Attached files

file filename
EX-3.2 - EX-3.2 - CU Bancorpd94066dex32.htm
EX-31.2 - EX-31.2 - CU Bancorpd94066dex312.htm
EX-32.1 - EX-32.1 - CU Bancorpd94066dex321.htm
EX-10.2 - EX-10.2 - CU Bancorpd94066dex102.htm
EX-10.1 - EX-10.1 - CU Bancorpd94066dex101.htm
EX-31.1 - EX-31.1 - CU Bancorpd94066dex311.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2015

 

¨ 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 001-35683

CU BANCORP

(Exact name of registrant as specified in its charter)

 

California   90-0779788
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
818 West 7th Street, Suite 220
Los Angeles, California
  90017
(Address of principal executive offices)   (Zip Code)

(213) 430-7000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

As of November 3, 2015 the number of shares outstanding of the registrant’s no par value Common Stock was 17,034,659.


Table of Contents

CU BANCORP

September 30, 2015 FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

ITEM 1.

  

Financial Statements

  

  

Consolidated Balance Sheets September 30, 2015 (Unaudited) and December 31, 2014

     3   
  

Consolidated Statements of Income Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)

     4   
  

Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)

     5   
  

Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2015 (Unaudited)

     6   
  

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2015 and 2014 (Unaudited)

     7   
  

Notes to the Consolidated Financial Statements (Unaudited)

     8   

ITEM 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      41   
   Overview      42   
   Results of Operations      47   
   Financial Condition      58   
   Liquidity      63   
   Dividends      64   
   Regulatory Matters      65   

ITEM 3.

   Quantitative and Qualitative Disclosures About Market Risk      68   

ITEM 4.

   Controls and Procedures      70   

PART II. OTHER INFORMATION

     71   

ITEM 1.

   Legal Proceedings      71   

ITEM 1A.

   Risk Factors      71   

ITEM 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      71   

ITEM 3.

   Defaults Upon Senior Securities      71   

ITEM 4.

   Mine Safety Disclosures      71   

ITEM 5.

   Other Information      71   

ITEM 6.

   Exhibits      71   

Signatures 

        72   

 

Page 2 of 72


Table of Contents

CU BANCORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

     September 30,
2015
    December 31,
2014
 
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 41,929      $ 33,996   

Interest earning deposits in other financial institutions

     269,298        98,590   
  

 

 

   

 

 

 

Total cash and cash equivalents

     311,227        132,586   

Certificates of deposit in other financial institutions

     58,674        76,433   

Investment securities available-for-sale, at fair value

     256,085        226,962   

Investment securities held-to-maturity, at amortized cost

     43,269        47,147   
  

 

 

   

 

 

 

Total investment securities

     299,354        274,109   

Loans

     1,771,347        1,624,723   

Allowance for loan loss

     (14,965     (12,610
  

 

 

   

 

 

 

Net loans

     1,756,382        1,612,113   

Premises and equipment, net

     4,981        5,377   

Deferred tax assets, net

     17,241        16,504   

Other real estate owned, net

     1,292        850   

Goodwill

     63,950        63,950   

Core deposit and leasehold right intangibles

     8,138        9,547   

Bank owned life insurance

     49,548        38,732   

Accrued interest receivable and other assets

     33,220        34,916   
  

 

 

   

 

 

 

Total Assets

   $ 2,604,007      $ 2,265,117   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Non-interest bearing demand deposits

   $ 1,248,348      $ 1,032,634   

Interest bearing transaction accounts

     257,853        206,544   

Money market and savings deposits

     691,292        643,675   

Certificates of deposit

     62,320        64,840   
  

 

 

   

 

 

 

Total deposits

     2,259,813        1,947,693   

Securities sold under agreements to repurchase

     16,698        9,411   

Subordinated debentures, net

     9,657        9,538   

Accrued interest payable and other liabilities

     19,491        19,283   
  

 

 

   

 

 

 

Total Liabilities

     2,305,659        1,985,925   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 14)

     —          —     

SHAREHOLDERS’ EQUITY

    

Serial Preferred Stock – authorized, 50,000,000 shares:

Series A, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 16,400 shares authorized, issued and outstanding at September 30, 2015 and December 31, 2014, respectively

     16,739        16,004   

Common stock – authorized, 75,000,000 shares no par value, 16,870,936 shares issued and 16,910,936 shares outstanding at September 30, 2015, and 16,683,856 shares issued and outstanding at December 31, 2014

     227,823        226,389   

Additional paid-in capital

     21,810        19,748   

Retained earnings

     31,713        16,861   

Accumulated other comprehensive income

     263        190   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     298,348        279,192   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,604,007      $ 2,265,117   
  

