Table of Contents
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, 2015
¨ | 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)
Commission File Number 001-35683
California | 90-0779788 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
818 West 7th Street, Suite 220 Los Angeles, California | 90017 | |
(Address of principal executive offices) | (Zip Code) |
(213) 430-7000
(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 6, 2015 the number of shares outstanding of the registrant’s no par value Common Stock was 16,800,067.
Table of Contents
CU BANCORP
March 31, 2015 FORM 10-Q
PART I. FINANCIAL INFORMATION |
| |||||||
ITEM 1. | Financial Statements | |||||||
Consolidated Balance Sheets | 3 | |||||||
Consolidated Statements of Income | 4 | |||||||
5 | ||||||||
6 | ||||||||
Consolidated Statements of Cash Flows | 7 | |||||||
9 | ||||||||
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 41 | ||||||
Overview | 43 | |||||||
Results of Operations | 47 | |||||||
Financial Condition | 54 | |||||||
Liquidity | 58 | |||||||
Dividends | 60 | |||||||
Capital Resources | 61 | |||||||
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 64 | ||||||
ITEM 4. | Controls and Procedures | 65 | ||||||
ITEM 1. | Legal Proceedings | 66 | ||||||
ITEM 1A. | Risk Factors | 66 | ||||||
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 66 | ||||||
ITEM 3. | Defaults Upon Senior Securities | 66 | ||||||
ITEM 4. | Mine Safety Disclosures | 66 | ||||||
ITEM 5. | Other Information | 66 | ||||||
ITEM 6. | Exhibits | 66 | ||||||
Signatures | 67 |
Page2 of67
Table of Contents
CU BANCORP
(Dollars in thousands)
March 31, 2015 | December 31, 2014 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 42,570 | $ | 33,996 | ||||
Interest earning deposits in other financial institutions | 200,020 | 98,590 | ||||||
|
|
|
| |||||
Total cash and cash equivalents | 242,590 | 132,586 | ||||||
Certificates of deposit in other financial institutions | 62,954 | 76,433 | ||||||
Investment securities available-for-sale, at fair value | 224,050 | 226,962 | ||||||
Investment securities held-to-maturity, at amortized cost | 46,124 | 47,147 | ||||||
|
|
|
| |||||
Total investment securities | 270,174 | 274,109 | ||||||
Loans | 1,665,277 | 1,624,723 | ||||||
Allowance for loan loss | (13,247 | ) | (12,610 | ) | ||||
|
|
|
| |||||
Net loans | 1,652,030 | 1,612,113 | ||||||
Premises and equipment, net | 5,190 | 5,377 | ||||||
Deferred tax assets, net | 15,589 | 16,504 | ||||||
Other real estate owned, net | 850 | 850 | ||||||
Goodwill | 63,950 | 63,950 | ||||||
Core deposit and leasehold right intangibles | 9,078 | 9,547 | ||||||
Bank owned life insurance | 49,028 | 38,732 | ||||||
Accrued interest receivable and other assets | 35,527 | 34,916 | ||||||
|
|
|
| |||||
Total Assets | $ | 2,406,960 | $ | 2,265,117 | ||||
|
|
|
| |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Non-interest bearing demand deposits | $ | 1,110,323 | $ | 1,032,634 | ||||
Interest bearing transaction accounts | 251,409 | 206,544 | ||||||
Money market and savings deposits | 660,313 | 643,675 | ||||||
Certificates of deposit | 61,546 | 64,840 | ||||||
|
|
|
| |||||
Total deposits | 2,083,591 | 1,947,693 | ||||||
Securities sold under agreements to repurchase | 10,498 | 9,411 | ||||||
Subordinated debentures, net | 9,578 | 9,538 | ||||||
Accrued interest payable and other liabilities | 18,226 | 19,283 | ||||||
|
|
|
| |||||
Total Liabilities | 2,121,893 | 1,985,925 | ||||||
|
|
|
| |||||
Commitments and Contingencies (Note 14) | — | — | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Serial Preferred Stock – authorized, 50,000,000 shares: Series A, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 16,400 shares authorized, 16,400 shares issued and outstanding at March 31, 2015 and December 31, 2014 | 16,235 | 16,004 | ||||||
Common stock - authorized, 75,000,000 shares no par value, 16,803,664 shares issued and 16,843,664 shares outstanding at March 31, 2015, and 16,683,856 shares issued and outstanding at December 31, 2014 | 226,917 | 226,389 | ||||||
Additional paid-in capital | 20,426 | 19,748 | ||||||
Retained earnings | 20,788 | 16,861 | ||||||
Accumulated other comprehensive income | 701 | 190 | ||||||
|
|
|
| |||||
Total Shareholders’ Equity | 285,067 | 279,192 | ||||||
|
|
|
| |||||
Total Liabilities and Shareholders’ Equity | $ | 2,406,960 | $ | 2,265,117 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page3 of67
Table of Contents
CU BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Interest Income | ||||||||
Interest and fees on loans | $ | 19,906 | $ | 11,924 | ||||
Interest on investment securities | 1,180 | 501 | ||||||
Interest on interest bearing deposits in other financial institutions | 202 | 211 | ||||||
|
|
|
| |||||
Total Interest Income | 21,288 | 12,636 | ||||||
|
|
|
| |||||
Interest Expense | ||||||||
Interest on interest bearing transaction accounts | 100 | 58 | ||||||
Interest on money market and savings deposits | 383 | 234 | ||||||
Interest on certificates of deposit | 51 | 56 | ||||||
Interest on securities sold under agreements to repurchase | 5 | 8 | ||||||
Interest on subordinated debentures | 107 | 107 | ||||||
|
|
|
| |||||
Total Interest Expense | 646 | 463 | ||||||
|
|
|
| |||||
Net Interest Income | 20,642 | 12,173 | ||||||
Provision for loan losses | 1,443 | 75 | ||||||
|
|
|
| |||||
Net Interest Income After Provision For Loan Losses | 19,199 | 12,098 | ||||||
|
|
|
| |||||
Non-Interest Income | ||||||||
Gain on sale of securities, net | — | — | ||||||
Gain on sale of SBA loans, net | 423 | 438 | ||||||
Deposit account service charge income | 1,141 | 630 | ||||||
Other non-interest income | 1,044 | 722 | ||||||
|
|
|
| |||||
Total Non-Interest Income | 2,608 | 1,790 | ||||||
|
|
|
| |||||
Non-Interest Expense | ||||||||
Salaries and employee benefits (includes stock based compensation expense of $513 and $408 for the three months ended March 31, 2015 and 2014, respectively) | 9,151 | 6,013 | ||||||
Occupancy | 1,420 | 986 | ||||||
Data processing | 641 | 475 | ||||||
Legal and professional | 846 | 523 | ||||||
FDIC deposit assessment | 333 | 221 | ||||||
Merger expenses | 240 | — | ||||||
OREO expenses | 6 | — | ||||||
Office services expenses | 414 | 264 | ||||||
Other operating expenses | 1,862 | 1,067 | ||||||
|
|
|
| |||||
Total Non-Interest Expense | 14,913 | 9,549 | ||||||
Net Income Before Provision for Income Tax Expense | 6,894 | 4,339 | ||||||
|
|
|
| |||||
Provision for income tax expense | 2,695 | 1,673 | ||||||
Net Income | 4,199 | 2,666 | ||||||
|
|
|
| |||||
Preferred stock dividends and discount accretion | 272 | — | ||||||
|
|
|
| |||||
Net Income available to common shareholders | $ | 3,927 | $ | 2,666 | ||||
|
|
|
| |||||
Earnings Per Share | ||||||||
Basic earnings per share | $ | 0.24 | $ | 0.25 | ||||
Diluted earnings per share | $ | 0.23 | $ | 0.24 |
The accompanying notes are an integral part of these consolidated financial statements.
Page4 of67
Table of Contents
CU BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Net Income | $ | 4,199 | $ | 2,666 | ||||
Other Comprehensive Income, net of tax: | ||||||||
Net unrealized gains on investment securities arising during the period | 511 | 158 | ||||||
|
|
|
| |||||
Other Comprehensive Income | 511 | 158 | ||||||
|
|
|
| |||||
Comprehensive Income | $ | 4,710 | $ | 2,824 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page5 of67
Table of Contents
CU BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2015
(Unaudited)
(Dollars in thousands)
Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||
Outstanding Shares | Amount | Issued Shares | Amount | Additional Paid in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income | Total Shareholders’ Equity | |||||||||||||||||||||||||
Balance at December 31, 2014 | 16,400 | $ | 16,004 | 16,683,856, | $ | 226,389 | $ | 19,748 | $ | 16,861 | $ | 190 | $ | 279,192 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net issuance of restricted stock | — | — | 70,875 | — | — | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | 56,065 | 528 | — | — | — | 528 | ||||||||||||||||||||||||
Stock based compensation expense related to employee stock options and restricted stock | — | — | — | — | 513 | — | — | 513 | ||||||||||||||||||||||||
Restricted stock repurchase | — | — | (7,132 | ) | — | (146 | ) | — | — | (146 | ) | |||||||||||||||||||||
Excess tax benefit – stock based compensation | — | — | — | — | 311 | — | — | 311 | ||||||||||||||||||||||||
Preferred stock dividends and discount accretion | — | 231 | — | — | — | (272 | ) | — | (41 | ) | ||||||||||||||||||||||
Net income | — | — | — | — | — | 4,199 | — | 4,199 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 511 | 511 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance at March 31, 2015 | 16,400 | $ | 16,235 | 16,803,644 | $ | 226,917 | $ | 20,426 | $ | 20,788 | $ | 701 | $ | 285,067 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page6 of67
Table of Contents
CU BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net income: | $ | 4,199 | $ | 2,666 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,443 | 75 | ||||||
Provision for unfunded loan commitments | 24 | 41 | ||||||
Stock based compensation expense | 513 | 408 | ||||||
Depreciation | 359 | 243 | ||||||
Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs | (1,878 | ) | (1,337 | ) | ||||
Net amortization from investment securities | 740 | 385 | ||||||
Increase in bank owned life insurance | (296 | ) | (152 | ) | ||||
Amortization of core deposit intangibles | 421 | 69 | ||||||
Amortization of time deposit premium | (6 | ) | (13 | ) | ||||
Net amortization of leasehold right intangible asset and liabilities | (15 | ) | 85 | |||||
Accretion of subordinated debenture discount | 40 | 40 | ||||||
Gain on sale of SBA loans, net | (423 | ) | (438 | ) | ||||
Decrease in deferred tax assets | 545 | 635 | ||||||
(Increase) decrease in accrued interest receivable and other assets | (612 | ) | 1,443 | |||||
Decrease in accrued interest payable and other liabilities | (1,751 | ) | (1,508 | ) | ||||
Net excess in tax benefit on stock compensation | (311 | ) | — | |||||
(Increase) Decrease in fair value of derivative swap liability | 1,044 | (244 | ) | |||||
|
|
|
| |||||
Net cash provided by operating activities | 4,036 | 2,398 | ||||||
|
|
|
| |||||
Cash flows from investing activities: | ||||||||
Purchases of available-for-sale investment securities | (5,002 | ) | — | |||||
Proceeds from repayment and maturities from investment securities | 9,079 | 4,216 | ||||||
Loans originated, net of principal payments | (39,059 | ) | (10,393 | ) | ||||
Purchases of premises and equipment | (172 | ) | (628 | ) | ||||
Net (increase) decrease in certificates of deposit in other financial institutions | 13,479 | (2,800 | ) | |||||
Purchase of bank owned life insurance | (10,000 | ) | — | |||||
|
|
|
| |||||
Net cash used in investing activities | (31,675 | ) | (9,605 | ) | ||||
|
|
|
| |||||
Cash flows from financing activities: | ||||||||
Net increase in Non-interest bearing demand deposits | 77,689 | 19,453 | ||||||
Net increase (decrease) in Interest bearing transaction accounts | 44,865 | (31,690 | ) | |||||
Net increase (decrease) in Money market and savings deposits | 16,638 | (15,510 | ) | |||||
Net decrease in Certificates of deposit | (3,288 | ) | (1,265 | ) | ||||
Net increase in Securities sold under agreements to repurchase | 1,087 | 824 | ||||||
Net proceeds from stock options exercised | 528 | 1,022 | ||||||
Restricted stock repurchase | (146 | ) | (186 | ) | ||||
Dividends paid on preferred stock | (41 | ) | — | |||||
Net excess in tax benefit on stock compensation | 311 | 266 | ||||||
|
|
|
| |||||
Net cash provided by (used in) financing activities | 137,643 | (27,086 | ) | |||||
|
|
|
| |||||
Net increase (decrease) in cash and cash equivalents | 110,004 | (34,293 | ) | |||||
Cash and cash equivalents, beginning of period | 132,586 | 241,287 | ||||||
|
|
|
| |||||
Cash and cash equivalents, end of period | $ | 242,590 | $ | 206,994 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
Page7 of67
Table of Contents
CU BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 599 | $ | 436 | ||||
Cash paid during the period for taxes | $ | 1,850 | $ | — | ||||
Supplemental disclosures of non-cash investing activities: | ||||||||
Net increase in unrealized gain or (decrease) in unrealized loss on investment securities, net of tax | $ | 511 | $ | (158 | ) |
Page8 of67
Table of Contents
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 income 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 current headquarters office located in Los Angeles, 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 U.S. generally accepted accounting principles (“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 9 – 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 2014 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 GAAP 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.
Page9 of67
Table of Contents
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 ten full service branch offices located in Los Angeles, Orange, Ventura and San Bernardino counties.
Note 2 - Recent Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. An entity can elect to adopt these amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of this ASU does not have an impact on the Company’s financial position or results of operations.
In June 2014, the FASB issued ASU No. 2014-11,Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures,to address investor concerns about the distinction in generally accepted accounting principles between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. ASU 2014-11 aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions all will be accounted for as secured borrowings. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. ASU 2014-11 also requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Further, the ASU requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes are effective for public companies for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2014. Earlier application for a public company is prohibited, but all other companies and organizations may elect to apply the requirements for interim periods beginning after December 15, 2014. The adoption of this ASU does not have an impact on the Company’s financial position or results of operations.
