CU Bancorp (CUNB) 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

CU BANCORP

(Exact name of registrant as specified in its charter)

California	90-0779788
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

15821 Ventura Boulevard, Suite 110 Encino, California	91436
(Address of principal executive offices)	(Zip Code)

(818) 257-7700

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed 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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	¨	Accelerated Filer	x
Non Accelerated Filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 2, 2014 the number of shares outstanding of the registrant’s no par value Common Stock was 11,210,785.

CU BANCORP

March 31, 2014 FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1.	Financial Statements
		Consolidated Balance Sheets March 31, 2014 (Unaudited) and December 31, 2013	3
		Consolidated Statements of Income Three Months Ended March 31, 2014 and 2013 (Unaudited)	4
		Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2014 and 2013 (Unaudited)	5
		Consolidated Statements of Changes in Shareholders’ Equity Year Ended December 31, 2013 and Three Months Ended March 31, 2014 (Unaudited)	6
		Consolidated Statements of Cash Flows Three Months Ended March 31, 2014 and 2013 (Unaudited)	7
		Notes to the Consolidated Financial Statements (Unaudited)	9
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
		Overview	39
		Results of Operations	45
		Financial Condition	51
		Liquidity	55
		Dividends	56
		Capital Resources	57
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	59
	ITEM 4.	Controls and Procedures	60
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings	61
	ITEM 1A.	Risk Factors	61
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
	ITEM 3.	Defaults Upon Senior Securities	61
	ITEM 4.	Mine Safety Disclosures	61
	ITEM 5.	Other Information	61
	ITEM 6.	Exhibits	61
	Signatures		62

Page 2 of 62

CU BANCORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	March 31, 2014			December 31, 2013
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	34,421		$	23,156
Interest earning deposits in other financial institutions		172,573			218,131
Total Cash and Cash Equivalents		206,994			241,287
Certificates of deposit in other financial institutions		63,107			60,307
Investment securities available-for-sale, at fair value		102,155			106,488
Loans		945,507			933,194
Allowance for loan loss		(10,823	)		(10,603	)
Net loans		934,684			922,591
Premises and equipment, net		3,916			3,531
Deferred tax assets, net		11,090			11,835
Goodwill		12,292			12,292
Core deposit and leasehold right intangibles		2,455			2,525
Bank owned life insurance		21,352			21,200
Accrued interest receivable and other assets		24,318			25,760
Total Assets	$	1,382,363		$	1,407,816
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Non-interest bearing demand deposits	$	651,645		$	632,192
Interest bearing transaction accounts		124,045			155,735
Money market and savings deposits		365,405			380,915
Certificates of deposit		62,303			63,581
Total deposits		1,203,398			1,232,423
Securities sold under agreements to repurchase		11,965			11,141
Subordinated debentures, net		9,419			9,379
Accrued interest payable and other liabilities		15,323			16,949
Total Liabilities		1,240,105			1,269,892
Commitments and Contingencies (Note 14)		0			0
SHAREHOLDERS’ EQUITY
Serial Preferred Stock – authorized, 50,000,000 shares no par value, no shares issued or outstanding		0			0
Common stock – authorized, 75,000,000 shares no par value, 11,213,908 and 11,081,364 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		122,697			121,675
Additional paid-in capital		8,865			8,377
Retained earnings		10,743			8,077
Accumulated other comprehensive loss		(47	)		(205	)
Total Shareholders’ Equity		142,258			137,924
Total Liabilities and Shareholders’ Equity	$	1,382,363		$	1,407,816

The accompanying notes are an integral part of these consolidated financial statements.

Page 3 of 62

CU BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31,
	2014		2013
Interest Income
Interest and fees on loans	$	11,924	$	11,425
Interest on investment securities		501		484
Interest on interest bearing deposits in other financial institutions		211		160
Total Interest Income		12,636		12,069
Interest Expense
Interest on interest bearing transaction accounts		58		52
Interest on money market and savings deposits		234		260
Interest on certificates of deposit		56		76
Interest on securities sold under agreements to repurchase		8		19
Interest on subordinated debentures		107		124
Total Interest Expense		463		531
Net Interest Income		12,173		11,538
Provision for loan losses		75		134
Net Interest Income After Provision For Loan Losses		12,098		11,404
Non-Interest Income
Gain on sale of securities, net		0		5
Gain on sale of SBA loans, net		438		350
Deposit account service charge income		630		568
Other non-interest income		722		503
Total Non-Interest Income		1,790		1,426
Non-Interest Expense
Salaries and employee benefits (includes stock based compensation expense of $408 and $258 for the three months ended March 31, 2014 and 2013, respectively)		6,013		5,675
Occupancy		986		1,064
Data processing		475		482
Legal and professional		523		507
FDIC deposit assessment		221		246
Merger related expenses		0		43
OREO valuation write-downs and expenses		0		26
Office services expenses		264		266
Other operating expenses		1,067		1,000
Total Non-Interest Expense		9,549		9,309
Net Income Before Provision for Income Tax Expense		4,339		3,521
Provision for income tax expense		1,673		1,366
Net Income	$	2,666	$	2,155
Earnings Per Share
Basic earnings per share	$	0.25	$	0.21
Diluted earnings per share	$	0.24	$	0.20

The accompanying notes are an integral part of these consolidated financial statements.

Page 4 of 62

CU BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2014		2013
Net Income	$	2,666	$	2,155
Other Comprehensive Income, net of tax:
Non-credit portion of other-than-temporary impairments arising during the period		0		(22	)
Net unrealized gains (losses) on investment securities arising during the period		158		(52	)
Other Comprehensive Income (Loss)		158		(74	)
Comprehensive Income	$	2,824	$	2,081

The accompanying notes are an integral part of these consolidated financial statements.

Page 5 of 62

CU BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Year Ended December 31, 2013 and the Three Months Ended March 31, 2014

(2014 activity unaudited)

(Dollars and shares in thousands)

	Common Stock
	Outstanding Shares			Amount		Additional Paid in Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2012		10,759		$	118,885	$	7,052		$	(1,708	)	$	1,394		$	125,623
Net Issuance of Restricted Stock		69			0		0			0			0			0
Exercise of Stock Options		282			2,790		0			0			0			2,790
Stock based compensation expense related to employee stock options and restricted stock		0			0		1,088			0			0			1,088
Restricted Stock Repurchase		(29	)		0		(422	)		0			0			(422	)
Excess tax benefit – stock based compensation		0			0		659			0			0			659
Net Income		0			0		0			9,785			0			9,785
Other Comprehensive (Loss)		0			0		0			0			(1,599	)		(1,599	)
Balance at December 31, 2013		11,081		$	121,675	$	8,377		$	8,077		$	(205	)	$	137,924
Net Issuance of Restricted Stock		40			0		0			0			0			0
Exercise of Stock Options		104			1,022		0			0			0			1,022
Stock based compensation expense related to employee stock options and restricted stock		0			0		408			0			0			408
Restricted Stock Repurchase		(11	)		0		(186	)		0			0			(186	)
Excess tax benefit – stock based compensation		0			0		266			0			0			266
Net Income		0			0		0			2,666			0			2,666
Other Comprehensive Income		0			0		0			0			158			158
Balance at March 31, 2014		11,214		$	122,697	$	8,865		$	10,743		$	(47	)	$	142,258

The accompanying notes are an integral part of these consolidated financial statements.

Page 6 of 62

CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:
Net income:	$	2,666		$	2,155
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		75			134
Provision for unfunded loan commitments		41			34
Stock based compensation expense		408			258
Depreciation		243			288
Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs		(1,337	)		(1,213	)
Net amortization from investment securities		385			428
Increase in bank owned life insurance		(152	)		(153	)
Amortization of core deposit intangibles		69			83
Amortization of time deposit premium		(13	)		(63	)
Net amortization of leasehold right intangible asset and liabilities		85			(123	)
Accretion of subordinated debenture discount		40			57
Gain on sale of securities, net		0			(5	)
Gain on sale of SBA loans, net		(438	)		(350	)
Decrease in deferred tax assets		635			1,181
(Increase) decrease in accrued interest receivable and other assets		1,443			(12,133	)
Decrease in accrued interest payable and other liabilities		(1,508	)		(918	)
Decrease in fair value of derivative swap liability		(244	)		(407	)
Net cash provided by (used in) operating activities		2,398			(10,747	)
Cash flows from investing activities:
Purchases of available-for-sale investment securities		0			(11,718	)
Proceeds from sales of available-for-sale investment securities		0			2,854
Proceeds from repayment and maturities from available-for-sale investment securities		4,216			16,645
Loans originated, net of principal payments		(10,393	)		(4,481	)
Purchases of premises and equipment		(628	)		(19	)
Net (increase) decrease in certificates of deposit in other financial institutions		(2,800	)		1,522
Net cash provided by (used in) investing activities		(9,605	)		4,803
Cash flows from financing activities:
Net increase in Non-interest bearing demand deposits		19,453			13,925
Net increase (decrease) in Interest bearing transaction accounts		(31,690	)		4,533
Net increase (decrease) in Money market and savings deposits		(15,510	)		4,679
Net decrease in Certificates of deposit		(1,265	)		(10,896	)
Net increase in Securities sold under agreements to repurchase		824			2,330
Net proceeds from stock options exercised		1,022			0
Restricted stock repurchase		(186	)		(151	)
Net excess in tax benefit on stock compensation		266			0
Net cash provided by (used in) financing activities		(27,086	)		14,420
Net increase (decrease) in cash and cash equivalents		(34,293	)		8,476
Cash and cash equivalents, beginning of year		241,287			182,896
Cash and cash equivalents, end of year	$	206,994		$	191,372

The accompanying notes are an integral part of these consolidated financial statements

Page 7 of 62

CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2014			2013
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	436		$	538
Cash paid during the period for taxes	$	0		$	1,303
Supplemental disclosures of non-cash investing activities:
Net decrease in unrealized loss on investment securities, net of tax	$	(158	)	$	(74	)

Page 8 of 62

CU BANCORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Note 1 - Basis of Financial Statement Presentation

CU Bancorp (the “Company”) is a bank holding company whose operating subsidiary is California United Bank. CU Bancorp was established to facilitate the reorganization and merger of Premier Commercial Bank, N.A. into California United Bank, which took place after the close of business on July 31, 2012. As a bank holding company, CU Bancorp is subject to regulation of the Federal Reserve Board (“FRB”). The term “Company”, as used throughout this document, refers to the consolidated balance sheets and consolidated statements of operations of CU Bancorp and California United Bank.

California United Bank (the “Bank”) is a full-service commercial business bank offering a broad range of banking products and services including: deposit services, lending and cash management to small and medium-sized businesses, to non-profit organizations, to business principals and entrepreneurs, to the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers and investors. The Bank opened for business in 2005, with its headquarters office located in Encino, California. As a state chartered non-member bank, the Bank is subject to regulation by the California Department of Business Oversight, (the “DBO”) and the Federal Deposit Insurance Corporation (“FDIC”). The deposits of the Bank are insured by the FDIC, to the maximum amount allowed by law.

The consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany items have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission.

CU Bancorp is the common shareholder of Premier Commercial Statutory Trust I, Premier Commercial Statutory Trust II, and Premier Commercial Statutory Trust III, entities which were acquired in the merger with Premier Commercial Bancorp (“PC Bancorp”). These trusts were established for the sole purpose of issuing trust preferred securities and do not meet the criteria for consolidation in accordance with ASC 810 Consolidation. For more detail, see Note 8 – Borrowings and Subordinated Debentures.

Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in the interim consolidated financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with our 2013 Annual Report on Form 10-K. In the opinion of management, the accompanying financial statements contain all necessary adjustments of a normal recurring nature, to present fairly the consolidated financial position of the Company and the results of its operations for the interim period presented.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, these accounting principles require the disclosure of contingent assets and liabilities as of the date of the financial statements.

Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan loss and various assets and liabilities measured at fair value. While management uses the most current available information to recognize losses on loans, future additions to the allowance for loan loss may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan loss. Regulatory agencies may require the Company to recognize additions to the allowance for loan loss based on their judgment about information available to them at the time of their examination.

Page 9 of 62

Business Segments

The Company is organized and operated as a single reporting segment, principally engaged in commercial business banking. The Company conducts its lending and deposit operations through eight full service branch offices located in Los Angeles, Orange, and Ventura counties.

Note 2 - Recent Accounting Pronouncements

In January 2014, the FASB issued ASU No. 2014-01,Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).ASU 2014-01 modifies the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. If the modified conditions are met, the amendments permit an entity to amortize the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). Additionally, ASU 2014-01 introduces new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments. Prior to these amendments, a reporting entity that invests in qualified affordable housing projects may elect to account for that investment using the level yield method if specific conditions are met. For investments that are not accounted for using the effective yield method, the investment must be accounted for under either the equity method or the cost method. Because the conditions which allow an entity to utilize the effective yield method were overly restrictive, this prevented many investors from using the effective yield method. Under the effective yield method, all tax credits, tax benefits, and the write-down of the investments are accounted for net of taxes as a component of income tax expense (benefit). This method more fairly represents the economics of the transaction than accounting under the equity method or cost method. The amendments in ASU 2014-01 are expected to enable more entities to qualify for the proportional amortization method to account for affordable housing project investments than the number of entities that currently qualify for the effective yield method. The amendments are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. For all entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company early adopted ASU 2014-01 in the fourth quarter of 2013. See Note 11 – Investments in Qualified Affordable Housing Projects, in the Company’s 2013 Form 10-K, for the Company’s disclosures on its investments in LIHTC projects required under ASU 2014-01.

In January 2014, the FASB issued ASU No. 2014-04,Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure (a consensus of the FASB Emerging Issues Task Force).The objective of this Update is to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. These amendments are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. An entity can elect to adopt these amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on the Company’s financial position or results of operations.

Page 10 of 62

Note 3 - Computation of Book Value and Tangible Book Value per Common Share

The Company utilizes the term Tangible Common Equity (“TCE”), a non-GAAP financial measure. Management believes that TCE is useful because it is a measure utilized by both regulators and market analysts in evaluating a consolidated bank holding company’s financial condition and capital strength. TCE represents common shareholders’ equity less goodwill and certain intangible assets.

Book value per common share was calculated by dividing total shareholders’ equity by the number of common shares issued and outstanding. Tangible book value per common share was calculated by dividing tangible common equity by the number of common shares issued and outstanding.

The table below presents the computation of TCE, book value and tangible book value per common share as of the dates indicated (dollars in thousands, except share and per share data):

	March 31, 2014		December 31, 2013
Total Shareholders’ Equity	$	142,258	$	137,924
Less: Goodwill		12,292		12,292
Less: Core deposit and leasehold right intangibles		2,455		2,525
Tangible common equity	$	127,511	$	123,107
Common shares issued and outstanding		11,213,908		11,081,364
Book value per common share	$	12.69	$	12.45
Tangible book value per common share	$	11.37	$	11.11

Note 4 - Computation of Earnings per Common Share

Basic and diluted earnings per common share were determined by dividing the net income by the applicable basic and diluted weighted average common shares outstanding. The following table shows weighted average basic shares outstanding, potential dilutive shares related to stock options, unvested restricted stock, and weighted average diluted shares for the periods indicated (dollars in thousands, except share and per share data):

	Three Months Ended March 31,
	2014		2013
Net Income	$	2,666	$	2,155
Weighted average basic common shares outstanding		10,874,368		10,486,188
Dilutive effect of potential common share issuances from stock options and restricted stock		220,146		231,435
Weighted average diluted common shares outstanding		11,094,514		10,717,623
Income per common share
Basic	$	0.25	$	0.21
Diluted	$	0.24	$	0.20
Anti-dilutive shares not included in the calculation of diluted earnings per share		81,000		247,133

Page 11 of 62

Note 5 - Investment Securities

The investment securities portfolio has been classified as available-for-sale, and as such is recorded at estimated fair market value.

