1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996.
OR
[ ] Transition Report 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
16030 Ventura Boulevard
Encino, California 91436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 907-9122
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(title of class)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 month (or for shorter periods 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1997:
$156,332,808
Common Stock, no par value -
----------------------------
The number of shares outstanding of the issuer's classes of common stock as of
February 28, 1997:
Common Stock, no par value 11,359,969 shares
--------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE -- NONE
This document contains __ pages.
2
TABLE OF CONTENTS
Item
Part Number Item Page
- ---- ------ ---- ----
I 1. Business 3
I 2. Properties 21
I 3. Legal Proceedings 23
I 4. Submission of Matters to a Vote of Security
Holders 23
II 5. Market for the Company's Common Stock and
Related Stockholder Matters 24
II 6. Selected Financial Data 25
II 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
II 8. Financial Statements and Supplementary Data 37
II 9. Changes in and Disagreements with Accountant on
Accounting and Financial Disclosure 62
III 10. Directors and Executive Officers of the Company 63
III 11. Executive Compensation 67
III 12. Security Ownership of Certain Beneficial Owners
and Management 83
III 13. Certain Relationships and Related Transactions 87
IV 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 88
2
3
PART 1
Item 1. BUSINESS
General Development of Business
CU Bancorp (the "Company") was incorporated under the laws of the
State of California on September 3, 1981 and is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended. The Company does
not conduct any activities other than in connection with its ownership of
California United Bank, a California state chartered bank (the "Bank"), which is
CU Bancorp's sole subsidiary.
At December 31, 1995, CU Bancorp's sole subsidiary was California
United Bank, National Association ("CUBNA"), a national banking association. On
January 12, 1996, CUBNA merged with Corporate Bank, a California state chartered
bank, with CUBNA as the surviving association. On August 9, 1996, the Company
merged with Home Interstate Bancorp, with CU Bancorp being the surviving
corporation. At the same time, CUBNA merged with and into Home Bank, a
California state charted bank and a wholly owned subsidiary of Home Interstate
Bancorp, with Home Bank being the surviving corporation, under the name of
California United Bank.
The Bank was founded in February 1950 and was licensed by the
California State Banking department and commenced operations as a state
chartered bank on October 28, 1950. The Bank is a member of the Federal Reserve
System and its deposits are insured up to the maximum extent permitted by law.
The Bank provides an extensive range of commercial and individual banking
services.
Recent Developments
On February 24, 1997, CU Bancorp announced the execution of an
Agreement and Plan of Reorganization, between the Company and Bancorp Hawaii,
Inc., (parent of Bank of Hawaii) pursuant to which the Company would be merged
with and into Bancorp Hawaii, Inc. ("BOH"). Pursuant to the Agreement, each
share of the Company's Common Stock would be converted into either: (i) $15.34
in cash or (ii) the equivalent in BOH Common Stock, subject to certain
adjustments. The amount of BOH Common Stock paid to the Company's shareholders
will not be less than 60% nor more than 80% of the total consideration. The
transaction is subject to the approval of the Company's shareholders and
regulatory approvals. It is expected that the Bank will thereafter operate as a
subsidiary of BOH, under substantially the same management.
DESCRIPTION OF BUSINESS
General Banking Business
The Bank delivers a mix of banking products and services to middle market
businesses, the entertainment industry, real estate developers and individuals
from 21 offices located in Ventura County, the San Fernando Valley, West Los
Angeles, the San Gabriel Valley, the South Bay and Orange County areas of the
Greater Los Angeles/Orange County Metropolitan area.
Commercial Banking Business
3
4
The Bank offers lending, deposit, accounts receivable financing, letters
of credit, cash management, Small Business Administration ("SBA") guaranteed
loans, international trade and investment services. These services are generally
offered to businesses, professionals, the entertainment industry and high net
worth individuals. They are also offered to owners, officers and employees of
the Bank's business customers, and customers of accounting and business
management firms with which the Bank regularly does business.
The Entertainment Division specializes in meeting the banking needs of
Southern California's entertainment and media industry, including motion picture
and television financing, record labels, talent agencies, business managers,
commercial houses and a variety of other related business activities.
The Private Banking division specializes in meeting the special,
individualized needs of high net worth individuals and their businesses.
Together, the Entertainment and Private Banking divisions have developed certain
specialty products aimed at the entertainment industry and related individuals
as well as other high net worth individuals.
The SBA division offers financing alternatives to businesses in the Bank's
market. This division offers both long-term and short-term credit products, as
well as real estate related financing products.
The International Trade Services Group offers a broad range of services to
support the import/export activities of customers. The division has direct
correspondent relationships with major overseas banks, providing business
customers with a broad international reach. The division can facilitate a wide
variety of international banking transactions, including letters of credit,
short term trade related financing, domestic and foreign collections, wire
transfers, standby commitments and government assisted programs.
An Investment Division was created by the Bank during 1996 to offer the
Bank's customers a range of non-deposit investment products. These services are
offered to individual, corporate and other investors. These products are not
FDIC insured. Within this division, the Bank offers sophisticated investment and
cash management services. Investment products are offered through Linsco/Private
Ledger Corporation, a member of the National Association of Securities Dealers
and the Securities Investors Protection Corporation. Linsco Private Ledger is a
separate company not affiliated with the Bank. The products offered are not FDIC
insured, are not the obligations of the Bank or the Company and are not
endorsed, recommended or guaranteed by the Bank or the Company. Products offered
are not proprietary to the Bank or the Company.
A Business Banking division was recently established by the Bank to deal
with the special needs of business smaller than those typically served by the
Commercial Banking division. This group will offer highly competitive services,
with accelerated decision making for targeted types of sizes of business
entities.
Real Estate Banking Business
The Bank originates construction and mini-permanent real estate loans and
a variety of other real estate loans. The primary focus of the Bank's real
estate construction activity is to provide short term loans (less than one year)
to local individuals and developers for the construction of entry level single
family residences, light industrial buildings and small commercial developments
in the Bank's primary service areas. The Bank offers SBA real estate lending
products. The Bank also provides limited short term real estate financing to
individuals and corporations. The Bank further offers home improvement and real
estate equity loans to individuals.
4
5
Retail Banking Business
The Bank also offers a wide range of banking services to individuals.
These services include personal checking accounts, interest-bearing negotiable
orders of withdrawal ("NOW") accounts and savings accounts and time certificates
of deposit. The Bank offers a variety of special banking and financial services
to its individual customers which include telephone transfers between accounts,
travelers' checks money orders safe deposit boxes, discount stock brokerage and
notary services. The Bank acts as a merchant depository for cardholder drafts.
The Bank also has walk-up, drive through and ATM facilities with extended hours
for customers' convenience. Services of the Investment Division are also
available to individual customers.
Deposit Activities
The Bank attracts customers and deposits by offering a personalized
approach and a high degree of service. The key to the Bank's deposit generation
is personal contacts and services rather than rate competition. A significant
portion of its business is with business customers who conduct substantially all
of their banking business with the Bank. Most of the Bank's deposits are
obtained from small and medium sized businesses, and from professionals and
individuals.
Either alone or in concert with correspondent banks, the Bank offers a
wide variety of deposit services to its customers. Management believes that its
current and prospective customers favorably respond to the individualized
tailored banking services that the Bank provides. Deposit services, which the
Bank offers, include personal and business checking accounts and savings
accounts, insured money market deposit accounts, NOW accounts, and time
certificates of deposit, along with IRA and Keogh accounts. The Bank offers
sophisticated on line banking capabilities to customers through its electronic
banking programs. The Bank has not requested and does not have regulatory
approval to offer trust services; nor does it have any present intention to seek
such approval. The Bank has made arrangements with a number of trust companies
to refer prospective customers, in connection with such referrals, the Bank may
receive a referral fee.
Continued development of a diversified deposit base is the Bank's highest
priority. Time and demand deposits are actively solicited by the directors,
officers and employees of the Bank. The executive and senior officers of the
Bank have had substantial experience in soliciting bank deposits and in serving
the comprehensive banking needs of small and mid-size businesses.
Lending Activities
The Bank's lending activities are concentrated in four primary areas,
commercial and industrial loans, real estate construction loans, other real
estate loans and installment loans. At December 31, 1996, these four categories
accounted for approximately 55%, 5%, 31% and 9%, respectively of the Bank's loan
portfolio. See "Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations of the Company."
5
6
Offices
During most of 1996, CUBNA serviced the commercial banking business from
seven offices including: its head office at 16030 Ventura Boulevard, in Encino,
California 91436, a suburb of Los Angeles; an office in West Los Angeles,
located at 10880 Wilshire Boulevard, Los Angeles California 90024, in the
Westwood commercial and retail district; a Ventura County (Camarillo) Regional
Office; a South Bay Regional Office in Gardena, California; a San Gabriel Valley
Regional Office, located in City of Industry, which serves the San Gabriel
Valley and northern Orange County; and two additional offices serving the Orange
County area, in Santa Ana and Anaheim.
During 1996, Home Bank operated from fifteen (15) branch locations in
Signal Hill, Brea, Fountain Valley, Hacienda Heights, Irvine, Lomita, Los
Alamitos, Lynwood, Manhattan Beach, Paramount, Redondo Beach, San Pedro (2),
Torrance and Westminster.
As a result of the merger with Home Bank in August 1996, the Bank operated
from 22 locations, the seven CUBNA branches and the fifteen Home Bank branches.
The Fountain Valley location was closed in December 1996.
Historical Regulatory Matters
In 1992, CUBNA and CU Bancorp both consented to agreements with their
primary regulators, a Formal Agreement with the OCC and a Memorandum of
Understanding with the Federal Reserve Bank of San Francisco. In June of 1992, a
new management team replaced substantially all of prior management. In November
of 1993, following the first OCC examination subsequent to new management's
implementation of internal controls and other new management techniques, the OCC
released CUBNA from the Formal Agreement and later that same month the Federal
Reserve Bank of San Francisco determined that CU Bancorp had met all the
requirements of the Memorandum of Understanding and terminated that document.
As a result of an examination of Home Bank completed by the FDIC in the
fourth quarter of 1992, the FDIC and Home Bank agreed to enter into an informal
agreement in the form of a Memorandum of Understanding, effective March 1993.
Pursuant to the Memorandum of Understanding, Home Bank, among other things,
agreed to maintain a minimum ratio of Tier 1 Capital to Total Average Assets of
7.5%. Additionally, with regard to the other items which were required under the
Memorandum of Understanding, Home Bank undertook steps to implement certain
actions or restrictions with respect to its lending and dividend activities and
to adopt or revise certain internal policies and procedures. The FDIC released
Home Bank from the Memorandum of Understanding on February 9, 1994.
The Bank's capital ratios, as of December 31, 1996, are in excess of all
minimums imposed by law and regulation and are within the range within which
banks are usually designated as "well capitalized". For further information see
Notes to Consolidated Financial Statements.
Mortgage Banking
In November 1993, CUBNA sold the origination portion of its mortgage
banking division to Republic Bancorp of Ann Arbor Michigan. CUBNA retained the
mortgage servicing portfolio after the sale of the division. At December 31,
1995 substantially all of the mortgage loan servicing portfolio had been sold.
See Management's Discussion and Analysis for further information relative to
sale of loans.
6
7
Customers and Business Concentration
The Bank believes that there is no single customer whose loss would have a
material adverse effect on the Bank. To account for seasonal and economic
variations, the Bank has taken a number of steps to insure liquidity. See
discussion regarding business concentrations in both lending and deposit
activities, in the Management's Discussion and Analysis.
Competition
The Company does not conduct any business unrelated to the business of the
Bank and thus is affected by competition only in the banking and financial
services industry.
The Bank's primary banking market area consists of the San Fernando
Valley, Beverly Hills, West Los Angeles, the South Bay and metropolitan areas of
the City and County of Los Angeles. The Bank also serves Orange County, Northern
San Diego County, the San Gabriel Valley and much of Southern California.
The banking and financial services business in California generally, as
well as the rest of the United States, is highly competitive, particularly in
the Bank's market areas. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product delivery
systems and the accelerating pace of consolidation among financial services
providers. The Bank competes for loans, deposits and customers for financial
services with other commercial banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions, and other nonbank financial
service providers. Many of these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader array
of financial services than the Bank. In order to compete with other providers of
financial services, the Bank principally relies upon local promotional
activities, personal relationships established by officers, directors and
employees with its customers, and specialized services tailored to meet its
customers' needs.
The Bank has 21 offices located in the following California counties:
Ventura, Los Angeles and Orange. Neither the deposits nor loans of the offices
of the Bank exceed 5% of all financial services companies located in the
counties in which the Bank operates.
EFFECT OF ECONOMIC CONDITIONS, GOVERNMENTAL POLICIES AND LEGISLATION
The assets of a commercial banking institution consist largely of interest
earning assets, including loans, federal funds sold, time certificates of
deposit with other financial institutions and investment securities. The
liabilities of a commercial banking institution consist of non-interest bearing
demand deposits and interest bearing liabilities, including time deposits,
savings accounts and other bank borrowings.
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprises the major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Company and the Bank. Accordingly,
the financial position, earnings and growth of the Bank are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
7
8
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of federal
and state governments and the policies of regulatory agencies, particularly the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
The Federal Reserve Board implements national monetary policies (with objectives
such as curbing inflation and combating recession) by its open-market operations
in United States Government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirements and by
varying the discount rates applicable to borrowings by depository institutions.
The actions of the Federal Reserve Board in these areas influence the growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact on the Company and the Bank of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial services providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial services provider are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major legislative changes and the impact such changes
might have on the Company and the Bank cannot be predicted. See "Item 1.
Business - Supervision and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of the Company and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations. The nature and impact of any future changes
concerning the regulation of the Company and the Bank cannot be predicted.
THE COMPANY
The Company, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and Regulation Y that has been adopted thereunder by the Federal Reserve Board.
The Company is required to file with the Federal Reserve Board quarterly and
annual reports and such additional information as the Federal Reserve Board may
require pursuant to the BHCA and Regulation Y. The Federal Reserve Board may
conduct examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of the Company's banking subsidiaries. The
Federal Reserve Board also has the authority to regulate provisions of certain
bank holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "Item 1. Business - Supervision and Regulation - Capital
Standards."
8
9
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities, or substantially all of the assets, of any bank
or bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced "de novo" and activities commenced by acquisition,
in whole or in part, of a going concern.
In 1996, the Economic Growth and Regulatory Paperwork Reduction Act of
1996 (the "Budget Act") eliminated the requirement that bank holding companies
seek Federal Reserve Board approval before engaging "de novo" in permissible
nonbanking activities listed in Regulation Y, which governs bank holding
companies, if the holding company and its lead depository institution are
well-managed and well-capitalized and certain other criteria specified in the
statute are met. For purposes of determining the capital levels at which a bank
holding company shall be considered "well-capitalized" under this section of the
Budget Act and Regulation Y, the Federal Reserve Board adopted as an interim
rule, risk-based capital ratios (on a consolidated basis) that are, with the
exception' of the leverage capital ratio (which is lower), the same as the
levels set for determining that a state member bank is well capitalized under
Section 38 of the Federal Deposit Insurance Act. See "Item 1. Business -
Supervision and Regulation--Prompt Corrective Action and Other Enforcement
Mechanisms."
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by the U.S. Congress.
9
10
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
THE BANK
The Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks ("Superintendent") and the Federal Reserve Board. If, as
a result of an examination of the Bank, the Federal Reserve Board should
determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the Bank's
operations are unsatisfactory or that the Bank or its management is violating or
has violated any law or regulation, various remedies are available to the
Federal Reserve Board. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in capital, to restrict the
growth of the Bank, to assess civil monetary penalties, to remove officers and
directors and ultimately to terminate the Bank's deposit insurance, which, as a
California state-chartered bank, would result in a revocation of the Bank's
charter. The Superintendent has many of the same remedial powers. The Bank is
not currently subject to any such actions by the Federal Reserve Board or the
Superintendent.
The Bank is a member of the FDIC, which currently insures the deposits of
each member bank to a maximum of $100,000 per depositor. For this protection,
the Bank pays a semi-annual assessment and is subject to the rules and
regulations pertaining to deposit insurance and other matters. Pursuant to the
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), more fully discussed below, the FDIC implemented a regulation to
modify deposit insurance premiums in 1993. Under this regulation, the amount of
FDIC assessments paid by individual insured depository institutions is based on
their relative risk as measured by regulatory capital ratios and certain other
factors. Under this new system, in establishing the insurance premium assessment
of each bank, the FDIC will take into consideration the probability that the
insurance fund will incur a loss with respect to that bank, and will charge a
bank with perceived higher inherent risks a higher insurance premium. The FDIC
will also consider the different categories and concentrations of assets and
liabilities of the institution, the likely amount of any such loss, the revenue
needs of the insurance fund and any other factors the FDIC deems relevant. The
assessment rates may not fall below the assessment rate of 23 cents per $100 of
eligible deposits if the FDIC has outstanding borrowing from the U.S. Treasury
department or the 1.25% designated reserve ratio has not been met. No assurance
can be given as to the effect of these regulations on the future level of
deposit insurance premiums.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements. Further, the Bank is
required to maintain certain minimum levels of capital. See "Item 1. Business
- --Supervision and Regulation--Capital Standards."
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
10
11
The Company is a legal entity separate and distinct from the Bank. The
Company's ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by the Bank. California law restricts the
amount available for cash dividends by state chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years (less
any distributions made to shareholders by the Bank or by any majority-owned
subsidiary of the Bank during such period). Notwithstanding this restriction,
the Bank may, with the prior approval of the Superintendent, make a distribution
to its shareholders in an amount not exceeding the greater of the retained
earnings of the Bank, net income for the Bank's last fiscal year or the net
income of the Bank for its current year.
As a Federal Reserve member bank, there are separate limitations
imposed under applicable Federal Reserve Board regulations with respect to the
Bank's ability to pay dividends to the Company. In particular, the prior
approval of the Federal Reserve Board is required if the total of all dividends
declared by a Federal Reserve member board in any calendar year exceeds the
Bank's net profits (as defined) for that year combined with its retained net
profits (as defined) for the preceding two years, less any transfers to surplus
or to a fund for the retirement of preferred stock. Such approval authority may
be delegated to the local Federal Reserve Bank under certain circumstances.
At present, substantially all of the Company's revenues, including funds
available for the payment of dividends and other operating expenses, is, and
will continue to be, primarily dividends paid by the Bank. At December 31, 1996,
the Bank had $7.8 million in retained earnings available for the payment of
cash dividends.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the Bank's capital
stock and surplus (as defined by federal regulations), and such secured loans
and investments are limited, in the aggregate, to 20% of the Bank's capital
stock and surplus (as defined by federal regulations). California law also
imposes certain restrictions with respect to transactions involving the Company
and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "Item 1. Business - Supervision
and Regulation - Prompt Corrective Regulatory Action and Other Enforcement
Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board has adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off-balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off-balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. Treasury securities, to 100% for assets with relatively
high credit risk, such as business loans.
11
12
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital primarily consists
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
consists of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long-term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the Tier 1 leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets is 3%. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
federal banking regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. The policy
statement provides that the adequacy and effectiveness of a bank's interest rate
risk management process and the level of its interest rate exposures are
critical factors in the evaluation of a bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels of exposure
relative to its capital will be directed by the federal banking agencies to take
corrective action. Such actions may include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses (ALLL) which, among
other things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the sum
of: (a) 100% of assets classified loss; (b) 50% of assets classified doubtful;
(c) 15% of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months. This amount is neither a "floor" nor a
"safe harbor" level for an institution's ALLL. As of December 31, 1996, the
Bank's ALLL exceeded these benchmarks.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109. See "Item 1. Business -- Recent Account
Pronouncements." The federal banking agencies issued final rules governing banks
and bank holding companies, which became effective April 1, 1995, which limit
the amount of deferred tax assets that are allowable in computing an
institution's regulatory capital. This standard has been in effect on an interim
basis since March 1993. Deferred tax assets that can be realized for taxes paid
in prior carry back years and from future reversals of existing taxable
temporary differences are generally not limited. Deferred tax assets that can
only be realized through future taxable earnings are
12
13
limited for regulatory capital purposes to the lesser of: (i) the amount that
can be realized within one year of the quarter-end report date, based on
projected taxable income for that year or (ii) 10% of Tier 1 Capital. The amount
of any deferred tax in excess of this limit would be excluded from Tier 1
Capital and total assets for purposes of regulatory risk-based capital
calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of profits,
if any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1996.
Regulatory Standards
------------------------
December 31, Well -
1996 Capitalized(1) Minimum
---- -------------- -------
Total Risk Based Capital 15.6% 10.0% 8.0%
Tier 1 Risk Based Capital 14.4 6.0 4.0
Equity to Average Assets 9.7 5.0 3.0
(Leverage Ratio)
(1) See discussion below for definition of "Well - Capitalized".
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. Such laws require each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
An insured depository institution generally will be classified in the
following categories based on the capital measures indicated below:
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and capital of 4%; and
Tier 1 risk-based Leverage ratio of 4%.
Leverage ratio of 5%.
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
13
14
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
receiving notice, or being deemed to have received notice, that the institution
is undercapitalized. The appropriate federal banking agency cannot accept a
capital plan unless, among other things, it determines that the plan: (i)
specifies: (a) the steps the institution will take to become adequately
capitalized; (b) the levels of capital to be attained during each year in which
the plan will be in effect; (c) how the institution will comply with the
restrictions or requirements then in effect under Section 38 of the Federal
Deposit Insurance Act; and (d) the types and levels of activities in which the
institution will engage; (ii) is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital; and (iii) would not
appreciably increase the risk (including credit risk, interest-rate risk, and
other types of risk) to which the institution is exposed.
In addition, each company controlling an undercapitalized depository
institution must guarantee that the institution will comply with the capital
plan until the depository institution has been adequately capitalized on average
during each of four consecutive calendar quarters and must otherwise provide
appropriate assurances of performance. The aggregate liability of such guarantee
is limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional restrictions
or sanctions that it may impose on significantly undercapitalized institutions
if it determines that such action will further the purpose of the prompt
correction action provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect fails to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced sale
of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency.