 

 

   

 

 

 

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

 

Page 3 of 72


Table of Contents

CU BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

     Three Months
Ended
September 30,
     Nine Months
Ended
September 30,
 
     2015      2014      2015      2014  

Interest Income

           

Interest and fees on loans

   $ 21,689       $ 12,401       $ 62,239       $ 36,691   

Interest on investment securities

     1,124         589         3,355         1,557   

Interest on interest bearing deposits in other financial institutions

     293         248         741         665   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Income

     23,106         13,238         66,335         38,913   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Interest on interest bearing transaction accounts

     105         70         303         194   

Interest on money market and savings deposits

     427         225         1,218         681   

Interest on certificates of deposit

     53         58         150         169   

Interest on securities sold under agreements to repurchase

     9         8         21         27   

Interest on subordinated debentures

     110         109         326         323   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Expense

     704         470         2,018         1,394   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     22,402         12,768         64,317         37,519   

Provision for loan losses

     705         35         2,831         518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision For Loan Losses

     21,697         12,733         61,486         37,001   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Income

           

Gain on sale of SBA loans, net

     640         331         1,278         936   

Deposit account service charge income

     1,159         631         3,453         1,891   

Other non-interest income

     1,189         1,042         3,960         2,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     2,988         2,004         8,691         5,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Expense

           

Salaries and employee benefits (includes stock based compensation expense of $810 and $445 for the three months, and $2,130 and $1,332 for the nine months ended September 30, 2015 and 2014, respectively)

     9,744         6,066         28,175         17,886   

Occupancy

     1,465         999         4,300         2,970   

Data processing

     596         472         1,872         1,423   

Legal and professional

     412         456         1,914         1,390   

FDIC deposit assessment

     370         195         1,054         596   

Merger expenses

     146         631         498         1,128   

OREO valuation write-downs and expenses

     153         8         179         14   

Office services expenses

     383         219         1,204         721   

Other operating expenses

     1,798         985         5,696         3,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Expense

     15,067         10,031         44,892         29,278   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Before Provision for Income Tax Expense

     9,618         4,706         25,285         13,300   

Provision for income tax expense

     3,355         2,157         9,556         5,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 6,263       $ 2,549       $ 15,729       $ 7,601   

Preferred stock dividends and discount accretion

     293         —           877         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income available to common shareholders

   $ 5,970       $ 2,549       $ 14,852       $ 7,601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings Per Share

           

Basic earnings per share

   $ 0.36       $ 0.23       $ 0.90       $ 0.70   

Diluted earnings per share

   $ 0.35       $ 0.23       $ 0.88       $ 0.68   

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

 

Page 4 of 72


Table of Contents

CU BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Net Income

   $ 6,263       $ 2,549       $ 15,729       $ 7,601   

Other Comprehensive Income, net of tax:

           

Net change in unrealized gains on available-for-sale investment securities

     311         8         73         408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Comprehensive Income

     311         8         73         408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive Income

   $ 6,574       $ 2,557       $ 15,802       $ 8,009   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Page 5 of 72


Table of Contents

CU BANCORP

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2015

(Unaudited)

(Dollars in thousands)

 

     Preferred Stock      Common Stock                            
     Outstanding
Shares
     Amount      Issued
Shares
    Amount      Additional
Paid in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive

Income
     Total
Shareholders’
Equity
 

Balance at December 31, 2014

     16,400       $ 16,004         16,683,856      $ 226,389       $ 19,748      $ 16,861      $ 190       $ 279,192   

Net issuance of restricted stock

     —           —           68,625        —           —          —          —           —     

Exercise of stock options

     —           —           158,315        1,434         —          —          —           1,434   

Stock based compensation expense related to employee stock options and restricted stock

     —           —           —          —           2,130        —          —           2,130   

Restricted stock repurchase

     —           —           (39,860     —           (856     —          —           (856

Excess tax benefit – stock based compensation

     —           —           —          —           788        —          —           788   

Preferred stock dividends and discount accretion

     —           735         —          —           —          (877     —           (142

Net Income

     —           —           —          —           —          15,729        —           15,729   

Other Comprehensive Income

     —           —           —          —           —          —          73         73   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2015

     16,400         16,739         16,870,936      $ 227,823       $ 21,810      $ 31,713      $ 263       $ 298,348   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

 

Page 6 of 72


Table of Contents

CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash flows from operating activities:

    

Net income:

   $ 15,729      $ 7,601   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     2,831        518   

