Version 3 29
11/2/94
2:12 PM
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
/X/ For the Quarterly Period Ended September 30, 1994, or
Transition Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________.
Commission File Number 0-11008
CU BANCORP
(Exact name of registrant as specified in its charter)
California 95-3657044
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
818-907-9122
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year if changes
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
As of September 30, 1994, the Registrant has outstanding 4,473,312 shares
of its Common stock, no par value.
CU Bancorp
Quarter Ended September 30, 1994
Table of Contents - Form 10-Q
Page
Part I. Financial Information
Item 1. Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operation. 3
Consolidated Statements of Financial Condition:
-September 30, 1994, and December 31, 1993. 19
Consolidated Statements of Income:
-Three and Nine month Periods Ended September 30, 1994,
and September 30, 1993. 20
Consolidated Statements of Cash Flows:
-Nine month Periods Ended September 30, 1994, and
September 30, 1993. 21
Notes to Consolidated Financial Statements 22
Signatures 25
Part II. Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Filings on Form 8-K 26
Management Discussion and Analysis
Overview
The Company earned $671 thousand, or $0.14 per share, during the third
quarter of 1994, compared to $566 thousand, or $0.13 per share, during the
same period in 1993. Third quarter 1994 earnings included profitable
performance by the Bank and a gain on the sale of a portion of the mortgage
servicing rights retained by the Bank when its mortgage origination network
was sold in 1993.
The Bank's asset quality ratios continue to be exceptionally strong. At
September 30, 1994, nonperforming assets were $113 thousand, down $0.9
million, or 89%, from the prior quarter, and $0.9 million, or 89% from the
third quarter of 1993. At September 30, 1994, the Bank did not have any
real estate acquired through foreclosure.
The Bank's allowance for loan losses as a percent of both nonperforming
loans and nonperforming assets at the end of the third quarter of 1994 was
6611%, compared to third quarter 1993 levels of 536% and 142%,
respectively. The allowance for loan losses as a percentage of
nonperforming loans and assets has increased as both nonperforming
categories were reduced. During the first nine months of 1994, the Bank
enjoyed a net recovery as recoveries exceeded chargeoffs for the third
consecutive quarter. Net recoveries further increase the allowance's
coverage of the nonperforming loans and assets.
Capital ratios are strong, substantially exceeding levels required to be in
the "well capitalized" category established by bank regulators. The Total
Risk-Based Capital Ratio was 16.9%, the Tier 1 Risk-Based Capital Ratio was
15.6%, and the Leverage Ratio was 10.6% at September 30, 1994, compared to
16.7%, 15.4%, and 9.2%, respectively, at year-end 1993. Regulatory
requirements for Total Risk-Based, Tier 1 Risk-Based, and Leverage capital
ratios are a minimum of 8%, 4%, and 3%, respectively, and for
classification as well capitalized, 10%, 6%, and 5%, respectively.
The successful results in 1993 and 1994 concerning asset quality,
regulatory relations, growth of middle market lending and strategic focus
make expansion and growth possible. Two new loan production offices were
opened in January 1994. These offices have allowed expanded market
penetration and commercial portfolio diversification. Both offices have
since been converted to branches. On April 1, 1994, the Bank acquired the
deposits of the Encino branch of Mechanics National Bank from the FDIC, to
expand and improve deposit mix. In October 1994, another loan production
office was opened in Camarillo, California to be the Ventura County
regional center.
Balance Sheet Analysis
Loan Portfolio Composition and Credit Risk
Significant improvements in loan portfolio composition and credit quality
are the result of management's commitment to middle market commercial
lending and a strong credit culture. The credit standards established over
two years ago have allowed creation of a high quality commercial loan
portfolio and nearly eliminated non performing assets. Real estate
concentrations established before that time have been reduced to the point
that they are no longer concentrations. Concentrations of loans in any
industry or collateral are now discouraged and limited by the Bank's credit
policy.
The Bank's focus on middle market lending, in its infancy at year-end 1992,
gained momentum in 1993 and has further accelerated in 1994. Total loans
increased over $19 million from December 31, 1993 to September 30, 1994.
Offsetting this, the remaining Held for Sale mortgages of $10.4 million at
December 31, 1993 were sold in the first quarter of 1994. Excluding this
planned liquidation, loans increased by almost $30 million, or 23%, for the
nine months ended September 30, 1994.
Table 1 Loan Portfolio Composition
Amounts in thousands of dollars September 30, December 31, September 30,
1994 1993 1993
Commercial & Industrial Loans $152,548 $120,513 $119,285
Real Estate Loans:
Held for Sale 0 10,426 93,999
Mortgages 6,383 8,496 9,183
Construction 18 1,226 232
Other Loans 861 0 187
Total loans net of unearned fees $159,810 $140,661 $222,886
Historically, the Bank's real estate loans secured by single family
residences were principally mortgages held for sale that were originated by
the Mortgage Banking Operation. These were sold to investors through firm
commitments, generally in less than 90 days. The loans amounted to $10.4
million, or 7.4% of the December 31, 1993, loan portfolio. This part of
the loan portfolio historically presented almost no credit risk. The sale
of the mortgage origination operation eliminated this loan concentration.
The remainder of real estate loans are generally collateralized by a first
or second trust deed position.
Lending efforts have been directed away from commercial real estate, as
well as construction and multifamily lending. The Bank is now focused on
business lending to middle market customers. Current credit policy in
general now permits commercial real estate lending only as part of a
complete commercial banking relationship with a middle market customer.
Existing commercial real estate loans, 13% of the loan portfolio, or $21
million at September 30, 1994, compared to $27 million at year-end 1993,
are secured by first or second liens on office buildings and other
structures. The loans are secured by real estate that had appraisals in
excess of loan amounts at origination.