Although the appropriate federal banking agency has discretion to
determine which of the foregoing restrictions or sanctions it will seek to
impose, it is required to: (i) force a sale of shares or obligations of the
Bank, or require the Bank to be acquired by or combine with another institution;
(ii) impose restrictions on affiliate transactions and (iii) impose restrictions
on rates paid on deposits, unless it determines that such actions would not
further the purpose of the prompt corrective action provisions. In addition,
without the prior written approval of the appropriate federal banking agency, a
significantly undercapitalized institution may not pay any bonus to its senior
executive officers or provide compensation to any of them at a rate that exceeds
such officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be
14
15
prohibited from engaging in any material transaction other than in the ordinary
course of business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the federal regulators.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement
with the agency. See "Item 1. Business--Supervision and
Regulation--Potential Enforcement Actions."
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted guidelines establishing
standards for safety and soundness, as required by the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA"). The guidelines set forth operational and
managerial standards relating to internal controls, information systems,
internal audit systems, loan documentation and underwriting, compensation and
interest rate exposure. In general, the guidelines are designed to assist the
federal banking agencies in identifying and addressing problems at insured
depository institutions before capital becomes impaired. Effective October 1,
1996, the federal banking agencies finalized these safety and soundness
regulations and accompanying interagency compliance guidelines by adopting
guidelines with respect to asset quality and earnings standards. These new
guidelines provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating. Under these
new standards, an insured depository institution should: (i) conduct periodic
asset quality reviews to identify problem assets; (ii) estimate the inherent
losses in those assets and establish reserves that are sufficient to absorb
estimated losses; (iii) compare problem asset totals to capital; (iv) take
appropriate corrective action to resolve problem assets; (v) consider the size
and potential risks of material asset concentrations; and (vi) provide periodic
asset reports with adequate information for management and the board of
directors to assess the level of asset risk. These new guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to raise funds to protect
deposits insured by the Bank Insurance Fund ("BIF"), which is administered by
the FDIC. The FDIC is authorized to borrow up to $30 billion from the United
States Treasury; up to 90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any borrowings not repaid
by asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
15
16
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law. On November 14, 1995, the FDIC issued
regulations that establish a new assessment rate schedule ranging from 0 cents
per $100 of deposits to 27 cents per $100 of deposits applicable to members of
BIF. To determine the risk-based assessment for each institution, the FDIC will
categorize an institution as well capitalized, adequately capitalized or
undercapitalized based on its capital ratios using the same standards used by
the FDIC for its prompt corrective action regulations. A well-capitalized
institution is generally one that has at least a 10% total risk-based capital
ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1 leverage capital
ratio. An adequately capitalized institution will generally have at least an 8%
total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a 4%
Tier 1 leverage capital ratio. An undercapitalized institution will generally be
one that does not meet either of the above definitions. The FDIC will also
assign each institution to one of three subgroups based upon reviews by the
institution's primary federal or state regulator, statistical analyses of
financial statements and other information relevant to evaluating the risk posed
by the institution. The three supervisory categories are: financially sound with
only a few minor weaknesses (Group A), demonstrates weaknesses that could result
in significant deterioration (Group B), and poses a substantial probability of
loss (Group C).
The BIF assessment rates are set forth below for institutions based
on their risk-based assessment categorization.
Assessment Rates Effective Through the First Half of 1997
Group A Group B Group C
------- ------- -------
Well Capitalized.............. 0 3 17
Adequately Capitalized........ 3 10 24
Undercapitalized.............. 10 24 27
Legislation was signed into law on September 30, 1996 as part of the
Budget Act to recapitalize the Savings Association Insurance Fund ("SAIF") of
the FDIC. To effect the recapitalization, all SAIF member institutions were
required to pay a one-time special assessment equal to 0.657% of deposits based
upon deposit levels as of March 31, 1995. The Budget Act also provided that,
effective January 1, 1997, SAIF members will have the same risk-based deposit
insurance assessment schedule as BIF member institutions. Additionally, under
the Budget Act, both BIF and SAIF members share in the cost of interest
obligations due on the Financing Corporation ("FICO") bonds which were issued to
help fund the costs associated with the savings and loan crisis of the late
1980's. Beginning January 1, 1997 and continuing through December 31, 1999,
partial sharing will occur. During this initial period, savings associations
will pay 3.2 cents per $100 in insured deposits, and commercial banks, such as
the Bank, will pay 0.64 cents per $100 in insured deposits. Full pro rata
sharing of the FICO interest payments will take effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%).
- ----------
(1) Assessment figures are expressed in terms of cents per $100 per deposits.
16
17
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, a bank holding company that is adequately capitalized
and managed may obtain approval under the BHCA to acquire an existing bank
located in another state without regard to state law. A bank holding company is
not permitted to make such an acquisition if, upon consummation, it would
control (a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application of such limitation does not discriminate against out-of-state
banks or bank holding companies. An out-of-state bank holding company may not
acquire a state bank in existence for less than a minimum length of time that
may be prescribed by state law except that a state may not impose more than a
five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
Under the Interstate Act, the extent of a commercial bank's ability to
branch into a new state will depend on the law of the state. In October 1995,
California adopted an early "opt in" statute under the Interstate Act that
permits out-of-state banks to acquire California banks that satisfy a five-year
minimum age requirement (subject to exceptions for supervisory transactions) by
means of merger or purchases of assets, although entry through acquisition of
individual branches of California institutions and de novo branching into
California are not permitted. The Interstate Act and the California branching
statute will likely increase competition from out-of-state banks in the markets
in which the Company operates, although it is difficult to assess the impact
that such increased competition may have on the Company's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In March 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact. In May 1995, the federal banking agencies issued final
regulations which change the manner in which they measure a bank's compliance
with its CRA obligations. The final regulations adopt a performance-based
evaluation system which bases CRA ratings on an institution's actual lending
service and investment performance, rather than the extent to which the
institution conducts needs assessments, documents community outreach, activities
or complies with other procedural requirements. The Federal Reserve Board has
rated the Bank "satisfactory" in complying with its CRA delegations.
17
18
ENFORCEMENT AUTHORITY
Commercial banking organizations, such as the Bank, and their
institution-affiliated parties, which include the Company, may be subject to
potential enforcement actions by the Federal Reserve Board, the FDIC and the
Superintendent for unsafe or unsound practices in conducting their businesses or
for violations of any law, rule, regulation or any condition imposed in writing
by the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits (in the case of the Bank), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against institution affiliated parties and the imposition of restrictions and
sanctions under the prompt corrective action provisions of the FDICIA.
Additionally, a holding company's inability to serve as a source of strength to
its subsidiary banking organizations could serve as an additional basis for a
regulatory action against the holding company. Neither the Company nor the Bank
are currently subject to any such enforcement actions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. This statement
also requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair value at the date of the
transfer. Furthermore, SFAS No. 125 requires that debtors reclassify financial
assets pledged as collateral, and that secured parties recognize those assets
and their obligation to return them in certain circumstances in which the
secured party has taken control of those assets. Finally, SFAS No. 125 requires
that a liability be derecognized if either (a) the debtor pays the creditor and
is relieved of its obligation for the liability; or (b) the debtor is legally
released from being the primary obligor under the liability either judicially or
by the creditor. Accordingly, a liability is not considered extinguished by an
in-substance defeasance. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996, and is to be applied prospectively. Management does not believe that the
application of this statement will have a material impact on the Bank's
financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation." This statement establishes a fair value based method of
accounting for stock-based compensation plans and encourages all entities to
adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. The accounting and disclosure
requirements of this Statement are effective for the Bank's fiscal year ending
December 31, 1996. Adoption of this pronouncement did not have a material impact
on the Bank's financial statements.
18
19
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights." SFAS 122 amends certain provisions of SFAS No. 65 "Accounting
for Certain Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair value, if it is practicable to estimate
those fair values. If it is not practicable to estimate those fair values, the
entire cost of the acquisition should be allocated to the mortgage loans only.
SFAS 122 is effective for the Bank's fiscal year covered by this annual report.
Adoption of this pronouncement did not have a material impact on the Bank's
financial statements.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. An impairment loss shall be measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. After an impairment is recognized, the reduced carrying amount of the
asset shall be accounted for as its new cost. SFAS No. 121 is effective for the
Bank's fiscal year covered by this annual report. Adoption of this statement did
not have a material impact on the Bank's financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." SFAS No. 114 prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled debt restructurings. SFAS No. 114 states
that a loan is impaired when it is probable that a creditor will be unable to
collect all principal and interest amounts due according to the contracted terms
of the loan agreement. A creditor is required to measure impairment by
discounting expected future cash flows at the loan's effective interest rate, or
by reference to an observable market price, or by determining that foreclosure
is probable. SFAS No. 114 also clarifies the existing accounting for
in-substance foreclosures by stating that a collateral-dependent real estate
loan would be reported as real estate owned only if the lender had taken
possession of collateral.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use
existing methods for recognizing interest income on an impaired loan. To
accomplish that it eliminated the provisions in SFAS No. 114 that described how
a creditor should report income on an impaired loan. SFAS No. 118 did not change
the provisions in SFAS No. 114 that require a creditor to measure impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, or as a practical expedient, at the observable
market price of the loan or the fair value of the collateral if the loan is
collateral dependent. SFAS No. 118 amends the disclosure requirements in SFAS
No. 114 to require information about the recorded investments in certain
impaired loans and about how a creditor recognizes interest income related to
those impaired loans. The Bank adopted SFAS No. 114 and No. 118 for the year
ended December 31, 1995. Adoption of this statement has not had a material
impact on the Bank's financial statements.
COMPETITION
To compete with major financial institutions, the Bank relies upon
specialized services, responsive handling of customer needs, local promotional
activity, and personal contacts by its officers, directors, and staff, as
opposed to large multi-branch banks which compete primarily by rate and location
of branches. For customers whose loan demands exceed the Bank's lending limit,
the Bank seeks to arrange
19
20
for such loans on a participation basis with correspondent banks. The Bank also
assists customers requiring services not offered by the Bank in obtaining such
services from its correspondent banks.
In the past, an independent bank's principal competitors for
deposits and loans have been other banks (particularly major banks), savings and
loan associations, and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies, and insurance
companies. In the past several years, the trend has been for other financial
intermediaries to offer financial services traditionally offered by banks. Other
institutions, such as brokerage houses, credit card companies, and even retail
establishments, have offered new investment vehicles such as money-market funds
or cash advances on credit card accounts. This led to increased cost of funds
for most financial institutions. Even within the Banking industry, the trend has
been towards offering more varied services, such as discount brokerage, often
through affiliate relationships. The direction of federal legislation seems to
favor and foster competition between different types of financial institutions
and to encourage new entrants into the financial services market. However, it is
not possible to forecast the impact such developments will have on commercial
banking in general, or on the Bank in particular.
EMPLOYEES
As of December 31, 1996, the Company had three employees, its
President, Chief Executive Officer and Chief Financial Officer . At December 31,
1996, the Bank had 372 employees, of which 282 were full-time employees, 15 were
modified full-time employees and 75 were flex, part-time employees. Of these
employees, 18 held titles of senior vice president or above. At December 31,
1996, none of the executive officers of the Bank served pursuant to written
employment agreements. None of the Company's or the Bank's employees are
represented by a labor union. The Company considers its relationship and the
Bank's relationship with each company's respective employees to be excellent.
20
21
Item 2. PROPERTIES
The principal offices of the Company are located in a multi-story
office building located at 16030 Ventura Boulevard, Encino, California 91364.
The Company's offices are part of the Bank's head office, for which it pays a
monthly rental of $60,000. The lease contains a ceiling on cost of living
adjustments of 5% per year. The lease is renewable.
The Bank owns both the land and the buildings at its office facilities at
the following locations:
- ----------------------------------------------------------------------------------
LOCATION USE OF FACILITIES SQUARE FEET OF OFFICE
SPACE
- ----------------------------------------------------------------------------------
Redondo Beach Branch Office 7,774
1217 North Catalina Avenue
Redondo Beach, California
- ----------------------------------------------------------------------------------
Paramount Branch Office 9,706
15943 Paramount Boulevard
Paramount, California
- ----------------------------------------------------------------------------------
Hacienda Heights Branch Office 7,623
2040 South Hacienda Boulevard
Hacienda Heights, California
- ----------------------------------------------------------------------------------
Fountain Valley vacant 6,978
17010 Magnolia Avenue
Fountain Valley, California
- ----------------------------------------------------------------------------------
Lynwood Branch Office 8,134
3645 Imperial Highway
Lynwood, California
- ----------------------------------------------------------------------------------
Signal Hill Branch 36,369
2633 Cherry Avenue Office/Administration
Signal Hill, California
- ----------------------------------------------------------------------------------
Los Alamitos Branch Office 7.915
10942 Pine Street
Los Alamitos, California
- ----------------------------------------------------------------------------------
Torrance Branch Office 6,112
2860 W. Sepulveda Boulevard
Torrance, California
- ----------------------------------------------------------------------------------
Lomita Branch Office 2,160
2270 Pacific Coast
Highway Lomita, California
- ----------------------------------------------------------------------------------
San Pedro Branch Office 7,318
740 S. Gaffey Street
San Pedro, California
- ----------------------------------------------------------------------------------
The Bank owns in fee the buildings and leases the land at its office facilities
at the following locations:
- --------------------------------------------------------------------------------------
LOCATION USE OF FACILITIES SQUARE FEET MONTHLY TERM OF
OF OFFICE RENT OF GROUND
SPACE GROUND LEASE
LEASE AS OF
12/31/96
- --------------------------------------------------------------------------------------
Brea Branch Office 6,483 $ 1,556 2/9/97 to
1643 East Imperial Hwy. 2/9/2001
Brea, California with two
ten year
21
22
- --------------------------------------------------------------------------------------
options
- --------------------------------------------------------------------------------------
Manhattan Beach Branch Office 6,050 $ 6,541 5/1/80 to
3300 N. Sepulveda Blvd. 4/30/2000
Manhattan Beach, California with two
ten year
options
- --------------------------------------------------------------------------------------
Westminster Branch Office 8,094 $ 1,902 1/1/74 to
535 Westminster Mall 2/31/2011
Westminster, California with two
ten year
options
- --------------------------------------------------------------------------------------
22
23
The Bank leases the following office locations:
- ------------------------------------------------------------------------------------
Irvine Branch Office 6,278 $ 14,031 11/1/80 to
4180 Barranca Parkway 11/1/2009
Irvine, California
- ------------------------------------------------------------------------------------
North San Pedro Branch Office 4,000 $ 7,970 7/15/94 to
1090 N. Western Ave 2/12/99
San Pedro, California with three
five year
options
- ------------------------------------------------------------------------------------
San Gabriel Branch Office 2,537 $5,074 5/1/95-
13181 Crossroads Pky. 4/30/98
City of Industry,
California
- ------------------------------------------------------------------------------------
Westwood Branch Office 1,674 $2,880 6/1/96-
10886 Wilshire 6/1/98
Boulevard
Los Angeles,
California
- ------------------------------------------------------------------------------------
South Bay Branch Office 3,131 $3,053 9/1/95-9/1/2000
1225 W. 90th Street
Gardena, California
- ------------------------------------------------------------------------------------
Ventura Branch Office 702 $2,899 5/1/95 -
601 Daily Drive 4/30/2000
Camarillo, California
- ------------------------------------------------------------------------------------
Santa Ana Branch Office / 8,250 $36,494 3/1/90-11/14/2007
2740 N. Grand Regional Loan
Santa Ana, California Center
- ------------------------------------------------------------------------------------
Anaheim Branch Office 5,824 $7,812 12/1/91 -
100 W. Lincoln Avenue 12/1/2005
Anaheim, California
- ------------------------------------------------------------------------------------
Encino Corporate 10,476 $60,488 1/1/89 -
16030 Ventura Headquarters / 4/1/2000
Boulevard Administrative
Encino, California Offices / Head
Office
- ------------------------------------------------------------------------------------
From time to time the Bank may acquire real property through foreclosure.
See Management's Discussion and Analysis "Nonperforming Assets" for further
amplification on real property acquired in this manner.
Item 3. LEGAL PROCEEDINGS
In the normal course of business, the Bank and the Company occasionally
becomes parties to litigation. In the opinion of management, based upon
consultation with legal counsel, there is no pending or threatened litigation
involving the Bank or the Company which will have a material adverse effect upon
its financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
23
24
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the National Association of
Securities Dealers Automated Quotation (Nasdaq Stock Market) National Market
System, where it trades under the symbol "CUBN". The following are high and low
closing sale prices of the Company's stock during 1995 and 1996:
1996 1995
---- ----
High Low High Low
---- --- ---- ---
First Quarter $11.50 $9.27 $7.50 $7/13
Second Quarter $11.25 $9.75 $7.13 $6.86
Third Quarter $11.63 $9.88 $8.75 $6.94
Fourth Quarter $11.63 $9.75 $10.25 $8.38
Holders of Company's Common Stock
As of the close of business on December 31, 1996, there were 1,414 record
holders of the Company's issued and outstanding Common Stock.
Dividends
During 1996, the Company declared and paid quarterly dividends, in the
aggregate, of $0.17 per share. Because of the expenses and adjustments related
to the merger of the Company and Home Interstate Bancorp in the third quarter of
1996, this represents a payout ratio of approximately 270%. Dividends declared
in 1995 totaled $0.20, for a 32% payout ratio. These dividends were paid
quarterly, except that Home Interstate Bancorp actually paid 5 dividends during
1995. Subsequent to December 31, 1996, the Company declared a dividend of $0.07
payable to shareholders of record on February 14, 1997 which would represent a
33% payout ratio on earnings for the fourth quarter of 1996.
As a bank holding company without significant assets other than its equity
interest in the Bank, the Company's ability to pay dividends primarily depends
upon the dividends it receives from the Bank, which in turn, are subject to
certain limitations. The Company's ability to pay dividends is also limited by
state corporation law. See "Item 1. Business - Supervision and Regulation -
Restrictions on Dividends by the Company and Transfers of Funds to the Company
by the Bank."
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by the Bank. California law restricts the
amount available for cash dividends by state chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years (less
any distributions made to shareholders by the Bank or by any majority-owned
subsidiary of the Bank during such period). Notwithstanding this restriction,
the Bank may, with the prior approval of the Superintendent, make a distribution
to its shareholders in an amount not exceeding the greater of the retained
earnings of the Bank, net income for the Bank's last fiscal year or the net
income of the Bank for its current year.
As a Federal Reserve member bank, there are separate limitations imposed
under applicable Federal Reserve Board regulations with respect to the Bank's
ability to pay dividends to the Company. In particular, the prior approval of
the Federal Reserve Board is required if the total of all dividends declared by
a Federal Reserve member board in any calendar year exceeds the Bank's net
profits (as defined) for that year combined with its retained net profits (as
defined) for the preceding two years, less any transfers to surplus or to a fund
for the retirement of preferred stock. Such approval authority may be delegated
to the local Federal Reserve Bank under certain circumstances.
At present, substantially all of the Company's revenues, including funds
available for the payment of dividends and other operating expenses, is, and
will continue to be, primarily dividends paid by the Bank. At December 31, 1996,
the Bank had $7.8 million in retained earnings available for the payment of cash
dividends.
24
25
Part II
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data
CU Bancorp and Subsidiary
(Amounts in thousands of dollars, except per share data and amounts expressed as
percentages)
As of and for the years ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Consolidated Balance Sheet Data -
Investment Securities $233,244 $206,966 $242,033 $209,155 $182,671
Net loans 464,581 391,806 363,006 330,619 426,933
Total earning assets 721,825 645,872 639,813 584,789 626,370
Total assets 844,210 749,100 743,786 670,506 762,897
Total deposits 737,360 653,541 656,450 574,728 680,481
Total shareholders' equity 88,513 84,422 75,398 74,401 68,281
Regulatory risk based capital 15.6% 16.2% 16.4% 17.1% 13.9%
ratio
Regulatory capital leverage 9.7% 10.5% 10.3% 9.9% 7.7%
ratio
Allowance for loan losses to:
Period end total loans 2.5% 2.5% 2.7% 3.0% 3.8%
Nonperforming loans 872% 230% 153% 199% 134%
Nonperforming assets 642% 108% 116% 98% 77%
Consolidated Operating Results -
Net revenue from earning assets 40,642 40,032 36,449 34,813 42,422
Other operating revenue 7,622 7,291 9,987 34,181 27,135
Provision for loan losses 4,400 2,100 800 1,200 23,090
Operating expenses 45,951 35,053 36,594 58,432 58,296
Net income (loss) 709 6,658 5,893 5,723 (7,748)
Fully diluted income/(loss) per
common & equivalent share $.06 $.62 $.56 $.55 ($.76)
Net interest margin 6.39% 6.29% 6.11% 5.93% 6.10%
Return on average .80% 8.40% 7.90% 8.07% (11.35%)
shareholders' equity
Return on average assets .09% .91% .84% .81% (1.14%)
Cash dividends per common share $.17 $.20 $.12 $.09 $.12
25
26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
On August 9, 1996, CU Bancorp, the holding company for California United Bank,
merged with Home Interstate Bancorp, the holding company for Home Bank. The
merger was accomplished through a tax-free exchange of stock, using the pooling
of interest method of accounting. The financial statements for current and prior
years reflect the combined operations of the two merged banks, including the
substantial costs associated with completing the merger. The Company earned $709
thousand, or $0.06 per share, during in 1996, compared to $6.7 million, or $0.62
per share, in 1995 and $5.9 million, or $.56 per share in 1994. Earnings for
1996 include a third quarter charge for non-recurring expenses related to the
merger with Home Bank of $11.5 million which reduced after-tax earnings by $7.2
million, or $0.62 per share.
The third quarter 1996 charge of $11.5 million included several large expenses
reflecting the costs of completing the merger activity and valuing the loan and
real estate portfolios on a single consistent and conservative basis. A loan
loss provision of $4.1 million, plus an additional loss of $2.6 million related
to real estate owned was recorded. This was a result of combining the valuation
reserve methodologies of California United Bank and Home Bank, as well as
reflecting the ongoing intent of the merged bank to manage potential problems in
the portfolio aggressively and maintain conservative standards for valuation.