Provision for unfunded loan commitments

     87        76   

Stock based compensation expense

     2,130        1,332   

Depreciation

     1,062        725   

Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs

     (1,038     (3,947

Net amortization from investment securities

     2,343        1,133   

Increase in bank owned life insurance

     (947     (463

Amortization of core deposit intangibles

     1,262        203   

Amortization of time deposit premium

     (10     (13

Net amortization of leasehold right intangible asset and liabilities

     4        158   

Accretion of subordinated debenture discount

     119        119   

Valuation write-downs on OREO

     133        —     

Gain on sale of SBA loans, net

     (1,278     (936

Decrease (increase) in deferred tax assets

     (790     1,176   

Decrease in accrued interest receivable and other assets

     2,484        1,838   

Increase (decrease) in accrued interest payable and other liabilities

     (327     255   

Net excess in tax benefit on stock compensation

     (788     (477

Increase (decrease) in fair value of derivative swap liability

     591        (364
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,597        8,934   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale investment securities

     (57,597     (48,656

Proceeds from repayment and maturities from investment securities

     30,135        15,157   

Loans originated, net of principal payments

     (145,359     (40,495

Purchases of premises and equipment

     (666     (842

Net increase (decrease) in certificates of deposit in other financial institutions

     17,759        (14,166

Purchase of bank owned life insurance

     (9,869     —     
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (165,597     (89,002
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in Non-interest bearing demand deposits

     215,714        66,059   

Net increase (decrease) in Interest bearing transaction accounts

     51,309        (9,836

Net increase (decrease) in Money market and savings deposits

     47,617        (14,970

Net decrease in Certificates of deposit

     (2,510     (10,716

Net increase in Securities sold under agreements to repurchase

     7,287        2,477   

Net proceeds from stock options exercised

     1,434        1,277   

Restricted stock repurchase

     (856     (246

Dividends paid on preferred stock

     (142     —     

Net excess in tax benefit on stock compensation

     788        477   
  

 

 

   

 

 

 

Net cash provided by financing activities

     320,641        34,522   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     178,641        (45,546

Cash and cash equivalents, beginning of year

     132,586        241,287   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 311,227      $ 195,741   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for interest

   $ 2,127      $ 1,301   

Cash paid during the period for taxes

   $ 6,767      $ 2,550   

Supplemental disclosures of non-cash investing activities:

    

Net change in unrealized gain on available-for-sale investment securities, net of tax

   $ 73      $ 408   

Loans transferred to other real estate owned

   $ 575      $ 219   

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

 

Page 7 of 72


Table of Contents

CU BANCORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

Note 1 - Basis of Financial Statement Presentation

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

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

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

CU Bancorp is the common shareholder of Premier Commercial Statutory Trust I, Premier Commercial Statutory Trust II, and Premier Commercial Statutory Trust III, entities which were acquired in the merger with Premier Commercial Bancorp (“PC Bancorp”). These trusts were established for the sole purpose of issuing trust preferred securities and do not meet the criteria for consolidation in accordance with Accounting Standards Codification (“ASC”) 810, Consolidations. For more detail, see Note 9 –Borrowings and Subordinated Debentures.

Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in the interim consolidated financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with our 2014 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements contain all necessary adjustments of a normal recurring nature, to present fairly the consolidated financial position of the Company and the results of its operations for the interim periods presented.

Use of Estimates in the Preparation of Financial Statements

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

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

Business Segments

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

 

Page 8 of 72


Table of Contents

Note 2 - Recent Accounting Pronouncements

In November 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. This ASU will require an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument issued in the form of a share, including the embedded derivative feature that is being evaluated for separate accounting from the host contract when evaluating whether the host contract is more akin to debt or equity. In evaluating the stated and implied substantive terms and features, the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. Although an individual term or feature may weigh more heavily in the evaluation on the basis of facts and circumstances, an entity should use judgment based on an evaluation of all the relevant terms and features. ASU 2014-16 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the ASU is effective for fiscal years ending after December 15, 2015, and interim periods within fiscal years thereafter. The effects of initially adopting the amendments should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendment is effective. Retrospective application is permitted to all relevant prior periods. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts the amendments in an interim period, any adjustments shall be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the adoption of this ASU to have an impact on the Company’s financial position or results of operations.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis to improve targeted areas of the consolidation guidance and reduce the number of consolidation models. The Company may either apply the amendments retrospectively or use a modified retrospective approach. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 simplifies the presentation of debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts. ASU 2015-03 is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which replaced existing revenue recognition guidance for contracts to provide goods or services to customers and amended existing guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate. ASU 2014-09 established a principles-based approach to recognizing revenue that applies to all contracts other than those covered by other authoritative GAAP guidance. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows were also required. ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 was to be applied on either a modified retrospective or full retrospective basis. In response to stakeholders’ requests to defer the effective date required by ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), in August 2015, the FASB issued ASU 2015-14 which defers the original effective date for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2015-14 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