The following tables present the amortized cost and estimated fair values of investment securities by major category as of the dates indicated. There were no impaired securities at March 31, 2014 or December 31, 2013, and as such there were no other than temporary impairment losses in the securities portfolio for the periods indicated in the tables below (dollars in thousands):

			Gross Unrealized
March 31, 2014 – Available-for-sale:	Amortized Cost		Gains		Losses		Fair Market Value
U.S. Govt Agency and Sponsored Agency – Note Securities	$	4,116	$	3	$	4	$	4,115
U.S. Govt Agency – SBA Securities		48,325		745		460		48,610
U.S. Govt Agency – GNMA Mortgage-Backed Securities		24,404		217		569		24,052
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		17,226		358		515		17,069
Corporate Securities		5,069		123		0		5,192
Municipal Securities		3,095		22		0		3,117
Total investment securities	$	102,235	$	1,468	$	1,548	$	102,155

			Gross Unrealized
December 31, 2013 – Available-for-sale:	Amortized Cost		Gains		Losses		Fair Market Value
U.S. Govt Agency and Sponsored Agency – Note Securities	$	4,153	$	1	$	2	$	4,152
U.S. Govt Agency – SBA Securities		50,521		875		491		50,905
U.S. Govt Agency – GNMA Mortgage-Backed Securities		28,107		180		909		27,378
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		15,348		345		479		15,214
Corporate Securities		5,086		125		0		5,211
Municipal Securities		3,621		9		2		3,628
Total investment securities	$	106,836	$	1,535	$	1,883	$	106,488

The Company’s investment securities portfolio at March 31, 2014, consists of U.S. Agency and U.S. Sponsored Agency issued AAA and AA rated investment-grade securities, investment grade corporate bond securities, and municipal securities. Securities with a market value of $12.4 million and $11.8 million were pledged to secure securities sold under agreements to repurchase at March 31, 2014 and December 31, 2013, respectively. See Note 8 – Borrowings and Subordinated Debentures. Securities with a market value of $11.4 million and $11.0 million were pledged to secure a certificate of deposit of $10.0 million with the State of California Treasurer’s office at March 31, 2014 and December 31, 2013. Securities with a market value of $27.9 million and $29.3 million were pledged to secure outstanding standby letters of credit confirmed/issued by a correspondent bank for the benefit of our customers in the amount of $21.1 million and $21.9 million at March 31, 2014 and December 31, 2013, respectively. Securities with a market value of $275,000 and $275,000 were pledged to secure local agency deposits at March 31, 2014 and December 31, 2013, respectively.

The Company had no securities that were classified as other-than-temporarily impaired at March 31, 2014 or December 31, 2013.

Page 12 of 62

The following tables present investment securities with unrealized losses that are considered to be temporarily-impaired, summarized and classified according to the duration of the loss period as of the dates indicated (dollars in thousands).

	< 12 Continuous Months				> 12 Continuous Months				Total
March 31, 2014	Fair Value		Net Unrealized Loss		Fair Value		Net Unrealized Loss		Fair Value		Net Unrealized Loss
Temporarily-impaired available-for-sale investment securities:
U.S. Govt. – Agency and Sponsored Agency Note Securities	$	1,036	$	4	$	0	$	0	$	1,036	$	4
U.S. Govt. Agency SBA Securities		12,116		351		2,778		109		14,894		460
U.S. Govt. Agency – GNMA Mortgage-Backed Securities		13,024		418		1,874		151		14,898		569
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities		7,657		372		2,162		143		9,819		515
Municipal Securities		0		0		0		0		0		0
Total temporarily-impaired available-for-sale investment securities	$	33,833	$	1,145	$	6,814	$	403	$	40,647	$	1,548

	< 12 Continuous Months				> 12 Continuous Months				Total
December 31, 2013	Fair Value		Net Unrealized Loss		Fair Value		Net Unrealized Loss		Fair Value		Net Unrealized Loss
Temporarily-impaired available-for-sale investment securities:
U.S. Govt. – Agency and Sponsored Agency Note Securities	$	1,041	$	2	$	0	$	0	$	1,041	$	2
U.S. Govt. Agency SBA Securities		11,686		491		0		0		11,686		491
U.S. Govt. Agency – GNMA Mortgage-Backed Securities		15,693		721		1,864		188		17,557		909
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities		7,650		479		0		0		7,650		479
Municipal Securities		0		0		1,029		2		1,029		2
Total temporarily-impaired available-for-sale investment securities	$	36,070	$	1,693	$	2,893	$	190	$	38,963	$	1,883

The Company evaluates all securities for declines in the fair market values below the securities cost basis for possible impairment on each reporting date.

During the quarter ended March 31, 2014, and the year ended December 31, 2013, the Company recognized gross gains and (losses) on sales of available-for-sale securities in the amount of $0 and $47,000, respectively. The Company had net proceeds from the sale of available-for-sale securities of $0, and $7.0 million at March 31, 2014, and December 31, 2013, respectively.

The amortized cost, estimated fair value and average yield of debt securities at March 31, 2014, are reflected in the table below (dollars in thousands). Maturity categories are determined as follows:

• U.S. Govt. Agency and U.S. Govt. Sponsored Agency bonds and notes – maturity date

• U.S. Govt. Sponsored Agency CMO or Mortgage-Backed Securities, U.S. Govt. Agency GNMA Mortgage-Backed Securities and U.S. Gov. Agency SBA Securities – estimated cash flow taking into account estimated pre-payment speeds

• Investment grade Corporate Bonds and Municipal Securities – maturity date

Page 13 of 62

Although, U.S. Government Agency and U.S. Government Sponsored Agency mortgage-backed and CMO securities have contractual maturities through 2048, the expected maturity will differ from the contractual maturities because borrowers or issuers may have the right to prepay such obligations without penalties.

	��	March 31, 2014
Maturities Schedule of Securities		Amortized Cost		Fair Value		Weighted Average Yield
Due through one year		$	18,283	$	18,414		1.24	%
Due after one year through five years			34,745		35,132		1.87	%
Due after five years through ten years			25,012		24,616		2.41	%
Due after ten years			24,195		23,993		2.91	%
Total		$	102,235	$	102,155		2.13	%

The weighted average yields in the above table are based on effective rates of book balances at the end of the period. Yields are derived by dividing interest income, adjusted for amortization of premiums and accretion of discounts, by total amortized cost.

Investment in FHLB Common Stock

The Company’s investment in the common stock of the FHLB of San Francisco is carried at cost and was $4.7 million as of March 31, 2014 and December 31, 2013. See Note 8 – Borrowings and Subordinated Debentures for a detailed discussion regarding the Company’s borrowings and the requirements to purchase FHLB common stock. See Note 5 – Investment Securities in the Company’s December 31, 2013 10-K for additional discussion on the Company’s evaluation and accounting for its investment in FHLB common stock.

Page 14 of 62

Note 6 - Loans

The following table presents the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands):

	March 31, 2014		December 31, 2013
Commercial and Industrial Loans:	$	290,000	$	299,473
Loans Secured by Real Estate:
Owner-Occupied Nonresidential Properties		195,151		197,605
Other Nonresidential Properties		286,198		271,818
Construction, Land Development and Other Land		56,706		47,074
1-4 Family Residential Properties		62,128		65,711
Multifamily Residential Properties		39,869		33,780
Total Loans Secured by Real Estate		640,052		615,988
Other Loans:		15,455		17,733
Total Loans	$	945,507	$	933,194

The following table is a breakout of the Company’s loan portfolio stratified by the industry concentration of the borrower by their respective NAICS code as of the dates indicated (dollars in thousands):

	March 31, 2014		December 31, 2013
Real Estate	$	398,543	$	381,830
Manufacturing		77,969		83,319
Hotel/Lodging		84,211		76,143
Construction		63,555		62,835
Wholesale		61,576		60,291
Professional Services		47,749		49,739
Finance		42,803		46,393
Healthcare		38,351		38,662
Restaurant/Food Service		36,158		35,244
Other Services		22,588		21,448
Retail		18,799		23,157
Administrative Management		16,907		15,218
Information		10,893		11,709
Education		10,224		10,270
Transportation		9,268		9,531
Entertainment		4,810		6,207
Other		1,103		1,198
Total	$	945,507	$	933,194

SBA Loans

As part of the acquisition of PC Bancorp, the Company acquired loans that were originated under the guidelines of the Small Business Administration (“SBA”) program. The total portfolio of the SBA contractual loan balances being serviced by the Company at March 31, 2014 was $109.2 million, of which $75.5 million has been sold. Of the $33.6 million remaining on the Company’s books, $24.2 million is un-guaranteed and $9.4 million is guaranteed by the SBA.

For SBA guaranteed loans, a secondary market exists to purchase the guaranteed portion of these loans with the Company continuing to “service” the entire loan. The secondary market for guaranteed loans is comprised of investors seeking long term assets with yields that adapt to the prevailing interest rates. These investors are typically financial institutions, insurance companies, pension funds, and other types of investors specializing in the acquisition of this product. When a decision to sell the guaranteed portion of an SBA loan is made by the Company, bids are solicited from secondary market investors and the loan is normally sold to the highest bidder.

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At March 31, 2014, there were no loans classified as held for sale. At March 31, 2014, the balance of SBA 7a loans originated during the quarter is $1.6 million, of which $1.2 million is guaranteed by the SBA. The Company does not currently plan on selling these loans, but it may choose to do so in the future.

Allowance for Loan Loss

The following table is a summary of the activity for the allowance for loan loss for the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2014			2013
Allowance for loan loss at beginning of period	$	10,603		$	8,803
Provision for loan losses		75			134
Net (charge-offs) recoveries:
Charge-offs		(0	)		(121	)
Recoveries		145			25
Net (charge-offs) recoveries		145			(96	)
Allowance for loan loss at end of period	$	10,823		$	8,841
Net (charge-offs) recoveries to average loans		0.02	%		(0.01	)%

	March 31, 2014			December 31, 2013
Allowance for loan loss to total loans		1.14	%		1.14	%
Allowance for loan loss to total loans accounted for at historical cost, which excludes loan balances and the related allowance for loans acquired through acquisition		1.48	%		1.50	%

The allowance for losses on unfunded loan commitments to extend credit is primarily related to commercial lines of credit and construction loans. The amount of unfunded loan commitments at March 31, 2014 and December 31, 2013 was $385.8 million and $345.9 million, respectively. The inherent risk associated with a loan is evaluated at the same time the credit is extended. However, the allowance held for the commitments is reported in other liabilities within the accompanying balance sheets and not as part of the allowance for loan loss in the above table. The allowance for the loss on unfunded loan commitments to extend credit was $370,000 and $329,000 at March 31, 2014 and December 31, 2013, respectively.

Page 16 of 62

The following tables present, by portfolio segment, the changes in the allowance for loan loss and the recorded investment in loans as of the dates and for the periods indicated (dollars in thousands):

	Commercial and Industrial			Construction, Land Development and Other Land			Commercial and Other Real Estate			Other			Total
Three Months Ended March 31, 2014
Allowance for loan loss – Beginning balance	$	5,534		$	1,120		$	3,886		$	63		$	10,603
Provision for loan losses		(399	)		214			273			(13	)		75
Net (charge-offs) recoveries:
Charge-offs		(0	)		(0	)		(0	)		(0	)		(0	)
Recoveries		143			0			2			0			145
Net recoveries		143			0			2			0			145
Ending balance	$	5,278		$	1,334		$	4,161		$	50		$	10,823
Three Months Ended March 31, 2013
Allowance for loan loss – Beginning balance	$	4,572		$	2,035		$	2,084		$	112		$	8,803
Provision for loan losses		(362	)		112			383			1			134
Net (charge-offs) recoveries:
Charge-offs		(44	)		0			(69	)		(8	)		(121	)
Recoveries		21			0			2			2			25
Net (charge-offs)		(23	)		0			(67	)		(6	)		(96	)
Ending balance	$	4,187		$	2,147		$	2,400		$	107		$	8,841

The following tables present both the allowance for loan loss and the associated loan balance classified by loan portfolio segment and by credit evaluation methodology (dollars in thousands):

	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
March 31, 2014
Allowance for loan loss:
Individually evaluated for impairment	$	3	$	0	$	0	$	0	$	3
Collectively evaluated for impairment		5,263		1,334		4,161		50		10,808
Purchased credit impaired (loans acquired with deteriorated credit quality)		12		0		0		0		12
Total Allowance for Loan Loss	$	5,278	$	1,334	$	4,161	$	50	$	10,823
Loans receivable:
Individually evaluated for impairment	$	2,568	$	0	$	3,649	$	0	$	6,217
Collectively evaluated for impairment		286,415		56,706		577,604		15,455		936,180
Purchased credit impaired (loans acquired with deteriorated credit quality)		1,017		0		2,093		0		3,110
Total Loans Receivable	$	290,000	$	56,706	$	583,346	$	15,455	$	945,507

Page 17 of 62

	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
December 31, 2013
Allowance for loan loss:
Individually evaluated for impairment	$	4	$	0	$	0	$	0	$	4
Collectively evaluated for impairment		5,520		1,120		3,886		63		10,589
Purchased credit impaired (loans acquired with deteriorated credit quality)		10		0		0		0		10
Total Allowance for Loan Loss	$	5,534	$	1,120	$	3,886	$	63	$	10,603
Loans receivable:
Individually evaluated for impairment	$	2,640	$	0	$	3,680	$	0	$	6,320
Collectively evaluated for impairment		295,787		47,074		561,952		17,733		922,546
Purchased credit impaired (loans acquired with deteriorated credit quality)		1,046		0		3,282		0		4,328
Total Loans Receivable	$	299,473	$	47,074	$	568,914	$	17,733	$	933,194

Credit Quality of Loans

The Company utilizes an internal loan classification system as a means of reporting problem and potential problem loans. Under the Company’s loan risk rating system, loans are classified as “Pass,” with problem and potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. Individual loan risk ratings are updated continuously or at any time the situation warrants. In addition, management regularly reviews problem loans to determine whether any loan requires a classification change, in accordance with the Company’s policy and applicable regulations. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The internal loan classification risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

• Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are several different levels of Pass rated credits, including “Watch” which is considered a transitory grade for pass rated loans that require greater monitoring. Loans not meeting the criteria of special mention, substandard, doubtful or loss that have been analyzed individually as part of the above described process are considered to be pass-rated loans.

• Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Special Mention loans do not currently expose the Company to sufficient risk to warrant classification as a Substandard, Doubtful or Loss classification, but possess weaknesses that deserve management’s close attention.