Other large expenses for the quarter include the costs of terminating the
existing data processing contracts for the combining banks, converting all major
operating systems to a single platform, payments to employees for severance and
other agreements and the various legal, advisory and accounting fees associated
with the merger itself.
Prior to the merger between CU Bancorp and Home Interstate Bank, CU Bancorp had
completed the acquisition of Corporate Bank, a Santa Ana based community bank
with approximately $70 million in assets. This acquisition was completed in
January, 1996 and accounted for as a purchase. The acquisition of Corporate
Bank, combined with internal growth and the merger between CU Bancorp and Home
Interstate Bank, resulted in the Company ending 1996 with over $844 million in
assets and 21 branches. Subsequent to year end, in February 1997, the Company
announced that it had signed a definitive agreement to merge CU Bancorp into
Bancorp Hawaii, Inc., the parent of Bank of Hawaii, at a price of $15.34 per
share of CU Bancorp common stock. The price is payable in a combination of
Bancorp Hawaii, Inc. common stock and cash, with the stock portion being not
more than 80% nor less than 60%. The purchase price is subject to adjustment
under certain circumstances.
The Bank's asset quality ratios continue to be exceptionally strong. At December
31, 1996, nonperforming assets were $1.9 million, compared with $9.3 million in
1995. The Bank had one property in real estate acquired through foreclosure at
December 31, 1996, with a book value of $500 thousand, compared to properties
valued at $4.9 million at December 31, 1995. The Bank's $12.1 million allowance
for loan losses as a percent of nonperforming loans and nonperforming assets at
December 31, 1996 was 872% and 642% respectively, compared to 230% and 108%,
respectively, at December 31, 1995.
Capital ratios continue to substantially exceed levels required for the "well
capitalized" classification established by bank regulators. The Total Risk-Based
Capital Ratio was 15.6%, the Tier 1 Risk-Based Capital Ratio was 14.4%, and the
Leverage Ratio was 9.7% at December 31, 1996, compared to 16.2%, 14.9%, and
10.5%, respectively, at year-end 1995. Regulatory requirements for Total
Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum of
8.0%, 4.0%, and 3.0%, respectively, and for classification as well capitalized,
10.0%, 6.0%, and 5.0%, respectively.
The Bank's strong capital and asset quality positions allow the Bank to continue
to grow its core business which provides relationship based services to middle
market customers and positions the Bank for its strategy for growth through
acquisition. During the year ended December 31, 1996, the Bank generated
approximately $180 million in new
26
27
commercial loan commitments. The same commercial lending team generated
commercial loan commitments of about $135 million and $121 million for the
comparable periods of 1995 and 1994.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
Total loans increased by $75 million during 1996. This included the acquisition
of Corporate Bank's $43 million loan portfolio. Portfolio growth during 1996 was
partially offset by the decline of that acquired portfolio. Further, efforts
have been made to retain loans from both Corporate Bank and Home Bank that are
consistent with the lending strategy of the combined Bank. This has resulted in
slower net growth of the loan portfolios than would be expected from the level
of loan commitment generated during the year.
The Bank focuses its efforts on lending to middle market commercial companies
which has caused its commercial and industrial loans to increase consistently.
Total loans increased $29 million during 1995.
TABLE 1: LOAN PORTFOLIO COMPOSITION
(Amounts in thousands of dollars)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Commercial &
Industrial Loans $260,143 55% $244,533 61% $239,785 64% $181,687 53% $194,153 44%
Real Estate Loans:
Construction 23,597 5 16,933 4 10,416 3 25,359 7 36,410 8
Held for sale 0 0 0 10,426 3 40,167 9
Other 152,479 32 108,652 27 96,475 26 99,000 29 135,468 31
Consumer and other
loans 40,481 8 31,731 8 26,575 7 24,233 8 33,732 7
Term federal funds sold 0 0 0 0 0 0 0 0 4,000 1
Total loans net of
unearned fees 476,700 100% 401,849 100% 373,251 100% 340,705 100% 443,930 100%
=== === === === ===
Less: Allowance for
loan losses 12,119 10,043 10,245 10,086 16,997
-------- -------- -------- -------- --------
Total Net Loans $464,581 $391,806 $363,006 $330,619 $426,933
======== ======== ======== ======== ========
Table 1a summarizes the maturities of the loan portfolio based upon the
contractual terms of the loans. The Bank does not automatically rollover any
loans at maturity. Maturing loans must go through the Bank's normal credit
approval process in order to receive a new maturity date.
TABLE 1A: LOAN PORTFOLIO MATURITIES AT DECEMBER 31, 1996
(Amounts in Thousands of dollars)
After 1 but
Within 1 Year Within 5 Years After 5 Years Total
------------- -------------- ------------- -----
Commercial & Industrial Loans $167,901 $64,886 $27,356 $260,143
Real Estate loans 55,723 62,497 57,856 176,076
Consumer and other loans 3,750 32,542 4,189 40,481
-------- -------- ------- --------
Total loans $227,374 $159,925 $89,401 $476,700
======== ======== ======= ========
Loans due after one year with
predetermined interest rates $69,607 $51,289
Loans due after one year with
floating or adjustable rates 90,318 38,112
-------- -------
$159,925 $89,401
======== =======
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. Each of the loans obtained in the Corporate Bank
acquisition and the Home Bank merger were reviewed and managed in a manner
consistent with this process. These classifications are one of the criteria
considered in determining the adequacy of the allowance for loan losses.
27
28
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)
December 31,
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Commercial & real estate Loans $10,536 $7,303 $8,319 $8,072 $14,107
Real estate loans - Held for
Sale 0 0 0 67 368
Real estate loans -
Construction 274 256 371 610 487
Other 1,809 2,484 1,555 1,337 2,035
------- ------- ------- ------- -------
Total Allowance for loan losses $12,119 $10,043 $10,245 $10,086 $16,997
======= ======= ======= ======= =======
Adequacy of the allowance is determined using management's estimates of the risk
of loss for the portfolio and individual loans. Included in the criteria used to
evaluate credit risk are, wherever appropriate, the borrower's cash flow,
financial condition, management capabilities, and collateral valuations, as well
as industry conditions. A portion of the allowance is established to address the
risk inherent in general loan categories, historic loss experience, portfolio
trends, economic conditions, and other factors. Based on this assessment a
provision for loan losses may be charged against earnings to maintain the
adequacy of the allowance. The allocation of the allowance based upon the risks
by type of loan, as shown in Table 2, implies a degree of precision that is not
possible when using judgments. While the systematic approach used does consider
a variety of segmentations of the portfolio, management considers the allowance
a general reserve available to address risks throughout the entire loan
portfolio.
Activity in the allowance, classified by type of loan, is as follows:
TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands of dollars)
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Balance at January 1 $10,043 $10,245 $10,086 $16,997 $16,149
------- ------- ------- ------- -------
Loans charged off:
Real estate secured loans 2,194 1,095 907 4,095 4,525
Commercial loans secured and unsecured loans 4,041 1,247 2,171 9,300 20,298
Loans to individuals, installment and other loans 493 418 360 1,245 1,385
------- ------- ------- ------- -------
Total charge-offs 6,728 3,572 3,438 14,640 26,208
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Real estate secured loans 272 536 761 393 249
Commercial loans secured and unsecured 1,246 682 1,984 5,817 3,573
Loans to individuals, installment and 35 52 52 319 144
------- ------- ------- ------- -------
Total recoveries of loans previously charged off 1,552 1,270 2,797 6,529 3,966
------- ------- ------- ------- -------
Net charge-offs 5,176 2,302 641 8,111 22,242
Provision for loan losses 4,400 2,100 800 1,200 23,090
------- ------- ------- ------- -------
Reserve of acquired bank 2,852
-------
Balance at December 31 $12,119 $10,043 $10,245 $10,086 $16,997
======= ======= ======= ======= =======
Net loan charge-offs as a
percentage of average loans outstanding
during the year ended December 31 1.16% .59% 0.18% 2.45% 5.21%
Allowance for possible loan losses to loans at end of
period 2.54% 2.50% 2.74% 2.96% 3.83%
The Bank's policy concerning nonperforming loans is more conservative than is
generally required. All loans which are ninety days or more past due are
classified as nonperforming. Nonperforming assets include nonperforming loans
and foreclosed real estate. Nonaccrual loans are those whose interest accrual
has been discontinued because the loan has become ninety days or more past due.
In addition, it includes loans where 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 December 31, 1996, nonperforming loans amounted to
$1.4 million compared with $4.4 million at December 31, 1995.
28
29
Potential problem loans are defined as loans as to which there are serious
doubts about the ability of the borrowers to comply with present loan repayment
terms. It is the policy of the Bank to place all potential problem loans on
nonaccrual status. At December 31, 1996, therefore, the Bank had no potential
problem loans other than those disclosed in Table 4 as nonperforming loans.
TABLE 4: NONPERFORMING ASSETS
(Amounts in thousands of dollars)
December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------- -------
Nonaccrual loans $1,389 $4,256 $6,593 $ 5,474 $16,694
Loans 90 days or more past due and still accruing 0 106 52 598 670
------ ------ ------ ------- -------
Total nonperforming loans 1,389 4,362 6,681 6,072 17,364
Other real estate owned 500 4,918 2,175 4,266 4,652
------ ------ ------ ------- -------
Total nonperforming assets $1,889 $9,280 $8,856 $10,338 $22,016
====== ====== ====== ======= =======
Allowance for loan losses as a percent of:
Nonperforming loans 872% 230% 153% 199% 134%
Nonperforming assets 642% 108% 116% 98% 77%
Nonperforming assets as a percent of total assets .2% 1.2% 1.2% 1.5% 2.9%
Nonperforming loans as a percent of total loans .3% 1.1% 1.8% 1.5% 3.0%
SECURITIES
The Securities Held to Maturity portfolio totaled $163 million at December 31,
1996, compared with $79 million at year-end 1995. At December 31, 1996, there
were unrealized gains of $200 thousand, and unrealized losses of $1.0 million in
the Securities Held to Maturity portfolio. This compares with unrealized gains
of $695 thousand and unrealized losses of $269 thousand at year end 1995.
The Securities Available for Sale portfolio totaled $70 million at December 31,
1996, compared with $128 million included in this category in 1995. Net
unrealized gains of $204 thousand and $1.1 million were included in the balances
for Securities Available for Sale at December 31, 1996 and December 31, 1995,
respectively. The Company realized gains of $114 thousand on the sale of
Securities Available for Sale in 1996, compared with a net gain of $53 thousand
in 1995, and a net loss of $130 thousand in 1994.
Additional information concerning securities is provided in the notes to the
accompanying financial statements.
OTHER REAL ESTATE OWNED
There was $500 thousand in Other Real Estate Owned on the Bank's balance sheet
at December 31, 1996 compared to $4.9 million at December 31, 1995. The Bank's
policy is to carry properties acquired in foreclosure at fair value less
estimated selling costs, which is determined using recent appraisal values
adjusted, if necessary, for other market conditions. Loan balances in excess of
fair value are charged to the allowance for loan losses when the loan is
reclassified to Other Real Estate Owned. Subsequent declines in fair value are
charged against a valuation allowance for other real estate owned, created by
charging a provision to other operating expenses. Gains on sale of Other Real
Estate Owned in 1996, 1995, and 1994 in thousands of dollars was $0, $139, and
$585, respectively. Losses on sale of Other Real Estate Owned in 1996, 1995, and
1994 in thousands of dollars was $1,540, $627, and $560, respectively. Expenses
related to Other Real Estate Owned in 1996, 1995 and 1994 was $1,099, $167, and
$33 respectively.
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.
29
30
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 $40 million
overnight federal funds line available from a correspondent bank. Potential
significant liquidity requirements are withdrawals from noninterest bearing
demand deposits and funding of commitments to loan customers.
From time to time the Bank may experience liquidity shortfalls ranging from one
to several days. In these instances, the Bank will either purchase federal
funds, and/or sell securities under repurchase agreements. These actions are
intended to bridge mismatches between funding sources and requirements, and are
designed to maintain the minimum required balances. The Bank has not had
significant borrowings in the form of Fed Funds purchased or repurchase
agreements during 1996 or 1995. Minor balances borrowed resulted from periodic
tests by the Bank of available borrowing arrangements, and securities repurchase
agreements to accommodate customer needs.
As a part of the process of managing current liquidity and interest rate risk in
the balance sheet, the Bank maintains a portfolio of certificates of deposit
from customers from outside the Bank's normal service area. These out of area
deposits are certificates of deposit of $90,000 or greater, that are priced
competitively with similar certificates from other financial institutions
throughout the country. At December 31, 1996, the Bank had approximately $64
million of these out of area deposits, compared to $83 million at December 31,
1995. The decline in out of area deposits during 1996 has been the result of
managing these balances to a lower level, as the acquisition of Corporate Bank
and the merger with Home Bank provided additional liquidity. The Bank's
experience with raising out of area deposits for the past three years indicates
that the balances are quite stable when priced to the current market.
The Bank's portfolio of large certificates of deposit (those of $100 thousand or
more), includes both deposits from its base of commercial customers and out of
area deposits. At December 31, 1996 this funding source was 11% of deposits,
compared to 10% at December 31, 1995. The Bank had $82 million in certificates
of deposit larger than $100 thousand dollars at December 31, 1996. The maturity
distribution of these deposits is relatively short term, with $56 million
maturing within 3 months and $80 million maturing within 12 months.
TABLE 5 INTEREST RATE MATURITIES OF EARNING ASSETS AND FUNDING LIABILITIES AT
DECEMBER 31, 1996
(Amounts in thousands of dollars)
Amounts Maturing or Repricing in
----------------------------------------------------------
More Than
3 Months But More than 1 year
Less Than 3 Less Than 12 But Less than
Months Months 5 Years Over 5 years
----------- ------------ --------------- ------------
Earning Assets
Gross Loans $336,260 $ 18,155 $ 69,607 $ 51,289
Investments 15,361 49,878 82,012 85,994
Federal funds sold & other 24,000 99 0 0
-------- -------- -------- --------
Total earning assets 375,621 68,132 151,619 137,283
-------- -------- -------- --------
Interest bearing deposits:
Savings and interest bearing demand 253,180
Time certificates of deposit:
Under $100 45,915 73,343 8,603 0
$100 or more 55,679 24,108 1,406 0
Other borrowed money 0 1,000 0 0
-------- -------- -------- --------
Total interest bearing liabilities 354,774 98,451 10,009 0
-------- -------- -------- --------
Interest rate sensitivity gap 20,847 (30,319) 141,610 137,283
======== ======== ======== ========
Cumulative interest rate sensitivity gap 20,847 (9,472) 132,138 269,421
Off balance sheet financial instruments 0 0 0 0
-------- -------- -------- --------
Net cumulative gap $ 20,847 $ (9,472) $132,138 $269,421
======== ======== ======== ========
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities (1) 1.06% .98% 1.29% 1.58%
======== ======== ======== ========
(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 risk
neutral position.
Assets and liabilities shown on Table 5 are categorized based on contractual
maturity dates. Mortgage backed securities of approximately $78 million are
included in the total investments with contractual maturities greater than five
years. The expected prepayments and scheduled payments on the mortgages
underlying these securities will result in actual return of
30
31
principal to the Bank well in advance of the contractual maturity dates. The
weighted average life of these investments, using current industry average
assumptions, is expected to be four years. The net cumulative gap position at
one year of less than $10 million indicates a minimal exposure to interest rate
fluctuations during the next twelve months. Interest rate exposure would
increase in a falling rate environment if the banking industry in California
were to be unable to reprice rates on NOW, savings and money market accounts as
rates fell. Similarly, interest rate exposure increases in a rising rate
environment to the extent the Banking industry is unable to respond to higher
rates with an increase in the prime rate.
31
32
CAPITAL
Total shareholders' equity was over $88 million at December 31, 1996, compared
to $84 million at year-end 1995. This increase was due to stock issued in the
acquisition of Corporate Bank, earnings, and the exercise of stock options,
offset by dividends paid for the year. The Bank is guided by statutory capital
requirements, which are measured with three ratios, two of which are sensitive
to the risk inherent in various assets and which consider off-balance sheet
activities in assessing capital adequacy. During 1996 and 1995, the Bank's
capital levels substantially exceeded the "well capitalized" standards, the
highest classification established by bank regulators.
TABLE 6 CAPITAL RATIOS
Regulatory Standards
------------------------------------------------------
December 31, December Well - Minimum
1996 31, 1995 Capitalized
------------ -------- ----------- -------
Total Risk Based Capital 15.6% 16.2% 10.0% 8.0%
Tier 1 Risk Based Capital 14.4 14.9 6.0 4.0
Equity to Average Assets 9.7 10.5 5.0 3.0
During 1996, the Company declared and paid dividends totaling $.17 per share.
Because of the expenses and adjustments related to the merger in the third
quarter of 1996, this represents a payout ratio of approximately 270%. Dividends
declared in 1995 totaled $.20 per share, for a 32% payout ratio. Subsequent to
year end, the Company declared a dividend of $.07 per share payable to
shareholders of record on February 14, 1997, which would represent a 33% payout
ratio on earnings for the fourth quarter of 1996.
The common stock of the Company is listed on the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market Systems where it
trades under the symbol CUBN.
TABLE 7 STOCK PRICES - UNAUDITED
1996 1995
---- ----
High Low High Low
------ ----- ----- -----
First Quarter $11.50 $9.63 $7.50 $6.75
Second Quarter 11.25 10.00 7.50 6.88
Third Quarter 11.62 9.88 8.75 6.94
Fourth Quarter 11.62 9.75 10.25 8.38
MARKET EXPANSION AND ACQUISITIONS
The Bank is committed to expanding the market penetration of the commercial
bank, including the creation of new branches and pursuing acquisition
opportunities. In January, 1996, the Company completed the acquisition of Santa
Ana based Corporate Bank. This acquisition brought two Orange County branches to
the Bank, representing an important geographic expansion.
During 1995, the Bank converted its former loan production offices in Ventura
County, the San Gabriel Valley and the South Bay to full service banking offices
in improved facilities. These moves expanded the Bank's branch system to seven
full service locations serving the greater Los Angeles area. Additionally,
during the second quarter of 1996, the Bank started two new business units to
serve its customer base. The Investment Services Group and the Private Banking
group were formed to meet the growing financial services needs of the customers.
In February 1996, the Bank consummated a deposit purchase agreement with
Southern California Bank in which the Bank purchased the deposits of Southern
California Bank's Signal Hill office. The deposits purchased in the transaction
totaled $1.7 million.
On August 9, 1996, the merger between CU Bancorp, parent of California United
Bank, and Home Interstate Bancorp, parent of Home Bank, was completed. This
transaction, which was a tax free exchange of common stock, was accounted
32
33
for as a pooling of interest so prior period financial statements have been
restated to reflect the transaction. With the completion of this merger, the
Bank is now the eleventh largest independent bank headquartered in Southern
California, with twenty one branches in Westwood, the San Gabriel and San
Fernando valleys, the South Bay, and Ventura and Orange counties.
NET INTEREST INCOME AND INTEREST RATE RISK
Net interest income is the difference between interest and fees earned on
earning assets and interest paid on funding liabilities. Net interest income was
$45 million for the year ended December 31, 1996 compared to $40 million in 1995
and $36 million in 1994. The change in 1996 is attributable to changes in volume
and deposit mix. The increased margin in 1996 is primarily due to the increased
volumes of loans and deposits, due to both the acquisition of Corporate Bank,
and the commercial loan growth generated over the past year.
TABLE 8 ANALYSIS OF CHANGES IN NET INTEREST INCOME (1)
(Amounts in thousands of dollars)
Increases(Decreases)
Year Ended December 31,
-----------------------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994
----------------------------------- -----------------------------------
Rate Volume Total Rate Volume Total
------- ------- ------- ------- ------- -------
Interest Income
Loans, net $ (757) $ 7,410 $ 6,653 $ 3,487 $ 3,885 $ 7,372
Investments 84 (5) 79 930 21 951
Federal Funds Sold (204) 19 (185) 710 82 792
------- ------- ------- ------- ------- -------
Total interest income (877) 7,424 6,547 5,128 3,987 9,115
------- ------- ------- ------- ------- -------
Interest Expense
Interest bearing deposits:
Demand (19) 437 418 (458) 234 (224)
Savings (58) (34) (92) 11 (167) (156)
Time Certificates of deposit:
Less than $100 1,475 (1,119) 356 1,871 2,101 3,972
More than $100 (177) 948 771 879 1,126 2,005
Other borrowings 79 5 84 (3) (62) (65)
------- ------- ------- ------- ------- -------
Total interest expense 1,299 238 1,537 2,299 3,233 5,532
------- ------- ------- ------- ------- -------
Net interest income $ 603 $ 4,407 $ 5,010 $ 1,128 $ 2,455 $ 3,583
======= ======= ======= ======= ======= =======
(1) The change in interest income or interest expense that is attributable to
both change in average balance and average rate has been allocated to the
changes due to (i) average balance and (ii) average rate in proportion to the
relationship of the absolute amounts of the changes in each.
Yields on earning assets were approximately 8.9% for the year ended December 31,
1996, compared to 8.8% in 1995 and 7.9% in 1994. The decrease in the prime
rate, from an average of 8.8% in 1995 to an average of 8.27% in 1996, was offset
by a higher percentage of earning assets being held in loans rather than lower
yielding investments. The increase in the average prime rate from 7.1% in 1994
to 8.8% in 1995 was a primary cause of the increase in earning asset yields
between those two years.
Rates on interest bearing liabilities resulted in an average cost of funds of
3.7% in 1996, compared with 3.5% for the comparable period of 1995 and 2.7% for
1994. The higher cost of funds in 1996 and 1995 compared with 1994 reflects both
the generally higher level of interest rates in those years, and a higher
percentage of certificates of deposit to total funding liabilities.
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin was 6.39% for 1996, compared to 6.29% in 1995 and
6.11% for 1994. The Bank's margin is strong because it has funded itself with a
significant amount of noninterest bearing deposits. Margin improvement in 1996
is mostly due to the growth in loans and the resulting improvement in earning
asset yield. Margin for 1995 was higher than 1994 in part due to the benefit of
rising interest rates. The deposit portfolio of Corporate Bank, which is
included in the 1996 totals, was similar in composition to the Bank's deposits,
resulting in very little change in the Bank's margin.