In August 2014, the FASB issued ASU No. 2014-14,Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.This ASU will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is 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 ASU is effective for annual periods ending after December 15, 2015, and interim periods within annual periods thereafter. An entity can elect a prospective or a modified retrospective transition method, but must use the same transition method that it elected under FASB ASU No. 2014-04,Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Early adoption, including adoption in an interim period, is permitted if the entity already adopted ASU 2014-04. The adoption of this ASU does not have an impact on the Company’s financial position or results of operations.
Page10 of67
Table of Contents
In November 2014, the FASB issued ASU No. 2014-16,Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.This ASU will require an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument issued in the form of a share, including the embedded derivative feature that is being evaluated for separate accounting from the host contract when evaluating whether the host contract is more akin to debt or equity. In evaluating the stated and implied substantive terms and features, the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. Although an individual term or feature may weigh more heavily in the evaluation on the basis of facts and circumstances, an entity should use judgment based on an evaluation of all the relevant terms and features. ASU 2014-16 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the ASU is effective for fiscal years ending after December 15, 2015, and interim periods within fiscal years thereafter. The effects of initially adopting the amendments should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendment is effective. Retrospective application is permitted to all relevant prior periods. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts the amendments in an interim period, any adjustments shall be reflected as of the beginning of the fiscal year that includes that interim period. We do not expect the adoption of this ASU to have an impact on the Company’s financial position or results of operations.
Page11 of67
Table of Contents
Note 3 - Business Combinations
On November 30, 2014, the Company completed the merger with 1st Enterprise Bank (“1st Enterprise”) pursuant to the terms of the Agreement and Plan of Merger dated June 2, 2014, as amended (“Merger Agreement”). 1st Enterprise was merged with and into the Bank, with the Bank continuing as the surviving entity in the merger. Pursuant to the terms and conditions set forth in the Merger Agreement, each outstanding share of 1st Enterprise common stock (other than shares as to which the holder exercised dissenters’ rights) was converted into the right to receive 1.3450 of a share of the CU Bancorp common stock, resulting in 5.2 million shares of CU Bancorp common stock issued. The fair value of the 5.2 million shares of common stock issued as part of the consideration paid ($102.7 million) was determined based on the closing market price ($19.60) of CU Bancorp common stock on November 30, 2014. The 16,400 shares of 1st Enterprise Non-Cumulative Perpetual Preferred Stock, Series D were converted into the right to receive 16,400 shares of CU Bancorp’s Non-Cumulative Perpetual Preferred Stock, Series A (“CU Bancorp Preferred Stock”). The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. As part of the Merger Agreement, CU Bancorp adopted the 1st Enterprise 2006 Stock Incentive Plan, as amended, as its own equity plan and all stock options granted by 1st Enterprise thereunder are exercisable for CU Bancorp common stock on substantially the same terms but adjusted to reflect the exchange ratio set forth in the Merger Agreement. See Note 16 - Stock Options and Restricted Stock, in the Company’s 2014 Form 10-K, for more details. The merger was accounted for by the Company using the acquisition method of accounting. Accordingly, the assets and liabilities of 1st Enterprise were recorded at their respective fair values at acquisition date and represents management’s estimates based on available information.
In connection with the merger, the consideration paid, the assets acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as summarized in the following table (dollars in thousands):
November 30, 2014 | ||||
Assets acquired: | ||||
Cash and due from banks | $ | 8,739 | ||
Interest earning deposits in other financial institutions | 11,554 | |||
Investment securities available-for-sale | 117,407 | |||
Investment securities held-to-maturity | 47,457 | |||
Loans | 553,183 | |||
Premises and equipment, net | 1,830 | |||
Deferred tax asset | 5,682 | |||
Goodwill | 51,658 | |||
Core deposit and leasehold right intangibles | 7,533 | |||
Bank owned life insurance | 16,871 | |||
Accrued interest receivable and other assets | 11,583 | |||
|
| |||
Total assets acquired | $ | 833,497 | ||
|
| |||
Liabilities assumed: | ||||
Deposits | $ | 703,358 | ||
Accrued interest payable and other liabilities | 1,856 | |||
|
| |||
Total liabilities assumed | $ | 705,214 | ||
|
| |||
Total consideration paid: | ||||
CU Bancorp common stock issued | $ | 102,712 | ||
CU Bancorp preferred stock issued | 15,921 | |||
Fair value of 1st Enterprise stock options | 9,561 | |||
Cash paid to a dissenter shareholder | 87 | |||
Cash in lieu of fractional shares paid to 1st Enterprise shareholders | 2 | |||
|
| |||
Total Consideration | $ | 128,283 | ||
|
|
Page12 of67
Table of Contents
1st Enterprise operated as a full-service independent commercial banking institution in the Southern California market with three branches located in downtown Los Angeles, Orange County and the Inland Empire and a loan production office in the San Fernando Valley. 1st Enterprise and the Bank had complementary business models and both had developed strong commercial banking platforms and production capabilities, low-cost deposit bases and robust credit cultures. The merger offers further delivery of sophisticated personal service to their target, small and middle-market business, entrepreneurs, non-profits and professional customers. The merger provides the combined institution with financial benefits that include reduced combined operating expenses and synergies.
The Company expensed approximately $240,000 of merger expenses for the three months ended March 31, 2015 and none for the three months ended March 31, 2014.
The other intangible assets are primarily related to core deposits and are being amortized on an accelerated basis over a period of approximately ten years in proportion to the related estimated benefits. The assets and liabilities of 1st Enterprise were accounted for at fair value and required either a third party analysis or an internal valuation analysis of fair value. An analysis was performed on loans, investment securities, contractual lease obligations, deferred compensation, deposits, premises and equipment, other assets, other liabilities and preferred stock as of the merger date. Balances that were considered to be at fair value at the date of acquisition were cash and cash equivalents, bank owned life insurance, derivatives, other assets (interest receivable), and certain other liabilities (interest payable). The Company made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the merger date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. For tax purposes, acquisition accounting adjustments, including goodwill, are not taxable or deductible.
The Company estimated the fair value for most loans acquired from 1st Enterprise by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, whether loans are fixed, adjustable, interest only or have balloon structures. Other considerations included risk ratings, delinquency history, performance status (accrual or non-accrual) and other relevant factors. The discounted cash flow approach (“DCF”) was used to arrive at the fair value of the loans acquired. Projected cash flows were determined by estimating future credit losses and prepayment rates, which were then discounted to present value at a risk-adjusted discount rate for similar loans.
There was no carryover of 1st Enterprise’s allowance for loan losses associated with the loans acquired as the loans were initially recorded at fair value.
Purchased Credit Impaired (“PCI”) loans are accounted for under Accounting Standards Codification (“ASC”) 310-30 and non-PCI loans are accounted for under ASC 310-20. 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 presents the fair value of loans pursuant to accounting standards for PCI and non-PCI loans as of the 1st Enterprise acquisition date (dollars in thousands):
November 30, 2014 | ||||||||||||
PCI loans | Non-PCI loans | Total | ||||||||||
Contractually required payments | $ | 577 | $ | 569,276 | $ | 569,853 | ||||||
Less: non-accretable difference | (108 | ) | — | (108 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flows expected to be collected (undiscounted) | 469 | 569,276 | 569,745 | |||||||||
Accretable yield | — | (16,562 | ) | (16,562 | ) | |||||||
|
|
|
|
|
| |||||||
Fair value of acquired loans | $ | 469 | $ | 552,714 | $ | 553,183 | ||||||
|
|
|
|
|
|
Page13 of67
Table of Contents
Note 4 - Computation of Book Value and Tangible Book Value per Common Share
Book value per common share was calculated by dividing total shareholders’ equity less preferred stock, 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 tables below present the computation of 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, 2015 | December 31, 2014 | |||||||
Total Shareholders’ Equity | $ | 285,067 | $ | 279,192 | ||||
Less: Preferred stock | 16,235 | 16,004 | ||||||
Less: Goodwill | 63,950 | 63,950 | ||||||
Less: Core deposit and leasehold right intangibles | 9,078 | 9,547 | ||||||
|
|
|
| |||||
Tangible common equity | $ | 195,804 | $ | 189,691 | ||||
|
|
|
| |||||
Common shares issued and outstanding | 16,803,664 | 16,683,856 | ||||||
Book value per common share | $ | 16.00 | $ | 15.78 | ||||
|
|
|
| |||||
Tangible book value per common share | $ | 11.65 | $ | 11.37 | ||||
|
|
|
|
Note 5 - 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, | ||||||||
2015 | 2014 | |||||||
Net Income | $ | 4,199 | $ | 2,666 | ||||
Less: Preferred stock dividends and discount accretion | 272 | — | ||||||
|
|
|
| |||||
Net Income available to common shareholders | $ | 3,927 | $ | 2,666 | ||||
|
|
|
| |||||
Weighted average basic common shares outstanding | 16,408,710 | 10,874,368 | ||||||
Dilutive effect of potential common share issuances from stock options and restricted stock | 439,521 | 220,146 | ||||||
|
|
|
| |||||
Weighted average diluted common shares outstanding | 16,848,231 | 11,094,514 | ||||||
|
|
|
| |||||
Income per common share | ||||||||
Basic | $ | 0.24 | $ | 0.25 | ||||
Diluted | $ | 0.23 | $ | 0.24 | ||||
|
|
|
| |||||
Anti-dilutive shares not included in the calculation of diluted earnings per share | 65,278 | 81,000 |
Page14 of67
Table of Contents
Note 6 - Investment Securities
The investment securities portfolio has been classified into two categories: available-for-sale (“AFS”), and held-to-maturity (“HTM”).
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, 2015 or December 31, 2014, 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, 2015 | Amortized Cost | Gains | Losses | Fair Market Value | ||||||||||||
Available-for-sale: | ||||||||||||||||
U.S. Govt Agency and Sponsored Agency - Note Securities | $ | 1,025 | $ | 4 | $ | — | $ | 1,029 | ||||||||
U.S. Govt Agency - SBA Securities | 51,665 | 682 | 211 | 52,136 | ||||||||||||
U.S. Govt Agency - GNMA Mortgage-Backed Securities | 28,173 | 249 | 168 | 28,254 | ||||||||||||
U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities | 103,379 | 803 | 218 | 103,964 | ||||||||||||
Corporate Securities | 4,036 | 64 | — | 4,100 | ||||||||||||
Municipal Securities | 1,031 | 11 | — | 1,042 | ||||||||||||
Asset Backed Securities | 8,502 | 2 | 39 | 8,465 | ||||||||||||
U.S. Treasury Notes | 25,029 | 31 | — | 25,060 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total available-for-sale | 222,840 | 1,846 | 636 | 224,050 | ||||||||||||
Held-to-maturity: | ||||||||||||||||
Municipal Securities | 46,124 | 272 | 74 | 46,322 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total held-to-maturity | 46,124 | 272 | 74 | 46,322 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment securities | $ | 268,964 | $ | 2,118 | $ | 710 | $ | 270,372 | ||||||||
|
|
|
|
|
|
|
|
Gross Unrealized | ||||||||||||||||
December 31, 2014 | Amortized Cost | Gains | Losses | Fair Market Value | ||||||||||||
Available-for-sale: | ||||||||||||||||
U.S. Govt Agency and Sponsored Agency - Note Securities | $ | 2,036 | $ | 2 | $ | — | $ | 2,038 | ||||||||
U.S. Govt Agency - SBA Securities | 54,062 | 770 | 345 | 54,487 | ||||||||||||
U.S. Govt Agency - GNMA Mortgage-Backed Securities | 29,364 | 255 | 277 | 29,342 | ||||||||||||
U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities | 107,348 | 457 | 577 | 107,228 | ||||||||||||
Corporate Securities | 4,043 | 77 | — | 4,120 | ||||||||||||
Municipal Securities | 1,039 | 11 | — | 1,050 | ||||||||||||
Asset Backed Securities | 8,711 | 1 | 40 | 8,672 | ||||||||||||
U.S. Treasury Notes | 20,031 | — | 6 | 20,025 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total available-for-sale | 226,634 | 1,573 | 1,245 | 226,962 | ||||||||||||
Held-to-maturity: | ||||||||||||||||
Municipal Securities | 47,147 | 169 | 157 | 47,159 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total held-to-maturity | 47,147 | 169 | 157 | 47,159 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment securities | $ | 273,781 | $ | 1,742 | $ | 1,402 | $ | 274,121 | ||||||||
|
|
|
|
|
|
|
|
The Company’s investment securities portfolio at March 31, 2015, consists of U.S. Treasury Notes, U.S. Agency and U.S. Sponsored Agency issued AAA and AA rated investment-grade securities asset backed securities, investment grade corporate bond securities, and municipal securities. At March 31, 2015 and December 31, 2014, securities with a market
Page15 of67
Table of Contents
value of $106.6 million and $89.3 million were pledged as collateral for securities sold under agreements to repurchase, public deposits, outstanding standby letters of credit, bankruptcy deposits, and other purposes as required by various statutes and agreements. See Note 9 – Borrowings and Subordinated Debentures.
The Company had no securities that were classified as other-than-temporarily impaired at March 31, 2015 or December 31, 2014.