• Substandard – loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

• Doubtful – loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

• Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

Page 18 of 62

The following tables present the risk category of loans by class of loans based on the most recent internal loan classification as of the dates indicated (dollars in thousands):

	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
March 31, 2014
Pass	$	278,461	$	56,706	$	562,235	$	15,453	$	912,855
Special Mention		2,725		0		3,882		0		6,607
Substandard		8,814		0		17,229		2		26,045
Doubtful		0		0		0		0		0
Total	$	290,000	$	56,706	$	583,346	$	15,455	$	945,507
December 31, 2013
Pass	$	289,594	$	47,074	$	547,600	$	17,731	$	901,999
Special Mention		1,540		0		2,613		0		4,153
Substandard		8,339		0		18,701		2		27,042
Doubtful		0		0		0		0		0
Total	$	299,473	$	47,074	$	568,914	$	17,733	$	933,194

Age Analysis of Past Due and Non-Accrual Loans

The following tables present an aging analysis of the recorded investment of past due loans and non-accrual loans as of the dates indicated (dollars in thousands):

	31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and Accruing		Total Past Due and Accruing		Total Non Accrual		Current		Total Loans
March 31, 2014
Commercial and Industrial	$	1,020	$	0	$	0	$	1,020	$	3,581	$	285,399	$	290,000
Construction, Land Development and Other Land		0		0		0		0		0		56,706		56,706
Commercial and Other Real Estate		0		0		0		0		4,646		578,700		583,346
Other		0		0		0		0		0		15,455		15,455
Total	$	1,020	$	0	$	0	$	1,020	$	8,227	$	936,260	$	945,507

	31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and Accruing		Total Past Due and Accruing		Total Non Accrual		Current		Total Loans
December 31, 2013
Commercial and Industrial	$	0	$	241	$	0	$	241	$	3,682	$	295,550	$	299,473
Construction, Land Development and Other Land		0		0		0		0		0		47,074		47,074
Commercial and Other Real Estate		0		0		0		0		5,874		563,040		568,914
Other		0		0		0		0		0		17,733		17,733
Total	$	0	$	241	$	0	$	241	$	9,556	$	923,397	$	933,194

Page 19 of 62

Impaired Loans

Impaired loans are evaluated by comparing the fair value of the collateral, if the loan is collateral dependent, and the present value of the expected future cash flows discounted at the loan’s effective interest rate, if the loan is not collateral dependent.

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable, in the table below as impaired loans “with no specific allowance recorded.” The valuation allowance disclosed below is included in the allowance for loan loss reported in the consolidated balance sheets as of March 31, 2014 and December 31, 2013.

The following tables present, by loan category, the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, for the dates and periods indicated (dollars in thousands). This table excludes purchased credit impaired loans (loans acquired in acquisitions with deteriorated credit quality) of $3.1 million and $4.3 million at March 31, 2014 and December 31, 2013, respectively.

	March 31, 2014						December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific allowance recorded:
Commercial and Industrial	$	2,468	$	5,315	$	0	$	2,540	$	5,347	$	0
Commercial and Other Real Estate		3,649		6,001		0		3,680		6,112		0
With a specific allowance recorded:
Commercial and Industrial		100		354		3		100		355		4
Total
Commercial and Industrial		2,568		5,669		3		2,640		5,702		4
Commercial and Other Real Estate		3,649		6,001		0		3,680		6,112		0
Total	$	6,217	$	11,670	$	3	$	6,320	$	11,814	$	4

	Three Months Ended March 31,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and Industrial	$	2,516	$	0	$	848	$	0
Construction, Land Development and Other Land		0		0		1,200		0
Commercial and Other Real Estate		3,670		0		3,455		0
With a specific allowance recorded:
Commercial and Industrial		100		0		150		0
Total:
Commercial and Industrial		2,616		0		998		0
Construction, Land Development and Other Land		0		0		1,200		0
Commercial and Other Real Estate		3,670		0		3,455		0
Total	$	6,286	$	0		5,653	$	0

Page 20 of 62

The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2014		2013
Interest foregone on impaired loans	$	171	$	90
Cash collections applied to reduce principal balance	$	108	$	42
Interest income recognized on cash collections	$	0	$	0

Troubled Debt Restructuring

The Company’s loan portfolio contains certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. Loans are restructured in an effort to maximize collections. Economic concessions can include: reductions to the interest rate, payment extensions, forgiveness of principal or other actions.

The modification process includes evaluation of impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the loan collateral. In these cases, management uses the current fair value of the collateral, less selling costs, to evaluate the loan for impairment. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off.

The following tables include the recorded investment and unpaid principal balances for troubled debt restructured loans for the periods ending March 31, 2014 and December 31, 2013 (dollars in thousands). These tables include two TDR loans that were purchased credit impaired. As of March 31, 2014, these loans had a recorded investment of $84,000 and unpaid principal balances of $147,000.

Period ended March 31, 2014	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized
Commercial and Industrial	$	537	$	840	$	0
Commercial and Other Real Estate		2,141		2,785		0
Total	$	2,678	$	3,625	$	0

Year ended December 31, 2013	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized
Commercial and Industrial	$	541	$	843	$	0
Commercial and Other Real Estate		2,173		2,785		0
Total	$	2,714	$	3,628	$	0

Page 21 of 62

The following table shows the pre- and post-modification recorded investment in TDR loans by loan segment that have occurred during the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2014						2013
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Troubled Debt Restructured Loans:
Commercial and Industrial		0		0		0		1		310		310
Total		0	$	0	$	0		1		310		310

Loans are restructured in an effort to maximize collections. There was no financial impact for specific reserves or from charge-offs for the modified loans included in the table above. Impairment analyses are performed on the Company’s troubled debt restructured loans in conjunction with the normal allowance for loan loss process. The Company’s troubled debt restructured loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan balance.

There have been no payment defaults in the three months ended March 31, 2014 or March 31, 2013 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months.

Loans Acquired Through Acquisition

The following table reflects the accretable net discount for loans acquired through acquisition, for the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2014			2013
Balance, beginning of period	$	7,912		$	12,189
Accretion, included in interest income		(562	)		(944	)
Reclassifications (to) from non-accretable yield		0			24
Balance, end of period	$	7,350		$	11,269

The above table reflects the fair value adjustment on the loans acquired from mergers that will be amortized to loan interest income based on the effective yield method over the remaining life of the loans. These amounts do not include the fair value adjustments on the purchased credit impaired loans acquired from mergers.

Page 22 of 62

Purchased Credit Impaired Loans

Purchased Credit Impaired Loans (“PCI”) loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable at the acquisition date, that the Company will not be able to collect all contractually required amounts.

When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans.

The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans.

The following table reflects the outstanding balance and related carrying value of PCI loans as of the dates indicated (dollars in thousands):

	March 31, 2014				December 31, 2013
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial and Industrial	$	1,580	$	1,017	$	1,599	$	1,046
Commercial and Other Real Estate		3,520		2,093		5,611		3,282
Other		0		0		0		0
Total	$	5,100	$	3,110	$	7,210	$	4,328

The following table reflects the activities in the accretable net discount for PCI loans for the period indicated (dollars in thousands):

	Three Months Ended March 31,
	2014			2013
Balance, beginning of period	$	395		$	9
Accretion, included in interest income		(17	)		(0	)
Reclassifications from non-accretable yield		0			0
Balance, end of period	$	378		$	9

Note 7 - Qualified Affordable Housing Project Investments

The Company’s investment in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits (“LIHTC”) at March 31, 2014 was $4.4 million, compared to $4.5 million at December 31, 2013. The decrease of $116,000 represents the amortization of the principal balance for the first quarter of 2013. The funding liability for the LIHTC at March 31, 2014 was $3.5 million compared to $4.0 million, at December 31, 2013. See Note 11 – Qualified Affordable Housing Project Investments in the Company’s 10-K financial statements at December 31, 2013 for additional detail regarding the Company’s investment in LIHTC.

Page 23 of 62

Note 8 - Borrowings and Subordinated Debentures

Securities Sold Under Agreements to Repurchase

The Company enters into certain transactions, the legal form of which are sales of securities under agreements to repurchase (“Repos”) at a later date at a set price. Securities sold under agreements to repurchase generally mature within 1 day to 180 days from the issue date and are routinely renewed.

As discussed in Note 5 – Investment Securities, the Company has pledged certain investments as collateral for these agreements. Securities with a fair value of $12.4 million and $11.8 million were pledged to secure the Repos at March 31, 2014 and December 31, 2013, respectively. The Company segregates both the principal and accrued interest on these securities with the Company’s third party safekeeping custodians. All principal and interest payments on the investment securities that are pledged as collateral on the Repo program are received directly by the safekeeping custodian.

The tables below describe the terms and maturity of the Company’s securities sold under agreements to repurchase as of the dates indicated (dollars in thousands):

	March 31, 2014
Date Issued	Amount		Interest Rate	Original Term	Maturity Date
February 3, 2014	$	750	0.10%	61 days	April 5, 2014
March 31, 2014		11,215	0.10% – 0.375%	1 days	April 1, 2014
Total	$	11,965	0.28%

	December 31, 2013
Date Issued	Amount		Interest Rate	Original Term	Maturity Date
December 3, 2013	$	750	0.10%	62 days	February 3, 2014
December 31, 2013		10,391	0.10% – 0.40%	2 days	January 2, 2014
Total	$	11,141	0.30%

Federal Home Loan Bank Borrowings

The Company maintains a secured credit facility with the Federal Home Loan Bank of San Francisco “FHLB”, allowing the Company to borrow on an overnight and term basis. The Company’s credit facility with the FHLB is $351.7 million, which represents approximately 25% of the Bank’s total assets, as reported by the Bank in its December 31, 2013 FFIEC Call Report.

As of March 31, 2014, the Company had $568 million of loan collateral pledged with the FHLB which provides $227 million in borrowing capacity. The Company has no investment securities pledged with the FHLB to support this credit facility. In addition, the Company must maintain an investment in the Capital Stock of the FHLB. The Company is required to purchase FHLB common stock to support its FHLB advances. Under the FHLB Act, the FHLB has a statutory lien on the FHLB capital stock that the Company owns and the FHLB capital stock serves as further collateral under the borrowing line.

The Company had no outstanding advances (borrowings) with the FHLB as of March 31, 2014 or December 31, 2013.

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Subordinated Debentures

The following table summarizes the terms of each issuance of subordinated debentures outstanding as of March 31, 2014:

Series	Amount (in thousands)			Issuance Date	Maturity Date	Rate Index	Current Rate			Next Reset Date
Trust I	$	6,186		12/10/04	03/15/35	3 month LIBOR + 2.05%		2.283	%	6/16/14
Trust II		3,093		12/23/05	03/15/36	3 month LIBOR + 1.75%		1.983	%	6/16/14
Trust III		3,093		06/30/06	09/15/36	3 month LIBOR + 1.85%		2.083	%	6/16/14
Subtotal		12,372
Unamortized fair value adjustment		(2,953	)
Net	$	9,419

The Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at March 31, 2014. These subordinated debentures were issued in three separate series. Each issuance had a maturity of 30 years from their approximate date of issue. All three subordinated debentures are variable rate instruments that reprice quarterly based on the three month LIBOR plus a margin (see tables above). All three subordinated debentures had their interest rates reset in March 2014 at the current three month LIBOR plus their index, and will continue to reprice quarterly through their maturity date. All three subordinated debentures are currently callable at par with no prepayment penalties.

The Company currently includes in Tier 1 capital an amount of subordinated debentures equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity less goodwill, core deposit and leasehold right intangibles and a portion of the SBA servicing assets.

Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB regulations. Notification to the FRB is required prior to the Company declaring and paying a dividend during any period in which the Company’s quarterly net earnings are insufficient to fund the dividend amount. This notification requirement is included in regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality, financial condition, capital adequacy, liquidity, future earnings projections, capital planning and credit concentrations. Should the FRB object to the dividend payments, the Company would be precluded from paying interest on the subordinated debentures after giving notice within 15 days before the payment date. Payments would not commence until approval is received or the Company no longer needs to provide notice under applicable guidance. The Company has the right, assuming no default has occurred, to defer payments of interest on the subordinated debentures at any time for a period not to exceed 20 consecutive quarters. The Company has not deferred any interest payments.

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Note 9 - Derivative Financial Instruments

At March 31, 2014, the Company has twenty three pay-fixed, receive-variable, interest rate contracts that are designed to convert fixed rate loans into variable rate loans. The Company acquired these interest rate swap contracts (“swaps”) on July 31, 2012 as a result of the merger with PC Bancorp. None of the original twenty four swap contracts acquired in the PC Bancorp acquisition were designated as accounting hedges from the acquisition date through September 30, 2012. Twenty one of the original interest rate swap contracts were re-designated as accounting hedges effective October 1, 2012.

The Company also acquired as part of the PC Bancorp acquisition, a pay-fixed, receive-variable, interest rate swap contract that was originally utilized to convert a fixed rate borrowing on a subordinated debenture to a variable rate borrowing. The fixed rate subordinated debenture converted to a variable rate borrowing in December of 2012 and the swap matured in 2013.

Prior to the merger with PC Bancorp, the Company did not utilize interest rate swaps to manage its interest rate risk position. The Company has incorporated these instruments into its asset liability program when monitoring its interest rate risk position. All of the interest rate swap contracts are with the same counterparty bank. The total notional amount of the outstanding swap contracts as of March 31, 2014 is $31.6 million. The outstanding swaps have original maturities of up to 15 years.

Balance Sheet Classification of Derivative Financial Instruments

The following tables present the notional amount and the fair values of the asset and liability of the Company’s derivative instruments as of the dates and periods indicated (dollars in thousands):

	Liability Derivatives
	March 31, 2014		December 31, 2013
Interest rate contacts notional amount	$	31,626	$	31,914
Derivatives not designated as hedging instruments:
Interest rate swap contracts fair value	$	677	$	738
Derivatives designated as hedging instruments:
Interest rate swap contracts fair value		3,022		3,205
Total interest rate contracts fair value	$	3,699	$	3,943
Balance sheet location		Accrued Interest Payable and Other Liabilities		Accrued Interest Payable and Other Liabilities

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The Effect of Derivative Instruments on the Consolidated Statements of Income

The following table summarizes the effect of derivative financial instruments on the consolidated statements of income for the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2014			2013
Derivatives not designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	61		$	62
Payments on interest rate swap contracts on loans		(68	)		(87	)
Net decrease in other non-interest income		(7	)		(25	)
Interest rate swap contracts – subordinated debenture
Increase in fair value of interest rate swap contracts		0			70
Payments on interest rate swap contracts on subordinated debentures		0			(70	)
Net decrease in other non-interest income		0			0
Net decrease in other non-interest income	$	(7	)	$	(25	)
Derivatives designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	183		$	345
Increase (decrease) in fair value of hedged loans		73			(69	)
Payment on interest rate swap contracts on loans		(316	)		(302	)
Net (decrease) in interest income on loans	$	(60	)	$	(26	)

The total amount of interest paid on all interest rate swap contracts by the Company for the three months ended March 31, 2014 and 2013 was $384,000 and $459,000, respectively. The total change in the fair value of the interest rate swap contracts for the three months ended March 31, 2014 was a decrease in the fair value liability balance of $244,000. The decline in the fair value liability of the interest rate swap contracts for the three months ended March 31, 2014 was the result of the decrease in the estimated net future cash flow payments expected to be made by the Company through the maturity date of the swap contracts. The decline in the estimated net cash flow payments was the result of a three month decline in the remaining maturity on the swaps, and a general increase in the LIBOR futures swap rates used in the cash flow calculations. Since the Company receives variable rate payments on the swap contracts, increases in the LIBOR futures swap rates reduces the net cash flow payments and liability balance of the swap contracts. The decline in the fair value liability of the interest rate swap contracts for the three months ended March 31, 2013 was primarily a result of a three month decline in the remaining maturity on the swap contracts and an increase in the LIBOR futures swap rates used in the cash flow calculations.

The interest rate swap contract associated with the subordinated debenture that was to mature in June 2013 was liquidated during the first quarter of 2013.

Under the interest rate swap contracts, the Company is required to pledge and maintain collateral for the credit support under these agreements. At March 31, 2014, the Company had $2.7 million in certificates of deposit and $1.6 million in non-interest bearing balances for a total of $4.3 million with the counterparty, Pacific Coast Bankers Bank. Of this amount, $4.0 million is required to be pledged as collateral under the interest rate swap contracts.