33
34
TABLE 9 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(Amounts in thousands of dollars)
1996 1995 1994
Interest Interest Interest
Income Income Income
or Yield or or Yield or - or Yield or
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
Interest Earning Assets
Loans, Net(1) $446,995 $ 47,989 10.74% $378,088 $41,336 10.93% $340,996 $33,964 9.96%
Investments(2) 214,621 12,289 5.73 214,713 12,207 5.69 213,266 11,215 5.26
Certificates of
Deposit in other banks 67 0 0 70 3 4.29 1,122 44 3.92
Federal Funds Sold 43,733 2,326 5.32 43,402 2,511 5.79 41,505 1,719 4.14
-------- -------- ----- -------- -------- ---- -------- ------- ----
Total Earning Assets 705,416 62,604 8.87% 636,273 56,057 8.81 596,889 46,942 7.86
----- -------- ---- -------
Non Earning Assets
Cash & Due From Banks 73,725 61,854 71,554
Other Assets 37,144 30,814 30,059
-------- -------- --------
Total Assets $816,285 $728,941 $698,502
======== ======== ========
Interest Bearing
Liabilities
Demand $212,615 4,220 1.98 $190,584 3,803 1.99 $179,696 4,026 2.24
Savings 62,850 1,411 2.25 64,316 1,503 2.34 71,455 1,659 2.32
Time Certificates of
Deposits
Less Than $100 116,510 7,636 6.55 135,705 7,280 5.36 89,767 3,308 3.69
More Than $100 73,412 3,948 5.38 55,921 3,176 5.68 32,357 1,172 3.62
Federal Funds Purchased
/Repos 5,429 347 6.39 4,251 263 6.19 5,136 328 6.39
-------- -------- ----- -------- -------- ---- -------- ------- ----
Total Interest Bearing
Liabilities 470,816 17,562 3.73 450,777 16,025 3.53 378,411 10,493 2.77
Non Interest Bearing
Deposits 254,130 0 0 191,010 0 0 238,190 0 0
-------- -------- ----- -------- -------- ---- -------- ------- ----
Total Funding Liabilities 724,946 17,469 2.41 641,787 15,790 2.46 616,601 10,170 1.66
Other Liabilities 6,737 7,925 7,417
Shareholders' Equity 84,602 79,229 74,484
-------- -------- --------
Total Liabilities and
Shareholders' Equity $816,285 $728,941 $698,502
======== ======== ========
Net Interest Income $ 45,042 6.39% $ 40,032 6.29% $ 36,449 6.11%
======== ===== ======== ==== ======== ===-
Shareholders' Equity to
Total Assets 10.36% 10.87% 10.66%
======== ======== ========
(1) Non-accrual loans are included in average loan balances, and loan fees
earned have been included in interest income on loans.
(2) Tax exempt securities do not materially affect reported yields.
OTHER OPERATING REVENUE
Other operating income earned during 1996 and 1995 of $7.6 million and $7.3
million, respectively, was primarily from fees and charges assessed against
deposit accounts in the normal course of business. Gains on the sale of real
estate owned totaled $139 thousand for 1995 and $585 for 1994, with no gains in
1996. Other operating income in 1994 was $10.0 million, including a large, non
recurring gain due to the sale of mortgage servicing rights.
The servicing rights retained by the Bank following sale of the mortgage
origination operation in 1993 were sold in 1994 for a gain of $2.6 million. The
Bank 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 was no longer a qualified
seller/servicer of such loans.
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 were 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 occurred within this period,
34
35
the remaining capitalized cost associated with the loan was written off. During
1994, the Bank had servicing related income of just over $1 million in
connection with the servicing portfolio that was disposed of during that year.
OTHER OPERATING EXPENSE
Total other operating expenses for the Bank were $46 million for the year ended
December 31, 1996, compared to $35 million in 1995 and $37 million for 1994. The
year ended December 31, 1996 included non recurring charges included in the
third quarter related to the merger with Home Bank of over $7 million. Corporate
Bank when acquired in January, 1996 had annual operating expenses of $6 million.
This expense structure was incorporated into the Bank and addressed to reduce it
to efficient levels. This cost control effort was effective but that structure
contributed to an increase in operating expense that will not continue in the
future. The expense level of the fourth quarter annualized is $40 million. This
is indicative of operating expense deemed to be adequate and will be leveraged
further as the core middle market business is expanded.
PROVISION FOR LOAN LOSSES
The Bank has made a provision for loan losses in 1996 of $4.4 million compared
to $2.1 million in 1995 and $.8 million for 1994. The provision for 1996 was
almost entirely part of the restructuring charge made for the Home Bank merger
in the third quarter. 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
In the normal course of business the Bank occasionally becomes a party to
litigation. Based upon consultation with legal counsel, the management believes
that pending or threatened litigation involving the Bank will have no adverse
material effect upon its financial condition, or results of operations.
The Bank has developed a very positive and proactive relationship with its
primary regulators. Results of regular safety and soundness examinations have
documented the progress the Bank has achieved. Management is committed to the
continuation of this process and maintaining our high standing with our
regulators.
35
36
BLANK PAGE
ILB
36
37
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
1. Consolidated Statements of Financial Condition as of December 31, 1996
and 1995; 38
2. Consolidated Statements of Income for the Years Ended December 31, 1996,
1995, and 1994, 39
3. Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1996, 1995, and 1994; 40
4. Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994; 41
5. Notes to Consolidated Financial Statements - December 31, 1996 42
6. Report of Independent Public Accountants 61
37
38
Consolidated Statements of Financial Condition
CU Bancorp and Subsidiary
Amounts in thousands of dollars, except share data December 31,
1996 1995
-------- ---------
Assets
Cash and due from banks $ 81,443 $ 67,173
Federal funds sold 24,000 47,100
-------- ---------
Total cash and cash equivalents 105,443 114,273
Securities held to maturity (Market value of $162,175 and
$79,575 at December 31, 1996 and 1995, respectively) 163,002 79,149
Securities available for sale, at market value 70,242 127,817
-------- ---------
Total Securities 233,244 206,966
Loans, (Net of allowance for loan losses of $12,119 and
$10,043 at December 31, 1996 and 1995, respectively) 464,581 391,806
Premises and equipment, net 17,784 15,476
Other real estate owned, net 500 4,918
Accrued interest receivable and other assets 22,658 15,661
-------- ---------
Total Assets $844,210 $ 749,100
======== =========
Liabilities and Shareholders' equity
Deposits:
Demand, non-interest bearing $275,126 $ 226,307
Savings and interest bearing demand 253,180 228,304
Time deposits under $100 127,861 135,693
Time deposits of $100 or more 81,193 63,237
-------- ---------
Total deposits 737,360 653,541
Accrued interest payable and other liabilities 18,337 11,137
-------- ---------
Total liabilities 755,697 664,678
-------- ---------
Commitments and contingencies 0 0
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1996 or 1995
Common stock, no par value:
Authorized - 24,000,000 shares
Issued and outstanding - 11,341,690 in 1996, and 75,790 70,123
10,537,289 in 1995
Retained earnings 12,600 13,818
Unrealized gain on securities available for sale, net of taxes 123 663
Unearned Compensation 0 (182)
-------- ---------
Total Shareholders' equity 88,513 84,422
-------- ---------
Total liabilities and shareholders' equity $844,210 $ 749,100
======== =========
The accompanying notes are an integral part of these consolidated statements.
38
39
Consolidated Statements of Income
CU Bancorp and Subsidiary
Amounts in thousands of dollars, except per share data For the years ended December 31,
1996 1995 1994
------- ------- --------
Revenue from earning assets:
Interest and fees on loans $47,989 $41,336 $ 33,964
Interest on investment securities 12,289 12,207 11,215
Interest on time deposits with other financial
institutions 0 3 44
Interest on federal funds sold 2,326 2,511 1,719
------- ------- --------
Total revenue from earning assets 62,604 56,057 46,942
------- ------- --------
Cost of funds:
Interest on savings and interest bearing demand 5,631 5,306 5,685
Interest on time deposits under $100 7,636 7,280 3,307
Interest on time deposits of $100 or more 3,948 3,176 1,172
Interest on federal funds purchased & securities sold
under agreements to repurchase and other
borrowings 347 263 329
------- ------- --------
Total cost of funds 17,562 16,025 10,493
------- ------- --------
Net revenue from earning assets before
provision for loan losses 45,042 40,032 36,449
Provision for loan losses 4,400 2,100 800
------- ------- --------
Net revenue from earning assets 40,642 37,932 35,649
------- ------- --------
Other operating revenue:
Service charges and other fees 7,508 6,716 5,830
Other fees and charges - mortgage banking 0 0 1,130
Gain on sale of mortgage servicing portfolio 0 383 2,572
Gain on sale of other real estate owned 0 139 585
Gain (loss) on sale of investment securities 114 53 (130)
------- ------- --------
Total other operating revenue 7,622 7,291 9,987
------- ------- --------
Other operating expenses:
Salaries and related benefits 20,867 17,175 16,423
Selling expenses - mortgage loans 0 0 333
Occupancy expense, net 6,331 4,845 4,338
Other operating expenses 18,753 13,033 15,500
------- ------- --------
Total other operating expenses 45,951 35,053 36,594
------- ------- --------
Income before provision for income taxes 2,313 10,170 9,042
Provision for income taxes 1,604 3,512 3,149
------- ------- --------
Net income $ 709 $ 6,658 $ 5,893
======= ======= ========
Earnings per common and equivalent share $ 0.06 $ .62 .$.56
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
39
40
Consolidated Statements of Changes in Shareholders' Equity
CU Bancorp and Subsidiary
Amounts in thousands of dollars
except share data
Number of Amount Unrealized Gain
Common of Retained (Loss) on Securities Unearned
Shares Common Earnings Available for Sale Compensation Total
---------- ------- -------- ------------------- ------------ -------
Balance at December 31, 1993 9,760,083 $64,806 $8,606 $989 $74,401
Exercise of stock options 2,305 14 0 14
Exercise of director
warrants 42,012 175 0 175
Cash dividend declared
($.12 per share) (1,141) (1,141)
Stock dividend issued 266,119 1,889 (1,889) 0
-------- -------
Unrealized gain (loss) on
securities available for
sale, net of tax (3,945) (3,945)
------
Net income for the year 5,893 5,893
---- -----
Balance at December 31, 1994 10,070,519 66,884 11,469 (2,956) 75,397
Exercise of stock options 32,454 204 204
Exercise of director
warrants 135,024 562 562
Cash dividend declared
($.20 per share) (2,021) (2,021)
Stock dividend issued 280,292 2,288 (2,288) 0
Restricted stock issued 19,000 185 $(185) 0
---------- -------
Compensation expense 3 3
------
Unrealized gain (loss) on
securities available for
sale, net of tax 3,619 3,619
------
Net Income for the year 6,658 6,658
------- ------
Balance at December 31, 1995 10,537,289 70,123 13,818 663 (182) 84,422
------
Exercise of stock options 152,337 990 990
Exercise of director
warrants
Cash dividend declared
($.17 per share) (1,927) (1,927)
Stock issued in acquisition 648,872 4,763 4,763
Restricted stock issued 11,250 0 0
Restricted stock retired (8,058) (86) (86)
----------- -------
Compensation expense 182 182
------
Unrealized gain (loss) on
securities available for
sale, net of tax (540) (540)
------
Net Income for the year 709 709
------- ------
Balance at December 31, 1996 11,341,690 $75,790 $12,600 $123 0 $88,513
========== ======= ======= ====== ====== =======
The accompanying notes are an integral part of these consolidated statements
40
41
Consolidated Statements of Cash Flows
CU Bancorp and Subsidiary
Amounts in thousands of dollars For the years ended December 31,
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities
Net income $ 709 $ 6,658 $ 5,893
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 1,671 1,450 1,172
Amortization of real estate mortgage servicing rights 0 0 15
Provision for losses on loans 4,400 2,100 800
Provision (benefit) of deferred taxes (979) 1,138 (1,180)
Loss (gain) on sale of investment securities, net (114) (53) 130
Increase/(decrease) in other assets (5,665) (785) 3,781
Increase/(decrease) in other liabilities 2,222 (2,845) (3,035)
(Increase)/decrease in accrued interest receivable 3,411 1,576 (2,187)
Amortization of deferred loan fees and costs (226) (1,094) (818)
Amortization of deferred compensation 182 0 0
Net loss on sale of premises, furniture and equipment 0 26 2
Net loss on sale of other real estate owned 1,540 614 488
Increase/(decrease) in accrued interest payable 134 (364) 542
Net amortization of (discount)/premium on investment
securities 806 2,134 2,283
--------- --------- ---------
Total adjustments 7,382 3,897 1,993
--------- --------- ---------
Net cash provided by operating activities 8,091 10,555 7,886
--------- --------- ---------
Cash flows from investing activities
Proceeds from investment securities sold or matured 244,719 79,082 87,401
Purchase of investment securities (267,550) (39,905) (129,683)
Purchase of business 18,316 0 0
Net decrease in time deposits with other financial
institutions 0 0 1,377
Proceeds from sale of other real estate owned 4,216 3,521 1,693
Proceeds from sale of premises and equipment 0 11 501
Purchases of premises and equipment, net (3,645) (2,435) (3,662)
Net (increase)/decrease in loans (31,442) (36,684) (33,380)
--------- --------- ---------
Net cash provided (used in) by investing
activities (35,926) 3,590 (76,253)
--------- --------- ---------
Cash flows from financing activities
Net increase/(decrease) in demand, savings and
interest bearing deposits 22,030 (34,581) 34,177
Net increase/(decrease) in time deposits (2,002) 31,672 47,546
Net increase/(decrease) in securities sold under
agreements to repurchase 0 (100) (3,900)
Proceeds from exercise of stock options and director
warrants 990 766 189
Restricted stock retired (86) 0 0
Cash dividend paid or declared (1,927) (2,022) (1,141)
--------- --------- ---------
Net cash provided (used) by financing activities 19,005 (4,265) 76,871
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (8,830) 9,880 8,504
Cash and cash equivalents at beginning of year 114,273 104,393 95,889
--------- --------- ---------
Cash and cash equivalents at end of year $ 105,443 $ 114,273 $ 104,393
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest $ 17,428 $ 15,613 $ 10,406
Taxes 4,018 5,281 3,785
Supplemental disclosure of noncash investing
activities:
Loans transferred to OREO 1,340 6,878 1,710
The accompanying notes are an integral part of these consolidated statements
41
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CU BANCORP AND SUBSIDIARY
DECEMBER 31, 1996
(Amounts in thousands unless otherwise specified)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CU Bancorp, a bank holding company (the Company), is a California corporation.
The accounting and reporting policies of the Company and its subsidiary conform
with generally accepted accounting principles and general practice within the
banking industry. The following comments describe the more significant of those
policies.
(a) Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, California United Bank (the Bank). All
significant transactions and accounts between the Company and the Bank have been
eliminated in the consolidated financial statements.
(b) Investment Portfolio --
The Bank's investment portfolio is separated into two groups, Securities Held to
Maturity and Securities Available for Sale. Securities are segregated in
accordance with management's intention regarding their retention. Accounting for
each group of securities follows the requirements of Statement of Financial
Accounting Standards (SFAS) 115 "Accounting for Certain Investments in Debt and
Equity Securities".
The Bank has the intent and ability to hold Securities Held to Maturity until
maturity. Securities in this classification are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a straight-line basis.
This approach 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.
Securities Available for Sale are those where management has the willingness to
sell under certain conditions. This category of securities is carried at current
market value with unrealized gains or losses recognized as a tax affected
adjustment to shareholders' equity in the statement of financial condition.
Gains and losses recognized on the sale of investment securities are based upon
the adjusted cost and determined using the specific identification method.
(c) 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 non-accrual (cash basis) status where
reasonable doubt exists with respect to the timely collectibility of such
interest. Payments on non-accrual loans are accounted for using a cost recovery
method. No interest income is recorded on non-accrual loans.
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 the
nature of the portfolio, current economic conditions, historical loan loss
experience, and other factors in determining the adequacy of the allowance. The
allowance is based on estimates and ultimate losses may differ from current
estimates. These estimates are reviewed periodically and as adjustments become
necessary, they are charged to earnings in the period in which they become
known. The allowance is increased by provisions charged to operating expenses,
increased for recoveries of loans previously charged-off, and reduced by
charge-offs.
The Bank adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," as of January 1, 1995. SFAS 114 requires that
42
43
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loans observable
market price, or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
balance of the loan, the impairment is recorded through a valuation allowance
included in the allowance for loan losses. The Bank had previously measured the
allowance for loan losses using methods similar to the prescribed in SFAS 114.
As a result, no additional provision was required by the adoption of this
pronouncement.
The Bank considers all loans impaired when it is probable that both interest and
principal will not be collected in accordance with the contractual terms of the
agreement. All loans that are ninety days or more past due are automatically
included in this category. An impaired loan will be charged off when the Bank
determines that repayment of principal has become unlikely or subject to a
lengthy collection process. All loans that are six months or more past due and
not well secured or in the process of collection are charged off.
(d) Premises and Equipment --
Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful life of the asset. Amortization is computed on the
straight-line method over the useful life of leasehold improvements or the
remaining term of the lease, whichever is shorter.
(e) Intangible Assets --
Goodwill arising from the acquisition of Torrance National Bank in 1990 and the
acquisition of Corporate Bank in 1996 has been recorded as an asset and is being
amortized to expense using the straight-line method over 15 and 10 years,
respectively. The total amount of goodwill included in other assets was $6,125
at December 31, 1996, and $4,374 at December 31, 1995. Intangible assets are
reviewed each year to determine if circumstances related to their valuation have
been materially effected. In the event that the current market value is
determined to be less than the current book value of the intangible asset, a
charge against current earnings would be recorded.
(f) Other Real Estate Owned --
Other real estate owned, acquired through direct foreclosure or deed in lieu of
foreclosure, is recorded at the lower of the loan balance or estimated fair
market value less estimated selling expenses. When a property is acquired, any
excess of the loan balance over the estimated fair market value is charged to
the allowance for loan losses. Subsequently, the assets are recorded at the
lower of the new cost basis at foreclosure or fair market value less estimated
selling expenses. During the time the property is held, all related expenses are
included in operating expense. Subsequent write-downs, if any, are included in
other operating expenses in the period in which they become known. Gains or
losses on sales are recorded in conformity with standards which apply to
accounting for sales of real estate. The Bank had $500 thousand other real
estate owned at December 31, 1996 compared to $4.9 million at December 31, 1995.
(g) Interest Rate Derivatives --
The Company may from time to time enter into interest rate hedge agreements
which involve the exchange of fixed and floating rate interest payments
periodically over the life of the agreement without the exchange of the
underlying principal amounts. The differential to be paid or received is accrued
as interest rates change and recognized over the life of the agreements as an
adjustment to interest expense. No interest rate hedging agreements were in
place in 1996,1995, or 1994.
Fees received in connection with loan commitments are deferred in other
liabilities until the loan is advanced and are then recognized over the term of
the loan as an adjustment of the yield. Fees on commitments that expire unused
are recognized in fees and commission revenue at expiration. Fees received for
guarantees are recognized as fee revenue over the term of the guarantees.
(h) Income Taxes --
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax basis of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expenses or credits are based on
the changes in the asset or liability from period to period.
(i) Earnings Per Share (amounts in whole numbers) --
43
44
Earnings per share are computed based on the weighted average number of shares
and common stock equivalents outstanding during each year of 11,621,969 in 1996,
10,743,833 in 1995, and 10,475,970 in 1994. Common stock equivalents include the
number of shares issuable on the exercise of outstanding options and warrants
reduced by the number of shares that could have been purchased with the proceeds
from the exercise of the options and warrants plus any tax benefits, based on
the higher of the average or the period end price of common stock.
44
45
(j) Statements of Cash Flows--
The Company presents its cash flows using the indirect method and reports
certain cash receipts and payments arising from customer loans and deposits, and
deposits placed with other financial institutions on a net basis. For purposes
of reporting cash flows, cash and cash equivalents include cash and due from
banks and federal funds sold. Generally federal funds are sold for one-day
periods.
(k) Post-Retirement Benefits --
The Company provides no post-retirement benefits. Accordingly the accounting
prescribed by SFAS No. 106 "Accounting for Post-Retirement Benefits" has no
effect on the Company's consolidated financial statements.
(l) Stock-Based Compensation --
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123 "Accounting for Stock-Based Compensation". Under the accounting method that
has been in effect prior to the effective date of this statement, if options
were granted at an exercise price equal to the market value of the stock at the
time of the grant, no compensation expense was recognized. SFAS 123 establishes
a second accounting method for employee stock options under which issuers record
compensation expense over the period they are expected to be outstanding prior
to exercise, expiration, or cancellation. The amount of compensation expense to
be recognized over this term is the "fair value" of the options at the time of
the grant as determined by an option pricing model. The option pricing model
attributes fair value to the options based on the length of their term, the
volatility of the stock price in past periods, and other factors. Under this
method, the Company would recognize compensation expense regardless of whether
the officer or director exercised the options. In SFAS 123, the FASB has
indicated its preference for the new method. However, the statement permits
entities to retain the prior accounting method for options granted. The Company
believes that the prior method better reflects the motivation for its issuance
of stock options - that they are incentives for future performance rather than
compensation for past performance. Therefore, in adopting SFAS 123 on January 1,
1996, the Company chose to continue to account for its stock option plans in
accordance with the prior method. SFAS 123 requires entities that elect to
retain the prior method to present proforma disclosures of net income and
earnings per share as if the new method had been applied. The Company presents
these disclosures in Note 12.
(m) Reclassifications --
Certain amounts have been reclassified in the prior years to conform to
classifications followed in 1996.