The following tables represent 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, 2015 | 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 SBA Securities | $ | 4,337 | $ | 24 | $ | 8,842 | $ | 188 | $ | 13,179 | $ | 212 | ||||||||||||
U.S. Govt. Agency – GNMA Mortgage-Backed Securities | 9,682 | 43 | 8,661 | 125 | 18,343 | 168 | ||||||||||||||||||
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities | 34,308 | 150 | 4,280 | 68 | 38,588 | 218 | ||||||||||||||||||
Asset Backed Securities | 4,855 | 39 | — | — | 4,855 | 39 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily-impaired available-for-sale investment securities | $ | 53,182 | $ | 256 | $ | 21,783 | $ | 381 | $ | 74,965 | $ | 637 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Temporarily-impaired held-to-maturity investment securities: | ||||||||||||||||||||||||
Municipal Securities | $ | 12,635 | $ | 74 | $ | — | $ | — | $ | 12,635 | $ | 74 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily-impaired held-to-maturity investment securities | $ | 12,635 | $ | 74 | $ | — | $ | — | $ | 12,635 | $ | 74 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
< 12 Continuous Months | > 12 Continuous Months | Total | ||||||||||||||||||||||
December 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 SBA Securities | $ | 10,688 | $ | 87 | $ | 10,095 | $ | 258 | $ | 20,783 | $ | 345 | ||||||||||||
U.S. Govt. Agency – GNMA Mortgage-Backed Securities | 12,784 | 65 | 8,784 | 212 | 21,568 | 277 | ||||||||||||||||||
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities | 64,360 | 413 | 6,584 | 164 | 70,944 | 577 | ||||||||||||||||||
Asset Backed Securities | 4,849 | 40 | — | — | 4,849 | 40 | ||||||||||||||||||
U.S Treasury Notes | 20,025 | 6 | — | — | 20,025 | 6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily-impaired available-for-sale investment securities | $ | 112,706 | $ | 611 | $ | 25,463 | $ | 634 | $ | 138,169 | $ | 1,245 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Temporarily-impaired held-to-maturity investment securities: | ||||||||||||||||||||||||
Municipal Securities | $ | 23,966 | $ | 157 | $ | — | $ | — | $ | 23,966 | $ | 157 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily-impaired held-to-maturity investment securities | $ | 23,966 | $ | 157 | $ | — | $ | — | $ | 23,966 | $ | 157 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in each of the above categories are associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuers. Further, the Company does not intend to sell these securities and is not more-likely-than-not to be required to sell the securities before the recovery of its amortized cost basis.
Page16 of67
Table of Contents
The Company did not have any sales of securities during the three months ended March 31, 2015 and 2014.
The amortized cost, estimated fair value and average yield of debt securities at March 31, 2015, are reflected in the table below (dollars in thousands). Maturity categories are determined as follows:
• | U.S. Govt. Agency, U.S. Treasury Notes 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, Asset 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 |
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, 2015 | ||||||||||||
Maturities Schedule of Securities | Amortized Cost | Fair Value | Weighted Average Yield | |||||||||
Available-for-sale: | ||||||||||||
Due through one year | $ | 29,485 | $ | 29,756 | 1.78 | % | ||||||
Due after one year through five years | 100,786 | 101,174 | 1.51 | % | ||||||||
Due after five years through ten years | 60,918 | 61,219 | 1.88 | % | ||||||||
Due after ten years | 31,651 | 31,901 | 2.62 | % | ||||||||
|
|
|
|
|
| |||||||
Total available-for-sale | $ | 222,840 | $ | 224,050 | 1.80 | % | ||||||
Held-to-maturity: | ||||||||||||
Due through one year | $ | 5,771 | $ | 5,772 | 1.54 | % | ||||||
Due after one year through five years | 28,285 | 28,366 | 1.57 | % | ||||||||
Due after five years through ten years | 12,068 | 12,184 | 1.82 | % | ||||||||
|
|
|
|
|
| |||||||
Total held-to-maturity | $ | 46,124 | $ | 46,322 | 1.63 | % | ||||||
|
|
|
|
|
| |||||||
Total investment securities | $ | 268,964 | $ | 270,372 | 1.77 | % | ||||||
|
|
|
|
|
|
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 $8.0 million as of March 31, 2015 and December 31, 2014. See Note 9 - 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, 2014 10-K for additional discussion on the Company’s evaluation and accounting for its investment in FHLB common stock.
Page17 of67
Table of Contents
Note 7 - Loans
The following table presents the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Commercial and Industrial Loans: | $ | 515,593 | $ | 528,517 | ||||
Loans Secured by Real Estate: | ||||||||
Owner-Occupied Nonresidential Properties | 352,071 | 339,309 | ||||||
Other Nonresidential Properties | 508,043 | 481,517 | ||||||
Construction, Land Development and Other Land | 79,696 | 72,223 | ||||||
1-4 Family Residential Properties | 128,609 | 121,985 | ||||||
Multifamily Residential Properties | 53,840 | 52,813 | ||||||
|
|
|
| |||||
Total Loans Secured by Real Estate | 1,122,259 | 1,067,847 | ||||||
|
|
|
| |||||
Other Loans: | 27,425 | 28,359 | ||||||
|
|
|
| |||||
Total Loans | $ | 1,665,277 | $ | 1,624,723 | ||||
|
|
|
|
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, | December 31, | |||||||
2015 | 2014 | |||||||
Real Estate | $ | 779,433 | $ | 744,663 | ||||
Manufacturing | 164,410 | 161,233 | ||||||
Wholesale | 120,931 | 124,336 | ||||||
Construction | 119,844 | 113,763 | ||||||
Finance | 101,258 | 96,074 | ||||||
Hotel/Lodging | 90,622 | 88,269 | ||||||
Professional Services | 55,734 | 64,215 | ||||||
Other Services | 45,659 | 45,781 | ||||||
Healthcare | 51,267 | 43,917 | ||||||
Retail | 37,315 | 35,503 | ||||||
Administrative Management | 25,758 | 28,016 | ||||||
Restaurant/Food Service | 25,217 | 24,525 | ||||||
Transportation | 18,523 | 18,158 | ||||||
Information | 8,532 | 15,457 | ||||||
Education | 9,498 | 10,253 | ||||||
Entertainment | 5,560 | 8,284 | ||||||
Other | 5,716 | 2,276 | ||||||
|
|
|
| |||||
Total | $ | 1,665,277 | $ | 1,624,723 | ||||
|
|
|
|
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, 2015 was $108.0 million, of which $75.5 million has been sold. Of the $32.5 million remaining on the Company’s books, $24.5 million is un-guaranteed and $8.0 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.
Page18 of67
Table of Contents
At March 31, 2015, there were no loans classified as held for sale. At March 31, 2015, the balance of SBA 7a loans originated during the quarter is $1.0 million, of which $764,000 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, | ||||||||
2015 | 2014 | |||||||
Allowance for loan loss at beginning of period | $ | 12,610 | $ | 10,603 | ||||
Provision for loan losses | 1,443 | 75 | ||||||
Net (charge-offs) recoveries: | ||||||||
Charge-offs | (890 | ) | — | |||||
Recoveries | 84 | 145 | ||||||
|
|
|
| |||||
Net (charge-offs) recoveries | (806 | ) | 145 | |||||
|
|
|
| |||||
Allowance for loan loss at end of period | $ | 13,247 | $ | 10,823 | ||||
|
|
|
| |||||
Net (charge-offs) recoveries to average loans | (0.05 | )% | 0.02 | % |
March 31, 2015 | December 31, 2014 | |||||||
Allowance for loan loss to total loans | 0.80 | % | 0.78 | % | ||||
Allowance for loan loss to total loans accounted for at historical cost, which excludes purchased loans acquired by acquisition | 1.36 | % | 1.39 | % |
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, 2015 and December 31, 2014 was $703.9 million and $719.6 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 $495,000 and $471,000 at March 31, 2015 and December 31, 2014, respectively.
Page19 of67
Table of Contents
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, 2015 | ||||||||||||||||||||
Allowance for loan loss – Beginning balance | $ | 5,864 | $ | 1,684 | $ | 4,802 | $ | 260 | $ | 12,610 | ||||||||||
Provision for loan losses | 681 | 79 | 635 | 48 | 1,443 | |||||||||||||||
Net (charge-offs) recoveries: | ||||||||||||||||||||
Charge-offs | (890 | ) | — | — | — | (890 | ) | |||||||||||||
Recoveries | 82 | — | 2 | — | 84 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total net (charge-offs) recoveries | (808 | ) | — | 2 | — | (806 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Ending balance | $ | 5,737 | $ | 1,763 | $ | 5,439 | $ | 308 | $ | 13,247 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
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 | — | — | — | — | — | |||||||||||||||
Recoveries | 143 | — | 2 | — | 145 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total net (charge-offs) recoveries | 143 | — | 2 | — | 145 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Ending balance | $ | 5,278 | $ | 1,334 | $ | 4,161 | $ | 50 | $ | 10,823 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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, 2015 | ||||||||||||||||||||
Allowance for loan loss: | ||||||||||||||||||||
Individually evaluated for impairment | $ | 302 | $ | — | $ | — | $ | — | $ | 302 | ||||||||||
Collectively evaluated for impairment | 5,435 | 1,763 | 5,439 | 308 | 12,945 | |||||||||||||||
Purchased credit impaired (loans acquired with deteriorated credit quality) | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Allowance for Loan Loss | $ | 5,737 | $ | 1,763 | $ | 5,439 | $ | 308 | $ | 13,247 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loans receivable: | ||||||||||||||||||||
Individually evaluated for impairment | $ | 3,448 | $ | — | $ | 728 | $ | — | $ | 4,176 | ||||||||||
Collectively evaluated for impairment | 511,741 | 79,696 | 1,040,303 | 27,425 | 1,659,165 | |||||||||||||||
Purchased credit impaired (loans acquired with deteriorated credit quality) | 404 | — | 1,532 | — | 1.936 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Loans Receivable | $ | 515,593 | $ | 79,696 | $ | 1,042,563 | $ | 27,425 | $ | 1,665,277 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Page20 of67
Table of Contents
Commercial and Industrial | Construction, Land Development and Other Land | Commercial and Other Real Estate | Other | Total | ||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Allowance for loan loss: | ||||||||||||||||||||
Individually evaluated for impairment | $ | 222 | $ | — | $ | — | $ | — | $ | 222 | ||||||||||
Collectively evaluated for impairment | 5,642 | 1,684 | 4,802 | 260 | 12,388 | |||||||||||||||
Purchased credit impaired (loans acquired with deteriorated credit quality) | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Allowance for Loan Loss | $ | 5,864 | $ | 1,684 | $ | 4,802 | $ | 260 | $ | 12,610 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loans receivable: | ||||||||||||||||||||
Individually evaluated for impairment | $ | 1,914 | $ | — | $ | 737 | $ | — | $ | 2,651 | ||||||||||
Collectively evaluated for impairment | 525,910 | 72,223 | 993,195 | 28,359 | 1,619,687 | |||||||||||||||
Purchased credit impaired (loans acquired with deteriorated credit quality) | 693 | — | 1,692 | — | 2,.385 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Loans Receivable | $ | 528,517 | $ | 72,223 | $ | 995,624 | $ | 28,359 | $ | 1,624,723 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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. |
Page21 of67
Table of Contents
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, 2015 | ||||||||||||||||||||
Pass | $ | 493,952 | $ | 79,696 | $ | 1,022,219 | $ | 27,425 | $ | 1,623,291 | ||||||||||
Special Mention | 5,214 | — | 8,487 | — | 13,701 | |||||||||||||||
Substandard | 16,427 | — | 11,857 | — | 28,285 | |||||||||||||||
Doubtful | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 515,593 | $ | 79,696 | $ | 1,042,563 | $ | 27,425 | $ | 1,665,277 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
December 31, 2014 | ||||||||||||||||||||
Pass | $ | 502,624 | $ | 72,223 | $ | 977,525 | $ | 28,358 | $ | 1,580,730 | ||||||||||
Special Mention | 8,738 | — | 4,878 | — | 13,616 | |||||||||||||||
Substandard | 17,155 | — | 13,221 | 1 | 30,377 | |||||||||||||||
Doubtful | — | — | 0 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 528,517 | $ | 72,223 | $ | 995,624 | $ | 28,359 | $ | 1,624,723 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Aging 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, 2015 | ||||||||||||||||||||||||||||
Commercial and Industrial | $ | 1 | $ | 229 | $ | — | $ | 230 | $ | 3,849 | $ | 511,514 | $ | 515,593 | ||||||||||||||
Construction, Land Development and Other Land | — | — | — | — | — | 79,696 | 79,696 | |||||||||||||||||||||
Commercial and Other Real Estate | 353 | — | — | 353 | 1,127 | 1,041,083 | 1,042,563 | |||||||||||||||||||||
Other | — | — | — | — | — | 27,425 | 27,425 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 354 | $ | 229 | �� | $ | — | $ | 583 | $ | 4,976 | $ | 1,659,718 | $ | 1,665,277 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2014 | ||||||||||||||||||||||||||||
Commercial and Industrial | $ | 192 | $ | 233 | $ | — | $ | 425 | $ | 2,604 | $ | 525,488 | $ | 528,517 | ||||||||||||||
Construction, Land Development and Other Land | — | — | — | — | — | 72,223 | 72,223 | |||||||||||||||||||||
Commercial and Other Real Estate | 354 | — | — | 354 | 1,305 | 993,965 | 995,624 | |||||||||||||||||||||
Other | — | — | — | — | — | 28,359 | 28,359 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 546 | $ | 233 | $ | — | $ | 779 | $ | 3,909 | $ | 1,620,035 | $ | 1,624,723 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page22 of67
Table of Contents
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, 2015 and December 31, 2014.
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 $1.9 million and $2.4 million at March 31, 2015 and December 31, 2014, respectively.