Monitoring and controlling the Bank's allowance for loan losses is a
continuous process. All loans are assigned a risk grade, as defined by
credit policies, at origination and are monitored to identify changing
circumstances that could modify their inherent risks. These classifications
are one of the criteria considered in determining the adequacy of the
allowance for loan losses.
The amount and composition of the allowance for loan losses is as follows:
Table 2 Allocation of Allowance for Loan Losses
Amounts in thousands of dollars September 30, December 31, September 30,
1994 1993 1993
Commercial & Industrial Loans $6,916 $5,699 $4,923
Real estate loans - Held for Sale 0 67 67
Real estate loans - Mortgages 197 225 196
Real estate loans - Construction 0 10 28
Other loans 0 0 17
Loans 7,115 6,001 5,231
Unfunded commitments and letters 355 512 478
of credit
Total Allowance for loan losses $7,470 $6,513 $5,709
Adequacy of the allowance is determined using management's estimates of the
risk of loss for the portfolio and individual loans. Included in the
criteria used to evaluate credit risk are, wherever appropriate, the
borrower's cash flow, financial condition, management capabilities, and
collateral valuations, as well as industry conditions. A portion of the
allowance is established to address the risk inherent in general loan
categories, historic loss experience, portfolio trends, economic
conditions, and other factors. Based on this assessment, a provision for
loan losses may be charged against earnings to maintain the adequacy of the
allowance. The allocation of the allowance based upon the risks by type of
loan, as shown in Table 2, implies a degree of precision that is not
possible when using judgment. While the systematic approach used does
consider a variety of segmentations of the portfolio, management considers
the allowance a general reserve available to address risks throughout the
entire loan portfolio.
Activity in the allowance, classified by type of loan, is as follows:
Table 3 Analysis of the Changes in the Allowance for Loan Loss
Amounts in thousands of dollars For the Periods Ended
September 30, December 31, September 30,
1994 1993 1993
Balance at January 1 $6,513 $12,986 $12,986
Loans charged off:
Real estate secured loans 486 3,266 3,266
Commercial loans secured and unsecured 574 6,582 6,203
Loans to individuals, installment and 99 901 484
other loans
Total charge-offs 1,159 10,749 9,953
Recoveries of loans previously charged off:
Real estate secured loans 545 393 135
Commercial loans secured and unsecured 1,568 3,189 1864
Loans to individuals, installment and 3 244 227
other loans
Total recoveries of loans previously 2,116 3,826 2,226
charged off
Net charge-off (recovery) (957) 6,923 7,727
Provision for loan losses 0 450 450
Balance at end of period $7,470 $6,513 $5,709
Net loan charge-offs (recoveries) as a
percentage of average gross loans
outstanding during the period ended (0.48%) 3.49% 2.98%
The Bank's policy concerning nonperforming loans is more conservative than
is generally required. It defines nonperforming assets as all loans ninety
days or more delinquent, loans classified nonaccrual, and foreclosed, or in
substance foreclosed real estate. Nonaccrual loans are those whose
interest accrual has been discontinued because the loan has become ninety
days or more past due or there exists reasonable doubt as to the full and
timely collection of principal or interest. When a loan is placed on
nonaccrual status, all interest previously accrued but uncollected is
reversed against operating results. Subsequent payments on nonaccrual loans
are treated as principal reductions. At September 30, 1994, nonperforming
loans amounted to $113 thousand, down 93% from $1.4 million at December 31,
1993.
Table 4: Nonperforming Assets
Amounts in thousands of dollars September 30, December 31, September 30,
1994 1993 1993
Loans not performing (1) $113 $1,378 $1,065
Other real estate owned 0 920 2,968
Total nonperforming assets $113 $2,298 $4,033
Allowance for loan losses as a percent of:
Nonperforming loans 6611% 473% 536%
Nonperforming assets 6611% 283% 142%
Nonperforming assets as a 0.0% 0.8% 3.3%
percent of total assets
Nonperforming loans as a 0.1% 1.0% 3.0%
percent of total loans
Note 1:
Loans not performing
Performing as agreed $113 $9 $937
Partial performance 0 369 6
Not performing 0 1000 122
$113 $1,378 $1,065
Nonaccrual:
Loans $113 $378 $1,065
Troubled debt restructurings 0 0 0
Securities
The securities portfolio at September 30, 1994, totaled $64 million,
compared to $88 million at year-end 1993. The securities are all held in a
Held for Investment portfolio. This portfolio is recorded at amortized
cost. It is the Bank's intention to hold these securities to their
individual maturity dates. There was no Held for Sale portfolio at
September 30, 1994 or year-end 1993.
There have been no realized gains or losses on securities in the first nine
months of 1994. Gains of $77 thousand were realized in the first nine
months of 1993. At September 30, 1994, there were unrealized gains of $16
thousand and losses of $1.7 million in the securities portfolio.
Additional information concerning securities is provided in the footnotes
to the accompanying financial statements.
Other Real Estate Owned
At September 30, 1994, there was no Other Real Estate Owned on the Bank's
balance sheet, compared with $920 thousand at December 31, 1993. The
carrying values of these properties are at fair value, which is determined
using recent appraisal values adjusted, if necessary, for other market
conditions. Loan balances in excess of fair value are charged to the
allowance for loan losses when the loan is reclassified to other real
estate. Subsequent declines in fair value are charged against an allowance
for real estate owned losses created by charging a provision to other
operating expenses.