(n) Accounting Estimates--
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
2. MERGERS AND ACQUISITIONS -
On August 9, 1996, Home Interstate Bancorp, the holding company of Home Bank,
was merged into CU Bancorp, the holding company of California United Bank. Each
share of Home Interstate Stock was converted into 1.409 shares of CU Bancorp
stock. Simultaneously with the merger of the two holding companies, California
United Bank was merged into Home Bank, with the surviving Bank being renamed
California United Bank. The merger of the two holding companies was accomplished
in an all stock transaction, except for the effect of fractional shares, and has
been accounted for using the pooling-of-interests method. A total of 5,955,000
shares of CU Bancorp stock were issued in this transaction.
Using the pooling-of-interests method of accounting, the assets, liabilities,
equity and results of operations for all prior periods have been restated to
include CU Bancorp and Home Interstate Bancorp as if they had been combined from
the beginning of the earliest period presented. There were no intercompany
eliminations or adjustments for accounting changes that were required in
presenting the combined history for the two companies. Revenues and earnings of
the two separate companies, relating to prior to the merger date of August 9,
1996, that are included in the combined income statements are as follows.
CU Bancorp Home Interstate Bancorp
Six months ended June 30, 1996:
Net revenue from earning assets
before provision for loan losses $9,762 $12,270
Net income 1,360 1,991
Twelve months ended December 31, 1995
Net revenue from earning assets
before provision for loan losses 15,536 24,496
Net income 2,894 3,764
Twelve months ended December 31, 1994
Net revenue from earning assets
before provision for loan losses 13,881 22,568
Net income 2,574 3,319
On January 12, 1996, the Company completed the acquisition of Corporate Bank, a
Santa Ana, California based commercial bank. The acquisition was accounted for
as a purchase. The Company issued 649 thousand shares of common stock, and paid
$1.7 million in cash, for a total purchase price of $6.5 million. The acquired
operations of Corporate Bank have been included in the Statement of Income from
the acquisition date of January 12, 1996. The Company's income for 1996 would
not have been materially different if the combination had been completed as of
January 1, 1996. The pro forma results of operations for the twelve months of
1995, had the acquisition been completed on January 1, 1995, would have been as
follows:
Net revenue from earning assets
before provision for loan losses $44,756
Income before provision for income taxes 9,424
Net income 6,152
Earnings per common and $ .54
equivalent share
The fair value of assets acquired from Corporate Bank was $72.7 million, with
liabilities assumed of $68.6 million. Cash and cash equivalents acquired, net of
cash paid, totaled $18.3 million. Goodwill of $2.4 million generated by the
purchase transaction is being amortized on a straight line basis over a ten year
period.
The third quarter 1996 included a charge of $11.5 million comprised of several
large expenses reflecting the costs of completing the merger activity with Home
Interstate Bancorp and valuing the loan and real estate portfolios on a single
consistent and conservative basis. A loan loss provision of $4.1 million, plus
an additional loss of $2.6 million related to real estate owned was recorded.
This was a result of combining the valuation reserve methodologies of
California United Bank and Home Bank, as well as reflecting the ongoing intent
of the merged bank to manage potential problems in the portfolio aggressively
and maintain conservative standards for valuation. Other large expenses for the
quarter include the costs of terminating the existing data processing contracts
for the combining banks, converting all major operating systems to a single
platform, payments to employees for severance and other agreements and the
various legal, advisory and accounting fees associated with the merger itself.
3. NATURE OF OPERATIONS -
The Bank is among the largest independent banks headquartered in Southern
California. It serves middle market businesses and consumers throughout Southern
California. It serves middle market businesses and consumers throughout Southern
California from 21 branches in Westwood, the San Gabriel and San Fernando
valleys, The South Bay, and Los Angeles, Ventura and Orange counties. In
addition to a comprehensive range of commercial banking products and services,
the Bank also offers specialty banking expertise in the areas of SBA lending,
international trade services, entertainment finance, investment services and
private banking services.
4. AVERAGE FEDERAL RESERVE BALANCES -
45
46
The average cash reserve balances required to be maintained at the Federal
Reserve Bank, under the Federal Reserve Act and Regulation D, were approximately
$8 million and $13 million for the years ended December 31, 1996 and 1995,
respectively.
5. INVESTMENT PORTFOLIO -
A summary of Securities held to Maturity at December 31, 1996 and 1995, is as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ------ --------
1996
U.S. Treasury securities $ 72,910 $124 $ 440 $ 72,594
U.S. Government agency securities 6,033 12 48 5,997
Mortgage backed securities 74,544 44 499 74,089
Obligations of state and political
subdivisions 8,964 19 39 8,944
Corporate Securities 551 1 1 551
-------- ---- ------ --------
Total portfolio $163,002 $200 $1,027 $162,175
======== ==== ====== ========
1995
U.S. Treasury securities $ 72,051 $685 $ 244 $ 72,492
U.S. Government agency securities 31 0 0 31
Obligations of state and political
subdivisions 6,414 5 25 6,394
Corporate Securities 653 5 0 658
-------- ---- ------ --------
Total portfolio $ 79,149 $695 $ 269 $ 79,575
======== ==== ====== ========
A summary of securities available for sale for December 31, 1996 and 1995 is as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
1996
U.S. Treasury securities $ 37,378 $ 189 $ 21 $ 37,546
U.S. Government agency securities 8,546 44 20 8,570
Mortgage backed securities 8,169 34 20 8,183
Obligations of state and political
subdivisions 3,504 3 42 3,465
Corporate Securities 10,910 28 39 10,899
Equity securities 380 62 14 428
Federal Reserve Bank stock 1,151 0 0 1,151
-------- ------ ---- --------
Total portfolio $ 70,038 $ 360 $156 $ 70,242
======== ====== ==== ========
1995
U.S. Treasury securities $ 93,079 $ 963 $ 86 $ 93,956
Mortgage backed securities 5,769 143 0 5,912
Obligations of state and political
subdivisions 7,165 33 40 7,158
Corporate Securities 19,140 121 45 19,216
Equity securities 380 66 22 424
Federal Reserve Bank stock 1,151 0 0 1,151
-------- ------ ---- --------
Total portfolio $126,684 $1,326 $193 $127,817
======== ====== ==== ========
Investments with a book value of $40 million and $45 million were pledged as of
December 31, 1996 and 1995, respectively, to secure court deposits and for other
purposes as required or permitted by law. Included in interest on investments in
1996, 1995, and 1994, is $376, $219, and $738, respectively, of interest from
tax-exempt securities.
46
47
The amortized cost and market value of debt securities as of December 31, 1996,
by maturity, are shown below.
Estimated
Securities Held to Maturity Amortized Cost Yield Market Value
- --------------------------- -------------- ----- ------------
Due in one year or less $24,727 5.0% 24,662
Due after one through five
years 56,650 5.86 56,351
Due after five years 81,625 6.50 81,162
Estimated
Securities Available for Sale Amortized Cost Yield Market Value
- ----------------------------- -------------- ----- ------------
Due in one year or less $37,418 6.2% $37,501
Due after one through five
years 25,331 6.0 25,360
Due after five years 5,756 7.2 5,802
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
In December 1995, as permitted by a Special Report of the Financial Accounting
Standards Board "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", the Bank made a one time
transfer of investment securities into the Available for Sale portfolio. These
securities had an amortized cost and estimated market value of $5,769 and
$5,912, respectively.
47
48
Proceeds from the sales and maturities of debt securities during 1996, 1995, and
1994 were $244,179, $79,082, and $87,400, respectively. Gross gains of $114,
$180 and $15 and were realized on those transactions. Gross realized losses on
sales transactions totaled $127 and $145 in 1995 and 1994, with no losses being
realized in 1996.
6. LOANS -
The loan portfolio, net of unamortized deferred fees of $1,393 at December 31,
1996, and $1,438 at December 31, 1995, consisted of the following:
December 31,
1996 1995
--------- ---------
Commercial and industrial loans $ 260,143 $ 244,533
Real estate loans -- construction 23,597 16,933
Real estate loans -- other 152,479 108,652
Consumer and other loans 40,481 31,731
--------- ---------
Gross Loans 476,700 401,849
Less - Allowance for loan losses (12,119) (10,043)
--------- ---------
Net loans $ 464,581 $ 391,806
========= =========
At December 31, 1996, the Bank had $1.4 million in impaired loans, against which
a loss allowance of $264 thousand has been provided. There were no impaired
loans for which no loss allowance has been provided. The recorded loss allowance
for all impaired loans has been calculated based on the present value of
expected cash flows discounted at the loan's effective interest rate. All
impaired loans are on nonaccrual status, and as such no interest income is
recognized. The Bank had an average investment in impaired loans of
approximately $3.7 million for the year ended December 31, 1996, and $5.0
million for the year ended December 31, 1995.
Total non-performing loans were $1.4 million and $4.4 million at December 31,
1996 and 1995, respectively. The interest income, which would have been
recognized had non-accrual loans been current, amounted to $52, $304, and $419,
in 1996, 1995, and 1994, respectively. No interest income has been reported on
non-accrual loans for the years 1996, 1995, or 1994.
An analysis of the activity in the allowance for loan losses is as follows:
1996 1995 1994
-------- -------- --------
Balance, beginning of period $ 10,043 $ 10,245 $ 10,086
Loans charged off (6,728) (3,572) (3,438)
Recoveries on loans previously charged off 1,552 1,270 2,797
Reserve of acquired bank 2,852
Provision for loan losses 4,400 2,100 800
-------- -------- --------
Balance, end of period $ 12,119 $ 10,043 $ 10,245
======== ======== ========
7. LOANS TO RELATED PARTIES -
At December 31, 1996, the Company had loan balances of $60 thousand or more
involving related parties ( Officers, Directors and their affiliates) of $565
thousand. The balance of $1.1 million in loans to related parties at December
31, 1995, has been reduced by repayments totaling $494 thousand during 1996. In
the opinion of the management of the Bank, all loans and commitments to lend
included in such transactions were made in compliance with applicable laws, and
on substantially the same terms, including interest rates and collateral, as
those prevailing for comparable transactions with other persons of similar
credit worthiness, and did not involve more than a normal risk of
collectibility or present other unfavorable features.
8. PREMISES AND EQUIPMENT -
Book value of premises and equipment is as follows:
48
49
December 31,
1996 1995
------- -------
Furniture, fixtures and equipment $15,226 $11,408
Land and improvements 7,575 7,701
Building and Improvements 8,457 8,561
Leasehold improvements 2,029 1,108
------- -------
Cost 33,287 28,778
Less - accumulated depreciation and amortization 15,503 13,302
------- -------
Net Book Value $17,784 $15,476
======= =======
The amounts of depreciation and amortization included in noninterest expense
were $1,671, $1,450, and $1,172 for the years ended December 31, 1996, 1995 and
1994, respectively, and are based on estimated lives of 1 to 10 years for
furniture, fixtures and equipment, 1 to 30 years for leasehold improvements, and
5 to 40 years for buildings and improvements.
The Bank leases facilities under renewable operating leases. Rental expense for
premises included in occupancy expenses were $1.8 million in 1996, $1.2 million
in 1995 and $1.1 million in 1994. As of December 31, 1996, the approximate
future lease payable under the lease commitments is as follows:
Year ended December 31, --
1997 $1,743
1998 1,702
1999 1,597
2000 933
2001 619
Thereafter 3,341
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -
Financial instruments are defined as cash, evidence of an ownership interest in
an entity or a contract that both imposes contractual obligations and rights to
exchange cash, and/or other financial instruments on the parties to the
transaction.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash, Due From Banks and Federal Funds Sold
For these short term investments , the carrying amount is a reasonable estimate
of fair value.
Securities
Quoted market prices are available for substantially all of the securities owned
by the Bank, both in the held to maturity and available for sale portfolios.
These market quotes have been used to estimate fair value.
Loans
The fair value of loans was estimated by discounting the future cash flows using
current market rates adjusted for approximated credit risk, operating costs and
interest rate risk inherent in the portfolios. Future cash flows are aggregated
based upon the payment terms and maturities of the loans. The discount rate is
calculated as the sum of the risk-free rate, a credit quality factor, an
operating expense factor and a prepayment option price. The risk-free rate is
based on the U.S. treasury curve for the stated maturity. The credit quality
factor is based on a combination of the Bank's loss experience and industry
standards for various categories of loans. The operating expense factor is based
on an internal analysis of the Bank's costs to deliver and service products.
Deposit Liabilities
49
50
Fair value for deposit liabilities without contractual maturities is equal to
the carrying value of those liabilities. This includes the bank's demand
deposits, NOW, savings and money market accounts. Fair value for certificates of
deposit are calculated by discounting the future cash flows using a current
market rate. The Bank's certificate of deposit portfolio has a fair value which
reasonably approximates carrying value, due to the short duration of the
portfolio.
Off Balance Sheet Items
The Bank's loan commitments are generally for variable rate loans representing
current market rates of interest. The Bank's letters of credit are generally
short term and are at terms consistent with the current market. Current
valuation of these off balance sheet instruments is immaterial. See note 14
for further description of these commitments.
December 31, 1996 December 31, 1995
Book Value, Estimated Book Value, Estimated
Net Fair Value Net Fair Value
----------- --------- ----------- ---------
Cash & Due From Banks $ 81,443 $ 81,443 $ 67,173 $ 67,173
Federal Funds Sold 24,000 24,000 47,100 47,100
Securities 233,244 232,417 206,966 207,393
Loans 464,581 471,148 391,806 398,468
Deposits 737,360 739,411 653,541 654,540
Other Borrowed Money 4,090 4,090 3,768 3,768
Off Balance Sheet Items 0 0 0 0
Estimations of fair value of financial instruments are subject to significant
uncertainty because active and liquid markets do not exist for a majority of
them. The estimates include assumptions concerning financial conditions, risk
characteristics, expected future losses, and market interest levels, among other
factors, and if changed could have a significant impact on them. The resulting
presentations of estimated fair value is not necessarily indicative of the value
realizable in an actual exchange of financial instruments.
10. INCOME TAXES -
The provisions (benefits) for income taxes for the years ended December 31,
1996, 1995 and 1994 for financial reporting were as follows:
1996 1995 1994
------- ------ -------
Current -
Federal $ 2,140 $2,031 $ 3,852
State 443 899 459
------- ------ -------
Total current provision 2,583 2,930 4,311
Deferred -
Federal (721) 571 (1,389)
State (258) 11 227
------- ------ -------
Total deferred provision (benefit) (979) 582 (1,162)
------- ------ -------
Total provisions for income taxes $ 1,604 $3,512 $ 3,149
======= ====== =======
As of December 31, 1996 and 1995, the temporary differences which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
December 31,
1996 1995
------- -------
Allowance for loan losses $ 4,139 $ 3,631
Depreciation 141 50
Other expense accruals 2,967 996
Real estate owned 1,896 718
Other 189 34
------- -------
Total deferred tax assets 9,332 5,422
Investment securities (281) (272)
Unrealized gain on securities available for sale (81) (471)
State tax expense (345) 12
50
51
Difference in tax and book basis of land (1,997) (1,814)
Leases (521) (157)
------- -------
Total deferred tax liabilities (3,225) (2,702)
Valuation allowance (1,334) (1,218)
------- -------
Net deferred tax asset $ 4,773 $ 1,502
======= =======
The Bank maintains a valuation reserve against net deferred tax assets to
reflect the inherent uncertainty of the ultimate realization of those assets.
The value of the Bank's largest deferred tax assets represent expenses, such as
the loan loss provision, which will become deductible on a future tax return
when an actual loss is incurred. Realization of deferred tax assets are
dependent on the availability of taxable income in the future or prior years to
offset these deductions. Because the State of California does not currently
allow net operating loss carrybacks, realization of deferred tax assets related
to California Franchise Taxes is subject to a greater degree of uncertainty.
The provisions (benefits) for income taxes varied from the Federal statutory
rate of 34% for 1996, 1995, and 1994, for the following reasons:
1996 1995 1994
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- ---
Provisions (benefit) for
income at statutory rate $ 786 34% $ 3,458 34% $ 3,074 34%
Interest on state and
municipal bonds and other
tax exempt transactions (114) (5) (148) (2) (258) (3)
State franchise taxes, net of
federal income tax benefit 122 5 401 4 419 5
Goodwill amortization 228 10 153 2 150 2
Non deductible acquisition costs 559 24 0 0
Reversal of contingency reserve 0 0 (377) (2) 0 0
Other, net 23 1 25 0 (236) (3)
------- ------- ------- ------- ------- ---
$ 1,604 69% $ 3,512 35% $ 3,149 35%
======= ======= ======= ======= ======= ===
The total net deferred tax asset of $4,773 in 1996 and $1,502 in 1995 is
included in Accrued Interest Receivable and Other Assets in the Consolidated
Statements of Financial Condition.
The Bank had no operating loss carryforwards at December 31, 1996 or 1995.
11. EMPLOYEE BENEFIT PLANS -
Home Bank had a non-contributory pension plan covering all employees over 21
years of age with one year of continuous service. Effective January 31, 1994,
the Company discontinued further accrual of benefits. In January, 1995, the
Company notified all participants of the intent to terminate the plan effective
April 13, 1995. All plan assets were
51
52
distributed during 1996. No pension costs were realized in 1996. Pension costs
for previous years included:
1995 1994
--------- ---------
Interest cost on projected benefits obligation $ 162,864 $ 130,044
Actual return on plan assets (370,451) 26,945
Net amortization and deferral 136,661 (239,827)
--------- ---------
Total pension costs $ (70,926) $ (82,838)
========= =========
The company had no remaining liability under this plan at December 31, 1996. The
plan's funded status and amounts recognized in the Company's consolidated
statements of financial condition at December 31, 1995 was as follows.
1995
------
Actuarial present value of benefits obligations:
Accumulated benefit obligation $2,508
Vested benefit obligation $2,433
Plan assets at fair value $3,735
Projected benefit obligation 2,508
Plan assets in excess of projected benefit
obligation 1,227
Unrecognized net loss 143
Unrecognized net transition asset at initial
application of SFAS 87 (38)
------
Prepaid pension cost included in plan assets $1,332
======
The principal assumptions were:
Discount rates 7.25%
Rates of increase in compensation levels 5.76%
Expected long term rate of return on plan assets 7.50%
52
53
12. SHAREHOLDERS' EQUITY -
The Company has five employee stock option plans, two non-employee director
stock option plans, one non-employee director warrant plan, and two restricted
stock plans. Options are granted under the employee plans and the restricted
stock plans based on the individual's and the Company's performance. They vest
on a straight line basis over a five year period. The maximum term of the
options is ten years.
The following table summarizes plan activity and outstanding options.
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Employee Plans
January 1, 887,681 $6.21 810,371 $6.13 556,515 $5.94
Granted 242,600 10.20 116,780 7.07 280,796 6.64
Exercised 137,217 6.44 17,332 6.76 2,305 6.08
Canceled 17,438 6.99 22,138 7.54 24,625 7.51
------- ----- ------- ----- ------- -----
December 31, 975,626 $7.15 887,681 $6.21 810,371 $6.13
======= ===== ======= ===== ======= =====
Price Range of Options $4.75 - $15.21
==============
Exerciseable 515,711 $6.16 402,260 $6.06 204,433 $5.95
======= ====== ======= ====== ======= =====
Non-Employee Director Plans
January 1, 78,490 $6.27 72,860 $5.96 45,360 $5.78
Granted 20,000 10.50 29,500 6.90 27,500 6.25
Exercised 15,120 5.79 15,120 5.78 0 0
Canceled 14,000 8.03 8,750 6.61 0 0
------ ----- ------ ------ ------ -----
December 31, 69,370 $7.24 78,490 $6.27 72,860 $5.96
====== ====== ====== ====== ====== =====
Price Range of Options $5.79 - $10.50
==============
Exerciseable 32,495 $6.16 37,615 $5.89 45,360 $5.78
====== ====== ====== ====== ====== =====
Total Option Plans
January 1, 966,171 $6.21 883,231 $6.12 601,375 $5.62
Granted 262,600 10.22 146,280 7.03 308,296 6.61
Exercised 152,337 6.38 32,452 6.30 2,305 6.08
Canceled 31,438 7.45 30,888 7.28 24,635 7.51
--------- ----- ------- ----- ------- -----
December 31, 1,044,996 $7.16 933,171 $6.20 883,231 $6.12
========= ===== ======= ====== ======= =====
Price Range of Options $4.75 - $15.21
Weighted Average ==============
Remaining Contractual Life 6.04 years
==========
Exerciseable 548,206 $6.16 441,375 $6.05 250,793 $5.93
======= ====== ======= ===== ======= =====
Weighted Average Fair Value of Grants $1,008 $366
======= ====
There are 2,083,075 authorized options under the five Employee Plans with
975,626 options outstanding with a weighted average price of $7.15 Two of these
plans with 750,075 shares authorized have expired although 289,330 options
issued under these plans remain outstanding. All grants are made at current
market value of the stock and can be issued either as Incentive stock options or
non qualified stock options. The prices these options were granted under range
from $4.75 to $15.21. Shares available for grant total 564,551. The three active
plans will expire between 2003 and 2006.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. Assumptions used in valuing the options
granted in 1996 and 1995 were that the risk-free interest rate was approximately
53
54
6.5%, the expected lives of the options granted was 6 years, the dividend yield
would be 2.5%, and the volatility of the stock price would be 40%. The Company
applies APB Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for any of the option plans. The options are granted at the
current market value of the stock, which reflects the fact that the issuance of
options is intended to motivate future performance. Had compensation cost been
recorded based on the fair value at grant dates, for grants subsequent to
January 1, 1995, using methods described in FASB Statement 123, Accounting for
Stock-based Compensation, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net income As reported $709 $6,658
Pro forma 620 6,607
Earnings per share As reported $.06 $.62
Pro forma .05 .61
In 1987, a special stock option plan was approved that is limited to directors
of the Company. Each of the directors of the Company, at the time the special
stock option plan was approved, received stock options to purchase 15,120 shares
at $5.78 per share, which was in excess of the then prevailing market price. The
options vested over a five year period with a maximum term of ten years. In both
1996 and 1995 15,120 options were exercised at $5.78 per share. At December 31,
1996 15,120 options remain outstanding with an exercise price of $5.78. There
are no remaining options available for grant under the 1987 special stock plan.