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Note 10 - Balance Sheet Offsetting

Assets and liabilities relating to certain financial instruments, including derivatives, and securities sold under repurchase agreements (“Repos”), may be eligible for offset in the consolidated balance sheets as permitted under accounting guidance. The Company’s interest rate swap derivatives are subject to a master bilateral netting and offsetting arrangement under specific conditions as defined within a master agreement governing all interest rate swap contracts that the Company and the counterparty bank have entered into. In addition, the master agreement under which the interest rate contracts have been written require the pledging of assets by the Company based on certain risk thresholds. The Company has pledged as collateral, both a certificate of deposit and cash that is maintained in a due from bank account with the counterparty bank. The pledged collateral under the swap agreements are reported in the Company’s consolidated balance sheets, unless the Company defaults under the master agreement. The Company currently does not net or offset the interest rate swap contracts in its consolidated balance sheets, as reflected within the table below.

The Company’s securities sold under repurchase agreements represent transactions the Company has entered into with several individual deposit customers. These transactions represent the sale of securities on an overnight or on a term basis to our deposit customers under an agreement to repurchase the securities from the customers the next business day or at maturity. There is an individual contract for each customer with only one transaction per customer. There is no master agreement that provides for the netting arrangement or the offsetting of these individual transactions or for the netting of collateral positions. The Company does not net or offset the Repos in its consolidated balance sheets as reflected within the table below.

The table below presents the Company’s financial instruments that may be eligible for offsetting which include securities sold under agreements to repurchase that have no enforceable master netting arrangement and derivative securities that could be offset in the consolidated financial statements due to an enforceable master netting arrangement (dollars in thousands):

	Gross Amounts Recognized in the Consolidated		Gross Amounts Offset in the Consolidated		Net Amounts of Assets Presented in the Consolidated		Gross Amounts Not Offset in the Consolidated Balance Sheets				Net Amount (Collateral over liability balance
	Balance Sheets		Balance Sheets		Balance Sheets		Financial Instruments		Collateral Pledged		required to be pledged)
March 31, 2014
Financial Liabilities:
Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)	$	3,699	$	0	$	3,699	$	3,699	$	3,967	$	268
Securities sold under agreements to repurchase (See Note 8 – Borrowings and Subordinated Debentures)		11,965		0		11,965		11,965		12,418		453
Total	$	15,664	$	0	$	15,664	$	15,664	$	16,385	$	721
December 31, 2013
Financial Liabilities:
Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)	$	3,943	$	0	$	3,943	$	3,943	$	4,194	$	251
Securities sold under agreements to repurchase (See Note 8 – Borrowings and Subordinated Debentures)		11,141		0		11,141		11,141		11,750		609
Total	$	15,084	$	0	$	15,084	$	15,084	$	15,944	$	860

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Note 11 - Stock Options and Restricted Stock

Equity Compensation Plans

The Company’s 2007 Equity and Incentive Plan, “Equity Plan,” was adopted by the Company in 2007 and replaced two prior equity compensation plans. The Equity Plan provides for significant flexibility in determining the types and terms of awards that may be made to participants. The Equity Plan was revised and approved by the Company’s shareholders in 2011 and adopted by the Company as part of the Bank holding company reorganization. This plan is designed to promote the interest of the Company in aiding the Company to attract and retain employees, officers and non-employee directors who are expected to contribute to the future success of the organization. The Equity Plan is intended to provide participants with incentives to maximize their efforts on behalf of the Company through stock-based awards that provide an opportunity for stock ownership. This plan provides the Company with a flexible equity incentive compensation program, which allows the Company to grant stock options, restricted stock, restricted stock award units and performance units. Certain options and share awards provide for accelerated vesting, if there is a change in control, as defined in the Equity Plan. These plans are described more fully in Note 16 – Stock Options and Restricted Stock in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

At March 31, 2014, future compensation expense related to un-vested stock option and un-vested restricted stock grants are reflected in the table below (dollars in thousands):

Future Stock Based Compensation Expense	Stock Options		Restricted Stock		Total
Remainder of 2014	$	6	$	1,211	$	1,217
2015		2		712		714
2016		0		187		187
2017		0		18		18
2018		0		3		3
Thereafter		0		0		0
Total	$	8	$	2,131	$	2,139

The estimated fair value of both incentive stock options and non-qualified stock options granted in prior years, have been calculated using the Black-Scholes option pricing model. The use of the Black-Scholes model and the variables and assumptions are described in Note 16 – Stock Options and Restricted Stock in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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Stock Options

There have been no stock options granted by the Company after 2010.

The following table summarizes the share option activity under the plans as of the date and for the period indicated:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding stock options at December 31, 2013		434,740		$	13.89		2.1	$	1,913
Granted		0			0
Exercised		(103,594	)		9.87
Forfeited		0			0.00
Expired		0			0.00
Outstanding stock options at March 31, 2014		331,146		$	15.14		2.1	$	1,348
Exercisable options at March 31, 2014		313,871		$	15.32		2.1	$	1,236
Unvested options at March 31, 2014		17,275		$	11.92		2.6	$	112
Outstanding, vested and expected to vest at March 31, 2014		331,146		$	15.14		2.1	$	1,348

The Company recorded stock option compensation expense of $4,000 and $9,000 for the three month period ended March 31, 2014 and 2013, respectively.

At December 31, 2013, there was one executive officer of the Company that had a remaining balance of 88,344 shares that were exercisable under Rule 10b5-1(c) (1) “10b5 Plan” under the Securities Exchange Act of 1934, as amended. This plan had been adopted by the executive officer in the 4^th quarter of 2013. During the first quarter of 2014 all 88,344 options that remained outstanding were exercised and sold. In addition, there was an additional 15,250 options exercised by employees in the first quarter of 2014.

The total intrinsic value of options exercised during the three months ended March 31, 2014 was $840,000 and there were no options exercised during the three months ended March 31, 2013.

Restricted Stock

The weighted-average grant-date fair value per share in the table below is calculated by taking the total aggregate cost of the restricted shares issued divided by the number of shares of restricted stock issued. The aggregate cost of the restricted stock was calculated by multiplying the number of shares granted at each of the grant dates by the closing stock price of the Company’s common stock on the date of the grant. The following table summarizes the restricted stock activity under the Equity Plan for the period indicated:

	Number of Shares			Weighted-Average Grant-Date Fair Value per Share
Restricted Stock:
Unvested at December 31, 2013		266,050		$	13.49
Granted		40,900			18.07
Vested		28,125			12.41
Cancelled and forfeited		(500	)		11.75
Unvested at March 31, 2014		278,325		$	14.27

Restricted stock compensation expense related to the restricted stock grants reflected in the table above was $404,000 and $249,000 for the three month period ended March 31, 2014 and 2013, respectively. Restricted stock awards reflected in the table above are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed.

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Note 12 - Common Stock

During the first quarter of 2014, the Company’s outstanding common stock increased by 132,544 shares to 11,213,908 at March 31, 2014. The components of this increase are as follows: The Company issued 103,594 shares of stock from the exercise of employee stock options for a total value of $1.0 million. The Company issued 40,900 shares of restricted stock to the Company’s employees, cancelled 500 shares of unvested restricted stock related to employee turnover and repurchased 10,950 shares of restricted stock that had a value of $186,000 related to employees electing to pay their tax obligation via the repurchase of the stock by the Company. The net issuance of restricted stock for 2014 was 28,950 shares. See Note 11 – Stock Options and Restricted Stock for additional detail related to the issuances of these shares.

During 2013, the Company issued 282,031 shares of stock from the exercise of employee stock options for a total value of $2.8 million. The Company issued 81,050 shares of restricted stock to the Company’s directors and employees, cancelled 11,600 shares of unvested restricted stock related to employee turnover and cancelled 28,791 shares of restricted stock that had a value of $422,000, when employees elected to pay their tax obligation via the repurchase of the stock by the Company. The net issuance of restricted stock for 2013 was 69,450 shares.

Note 13 - Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component for the periods indicated (dollars in thousands):

	Before Tax			Tax Effect			Net of Tax
Three Months Ended – March 31, 2014
Net unrealized gains (losses) on investment securities:
Beginning balance	$	(348	)	$	143		$	(205	)
Net unrealized gains arising during the period		268			(110	)		158
Reclassification adjustment for gains realized in net income		0			0			0
Net other comprehensive income		268			(110	)		158
Ending balance	$	(80	)	$	33		$	(47	)

	Before Tax			Tax Effect			Net of Tax
Three Months Ended – March 31, 2013
Net unrealized gains on investment securities:
Beginning balance	$	2,369		$	(975	)	$	1,394
Non-credit portion of other-than-temporary impairments arising during the period		(32	)		13			(19	)
Net unrealized losses arising during the period		(89	)		37			(52	)
Other comprehensive loss before reclassifications		(121	)		50			(71	)
Reclassification adjustment for gains realized in net income		(5	)		2			(3	)
Net other comprehensive loss		(126	)		52			(74	)
Ending balance	$	2,243		$	(923	)	$	1,320

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Note 14 - Commitments and Contingencies

Litigation

From time to time the Company is a party to claims and legal proceedings arising in the ordinary course of business. The Company accrues for any probable loss contingencies that are estimable and discloses any material losses. As of March 31, 2014, there were no legal proceedings against the Company the outcome of which are expected to have a material adverse impact on the Company’s financial position, results of operations or cash flows, as a whole.

Financial Instruments with Off Balance Sheet Risk

See Note 22 – Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Financial instruments with off balance sheet risk include commitments to extend credit of $386 million and $346 million at March 31, 2014 and December 31, 2013, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $40.0 million and $40.6 million at March 31, 2014 and December 31, 2013, respectively.

Note 15 - Fair Value of Assets and Liabilities

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The required disclosure within the financial statements of the fair value of financial assets and financial liabilities includes both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and those reported on a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value, and for estimating the fair value of financial assets and financial liabilities not recorded at fair value, are discussed below.

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:

• Level 1 – Observable unadjusted quoted market prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

• Level 2 – Significant other observable market based inputs, other than Level 1 prices such as quoted prices for similar assets or liabilities or unobservable inputs that are corroborated by market data. This includes quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, either directly or indirectly. This would include those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace.

• Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Assets measured utilizing level 3 are for positions that are not traded in active markets or are subject to transfer restrictions, and or where valuations are adjusted to reflect illiquidity and or non-transferability. These assumptions are not corroborated by market data. This is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. Management uses a combination of reviews of the underlying financial statements, appraisals and management’s judgment regarding credit quality to determine the value of the financial asset or liability.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

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Investment Securities Available-for-Sale: The fair value of securities available-for-sale may be determined by obtaining quoted prices in active markets, when available, from nationally recognized securities exchanges (Level 1 financial assets) If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the securities industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities which are observable market inputs (Level 2 financial assets). Debt securities’ pricing is generally obtained from one of the matrix pricing models developed from one of the three national pricing agencies. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3 financial assets.

Securities classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are excluded from net income and reported as an amount net of taxes as a separate component of accumulated other comprehensive income included in shareholders’ equity.

The Company considers the inputs utilized to fair value the U.S. Agency and U.S. Sponsored Agency issued debt securities (callable and non-callable notes), mortgage backed securities guaranteed by those agencies, collateralized mortgage obligations issued by those agencies, corporate bond securities, and municipal securities to be observable market inputs and classified these financial assets within the Level 2 fair value hierarchy. Management bases the fair value for these investments primarily on third party price indications provided by independent pricing sources utilized by the Company’s bond accounting system to obtain market pricing on its individual securities. Vining Sparks, who provides the Company with its bond accounting system, utilizes pricing from three independent third party pricing sources for pricing of securities. These third party pricing sources utilize, quoted market prices or when quoted market prices are not available, then fair values are estimated using nationally recognized third-party vendor pricing models of which the inputs are observable. However, the fair value reported may not be indicative of the amounts that could be realized in an actual market exchange.

The fair value of the Company’s U.S. Agency and U.S. Sponsored Agency callable and non-callable agency securities, mortgage backed securities guaranteed by those agencies, and collateralized mortgage obligations issued by those agencies, corporate bond securities, and municipal securities are calculated using an option adjusted spread model from one of the nationally recognized third-party pricing models. Depending on the assumptions used and the treasury yield curve and other interest rate assumptions, the fair value could vary significantly in the near term.

Loans: The fair value for loans is estimated by discounting the expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities, adjusted for the allowance for loan loss. Loans are segregated by type such as commercial and industrial, commercial real estate, construction and other loans with similar credit characteristics and are further segmented into fixed and variable interest rate loan categories. Expected future cash flows are projected based on contractual cash flows, adjusted for estimated prepayments. The inputs utilized in determining the fair value of loans are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

Impaired Loans: The fair value of impaired loans is determined based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, less costs to sell, if the loan is collateral dependent, or based on the discounted cash flows for non-collateral dependent loans. Collateral on collateral dependent loans may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals performed by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and unobservable. For unsecured loans, the estimated future discounted cash flows of the business or borrower, are used in evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The inputs utilized in determining the fair value of impaired loans are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

Interest Rate Swap Contracts: The fair value of the interest rate swap contracts are provided by an independent third party vendor that specializes in interest rate risk management and fair value analysis using a model that utilizes current market data to estimate cash flows of the interest rate swaps utilizing the future LIBOR yield curve for accruing and the future Overnight Index Swap Rate (Fed Funds Effective Swap Rate) “OIS” yield curve for discounting through the maturity date of the interest

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rate swap contract. The future LIBOR yield curve is the primary input in the valuation of the interest rate swap contracts. Both the LIBOR and OIS yield curves are readily observable in the marketplace. Accordingly, the interest rate swap contracts are classified within Level 2 of the fair value hierarchy.

Other Real Estate Owned: The fair value of other real estate owned is generally based on real estate appraisals (unless more current market information is available) less estimated costs of sale. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant. The inputs utilized in determining the fair value of other real estate owned are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

SBA Servicing Asset: The Company acquired an SBA servicing asset with the PC Bancorp merger and has added to the servicing asset with the sale of SBA loans subsequent to the merger. This servicing asset was initially fair valued at the merger date based on an evaluation by a third party who specializes in fair value analysis. The fair value of this asset was based on the estimated discounted future cash flows utilizing market based discount rates and estimated prepayment speeds. The discount rate was based on the current U.S. Treasury yield curve, plus a spread for marketplace risk associated with these assets. Prepayment speeds were selected based on the historical prepayments of similar SBA pools. The prepayment speeds determine the timing of the cash flows. The SBA servicing asset is amortized over the estimated life of the loans based on an effective yield approach. In addition, the Company’s servicing asset is evaluated regularly for impairment by discounting the estimated future cash flows using market-based discount rates and prepayment speeds. If the calculated present value of the servicing asset declines below the Company’s current carrying value, the servicing asset is written down to its present value. Based on the Company’s methodology in its valuation of the SBA servicing asset, the current carrying value is estimated to approximate the fair value. The inputs utilized in determining the fair value of SBA servicing asset are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

Non-Maturing Deposits: The fair values for non-maturing deposits (deposits with no contractual termination date), which include non-interest bearing demand deposits, interest bearing transaction accounts, money market deposits and savings accounts are equal to their carrying amounts, which represent the amounts payable on demand. Because the carrying value and fair value are by definition identical, and accordingly non-maturity deposits are classified within Level 1 of the fair value hierarchy, these balances are not listed in the following tables.