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||||
With no specific allowance recorded: | ||||||||||||||||||||||||
Commercial and Industrial | $ | 2,074 | $ | 2,282 | $ | — | $ | 520 | $ | 609 | $ | — | ||||||||||||
Commercial and Other Real Estate | 728 | 735 | — | 737 | 739 | — | ||||||||||||||||||
With a specific allowance recorded: | ||||||||||||||||||||||||
Commercial and Industrial | 1,374 | 1,527 | 302 | 1,394 | 1,546 | 222 | ||||||||||||||||||
Total | ||||||||||||||||||||||||
Commercial and Industrial | 3,448 | 3,809 | 302 | 1,914 | 2,155 | 222 | ||||||||||||||||||
Commercial and Other Real Estate | 728 | 735 | — | 737 | 739 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 4,176 | $ | 4,544 | $ | 302 | $ | 2,651 | $ | 2,894 | $ | 222 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
With no specific allowance recorded: | ||||||||||||||||
Commercial and Industrial | $ | 1,025 | $ | — | $ | 2,516 | $ | — | ||||||||
Commercial and Other Real Estate | 728 | — | 3,670 | — | ||||||||||||
With a specific allowance recorded: | ||||||||||||||||
Commercial and Industrial | 1,374 | — | 100 | — | ||||||||||||
Total: | ||||||||||||||||
Commercial and Industrial | 2,399 | — | 2,616 | — | ||||||||||||
Commercial and Other Real Estate | 728 | — | 3,670 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 3,127 | $ | — | 6,286 | $ | — | |||||||||
|
|
|
|
|
|
|
|
Page23 of67
Table of Contents
The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Interest foregone on impaired loans | $ | 69 | $ | 171 | ||||
Cash collections applied to reduce principal balance | $ | 144 | $ | 108 | ||||
Interest income recognized on cash collections | $ | — | $ | — |
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, 2015 and December 31, 2014 (dollars in thousands). These tables include two TDR loans that were purchased credit impaired. As of March 31, 2015, these loans had a recorded investment of $189,000 and unpaid principal balances of $374,000.
Three months ended March 31, 2015 | Recorded Investment | Unpaid Principal Balance | Interest Income Recognized | |||||||||
Commercial and Industrial | $ | 500 | $ | 704 | $ | — | ||||||
Commercial and Other Real Estate | 110 | 112 | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 610 | $ | 816 | $ | — | ||||||
|
|
|
|
|
| |||||||
Year ended December 31, 2014 | Recorded Investment | Unpaid Principal Balance | Interest Income Recognized | |||||||||
Commercial and Industrial | $ | 530 | $ | 719 | $ | — | ||||||
Commercial and Other Real Estate | 114 | 115 | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 644 | $ | 834 | $ | — | ||||||
|
|
|
|
|
|
There were no loans modified or restructured during the three months ended March 31, 2015 or March 31, 2014.
Loans are restructured in an effort to maximize collections. 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, 2015 or March 31, 2014 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months.
Page24 of67
Table of Contents
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, | ||||||||
2015 | 2014 | |||||||
Balance, beginning of period | $ | 21,402 | $ | 7,912 | ||||
Accretion, included in interest income | (1,216 | ) | (562 | ) | ||||
Reclassifications (to) from non-accretable yield | (109 | ) | — | |||||
|
|
|
| |||||
Balance, end of period | $ | 20,077 | $ | 7,350 | ||||
|
|
|
|
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.
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, 2015 | December 31, 2014 | |||||||||||||||
Unpaid Principal Balance | Carrying Value | Unpaid Principal Balance | Carrying Value | |||||||||||||
Commercial and Industrial | $ | 786 | $ | 404 | $ | 1,205 | $ | 693 | ||||||||
Commercial and Other Real Estate | 2,379 | 1,532 | 3,018 | 1,692 | ||||||||||||
Other | — | — | 62 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 3,165 | $ | 1,936 | $ | 4,285 | $ | 2,385 | ||||||||
|
|
|
|
|
|
|
|
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, | ||||||||
2015 | 2014 | |||||||
Balance, beginning of period | $ | 324 | $ | 395 | ||||
Accretion, included in interest income | (19 | ) | (17 | ) | ||||
Reclassifications from non-accretable yield | — | — | ||||||
|
|
|
| |||||
Balance, end of period | $ | 305 | $ | 378 | ||||
|
|
|
|
Page25 of67
Table of Contents
Note 8 - 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, 2015 was $4.0 million, compared to $4.1 million at December 31, 2014. The decrease of $114,000 represents the amortization of the principal balance for the first quarter of 2015. The funding liability for the LIHTC at March 31, 2015 was $2.4 million compared to $2.5 million, at December 31, 2014. See Note 11 – Qualified Affordable Housing Project Investments in the Company’s 10-K financial statements at December 31, 2014 for additional detail regarding the Company’s investment in LIHTC.
Note 9 - 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 6 – Investment Securities, the Company has pledged certain investments as collateral for these agreements. Securities with a fair value of $30.9 million and $32.3 million were pledged to secure the Repos at March 31, 2015 and December 31, 2014, 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, 2015 | ||||||||||||||||
Date Issued | Amount | Interest Rate | Original Term | Maturity Date | ||||||||||||
March 31, 2015 | $ | 10,498 | 0.125% – 0.25% | 1 days | April 01, 2015 | |||||||||||
|
| |||||||||||||||
Total | $ | 10,498 | 0.21% | |||||||||||||
|
| |||||||||||||||
December 31, 2014 | ||||||||||||||||
Date Issued | Amount | Interest Rate | Original Term | Maturity Date | ||||||||||||
December 31, 2014 | $ | 9,411 | 0.13% – 0.25% | 2 days | January 2, 2015 | |||||||||||
|
| |||||||||||||||
Total | $ | 9,411 | 0.20% | |||||||||||||
|
|
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 $566.0 million, which represents approximately 25% of the Bank’s total assets, as reported by the Bank in its December 31, 2014 FFIEC Call Report.
As of March 31, 2015, the Company had $735 million of loan collateral pledged with the FHLB which provides $486.9 million in borrowing capacity. The Company has $22.6 million 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, 2015 or December 31, 2014.
Page26 of67
Table of Contents
Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of March 31, 2015:
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% | 2.321 | % | 06/15/15 | ||||||||
Trust II | 3,093 | 12/23/05 | 03/15/36 | 3 month LIBOR + 1.75% | 2.021 | % | 06/15/15 | |||||||||
Trust III | 3,093 | 06/30/06 | 09/18/36 | 3 month LIBOR + 1.85% | 2.121 | % | 06/15/15 | |||||||||
|
| |||||||||||||||
Subtotal | 12,372 | |||||||||||||||
Unamortized fair value adjustment | (2,794 | ) | ||||||||||||||
|
| |||||||||||||||
Net | $ | 9,578 | ||||||||||||||
|
|
The Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at March 31, 2015. These subordinated debentures were acquired as part of the PC Bancorp merger and were issued to trusts originally established by PC Bancorp, which in turn issued trust preferred securities. 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 2015 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.
Under Dodd Frank, trust preferred securities and cumulative perpetual preferred stock are excluded from Tier 1 capital, unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. CU Bancorp assumed approximately $12.4 million of junior subordinated debt securities issued to various business trust subsidiaries of Premier Commercial Bancorp and funded through the issuance of approximately $12.0 million of floating rate capital trust preferred securities. These junior subordinated debt securities were issued prior to May 19, 2010. Because CU Bancorp has less than $15 billion in assets, the trust preferred securities that CU Bancorp assumed from Premier Commercial Bancorp continue to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements.
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.
Page27 of67
Table of Contents
Note 10 - Derivative Financial Instruments
Derivative Financial Instruments Acquired from 1st Enterprise Bank
The Company is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. At March 31, 2015, the Company has thirteen interest rate swap agreements with customers and thirteen offsetting interest-rate swaps with a counterparty bank that were acquired as a result of the merger with 1st Enterprise on November 30, 2014. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Company a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Company’s earnings.
The structure of the swaps is as follows: The Company enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Company enters into a swap with the counterparty bank to allow the Company to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Company to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations. Our interest rate swap derivatives acquired from 1st Enterprise are subject to a master netting arrangement with one counterparty bank. None of our derivative assets and liabilities are offset in the balance sheet.
The Company believes the risk of loss associated with counterparty borrowers relating to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of the swaps is subject to market and counterparty risk. At March 31, 2015 and December 31, 2014, the total notional amount of the Company’s swaps acquired from 1st Enterprise was $35.4 million and $35.7 million, respectively.
The following table presents the fair values of the asset of the Company’s derivative instruments acquired from 1st Enterprise as of the dates indicated (dollars in thousands):
Asset Derivatives | ||||||||
March 31, 2015 | December 31, 2014 | |||||||
Interest rate swap contracts fair value | $ | 1,156 | $ | 719 | ||||
|
|
|
| |||||
Balance sheet location | | Accrued Interest Receivable and Other Assets | | | Accrued Interest Receivable and Other Assets | |
The following table presents the fair values of the liability of the Company’s derivative instruments acquired from 1st Enterprise as of the dates indicated (dollars in thousands):
Liability Derivatives | ||||||||
March 31, 2015 | December 31, 2014 | |||||||
Interest rate swap contracts fair value | $ | 1,156 | $ | 719 | ||||
|
|
|
| |||||
Balance sheet location |
| Accrued Interest Payable and Other Liabilities |
|
| Accrued Interest Payable and Other Liabilities |
|
Derivative Financial Instruments Acquired from PC Bancorp
At March 31, 2015, the Company also has twenty two 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 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.
Page28 of67
Table of Contents
Prior to the merger with PC Bancorp, the Company did not utilize interest rate swaps to manage its interest rate risk position. All of the interest rate swap contracts acquired from PC Bancorp are with the same counterparty bank. The outstanding swaps have original maturities of up to 15 years.
The following table presents the notional amount and the fair values of the asset and liability of the Company’s derivative instruments acquired from PC Bancorp as of the dates indicated (dollars in thousands):
Liability Derivatives | ||||||||
March 31, 2015 | December 31, 2014 | |||||||
Fair Value Hedges | ||||||||
Total interest rate contacts notional amount | $ | 28,992 | $ | 29,289 | ||||
|
|
|
| |||||
Derivatives not designated as hedging instruments: | ||||||||
Interest rate swap contracts fair value | $ | 492 | $ | 519 | ||||
Derivatives designated as hedging instruments: | ||||||||
Interest rate swap contracts fair value | 2,192 | 2,277 | ||||||
|
|
|
| |||||
Total interest rate contracts fair value | $ | 2,684 | $ | 2,796 | ||||
|
|
|
| |||||
Balance sheet location | | Accrued Interest Payable and Other Liabilities | | | Accrued Interest Payable and Other Liabilities | |
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, | ||||||||
2015 | 2014 | |||||||
Derivatives not designated as hedging instruments: | ||||||||
Interest rate swap contracts – loans | ||||||||
Increase in fair value of interest rate swap contracts | $ | 27 | $ | 61 | ||||
Payments on interest rate swap contracts on loans | (66 | ) | (68 | ) | ||||
|
|
|
| |||||
Net decrease in other non-interest income | (39 | ) | (7 | ) | ||||
|
|
|
| |||||
Derivatives designated as hedging instruments: | ||||||||
Interest rate swap contracts – loans | ||||||||
Increase in fair value of interest rate swap contracts | $ | 85 | $ | 183 | ||||
Increase in fair value of hedged loans | 161 | 73 | ||||||
Payments on interest rate swap contracts on loans | (286 | ) | (316 | ) | ||||
|
|
|
| |||||
Net decrease in interest income on loans | $ | (40 | ) | $ | (60 | ) | ||
|
|
|
|
Under all of the Company’s interest rate swap contracts, the Company is required to pledge and maintain collateral for the credit support under these agreements. At March 31, 2015, the Company had $2.2 million in investment securities, $2.7 million in certificates of deposit and $1.7 million in non-interest bearing balances for a total of $6.6 million, of which $5.1 million is pledged as collateral.
Page29 of67
Table of Contents
Note 11 - 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 banks 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, a certificate of deposit, cash that is maintained in a due from bank account and investment securities. 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 Balance Sheets | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts of Assets Presented in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | Net Amount (Collateral over liability balance required to be pledged) | ||||||||||||||||||||
Financial Instruments | Collateral Pledged | |||||||||||||||||||||||
March 31, 2015 | ||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||
Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments) | $ | 1,156 | $ | — | $ | 1,156 | $ | 1,156 | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,156 | $ | — | $ | 1,156 | $ | 1,156 | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||
Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments) | $ | 3,840 | $ | — | $ | 3,840 | $ | 3,840 | $ | 5,069 | $ | 1,229 | ||||||||||||
Securities sold under agreements to repurchase (See Note 9 – Borrowings and Subordinated Debentures) | 10,498 | — | 10,498 | 10,498 | 30,944 | 20,446 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 14,338 | $ | — | $ | 14,338 | $ | 14,338 | $ | 36,013 | $ | 21,675 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Page30 of67
Table of Contents
Gross Amounts Recognized in the Consolidated Balance Sheets | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts of Assets Presented in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | Net Amount (Collateral over liability balance required to be pledged) | ||||||||||||||||||||
Financial Instruments | Collateral Pledged | |||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||
Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments) | $ | 719 | $ | — | $ | 719 | $ | 719 | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 719 | $ | — | $ | 719 | $ | 719 | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||
Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments) | $ | 3,515 | $ | — | $ | 3,515 | $ | 3,515 | $ | 4,150 | $ | 635 | ||||||||||||
Securities sold under agreements to repurchase (See Note 9 – Borrowings and Subordinated Debentures) | 9,411 | — | 9,411 | 9,411 | 32,304 | 22,893 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 12,926 | $ | — | $ | 12,926 | $ | 12,926 | $ | 36,454 | $ | 23,528 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Note 12 - 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, 2014.
At March 31, 2015, future compensation expense related to unvested restricted stock grants are reflected in the table below (dollars in thousands):
Future Restricted Stock Expense | ||||
Remainder of 2015 | $ | 1,978 | ||
2016 | 1,586 | |||
2017 | 603 | |||
2018 | 211 | |||
2019 | 19 | |||
Thereafter | — | |||
|
| |||
Total | $ | 4,397 | ||
|
|
There was no future compensation expense related to unvested stock options as of March 31, 2015.
Page31 of67
Table of Contents
Stock Options
There were no stock options granted by the Company in 2012, 2013, 2014, or during the three months ended March 31, 2015.