 

Page 9 of 72


Table of Contents

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement Period Adjustments. GAAP requires that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The acquirer also must revise comparative information for prior periods presented in the financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in ASU 2015-16 eliminate the requirement to retrospectively account for those adjustments. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not yet been made available for issuance. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

Page 10 of 72


Table of Contents

Note 3 - Business Combinations

On November 30, 2014, the Company completed the merger with 1st Enterprise Bank (“1st Enterprise”) pursuant to the terms of the Agreement and Plan of Merger dated June 2, 2014, as amended (“Merger Agreement”). 1st Enterprise was merged with and into the Bank, with the Bank continuing as the surviving entity in the merger. Pursuant to the terms and conditions set forth in the Merger Agreement, each outstanding share of 1st Enterprise common stock (other than shares as to which the holder exercised dissenters’ rights) was converted into the right to receive 1.3450 of a share of CU Bancorp common stock, resulting in five million shares of CU Bancorp common stock issued. The fair value of the five million shares of common stock issued as part of the consideration paid ($103 million) was determined based on the closing market price ($19.60) of CU Bancorp common stock on November 30, 2014. The 16,400 shares of 1st Enterprise Non-Cumulative Perpetual Preferred Stock, Series D were converted into the right to receive 16,400 shares of CU Bancorp’s Non-Cumulative Perpetual Preferred Stock, Series A (“CU Bancorp Preferred Stock”). The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. As part of the Merger Agreement, CU Bancorp adopted the 1st Enterprise 2006 Stock Incentive Plan, as amended, as its own equity plan and all stock options granted by 1st Enterprise thereunder are exercisable for CU Bancorp common stock on substantially the same terms but adjusted to reflect the exchange ratio set forth in the Merger Agreement. See Note 16—Stock Options and Restricted Stock, in the Company’s 2014 Form 10-K, for more details. The merger was accounted for by the Company using the acquisition method of accounting. Accordingly, the assets and liabilities of 1st Enterprise were recorded at their respective fair values at acquisition date and represents management’s estimates based on available information.

In connection with the merger, the consideration paid, the assets acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as summarized in the following table (dollars in thousands):

 

     November 30,
2014
 

Assets acquired:

  

Cash and due from banks

   $ 8,739   

Interest earning deposits in other financial institutions

     11,554   

Investment securities available-for-sale

     117,407   

Investment securities held-to-maturity

     47,457   

Loans

     553,183   

Premises and equipment, net

     1,830   

Deferred tax asset

     5,682   

Goodwill

     51,658   

Core deposit and leasehold right intangibles

     7,533   

Bank owned life insurance

     16,871   

Accrued interest receivable and other assets

     11,583   
  

 

 

 

Total assets acquired

   $ 833,497   
  

 

 

 

Liabilities assumed:

  

Deposits

   $ 703,358   

Accrued interest payable and other liabilities

     1,856   
  

 

 

 

Total liabilities assumed

   $ 705,214   
  

 

 

 

Total consideration paid:

  

CU Bancorp common stock issued

   $ 102,712   

CU Bancorp preferred stock issued

     15,921   

Fair value of 1st Enterprise stock options

     9,561   

Cash paid to a dissenter shareholder

     87   

Cash in lieu of fractional shares paid to 1st Enterprise shareholders

     2   
  

 

 

 

Total Consideration

   $ 128,283   
  

 

 

 

1st Enterprise operated as a full-service independent commercial banking institution in the Southern California market with three branches located in downtown Los Angeles, Orange County and the Inland Empire and a loan production office in the San Fernando Valley. 1st Enterprise and the Bank had complementary business models and both had developed strong commercial banking platforms and production capabilities, low-cost deposit bases and robust credit cultures.

The Company expensed approximately $146,000 of merger expenses for the three months ended September 30, 2015 and $631,000 for the three months ended September 30, 2014. For the nine months ended September 30, 2015 and September 30, 2014, the Company expensed approximately $498,000 and $1 million of merger expenses, respectively.