During the third quarter of 1994, the bank sold one property held as Other
Real Estate Owned, realizing a gain of $494 thousand, bringing year to date
gains on real estate sales to $585 thousand. There were no comparable
sales in 1993. Expenses related to Other Real Estate Owned were $21
thousand in the nine months ended September 30, 1994, with $9 thousand
incurred in the third quarter. This compares to $74 thousand and $232
thousand in the three and nine month periods ended September 30, 1993.
Deposit Concentration
Due to its historic focus on real estate related activities, the Bank
developed a concentration of deposit accounts from title insurance and
escrow companies. These deposits are generally noninterest bearing
transaction accounts that contribute to the Bank's interest margin.
Noninterest expense related to these deposits is included in other
operating expense. The Bank monitors the profitability of these accounts
through an account analysis procedure.
The Bank offers products and services allowing title insurance and escrow
customers to operate with increased efficiency. A substantial portion of
the services, provided through third party vendors, are automated data
processing and accounting for trust balances maintained on deposit at the
Bank. These and other banking related services, such as messenger and
deposit courier services, will be limited or charged back to the customer
if the deposit relationship profitability does not meet the Bank's
expectations.
Noninterest bearing deposits represent nearly the entire title and escrow
relationship. These balances have been reduced substantially as the Bank
focused on middle market business loans. The balance at September 30,
1994, was $39 million compared to $58 million at December 31, 1993. Costs
relative to servicing the above relationships are the significant portion
of the Bank's customer data processing and messenger and courier costs.
There have been no significant changes in these costs in the first nine
months of 1994.
The Bank had $20.4 million in certificates of deposit larger than $100
thousand dollars at September 30, 1994. The maturity distribution of these
deposits is relatively short term, with $15.7 million maturing within 3
months and the balance maturing within 12 months.
Liquidity and Interest Rate Sensitivity
The objective of liquidity management is to ensure the Bank's ability to
meet cash requirements. The liquidity position is managed giving
consideration to both on and off-balance sheet sources and demands for
funds.
Sources of liquidity include cash and cash equivalents (net of Federal
Reserve requirements to maintain reserves against deposit liabilities),
securities eligible for pledging to secure borrowings from dealers pursuant
to repurchase agreements, loan repayments, deposits, and borrowings from a
$20 million overnight federal funds line available from a correspondent
bank. Potential significant liquidity requirements are withdrawals from
noninterest bearing demand deposits and funding of commitments to loan
customers.
During 1993, the Bank maintained a $20 million line of credit with a major
purchaser of the mortgage loans originated by the mortgage origination
operation. This warehouse line was terminated in conjunction with the sale
of that operation.
From time to time the Bank may experience liquidity shortfalls ranging from
one to several days. In these instances, the Bank will either purchase
federal funds, and/or sell securities under repurchase agreements. These
actions are intended to bridge mismatches between funding sources and
requirements, and are designed to maintain the minimum required balances.
The Bank had no Federal Funds purchased or borrowings under repurchase
agreements in the first nine months of 1994.
The Bank's portfolio of large certificates of deposit (those of $100
thousand or more) at September 30, 1994 was 8.4% of total deposits,
compared to 8.1% at December 31, 1993. This funding source has
traditionally been used to manage liquidity needs within the deposit
portfolio.
Table 6 Interest Rate Maturities of Earning Assets and Funding
Liabilities at September 30, 1994
Amounts in thousands of dollars Amounts Maturing or Repricing in
More Than 3 More Than 6 More Than 9
Months But Months But Months But
Less Than Less Than Less Than Less than 12 Months
3 Months 6 Months 9 Months 12 Months & Over
Earning Assets
Gross Loans $148,940 $1,692 $4,231 $105 $4,842
Securities 4,388 3,009 3,000 3,002 51,052
Federal funds sold & other 12,000 --- --- --- ---
Total earning assets 165,328 4,701 7,231 3,107 57,271
Interest-bearing deposits:
Now and money market 77,393
Savings 10,337
Time certificates of deposit:
Under $100 14,296 1,879 1,530 2,600 96
$100 or more 15,709 2,857 1,335 400 105
Non interest-bearing demand deposits 35,397 --- --- --- ---
Total funding liabilities 153,132 4,736 2,865 3,000 201
Interest rate sensitivity gap 12,196 (35) 4,366 107 57,070
Cumulative interest rate sensitivity gap 12,196 12,161 16,527 16,634 73,704
Off balance sheet financial instruments 0 0 0 0 0
Net cumulative gap $12,196 $12,161 $16,527 $16,634 $73,704
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities (1) 1.08% 1.08% 1.10% 1.10% 1.45%
(1) Ratios greater than 1.0 indicate a net asset sensitive position.
Ratios less than 1.0 indicate a liability sensitive position. A ratio
of 1.0 indicates a risk neutral position.
Assets and liabilities shown on Table 6 are categorized based on
contractual maturity dates. Maturities for those accounts without
contractual maturities are estimated based on the Bank's experience with
these customers. Noninterest bearing deposits of title and escrow
companies, having no contractual maturity dates, are considered subject to
more volatility than similar deposits from commercial customers. The net
cumulative gap position shown in the table above indicates that the Bank
does not have a significant exposure to interest rate fluctuations during
the next twelve months.
Capital
Total shareholders' equity was $29.0 million at September 30, 1994,
compared to $27.0 million at year-end 1993. This increase was due to
earnings, plus the exercise of stock options. The Bank is guided by
statutory capital requirements, which are measured with three ratios, two
of which are sensitive to the risk inherent in various assets and which
consider off-balance sheet activities in assessing capital adequacy.
During 1994 and 1993, the Bank's capital levels exceeded the "well-
capitalized" standards, the highest classification established by bank
regulators.