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, 2014 | 1,016,490 | $ | 10.13 | 1.6 | $ | 11,770 | ||||||||||
Granted | — | |||||||||||||||
Exercised | (56,065 | ) | ||||||||||||||
Forfeited | (5,000 | ) | ||||||||||||||
Expired | — | |||||||||||||||
|
| |||||||||||||||
Outstanding stock options at March 31, 2015 | 955,425 | $ | 10.11 | 1.4 | $ | 12,075 | ||||||||||
|
| |||||||||||||||
Exercisable options at March 31, 2015 | 949,225 | $ | 10.10 | 1.4 | $ | 12,010 | ||||||||||
Unvested options at March 31, 2015 | 6,200 | $ | 12.20 | 2.1 | $ | 65 | ||||||||||
Outstanding, vested and expected to vest at March 31, 2015 | 955,425 | $ | 10.11 | 1.4 | $ | 12,075 |
The Company recorded stock option compensation expense of $1,000 and $4,000 for the three months ended March 31, 2015 and 2014, respectively.
The total intrinsic value of options exercised during the three months ended March 31, 2015 and 2014 was $643,000 and $840,000, respectively.
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 outstanding. 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, 2014 | 309,506 | $ | 16.66 | |||||
Granted | 116,300 | 20.96 | ||||||
Vested | (28,750 | ) | 12.42 | |||||
Cancelled and forfeited | (5,425 | ) | 14.96 | |||||
|
| |||||||
Unvested at March 31, 2015 | 391,631 | $ | 16.13 | |||||
|
|
Restricted stock compensation expense related to the restricted stock grants reflected in the table above was $512,000 and $404,000 for the three month period ended March 31, 2015 and 2014, 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. During the three months ended March 31, 2015, the Company granted 40,000 shares of Restricted Stock Unit (“RSU”) under the Equity Plan to one of its executive officers. Such grant is reflected in the table above. The shares of common stock underlying the 40,000 shares of RSU will not be issued until the RSUs vest but are outstanding as of March 31, 2015. The RSUs 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.
Page32 of67
Table of Contents
Note 13 - Shareholders’ Equity
Common Stock
The Company’s issued common stock increased by 119,808 shares, from 16,683,856 shares at December 31, 2014, to 16,803,664 shares at March 31, 2015. During the three months ended March 31, 2015, the Company issued 56,065 shares of stock from the exercise of employee stock options for a total value of $528,000. The Company also granted 76,300 shares of restricted stock awards to the Company’s directors and employees and cancelled 5,425 shares of unvested restricted stock related to employee turnover, resulting in a net issuance of restricted stock of 70,875 shares. Further, the Company cancelled 7,132 shares of restricted stock that had a value of $146,000, when employees elected to pay their tax obligation via the repurchase of the stock by the Company.
The Equity Plan, as amended, allows employees to make an election to have a portion of their restricted stock that became vested during the year repurchased by the Company to provide funds to pay the employee’s tax obligation related to the vesting of the stock.
Preferred Stock
As discussed in Note 3 – Business Combinations, the Company completed the merger with 1st Enterprise on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1st Enterprise as part of the Small Business Lending Fund (SBLF) program of the United States Department of Treasury was converted into substantially 16,400 identical shares with identical terms. CU Bancorp Preferred Stock has a liquidation preference amount of $1,000 per share, designated as the Company’s Non-Cumulative Perpetual Preferred Stock, Series A. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. The CU Bancorp Preferred Stock has an estimated life of four years and the fair value was $15.9 million at the merger date, resulting in a net discount of $479,000. The life-to-date and the year-to-date accretion on the net discount as of March 31, 2015 is $314,000 and $231,000, respectively. The net carrying value of the CU Bancorp Preferred Stock is $16.2 million ($16.4 million net of $165,000 net discount) as of March 31, 2015. Dividends on the CU Bancorp Preferred Stock are paid to the U.S. Department of the Treasury on a quarterly basis. See Note 22 – Regulatory Matters, in the Company’s 2014 Form 10-K, for restrictions on dividends.
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, 2015 | ||||||||||||
Net unrealized gains (losses) on investment securities: | ||||||||||||
Beginning balance | $ | 333 | $ | (143 | ) | $ | 190 | |||||
|
|
|
|
|
| |||||||
Net unrealized gains arising during the period | 882 | (371 | ) | 511 | ||||||||
|
|
|
|
|
| |||||||
Ending balance | $ | 1,215 | $ | (514 | ) | $ | 701 | |||||
|
|
|
|
|
|
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 | ||||||||
|
|
|
|
|
| |||||||
Ending balance | $ | (80 | ) | $ | 33 | $ | (47 | ) | ||||
|
|
|
|
|
|
Page33 of67
Table of Contents
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, 2015, 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 21 – Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Financial instruments with off balance sheet risk include commitments to extend credit of $704 million and $720 million at March 31, 2015 and December 31, 2014, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $56.1 million and $57.2 million at March 31, 2015 and December 31, 2014, 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. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and 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.
Page34 of67
Table of Contents
Investment Securities Available-for-Sale and Held-to-Maturity: The fair value of securities available-for-sale and held-to-maturity 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. Securities classified as held-to-maturity are accounted for at their amortized historical cost.
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.
Page35 of67
Table of Contents
Interest Rate Swap Contracts:
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 London Interbank Offered Rate (“LIBOR”) yield curve for accruing and the future Overnight Index Swap Rate (“OIS”) yield curve for discounting through the maturity date of the interest 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 to sell. 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) 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 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, 2015, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at March 31, 2015. Because all three of the debentures re-priced on March 16, 2015 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, 2015, 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.
Page36 of67
Table of Contents
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 than the current market rate were insignificant at March 31, 2015 and December 31, 2014.
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, 2015 | ||||||||||||||||||||||||
Investment securities available-for-sale | $ | 224,050 | $ | — | $ | 224,050 | $ | — | ||||||||||||||||
Interest Rate Swap Contracts | 1,156 | — | 1,156 | — | ||||||||||||||||||||
Financial Liabilities – March 31, 2015 | ||||||||||||||||||||||||
Interest Rate Swap Contracts | $ | 3,840 | $ | — | $ | 3,840 | $ | — | ||||||||||||||||
Financial Assets – December 31, 2014 | ||||||||||||||||||||||||
Investment securities available-for-sale | $ | 226,962 | $ | — | $ | 226,962 | $ | — | ||||||||||||||||
Interest Rate Swap Contracts | 719 | — | 719 | — | ||||||||||||||||||||
Financial Liabilities – December 31, 2014 | ||||||||||||||||||||||||
Interest Rate Swap Contracts | $ | 3,515 | $ | — | $ | 3,515 | $ | — |
At December 31, 2014 and at March 31, 2015 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). Additionally, 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, 2015 and 2014.
Page37 of67
Table of Contents
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, 2015 and 2014.
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 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Financial Assets – March 31, 2015 | ||||||||||||||||
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans) | $ | 1,071 | $ | — | $ | — | $ | 1,071 | ||||||||
Other real estate owned | 850 | — | — | 850 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 1,921 | $ | — | $ | — | $ | 1,921 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Financial Assets – December 31, 2014 | ||||||||||||||||
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans) | $ | 1,173 | $ | — | $ | — | $ | 1,173 | ||||||||
Other real estate owned | 850 | — | — | 850 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,023 | $ | — | $ | — | $ | 2,023 | ||||||||
|
|
|
|
|
|
|
|
Page38 of67
Table of Contents
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, 2015 | ||||||||||
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off | $ | 1,071 | Credit loss estimate of aged accounts receivable collateral | Credit loss factors on aging of accounts receivable collateral | 10%-80% | |||||
Estimated selling costs | 15% | |||||||||
Other real estate owned | $ | 850 | Residential real estate appraisal | Sales approach Estimated selling costs | 6% | |||||
|
| |||||||||
Total | $ | 1,921 | ||||||||
|
| |||||||||
Financial Assets – December 31, 2014 | ||||||||||
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off | $ | 1,173 | Credit loss estimate of aged accounts receivable collateral | Credit loss factors on aging of accounts receivable collateral | 10%-80% | |||||
Estimated selling costs | 15% | |||||||||
Other real estate owned | $ | 850 | Residential real estate appraisal | Sales approach Estimated selling costs | 6% | |||||
|
| |||||||||
Total | $ | 2,023 | ||||||||
|
|
Page39 of67
Table of Contents
Fair Value of Financial Assets and Liabilities
ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or 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, 2015 and December 31, 2014. 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 Measurements | ||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
March 31, 2015 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Investment securities available-for-sale | $ | 224,050 | 224,050 | $ | — | $ | 224,050 | $ | — | |||||||||||
Investment securities held-to-maturity | 46,124 | 46,322 | — | 46,322 | — | |||||||||||||||
Loans, net | 1,652,030 | 1,659,228 | — | — | 1,659,228 | |||||||||||||||
Interest rate swap contracts | 1,156 | 1,156 | — | 1,156 | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Certificates of deposit | 61,546 | 61,556 | — | 61,556 | — | |||||||||||||||
Securities sold under agreements to repurchase | 10,498 | 10,498 | — | 10,498 | — | |||||||||||||||
Subordinated debentures | 9,578 | 12,372 | — | 12,372 | — | |||||||||||||||
Interest rate swap contracts | 3,840 | 3,840 | — | 3,840 | — | |||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Investment securities available-for-sale | $ | 226,962 | 226,962 | $ | — | $ | 226,962 | $ | — | |||||||||||
Investment securities held-to-maturity | 47,147 | 47,159 | — | 47,159 | — | |||||||||||||||
Loans, net | 1,612,113 | 1,627,717 | — | — | 1,627,717 | |||||||||||||||
Interest rate swap contracts | 719 | 719 | — | 719 | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Certificates of deposit | 64,840 | 64,857 | — | 64,857 | — | |||||||||||||||
Securities sold under agreements to repurchase | 9,411 | 9,411 | — | 9,411 | — | |||||||||||||||
Subordinated debentures | 9,538 | 12,372 | — | 12,372 | — | |||||||||||||||
Interest rate swap contracts | 3,515 | 3,515 | — | 3,515 | — |
Page40 of67
Table of Contents
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 2014 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” “anticipate,” “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 onForm 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 should these events occur. |
• | The effects of trade, monetary and fiscal policies and laws. |
• | Possible losses of businesses and population in Los Angeles, Orange, Ventura, San Bernardino or Riverside Counties. |
• | Loss of customer checking and money-market account deposits as customers pursue other higher-yield investments, particularly in a rising rate environment. |
• | 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. |
• | Loss of significant customers. |
• | 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. |
Page41 of67
Table of Contents
• | Compression of our net interest margin. |
• | Stability of funding sources and continued availability of borrowings to the extent necessary. |
• | 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. |
• | The effect of labor and port slowdowns on small businesses. |
• | Risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs. |
• | Lack of take-out financing or problems with sales or lease-up with respect to our construction loans. |
• | Our ability to recruit and retain key management and staff. |
• | 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. |
• | Increased regulation of the securities markets, including the securities of the Company, whether pursuant to the Sarbanes-Oxley Act of 2002, or otherwise. |
• | 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, 2014 and particularly, Item 1A, titled “Risk Factors.”
Page42 of67
Table of Contents
CU Bancorp (the “Company”) is a bank holding company whose operating subsidiary is California United Bank. 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 income 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 in Los Angeles, Orange, Ventura and San Bernadino counties, 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 current headquarters office located in Los Angeles, 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.
Total assets increased $141.8 million or 6.3% from December 31, 2014 to $2.4 billion mainly due to deposit growth of $135.9 million and earnings available to common shareholders of $3.9 million. Loan growth during the period was concentrated primarily in Other Nonresidential Property loans of $26.5 million and Owner-Occupied Nonresidential Property loans of $12.8 million. Funding the loan growth of the Company for the three months ended March 31, 2015 were increases in non-interest bearing demand deposits of $77.7 million and interest bearing deposits of $44.9 million. At both March 31, 2015 and December 31, 2014, non-interest bearing deposits represented 53% of total deposits.
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 2014 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
The allowance for loan loss (“Allowance”) is established by a provision for loan losses that is charged against income, increased by charges to expense and decreased by charge-offs (net of recoveries). Loan charge-offs are charged against the Allowance when management believes the collectability of loan principal becomes unlikely. Subsequent recoveries, if any, are credited to the Allowance.
The Allowance is an amount that management believes will be adequate to absorb estimated charge-offs related to specifically identified loans, as well as probable loan charge-offs inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. Management carefully monitors changing economic conditions, the concentrations of loan categories and collateral, the financial condition of the borrowers, the history of the loan portfolio, as well as historical peer group loan loss data to determine the adequacy of the Allowance. The Allowance is based upon estimates, and actual charge-offs may vary from the estimates. No assurance can be given that
Page43 of67
Table of Contents
adverse future economic conditions will not lead to delinquent loans, increases in the provision for loan losses and/or charge-offs. These evaluations are inherently subjective, as they require estimates that are susceptible to significant revisions as conditions change. In addition, regulatory agencies, as an integral part of their examination process, may require additions to the Allowance based on their judgment about information available at the time of their examinations. Management believes that the Allowance as of March 31, 2015 is adequate to absorb known and probable losses in the loan portfolio.
The Allowance consists of specific and general components. The specific component relates to loans that are categorized as impaired. For loans that are categorized as impaired, a specific reserve is established when the fair value of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on the type of loan and historical charge-off experience adjusted for qualitative factors.
While the general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative factors, the change in the Allowance from one reporting period to the next may not directly correlate to the rate of change of nonperforming loans for the following reasons:
• | A loan moving from the impaired performing status to an impaired non-performing status does not mandate an automatic increase in reserves. The individual loan is evaluated for a specific reserve requirement when the loan moves to the impaired status, not when the loan moves to non-performing status. In addition, the impaired loan is reevaluated at each subsequent reporting period. Impaired loans are evaluated by comparing the fair value of the collateral less costs to sell, 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. |
• | Not all impaired loans require a specific reserve. The payment performance of the borrower may require an impaired classification, but the collateral evaluation may support adequate collateral coverage. For a number of impaired loans in which borrower performance is in question, the collateral coverage may be sufficient because a partial charge off of the loan has been taken. In those instances, neither a general reserve nor a specific reserve is assessed. |
Investment Securities
The Company currently classifies its investment securities under the available-for-sale and held-to-maturity 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 (loss) included in shareholders’ equity. Under the held-to-maturity classification, if the Company has the intent and the ability at the time of purchase to hold these securities until maturity, they are classified as held-to-maturity and are stated at amortized cost.