In 1994, a non-employee director stock option plan was approved and options were
granted to purchase 27,500 shares at $6.25 per share. During 1995, 29,500
options were granted at $6.90 per share. During 1996, 20,000 options were
granted at $10.50 per share. The options granted under this plan are granted
each year to the existing directors. The options vest over a five year period
with a maximum term of ten years. Options are issued at prices equal to the
market price at the date of grant. During 1996 14,000 options with weighted
average exercise price of $8.03 were canceled and during 1995 8,750 options with
weighted average exercise price of $6.61 were canceled.
In 1984, certain members of the Board of Directors were granted warrants to
purchase up to 360,067 shares of common stock at $4.17 per share, primarily for
guaranteeing a capital note issued by the Company. These warrants became
exercisable when the capital note was paid off in 1987, and had a maturity date
of February 15, 1995. During 1995, all outstanding warrants were exercised.
During 1995 and 1994, warrants for 135,024 and 57,012 shares were exercised.
In 1994, warrants to purchase 7,500 shares of common stock at the fair market
value at date of grant of $7.125 per share, with an expiration date of February
1, 1999 , were issued to the former chairman of the board.
During 1995, the Company's shareholders approved adoption of a CU Bancorp 1995
Restricted Stock Plan, providing for the issuance of Common Stock to employees,
subject to restrictions on sale or transfer. The restrictions on sale or
transfer expire over a period of five years. During 1995, 19,000 restricted
shares were issued with a market value of $185. This amount was recorded as
unearned compensation and is shown as a separate component of shareholders'
equity. Unearned compensation is being amortized to expense over the five year
vesting period, with expense of $182 and $3 recorded for 1996 and 1995. The
restrictions on these shares lapsed when the merger with Home Interstate Bancorp
closed in August 1996 because that merger constituted a change of control under
the Plan.
During 1996, the Company's shareholders approved adoption of a CU Bancorp 1996
Restricted Stock Plan, providing for the issuance of 175,000 shares of Common
Stock to employees, subject to restrictions on sale or transfer. The
restrictions on sale or transfer expire over a period of five years. No shares
have been granted under this plan at December 31, 1996.
54
55
13. CAPITAL -
Total shareholders' equity was over $88 million at December 31, 1996, compared
to $84 million at year-end 1995. This increase was due to stock issued in the
acquisition of Corporate Bank, earnings, and the exercise of stock options,
offset by dividends paid for the year. The Bank is guided by statutory capital
requirements, which are measured with three ratios, two of which are sensitive
to the risk inherent in various assets and which consider off-balance sheet
activities in assessing capital adequacy. During 1996 and 1995, the Bank's
capital levels substantially exceeded the "well capitalized" standards, the
highest classification established by bank regulators.
CAPITAL RATIOS
REGULATORY STANDARDS
------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 WELL-CAPITALIZED MINIMUM
----------------- ----------------- ---------------- -------
Total Risk Based Capital 15.6% 16.2% 10.0% 8.0%
Tier 1 Risk Based Capital 14.4 14.9 6.0 4.0
Equity to Average Assets 9.7 10.5 5.0 3.0
During 1996, the Company declared and paid dividends totaling $.17 per share.
Because of the expenses and adjustments related to the merger in the third
quarter of 1996, this represents a payout ratio of approximately 270%.
Dividends declared in 1995 totaled $.20 per share, for a 32% payout ratio.
Subsequent to year end, the Company declared a dividend of $.07 per share
payable to shareholders of record on February 14, 1997, which would represent a
33% payout ratio on earnings for the fourth quarter of 1996.
As of December 31, 1996, the most recent notification from the Bank's
regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. Management believes that there have
been no conditions or events since that notification that should have changed
the institution's category.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND COMMITMENTS AND
CONTINGENCIES -
The consolidated statements of financial condition do not reflect various
commitments relating to financial instruments which are used in the normal
course of business. These instruments include commitments to extend credit,
standby and commercial letters of credit, and interest rate floor and swap
agreements. These financial instruments carry various degrees of credit and
market risk. Credit risk is defined as the possibility that a loss may occur
from the failure of another party to perform according to the terms of the
contract. Market risk is the possibility that future changes in market prices
may make a financial instrument less valuable. Management does not anticipate
that the settlement of these financial instruments will have a material adverse
effect on the Bank's financial position or results of operation.
These financial instruments carry various degrees of credit and market risk.
Credit risk is defined as the possibility that a loss may occur from the failure
of another party to perform according to the terms of the contract. Market risk
is the possibility that future changes in market prices may make a financial
instrument less valuable.
55
56
The Bank primarily grants commercial and real estate loan commitments with
variable rates of interest and maturities of one year or less to customers in
the greater Los Angeles area. The contractual amounts of commitments to extend
credit and standby and commercial letters of credit represent the amount of
credit risk. Since many of the commitments and letters of credit are expected to
expire without being drawn, the contractual amounts do not necessarily represent
future cash requirements. For interest rate floor and swap agreements, the
notional amounts do not represent exposure to credit loss.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank evaluates the
creditworthiness of each customer. The amount of collateral obtained, if deemed
necessary by the Bank upon the extension of credit, is based upon management's
evaluation. Collateral held varies, but may include securities, accounts
receivable, inventory, personal property, equipment, and income-producing
commercial or residential property.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. Standby letters of credit
generally have terms of up to one year.
Commercial letters of credit are issued to customers to facilitate foreign and
domestic trade transactions. They represent a substitution of the Bank's credit
for the customer's credit. Such letters of credit are generally short term in
nature and are collateralized by the merchandise covered by the transaction. At
December 31, 1996 and 1995 there were $1.2 million and $1.0 million outstanding,
respectively. These amounts reduce the availability under the applicable
customer's loan facility.
Interest rate swaps and floors may be created to hedge certain assets and
liabilities of the Bank. These transactions involve either an exchange of fixed
or floating rate payment obligations on an underlying notional amount. In the
case of a rate floor, there is a guaranteed payment of a rate differential on a
notional amount, should a specific market rate fall below a specific agreed upon
level. Credit risk related to interest rate swaps is limited to the interest
receivable from the counterparty less the interest owed that party or, in the
case of rate floors, to interest receivable on the differential between the
specific rate contracted in the floor agreement and actual rates in effect at
various settlement dates. Market risk fluctuates with interest rates. The
Company has not entered into any interest rate swaps or floors in 1996,1995 or
1994.
The following is a summary of various financial instruments with off-balance
sheet risk at December 31,1996 and 1995:
December 31,
1996 1995
Standby letters of credit $5,204 $8,779
Undisbursed loans 190,817 137,980
In the normal course of business, the Company occasionally becomes a party to
litigation. See note 19.
56
57
15. OTHER OPERATING EXPENSES -
Other operating expenses included the following:
1996 1995 1994
---- ---- ----
Promotional expenses $680 $775 $726
Data processing for customers 503 564 737
Director and advisory fees 192 267 276
Legal and professional fees 4,130 1,106 1,454
Messenger services 661 513 533
Other data processing fees 5,207 3,479 3,287
Regulatory assessments 181 861 1,452
Expenses for other real estate owned 1,099 167 33
Losses on real estate owned 1,540 627 560
Operating losses 405 396 300
Stationery and supplies 624 563 610
Goodwill amortization 656 456 447
Reserve for branch relocation 0 0 58
Other outside services 0 73 522
Other 2,875 3,186 3,905
------- ------- -------
Total operating expenses $18,753 $13,033 $14,900
======= ======= =======
57
58
17. CONDENSED FINANCIAL INFORMATION OF CU BANCORP -
At December 31, 1996 and 1995, the condensed unconsolidated balance sheets of
the Company are as follows:
December 31,
1996 1995
------- -------
Balance Sheets
Cash $ 1,616 $ 1,601
Securities available for sale 529 933
Investments in California United Bank 86,452 82,466
Other assets 0 7
------- -------
Total assets $88,597 $85,007
======= =======
Other liabilities $ 84 $ 585
Shareholders' equity 88,513 84,422
------- -------
Total liabilities and shareholders' equity $88,597 $85,007
======= =======
For the years ended December 31, 1996, 1995, and 1994, the condensed
unconsolidated statements of income of the Company are as follows:
December 31,
1996 1995 1994
------ ------ ------
Statements of Income
Equity in earnings of the Bank $2,330 $6,953 6,148
Interest and other income 68 89 87
------ ------ ------
Total income 2,398 7,042 6,235
Operating expenses 1,784 480 382
------ ------ ------
Pretax income 614 6,562 5,853
Allocated income tax benefit 95 96 42
------ ------ ------
Net income $ 709 $6,658 $5,893
====== ====== ======
For the years ended December 31, 1996, 1995 and 1994, the condensed
unconsolidated statements of cash flows are as follows:
1996 1995 1994
------- ------- -------
Cash flows from operating activities
Net income $ 709 $ 6,658 $ 5,893
Equity in undistributed earnings of
subsidiaries 1,965 (4,828) (4,866)
Other, net 195 376 118
------- ------- -------
Net cash provided (used) by operations 2,769 2,206 1,145
Cash flows from financing activities
Proceeds from exercise of stock options
and director warrants 990 766 189
Restricted stock retired (86) 0 0
Cash paid in acquisition (1,731) 0 0
Cash dividend paid (2,754) (2,021) (1,141)
------- ------- -------
Net cash provided by (used in)
financing activities 3,740 (1,266) (952)
Net increase in cash and cash equivalents 15 951 193
Cash and cash equivalents at beginning
of the year 1,601 650 457
------- ------- -------
Cash and cash equivalents at end of year $ 1,616 $ 1,601 $ 650
======= ======= =======
Under state and federal law applicable to the Bank as a California state
chartered, Federal Reserve member bank, the Bank is limited in its ability to
declare dividends to the Company (without approval of its regulatory agencies)
to the smaller of the following: (1) the lesser of retained earnings or the
Bank's net income for its last three fiscal years (less any distributions made
to the Company during such period) or (2) the Bank's net profits for any year
combined with its retained net profits for the preceding two years (less any
transfers to surplus or to a fund for the retirement of preferred stock).
58
59
surplus. Actual dividends paid from the Bank to the parent company
totaled $3.5 million in 1996, $2.1 million in 1995, and $1.3 million in 1994.
17. SUMMARY OF QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The following unaudited quarterly financial information is presented giving
effect to the pooling transaction that occurred in 1996 between CU Bancorp and
Home Interstate Bancorp. Using the pooling-of-interests method of accounting
quarterly results of operations for all periods have been restated to include CU
Bancorp and Home Interstate Bancorp as if they had been combined from the
beginning of the earliest period presented.
Quarter ended 3/31/95 6/30/95 9/30/95 12/31/95
------- ------- ------- --------
Net margin $9,865 $10,187 $9,771 $10,209
Pretax income 2,316 2,559 2,869 2,426
Net income $1,433 $ 1,565 $1,710 $ 1,950
Earnings per share $ .14 $ .15 $ .16 $ .18
Quarter ended 3/31/96 6/30/96 9/30/96 12/31/96
------- ------- ------- --------
Net margin $10,738 $11,294 $ 11,439 $11,571
Pretax income 2,514 3,386 (7,843) 4,256
Net income $ 1,417 $ 1,935 $ (5,118) $ 2,475
Earnings per share $ .12 $ .17 $ (.44) $ .21
18. REGULATORY MATTERS -
In 1992, as a result of deteriorating loan quality California United Bank,
National Association and CU Bancorp both consented to agreements with their
primary regulators, a Formal Agreement with the Office of the Comptroller of the
Currency ("OCC") and a Memorandum of Understanding with the Federal Reserve Bank
of San Francisco. The Formal Agreement required the implementation of certain
policies and procedures for the operation of the bank to improve lending
operations and management of the loan portfolio. It also required maintenance of
a Tier 1 Risk Weighted Capital ratio of 10.5% and a 6.0% Tier 1 Leverage Ratio.
The Memorandum of Understanding required development of formal policies, as well
as quarterly reporting to the Federal Reserve Bank of San Francisco. Federal
Reserve Bank of San Francisco approval was required for the payment of any
dividends.
In June of 1992, a new management team replaced substantially all of prior
management. In November of 1993, following the first OCC examination subsequent
to new management's implementation of internal controls and other new management
techniques, the OCC released California United Bank, National Association from
the Formal Agreement and later that same month the Federal Reserve Bank of San
Francisco determined that CU Bancorp had met all the requirements of the
Memorandum of Understanding and terminated that document.
As a result of an examination of Home Bank completed by the FDIC in the
fourth quarter of 1992, the FDIC and Home Bank agreed to enter into an informal
agreement in the form of a Memorandum of Understanding, effective March
59
60
1993. Pursuant to the Memorandum of Understanding, Home Bank, among other
things, agreed to maintain a minimum ratio of Tier 1 Capital to Total Average
Assets of 7.5%. Additionally, with regard to the other items which were required
under the Memorandum of Understanding, Home Bank undertook steps to implement
certain actions or restrictions with respect to its lending and dividend
activities and to adopt or revise certain internal policies and procedures. The
FDIC released Home Bank from the Memorandum of Understanding on February 9,
1994.
19. 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, there is no pending or threatened litigation involving the Bank which
will have a material adverse effect upon its financial condition or results of
operations.
20. SUBSEQUENT EVENTS -
On February 24, 1997, the Company announced that it had signed a definitive
agreement to merge CU Bancorp into Bancorp Hawaii, Inc., the parent of Bank of
Hawaii, at a price of $15.34 per share of CU Bancorp common stock. The price is
payable in a combination of Bancorp Hawaii, Inc. common stock and cash, with the
stock portion being not more than 80% nor less than 60%. The purchase price is
subject to adjustment under certain circumstances. California United Bank will
continue to operate under its current leadership and management structure, as a
subsidiary of the Hawaiian holding company.
60
61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of CU Bancorp and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of CU Bancorp and Subsidiary (the Company) as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CU Bancorp and
Subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 27, 1997 (except with respect to the matter discussed in Note 20, as to
which the date is February 25, 1997)
61
62
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
62
63
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information as of December 31, 1996 with
respect to each director of CU Bancorp. See "Item 12 - SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" for information pertaining to stock
ownership of the Directors.
DIRECTOR
POSITION AND POSITION AND OF
OFFICE WITH OFFICE WITH THE COMPANY/
NAME AGE CU BANCORP BANK BANK SINCE(1):
- ---- --- ---------- ---- --------------
Kenneth L. Bernstein 54 Director Director 1994
Donald A. Buschenfield 81 Director Director 1981/1970
Stephen G. Carpenter 57 Chairman, Chairman, Chief 1992
Chief Executive
Executive Officer
Officer
J. Richard Denham 64 Director Director 1981
Randall G. Elston 43 Director Director 1987/1992
Donald G. Martin 49 Director Director 1993/1994
Paul W. Glass 51 Director Director 1984
Ronald S. Parker 52 Director Director 1994
David I. Rainer 39 Director, Director, 1993
President, President, Chief
Chief Operating Officer
Operating
Officer
James P. Staes 58 Director, Vice Director, Vice 1985
Chairman Chairman
(1) Includes service with Home Interstate Bancorp and Home Bank.
Each of these individuals serves until the annual meeting of shareholders
next following their election, and until their successors shall be duly elected
and qualified.
The Company has two Directors Emeritus, which are honorary positions. They
are:
Name Title
- ---- -----
Ruth A. Martin Chairman Emeritus
M. David Nathanson Director Emeritus
Set forth below are brief summaries of the background and business experience,
including principal occupation, of the CU Bancorp Board of Directors.
KENNETH L. BERNSTEIN, was elected to the Board of CU Bancorp and the Bank
in December 1993, and assumed the positions in February 1994. He is the
President of BFC Financial Corporation and has served in such capacity since
1965. BFC Financial Corporation performs a variety of services for both the
finance industry and clients of that industry.
63
64
DONALD A. BUSCHENFIELD has been a director of Home Interstate Bancorp
since 1981. He has been a director of Home Bank since 1970. Mr. Buschenfield
served as a consultant to Home Bank from 1985 to February 1997. (See "Director
Compensation"). Mr. Buschenfield became a director of the Company upon the
merger of the Company with Home Interstate Bancorp in August 1996.
STEPHEN G. CARPENTER joined the Bank in 1992 from Security Pacific
National Bank where he was Vice Chairman in charge of middle market lending from
July 1989 to June 1992. Mr. Carpenter was previously employed at Wells Fargo
Bank from July 1980 to July 1989, where he was an Executive Vice President. He
assumed the additional role of Chairman of the Bank in February, 1994 and
Chairman of CU Bancorp in 1995.
J. RICHARD DENHAM has been a director of Home Bank and Home Bancorp since
1981. Mr. Denham is the owner of Cement Tool Co./D & G Manufacturing Company,
which is engaged in industrial development. He served as Chief of Police for the
City of Signal Hill, California from 1967 to 1979. Mr. Denham became a rancher
and industrial developer after leaving the Signal Hill Police Department in
1979. Since January 1984, Mr. Denham has been breeding and training Andalusian
horses. Mr. Denham became a director of the Company upon the merger of the
Company with Home Interstate Bancorp in August 1996.
PAUL W. GLASS is a certified public accountant and has been a principal in
the accountancy firm of Glass & Rosen, in Encino, California, since 1980.
RANDALL G. ELSTON, MAI, began serving as a director of Home Interstate
Bancorp in 1987, and as a director of Home Bank in March 1992. He is a real
estate appraiser and has, since 1982, owned Elston Enterprises, Inc., a
corporation doing business under the name Pacific Real Estate Appraisal. Mr.
Elston became a director of the Company upon the merger of the Company with Home
Interstate Bancorp in August 1996.
DONALD G. MARTIN began serving as a director of Home Bancorp in December,
1993 and as a director of Home Bank in February 1994. Since 1970, Mr. Martin has
been involved in the agricultural industry in South Dakota where he maintains an
interest in cattle ranching. He has also been a licensed Certified Public
Accountant since 1980. Mr. Martin is the son of Ruth A. Martin, Chairman
Emeritus of the Company and California United Bank. Mr. Martin became a director
of the Company upon the merger of the Company with Home Interstate Bancorp in
August 1996.
RONALD S. PARKER has been the Chairman of Parker, Mulcahy & Associates, a
regional merchant banking firm, since May 1992. Prior to that he was the
Executive Vice President and Group Head of the Corporate Banking Group of
Security Pacific National Bank from March of 1991 to May of 1992. He held a
similar position at Wells Fargo National Bank from 1984 to 1991. Mr. Parker
resigned from the Board in December 1993. He was reappointed in 1994.
DAVID I. RAINER was appointed Executive Vice President of the Bank in June
1992 and assumed the position of Chief Operating Officer in late 1992. He
assumed the additional title of President of the Bank in February, 1994 and
President and Chief Operating Officer of CU Bancorp in 1994. He was elected to
the CU Bancorp Board and the Bank Board in 1993. From July 1989 to June 1992,
Mr. Rainer was employed by Bank of America (Security Pacific National Bank)
where he held the position of Senior Vice President. From March 1989 to July
1989, Mr. Rainer was a Senior Vice President at Faucet & Company, where he
co-managed a stock and bond portfolio. From July 1982 to March 1989, Mr. Rainer
was employed by Wells Fargo Bank, where he held the positions of Vice President
and Manager.
JAMES P. STAES is currently Vice Chairman of the Company and the Bank. He
previously served as Home Interstate Bancorp's Chief Executive Officer and Vice
Chairman from 1985 to 1996. He served as Home Interstate Bancorp's President
from 1986 to 1987 and from February 1993 to present. Mr. Staes served as a
director of Home Interstate Bancorp from 1985 to 1996 (except from May 1987 to
May 1988). Mr. Staes has also served as a director of Home Bank and as its
President from 1984 to 1996 and as Chief Executive Officer of Home Bank from
1985 to 1996. Previously, Mr. Staes served as President and Chief Executive
Officer of the Bank of Manhattan from 1982 to 1983. Mr. Staes has been employed
in the banking industry for 29 years.
64
65
EXECUTIVE OFFICERS
Set forth below is certain information as of December 31, 1996 with
respect to each of the executive officers of CU Bancorp.
Position and Position
Offices with and Offices Officer
Name Age the Company with the Bank Since
- ---- --- ----------- ------------- -----
STEPHEN G. CARPENTER 57 Chairman, Chief Chairman, Chief 1992
Executive Executive
Officer Officer
DAVID I. RAINER 39 Director, Director, 1992
President, President,
Chief Operating Chief Operating
Officer Officer
PATRICK HARTMAN 48 Chief Financial Chief Financial 1992
Officer Officer
JAMES P. STAES 58 Vice Chairman Vice Chairman
ANNE WILLIAMS 39 Chief Credit Chief Credit 1992
Officer Officer
ANITA WOLMAN 45 Corporate Corporate 1996
Secretary, Secretary,
General Counsel General Counsel
Set forth below are brief summaries of the background and business
experience, including principal occupation, of the executive officers of CU
Bancorp who have not previously been discussed herein.
PATRICK HARTMAN has been employed by the Bank since November, 1992. Prior
to assuming his present positions, he was Senior Vice President/Chief Financial
Officer for Cenfed Bank for a period during 1992. Mr. Hartman held the post of
Senior Vice President/Chief Financial Officer of Community Bank, Pasadena,
California, for thirteen years.
ANNE WILLIAMS joined the Bank in 1992 as Senior Loan Officer. She was
named to the position of Chief Credit Officer in July 1993. Prior to that time
she spent five years at Bank of America / Security Pacific National Bank, where
she was a credit administrator in asset based lending, for middle market in the
Los Angeles Area. Ms. Williams was trained at Chase Manhattan Bank in New York,
and was a commercial lender at Societe Generale in Los Angeles and Boston Five
Cents Savings Bank where she managed the corporate lending group.
ANITA WOLMAN joined the Bank in 1992 as General Counsel. She was named to
the post of Corporate Secretary in August 1996. Prior to joining the Bank, Ms.
Wolman was a principal in the law firm of Rosen, Wachtell & Gilbert, a
Professional Corporation, specializing in banking and regulatory law.
None of the directors or officers of CU Bancorp or the Bank were selected
pursuant to any arrangement or understanding other than with the directors and
officers of CU Bancorp and the Bank acting in their capacities as such. There
are no family relationships between any two or more of the current directors, or
officers, and none serve as directors of any company required to report under
the Exchange Act, or any investment company registered under the Investment
Company Act of 1940, as amended. Director Donald Martin is the son of Chairman
Emeritus Ruth A. Martin.