Table 7 Capital Ratios
Regulatory Standards
September 30, December 31, Adequately Well
1994 1993 Capitalized Capitalized
Total Risk Based Capital 16.9% 16.7% 8.0 % 10.0%
Tier 1 Risk Base Capital 15.6 15.4 4.0 6.0
Leveraged Capital 10.6 9.2 4.0 5.0
No dividends have been paid in 1994 or 1993. Capital being generated by
current earnings is currently expected to be used to support anticipated
growth of the Bank.
The common stock of the Company is listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market Systems
where it trades under the symbol CUBN.
Table 8 Stock Prices
1994 1993
High Low High Low
First Quarter $7.50 $6.50 $6.25 $3.38
Second Quarter 7.00 5.75 7.00 4.75
Third Quarter 7.50 6.00 6.25 5.00
Fourth Quarter --- --- 7.25 5.75
Earnings by Line of Business
Prior to the sale of the mortgage origination network in November, 1993,
the Bank operated a commercial bank and a mortgage bank as two distinct
business segments. In 1994, real estate lending is generally only done as
part of a commercial banking relationship. For 1994, therefore, the Bank
consists of only a single segment, the commercial banking operation.
Tables 9A and 9B show the pre-tax operating contributions by the Commercial
Banking and Mortgage Banking divisions for the three and nine months ended
September 30, 1994 and 1993.
Table 9A Pre-tax operating contribution by line of business (i)
Amounts in thousands of dollars
For the three For the three
months ended months ended
September 30, September 30, 1993
1994
Commercial Mortgage
Consolidated Consolidated Banking Banking
Net interest income $3,702 $3,863 $3,556 $307
Provisions for loan losses 0 150 75 75
Risk adjusted net interest income 3,702 3,713 3,481 232
Noninterest revenue 1041 8242 284 7,958
Total revenues 4,743 11,955 3,765 8,190
Salaries and related benefits 1,599 2,867 1,447 1,420
Restructuring charge 600 0 0 0
Other operating expenses 1,985 8,141 1,900 6,203
Total operating expenses 4,184 11,008 3,347 7,623
Operating income 559 947 418 567
Gain on sale of mortgage servicing
portfolio 625 --- --- ---
Income before taxes $1,184 $947 $418 $567
(i) Inter-divisional transactions for 1993 have been eliminated at the
division level.
Table 9B Pre-tax operating contribution by line of business (i)
Amounts in thousands of dollars
For the nine For the nine
months ended months ended
September 30, September 30, 1993
1994
Commercial Mortgage
Consolidated Consolidated Banking Banking
Net interest income $9,774 $11,507 $10,562 $945
Provisions for loan losses 0 450 300 150
Risk adjusted net interest income 9,774 11,507 10,262 795
Noninterest revenue 2,536 18,575 746 17,829
Total revenues 12,310 29,632 11,008 18,624
Salaries and related benefits 4,678 8,129 4,649 3,480
Restructuring charge 600 0 0 0
Other operating expenses 5,943 18,978 5,633 13,218
Total operating expenses 11,221 27,107 10,282 16,698
Operating income 1,089 2,525 726 1,926
Gain on sale of mortgage servicing
portfolio 2,183 --- --- ---
Income before taxes $ 3,272 $ 2,525 $ 726 $1,926
(i) Inter-divisional transactions for 1993 have been eliminated at the
division level.
The Bank continues to take steps to facilitate the expansion and market
penetration of the commercial bank including the creation of loan
production offices, establishment of a Small Business Administration
("SBA") loan production group, and development of an international trade
services group.
Branches have been established in two strategic locations in Southern
California. These will serve the San Gabriel Valley area and the South Bay
area. The offices are staffed with seasoned commercial lenders whose
primary focus is business development. Such offices are cost effective
approaches to business development and allow the Bank access to wider
market exposure. While these offices are primarily staffed with existing
personnel, when appropriate, key people with specific market knowledge and
experience have been hired. In October 1994, the Bank opened a loan
production office in Camarillo, California as its regional center for
Ventura County.
The Bank has established a group of lenders to focus on the production of
commercial loans that can be participated with the SBA. These loans are
subject to the same credit quality policies and procedures as all
commercial loan production. Fees generated from the sale of the guaranteed
portion of the loans will be an important new source of noninterest income.
Another new product was added with the creation of an international trade
services group. Many of the Bank's existing commercial customers and
prospects are involved in import and/or export. This product line includes
letters of credit, foreign exchange, and foreign collections, and is
another important element in the total banking relationship offered to our
business customers.
Net Interest Income and Interest Rate Risk
Net interest income is the difference between interest and fees earned on
earning assets and interest paid on funding liabilities. Net interest
income was $3.7 million and $9.8 million for the three and nine month
periods ended September 30, 1994, compared to $3.9 million and $11.5
million for the comparable periods in 1993. The change is primarily
attributable to changes in volume. As a result of efforts to deal with
credit quality issues and refocus the Bank on middle market business
customers, loans outside target markets have been motivated to leave the
Bank. Initially this has an adverse affect on net interest margin but
subsequent growth of the middle market loan portfolio replaces these assets
and provides a more reliable and valuable source of interest margin.