As of each reporting date, the Company evaluates the securities portfolio to determine if there has been an other-than-temporary impairment (“OTTI”) on each of the individual securities in the investment securities portfolio. If it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an OTTI shall be considered to have occurred. Once an OTTI is considered to have occurred, 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.
In estimating whether an other-than-temporary impairment loss has occurred, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the current liquidity and volatility of the market for each of the individual security categories, (iv) the current slope and shape of the Treasury yield curve, along with where the economy is in the current interest rate cycle, (v) the spread differential between the current spread and the long-term average spread for that security category, (vi) the projected cash flows from the specific security type, (vii) any financial guarantee and financial condition of the guarantor and (viii) the intent and ability of the Company to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value.
If it’s determined that an OTTI 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 the amount of the OTTI in earnings equal to the difference between the security’s fair value and its adjusted cost basis. If neither of the conditions is met, the Company determines (a) the amount of
Page44 of67
Table of Contents
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 is the portion of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The portion of total impairment related to all other factors is included in other comprehensive income. 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 expected maturity term of the securities. For mortgage-backed securities, the amortization or accretion is based on estimated average 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.
Derivative Financial Instruments and Hedging Activities
All derivative instruments (interest rate swap contracts) were recognized on the consolidated balance sheet at their current 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. ASC Topic 815 establishes the accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. ASC Topic 815 requires 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 by the Company, 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 also formally assesses the hedge’s current effectiveness in offsetting changes in the fair values of the hedged items. On an ongoing basis, the derivatives that are used in hedging transactions are evaluated as to how effective they are in offsetting changes in fair values or cash flows of hedged items.
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, 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 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, 2015 that were created from the business combinations with California Oaks State Bank (COSB), Premier Commercial Bancorp (PC Bancorp) and 1st Enterprise Bank (1st Enterprise) on December 31, 2010, July 31, 2012 and November 30, 2014, 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
Page45 of67
Table of Contents
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 results in it being probable that the Company’s fair value has declined below its book value, the Company would perform an impairment analysis at that time.
Based on the Company’s 2014 goodwill impairment analysis, no impairment to goodwill has occurred. The Company is a sole reporting unit for evaluation of goodwill. We believe the estimated fair value of the Company is above its carrying value at March 31, 2015.
The core deposit intangibles on non-maturing deposits, which represent the intangible value of depositor relationships resulting from deposit liabilities assumed through acquisition, are being amortized over the projected useful lives of the deposits. The weighted remaining life of the core deposit intangible is estimated at approximately 9 years at March 31, 2015. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
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 and a credit component 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 is 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 for deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryback and carryforward period and that current tax law will allow for the realization of those tax benefits.
The Company is required to account for uncertainty associated with the tax positions it has taken or expects to be taken on past, current and future tax returns. Where there may be a degree of uncertainty as to the tax realization of an item, the Company may only record the tax effects (expense or benefits) from an uncertain tax position in the financial statements if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. The Company does not believe that it has any material uncertain tax positions taken to date that are not more likely than not to be realized.
Page46 of67
Table of Contents
Key Profitability Measures
The following table presents key profitability measures 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, | Increase / (Decrease) | |||||||||||||||
2015 | 2014 | $ | % | |||||||||||||
Net Income Available to Common Shareholders | $ | 3,927 | $ | 2,666 | $ | 1,261 | 47.30 | % | ||||||||
|
|
|
|
|
| |||||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.24 | $ | 0.25 | $ | (0.01 | ) | 4.00 | % | |||||||
Diluted | $ | 0.23 | $ | 0.24 | $ | (0.01 | ) | 4.17 | % | |||||||
Return on average assets | 0.69 | % | 0.78 | % | (0.09 | )% | (11.54 | )% | ||||||||
Return on average equity | 5.63 | % | 7.70 | % | (2.07 | )% | (26.88 | )% | ||||||||
Return on average tangible common equity | 8.23 | % | 8.60 | % | (0.37 | )% | (4.3 | )% | ||||||||
Net interest margin | 3.95 | % | 3.82 | % | 0.13 | % | 3.40 | % | ||||||||
Efficiency ratio (1) | 64.14 | % | 68.39 | % | (4.25 | )% | (6.21 | )% |
(1) | Efficiency ratio represents non-interest expense as a percent of net interest income plus non-interest income, excluding gain on sale of securities, net. |
Operations Performance Summary
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Net income available to common shareholders for the three months ended March 31, 2015 was $3.9 million, or $0.23 per diluted share, compared to $2.7 million, or $0.24 per diluted share for the three months ended March 31, 2014. The $1.3 million increase, or 47.3%, was primarily due to an $8.5 million increase in net interest income, $818,000 increase in non-interest income, offset by a $5.4 million increase in non-interest expense. These increases are due to strong organic loan growth coupled with the merger with 1st Enterprise on November 30, 2014. Further, merger related expenses were $464,000 ($240,000 of merger expenses and $224,000 of severance and retention expense included in salaries and employee benefits) for the three months ended March 31, 2015 compared to none in the comparative quarter, a $353,000 increase in core deposit intangible amortization mainly due to the $7.4 million core deposit intangible recognized from the 1st Enterprise merger, as well as a $1.4 million increase in provision for loan losses as a result of strong organic loan growth and net charge-offs of $806,000. Each of these increases and or decreases is more fully described below.
Page47 of67
Table of Contents
Average Balances, Interest Income and Expense, Yields and Rates
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, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Yield/ Rate (6) | Average Balance | Interest Income/ Expense | Average Yield/ Rate (6) | |||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||
Deposits in other financial institutions | $ | 197,465 | $ | 202 | 0.41 | % | $ | 265,750 | $ | 211 | 0.32 | % | ||||||||||||
Investment Securities (2) | 271,504 | 1,180 | 1.74 | % | 104,767 | 501 | 1.91 | % | ||||||||||||||||
Loans (1) | 1,650,802 | 19,906 | 4.89 | % | 922,971 | 11,924 | 5.24 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest-earning assets | 2,119,771 | 21,288 | 4.07 | % | 1,293,488 | 12,636 | 3.96 | % | ||||||||||||||||
Non-interest-earning assets | 202,055 | 92,357 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 2,321,826 | $ | 1,385,845 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||
Interest bearing transaction accounts | $ | 238,220 | 100 | 0.17 | % | $ | 138,006 | 58 | 0.17 | % | ||||||||||||||
Money market and savings deposits | 650,721 | 383 | 0.24 | % | 373,258 | 234 | 0.25 | % | ||||||||||||||||
Certificates of deposit | 63,942 | 51 | 0.32 | % | 62,964 | 56 | 0.36 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest bearing deposits | 952,883 | 534 | 0.23 | % | 574,228 | 348 | 0.25 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Subordinated debentures, net | 9,568 | 107 | 4.47 | % | 9,399 | 107 | 4.55 | % | ||||||||||||||||
Securities sold under agreements to repurchase | 10,760 | 5 | 0.19 | % | 11,951 | 8 | 0.27 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total borrowings | 20,328 | 112 | 2.23 | % | 21,350 | 116 | 2.20 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest bearing liabilities | 973,221 | 646 | 0.27 | % | 595,578 | 463 | 0.32 | % | ||||||||||||||||
Non-interest bearing demand deposits | 1,046,636 | 633,233 | ||||||||||||||||||||||
Total funding sources | 2,019,847 | 1,228,811 | ||||||||||||||||||||||
Non-interest-bearing liabilities | 19,077 | 16,595 | ||||||||||||||||||||||
Shareholders’ equity | 282,902 | 140,439 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,321,826 | $ | 1,385,845 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Excess of interest-earning assets over funding sources | $ | 99,924 | $ | 64,677 | ||||||||||||||||||||
Net interest income | $ | 20,642 | $ | 12,173 | ||||||||||||||||||||
Net interest rate spread (3) | 3.80 | % | 3.64 | % | ||||||||||||||||||||
Net interest margin (4) | 3.95 | % | 3.82 | % | ||||||||||||||||||||
Core net interest margin (5) | 3.90 | % | 3.65 | % |
(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) | Core net interest margin is computed by dividing net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans, interest recovered or reversed on non-accrual loans or other nonrecurring items based on management’s judgment, by average total interest-earning assets. See the reconciliation table for core net interest margin. |
(6) | Annualized |
Page48 of67
Table of Contents
The following table represents a reconciliation of GAAP net interest margin to core net interest margin used by the Company. The table presents the information for the periods indicated (dollars in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Net Interest Income | $ | 20,642 | $ | 12,173 | ||||
Less: Accelerated accretion of fair value adjustment on early loan payoffs | 110 | 519 | ||||||
Less: Income recognition due to early payoff of organic loans | 201 | — | ||||||
|
|
|
| |||||
Core Net Interest Income | $ | 20,331 | $ | 11,654 | ||||
|
|
|
| |||||
Net interest margin | 3.95 | % | 3.82 | % | ||||
Core net interest margin | 3.90 | % | 3.65 | % |
The following table reflects the composition of the net deferred loan fees, costs and fair value discounts included in total loans at March 31, 2015 and December 31, 2014 (dollars in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Accreting discount | $ | 20,382 | $ | 21,726 | ||||
Non accreting loan discount | 619 | 567 | ||||||
|
|
|
| |||||
Acquired loans remaining discount | 21,001 | 22,293 | ||||||
Organic loans net deferred fees | 3,552 | 3,471 | ||||||
|
|
|
| |||||
Total | $ | 24,553 | $ | 25,763 | ||||
|
|
|
|
Page49 of67
Table of Contents
Net Changes in Average Balances, Composition, Yields and Rates
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, | ||||||||||||||||||||||||||||||||||||
2015 | 2014 | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Average Balance | % of Total | Average Yield/ Rate | Average Balance | % of Total | Average Yield/ Rate | Average Balance | % of Total | Average Yield/ Rate | ||||||||||||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||||||||||||||
Deposits in other financial institutions | $ | 197,465 | 9.3 | % | 0.41 | % | $ | 265,750 | 20.5 | % | 0.32 | % | $ | (68,285 | ) | (11.2 | )% | 0.09 | % | |||||||||||||||||
Investment Securities | 271,504 | 12.8 | % | 1.74 | % | 104,767 | 8.1 | % | 1.91 | % | 166,737 | 4.7 | % | (0.17 | )% | |||||||||||||||||||||
Loans | 1,650,802 | 77.9 | % | 4.89 | % | 922,971 | 71.4 | % | 5.24 | % | 727,831 | 6.5 | % | (0.35 | )% | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Total interest-earning assets | $ | 2,119,771 | 100 | % | 4.07 | % | $ | 1,293,488 | 100.0 | % | 3.96 | % | $ | 826,283 | 0.11 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||||||||||||||
Non-interest bearing demand deposits | $ | 1,046,636 | 51.8 | % | $ | 633,233 | 51.5 | % | $ | 413,403 | 0.3 | % | ||||||||||||||||||||||||
Interest bearing transaction accounts | 238,220 | 11.8 | % | 0.17 | % | 138,006 | 11.2 | % | 0.17 | % | 100,214 | 0.6 | % | — | % | |||||||||||||||||||||
Money market and savings deposits | 650,721 | 32.2 | % | 0.24 | % | 373,258 | 30.4 | % | 0.25 | % | 277,463 | 1.8 | % | (0.01 | )% | |||||||||||||||||||||
Certificates of deposit | 63,942 | 3.2 | % | 0.32 | % | 62,964 | 5.1 | % | 0.36 | % | 978 | (1.9 | )% | (0.04 | )% | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
Total deposits | 1,999,519 | 99.0 | % | 0.11 | % | 1,207,461 | 98.3 | % | 0.12 | % | 792,058 | 0.7 | % | (0.01 | )% | |||||||||||||||||||||
Subordinated debentures, net | 9,568 | 0.5 | % | 4.47 | % | 9,399 | 0.8 | % | 4.55 | % | 169 | (0.3 | )% | (0.08 | )% | |||||||||||||||||||||
Securities sold under agreements to repurchase | 10,760 | 0.5 | % | 0.19 | % | 11,951 | 1.0 | % | 0.27 | % | (1,191 | ) | (0.5 | )% | (0.08 | )% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Total Borrowings | 20,328 | 1.0 | % | 2.23 | % | 21,350 | 1.7 | % | 2.18 | % | (1,022 | ) | (0.7 | )% | 0.53 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Total funding sources | $ | 2,019,847 | 100 | % | 0.13 | % | $ | 1,228,811 | 100.0 | % | 0.15 | % | $ | 791,036 | (0.02 | )% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Page50 of67
Table of Contents
Volume and Rate Variance Analysis of Net Interest Income
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, 2015 vs. 2014 | ||||||||||||
Increase (Decrease) Due To | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest Income: | ||||||||||||
Loans | $ | 9,406 | $ | (1,425 | ) | $ | 7,981 | |||||
Deposits in other financial institutions | (54 | ) | 45 | (9 | ) | |||||||
Investment securities | 794 | (115 | ) | 679 | ||||||||
|
|
|
|
|
| |||||||
Total interest income | 10,146 | (1,495 | ) | 8,651 | ||||||||
|
|
|
|
|
| |||||||
Interest Expense: | ||||||||||||
Interest bearing transaction accounts | 42 | — | 42 | |||||||||
Money market and savings deposits | 164 | (15 | ) | 149 | ||||||||
Certificates of deposit | 1 | (6 | ) | (5 | ) | |||||||
|
|
|
|
|
| |||||||
Total deposits | 207 | (21 | ) | 186 | ||||||||
Subordinated debentures | 2 | (2 | ) | — | ||||||||
Securities sold under agreements to repurchase | (1 | ) | (3 | ) | (4 | ) | ||||||
|
|
|
|
|
| |||||||
Total Borrowings | 1 | (5 | ) | (4 | ) | |||||||
|
|
|
|
|
| |||||||
Total interest expense | 208 | (26 | ) | 182 | ||||||||
|
|
|
|
|
| |||||||
Net Interest Income | $ | 9,938 | $ | (1,469 | ) | $ | 8,469 | |||||
|
|
|
|
|
|
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
The net interest margin increased 13 basis points to 3.95% for the three months ended March 31, 2015, compared to 3.82% for the three months ended March 31, 2014. The increase in net interest margin is primarily due to average loans being a higher percentage of interest-earning assets for the quarter ended March 31, 2015 than for the same quarter a year ago. This was offset by fair value discounts earned on early payoffs of acquired loans were $110,000 compared to $519,000 for the three months ended March 31, 2015 and 2014, respectively. Additionally, in the first quarter of 2015, the net interest margin benefitted 4 basis points from the recognition of interest income due to the early pay off of organic loans in the amount of $201,000. Net interest income increased $8.5 million mainly due to higher average loans and investment securities, as a result of strong net organic loan growth over the last year and the most recent merger, which more than offset the decline on the rate in those assets. The impact to the Company’s net interest margin from the accelerated accretion of fair value discounts on early payoffs of acquired loans during the quarters ending March 31, 2015 and 2014 was 2 basis points and 16 basis points, respectively.
