INCOME-PRETAX> 4,454
<INCOME-PRE-EXTRAORDINARY> 4,454
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,717
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<YIELD-ACTUAL> 2.13
<LOANS-NON> 1,108
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,119
<CHARGE-OFFS> 770
<RECOVERIES> 449
<ALLOWANCE-CLOSE> 11,798
<ALLOWANCE-DOMESTIC> 11,798
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,608
</TABLE>