No director, officer or affiliate of CU Bancorp or of the Bank, no owner
of record or beneficially of more than five percent of any class of voting
securities of CU Bancorp or no associate of any such
65
66
director, officer or affiliate is a party adverse to CU Bancorp or the Bank in
any material pending legal proceedings to which CU Bancorp or the Bank is a
party.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16
Under Section 16(a) of the Exchange Act, CU Bancorp's directors, executive
officers and any persons holding ten percent or more of CU Stock are required to
report their ownership of CU Stock and any changes in that ownership to the
Commission and to furnish CU Bancorp with copies of such reports. Specific due
dates for these reports have been established and CU Bancorp is required to
report in this Annual Report on Form 10-K any failure to file on a timely basis
by such persons. Based solely upon a review of copies of reports filed with the
Commission during the fiscal year ended December 31, 1996, all persons subject
to the reporting requirements of Section 16(a) filed all required reports on a
timely basis.
67
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following information is furnished with respect to (i) the chief
executive officer of CU Bancorp and (ii) four additional executive officers of
CU Bancorp (including officers of The Bank who may be deemed to be executive
officers of CU Bancorp), who served as executive officers during 1996 and were
CU Bancorp's four most highly compensated executive officers for 1996 (the
"Named Executives").
67
68
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
----------------------------------------------- -----------------------------------------------------
Award Payouts
---------------------------- -------
Other Restricted Securities
Name and Principal Annual Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation(1) Award(s)(4) Options/SARs Payouts Compensation
- ------------------ ---- ------ ----- --------------- ----------- ------------ ------- ---------
Stephen G. Carpenter 1994 $256,250 $50,000 $13,440(2) 0 100,000 0 $2,250(3)
Chief Executive 1995 $263,937 $100,000(5) $14,250(2) 0 0 0 $2,280(3)
Officer/Chief Executive 1996 $285,225 $150,000 $14,301(2) $52,500 1,000 0 $2,250(3)
Officer - CU Bank(1)
David I. Rainer - Chief 1994 $206,000 $ 50,000 $12,330(2) 0 75,000 0 $2,250(3)
Operating Officer/ 1995 $211,150 $100,000(5) $12,330(2) 0 0 0 $2,250(3)
President and Chief 1996 $212,180 $150,000 $12,337(2) $52,500 5,000 0 $2,390(3)
Operating Officer -
CU Bank(1)
James P. Staes - Vice 1994 $201,086 $ 20,959 $20,959(2) 0 0 0 $ 8,560(6)
Chairman / Vice 1995 $201,056 $ 21,154 $21,154(2) 0 0 0 $11,792(6)
Chairman CU Bank 1996 $208,749 $ 30,000 $79,421(7) 0 0 0 $13,391(6)
Patrick Hartman - 1994 $140,021 $ 13,000 $ 8,653(2) 0 10,000 0 0
Senior Vice President 1995 $143,452 $ 25,000(5) $ 8,868(2) $14,695 12,500 0 $ 450(3)
Chief Financial 1996 $147,039 $ 45,000 $ 8,675(2) 0 0 0 $ 2,347(3)
Officer - CU Bank
Anne Williams - 1994 $124,000 $ 15,000 $ 8,092(2) 0 10,000 0 $ 2,085(3)
Executive Vice 1995 $128,960 $ 37,500(5) $ 8,095(2) $14,595 12,500 0 $ 2,250(3)
President Chief Credit 1996 $137,872 $ 45,000 $ 8,116(2) 0 7,600 0 $ 1,982(3)
Officer/Chief Credit
Officer - CU Bank
68
69
(1) Aggregate amount of perquisites and other personal benefits did not exceed
the lesser of $50,000 or 10% of total salary and bonus reported in this
table.
(2) Consists of amounts paid for automobile allowances and term life
insurance.
(3) Consists of CU Bancorp's matching portion of 401-K Plan contributions.
(4) Grants pursuant to CU Bancorp 1995 Restricted Stock Plan. 25% of any grant
of restricted stock ("Restricted Stock") vests at the second anniversary
of the grant. At each anniversary thereafter, an additional 25% of the
grant becomes vested. Dividends are payable on the Restricted Stock, at
the amount and times payable to all holders of CU Stock. The Restricted
Stock does not have any preferential or special dividend provisions. The
vesting of the Restricted Stock is not subject to performance based
conditions, other than lapse of time and continued service. All
restrictions on the Restricted Stock lapsed in connection with the merger
of CU Bancorp and Home Interstate Bancorp in August 1996, and the Plan
terminated concurrently.
(5) In addition, discretionary bonuses paid in 1995 with regard to services in
1994 of Messrs. Carpenter, Rainer and Hartman and Ms. Williams were
$60,000, $60,000, $25,000 and $30,000, respectively.
(6) Represents Annual Profit Sharing Contribution
(7) Represents $69,021 payment pursuant to Mr. Staes' Retention Agreement.
See "Other Matters Relative to Compensation - Retention Agreements",
$8,400 in director fees paid by Home Bank and Home Interstate Bancorp
prior to the merger with CU Bancorp and automobile allowance.
69
70
STOCK OPTIONS
The table below contains information concerning the grant of stock options
during the fiscal year ended December 31, 1996 to the Named Executives:
OPTION / SAR GRANTS IN THE LAST FISCAL YEAR
Number of
Securities % Of Total Potential Realizable Value At Assumed
Underlying Options/Sars Annual Rates Of Stock Price
Options/Sars Granted to Exercise Or Appreciation For the Option Term
Granted Employees In Fiscal Base Price Expiration ------------------------------------
Name (1)(2)(3)(4) Year ($/Sh) Date 5% 10%
---- ------------ ---- ------ ---- -- ---
Stephen Carpenter 1,000 0.4039% $10.50 2/27/06 $6,603 $16,734
David Rainer 5,000 2.0194% $10.50 2/27/06 $33,017 $83,671
James Staes 0 - - - - -
Anne Williams 7,500 3.0291% $10.50 2/27/06 $49,525 $125,507
Patrick Hartman 0 - - - 0 0
(1) The options are exercisable in 20% increments commencing one year
subsequent to grant and are exercisable over a six year period, provided
however, that certain options shall vest fully upon the occurrence of
certain significant events that include a merger or dissolution of CU
Bancorp where CU Bancorp is not the surviving corporation, or sale of
substantially all CU Bancorp's assets. As of December 31, 1996 options
equal to the amounts set forth in the section herein entitled "Security
Ownership of Certain Beneficial Owners and Management," below were vested.
The vested portion of each option may be exercised at any time prior to
its expiration by tendering the exercise price in cash, check or in shares
of CU Stock, valued at fair market value on the date of exercise. Each
option will terminate three months after termination of employment for any
reason other than death or disability. In the event of termination due to
death or disability, the option will terminate no later than one year
after such termination. Each option is not transferable other than by will
or the laws of distribution and is not exercisable by anyone other than
the optionee during his lifetime. If the outstanding shares of stock of CU
Bancorp are increased, decreased or changed into or exchanged for, a
different number or kind of shares or securities of CU Bancorp, without
receipt of consideration by CU Bancorp, a corresponding adjustment
changing the number or kind of shares and the exercise price per share
allocated to unexercised options shall be made. Subject to certain
limitations in the Plan, each option may be amended by mutual agreement of
the optionee and CU Bancorp.
(2) The exercise price of all options is adjustable in connection with stock
dividends, stock splits and similar events.
(3) The Potential Realizable Value is the product of (a) the difference
between (i) the product of the closing market price per share at the grant
date and the sum of (A) 1 plus (B) the assumed rate of appreciation of the
CU Bancorp Stock compounded annually over the term of the option and (ii)
the per share exercise price of the option and (b) the number of shares of
CU bancorp Stock underlying the option at December 31, 1996. These amounts
represent certain assumed rates of appreciation only. Actual gains, if
any, on stock option exercises are dependent on a variety of factors,
including market conditions and the price performance of the CU Bancorp
Stock. There can be no assurance that the rate of appreciation presented
in this table will be achieved.
70
71
(4) Reflects the number of shares of CU Stock underlying the options granted
to the Named Executives during the year. Each of the options was granted
pursuant to CU Bancorp's 1985 or 1993 Employee Stock Option Plans.
No options were exercised during 1996 by any of the named parties in the
Compensation Table. No exercise price of any option previously granted to any
executive officer was adjusted or amended ("repriced") during 1996.
AGGREGATED FISCAL YEAR END OPTION VALUES
Number of Unexercised Value of Unexercised
Options at 12/31/96 In-the-money Options
at 12/31/96
-------------------------- ------------------------
Name Exercisable / Exercisable /
Name Unexercisable Unexercisable
- ------------------------ -------------------------- ------------------------
Stephen G. Carpenter 129,907 / 70,093 $764,585 / $386,290
David I. Rainer 96,499 / 63,501 $576,823 / $331,225
Patrick Hartman 20,124 / 22,376 $98,683 / $106,942
James P. Staes 19,433 / 0 $100,703 / 0
Anne Williams 23,125 / 26,875 $137,125 / $106,625
71
72
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of directors Paul W. Glass,
Ronald Parker, Donald Buschenfield and Richard Denham. CU Bancorp has no
interlocking relationship involving any of its Compensation Committee members
that are required to be reported pursuant to applicable Securities and Exchange
Commission regulations.
OTHER MATTERS RELATED TO COMPENSATION
OTHER COMPENSATION / GOLDEN PARACHUTES
Mr. Carpenter and Mr. Rainer do not have employment contracts. However, in
the event that there is a change in control ("Change of Control") of the Bank or
its parent company (including a change of more than 50% of the current
shareholders of CU Bancorp), Mr. Carpenter and Mr. Rainer will each be entitled
to any accrued but unpaid bonus at that time. Additionally, in the event of a
Change of Control, if a position commensurate with either of their current
positions with the Bank is not offered, the Bank will pay such party, subject to
non-disapproval by the regulators, 12 months' compensation.
RETENTION AGREEMENTS
Effective June 30, 1995, Mr. Staes, then president and chief executive
officer of Home Bank, entered into an agreement (the "Staes Retention
Agreement") with Home Bank pursuant to which Mr. Staes would become entitled to
receive two years' base annual salary (or $402,132) payable in 48 substantially
equal installments over a two-year period upon the occurrence of a "change of
control" of Home Interstate Bancorp or Home Bank (as defined in such agreement).
Ten other key employees of Home Interstate Bancorp or Home Bank, entered into
similar agreements with Home Bank effective June 30, 1995 ("Employee Retention
Agreements"). Pursuant to the Employee Retention Agreements, each of the ten
employees was entitled to receive the equivalent of one years' base annual
salary, payable in 24 substantially equal installments over a one-year period,
upon a "change of control" of Home Interstate Bancorp or Home Bank.
Upon the merger of Home Interstate Bancorp into the Company in August
1996, these agreements or other agreements with similar terms became effective.
The Staes Retention Agreement includes provisions requiring Mr. Staes to provide
certain consulting services for a one-year period after the 48 month payment
term and prohibits Mr. Staes for a three-year period after the merger from
serving as a director or executive officer of another bank, savings and loan
association, credit union or thrift and loan which has an office within five
miles of a branch office of Home Bank (prior to the merger). Total payments to
be made by the Company under the Employee Retention Agreements and the Staes
Retention Agreement are approximately $1.2 million. Payments under the Employee
Retention Agreements were required, whether or not the recipient was employed by
the Company after the merger.
72
73
COMPENSATION OF DIRECTORS
Directors of CU Bancorp receive no compensation for attending meetings of
the CU Board. However, the directors of CU Bancorp also serve as directors of
the Bank. Director Compensation is designed to tie director compensation to
board and committee meeting attendance and is also designed to be substantially
similar in total compensation to similar banking institutions. Directors who are
also salaried employees of the Bank do not receive any additional compensation
for activities as directors. Eligible directors receive: (i) a retainer of
$1,250 per month; (ii) $500 per regular monthly board meeting attended; (iii)
$300 per committee meeting attended in person (for committees for which they are
members)and (iv) $200 for participation in any committee or Board meeting held
by telephone conference. During 1996, director compensation for meetings and
related matters ranged from a high of $25,350 to a low of $15,650, for the
entire year, and totaled $191,150 in the aggregate for the year 1996. In
addition to attendance at Board and committee meetings, directors discharge
their responsibilities throughout the year by personal meetings and telephone
contacts with CU Bancorp and CU Bank executive officers and others regarding the
business and affairs of CU Bancorp and the Bank. Current directors also
participate in the CU Bancorp 1994 Non-Employee Director Stock Option Plan as
more fully described below. The CU Board does not have a mandatory retirement
policy, nor are any retirement benefits paid.
During 1995, Home Bank contracted with Donald A. Buschenfield, Vice
Chairman of Home Bank and a Director of Home Bancorp, to act as a consultant to
Home Bank. Under the terms of the Consulting Agreement, Mr. Buschenfield was to
advise Home Bank on insurance, loan, investment and shareholder matters. Mr.
Buschenfield was paid an aggregate sum of $24,000 and $25,841 for services
during 1995 and 1996, respectively. This arrangement was terminated in February
1997.
ADDITIONAL DIRECTOR COMPENSATION
CU Bancorp has two director stock option plans, one of which has no
options available for grant. In addition, in the past, as more fully described
below, CU Bancorp has issued and sold warrants to purchase CU Stock to certain
directors.
1987 SPECIAL (DIRECTOR) STOCK OPTION PLAN
On October 20, 1987, the shareholders of CU Bancorp approved the 1987
Special Stock Option Plan ("Special Plan") for CU Bancorp's directors, to
encourage them to continue as directors, give them additional incentive as
directors and reward them for past services. This Special Plan was limited to
directors of CU Bancorp and the Bank and provided for the issuance of 120,960
authorized but previously unissued shares of CU Stock. Only options which do not
qualify as "incentive stock options" ("Non-qualified Stock Options") under
Section 422 of the Code may be issued. Pursuant to the shareholders' approval of
the Special Plan, each then current director received options to purchase 15,120
shares. THERE ARE NO ADDITIONAL OPTIONS CURRENTLY AVAILABLE FOR GRANT UNDER THE
SPECIAL PLAN. The only current director who holds options, pursuant to the
Special Plan is Paul Glass who holds options for 15,120 shares at an exercise
price of $5.791. Options terminate 90 days after a director ceases being a
director.
73
74
DIRECTOR WARRANTS
In May 1985, the shareholders ratified the grant to certain directors at
that time, of warrants to purchase 30,006 shares each, a total of 330,066 shares
of CU Stock, over a ten-year period as compensation for the personal guarantees
of a capital note of CU Bancorp in the amount of $1,250,000 from First
Interstate Bank of California. Director Glass received an identical warrant to
purchase 30,006 shares, at a later date. To comply with regulatory capital
requirements by supporting CU Bancorp's additional asset growth, CU Bancorp
issued the capital note, for which the lender required the guarantees by the
directors in connection with the purchase of such capital note. The exercise
price of such warrants of $4.17 per share was the weighted average price of the
CU Stock for the 60 days prior to April 2, 1984, the date on which First
Interstate Bank of California approved the purchase of the capital note. The
purchase price of each warrant to purchase 30,006 shares was $750. As of March
31, 1995, all of these warrants had been exercised and there are currently no
warrants from this program outstanding.
In January 1994, the CU Board awarded former chairman of the board Dr. Jon
P. Goodman warrants to purchase 7,500 shares of stock at fair market value on
date of grant which was $7.13, in recognition of her services to CU Bancorp, in
view of the fact that she was the only long term director without such
incentive, and in connection with her resignation.
CU BANCORP 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On April 27, 1994, the CU Board adopted and approved, subject to
shareholder approval, the 1994 Plan, which was approved by the shareholders of
CU Bancorp at the 1994 Annual Meeting of Shareholders. 200,000 shares were
reserved for options under the 1994 Plan. All non-employee directors of CU
Bancorp are eligible to participate in the 1994 Plan. The following discussion
summarizes the principal features of the 1994 Plan. This description is
qualified in its entirety by reference to the full text of the 1994 Plan, copies
of which are available for review at CU Bancorp's principal office.
The 1994 Plan is administered by a Committee, to the extent possible under
applicable law. The Committee will not have any discretion in the amount of
options to be granted to any party, the price of any option or the term and
exercisability of any option. Option grants shall be automatic as described
herein and shall not be variable by the Committee. Each member of a Committee
shall be a disinterested person as provided in Rule 16b-3(c)(2) promulgated
pursuant to the Exchange Act. The CU Board or the Committee (as the case shall
be) shall have full power and authority in its discretion to take any and all
action required or permitted to be taken under the 1994 Plan. Options issued
under the 1994 Plan are Non-Qualified Stock Options.
Under the 1994 Plan, non-employee directors of CU Bancorp on the date of
each annual meeting receive Non-Qualified Stock Options. The 1994 Plan provides
for the grant of options to non-employee directors, without any action on the
part of the Committee, only upon the following terms and conditions: (i) each
person who was a director of CU Bancorp on July 1, 1994 received Non-Qualified
Stock Options to acquire 5,000 shares of CU stock. The Chairman of the Board on
July 1, 1994 received options to purchase an additional 2,500 shares of CU
Stock; (ii) each person who is a director of CU Bancorp on the day following an
Annual Meeting of Shareholders after 1994 receives Non-Qualified Stock Options
to acquire 5,000 shares of CU Stock, provided that the person who is then the
Chairman of the Board receives options to purchase an additional 2,500 shares of
CU Stock (in the event the shares available under the 1994 Plan are insufficient
to make any such grant, all grants made thereunder on such date shall be
prorated); (iii) none of the options will be exercisable until the March 31 next
following the date of grant. Each option becomes exercisable in the following
four cumulative annual installments: 25% on the first March 31 following the
date of the grant; an additional 25% on the second March 31 following the date
of the grant; an additional 25% on the third March 31 following the date of the
grant; and the last 25% on the fourth March 31 following the date of the grant.
From time to time during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to that period,
and/or with respect to some or all of the shares allotted to any prior period as
to which the option was not
74
75
fully exercised. During the remainder of the term of the option (if its term
extends beyond the end of the installment periods), the option may be exercised
from time to time with respect to any shares then remaining subject to the
option; (iv) subject to earlier termination as provided elsewhere in the 1994
Plan, each option shall expire ten years from the date the option was granted or
twelve months following the termination of directorship (except for termination
for cause), whichever is first; and (v) the exercise price of each option shall
be equal to one hundred percent of the fair market value of the stock subject to
the option on the date the option is granted.
The exercise price of CU Stock acquired pursuant to an option shall be
paid in cash, in whole shares of CU Stock owned by the optionee having a fair
market value on the exercise date (determined by the Committee in accordance
with any reasonable evaluation method) equal to the option price of the shares
being purchased, or a combination of stock and cash, equal in the aggregate to
the option price of the shares being purchased.
The 1994 Plan will terminate upon the occurrence of a terminating event,
including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp with another corporation in which CU Bancorp is not
the surviving corporation or resulting corporation, or a sale of substantially
all the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property (a "Terminating Event"). The CU Board or the Committee (as the
case may be) shall notify each optionee not less than thirty days prior thereto
of the pendency of a Terminating Event. Upon delivery of such notice, any option
outstanding shall be exercisable in full and not only as to those shares with
respect to which installments, if any, have then accrued, subject, however, to
earlier expiration or termination as provided elsewhere in the 1994 Plan. The CU
Board or the Committee (as the case may be) may also suspend or terminate the
1994 Plan at any time. Unless sooner terminated, the 1994 Plan shall terminate
ten years from the effective date, of the 1994 Plan. No options may be granted
under the 1994 Plan while the 1994 Plan is suspended or after the 1994 Plan is
terminated. Rights and obligations under any option granted pursuant to the 1994
Plan, while in effect, shall not be altered or impaired by suspension or
termination of the 1994 Plan, except with the consent of the person to whom the
stock option was granted.
Directors hold options under the 1994 Plan at December 31, 1996 as follows:
Number of Termination
Director Number of Shares Price Date
Shares Exercisable
- ---------------------- --------------- ---------------- ---------- --------------
Kenneth L. Bernstein 15,000 3,750 $6.25- 7/1/04-
$10.50 7/19/06
$6.25- 7/1/04-
Paul W. Glass 20,000 5,625 $10.50 7/19/06
$6.25- 7/1/04-
Ronald S. Parker 15,000 3,750 $10.50 7/19/06
75
76
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLANS
CU Bancorp has five employee stock option plans (the "Employee Plans"),
pursuant to which options have in the past been granted to employees. Two of the
plans have terminated and no further grants may be made pursuant to these plans,
although options granted under such plans continue to vest and are eligible to
be exercised over the period specified in the stock option agreements. One of
the plans (the "Conversion Plan") was designed in connection with the merger
between CU Bancorp and Home Interstate Bancorp to assume outstanding options to
purchase Home Interstate Bancorp Common Stock, and no further options may be
granted pursuant to that plan. All options under the Conversion Plan are vested
and immediately exercisable. Each of the plans is substantially similar as to
the material provisions thereof, as described below. The plans were adopted at
intervals of two, eight and three years and were designed to augment options
available after substantial depletion of the prior plan through grants and
exercises of options.
All options under the Employee Plans were granted at fair market value at
the date of grant. All Plans have similar provisions regarding termination upon
a Change of Control or other similar event. Upon the occurrence of a terminating
event, including, but not limited to, liquidation, reorganization, merger or
consolidation of CU Bancorp with another corporation in which CU Bancorp is not
the surviving corporation or resulting corporation, or a sale of substantially
all the assets of CU Bancorp to another person, or a reverse merger in which CU
Bancorp is the surviving corporation but the shares of CU Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property (a "Terminating Event"), any option outstanding shall be
exercisable in full and not only as to those shares with respect to which
installments, if any, have then accrued.
The Committees administering the Employee Plans have indicated that
options granted thereunder shall, to the extent permitted under applicable law,
be Incentive Stock Options. Options which fail to qualify as Incentive Stock
Options are Non-Qualified Stock Options. Options under the Employee Plans are
exercisable over a period of time and are of a ten year maximum duration.