Maturing Deposits: The fair values of fixed maturity certificates of deposit (time deposits) ) “CD’s” are estimated using a discounted cash flow calculation that applies current market deposit interest rates to the Company’s current certificates of deposit interest rates for similar term certificates. The inputs utilized in determining the fair value of maturing deposits are observable from published and quoted CD rates marketed by other financial institutions and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.

Securities Sold under Agreements to Repurchase (“Repos”): The fair value of securities sold under agreements to repurchase is estimated based on the discounted value of future cash flows expected to be paid on the deposits. The carrying amounts of Repos with maturities of 90 days or less approximate their fair values. The fair value of Repos with maturities greater than 90 days is estimated based on the discounted value of the contractual future cash flows. The inputs utilized in determining the fair value of securities sold under agreements to repurchase are observable and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.

Subordinated Debentures: The fair value of the three variable rate subordinated debentures (“debentures”) is estimated using a discounted cash flow calculation that applies the three month LIBOR plus the margin index at March 31, 2014, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at March 31, 2014. Because all three of the debentures re-priced on March 16, 2014 based on the current three month LIBOR index rate plus the index margin at that date, and with relatively little to no change in the three month LIBOR index rate from the re-pricing date through March 31, 2014, the current face value of the debentures and their calculated fair value are approximately equal. The inputs utilized in determining the fair value of subordinated debentures are observable and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.

Fair Value of Commitments: Loan commitments that are priced on an index plus a margin to a market rate of interest are reported at the carrying value of the loan commitment. Loan commitments on which the committed fixed interest rate is less or more than the current market rate were insignificant at March 31, 2014 and December 31, 2013.

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Interest Rate Risk: The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. In addition, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall rate risk.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the financial assets and financial liabilities measured at fair value on a recurring basis as of the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

	Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets – March 31, 2014
Investment securities available-for-sale	$	102,155	$	0	$	102,155	$	0
Financial Liabilities – March 31, 2014
Interest Rate Swap Contracts	$	3,699	$	0	$	3,699	$	0
Financial Assets – December 31, 2013
Investment securities available-for-sale	$	106,488	$	0	$	106,488	$	0
Financial Liabilities – December 31, 2013
Interest Rate Swap Contracts	$	3,943	$	0	$	3,943	$	0

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At December 31, 2013 and at March 31, 2014 the Company had no financial assets or liabilities that were measured at fair value on a recurring basis that required the use of significant unobservable inputs (Level 3), and thus a table has not been provided for the three months ended March 31, 2014. The following table presents a roll forward of all assets and liabilities and additional information about the financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the date and period indicated (dollars in thousands):

Financial Assets – Measured at Fair Value on a Recurring Basis using Unobservable Inputs	Balance at January 1		Included in Earnings			Included in Other Comprehensive Income (Loss)			Purchases, Issuances, Sales, Settlements			Transfers into (out of) Level 3		Balance at March 31
Period ended March 31, 2013
Private Issue CMO Securities	$	2,910	$	(5	)	$	(866	)	$	(2,039	)	$	0	$	0
Total	$	2,910	$	(5	)	$	(866	)	$	(2,039	)	$	0	$	0

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a recurring basis for the period ended March 31, 2014 and 2013.

Assets Measured at Fair Value on a Non-recurring Basis

The Company may be required periodically, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of or during the period.

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a non-recurring basis for the three months ended March 31, 2014 and 2013.

The following table presents the balances of assets and liabilities measured at fair value on a non-recurring basis by caption and by level within the fair value hierarchy as of the dates indicated (dollars in thousands):

	Recorded Investment Carrying Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets – March 31, 2014
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)	$	264	$	0	$	0	$	264
Total	$	264	$	0	$	0	$	264
Financial Assets – December 31, 2013
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)	$	264	$	0	$	0	$	264
Total	$	264	$	0	$	0	$	264

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The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of the dates indicated (dollars in thousands):

	Fair Value		Valuation Methodology	Valuation Model and/or Factors	Unobservable Input Values
Financial Assets – March 31, 2014
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off (1)	$	264	Credit loss estimate of aged accounts receivable collateral	Credit loss factors on aging of accounts receivable collateral		80	%
			Commercial real estate appraisal	Sales approach (2)
				Estimated selling costs		8	%
Financial Assets – December 31, 2013
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off (1)	$	264	Credit loss estimate of aged accounts receivable collateral	Credit loss factors on aging of accounts receivable collateral		80	%
			Commercial real estate appraisal	Sales approach (2)
				Estimated selling costs		8	%

(1) The Company has recorded total charge-offs of $605,000 on the principal balance on two of the loans included in the balance in the above table. These charge-offs were recorded in 2013.

(2) For the one commercial real estate loan included in the above table, the Company established the fair value of the loan based on a recent commercial real estate appraisal. The Company selected the “sales approach” for valuing the collateral over the “income approach” or the “cost approach” in establishing the fair value of the collateral.

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Fair Value of Financial Assets and Liabilities

The required disclosure within the financial statements of the fair value of financial assets and financial liabilities, include both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and those reported on a non-recurring basis. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of March 31, 2014 and December 31, 2013. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The description of the valuation methodologies used for assets and liabilities measured at fair value and for estimating fair value for financial instruments not recorded at fair value has been described above.

The table below presents the carrying amounts and fair values of financial instruments based on their fair value hierarchy indicated (dollars in thousands):

			Fair Value
	Recorded Investment Carrying Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2014
Financial Assets
Investment securities available-for-sale	$	102,155	$	0	$	102,155	$	0
Loans, net		934,684		0		0		941,378
Financial Liabilities
Certificates of deposit		62,303		0		62,376		0
Securities sold under agreements to repurchase		11,965		0		11,965		0
Subordinated debentures		9,419		0		12,372		0
Interest rate swap contracts		3,699		0		3,699		0
December 31, 2013
Financial Assets
Investment securities available-for-sale	$	106,488	$	0	$	106,488	$	0
Loans, net		922,591		0		0		926,500
Financial Liabilities
Certificates of deposit		63,581		0		63,680		0
Securities sold under agreements to repurchase		11,141		0		11,141		0
Subordinated debentures		9,379		0		12,372		0
Interest rate swap contracts		3,943		0		3,943		0

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

See “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” below relating to “forward-looking” statements included in this report.

The following is management’s discussion and analysis of the major factors that influenced the results of the operations and financial condition of CU Bancorp, the (“Company”) for the current period. This analysis should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2013 Annual Report on Form 10K and with the unaudited financial statements and notes as set forth in this report.

OVERVIEW

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

We have made forward-looking statements in this document about the Company, for which the Company claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995.

The Company’s forward-looking statements include descriptions of plans or objectives of management for future operations, products or services, and forecasts of its revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words “believe,” “expect,” “intend,” “estimate” “anticipates,” “project”, “assume”, “plan”, “predict” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.”

We make forward-looking statements as set forth above and regarding projected sources of funds, availability of acquisition and growth opportunities, dividends, adequacy of our allowance for loan and lease losses and provision for loan and lease losses, our loan portfolio and subsequent charge-offs. Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the SEC, Item 1A of our Annual Report on Form 10-K, and the following:

• Current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, high unemployment rates and overall slowdowns in economic growth.

• Loss of customer checking and money-market account deposits as customers pursue other, higher-yield investments.

• Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits.

• Competitive market pricing factors.

• Deterioration in economic conditions that could result in increased loan losses.

• Risks associated with concentrations in real estate related loans.

• Risks associated with concentrations in deposits.

• Market interest rate volatility.

• Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.

• Changes in the speed of loan prepayments, loan origination and sale volumes, loan loss provisions, charge offs or actual loan losses.

• Compression of our net interest margin.

• Stability of funding sources and continued availability of borrowings.

• Changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth.

• The inability of our internal disclosure controls and procedures to prevent or detect all errors or fraudulent acts.

• Inability of our framework to manage risks associated with our business, including operational risk and credit risk, to mitigate all risk or loss to us.

• Our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft.

• The effects of man-made and natural disasters, including earthquakes, floods, droughts, brush fires, tornadoes and hurricanes.

• Our ability to recruit and retain key management and staff.

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• Availability of, and competition for acquisition opportunities.

• Risks associated with merger and acquisition integration.

• Significant decline in the market value of the Company that could result in an impairment of goodwill.

• Regulatory limits on the Bank’s ability to pay dividends to the Company.

• New accounting pronouncements.

• The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and related rules and regulations on the Company’s business operations and competitiveness.

• Our ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate capital internally or raise capital on favorable terms.

• The effects of any damage to our reputation resulting from developments related to any of the items identified above.

Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.

For a more complete discussion of these risks and uncertainties, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and particularly, Item 1A, titled “Risk Factors.”

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Recent Developments

Regulatory Legislation

Dodd-Frank Wall Street Reform and Consumer Protection Act:

For a discussion regarding the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, see the Company’s December 31, 2013 Form 10K, Part I, Item 1 – Business – Supervision and Regulation – Recent Legislation and Regulation – Dodd-Frank Wall Street Reform and Consumer Protection Act, Final Volker Rule, and Bureau of Consumer Financial Protection.

Basel III Capital Standards:

For a discussion regarding the phase in of the new Basel III capital requirements see the Company’s December 31, 2013 Form 10K, Part I, Item 1 – Business – Recent Legislation and Regulation – New Financial Institution Capital Rules.

The Company has evaluated the final rules and their expected impact on the Company and based upon our assessment we believe the Company’s and Bank’s current capital levels at March 31, 2014 would equal or exceed these minimum capital requirements, including the capital conservation buffer, if they were in effect on that date.

Capital

At March 31, 2014, the respective capital ratios of the Company and the Bank exceeded the minimum percentage requirements to be deemed “well-capitalized” under the current capital guidelines.

The following table sets forth the regulatory capital requirements and the actual capitalization levels for the Company and the Bank as of March 31, 2014:

	Adequately Capitalized			Well Capitalized			CU Bancorp			California United Bank
	(greater than or equal to)
Total Risk-Based Capital Ratio		8.0	%		10.0	%		13.0	%		12.1	%
Tier 1 Risk-Based Capital Ratio		4.0	%		6.0	%		12.0	%		11.1	%
Tier 1 Leverage Capital Ratio		4.0	%		5.0	%		10.2	%		9.4	%

Corporate Governance

The following are some of the key corporate governance practices at both the Company and the Bank, which are oriented to ensure that there are no conflicts of interest and that the Company operates in the best interests of shareholders:

• Eight of the Company’s and Bank’s eleven directors at March 31, 2014 are independent outside directors.

• A new independent director was appointed effective April, 1, 2014.

• None of the Company’s senior officers and directors have received loans from the Bank.

• There are no loans by the Bank to outside companies controlled by, or affiliated with officers or directors.

• The Company’s Board of Directors has Audit and Risk, and Compensation, Nomination and Governance committees comprised solely of independent outside directors.

Number of Employees

The number of active full-time equivalent employees increased from 176 at December 31, 2013 to 181 at March 31, 2014.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and other subjective assessments. We have identified several accounting policies that, due to judgments, estimates, and assumptions inherent in those policies, are essential to an understanding of our consolidated financial statements. These policies relate to the methodologies that determine our allowance for loan loss, the valuation of impaired loans, the classification and valuation of investment securities, accounting for and valuation of derivatives and hedging activities, accounting for business combinations, evaluation of goodwill for impairment, and accounting for income taxes.

Our critical accounting policies are described in greater detail in our 2013 Annual Report on Form 10-K, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies and Estimates. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessment, are as follows:

Allowance for Loan Loss

We maintain an allowance for loan loss (“Allowance”) to provide for probable losses in the loan portfolio. Additions to the Allowance are made by charges to operating expense in the form of a provision for loan losses. All loans that are judged to be uncollectible will be charged against the Allowance while any recoveries would be credited to the Allowance. We have instituted loan policies and procedures which enable us to adequately evaluate, analyze and monitor risk factors associated with our loan portfolio. These policies and procedures enable us to assess risk factors prior to granting new loans and to continually monitor the risk levels in the loan portfolio. We conduct a critical evaluation of the loan portfolio and the level of the Allowance quarterly. We have instituted loan policies to adequately evaluate and analyze risk factors associated with our loan portfolio and to enable us to assess such risk factors prior to granting new loans and to assess the sufficiency of the allowance. This evaluation includes an assessment of the following factors: the results of any internal and external loan reviews and any regulatory examination, changes in management or lending policies and underwriting standards, levels of past due loans, loan loss experience, estimated probable loss exposure on each impaired credit, concentrations of credit, value of collateral and any known impairment in the borrowers’ ability to repay, and current economic conditions.

Investment Securities

The Company currently classifies its investment securities under the available-for-sale classification. Under the available-for-sale classification, securities can be sold in response to certain conditions, such as changes in interest rates, changes in the credit quality of the securities, when the credit quality of a security does not conform with current investment policy guidelines, fluctuations in deposit levels or loan demand or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than amortized cost. Unrealized gains or losses are excluded from net income and reported as a separate component of accumulated other comprehensive income (net of taxes) included in shareholders’ equity.

At each reporting date, investment securities are assessed to determine whether there is an other-than-temporary impairment. If it is probable, based on current information, that we will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. If it’s determined that an other-than-temporary impairment exists on a debt security, the Company then determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Company will recognize an other-than-temporary impairment in earnings equal to the difference between the security’s fair value and its adjusted cost basis, the credit portion of the loss is required to be recognized in current earnings, while the non-credit portion of the loss is recorded as a separate component of shareholders’ equity. If neither of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss portion of such impairment, if

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any, is the portion of the other-than-temporary impairments that is recognized in current earnings rather than as a separate component of shareholders, equity and is a reduction to the cost basis of the security. The portion of total impairment related to all other factors is included in accumulated other comprehensive income (loss). Significant judgment is required in this analysis that includes, but is not limited to assumptions regarding the collectability of principal and interest, future default rates, future prepayment speeds, the amount of current delinquencies that will result in defaults and the amount of eventual recoveries expected on these defaulted loans through the foreclosure process.

Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. For mortgage-backed securities, the amortization or accretion is based on estimated lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The amount of prepayments varies from time to time based on the interest rate environment and the rate of turnover of mortgages. The Company’s investment in the common stock of the FHLB, Pacific Coast Bankers Bank and The Independent Banker’s Bank (“TIB”) and the preferred stock of TIB is carried at cost and is included in other assets on the accompanying consolidated balance sheets.

Derivative Financial Instruments and Hedging Activities

All derivative instruments are recorded on the consolidated balance sheet at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and hedged item related to the hedged risk are recognized in earnings. Current financial accounting and reporting standards require every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the consolidated balance sheet as either an asset or liability measured at its fair value. Accounting standards require that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

On the date a derivative contract is entered into, the Company will designate the derivative contract as either a fair value hedge (i.e. a hedge of the fair value of a recognized asset or liability), a cash flow hedge (i.e. a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability), or a stand-alone derivative (i.e. an instrument with no hedging designation). For a derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as other non-interest income.

The Company will discontinue hedge accounting prospectively when: it is determined that the derivative is no longer effective in offsetting change in the fair value of the hedged item, the derivative expires or is sold, is terminated, is exercised or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company will continue to carry the derivative on the consolidated balance sheet at its fair value (if applicable), but will no longer adjust the hedged asset or liability for changes in fair value. The adjustments of the carrying amount of the hedged asset or liability will be accounted for in the same manner as other components of the carrying amount of that asset or liability, and the adjustments are amortized to interest income over the remaining life of the hedged item upon the termination of hedge accounting.