Table 10 Analysis of Changes in Net Interest Income (1)
Amounts in thousands of dollars Nine months ended September 30, Nine months ended September 30,
1994 compared to 1993 1993 compared to 1992
Increases(Decreases) Volume Rate Total Volume Rate Total
Interest Income
Loans, net $(3,936) $423 $(3,513) $(2,943) $(133) $(3,076)
Investments 826 75 901 (1,063) (541) (1,604)
Federal Funds Sold 221 132 353 (358) (114) (472)
Total interest income (2,889) 630 (2,259) (4,364) (788) (5,152)
Interest Expense
Interest-bearing deposits:
Demand and Savings 70 (95) (25) (305) (531) (836)
Time Certificates of deposit
Under $100 (226) 27 (199) 409 (53) 356
$100 or more (234) 62 (172) (349) (197) (546)
Federal funds purchased / Repos (22) (22) (43) (11) (9) (20)
Other borrowings (92) 5 (87) 341 0 341
Total interest expense (503) (23) (526) 84 (789) (705)
Net interest income $(2,386) $653 $(2,765) (4,448) 1 (4,447)
(1) The change in interest income or interest expense that is attributable
to both change in average balance and average rate has been allocated to
the changes due to (i) average balance and (ii) average rate in
proportion to the relationship of the absolute amounts of the changes in
each.
Yields on earning assets were approximately 7.7% and 7.4% for the three and
nine months ended September 30, 1994, compared to 7.7% and 8.0% for the
comparable periods in 1993. The lower average yield on earning assets in
1994 is largely due to the higher mix of Fed Funds and government
securities held in 1994 compared with higher concentrations of mortgage
loans in 1993. Through October 8, 1993, net interest income continued to
benefit from an interest rate swap agreement, discussed below. Rates on
interest-bearing deposits resulted in an average cost of funds of 2.7% in
1994, compared to 2.9% for the same period in 1993.
Shrinkage in the Bank's earning asset and funding liability portfolios
contributed to the reduction in net interest income. Average loans during
the third quarter of 1994 decreased $44 million from $187 million in the
third quarter of 1993. As previously discussed, this resulted from the sale
of the held for sale mortgage loans, discussed below, and management's
efforts to improve the quality of the loan portfolio and redirect
production to middle market commercial loans. Earning assets averaged $224
million in 1994, down $21 million from $245 million in the same period of
1993.
Table 11 Average Balance Sheets and Analysis of Net Interest Income
Nine months ended Nine months ended
Amounts in thousands of dollars ----September 30, 1994---- ----September 30, 1993-----
Interest Annual Interest Annual
Income Yield or Income Yield or
Balance or Rate Balance or Rate
Expense Expense
Interest Earning Assets
Loans, Net $134,840 $9,660 9.55% $189,955 $13,173 9.25%
Investments 65,511 2,059 4.19 35,781 1,100 4.10
Certificates of Deposit
in other banks 1,183 46 5.10 4,615 104 3.00
Federal Funds Sold 22,804 656 3.83 14,291 303 2.83
Total Earning Assets 224,338 12,421 7.38 244,642 14,680 8.00
Non Earning Assets
Cash & Due From Banks 29,306 44,008
Other Assets 7,825 16,602
Total Assets $261,469 $305,252
Interest-bearing Liabilities
Demand and savings $80,938 1,427 2.35 $77,107 1,452 2.51
Time Certificates of Deposits
Less Than $100 17,829 509 3.80 25,777 708 3.66
More Than $100 17,535 457 3.47 26,705 629 3.14
Fed Funds Purchased / Repos
--- -- --- 1,908 43 3.10
Total interest-bearing 116,302 2,393 2.74 131,497 2,832 2.87
Noninterest-bearing Deposits 109,505 139,110
Total Deposits 225,807 2,393 1.41 270,607 2,832 1.40
Other Borrowings 5,184 254 6.53 7,057 341 6.44
Total Funding Liabilities 230,991 2,647 1.53 277,664 3,173 1.52
Other Liabilities 2,878 2,159
Shareholders' Equity 27,600 25,429
Total Liabilities and
Shareholders' Equity $261,469 $305,252
Net Interest Income $9,774 5.81% $11,507 6.27%
Shareholders' Equity to Total
Assets 10.56% 8.17%
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin was 6.18% and 5.81% for the three and nine
months ended September 30, 1994, compared to 6.00 and 6.27% for the same
periods in 1993. The Bank's margin is strong because it has funded itself
with a significant amount of noninterest bearing deposits. The lower
margin in 1994 is largely due to the maturing of the interest rate swap
discussed below.
Through October 8, 1993, the Bank continued to benefit from an interest
rate swap agreement entered into October 8, 1991, which had a notional
value of $100 million. Under this arrangement, the Bank received a fixed
rate of 8.18% and paid interest at prime rate, which was 6.0% during 1993.
The income earned from the interest rate swap agreement was $550 thousand
and $1.6 million in the three and nine month periods ending September 30,
1993.
Other Operating Income
The majority of other operating income in prior years was earned as the
Mortgage Banking Operation originated and sold mortgage loans. The trends
and composition of other operating income are shown in the following table.