RESTRICTED STOCK PLANS
On March 28, 1995 the CU Board adopted and approved, subject to
shareholder approval, the 1995 Restricted Stock Plan. The 1995 Restricted Stock
Plan terminated upon the merger of Home Interstate Bancorp and CU Bancorp in
August 1996, and all restrictions on any stock issued pursuant to such plan
terminated.
In July 1996, the shareholders approved adoption of the 1996 Restricted
Stock Plan. NO RESTRICTED STOCK HAS BEEN GRANTED PURSUANT TO THIS PLAN.
Restricted Stock is common stock issued by CU Bancorp, subject to
restrictions on sale or transfer (more fully described below) which continue
until such time as may be specified in the 1996 Restricted Stock Plan or the
granting documents. An employee holding Restricted Stock is entitled to receive
cash dividends when and as declared, and to vote the shares. At such time as the
conditions set forth in the 1996 Restricted Stock Plan or the granting documents
are satisfied, the restrictions lapse. The primary conditions set forth in the
1996 Restricted Stock Plan are the lapse of time and continued employment by CU
Bancorp. If the employee's employment is terminated before the restrictions
lapse, or if any conditions are not fulfilled, the restricted stock (or that
portion of it as to which the restrictions have not lapsed) must be returned to
CU Bancorp.
The number of shares of CU Stock reserved for issuance under the 1996
Restricted Stock Plan is 175,000. If any an employee is required under the terms
of the 1996 Restricted Stock Plan to return the Restricted Shares to CU Bancorp
(or if such shares automatically are canceled), such shares shall again become
available for the 1996 Restricted Stock Plan.
76
77
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which consists solely of outside directors,
determines and administers the compensation of the Bank's executive officers.
The present membership of the Compensation Committee consists of Paul W. Glass,
Ronald S. Parker, Donald Buschenfield and Richard Denham. CU Bancorp does not
pay any direct compensation to its executive officers, except pursuant to the
stock option and restricted stock plans. The executive officers of CU Bancorp
are compensated by the Bank for their services to the Bank, and receive benefits
under various the Bank employee benefit plans. The Compensation Committee
oversees the compensation programs of the officers of the Bank and also serves
as a Compensation Committee for the Bank. The Compensation Committee is
responsible for establishing compensation programs for executive officers of CU
Bancorp and the Bank designed to attract, motivate, reward and retain key
executives responsible for the success of the corporation as a whole;
administering and maintaining such programs in a manner that will benefit the
long term interests of CU Bancorp and its shareholders; and determining the
compensation of CU Bancorp and the Bank's executive officers. The Committee also
advises on the selection, development and performance of executive officers of
CU Bancorp and its subsidiary. This report is presented by the Compensation
Committee as the Compensation Committee for CU Bancorp and the Bank. None of the
members of the Compensation Committee is an employee of the Bank or CU Bancorp,
although Messrs. Buschenfield and Denham have, in the past, been officers
(unpaid) of Home Interstate Bancorp or Home Bank, and Mr. Buschenfield, until
February 1997 served as a consultant for Home Interstate Bancorp and the
Company. Neither Mr. Buschenfield or Mr. Denham are officers of the Company, nor
have they ever served in such capacity for the Company. The Compensation
Committee provides the following report on executive compensation.
Notwithstanding anything to the contrary set forth in CU Bancorp's previous
filings under the Securities Act or the Exchange Act that might incorporate
future filings, including this Annual Report on Form 10-K, the following Report,
and the performance graph shall not be incorporated by reference into any such
filings.
77
78
OVERALL PHILOSOPHY
In view of the past history of CU Bancorp and in what the Compensation
Committee believes is in the best interests of the shareholders in building long
term value, the Compensation Committee has adopted a philosophy to accentuate
long term profitability over short term compensation. However, it is expected
that development of a compensation strategy is a dynamic process that will
continue to provide the appropriate mix of long term incentive and current
reward. The Compensation Committee views the executive compensation program as a
major factor in the competitive strategy of the Bank. The program's goal is to
attract, provide incentive to and retain competent managers whose goals are
aligned with those of CU Bancorp's shareholders. To this end, it is the ongoing
responsibility of the Compensation Committee to establish and administer an
executive compensation program that fosters competency in management, provides
high caliber executive talent and both recognizes and motivates performance in
the short and long term.
Among the CU Board's requirements of management are the following, none of
which is assigned any particular weight or emphasis: (i) develop strategies to
deliver strong market franchises and build shareholder wealth over the long
term; (ii) recommend appropriate strategic and operating plans; (iii) maintain
effective control of operations; (iv) measure performance against peers; (v)
strong, principled and ethical leadership; (vi) assure sound succession planning
and management development; (vii) sound organizational structure; (viii) inform
the CU Board regularly regarding the status of key initiatives; (ix) no
surprises; (x) CU Board meetings which are well planned, allow meaningful
participation and provide for timely resolution of issues; and (xi) advance CU
Board materials which contain the right amount of information and are received
sufficiently in advance of meetings.
The Compensation Policy of CU Bancorp is threefold. First it seeks to
align compensation with profitability of CU Bancorp and enhancement of
shareholder value. Second, it seeks to serve to attract, motivate and retain the
most qualified professionals to CU Bancorp as employees by providing competitive
compensation packages and seeking employees with diverse and sophisticated
experience. Finally, it is designed to put a substantial portion of employee
compensation "at risk," by designing long term compensation and option plans the
value of which is dependent on long term profitability of CU Bancorp but to
balance that with the realistic needs of the employees for current income.
RECRUITMENT OF MANAGEMENT PERSONNEL
In seeking executive officers, it is CU Bancorp's strategy to seek highly
credentialed, experienced bankers and other professionals, with proven skills.
The Compensation Committee acknowledges that these requirements may result in
recruitment of individuals whose primary experience is in much larger and more
sophisticated institutions, with concomitant compensation requirements. It is
the philosophy of CU Bancorp to command the best talent available at all levels,
to position CU Bancorp to take advantage of growth, strategic acquisition and
other opportunities in the future, which may require such a sophisticated
management group. The Compensation Committee believes that the Bank's current
chief executive officer, chief operating officer and top executive group
reflects the successful satisfaction of the Board's recruitment objectives.
COMPENSATION PHILOSOPHY
The Compensation Committee believes it has in place a performance-driven
executive incentive plan to reflect the philosophy set forth above, in tandem
with an executive performance evaluation system. CU Bancorp's goal is to be
competitive with those financial institutions which the Compensation Committee
deems to be similar, and in this manner to attract and retain top financial
institution executives. Similarity will be determined on a number of factors, of
which size may or may not be a significant determinant. Other factors will
include, but not be limited to, similar business strategy and customer base,
78
79
financial condition and results of operation, individual contributions and
teamwork, and level and type of professional experience. Informal surveys of
such institutions will be conducted or reviewed on a periodic basis.
The philosophy of the Compensation Committee is oriented toward
compensation and performance systems that merge the interests of the
shareholders and management by placing emphasis on rewards tied to various
financial measures. The goal of all compensation and the evaluation system is to
motivate and monitor the exceptional executive performances that will be
required for the Bank to achieve its strategic business objectives.
The compensation and performance system rewards employees based on the
achievement of corporate and individual objectives by providing annual variable
compensation awards. The corporate objectives are outlined, in part, in the
strategic plan of CU Bancorp and its subsidiary, and include the attainment of
specific levels of return on equity and return on assets which are for future
periods.
There are three major components of CU Bancorp's executive officer
compensation: (i) base salary; (ii) annual incentive awards (bonuses); and (iii)
long-term incentive awards (stock options and restricted stock). The process
utilized by the Compensation Committee in determining executive officer
compensation levels for all of these components is based upon the Compensation
Committee's subjective judgment and takes into account both qualitative and
quantitative factors. No weights are assigned to such factors with respect to
any compensation component. Among the factors considered by the committee are
the recommendations of the chief executive officer with respect to the
compensation of CU Bancorp's other key executive officers. The Compensation
Committee conducts an annual review of performance by the chief executive
officer, and the chief operating officer, at a meeting which neither the chief
executive officer nor any other officer attend.
CHIEF EXECUTIVE OFFICER BASE SALARY
The Compensation Committee believes that the chief executive officer base
salary (and total compensation package) is in line with both the goals of CU
Bancorp discussed above and is in the top quartile of similarly situated
executive salaries. The Compensation Committee believes that such level of
compensation is acceptable based on the background, experience and
sophistication of the chief executive officer, which is in line with the
standards discussed above. Based on this information, and providing no
substantial change in the data, the Compensation Committee would expect base
salary increases for the chief executive officer and executive officers to be
related primarily to changes in the cost of living and changes in duties or
responsibilities, unless the survey material suggests adjustments are in order.
BONUSES
Bonuses will be related to achievement of corporate and individual goals,
some of which will be established as part of the review process and some of
which will relate to CU Bancorp's strategic planning. The goal of bonuses is to
motivate the exceptional executive performances which will be required in order
for the Bank to achieve its strategic business objectives, to monitor the
achievement of these objectives, and to reward extraordinary effort. The general
pool available for bonuses will be determined after review of CU Bancorp's
profitability, and thereafter the individual benchmarks will be reviewed. It is
expected that bonuses will constitute the primary cash compensation increases in
the near term.
79
80
LONG-TERM COMPENSATION / STOCK OPTIONS AND RESTRICTED STOCK
The long-term plan will make awards based upon the achievement of
corporate and individual objectives which will enable the Bank to reach
financial goals determined in its strategic planning process. The financial
goals include increasing profitability, the attainment of specific levels of
return on equity and return on assets. The magnitude of awards under the plan
will be determined by increases in the value of CU Stock, thus increasing the
plan participants' incentive to achieve the goals of shareholders. It is the
philosophy of the Compensation Committee to provide the potential for long-term
incentives to all employees of the Bank.
Stock options and Restricted Stock grants, will also be utilized to
encourage executive officers to have a stake in CU Bancorp, encourage them to
remain with CU Bancorp and to align their interests more fully with those of the
other shareholders.
SPECIAL DEDUCTION LIMIT
Section 162 (m) of the Code limits federal income tax deductions for
compensation paid after 1993 to CU Bancorp's chief executive officer and its
four other most highly compensated officers to $1,000,000 per year per
individual, but includes an exception for performance based compensation that
satisfies certain conditions. CU Bancorp has not adopted performance based
compensation which qualifies under these provisions, and does not believe that
in the ordinary course, compensation to any executive officer will exceed or
approach such $1,000,000 cap and the Compensation Committee will monitor
compensation to minimize the impact of this provision. It is the intent of CU
Bancorp to retain the deduction for compensation, to the extent possible. Based
on the current level of compensation to executives of CU Bancorp and the level
contemplated for the immediate future, it is believed that this limitation will
not materially affect CU Bancorp, except for some unforeseen circumstance.
PAUL W. GLASS
RONALD S. PARKER
DONALD BUSCHENFIELD
RICHARD DENHAM
80
81
SHAREHOLDER RETURN GRAPH
Thefollowing line graph compares the total cumulative shareholder return on CU
Stock, based upon quarterly reinvestment of all dividends, to the cumulative
total returns of the Standard & Poors 500, and the Standard and Poors Banks
(Major Regional)-500 of selected bank stocks. The graph assumes $100 invested
on December 31, 1991, in CU Stock and each of the indices.
[GRAPH]
81
82
The following table sets forth the data points for the performance graph.
December 31,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
CU Bancorp 100 65.00 130.00 135.00 207.06 238.17
Banks (Major 100 127.34 135.00 127.78 201.20 274.92
Regional)-
500
S&P 500 100 107.62 118.46 120.03 165.13 203.05
SOURCE: Standard and Poor's Compustat
The indices used for comparison have been changed from prior years'
presentations based upon availability of data.
82
83
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1996
pertaining to beneficial ownership of CU Stock by persons known to CU Bancorp to
own five percent or more of such stock, directors of CU Bancorp and all
directors and officers of CU Bancorp as a group. The information contained
herein has been obtained from CU Bancorp's records, from information furnished
directly by the individual or entity to CU Bancorp, or from various filings made
by the named individuals with the Commission.
CU Bancorp is of the opinion that there is no person who possesses,
directly or indirectly, the power to direct or cause to direct the management
and policies of CU Bancorp, nor is it aware of the existence of a group of
persons formed for such purpose, whether through the ownership of voting
securities, by contract, or otherwise.
83
84
Amount and Nature
of Beneficial
Relationship With Ownership Percent of
Name of Beneficial Owner Company (1)(2)(3) Class(4)
------------------------ ------- --------- --------
Kenneth L. Bernstein Director 29,730 0.26%
Donald A. Buschenfield Director 135,604 1.20%
Stephen G. Carpenter Director, Chairman, 147,113 1.28%
Chief Executive Officer
J. Richard Denham Director 16,093 0.14%
Randall G. Elston, MAI Director 40,471 0.36%
Paul W. Glass Director 104,403 0.92%
Donald G. Martin, CPA Director 183,107 1.61%
Ruth A. Martin Chairman Emeritus, 5% 654,533 5.77%
Shareholder
Ronald S. Parker Director 9,750 0.08%
David I. Rainer Director, President, 107,407 0.94%
Chief Operating Officer
James P. Staes Director, Vice Chairman 79,946 0.70%
Anne Williams Chief Credit Officer 29,625 0.26%
Patrick Hartman Chief Financial Officer 24,717 0.22%
FBL Investment Advisory Beneficial Owner of 604,300 5.33%
Services, Inc. More Than 5%
All directors (10 in Directors
number) 853,624 7.33%
ALL CURRENT EXECUTIVE
OFFICERS AND
DIRECTORS AS A GROUP
(13 IN NUMBER)(6)(7)(8) 929,991 7.94%
- --------------------------------
(1) Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared
voting and investment power with a spouse, the persons listed have sole
voting and investment power with respect to such shares unless otherwise
noted.
84
85
(2) Includes as if currently outstanding the following shares subject to
options which are exercisable within 60 days.
Options
Director Exercisable
----------------------- --------------
Kenneth Bernstein 3,750
Donald A. Buschenfield 0
Stephen Carpenter 135,157
J. Richard Denham 7,194
Randall G. Elston 7,194
Paul Glass 20,745
Donald G. Martin 0
Ronald Parker 3,750
David Rainer 102,179
James P. Staes 19,422
Anne Williams 28,125
Patrick Hartman 23,249
All Directors as a group 299,391
All Directors and
Executive Officers
as a group 370,290
(3) Shares issuable pursuant to options which may be exercised within 60 days
are deemed to be issued and outstanding in calculating the percentage
ownership of those individuals possessing such interest, but not for any
other individuals.
(4) Only common stock is outstanding.
(5) FBL Investment Advisory Services, Inc. ("FBL"), 5400 University Avenue,
West Des Moines, IA is an investment advisor registered under the
Investment Advisors Act of 1940. According to a Schedule 13-G filed as of
December 31, 1996, FBL was deemed to have beneficial ownership of 604,300
shares as of such date. According to a Schedule 13-G, the shares are
owned on behalf various investment advisory clients of the reporting
person which have the right to receive or the power to direct the receipt
of dividends from, or the proceeds from a sale of such securities. None of
such clients individually own more than five percent.
85
86
(6) The listing of individuals as executive officers in this table or
elsewhere in this Joint Proxy Statement/ Prospectus should not be
interpreted as an indication that such individuals are considered to be
executive officers of CU Bancorp or the Bank for any other purposes.
(7) Includes as if currently outstanding 370,290 shares subject to options
held by directors and executive officers which are exercisable within 60
days from the CU Record Date.
(8) The address of all listed individuals, with the exception of FBL is c/o CU
Bancorp, 16030 Ventura Boulevard, Encino, California 91436. The address of
FBL is 5400 University Avenue, West Des Moines, IA.
86
87
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
Some of CU Bancorp's directors and executive officers, as well as their
immediate family and associates, are customers of, and have had banking
transactions with, the Bank in the ordinary course of the Bank's business, and
the Bank expects to have such limited ordinary banking transactions with such
persons in the future. The Bank has adopted a policy that it generally will not
make new loans to directors, with the exception of loans fully secured by cash.
In the opinion of the management of the Bank, all loans and commitments to lend
included in such transactions were made in compliance with applicable laws, and
on substantially the same terms, including interest rates and collateral, as
those prevailing for comparable transactions with other persons of similar
credit worthiness, and did not involve more than a normal risk of collectibility
or present other unfavorable features. Although the Bank does not have any
limits on the aggregate amount it would be willing to lend to directors and
officers as a group, loans to individual directors and officers must comply with
the Bank's respective lending policies and statutory lending limits, and prior
approval of the Bank's Board is required for these loans.
OTHER MATERIAL TRANSACTIONS
There are no other existing or proposed material transactions between CU
Bancorp or the Bank and any of CU Bancorp's directors, executive officers or
beneficial owners of five percent or more of CU Stock, or the immediate family
or associates of any of the foregoing persons.
87
88
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(a)
Consolidated Financial Statements Page
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995. 38
Consolidated Statements of Income for the years
ended December 31, 1996, 1995, and 1994. 39
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1995, and 1994. 40
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995, and 1994. 41
Notes to Consolidated Financial Statements
dated December 31, 1996 42
Report of Independent Public Accountants 61
(b) Financial Statement Schedules
No financial statement schedules are included herewith as the
information required is incorporated in the Footnotes to the Consolidated
Financial Statements.
(3) Exhibits
2. (a) Agreement and Plan of Reorganization between CU Bancorp and Bancorp
Hawaii, Inc., dated February 24, 1997 incorporated by reference herein from
Current Report on Form 8-K dated February 27, 1997 Exhibit 2.1, thereto.
(b) Stock Option Agreement between CU Bancorp and Bancorp Hawaii, Inc.
dated February 24, 1997 incorporated by reference herein from Current Report on
Form 8-K dated February 27, 1997 Exhibit 99.1, thereto.
3 (a) Certificate of Amendment of Bylaws
(b) Certificate of Amendment of Bylaws
88
89
10. Material Contracts
10.1. Agreement dated August 6, 1996 between California United Bank and M&
I Data Services, Inc.
10.2 Agreement dated August 22, 1996 between California United Bank and
Imperial Bank.
10.3 CU Bancorp 1996 Employee Stock Option Plan, incorporated by reference
from Registration Statement on Form S-4 dated April 24, 1996 (33-02777) as
Exhibit 10.7.
10.4 CU Bancorp Conversion Stock Option Plan, incorporated by reference
from Registration Statement on Form S-4 dated April 24, 1996 (33-02777) as
Exhibit 10.9
10.5 CU Bancorp 1994 Director Stock Option Plan, Amendment Number 1,
incorporated by reference from Registration Statement on Form S-4 dated April
24, 1996 (33-02777) as Exhibit 10.6.
10.6 CU Bancorp 1996 Restricted Stock Plan incorporated by reference from
Registration Statement on Form S-4 dated April 24, 1996 (33-02777) as Exhibit
10.8.
21. Subsidiaries
27. Financial Data Schedules
89
90
Exhibits
90
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 25, 1997 C U BANCORP
By STEPHEN G. CARPENTER
----------------------------
Stephen G. Carpenter
Chairman and Chief
Executive Officer
By PATRICK HARTMAN
----------------------------
Patrick Hartman
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ STEPHEN G. CARPENTER Director, Chairman March 25, 1997
- ------------------------ Chief Executive
Stephen G. Carpenter Officer
/s/ KENNETH BERNSTEIN Director March 25, 1997
- ------------------------
Kenneth Bernstein
/s/ DONALD BUSCHENFIELD Director March 25, 1997
- ------------------------
Donald Buschenfield
/s/ J. RICHARD DENHAM Director March 25, 1997
- ------------------------
J. Richard Denham
/s/ RANDALL ELSTON Director March 25, 1997
- ------------------------
Randall Elston
/s/ PAUL GLASS Director March 25, 1997
- ------------------------
Paul Glass
91
92
/s/ DONALD MARTIN Director
- ----------------------- March 25, 1997
Donald Martin
/s/ RONALD PARKER Director
- ----------------------- March 25, 1997
Ronald Parker
/s/ DAVID I. RAINER Director, President,
- ----------------------- Chief Operating Officer March 25, 1997
David I. Rainer
/s/ JAMES P. STAES
- ------------------------ Director, Vice Chairman March 25, 1997
James P. Staes
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15 (d) of the Act by Registrant Which Have Not Registered Securities Pursuant
to Section 12 of the Act
92
93
EXHIBIT INDEX
(3) Exhibits
2. (a) Agreement and Plan of Reorganization between CU Bancorp and Bancorp
Hawaii, Inc., dated February 24, 1997 incorporated by reference herein from
Current Report on Form 8-K dated February 27, 1997 Exhibit 2.1, thereto.
(b) Stock Option Agreement between CU Bancorp and Bancorp Hawaii, Inc.
dated February 24, 1997 incorporated by reference herein from Current Report on
Form 8-K dated February 27, 1997 Exhibit 99.1, thereto.
3 (a) Certificate of Amendment of Bylaws
(b) Certificate of Amendment of Bylaws
10. Material Contracts
10.1. Agreement dated August 6, 1996 between California United Bank and M&
I Data Services, Inc.
10.2 Agreement dated August 22, 1996 between California United Bank and
Imperial Bank.
10.3 CU Bancorp 1996 Employee Stock Option Plan, incorporated by reference
from Registration Statement on Form S-4 dated April 24, 1996 (33-02777) as
Exhibit 10.7.
10.4 CU Bancorp Conversion Stock Option Plan, incorporated by reference
from Registration Statement on Form S-4 dated April 24, 1996 (33-02777) as
Exhibit 10.9
10.5 CU Bancorp 1994 Director Stock Option Plan, Amendment Number 1,
incorporated by reference from Registration Statement on Form S-4 dated April
24, 1996 (33-02777) as Exhibit 10.6.
10.6 CU Bancorp 1996 Restricted Stock Plan incorporated by reference from
Registration Statement on Form S-4 dated April 24, 1996 (33-02777) as Exhibit
10.8.
11. Statements re computation of per share earnings
21. Subsidiaries
27. Financial Data Schedules