Business Combinations

The Company has a number of fair value adjustments recorded within the consolidated financial statements at March 31, 2014 that were created from the business combinations with California Oaks State Bank (“COSB”) and Premier Commercial Bancorp (“PC Bancorp”) on December 31, 2010 and July 31, 2012, respectively. These fair value adjustments include the Company’s goodwill, fair value adjustments on loans, core deposit intangible assets, other intangible assets, fair value adjustments to acquired lease obligations, fair value adjustments to high rate certificates of deposit and fair value adjustments on derivatives. The assets and liabilities acquired through acquisition have been accounted for at fair value as of the date of the acquisition. The goodwill that was recorded on the transactions represented the excess of the purchase price over the fair value of net assets acquired. If the consideration paid would have been less than the fair value of the net assets acquired, the Company would have recorded a bargain purchase gain. Goodwill is not amortized and is reviewed for impairment on October 1st of each year. If an event occurs or circumstances change that result in the Company’s fair value declining to below its book value, the Company would perform an impairment analysis at that time.

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Purchased Credit Impaired Loans (“PCI”) loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable at the acquisition date, that the Company will not be able to collect all contractually required amounts. When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans. The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans. For non-PCI loans, loan fair value adjustments consist of an interest rate premium or discount on each individual loan and are amortized to loan interest income based on the effective yield method over the remaining life of the loans.

Income Taxes

Deferred income tax assets and liabilities are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance may be established to the extent necessary to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax assets or benefits will be realized. Realization of tax benefits depends on having sufficient taxable income, available tax loss carrybacks or credits, the reversing of taxable temporary differences and/or tax planning strategies within the reversal period and that current legislative tax law allows for the realization of those tax benefits.

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RESULTS OF OPERATIONS

The following table presents condensed statements of income and related performance data for the periods indicated and the dollar and percentage changes between the periods (dollars in thousands, except per share data):

	Three Months Ended March 31,
	Amounts						Increase (Decrease)
	2014			2013
Interest Income	$	12,636		$	12,069		$	567		4.7	%
Interest Expense		463			531			(68	)	(12.8	)%
Net Interest Income		12,173			11,538			635		5.5	%
Provision for loan losses		75			134			(59	)	(44.0	)%
Gain on sale of securities		0			5			(5	)	(100.0	)%
Gain on sale of SBA loans		438			350			88		25.1	%
Other non-interest income		1,352			1,071			281		25.2	%
Non-interest expense		9,549			9,309			240		2.6	%
Provision for Income Taxes		1,673			1,366			307		22.5	%
Net Income	$	2,666		$	2,155		$	511		23.7	%
Earnings per share
Basic	$	0.25		$	0.21		$	0.04		19.0	%
Diluted	$	0.24		$	0.20		$	0.04		20.0	%
Return on average equity		7.70	%		6.87	%		0.83	%	12.1	%
Return on average assets		0.78	%		0.69	%		0.09	%	13.0	%
Net interest rate spread		3.64	%		3.82	%		(0.18	)%	(0.05	)%
Net interest margin		3.82	%		4.00	%		(0.18	)%	(0.05	)%
Efficiency ratio (1)		68.39	%		71.83	%		(3.45	)%	(4.8	)%

(1) Efficiency ratio is defined as non-interest expense divided by the sum of net interest income, gain on sale of SBA loans, and other non-interest income.

Operations Performance Summary

Three Months Ended March 31, 2014 and 2013

The Company reported net income of $2.7 million (or earnings per share of $0.25 and $0.24 on a basic and diluted basis, respectively) for the quarter ended March 31, 2014, compared to net income of $2.2 million (or earnings per share of $0.21 and $0.20 on a basic and diluted basis, respectively) for the same period of 2013. This represents a $511,000 or 23.7% increase between the two periods. The following describes the changes in the major components of the Company’s net income for the three months ended March 31, 2014 compared to the comparable period in 2013:

The increase in interest income of $567,000 to $12.6 million for the quarter ended March 31, 2014, compared to the same period of 2013 is primarily the result of an increase in average interest earning assets of $125 million, partially offset by a decrease in the overall yields on interest-earning assets of 23 basis points to 3.96%. The increase in average interest earning assets increased interest income by $1.1 million, while the decline in the yield of 23 basis points decreased interest income by $557,000 for the first quarter of 2014 compared to 2013.

Loan interest income for the quarter ended March 31, 2014, increased by $499,000 to $11.9 million, or 4.4% compared to the same period of 2013. This increase was attributable to an increase in the average loan balance of $81 million or 9.6% between the two periods, which added $1.1 million to loan interest income. For the quarter ended March 31, 2013, the Company’s average quarterly loan portfolio was $842 million, and for the quarter ended March 31, 2014 the average quarterly loan portfolio had grown to $923 million. Loan interest income was negatively impacted by a decline in the overall loan yield of 26 basis points, from 5.5% during the first quarter of 2013, to 5.24% in the first quarter of 2014. The impact was a decline of $620,000 in loan interest income during the first quarter of 2014 compared to the first quarter of 2013. During 2013, yields on new loans were generally lower than loans paying off, and as a result, the Company has seen a decline in the core loan yield over the last four quarters. However, during the first quarter of 2014, the coupon on new loans originated (4.66%) was higher than the average yields of loans paying off. The decline in loan interest income during the

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first quarter of 2014 occurred primarily because the rates on loans paying off during the first quarter of 2014 were lower than those that paid off in 2013. Additionally, there was a higher concentration of CRE originations during the quarter, which carry higher coupon rates. The overall loan income from the amortization of unearned loan fee income and fair value discounts for the first quarter of 2013 was $1.2 million which compares to $1.3 million for the first quarter of 2014. During the first quarter of 2014, loan interest income was positively impacted by $519,000 related to the discount earned on early loan payoffs of acquired loans, including one discount of $445,000. This compares to $37,000 of discount earned on early loan payoffs during the first quarter of 2013.

Interest income on investment securities increased by $17,000 to $501,000, a 3.5% increase for the quarter ended March 31, 2014 compared to the same period of 2013. The overall increase in investment securities income was attributable to an increase in the overall yields between the two periods, partially offset by a decrease in the average balances. An increase of $50,000 in investment securities income was attributable to an increase of 0.19% in the overall yield. The overall yield increased from 1.72% for the first quarter of 2013 to 1.91% for the first quarter of 2014, and was primarily related to the maturity of lower yielding agency, treasury and muni securities during 2013, resulting in a higher yielding securities portfolio in the first quarter of 2014. The investment securities average balance declined by $7.6 million, which reduced investment securities income by $33,000 for the quarter ended March 31, 2014.

Interest income on interest bearing deposits in other financial institutions increased by $51,000 to $211,000, or 31.9% for the first quarter of 2014 compared to the same period of 2013. The increase in interest income was primarily attributable to the increase of $52 million, or 24.1% in average balances from $215 million for the first quarter of 2013 to $266 million for the first quarter of 2014. The overall yield increased 2 basis points, from 0.30% in the first quarter of 2013 to 0.32% in the first quarter of 2014. The increase in the average balances attributed an increase of $38,000 in interest income, while the higher yield increased interest income by $13,000. The increase in the outstanding balances between these periods was the result of the Company investing additional liquidity into these investments. These investments included the interest bearing balances maintained with the Federal Reserve Bank (“FRB”) earning 25 basis points, individual certificates of deposit invested in other financial institutions (generally not to exceed the $250,000 FDIC insurance limit on each) for terms longer than 60 days but not exceeding one year, and other overnight interest bearing balances with correspondent banks of the Company.

Interest expense on interest bearing deposit accounts decreased by $40,000 to $348,000, or 10.3% for the first quarter of 2014 compared to the same period of 2013. The decrease in interest expense on deposits was primarily attributable to the decrease in the rates paid on deposits, partially offset by an increase in the average balance. The overall rate decreased by 4 basis points, from 0.29% in the first quarter of 2013 to 0.25% in the first quarter of 2014, which resulted in a decrease in interest expense of $55,000. Partially offsetting this decrease in interest expense was a $29 million increase in the average balance of interest earning deposits, from $545 million for the first quarter of 2013 to $574 million for the first quarter of 2014. The increase in the average balances increased interest expense on deposits by $15,000.

Interest expense on borrowings decreased by $28,000 to $115,000, or 19.6% for the first quarter of 2014 compared to the same period of 2013. The decrease was attributable to a $14 million decrease in the average balance resulting in a decrease of $7,000 in interest expense. While the overall rate on borrowings increased 53 basis points from 1.65% for the first quarter of 2013 to 2.18% for the first quarter of 2014, the rate increase was the result of the change in the composition of the two interest bearing instruments that make up this category. The decrease in the average balance on the Repos between the quarters was a result of one of the Company’s customers moving their balances out of the Company’s Repo program and into an interest bearing deposit account with the Company.

The Company’s overall net interest margin declined 18 basis points from 4.0% at March 31, 2013 to 3.82% at March 31, 2014. This decline was primarily a result of the decline in the overall loan yield by 26 basis points offset by a 5 basis point decline in the rate paid on interest-bearing liabilities and an increase on the yield of other earning assets of 3 basis points. The impact of the early loan payoffs to the net interest margin was 16 basis points for the first quarter of 2014 compared to only 1 basis point for the first quarter of 2013.

The Company recorded a provision for loan losses of $75,000 for the first quarter of 2014, compared to a provision for loan losses of $134,000 for the same period in 2013. A provision for the first quarter of 2014 was the result of a $24 million increase in the Company’s organic loan balances from $706 million at December 31, 2013 to $730 million at March 31, 2014. The provision amount reflects increases in asset quality, an improving economy and loan recoveries of $145,000 for the first quarter of 2014. The Company’s allowance for loan loss was 1.48% of the outstanding organic loan balance (loans that are accounted for at historical cost) which excludes loans that were accounted for at fair value from the COSB and PC Bancorp acquisitions. During the first quarter of 2014, the Company had no loan charge-offs and $145,000 of loan recoveries, compared to $121,000 of loan charge-offs and $25,000 of loan recoveries for the first quarter of 2013.

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Non-interest income increased by $364,000 to $1.8 million, or 26%, for the first quarter of 2014, compared to the same period of 2013. This overall increase was the result of an increase of the following: $88,000 in gain on sale of SBA loans, $62,000 in deposit account service charges resulting from growth in the number and balances of the Company’s deposit accounts, and $214,000 in other non-interest income. The $214,000 increase in other non-interest income was largely the result of an increase of the following: loan related transaction referral income of $75,000, letters of credit fees of $37,000, dividend income of $50,000, wire, interchange and revenue sharing fees of $18,000 and other loan related fees of $16,000. The fluctuation of $88,000 in the net gain on sale of SBA 7a loans for the first quarter of 2014 was the result of selling ten SBA 7a loans at gross premium in the range of $109 to $116 The gains will fluctuate as the decision to sell or retain SBA loans is made on an ongoing basis and is dependent on premiums in the secondary market and the Company’s liquidity needs.

Non-interest expense increased by $240,000 to $9.5 million, or 2.6% for the first quarter of 2014, compared to the same period of 2013. See the components in the “Non-Interest Expense” table for the first quarter of 2014 and their dollar and percent changes compared to the same period of 2013. This overall increase was the result of an increase of the following: $188,000 in salaries and employee benefits, $150,000 in stock based compensation expense, $16,000 in legal and professional expense and $67,000 in other operating expenses. Partially offsetting these cost increases was a decline in the following: $78,000 in occupancy cost, $25,000 in FDIC deposit assessment, $43,000 in merger related expense and $26,000 in OREO valuation write-downs and expenses. There were no merger related expenses or OREO valuation write-down and expenses in the first quarter of 2014 as the Company held no OREO in the first quarter of 2014. Occupancy expense declined due to the consolidation of the Irvine LPO and the acquired Irvine/Newport Beach branch into a new location. Stock based compensation expense increased in the first quarter of 2014 as restricted stock grants were awarded to key senior managers in the first quarter of 2014 as compared to restricted stock grants occurring later in 2013. In addition, the CEO received a restricted stock grant in the first quarter of 2014 in lieu of a cash bonus for 2013 performance. This grant vests in December 2014.

The provision for income tax expense for the quarter ended March 31, 2014 was $1.7 million, which represents an effective tax rate of approximately 38.6%, compared to income tax expense of $1.4 million or an effective tax rate of approximately 38.8% for the same period of 2013. The Company’s blended statutory tax rate is approximately 42.0%. The effective tax rate for the quarter ended March 31, 2014 is lower than the statutory rate is primarily due to permanent deductible differences such as income from cash surrender value of bank owned life insurance policies, and tax credits generated by the Company’s investments in low income housing and other tax credits. The Company’s taxable income is also affected by certain operating costs that are not tax deductible such as certain merger related costs, business entertainment expenses and membership dues. For the quarter ended March 31, 2013, the Bank was able to reduce taxable income by the net interest income on loans within the State of California designated enterprise zone areas for state income taxes. The net interest income deduction on loans located in enterprise zones expired at December 31, 2013.

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Average Balances, Interest Income and Expense, Yields and Rates

Three Months Ended March 31, 2014 and 2013

The following table presents the Company’s average balance sheets, together with the total dollar amounts of interest income and interest expense and the weighted average interest yield/rate for the periods presented. All average balances are daily average balances (dollars in thousands).

	Three Months Ended March 31,
	2014							2013
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (5)			Average Balance		Interest Income/ Expense		Average Yield/ Rate (5)
Interest-Earning Assets:
Loans (1)	$	922,971	$	11,924		5.24	%	$	842,234	$	11,425		5.50	%
Deposits in other financial institutions		265,750		211		0.32	%		214,198		160		0.30	%
Investment Securities (2)		104,767		501		1.91	%		112,401		484		1.72	%
Total interest-earning assets		1,293,488		12,636		3.96	%		1,168,833		12,069		4.19	%
Non-interest-earning assets		92,357							92,783
Total assets	$	1,385,845						$	1,261,616
Interest-Bearing Liabilities:
Interest bearing transaction accounts	$	138,006		58		0.17	%	$	118,361		52		0.18	%
Money market and savings deposits		373,258		234		0.25	%		350,363		260		0.30	%
Certificates of deposit		62,964		56		0.36	%		76,246		76		0.40	%
Total interest bearing deposits		574,228		348		0.25	%		544,970		388		0.29	%
Subordinated debentures		9,399		107		4.55	%		9,198		124		5.39	%
Securities sold under agreements to repurchase		11,951		8		0.27	%		25,853		19		0.30	%
Total borrowings		21,350		115		2.18	%		35,051		143		1.65	%
Total interest bearing liabilities		595,578		463		0.32	%		580,021		531		0.37	%
Non-interest bearing demand deposits		633,233							541,462
Total funding sources		1,228,811							1,121,483
Non-interest-bearing liabilities		16,595							12,844
Shareholders’ equity		140,439							127,289
Total liabilities and shareholders’ equity	$	1,385,845						$	1,261,616
Excess of interest-earning assets over funding sources	$	64,677						$	47,350
Net interest income			$	12,173						$	11,538
Net interest rate spread (3)						3.64	%						3.82	%
Net interest margin (4)						3.82	%						4.00	%

(1) Average balances of loans are calculated net of deferred loan fees and fair value discounts, but would include non-accrual loans which have a zero yield.

(2) Average balances of investment securities are presented on an amortized cost basis and thus do not include the unrealized market gain or loss on the securities.

(3) Net interest rate spread represents the yield earned on average total interest-earning assets less the rate paid on average total interest-bearing liabilities.

(4) Net interest margin is computed by dividing annualized net interest income by average total interest-earning assets.