Table 12A Other operating income
Amounts in thousands of dollars For the three --------- For the three---------
months ended ----------months ended----------
September 30, September 30, 1993
1994
Commercial Mortgage
Consolidated Consolidated Banking Banking
Processing fees $363 $363
Capitalization of excess 9 9
servicing rights
Fees on loans sold 232 232
Premium on sales of mortgage 6,479 6,479
loans
Servicing income 247 495 495
Documentation fees 29 281 19 262
Other service fees and charges 271 383 265 118
Securities & other nonoperating gains 0 0 0 0
Gain on sale of real estate owned 494
Gain on sale of mortgage
servicing portfolio 625 --- --- ---
Total $1,666 $8,242 $284 $7,958
Table 12B Other operating income
Amounts in thousands of dollars For the nine For the nine
months ended months ended
September 30, September 30, 1993
1994
Commercial Mortgage
Consolidated Consolidated Banking Banking
Processing fees $929 $959
Capitalization of excess 207 207
servicing rights
Fees on loans sold $15 938 938
Premium on sales of mortgage loans 83 9,357 9,357
Servicing income 961 1,498 1,498
Documentation fees 73 766 79 687
Other service fees and charges 819 888 590 298
Securities & other nonoperating gains 0 77 77
Gain on sale of real estate owned 585
Gain on sale of mortgage
servicing portfolio 2,183 --- --- ---
Total $4,719 $18,575 $746 $17,829
The Mortgage Banking Operation earned fee income on loans originated, and
gains as loans were sold to permanent investors. Loans for which servicing
was retained are conventional mortgages under approximately $200 thousand
which were sold to the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation, and other institutional investors. Excess
servicing rights were capitalized, and related gains recognized, based on
the present value of the servicing cash flows discounted over a period of
seven years. When loan prepayments occur within this period, the remaining
capitalized cost associated with the loan is written off.
The servicing rights were retained by the bank following sale of the
mortgage origination operation. The Bank has entered into an agreement with
the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation to dispose of any remaining portion of this portfolio
by the end of 1994 because, with the sale of the mortgage origination
operation, the Bank is no longer a qualified seller/servicer of such loans.
During the first nine month of 1994, the bank sold a portion of the
retained servicing rights realizing a gain of $2,183, including a gain of
$625 thousand in the current quarter.
Operating Expense
The Bank restructured its branch operations functions in the third quarter
of 1994, re-engineering its entire work flow and information handling
activities. This resulted in a one time charge of $600 thousand for
severance pay and other expenses associated with the changes to the
operating policies and procedures. Operating expense for the commercial
bank excluding this charge was $3.6 million and $10.6 million in the three
and nine months ended September 30, 1994, compared to $3.3 million and
$10.3 million for the same periods in 1993. Operating expenses for the
consolidated Bank have declined in 1994, primarily due to the sale of the
mortgage origination operation at the end of 1993.
Provision for Loan Losses
The Bank has made no provision for loan losses in 1994 compared with $150
thousand and $450 thousand for the three and nine month periods ended
September 30, 1993. This change in provision was made possible by the
significant reduction of nonperforming loans. The relationship between the
level and trend of the allowance for loan losses and nonperforming assets,
combined with the results of the ongoing review of credit quality,
determine the level of provisions.
Legal and Regulatory Matters
In June 1992, the Bank entered into an agreement with the Office of the
Comptroller of the Currency (OCC), the Bank's primary federal regulator,
which required the implementation of certain policies and procedures for
the operation of the bank to improve lending operations and management of
the loan portfolio. In November 1993, after completion of its annual
examination, the OCC released the Bank from the Formal Agreement.
Following this, the Federal Reserve Bank of San Francisco ("Fed") notified
the Company on November 29, 1993, that the Memorandum of Understanding,
which it had signed, was terminated because the requirements of the
agreement were satisfied.
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
Amounts in thousands of dollars Sept.30, December 31,
1994 1993
Assets
Cash and due from banks $43,228 $18,440
Federal funds sold 12,000 28,000
Total cash and cash equivalents 55,228 46,440
Time deposits with other financial institutions 397 1,377
Investment securities (Market value of $62,787 and
$87,889 at September 30, 1994 and December 31, 1993,
respectively) 64,451 88,034
Loans, (Net of allowance for loan losses of $7,470 and
$6,513 at September 30, 1994, and December 31, 1993,
respectively) 152,340 134,148
Premises and equipment, net 779 924
Other real estate owned, net 0 920
Accrued interest receivable and other assets 7,241 7,363
Total Assets $280,436 $279,206
Liabilities and Shareholders' equity
Deposits:
Demand deposits $113,995 $125,665
Savings deposits 87,730 66,214
Time deposits under $100 20,401 27,753
Time deposits of $100 or more 20,406 19,296
Total deposits 242,532 238,928
Accrued interest payable and other liabilities 8,878 13,288
Total liabilities 251,410 252,216
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1994 or 1993 ---
Common stock, no par value:
Authorized - 20,000,000 shares
Issued and outstanding - 4,473,312 in 1994, and
4,424,306 in 1993 . 26,429 26,250
Retained earnings 2,597 740
Total Shareholders' equity 29,026 26,990
Total Liabilities and Shareholders' equity $280,436 $279,206
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Income CU Bancorp and Subsidiary
Amounts in thousands of dollars, except per share data For the three months For the nine months
ended Sept.30, ended Sept. 30,
1994 1993 1994 1993
Revenue from earning assets:
Interest and fees on loans $3,617 $3,821 $9,660 $11,542
Benefits of interest rate hedge transactions 0 550 0 1,631
Interest on taxable investment securities 761 263 2,049 1,068
Interest on tax exempt investment securities 8 9 10 32
Interest on time deposits with other financial institutions 14 33 46 104
Interest on federal funds sold 257 200 656 303
Total revenue from earning assets 4,657 4,876 12,421 14,680
Cost of funds:
Interest on interest-bearing demand deposits 481 400 1,259 1,193
Interest on savings deposits 67 85 168 259
Interest on time deposits under $100 160 273 509 708
Interest on time deposits of $100 or more 181 156 457 629