 

Page 11 of 72


Table of Contents

The other intangible assets are primarily related to core deposits and are being amortized on an accelerated basis over a period of approximately ten years in proportion to the related estimated benefits. The assets and liabilities of 1st Enterprise were accounted for at fair value and required either a third party analysis or an internal valuation analysis of fair value. An analysis was performed on loans, investment securities, contractual lease obligations, deferred compensation, deposits, premises and equipment, other assets, other liabilities and preferred stock as of the merger date. Balances that were considered to be at fair value at the date of acquisition were cash and cash equivalents, bank owned life insurance, derivatives, other assets (interest receivable), and certain other liabilities (interest payable). The Company made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the merger date. For tax purposes, acquisition accounting adjustments, including goodwill, are not taxable or deductible.

The Company estimated the fair value for most loans acquired from 1st Enterprise by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, whether loans are fixed, adjustable, interest only or have balloon structures. Other considerations included risk ratings, delinquency history, performance status (accrual or non-accrual) and other relevant factors. The discounted cash flow approach (“DCF”) was used to arrive at the fair value of the loans acquired. Projected cash flows were determined by estimating future credit losses and prepayment rates, which were then discounted to present value at a risk-adjusted discount rate for similar loans.

There was no carryover of 1st Enterprise’s allowance for loan losses associated with the loans acquired as the loans were initially recorded at fair value.

Purchased Credit Impaired (“PCI”) loans are accounted for under ASC 310-30 and non-PCI loans are accounted for under ASC 310-20. PCI loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable at the acquisition date, that the Company will not be able to collect all contractually required amounts. When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans. The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date, which can fluctuate due to changes in expected cash flows during the life of the PCI loans.

The following table presents the fair value of loans pursuant to accounting standards for PCI and non-PCI loans as of the 1st Enterprise acquisition date (dollars in thousands):

 

     November 30,
2014
 
     PCI loans      Non-PCI loans      Total  

Contractually required payments

   $ 577       $ 569,276       $ 569,853   

Less: non-accretable difference

     (108      —           (108
  

 

 

    

 

 

    

 

 

 

Cash flows expected to be collected (undiscounted)

     469         569,276         569,745   

Accretable yield

     —           (16,562      (16,562
  

 

 

    

 

 

    

 

 

 

Fair value of acquired loans

   $ 469       $ 552,714       $ 553,183   
  

 

 

    

 

 

    

 

 

 

 

Page 12 of 72


Table of Contents

Note 4 - Computation of Book Value and Tangible Book Value per Common Share

Book value per common share was calculated by dividing total shareholders’ equity less preferred stock, by the number of common shares issued. Tangible book value per common share was calculated by dividing tangible common equity, by the number of common shares issued. The tables below present the computation of book value and tangible book value per common share as of the dates indicated (dollars in thousands, except share and per share data):

 

     September 30,
2015
     December 31,
2014
 

Total Shareholders’ Equity

   $ 298,348       $ 279,192   

Less: Preferred stock

     16,739         16,004   

Less: Goodwill

     63,950         63,950   

Less: Core deposit and leasehold right intangibles

     8,138         9,547   
  

 

 

    

 

 

 

Tangible common equity

   $ 209,521       $ 189,691   
  

 

 

    

 

 

 

Common shares issued

     16,870,936         16,683,856   

Book value per common share

   $ 16.69       $ 15.78   
  

 

 

    

 

 

 

Tangible book value per common share

   $ 12.42       $ 11.37   
  

 

 

    

 

 

 

Note 5 - Computation of Earnings per Common Share

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Net Income

   $ 6,263       $ 2,549       $ 15,729       $ 7,601   

Less: Preferred stock dividends and discount accretion

     293         —           877         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income available to common shareholders

   $ 5,970       $ 2,549       $ 14,852       $ 7,601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average basic common shares outstanding

     16,541,380         10,986,065         16,477,206         10,937,507   

Dilutive effect of potential common share issuances from stock options, restricted stock and restricted stock units

     456,684         203,837         446,296         210,154   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     16,998,064         11,189,902         16,923,502         11,147,661   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share

           

Basic

   $ 0.36       $ 0.23       $ 0.90       $ 0.70   

Diluted

   $ 0.35       $ 0.23       $ 0.88       $ 0.68   

Anti-dilutive shares not included in the calculation of diluted earnings per share

     —           81,000         43,259         82,625   

 

Page 13 of 72


Table of Contents

Note 6 - Investment Securities

The investment securities portfolio has been classified into two categories: available-for-sale (“AFS”) and held-to-maturity (“HTM”).