(5) Annualized

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The following table reflects the composition of the net deferred loan fees, costs and fair value discounts at March 31, 2014 (dollars in thousands):

	March 31, 2014
Accreting loan discount	$	7,728
Non-accreting loan discount		1,567
Acquired loans remaining discount		9,295
Organic loans net deferred fees		2,377
Total	$	11,672

Net Changes in Average Balances, Composition, Yields and Rates

Three Months Ended March 31, 2014 and 2013

The following table sets forth the composition of average interest-earning assets and average interest-bearing liabilities by category and by the percentage of each category to the total for the periods indicated, including the change in average balance, composition, and yield/rate between these respective periods (dollars in thousands):

	Three Months Ended March 31,																Increase (Decrease)
	2014								2013
	Average Balance		% of Total			Average Yield/ Rate			Average Balance		% of Total			Average Yield/ Rate			Average Balance			% of Total			Average Yield/ Rate
Interest-Earning Assets:
Loans	$	922,971		71.4	%		5.24	%	$	842,234		72.1	%		5.50	%	$	80,737			(0.7	)%		(0.26	)%
Deposits in other financial institutions		265,750		20.5	%		0.32	%		214,198		18.3	%		0.30	%		51,552			2.2	%		0.02	%
Investment Securities		104,767		8.1	%		1.91	%		112,401		9.6	%		1.72	%		(7,634	)		(1.5	)%		0.19	%
Total interest-earning assets	$	1,293,488		100.0	%		3.96	%	$	1,168,833		100.0	%		4.19	%	$	124,655						(0.23	)%
Interest-Bearing Liabilities:
Non-interest bearing demand deposits	$	633,233		51.5	%				$	541,462		48.3	%					91,771			3.3	%
Interest bearing transaction accounts		138,006		11.2	%		0.17	%		118,361		10.6	%		0.18	%		19,645			0.7	%		(0.01	)%
Money market and savings deposits		373,258		30.4	%		0.25	%		350,363		31.2	%		0.30	%		22,895			(0.9	)%		(0.05	)%
Certificates of deposit		62,964		5.1	%		0.36	%		76,246		6.8	%		0.40	%		(13,282	)		(1.7	)%		(0.04	)%
Total deposits		1,207,461		98.3	%		0.12	%		1,086,432		96.9	%		0.14	%		121,029			1.4	%		(0.02	)%
Subordinated debentures		9,399		0.8	%		4.55	%		9,198		0.8	%		5.39	%		201			(0.1	)%		(0.84	)%
Securities sold under agreements to repurchase		11,951		1.0	%		0.27	%		25,853		2.3	%		0.30	%		(13,902	)		(1.3	)%		(0.03	)%
Total Borrowings		21,350		1.7	%		2.18	%		35,051		3.1	%		1.65	%		(13,701	)		(1.4	)%		(0.53	)%
Total funding sources	$	1,228,811		100.0	%		0.15	%	$	1,121,483		100.0	%		0.19	%		107,328						(0.04	)%

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Volume and Rate Variance Analysis of Net Interest Income

Three Months Ended March 31, 2014 and 2013

The following table presents the dollar amount of changes in interest income and interest expense due to changes in average balances of interest-earning assets and interest-bearing liabilities and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (i.e. changes in average balance multiplied by prior period rate) and (ii) changes in rate (i.e. changes in rate multiplied by prior period average balance). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the absolute dollar amounts of the changes due to volume and rate (dollars in thousands):

��	Three Months Ended March 31, 2014 vs. 2013 Increase (Decrease) Due To
	Volume			Rate			Total
Interest Income:
Loans	$	1,119		$	(620	)	$	499
Deposits in other financial institutions		38			13			51
Investment securities		(33	)		50			17
Total interest income		1,124			(557	)		567
Interest Expense:
Interest bearing transaction accounts		11			(5	)		6
Money market and savings deposits		18			(44	)		(26	)
Certificates of deposit		(14	)		(6	)		(20	)
Total deposits		15			(55	)		(40	)
Subordinated debentures		3			(20	)		(17	)
Securities sold under agreements to repurchase		(10	)		(1	)		(11	)
Total Borrowings		(7	)		(21	)		(28	)
Total interest expense		8			(76	)		(68	)
Net Interest Income	$	1,116		$	(481	)	$	635

Non-interest Expense

The following table sets forth certain information with respect to the Company’s non-interest expense for the periods indicated (dollars in thousands):

	Three Months Ended March 31,				Increase (Decrease)
	2014		2013		$			%
Salaries and employee benefits	$	5,605	$	5,417	$	188			3.5	%
Stock based compensation expense		408		258		150			58.1	%
Occupancy		986		1,064		(78	)		(7.3	)%
Data processing		475		482		(7	)		(1.5	)%
Legal and professional		523		507		16			3.2	%
FDIC deposit assessment		221		246		(25	)		(10.2	)%
Merger related expenses		0		43		(43	)		(100.0	)%
OREO valuation write-downs and expenses		0		26		(26	)		(100.0	)%
Office services expense		264		266		(2	)		(0.8	)%
Other operating expenses		1,067		1,000		67			6.7	%
Total Non-Interest Expense	$	9,549	$	9,309	$	240			2.6	%

Non-interest expense for the three months ended March 31, 2014 increased by $240,000 to $9.5 million compared to the same period of 2013. For a more detailed discussion of these fluctuations see theOperations Performance Summary – Three Months Ended March 31, 2014 and 2013.

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FINANCIAL CONDITION

Balance Sheet Analysis

The following table presents balance sheets as of the dates indicated and the dollar and percentage changes between the periods (dollars in thousands):

	March 31, 2014			December 31, 2013			Increase (Decrease)
							$			%
Assets
Cash and cash equivalents	$	206,994		$	241,287		$	(34,293	)		(14.2	)%
Certificates of deposit in financial institutions		63,107			60,307			2,800			4.6	%
Investment securities available-for-sale, at fair value		102,155			106,488			(4,333	)		(4.1	)%
Loans:
Loans		945,507			933,194			12,313			1.3	%
Allowance for loan loss		(10,823	)		(10,603	)		(220	)		2.1	%
Net loans		934,684			922,591			12,093			1.3	%
Goodwill		12,292			12,292			0			0.0	%
Bank owned life insurance		21,352			21,200			152			0.7	%
Other assets		41,779			43,651			(1,872	)		(4.3	)%
Total assets	$	1,382,363		$	1,407,816		$	(25,453	)		(1.8	)%
Liabilities
Deposits:
Non-interest bearing demand deposits	$	651,645		$	632,192		$	19,453			3.1	%
Interest bearing transaction accounts		124,045			155,735			(31,690	)		(20.3	)%
Money market and savings deposits		365,405			380,915			(15,510	)		(4.1	)%
Certificates of deposit		62,303			63,581			(1,278	)		(2.0	)%
Total deposits		1,203,398			1,232,423			(29,025	)		(2.4	)%
Securities sold under agreements to repurchase		11,965			11,141			824			7.4	%
Subordinated debentures, net		9,419			9,379			40			0.4
Accrued interest payable and other liabilities		15,323			16,949			(1,626	)		(9.6	)%
Total liabilities		1,240,105			1,269,892			(29,787	)		(2.3	)%
Shareholders’ Equity
Common stock		122,697			121,675			1,022			0.8	%
Additional paid-in capital		8,865			8,377			488			5.8	%
Retained earnings		10,743			8,077			2,666			33.0	%
Accumulated other comprehensive income		(47	)		(205	)		158			(77.1	)%
Total shareholders’ equity		142,258			137,924			4,334			3.1	%
Total liabilities and shareholders’ equity	$	1,382,363		$	1,407,816		$	(25,453	)		(1.8	)%

Total assets decreased by $25 million or 1.8%, during the three months ended March 31, 2014. The decline was the result of a reduction in interest bearing liabilities during the quarter.

During the first quarter of 2014, the Company had $24 million of net organic loan growth, primarily from new relationships, which was partially offset by $12 million in loan run-off from acquired portfolios from COSB and PC Bancorp. Total liabilities decreased by $30 million during the quarter ended March 31, 2014, primarily due to a $48 million decrease in interest bearing deposits, partially offset by a $19 million increase in non-interest bearing deposits. The Company’s non-interest bearing demand deposits represented 54% of total deposits at March 31, 2014, compared to 51% at December 31, 2013. The result was a total decline in deposit liabilities of $29 million. The decrease in interest bearing deposit liabilities was related primarily to real estate investors, who had accumulated interest bearing deposits with the Company over the fourth quarter and began deploying a portion of their funds for opportunistic real estate purchases during the first quarter of 2014. These same customers have continued to maintain their business relationship with the Company. In addition, one of the Company’s long standing deposit customers transferred approximately $18.4 million of interest-bearing deposits out of the Bank to be managed by an investment advisor. The Company, as part of its long-term business plan, has been focused on attracting low cost deposits including non-interest bearing deposits and continued to do so during the quarter ended March 31, 2014.

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Shareholders’ equity increased by $4.3 million to $142.3 million, during the quarter ended March 31, 2014, primarily due to net income of $2.7 million, the exercise of employee stock options of $1.0 million, stock compensation expense of $408,000, the increase in other comprehensive income of $158,000 and excess tax benefits of $266,000.

Lending

The Company’s loan origination and lending activities continue to be focused primarily on direct contact with its borrowers through the Company’s relationship managers and/or executive officers. Total loans were $946 million at March 31, 2014, an increase of $12.3 million or 1.3% from $933 million at December 31, 2013. The Company had approximately $24.1 million of net organic loan growth which was partially offset by approximately $11.8 million in loan run-off from the acquired loan portfolios. The increase in total loans from the end of the prior quarter included a $14.4 million increase in the other nonresidential real estate properties portfolio, a $9.6 million increase in the construction, land development and other land portfolio, and a $6.1 million increase in the multi-family properties portfolio.

The net growth in the Company’s other nonresidential real estate properties portfolio of approximately $14.4 million during the first quarter of 2014 was primarily attributable to two loans. The first loan was originated to refinance a retail center in the Company’s footprint and has a balance that represents a loan-to-value of less than fifty percent. The second loan represents a new customer relationship for the Company with a borrower to facilitate the purchase of a hotel near an Orange County entertainment center, with plans to redevelop the property.

The increase in the construction, land development and other land portfolio of $9.6 million is related to the development of a property located in Los Angeles by a real estate developer who is a well-known and long-time customer of the Bank.

We continue to establish new relationships and expand our current business, as evidenced by our increased commercial line of credit commitments, which are up 17% from last year’s first quarter and more than six percent from December 31, 2013; however due to the dynamic nature of commercial and industrial lending, actual credit utilization does experience ebbs and flows. The Company’s commercial and industrial line of credit utilization was approximately 42% as of March 31, 2014 and 49% as of December 31, 2013. The Company experienced a spike in line utilization at December 31, 2013 as a result of several of our smaller businesses drawing on their lines of credit at year end and then paying down their lines during the first quarter. This kind of cyclical activity occurs annually around year-end and appears to be a reoccurring trend.

A high proportion of the Company’s first quarter loan production and origination occurred late in the first quarter of 2014, which resulted in the total end of period loans of $946 million, approximately $23 million higher than the average loan portfolio of $923 million during the first quarter of 2014.

The Company had 34 commercial banking relationship managers and 5 commercial real estate relationship managers at March 31, 2014. This compares with 35 commercial banking relationship managers and 5 commercial real estate relationship managers at December 31, 2013. The Company’s credit approval process includes an examination of the collateral, cash flow, and debt service coverage of the loan, as well as the financial condition and credit references of the borrower. The Company’s senior management is actively involved in its lending activities and collateral valuation and review process and the Company obtains independent third party appraisals of real property securing commercial real estate loans, as required by applicable federal and state laws and regulations. There is also a loan committee comprised of senior management that reviews problem loans.

The Company believes that it carefully manages credit risk in its loan portfolio and uses a variety of policy guidelines and analytical tools to achieve its asset quality objectives.

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Allowance for Loan Loss

The allowance for loan loss increased by $220,000, to $10.8 million during the quarter ended March 31, 2014, due to a provision for loan losses of $75,000 and recoveries of $145,000. There were no loan charge-offs during the quarter. The allowance for loan loss as a percentage of total loans was 1.14% at both March 31, 2014 and December 31, 2013. The allowance for loan loss as a percentage of loans (excluding loan balances and the related allowance for loan loss on loans acquired through acquisition) was 1.48% and 1.50%, respectively, at March 31, 2014 and December 31, 2013. The decrease in the allowance ratio related to organic loans was directly attributable to improvements in the economic conditions within the Company’s markets, as well as a reduction in non-accrual loans.

The Company’s management considered the following factors in evaluating the allowance for loan loss at March 31, 2014:

• During the three months ended March 31, 2014 there were loan recoveries of $145,000

• There were no loan charge-offs during the three months ended March 31, 2014

• There were twenty-six non-accrual loans totaling $8.2 million at March 31, 2014

• The overall growth and composition of the loan portfolio

• Changes to the overall economic conditions within the markets in which the Company makes loans

• Concentrations within the loan portfolio, as well as risk conditions within its commercial and industrial loan portfolio

• The remaining fair value adjustments on loans acquired through acquisition with special attention to the fair value adjustments associated with the purchased credit impaired loans

Management has considered various material elements of potential risk within the loan portfolio, including classified credits, pools of loans with similar characteristics, economic factors, trends in the loan portfolio and modification and changes in the Company’s lending policies, procedures and underwriting criteria. In addition, management recognized the potential for unforeseen events to occur when evaluating the qualitative factors in all categories of its analysis.

The Company analyzes historical net charge-offs in various loan portfolio segments when evaluating the reserves. For loan segments without previous loss experience, the analysis is adjusted to reflect regulatory peer group loss experience in those loan segments. The loss analysis is then adjusted for qualitative factors that may have an impact on loss experience in the particular loan segments.

The Allowance and the reserve for unfunded loan commitments are significant estimates that can and do change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers and applicable economic and environmental conditions, among other factors. In considering all of the above factors, management believes that the Allowance at March 31, 2014 is adequate. Although the Company maintains its Allowance at a level which it considers adequate to provide for probable charge-offs, there can be no assurance that such charge-offs will not exceed the estimated amounts, thereby adversely affecting future results of operations.

Loans acquired through acquisition are recorded at estimated fair value on their purchase date without a carryover of the related Allowance. Loans acquired with deteriorated credit quality are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect principal and interest payments according to contractual terms. These loans are accounted for under ASC Subtopic 310-30Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and non-accrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the credit loss or non accretable yield. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

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The following table is a summary of the activity for the allowance for loan loss as of the dates and for the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2014			2013
Allowance for loan loss at beginning of period	$	10,603		$	8,803
Provision for loan losses		75			134
Net (charge-offs) recoveries:
Charge-offs		0			(121	)
Recoveries		145			25
Total net (charge-offs) recoveries		145			(96	)
Allowance for loan loss at end of period	$	10,823		$	8,841
Net (charge-offs) recoveries to average loans		0.02	%		(0.01	)%

	March 31, 2014			December 31, 2013
Allowance for loan loss to total loans		1.14	%		1.14	%
Allowance for loan loss to total loans accounted for at historical cost, which excludes loan balances and the related allowance for loans acquired through acquisition		1.48	%		1.50	%
Allowance for loan loss to total non-accrual loans		131.6	%		111.0	%
Allowance for loan loss to non-accrual loans, excludes non-accrual purchased loans acquired through acquisition and related allowance		682.0	%		639.8	%

The following is a summary of information pertaining to impaired loans excluding purchased credit impaired loans, non-accrual loans, and troubled debt restructured loans, for the dates indicated (dollars in thousands):

	March 31, 2014		December 31, 2013
Impaired loans with a valuation allowance	$	100	$	100
Impaired loans without a valuation allowance		6,117		6,220
Total impaired loans (1)	$	6,217	$	6,320
Valuation allowance related to impaired loans	$	3	$	4
Loans on non-accrual status (2)	$	8,227	$	9,556
Troubled debt restructured loans	$	2,678	$	2,714

	Three Months Ended March 31,
	2014		2013
Average recorded investment in impaired loans	$	6,286	$	5,653
Interest foregone on impaired loans	$	171	$	90
Cash collections applied to reduce principal balance	$	108	$	42
Interest income recognized on cash collections	$	—	$	—

(1) This balance excludes purchased credit impaired loans. Purchased credit impaired loans are loans acquired that had evidence of deterioration in credit quality since origination. The fair value of these loans as of acquisition includes estimates of credit losses.