Interest on federal funds purchased & securities sold
under agreements to repurchase 0 0 0 43
Interest on other borrowings 66 99 254 341
Total cost of funds 955 1,013 2,647 3,173
Net revenue from earning assets before provision for
loan losses 3,703 3,863 9,774 11,507
Provision for loan losses 0 150 0 450
Net revenue from earning assets 3,703 3,713 9,774 11,057
Other operating revenue:
Capitalization of excess servicing rights 0 9 0 207
Servicing income - mortgage loans sold 247 495 961 1,498
Other fees & charges - commercial 296 283 735 667
Fees on loans sold 0 232 15 938
Premium on sales of mortgage loans 0 6,479 83 13,272
Other fees and charges - mortgage 4 744 157 1,916
Gain on sale of mortgage servicing portfolio 625 --- 2183 ---
Gain on sale of real estate owned 494 585
Gain on sale of investment securities (before taxes of $0,
and $11, in 1994, 1993, respectively) 0 0 0 28
Gain on sale of securities held for sale (before taxes of $0
and $20 in 1994 and 1993, respectively) 0 0 0 49
Total other operating revenue 1,666 8,242 4,719 18,575
Other operating expenses:
Salaries and related benefits 1,599 2,867 4,678 8,129
Selling expenses - mortgage loans 87 4,436 333 9,621
Restructuring charge 600 0 600 0
Other operating expenses 1,898 3,705 5,610 9,357
Total operating expenses 4,184 11,008 11,221 27,107
Income before provision for income taxes 1,184 947 3,272 2,525
Provision for income taxes 513 381 1,415 1,019
Net income $671 $566 $1,857 $1,507
Earnings per share $0.14 $0.13 $0.40 $0.34
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statement of Cash Flows CU Bancorp and Subsidiary
Amounts in thousands of dollars --For the nine months ended--
Sept. 30,
1994 1993
Increase(decrease) in cash and cash equivalents
Cash flows from operating activities
Net income $1,857 $1,507
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation and amortization 349 630
Amortization of real estate mortgage servicing rights 15 243
Provision for losses on loans and other real estate owned 0 450
Gain on sale of investment securities, net 0 (49)
(Increase) decrease in other assets 1,997 (1,104)
(Decrease) in other liabilities (4,386) (1,556)
(Increase) Decrease in accrued interest receivable (970) (397)
Increase in deferred loan fees 181 24
Capitalization of excess mortgage servicing rights 0 207
(Decrease) in accrued interest payable (24) (133)
Net amortization of premium on securities 813 148
Accrued benefits from interest rate hedge transactions 0 36
Total adjustments (2,025) (1,501)
Net cash provided by operating activities (168) 6
Cash flows from investing activities
Proceeds from investment securities sold or matured 52,861 16,362
Proceeds from held for sale securities sold 0 41,755
Purchase of investment securities (30,091) 0
Net decrease in time deposits with other financial
institutions 0 (1,516)
Net (increase) decrease in loans (18,373) (24,008)
(Purchases) of premises and equipment, net (204) (493)
Net cash provided by (used in) investing activities 4,193 32,100
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits 9,846 (60,355)
Net increase (decrease) in time certificates of deposit (5,261) 3,004
Proceeds from exercise of stock options and director
warrants 179 190
Net cash provided (used) by financing activities 4,764 (57,161)
Net increase in cash and cash equivalents 8,789 (25,055)
Cash and cash equivalents at beginning of year 46,440 55,989
Cash and cash equivalents at end of year $55,229 $30,934
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements
September 30, 1994
UNAUDITED
Note A. BASIS OF PRESENTATION
The accounting and reporting policies of CU Bancorp ("the Company") and its
wholly owned subsidiary, California United Bank, N.A. ("the Bank"), are
prepared in accordance with generally accepted accounting principles used
in the banking industry. All material inter company balances have been
eliminated and all material interim period adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
condition, results of operations, and cash flow have been made.
Note B. EARNINGS PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
periods presented, except when the effect of the latter would be anti-
dilutive.
NOTE C. SECURITIES
The Bank has the intent and ability to hold its investment securities until
maturity. Accordingly, investment securities are carried at cost, adjusted
for amortization of premiums and accretion of discounts on a straight-line
basis, which approximates the effective interest method. Gains and losses
recognized on the sale of investment securities are based upon the adjusted
cost and determined using the specific identification method.
The Bank has no securities classified as "held for sale", indicating the
willingness to sell these securities under certain conditions. These
securities would be carried at current market value with unrealized gains
or losses not recognized as current income, but reported as an increase or
decrease to capital in the statements of financial condition and in the
statements of shareholders' equity.
The following tables set forth the book value and market value, of
investment securities at Sept. 30, 1994.
Gross Gross
Book Unrealized Unrealized Market
(Thousands of dollars) Value Gains Losses Value
U.S. Treasury Securities $57,418 $(1,602) $55,816
U.S. Government Agency Securities 5,850 (78) 5,772
State and Municipal Securities 750 $16 766
Federal Reserve Bank Stock 433 - - 433
Total $64,451 $16 $(1,680) $62,787
At June 30, 1994, investment securities with a book value of $43.3 million
were pledged to secure U.S. District Court deposits and for other purposes
as required or permitted by law. Included in interest on investment
securities is $10 thousand of interest from tax-exempt securities.
Note D. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve required to be maintained at the Federal Reserve
Bank was approximately $5.9 million, $9.0 million, and $8.0 million for the
periods ending September 30, 1994 and December 31 and September 30, 1993,
respectively.
Note E. PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Amortization of leasehold
improvements is also computed using the straight-line method over the
shorter of the useful life of the improvement or the term of the lease.
Note F. OTHER REAL ESTATE OWNED
Real estate owned, acquired either through foreclosure or deed in lieu of
foreclosure, is carried at the lower of cost or fair value. When acquired,
any excess of the loan amount over the fair value is charged to the
allowance for loan losses. Subsequent write-downs, if any, are charged to
operation expenses in the periods that they become known. There was no
other real estate owned as of September 30, 1994. Other real estate owned
at December 31, and September 30, 1993 was $0.9 million and $3.0 million,
respectively.