The following tables present the amortized cost, gross unrealized gains and losses, and fair values of investment securities by major category as of the dates indicated (dollars in thousands):

 

            Gross Unrealized         

September 30, 2015

   Amortized
Cost
     Gains      Losses      Fair Value  

Available-for-sale:

           

U.S. Govt Agency and Sponsored Agency - Note Securities

   $ 1,018       $ 4       $ —         $ 1,022   

U.S. Govt Agency - SBA Securities

     76,238         665         371         76,532   

U.S. Govt Agency - GNMA Mortgage-Backed Securities

     32,607         243         252         32,598   

U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities

     97,568         622         285         97,905   

Corporate Securities

     4,023         29         —           4,052   

Municipal Securities

     1,017         3         —           1,020   

Asset Backed Securities

     8,113         —           254         7,859   

U.S. Treasury Notes

     35,047         50         —           35,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     255,631         1,616         1,162         256,085   

Held-to-maturity:

           

Municipal Securities

     43,269         224         71         43,422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     43,269         224         71         43,422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 298,900       $ 1,840       $ 1,233       $ 299,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Gross Unrealized         

December 31, 2014

   Amortized
Cost
     Gains      Losses      Fair Value  

Available-for-sale:

           

U.S. Govt Agency and Sponsored Agency - Note Securities

   $ 2,036       $ 2       $ —         $ 2,038   

U.S. Govt Agency - SBA Securities

     54,062         770         345         54,487   

U.S. Govt Agency - GNMA Mortgage-Backed Securities

     29,364         255         277         29,342   

U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities

     107,348         457         577         107,228   

Corporate Securities

     4,043         77         —           4,120   

Municipal Securities

     1,039         11         —           1,050   

Asset Backed Securities

     8,711         1         40         8,672   

U.S. Treasury Notes

     20,031         —           6         20,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     226,634         1,573         1,245         226,962   

Held-to-maturity:

           

Municipal Securities

     47,147         169         157         47,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     47,147         169         157         47,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 273,781       $ 1,742       $ 1,402       $ 274,121   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s investment securities portfolio at September 30, 2015, consists of U.S. Treasury Notes, U.S. Agency and U.S. Sponsored Agency issued AAA and AA rated investment-grade securities, asset backed securities, investment grade corporate bond securities, and municipal securities. At September 30, 2015 and December 31, 2014, securities with a market value of $203 million and $148.8 million, respectively, were pledged as collateral for securities sold under agreements to repurchase, public deposits, outstanding standby letters of credit, bankruptcy deposits, and other purposes as required by various statutes and agreements. See Note 9 – Borrowings and Subordinated Debentures.

 

Page 14 of 72


Table of Contents

The Company did not have any sales of securities during the three and nine months ended September 30, 2015 and 2014.

The following tables present the gross unrealized losses and fair values of AFS and HTM investment securities that were in unrealized loss positions, summarized and classified according to the duration of the loss period as of the dates indicated (dollars in thousands).

 

     < 12 Continuous
Months
     > 12 Continuous
Months
     Total  

September 30, 2015

   Fair
Value
     Gross
Unrealized
Loss
     Fair
Value
     Gross
Unrealized
Loss
     Fair
Value
     Gross
Unrealized
Loss
 

Temporarily-impaired available-for-sale investment securities:

                 

U.S. Govt. Agency SBA Securities

   $ 27,938       $ 204       $ 11,904       $ 167       $ 39,842       $ 371   

U.S. Govt. Agency – GNMA Mortgage-Backed Securities

     8,569         69         7,421         183         15,990         252   

U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities

     38,563         194         4,079         91         42,642         285   

Asset Backed Securities

     7,859         254         —           —           7,859         254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily-impaired available-for-sale investment securities

   $ 82,929       $ 721       $ 23,404       $ 441       $ 106,333       $ 1,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Temporarily-impaired held-to-maturity investment securities:

                 

Municipal Securities

   $ 10,932       $ 71       $ —         $ —         $ 10,932       $ 71   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily-impaired held-to-maturity investment securities

   $ 10,932       $ 71       $ —         $ —         $ 10,932       $ 71   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     < 12 Continuous
Months
     > 12 Continuous
Months
     Total  

December 31, 2014

   Fair
Value
     Gross
Unrealized
Loss
     Fair
Value
     Gross
Unrealized
Loss
     Fair
Value
     Gross
Unrealized
Loss
 

Temporarily-impaired available-for-sale investment securities:

                 

U.S. Govt. Agency SBA Securities

   $ 10,688       $ 87       $ 10,095       $ 258       $ 20,783       $ 345   

U.S. Govt. Agency – GNMA Mortgage-Backed Securities

     12,784         65         8,784         212         21,568         277   

U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities

     64,360         413         6,584         164         70,944         577   

Asset Backed Securities

     4,849         40         —           —           4,849         40   

U.S Treasury Notes

     20,025         6         —           —           20,025         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily-impaired available-for-sale investment securities