Provision for Loan Losses
The Company maintains 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 are charged against the Allowance, while any recoveries are credited to the Allowance.
Provision for loan losses for the three months ended March 31, 2015 was $1.4 million compared to $75,000 for the three months ended March 31, 2014. The Company had $67 million of net organic loan growth for the quarter ended March 31, 2015, compared to $24 million for the same quarter a year ago. Net charge-offs for the three months ended March 31, 2015 were $806,000 compared to net recoveries of $145,000 in 2014. See further discussion inBalance Sheet Analysis, Allowance for Loan Loss.
Page51 of67
Table of Contents
Non-interest Income
The following table sets forth certain information with respect to the Company’s non-interest income for the periods indicated (dollars in thousands):
Three Months Ended March 31, | Increase (Decrease) | |||||||||||||||
2015 | 2014 | $ | % | |||||||||||||
Gain on sale of securities, net | $ | — | $ | — | $ | — | — | % | ||||||||
Gain on sale of SBA loans, net | 423 | 438 | (15 | ) | (3.4 | )% | ||||||||||
Deposit account service charge income | 1,141 | 630 | 511 | 81.1 | % | |||||||||||
Other non-interest income | 1,044 | 722 | 322 | 44.6 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Non-Interest Income | $ | 2,608 | $ | 1,790 | $ | 818 | 45.7 | % | ||||||||
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Non-interest income increased $818,000 or 45.7% to $2.6 million for the three months ended March 31, 2015 compared to $1.8 million for the three months ended March 31, 2014. This change was mainly due to a $511,000 increase in the deposit account service charge income as a result of the merger and a $145,000 increase in BOLI income included in other non-interest income as a result of the merger and additional purchases.
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) | |||||||||||||||
2015 | 2014 | $ | % | |||||||||||||
Salaries and employee benefits | $ | 8,638 | $ | 5,605 | $ | 3,033 | 54.1 | % | ||||||||
Stock based compensation expense | 513 | 408 | 105 | 25.7 | % | |||||||||||
Occupancy | 1,420 | 986 | 434 | 44.0 | % | |||||||||||
Data processing | 641 | 475 | 166 | 34.9 | % | |||||||||||
Legal and professional | 846 | 523 | 323 | 61.8 | % | |||||||||||
FDIC deposit assessment | 333 | 221 | 112 | 50.7 | % | |||||||||||
Merger expenses | 240 | — | 240 | — | % | |||||||||||
OREO expenses | 6 | — | 6 | — | % | |||||||||||
Office services expense | 414 | 264 | 150 | 56.8 | % | |||||||||||
Other operating expenses | 1,862 | 1,067 | 795 | 74.5 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Non-Interest Expense | $ | 14,913 | $ | 9,549 | $ | 5,364 | 56.2 | % | ||||||||
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Non-interest expense increased $5.4 million or 56.2% to $14.9 million for the three months ended March 31, 2015 compared to $9.5 million for the three months ended March 31, 2014. The overall increase between the quarters was primarily due to a $3.0 million increase in salaries and employee benefits, $240,000 of merger expenses and a $353,000 increase in core deposit intangible amortization mainly due to the $7.4 million core deposit intangible recognized from the 1st Enterprise merger. Further, the three months ended March 31, 2015 was the first complete quarter of combined operations after the merger, which accounted for the substantial increase in salary expense, stock based compensation expense, occupancy expense, office services expense and other operating expenses over the prior year. Merger related expenses included the $240,000 of merger expenses and $224,000 of severance and retention expense included in salaries and employee benefits. The Company had 253 active full-time equivalent employees at March 31, 2015 compared to 181 at March 31, 2014.
Page52 of67
Table of Contents
Income Taxes
The effective tax rate for the three months ended March 31, 2015 was 39.1% compared to 38.6% for the three months ended March 31, 2014. The merger related expenses of $464,000 for the three months ended March 31, 2015 were tax-deductible. The Company’s effective tax rate is impacted by the increase in cash surrender value of bank owned life insurance policies which is excluded from taxable income and deductions from disqualifying disposition of incentive stock options. In addition, the Company has invested in Qualified Affordable Housing Projects “LIHTC” that generate tax credits and benefits for the Company. The Company operates in the Federal and California jurisdictions and the blended statutory tax rate for Federal and California income taxes is 42.05%.
Page53 of67
Table of Contents
Balance Sheet Analysis
Total assets increased $142 million for the three months ended March 31, 2015 to $2.4 billion with an increase of $110 million in cash and cash equivalents and an increase of $41 million in loans, mainly driven by a $136 million increase in total deposits during the quarter. The increase in loans from the prior quarter was due to organic loan growth. These increases were offset by a decrease of $3 million in investment securities available-for-sale, at fair value and a decrease of $1 million in investment securities held-to-maturity. Net organic loan growth during the period was $67 million, partially offset by $26 million in runoff of purchased loans from the COSB, PC Bancorp acquisitions and 1st Enterprise merger. Loan growth for the first three months of 2015 was concentrated in Other Nonresidential Properties of $27 million, Owner-Occupied Nonresidential Properties of $13 million, and Construction, Land Development and Other Land of $8 million.
Funding the asset growth for the Company for the first three months of 2015 was the growth in deposits of $136 million and earnings of $4 million. Further, the deposits growth of $136 million is the result of a $78 million increase in non-interest bearing deposits and a $45 million increase in interest bearing transactions. At both March 31, 2015 and December 31, 2014, non-interest bearing deposits represented 53% of total deposits.
Lending
The following table presents the composition of the loan portfolio at the dates indicated (dollars in thousands):
March 31, 2015 | December 31, 2014 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Commercial and Industrial Loans: | $ | 515,593 | 31 | % | $ | 528,517 | 33 | % | ||||||||
Loans Secured by Real Estate: | ||||||||||||||||
Owner-Occupied Nonresidential Properties | 352,071 | 21 | % | 339,309 | 21 | % | ||||||||||
Other Nonresidential Properties | 508,043 | 31 | % | 481,517 | 30 | % | ||||||||||
Construction, Land Development and Other Land | 79,696 | 5 | % | 72,223 | 4 | % | ||||||||||
1-4 Family Residential Properties | 128,609 | 8 | % | 121,985 | 8 | % | ||||||||||
Multifamily Residential Properties | 53,840 | 3 | % | 52,813 | 3 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Loans Secured by Real Estate | 1,122,259 | 67 | % | 1,067,847 | 66 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other Loans: | 27,425 | 2 | % | 28,359 | 2 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Loans | $ | 1,665,277 | 100 | % | $ | 1,624,723 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
The following table is a breakout of the Company’s gross loans stratified by the industry concentration of the borrower by their respective NAICS code at the dates indicated (dollars in thousands):
March 31, 2015 | December 31, 2014 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Real Estate | $ | 779,433 | 47 | % | $ | 744,663 | 46 | % | ||||||||
Manufacturing | 164,410 | 10 | % | 161,233 | 10 | % | ||||||||||
Wholesale | 120,931 | 7 | % | 124,336 | 8 | % | ||||||||||
Construction | 119,844 | 7 | % | 113,763 | 7 | % | ||||||||||
Finance | 101,258 | 6 | % | 96,074 | 6 | % | ||||||||||
Hotel/Lodging | 90,622 | 5 | % | 88,269 | 5 | % | ||||||||||
Professional Services | 55,734 | 3 | % | 64,215 | 4 | % | ||||||||||
Healthcare | 51,267 | 3 | % | 43,917 | 3 | % | ||||||||||
Other Services | 45,659 | 3 | % | 45,781 | 3 | % | ||||||||||
Retail | 37,315 | 2 | % | 35,503 | 2 | % |
Page54 of67
Table of Contents
Administrative Services | 25,758 | 2 | % | 28,016 | 2 | % | ||||||||||
Restaurant/Food Service | 25,217 | 2 | % | 24,525 | 2 | % | ||||||||||
Transportation | 18,523 | 1 | % | 18,158 | 1 | % | ||||||||||
Education | 9,498 | 1 | % | 10,253 | 1 | % | ||||||||||
Information | 8,532 | 1 | % | 15,457 | 1 | % | ||||||||||
Other | 5,716 | 0 | % | 2,276 | 0 | % | ||||||||||
Entertainment | 5,560 | 0 | % | 8,284 | 1 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Loans | $ | 1,665,277 | 100 | % | $ | 1,624,723 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
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 $1.67 billion at March 31, 2015, an increase of $41 million or 2.5%, from $1.62 billion at December 31, 2014. The Company had approximately $67 million of net organic loan growth, which was partially offset by approximately $26 million in loan run-off from the acquired loan portfolios. The increase in total loans from the end of the prior quarter included a $27 million increase in the other nonresidential real estate properties portfolio, a $13 million increase in the owner-occupied nonresidential properties portfolio, and a $8 million increase in the construction, land development and other land portfolio. These increases were offset by a decrease of $13 million in commercial and industrial loans.
The net growth in the Company’s other nonresidential real estate properties portfolio of approximately $27 million during the first quarter of 2015 was primarily attributable to a large loan originated in the amount of $23 million. The loan was originated to refinance a multi-tenant neighborhood retail center in the Company’s footprint and has a balance that represents a loan-to-value of seventy percent. The increase in the owner-occupied nonresidential properties portfolio of $13 million is mainly attributable to four new loans below $5 million originated during the quarter.
We continue to establish new relationships and expand our current business, as evidenced by our increased commercial line of credit commitments, which are up $371 million, or 87.5% from $424 million at March 31, 2014 to $795 million at March 31, 2015 primarily as a result of the merger. Compared to December 31, 2014, commercial line of credit commitments remained stable at $795 million at March 31, 2015 and $778 million at December 31, 2014. However, due to the dynamic nature of commercial and industrial lending, actual credit utilization may experience ebbs and flows. The Company’s commercial and industrial line of credit utilization was approximately 45% as of March 31, 2015 and December 31, 2014.
The Company had 53 commercial banking relationship managers and 10 commercial real estate relationship managers at March 31, 2015. This compares to 51 commercial banking relationship managers and 10 commercial real estate relationship managers at December 31, 2014. 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 problem loan committee comprised of senior management that reviews criticized 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. There is also a director loan committee that reviews loan portfolio management.
Page55 of67
Table of Contents
Allowance for Loan Loss
The allowance for loan loss increased by $637,000, to $13.2 million during the quarter ended March 31, 2015, due to a provision for loan losses of $1.4 million and net charge-offs of $806,000. The allowance for loan loss as a percentage of total loans was 0.80% at March 31, 2015 and 0.78% at December 31, 2014. 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 1.36% and 1.39%, respectively, at March 31, 2015 and December 31, 2014. 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 continued low level of non-performing assets at March 31, 2015.
The Company’s management considered the following factors in evaluating the allowance for loan loss at March 31, 2015:
• | During the three months ended March 31, 2015 there were loan recoveries of $84,000 |
• | There were $890,000 in loan charge-offs during the three months ended March 31, 2015 including on large one |
• | There were nineteen non-accrual loans totaling $5.0 million |
• | 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, 2015 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.
Page56 of67
Table of Contents
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, | ||||||||
2015 | 2014 | |||||||
Allowance for loan loss at beginning of period | $ | 12,610 | $ | 10,603 | ||||
Provision for loan losses | 1,443 | 75 | ||||||
Net (charge-offs) recoveries: | ||||||||
Charge-offs | (890 | ) | — | |||||
Recoveries | 84 | 145 | ||||||
|
|
|
| |||||
Total net (charge-offs) recoveries | (806 | ) | 145 | |||||
|
|
|
| |||||
Allowance for loan loss at end of period | $ | 13,247 | $ | 10,823 | ||||
|
|
|
| |||||
Net (charge-offs) recoveries to average loans | 0.05 | % | 0.02 | % |
The following is a summary of our asset quality data and key ratios at the dates indicated (dollars in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Loans originated by the Bank on non-accrual | $ | 2,056 | $ | 2,131 | ||||
Loans acquired through acquisition that are on non-accrual | 2,920 | 1,778 | ||||||
|
|
|
| |||||
Total non-accrual loans | 4,976 | 3,909 | ||||||
Other Real Estate Owned | 850 | 850 | ||||||
|
|
|
| |||||
Total non-performing assets | $ | 5,826 | $ | 4,759 | ||||
|
|
|
| |||||
Net charge-offs year to date | $ | 806 | $ | 232 | ||||
Non-accrual loans to total loans | 0.30 | % | 0.24 | % | ||||
Total non-performing assets to total assets | 0.24 | % | 0.21 | % | ||||
Allowance for loan losses to total loans | 0.80 | % | 0.78 | % | ||||
Allowance for loan losses to total loans accounted at historical cost, which excludes purchased loans acquired by acquisition | 1.36 | % | 1.39 | % | ||||
Net year to date charge-offs to average year to date loans | 0.05 | % | 0.02 | % | ||||
Allowance for loan losses to non-accrual loans accounted at historical cost, which excludes non-accrual purchased loans acquired by acquisition and related allowance | 642.0 | % | 591.7 | %�� | ||||
Allowance for loan losses to total non-accrual loans | 266.2 | % | 322.6 | % |
Page57 of67
Table of Contents
Deposits
The following table presents the balance of each major category of deposits at the dates indicated (dollars in thousands):
March 31, 2015 | December 31, 2014 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Non-interest bearing demand deposits | $ | 1,110,323 | 53 | % | $ | 1,032,634 | 53 | % | ||||||||
Interest bearing transaction accounts | 251,409 | 12 | % | 206,544 | 11 | % | ||||||||||
Money market and savings deposits | 660,313 | 32 | % | 643,675 | 33 | % | ||||||||||
Certificates of deposit | 61,546 | 3 | % | 64,840 | 3 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total deposits | $ | 2,083,591 | 100 | % | $ | 1,947,693 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
Total deposits increased $136 million to $2.1 billion at March 31, 2015 mainly due to a $78 million increase in non-interest bearing demand deposits and a $45 million increase in total interest bearing deposits. The increase in non-interest bearing demand deposits is due to an existing relationship which brought in $68 million, which over the course of the next 12 months will likely be reinvested by them. A long-time 1st Enterprise relationship transferred in $18 million of deposits and the culmination of a business event brought in $18 million of deposits from another 1st Enterprise relationship, all of which the Company believe will stay for the foreseeable future. In addition to these transactions, the Company believes some of the increase in deposits late in the first quarter is likely related to customers accumulating cash in anticipation of federal and state income tax payments, as well as county property taxes in California. At both March 31, 2015 and December 31, 2014, non-interest bearing deposits represented 53% of total deposits.