Note G. INCOME TAXES
Effective January 1, 1993, the Bank implemented the provisions of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
implementation had no significant impact on the financial condition or
operations of the Bank. SFAS No. 109 utilizes the liability method and
deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
Note H. LOANS
Loans are carried at face amount, less payments collected, allowance for
loan losses, and unamortized deferred fees. Interest on loans is accrued
monthly on a simple interest basis. The general policy of the Bank is to
discontinue the accrual of interest and transfer loans to nonaccrual (cash
basis) status where reasonable doubt exists with respect to the timely
collectibility of such interest. Payments on nonaccrual loans are accounted
for using a cost recovery method.
Loan origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of
the loan as a yield adjustment.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can reasonably be anticipated. Management
considers current economic conditions, historical loan loss experience, and
other factors in determining the adequacy of the allowance. The allowance
is based on estimates and ultimate losses may differ from current
estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are charged to earnings in the period in which they
become known. The allowance is increased by provisions charged to operating
expenses, increased for recoveries of loans previously charged-off, and
reduced by charge-offs.
Note I. RESTRUCTURING CHARGE
The Bank restructured its branch operations functions in the third quarter
of 1994, re-engineering its entire work flow and information handling
activities. This resulted in a one time charge of $600 thousand for
severance pay and other expenses associated with the changes to the
operating policies and procedures.
Note J. RECLASSIFICATIONS
Certain items have been reclassified in the prior period financial
statements presented herein, in order to conform to classifications
followed for September 30, 1994.
Note K. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party to
litigation. In the opinion of management, based upon consultation with
legal counsel, other than as set forth below, pending or threatened
litigation involving the Bank will have no adverse material effect upon its
financial condition, or results of operations.
The Bank is a defendant in multiple lawsuits related to the failure of two
real estate investment companies, Property Mortgage Company, Inc., ("PMC")
and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by
investors in PMC and SLGH (the "Federal Investor Action"), at least three
state court actions by groups of Investors (the "State Investor Actions"),
and an action filed by the Resolution Agent for the combined and
reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An
additional action was filed by an individual investor and his related
pension and profit sharing plans (the "Individual Investor Action").
Other defendants in these multiple actions and in related actions include
financial institutions, title companies, professionals, business entities
and individuals, including the principals of PMC and SLGH. The Bank was a
depository bank for PMC, SLGH and related companies and was a lender to
certain principals of PMC and SLGH ("Individual Loans").
Plaintiffs allege that PMC/SLGH was or purported to be engaged in the
business of raising money from investors by the sale and issuance of
interests in loans evidenced by promissory notes secured by real property.
Plaintiffs allege that false representations were made, and the investment
merely constituted a "Ponzi" scheme. Other charges relate to the Bank's
conduct with regard to the depository accounts, the lending relationship
with the principals and certain collateral taken , pledged by PMC and SLGH
in conjunction with the Individual Loans. The lawsuits allege inter alia
violations of federal and state securities laws, fraud, negligence, breach
of fiduciary duty, and conversion as well as conspiracy and aiding and
abetting counts with regard to these violations. The Bank denies the
allegations of wrongdoing.
Damages in excess of $100 million have been alleged, and compensatory and
punitive damages have been sought generally against all defendants,
although no specific damages have been prayed for with regard to the Bank,
nor has there been any apportioning of liability among defendants or
attributable to the various claims asserted. A former officer and director
of the Bank has also been named as a defendant. The Bank and the named
officer/director have notified
the Bank's insurance carriers of the various lawsuits.
In August 1994, the Bank entered into a settlement agreement with the
representatives of the various plaintiffs, which, if approved as more fully
set forth below, will dismiss all of the above referenced cases, with
prejudice, against the Bank, its officers and directors, with the exception
of the officer/director previously named. In connection with the
settlement, the Bank will release its security interest in certain disputed
collateral and cash proceeds thereof, which the Bank received from PMC,
SLGH, or the principals, in connection with the Individual Loans. This
collateral has been a subject of dispute in the Neilson Action, with both
the Bank and the representatives of PMC/SLGH asserting the right to such
collateral. All the loans have been charged off, previously. The Bank
will also make a cash payment to the Plaintiffs in connection with the
settlement. In connection with the settlement the Bank will assign its
rights, if any, under various insurance policies, to the Plaintiffs. The
settlement does not resolve the claims asserted against the
officer/director.
The settlement requires the approval of each of the courts in which actions
have been filed. The Federal Bankruptcy Court approved the settlement in
October, 1994. There are a number of technical issues related to the
settlement which must be resolved prior to its effectiveness.
Note K. REGULATORY MATTERS
On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"),
after completion of their annual examination of the Bank, terminated the
Formal Agreement entered into in June, 1992. In December 1993, the Fed
terminated the Memo of Understanding (MOU) entered into in August, 1992.
The Formal Agreement and the MOU required the implementation of certain
policies and procedures for the operation of the Bank and the Company to
improve lending operations and management of the loan portfolio.
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Registrant has
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CU BANCORP
November 9, 1994
By:_Patrick Hartman________
Patrick Hartman
Chief Financial Officer
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Notes J and K, on pages 23 and 24 above, for a complete
discussion of both legal and regulatory matters.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Filings on Form 8-K
(a) Exhibits:
(10) Material Contracts
(i) Mortgage Servicing Purchase and Sale Agreement
Dated August 31, 1994 pg. 27
(b) Reports on Form 8-K:
None.