   $ 112,706       $ 611       $ 25,463       $ 634       $ 138,169       $ 1,245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Temporarily-impaired held-to-maturity investment securities:

                 

Municipal Securities

   $ 23,966       $ 157       $ —         $ —         $ 23,966       $ 157   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily-impaired held-to-maturity investment securities

   $ 23,966       $ 157       $ —         $ —         $ 23,966       $ 157   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses in each of the above categories are associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuers. Further, the Company does not intend to sell these securities and is not more-likely-than-not to be required to sell the securities before the recovery of its amortized cost basis. Accordingly, the Company had no securities that were classified as other-than-temporarily impaired at September 30, 2015 or December 31, 2014, and did not recognize any impairment charges in the consolidated statements of income.

 

Page 15 of 72


Table of Contents

The amortized cost, fair value and average yield of debt securities at September 30, 2015, are reflected in the table below (dollars in thousands). Maturity categories are determined as follows:

 

    U.S. Govt. Agency, U.S. Treasury Notes and U.S. Govt. Sponsored Agency bonds and notes – maturity date

 

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

 

    Investment grade Corporate Bonds and Municipal Securities – the earlier of the maturity date or the expected call date

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

 

     September 30, 2015  

Maturities Schedule of Securities (Dollars in thousands)

   Amortized
Cost
     Fair Value      Weighted
Average
Yield
 

Available-for-sale:

        

Due through one year

   $ 51,864       $ 52,087         1.22

Due after one year through five years

     100,939         101,176         1.50

Due after five years through ten years

     64,028         63,949         1.85

Due after ten years

     38,800         38,873         2.45
  

 

 

    

 

 

    

 

 

 

Total available-for-sale

     255,631         256,085         1.67

Held-to-maturity:

        

Due through one year

     3,743         3,747         2.04

Due after one year through five years

     31,557         31,646         1.52

Due after five years through ten years

     7,969         8,029         1.94
  

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     43,269         43,422         1.65
  

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 298,900       $ 299,507         1.67
  

 

 

    

 

 

    

 

 

 

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

Investment in FHLB Common Stock

The Company’s investment in the common stock of the FHLB of San Francisco is carried at cost and was $8.0 million as of September 30, 2015 and December 31, 2014. The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. Based on the current financial condition of the FHLB and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment, no impairment losses have been recorded through September 30, 2015. The FHLB also paid a special dividend of $296,000 in the second quarter of 2015.

See Note 9 - Borrowings and Subordinated Debentures for a detailed discussion regarding the Company’s borrowings and the requirements to purchase FHLB common stock. See Note 5 - Investment Securities in the Company’s December 31, 2014 10-K for additional discussion on the Company’s evaluation and accounting for its investment in FHLB common stock.

 

Page 16 of 72


Table of Contents

Note 7 - Loans

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

 

     September 30,
2015
     December 31,
2014
 

Commercial and Industrial Loans:

   $ 556,462       $ 528,517   

Loans Secured by Real Estate:

     

Owner-Occupied Nonresidential Properties

     376,579         339,309   

Other Nonresidential Properties

     515,402         481,517   

Construction, Land Development and Other Land

     94,353         72,223   

1-4 Family Residential Properties

     125,635         121,985   

Multifamily Residential Properties

     65,275         52,813   
  

 

 

    

 

 

 

Total Loans Secured by Real Estate

     1,177,244         1,067,847   
  

 

 

    

 

 

 

Other Loans:

     37,641         28,359   
  

 

 

    

 

 

 

Total Loans

   $ 1,771,347       $ 1,624,723   
  

 

 

    

 

 

 

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

 

     September 30,
2015
     December 31,
2014
 

Real Estate

   $ 811,868       $ 744,663   

Manufacturing

     167,152         161,233   

Wholesale

     129,952         124,336   

Construction

     154,085         113,763   

Finance

     113,956         96,074   

Hotel/Lodging

     101,239         88,269   

Professional Services

     53,147         64,215   

Other Services

     47,041         45,781   

Healthcare

     47,359         43,917   

Retail

     36,777         35,503   

Administrative Management

     26,164         28,016   

Restaurant/Food Service

     31,884         24,525   

Transportation

     21,596         18,158   

Information

     8,756         15,457   

Education

     9,192         10,253   

Entertainment

     5,610         8,284   

Other

     5,569         2,276   
  

 

 

    

 

 

 

Total

   $ 1,771,347       $ 1,624,723   
  

 

 

    

 

 

 

SBA Loans

As part of the acquisition of PC Bancorp, the Company acquired loans that were originated under the guidelines of the Small Business Administration (“SBA”) program. The total portfolio of the SBA contractual loan balances being serviced by the Company at September 30, 2015 was $109 million, of which $77 million has been sold. Of the $32 million remaining on the Company’s books, $25 million is un-guaranteed and $7 million is guaranteed by the SBA.