(2) This balance includes purchased credit impaired loans of $2.0 million and $3.2 million as of March 31, 2014 and December 31, 2013, respectively.

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LIQUIDITY

The Company’s primary long term source of funding has come from the liability side of the balance sheet and has historically been through the growth in non-interest bearing and interest bearing core deposits from its customers. Additional sources of funds from the Company’s asset side of the balance sheet have included Federal Funds sold, interest-earning deposits with other financial institutions, balances maintained with the Federal Reserve Bank, short term certificates of deposit in other financial institutions and payments of principal and interest on loans and investment securities. While maturities and scheduled principal amortization on loans are a reasonably predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition.

As an additional source of liquidity, the Company maintains credit facilities, “Fed Funds Borrowing Lines,” of $54.5 million with its primary correspondent banks for the purchase of overnight Federal funds. The lines are subject to availability of funds and have restrictions as to the number of days and length used during a month, $5 million of these credit facilities require the pledging of investment securities collateral.

The Company has established a secured credit facility with the FHLB of San Francisco which allows the Bank to borrow up to 25% of the Bank’s total assets, which equates to a credit line of approximately $351.7 million at March 31, 2014. The Company currently has no outstanding borrowings with the FHLB. As of March 31, 2014, the Company had $568 million of loan collateral pledged with the FHLB. This level of loan collateral would provide the Company with $227 million in borrowing capacity. Any amount of borrowings in excess of the $227 million would require the Company to pledge additional collateral. In addition the Company must maintain a certain investment in the common stock of the FHLB. The Company’s investment in the common stock of the FHLB is $4.7 million at March 31, 2014. This level of capital would allow the Company to borrow up to $101 million. Any advances from the FHLB in excess of the $101 million would require additional purchases of FHLB common stock. The Company had no securities pledged with the FHLB at March 31, 2014.

The Company maintains a secured credit facility with the Federal Reserve Bank of San Francisco (“FRB”) which is collateralized by investment securities pledged with the FRB. At March 31, 2014, the Company’s available borrowing capacity was $4.3 million.

The Company maintains investments in short term certificates of deposit with other financial institutions, with an average remaining maturity of approximately 4.4 months, with various balances maturing monthly. The Company had balances of $63.1 million and $60.3 million at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014, $2.7 million of the Company’s certificates of deposit with other financial institutions were pledged as collateral as credit support for the interest rate swap contracts and are not available as a source of liquidity.

As of March 31, 2014, the Company’s primary overnight source of liquidity consisted of cash and cash equivalents of $207 million which compared to $241 million at December 31, 2013. Of the $207 million in cash and cash equivalents at March 31, 2014, approximately $142 million was with the Federal Reserve Bank. At March 31, 2014, $1.3 million of the Company’s due from bank balances was pledged as collateral as credit support for the interest rate swap contracts and is not available as a source of liquidity.

The Company’s commitments to extend credit (off-balance sheet liquidity risk) are agreements to lend funds to customers as long as there are no violations as established in the loan agreement. Many of the commitments are expected to expire without being drawn upon, and as such, the total commitment amounts do not necessarily represent future cash requirements. Financial instruments with off-balance sheet risk for the Company include both undisbursed loan commitments, as well as undisbursed letters of credit. The Company’s exposure to extend credit was $386 million and $346 million at March 31, 2014 and December 31, 2013, respectively.

The holding company liquidity on a stand-alone basis was $5.3 million and $4.3 million, in cash on deposit at the Bank, at March 31, 2014 and December 31, 2013, respectively. Management believes this amount of cash is currently sufficient to fund the holding company’s cash flow needs over at least the next twelve to twenty four months.

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DIVIDENDS

To date, the Company has not paid any cash dividends. Payment of stock or cash dividends in the future will depend upon earnings, liquidity, financial condition and other factors deemed relevant by our Board of Directors. Notification to the FRB is required prior to declaring and paying a dividend to shareholders that exceeds earnings for the period for which the dividend is being paid. This notification requirement is included in regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality, financial condition, capital adequacy, liquidity, future earnings projections, capital planning and credit concentrations. Should the FRB object to dividend payments, the Company would be precluded from declaring and paying dividends, until approval is received or the Company no longer needs to provide notice under applicable guidance.

California law also limits the Company’s ability to pay dividends. A corporation may make a distribution/dividend from retained earnings to the extent that the retained earnings exceed (a) the amount of the distribution plus (b) the amount if any, of dividends in arrears on shares with preferential dividend rights. Alternatively, a corporation may make a distribution/dividend, if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution/dividend.

The Bank is subject to certain restrictions on the amount of dividends that may be declared without regulatory approval. Such dividends shall not exceed the lesser of the Bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). In addition, the Bank may not pay dividends that would result in its capital being reduced below the minimum requirements shown above for capital adequacy purposes.

As of March 31, 2014, both CU Bancorp “the holding company” and the Bank had positive retained earnings and positive net income that would allow either of them to declare and pay a dividend as of March 31, 2014. However, neither the holding company nor the Bank has plans to declare and pay a cash dividend at the current time.

The Company has a program to repurchase a portion of an employee outstanding restricted stock upon the vesting of this restricted stock, but only in amounts necessary to cover the employee tax withholding obligations at the option of the restricted stockholder (employee). The Company had this program in place during all of 2013 and through the first quarter of 2014. This program was designed to provide the Bank’s employees with the financial ability to cover their tax liability obligation associated with the vesting of their restricted stock at the date of vesting. These transactions under the State of California Corporations Code are defined as distributions to shareholders. Approval of this program would be necessary from the Department of Business Oversight “DBO”, if the Company had negative retained earnings, or insufficient earnings to support the dividend. The Company currently plans to provide this program to its employees during the remainder of 2014.

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CAPITAL RESOURCES

The Company’s objective is to maintain a level of capital that will support sustained asset and loan growth, provide for anticipated credit risks, and ensure that regulatory guidelines and industry standards are met. The Company and the Bank are subject to certain minimum capital adequacy and minimum well capitalized category guidelines adopted by the FRB and the FDIC. These guidelines relate primarily to the Tier 1 leverage ratio, the Tier 1 risk-based capital ratio, and the Total risk-based capital ratio. The minimum well capitalized required ratios are 5.00% Tier 1 leverage, 6.00% Tier 1 risk-based capital and 10.00% total risk-based capital. The minimum capital adequacy required ratios are 4.00% Tier 1 leverage, 4.00% Tier 1 risk-based capital and 8.00% total risk-based capital. At March 31, 2014, the Company and the Bank exceeded the required ratios for minimum capital adequacy and classification as well capitalized.

The following tables present the regulatory capital ratios and data of the Company and the Bank as of the dates indicated (dollars in thousands):

CU Bancorp

	March 31, 2014			December 31, 2013
Regulatory Capital Ratios:
Tier 1 leverage ratio		10.19	%		9.57	%
Tier 1 risk-based capital ratio		12.02	%		11.84	%
Total risk-based capital ratio		12.99	%		12.80	%
Regulatory Capital Data:
Tier 1 capital	$	139,687		$	134,440
Total risk-based capital	$	150,880		$	145,372
Average total assets	$	1,370,855		$	1,404,293
Risk-weighted assets	$	1,161,786		$	1,135,552

California United Bank

	March 31, 2014			December 31, 2013
Regulatory Capital Ratios:
Tier 1 leverage ratio		9.44	%		8.90	%
Tier 1 risk-based capital ratio		11.14	%		10.99	%
Total risk-based capital ratio		12.10	%		11.96	%
Regulatory Capital Data:
Tier 1 capital	$	129,329		$	124,750
Total risk-based capital	$	140,522		$	135,682
Average total assets	$	1,370,083		$	1,402,041
Risk-weighted assets	$	1,161,020		$	1,134,653

Total Tier 1 capital of the Company increased by $5.2 million or 3.9% to $139.7 million during the three months ended March 31, 2014. The increase in the Company’s Tier 1 leverage ratio during the three months ended March 31, 2014, was primarily the result of the following: first quarter earnings increased capital by $2.7 million, the exercise of employee stock options increased capital by $1.0 million, stock based compensation expense increased capital by $408,000, the excess tax benefits related to stock based compensation increased capital by $266,000, an increase in other comprehensive income (the increase in unrealized gains or the decrease in unrealized losses on investment securities) increased capital by $158,000 and a decrease in the amount of disallowed deferred tax that is subtracted from regulatory capital increased capital by approximately $1.0 million. For regulatory capital calculations, a portion of the Company’s deferred tax asset may be disallowed based on the regulatory capital disallowance calculation. The disallowed deferred tax asset that was subtracted from regulatory capital during the first quarter of 2014 was $97,000. The Company’s total average assets used in the calculation of Tier 1 leverage ratio decreased by $33 million or 2.4% in the quarter ending March 31, 2014.

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Total risk-based capital of the Company increased by $5.5 million or 3.8% to $150.9 million during the three months ended March 31, 2014. The major component elements that resulted in the increase in the Company’s Tier 1 risk-based capital, as described above were the same components that lead to the increases in the Total risk-based capital during the three months ended March 31, 2014. The Company’s Risk-weighted assets used in the calculation of Total risk-based capital ratio increased by $26.2 million or 2.3%.

Total Tier 1 capital at the Bank increased by $4.6 million or 3.7% to $129.3 million during the three months ended March 31, 2014. The increase in the Bank’s Tier 1 leverage ratio during the three months ended March 31, 2014 was primarily the result of the Bank’s first quarter earnings of $2.8 million, stock based compensation expense increased capital by $408,000, excess tax benefits related to stock based compensation increased capital by $266,000, an increase in other comprehensive income (the increase in unrealized gains or the decrease in unrealized losses on investment securities) increased capital by $158,000 and a decrease in the amount of disallowed deferred tax that is subtracted from regulatory capital increased capital by approximately $1.0 million. For regulatory capital calculations a portion of the Company’s deferred tax asset may be disallowed based on the regulatory capital disallowance calculation. The disallowed deferred tax asset that was subtracted from regulatory capital as of March 31, 2014 was $111,000. The Bank’s Average total assets used in the calculation of Tier 1 leverage ratio decreased by $32 million or 2.5%.

Total risk-based capital at the Bank increased by $4.8 million or 3.6% to $140.5 million during the three months ended March 31, 2014. The major component elements that resulted in the increase in the Bank’s Tier 1 risk-based capital as described above were the same components that lead to the increases in the Total risk-based capital ratios during the three months ended March 31, 2014. The Bank’s Risked weighted assets used in the calculation of Total risk-based capital ratio increased by $26 million or 2.3%.

The primary impact and change in the capital ratios of both the Company and the Bank from December 31, 2013 to March 31, 2014 were the first quarter earnings and the reduction in the amount of disallowed deferred tax assets.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. To mitigate interest rate risk, the structure of the Company’s balance sheet is managed with the objective of correlating the movements of interest rates on loans and investments with those of deposits and borrowings.

The Company’s exposure to interest rate risk is reviewed by the Company’s Management Asset/Liability Committee formally on a quarterly basis and on an ongoing basis. The main tool used to monitor interest rate risk is a dynamic simulation model that quantifies the estimated exposure of net interest income to sustained interest rate changes. The simulation model estimates the impact of changing interest rates on the interest income from all interest-earning assets and the interest expense paid on all interest-bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to Company policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 100 and 400 basis point upward and 200 basis point downward shift in interest rates.

An additional tool used by management to monitor interest rate risk includes the standard GAP report, which measures the estimated difference between the amount of interest-sensitive assets and interest-sensitive liabilities anticipated to mature or reprice during future periods, based on certain assumptions. In general, the GAP report presents the carrying amounts of these assets and liabilities in a particular period based on either the date that they first reprice, for variable rate products, or the maturity date, for fixed rate products.

At March 31, 2014, the Company had twenty three pay-fixed, receive-variable interest rate contracts that were designed to convert fixed rate loans into variable rate loans. Twenty one of these swap contacts are designated as fair value hedges. For additional information on these interest rate contracts, see Note 9 – Derivative Financial Instruments located in Part I, Item 1. – Notes to the Consolidated Financial Statements.

The Company has no market risk sensitive instruments held for trading purposes. Management believes that the Company’s market risk is reasonable at this time.

The following depicts the Company’s net interest income sensitivity analysis as of March 31, 2014 (dollars in thousands):

Simulated Rate Changes	Estimated Net Interest Income Sensitivity
+ 400 basis points	38.1%	$16,309
+ 100 basis points	8.7%	$ 3,721
- 200 basis points (1)	(3.8)%	$(1,617)

The Company is currently asset sensitive. The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

Variable rate loans make up 70% of the loan portfolio. However, the Company has floors on some of its loans. At March 31, 2014, 49% of variable rate loans are at their floor, and thus an increase in the underlying index may not necessarily result in an increase in the coupon until the loan index plus margin exceeds that floor.

The Company’s static GAP as of March 31, 2014, is not materially different from that reported at December 31, 2013 and is thus not included in this 10Q. See the Company’s Static Gap reports under “Item7A-Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2013 Annual Report on Form 10-K.

(1) The simulated rate change under the -200 basis points reflected above actually reflects only a maximum negative 25 basis points or less decline in actual rates based on the current targeted Fed Funds target rate by the government of 0% to 0.25%. The -200 simulation model reflects repricing of liabilities of less than 0.25% due to the Company paying significantly less than 25 basis points on its deposit accounts, and higher downward repricing of the Company’s interest-earning assets in the -200 simulation model.

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ITEM 4. Controls and Procedures

(a) As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”) have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (as adopted by the FDIC), are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management, including the CEO and CFO, does not expect that the Company’s Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their controls evaluation, the CEO and CFO have concluded that the Company’s Disclosure Controls are effective at a reasonable assurance level.

(b) There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Bank’s 2013 Annual Report onForm 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

(a) None.

(b) None.

ITEM 6. Exhibits

(a) Index to Exhibits

Exhibit Number	Description
10.1*D	2014 CU Bancorp Executive Performance Incentive Plan Amendment #1 – April 24, 2014 (Amendment to Exhibit 10.6 in the Company’s 2013 Form 10-K)
31.1D	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2D	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1D	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2D	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSD	XBRL Instance Document
101.SCHD	XBRL Taxonomy Extension Schema Document
101.CALD	XBRL Taxonomy Calculation Linkbase Document
101.LABD	XBRL Taxonomy Label Linkbase Document
101 DEFD	XBRL Taxonomy Extension Definition Linkbase Document
101.PRED	XBRL Taxonomy Presentation Linkbase Document

* Refers to management contracts or compensatory plans or arrangements

^D  Attached hereto

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SIGNATURES

Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CU BANCORP

Date:May 9, 2014	/s/    DAVID I. RAINER
	David I. Rainer
	President and Chief Executive Officer
Date:May 9, 2014	/s/    KAREN A. SCHOENBAUM
	Karen A. Schoenbaum
	Executive Vice President and Chief Financial Officer

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