The following table provides a summary of the Company’s primary and secondary liquidity levels at the dates indicated (dollars in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Amount | Amount | |||||||
Primary Liquidity- On Balance Sheet: | ||||||||
Cash and due from banks | $ | 42,570 | $ | 33,996 | ||||
Interest earning deposits in other financial institutions | 200,020 | 98,590 | ||||||
Investment securities available-for-sale | 224,050 | 226,962 | ||||||
Less: pledged cash and due from banks | (1,500 | ) | (1,500 | ) | ||||
Less: pledged investment securities | (151,859 | ) | (148,805 | ) | ||||
|
|
|
| |||||
Total primary liquidity | $ | 313,281 | $ | 209,243 | ||||
|
|
|
| |||||
Ratio of primary liquidity to total deposits | 15.0 | % | 10.7 | % | ||||
Additional Liquidity Not Included In Primary Liquidity : | ||||||||
Certificates of deposit in other financial institutions | $ | 62,954 | $ | 76,433 | ||||
Less: Certificate of deposits pledged | (2,731 | ) | (2,731 | ) | ||||
|
|
|
| |||||
Total additional liquidity | $ | 60,223 | $ | 73,702 | ||||
|
|
|
| |||||
Secondary Liquidity- Off-Balance Sheet: | ||||||||
Available Borrowing Capacity: | ||||||||
Total secured borrowing capacity with FHLB | $ | 486,949 | $ | 484,669 | ||||
Fed Funds borrowing lines | 71,000 | 71,000 | ||||||
Secured credit line with the FRBSF | 22,256 | 17,528 | ||||||
|
|
|
| |||||
Total secondary liquidity | $ | 580,205 | $ | 446,215 | ||||
|
|
|
|
Page58 of67
Table of Contents
As of March 31, 2015, the Company’s primary overnight source of liquidity consisted of the balances reflected in the table above. The Company’s primary liquidity consisted of cash and due from banks and interest-earning deposits at financial institutions. The amount of funds maintained directly with the Federal Reserve included in interest-earning deposits in other financial institutions was $158.7 million and $60.1 million, at March 31, 2015 and December 31, 2014, respectively. The next source of liquidity is the money market at other banks. Furthermore, the Company has collateralized borrowings and unsecured borrowing facilities. In addition, the Company has $62.9 million of certificates of deposits in other financial institutions where the average maturity is approximately 5.27 months that could be utilized over time to supplement the liquidity needs of the Company.
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 $71 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, $5.0 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 $566 million at March 31, 2015. The Company currently has no outstanding borrowings with the FHLB. As of March 31, 2015, the Company had $735 million of loan collateral pledged with the FHLB. This level of loan collateral would provide the Company with $487 million in borrowing capacity. Any amount of borrowings in excess of the $487 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 $8 million at March 31, 2015. This level of capital would allow the Company to borrow up to $267.1 million. Any advances from the FHLB in excess of the $267.1 million would require additional purchases of FHLB common stock. The Company has $22.6 million in securities pledged with the FHLB at March 31, 2015.
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, 2015, the Company’s available borrowing capacity was $22.3 million.
The Company maintains investments in short term certificates of deposit with other financial institutions, with an average remaining maturity of approximately 5.27 months, with various balances maturing monthly. The Company had balances of $63 million and $76 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, $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.
At March 31, 2015 and December 31, 2014, $1.5 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 $704 million and $720 million at March 31, 2015 and December 31, 2014, respectively.
The holding company liquidity on a stand-alone basis was $5.1 million and $4.6 million, in cash on deposit at the Bank, at March 31, 2015 and December 31, 2014, 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.
Page59 of67
Table of Contents
To date, the Company has not paid any cash dividends on its common stock. 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 for capital adequacy purposes.
On November 30, 2014, the Company entered into an Assignment and Assumption Agreement with the Secretary of the Treasury, pursuant to which the Company issued to the U.S. Treasury 16,400 shares of its Non-Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share and the Company assumed the obligations of 1st Enterprise Bank in connection with its issuance of the same number and type of securities to the Treasury (which shares were retired in connection therewith). The issuance was pursuant to the Treasury’s SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010, which encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. The Series A Preferred Stock is entitled to receive non-cumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1. The current dividend rate is fixed at the current rate of 1% through January 2016. If the Series A Preferred Stock remains outstanding beyond January 2016, the dividend rate will be fixed at 9%. However, the dividend yield through November 30, 2018 approximates 7% as a result of business combination accounting.
As of March 31, 2015, 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, 2015. However, neither the holding company nor the Bank has plans to declare and pay a cash dividend on the common stock at the current time.
The Company has a program to repurchase a portion of an employee’s outstanding restricted stock upon the vesting of this restricted stock, but only in amounts necessary to cover the minimum employee tax withholding obligations at the option of the restricted stockholder (employee). The Company had this program in place during all of 2014 and through the three months ending March 31, 2015. 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.
Page60 of67
Table of Contents
REGULATORY MATTERS
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 Common Equity Tier 1 Ratio (“CET1”), 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, 6.50% Common Equity Tier 1, 8.00% Total Tier 1 risk-based capital and 10.00% Total risk-based capital.
At March 31, 2015, 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 tables present the regulatory capital ratio requirements and the actual capitalization levels of the Company and the Bank as of the dates indicated (dollars in thousands):
CU Bancorp | March 31, 2015 | December 31, 2014 | Adequately Capitalized | Well Capitalized | ||||||||||||
Amount | Amount | (greater than or equal to) | ||||||||||||||
Regulatory Capital Ratios: | ||||||||||||||||
Tier 1 leverage ratio | 10.23 | % | 12.92 | % | 4.0 | % | 5.0 | % | ||||||||
Common Equity Tier 1 ratio | 9.67 | % | — | 4.5 | % | 6.5 | % | |||||||||
Total Tier 1 risk-based capital ratio | 11.05 | % | 10.95 | % | 6.0 | % | 8.0 | % | ||||||||
Total risk-based capital ratio | 11.71 | % | 11.61 | % | 8.0 | % | 10.0 | % | ||||||||
Regulatory Capital Data: | ||||||||||||||||
Common Equity Tier 1 | $ | 201,882 | NA | |||||||||||||
Total Tier 1 capital | 230,637 | $ | 218,147 | |||||||||||||
Total risk-based capital | 244,379 | 231,228 | ||||||||||||||
Average total assets | 2,255,550 | 1,689,096 | ||||||||||||||
Risk-weighted assets | 2,086,916 | 1,992,043 |
California United Bank | March 31, 2015 | December 31, 2014 | Adequately Capitalized | Well Capitalized | ||||||||||||
Amount | Amount | (greater than or equal to) | ||||||||||||||
Regulatory Capital Ratios: | ||||||||||||||||
Tier 1 leverage ratio | 9.87 | % | 12.44 | % | 4.0 | % | 5.0 | % | ||||||||
Common Equity Tier 1 ratio | 10.67 | % | — | 4.5 | % | 6.5 | % | |||||||||
Total Tier 1 risk-based capital ratio | 10.67 | % | 10.55 | % | 6.0 | % | 8.0 | % | ||||||||
Total risk-based capital ratio | 11.32 | % | 11.20 | % | 8.0 | % | 10.0 | % | ||||||||
Regulatory Capital Data: | ||||||||||||||||
Common Equity Tier 1 | $ | $222,535 | NA | |||||||||||||
Tier 1 capital | 222,535 | $ | 210,031 | |||||||||||||
Total risk-based capital | 236,277 | 223,112 | ||||||||||||||
Average total assets | 2,254,910 | 1,688,308 | ||||||||||||||
Risk-weighted assets | 2,086,479 | 1,991,253 |
NA: Not Applicable
The decrease in the Tier 1 leverage ratio at March 31, 2015 from December 31, 2014 is due to the increase in the average total assets for the quarter ended March 31, 2015 compared to the quarter ended December 31, 2014, as the assets acquired from the 1st Enterprise merger was outstanding for the full quarter in 2015 but only one month for the quarter ended December 31, 2014.
Page61 of67
Table of Contents
In July 2013, the federal bank regulatory agencies adopted final regulations which revised their risk-based and leverage capital requirements for banking organizations to meet requirements of Dodd-Frank and to implement international agreements reached by the Basel Committee on Banking Supervision intended to improve both the quality and quantity of banking organizations’ capital (“Basel III”). Dodd-Frank required the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.
The following are among the new requirements that were phased-in beginning January 1, 2015 under the new capital rules:
• | an increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets; |
• | a new category and a required 4.50% of risk-weighted assets ratio is established for CET1 as a subset of Tier 1 capital limited to common equity; |
• | a minimum non-risk-based leverage ratio is set at 4.00%; |
• | changes in the permitted composition of Tier 1 capital to exclude trust preferred securities (however, trust preferred securities issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets, such as CU Bancorp, continues to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements; see further discussion below), mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities; |
• | the risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures; |
• | an additional “countercyclical capital buffer” is required for larger and more complex institutions; and |
• | a new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. |
Including the capital conservation buffer of 2.5%, the new final capital rule results in the following minimum ratios: (i) a Tier 1 capital ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. While the new final capital rule sets higher regulatory capital standards for the Company and the Bank, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of the new capital rules or more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of additional capital.
Under Dodd Frank, trust preferred securities and cumulative perpetual preferred stock is excluded from Tier 1 capital, unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. CU Bancorp assumed approximately $12.4 million of junior subordinated debt securities issued to various business trust subsidiaries of Premier Commercial Bancorp and funded through the issuance of approximately $12.0 million of floating rate capital trust preferred securities. These junior subordinated debt securities were issued prior to May 19, 2010. Because CU Bancorp has less than $15 billion in assets, the trust preferred securities that CU Bancorp assumed from Premier Commercial Bancorp continues to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements.
The Company also currently includes in its Tier 1 capital an amount of Non-Cumulative Perpetual Preferred Stock, Series A issued under the SBLF program. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. Under the Final Rule, the CU Bancorp Preferred Stock continues to be included in Tier 1 Risk-Based Capital because non-cumulative perpetual preferred stock remained classified as Tier 1 capital following the enactment of Dodd Frank.
Page62 of67
Table of Contents
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, 2014 Form 10K, Part I, Item 1 – Business – Supervision and Regulation – Legislation and Regulatory Developments – Dodd-Frank Wall Street Reform and Consumer Protection Act.
Number of Employees
The number of active full-time equivalent employees increased from 250 at December 31, 2014 to 253 at March 31, 2015.
Page63 of67
Table of Contents
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 the Company’s 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, 2015, the Company had twenty-two pay-fixed, receive-variable interest rate contracts that were designed to convert fixed rate loans into variable rate loans. Twenty of these swap contacts are designated as fair value hedges. For additional information on these interest rate contracts, see Note 10 – 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, 2015 (dollars in thousands):
Simulated Rate Changes | Estimated Net Interest Income Sensitivity | |||||||
+ 400 basis points | 44.8 | % | $ | 33,398 | ||||
+ 100 basis points | 10.8 | % | $ | 8,054 | ||||
- 200 basis points (1) | (4.8 | )% | $ | (3,583 | ) |
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. The duration of the Company’s investment securities portfolio at March 31, 2015 is approximately 2.4 years. 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 73% of the loan portfolio. However, the Company has floors on some of its loans. At March 31, 2015, 38% 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, 2015, is not materially different from that reported at December 31, 2014 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 2014 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. |
Page64 of67
Table of Contents
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. |
Page65 of67
Table of Contents
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 2014 Annual Report on Form 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 | Description | |
31.1⌂ | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2⌂ | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1⌂ | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS⌂ | XBRL Instance Document | |
101.SCH⌂ | XBRL Taxonomy Extension Schema Document | |
101.CAL⌂ | XBRL Taxonomy Calculation Linkbase Document | |
101.LAB⌂ | XBRL Taxonomy Label Linkbase Document | |
101 DEF⌂ | XBRL Taxonomy Extension Definition Linkbase Document | |
101.PRE⌂ | XBRL Taxonomy Presentation Linkbase Document |
⌂ Attached hereto
Page66 of67
Table of Contents
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 7, 2015 | /s/ DAVID I. RAINER | ||||||
David I. Rainer | ||||||||
Chief Executive Officer | ||||||||
Date: | May 7, 2015 | /s/ KAREN A. SCHOENBAUM | ||||||
Karen A. Schoenbaum | ||||||||
Chief Financial Officer |
Page67 of67