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

 

Page 17 of 72


Table of Contents

At September 30, 2015, there were no loans classified as held for sale. At September 30, 2015, the balance of SBA 7a loans originated during the quarter is $2 million, of which $1 million is guaranteed by the SBA. The Company does not currently plan on selling these loans, but it may choose to do so in the future.

Allowance for Loan Loss

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Allowance for loan loss at beginning of period

   $ 14,124      $ 11,284      $ 12,610      $ 10,603   

Provision for loan losses

     705        35        2,831        518   

Net (charge-offs) recoveries:

        

Charge-offs

     (42     (8     (933     (165

Recoveries

     178        37        457        392   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     136        29        (476     227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan loss at end of period

   $ 14,965      $ 11,348      $ 14,965      $ 11,348   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries to average loans

     0.01     0.00     (0.03 )%      (0.02 )% 

 

     September 30,
2015
    December 31,
2014
 

Allowance for loan loss to total loans

     0.84     0.78

Allowance for loan loss to total loans accounted for at historical cost, which excludes loans and the related allowance for loans acquired through acquisition

     1.30     1.39

The allowance for losses on unfunded loan commitments to extend credit is primarily related to commercial lines of credit and construction loans. The amount of unfunded loan commitments at September 30, 2015 and December 31, 2014 was $765 million and $720 million, respectively. The inherent risk associated with a loan is evaluated at the same time the credit is extended. However, the allowance held for the commitments is reported in other liabilities within the accompanying consolidated balance sheets and not as part of the allowance for loan loss in the above table. The allowance for losses on unfunded loan commitments to extend credit was $561,000 and $471,000 at September 30, 2015 and December 31, 2014, respectively.

 

Page 18 of 72


Table of Contents

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

 

     Commercial
and
Industrial
     Construction,
Land
Development
and
Other Land
    Commercial
and
Other
Real Estate
    Other      Total  

Three Months Ended

September 30, 2015

            

Allowance for loan loss – Beginning balance

   $ 6,244       $ 1,607      $ 5,799      $ 474       $ 14,124   

Provision for loan losses

     181         371        143        10         705   

Net (charge-offs) recoveries:

            

Charge-offs

     —           —          (42     —           (42

Recoveries

     177         —          1        —           178   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net (charge offs) recoveries

     177         —          (41     —           136   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 6,602       $ 1,978      $ 5,901      $ 484       $ 14,965   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Three Months Ended

September 30, 2014

      

Allowance for loan loss – Beginning balance

   $ 5,385       $ 1,422      $ 4,426      $ 51       $ 11,284   

Provision for loan losses

     333         (205     (429     336         35   

Net (charge-offs) recoveries:

            

Charge-offs

     —           —          (8     —           (8

Recoveries

     36         —          1        —           37   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net (charge-offs) recoveries

     36         —          (7     —           29   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 5,754       $ 1,217      $ 3,990      $ 387       $ 11,348   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

     Commercial
and
Industrial
    Construction,
Land
Development
and
Other Land
     Commercial
and
Other
Real Estate
    Other      Total  

Nine Months Ended

September 30, 2015

         

Allowance for loan loss – Beginning balance

   $ 5,864      $ 1,684       $ 4,802      $ 260       $ 12,610   

Provision for loan losses

     1,176        294         1,137        224         2,831   

Net (charge-offs) recoveries:

            

Charge-offs

     (891     —           (42     —           (933

Recoveries

     453        —           4        —           457   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net (charge-offs) recoveries

     (438     —           (38     —           (476
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 6,602      $ 1,978       $ 5,901      $ 484       $ 14,965   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Nine Months Ended

September 30, 2014

       

Allowance for loan loss – Beginning balance

   $ 5,534      $ 1,120       $ 3,886      $ 63       $ 10,603   

Provision for loan losses

     25        97         72        324         518   

Net (charge-offs) recoveries:

            

Charge-offs

     (93     —           (72     —           (165

Recoveries

     288        —           104        —           392   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net (charge-offs) recoveries

     195        —           32        —           227   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 5,754      $ 1,217       $ 3,990      $ 387       $ 11,348   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Page 19 of 72


Table of Contents

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

 

     Commercial
and

Industrial
     Construction,
Land
Development
and

Other Land
     Commercial
and

Other
Real Estate
     Other      Total  

September 30, 2015

           

Allowance for loan loss:

           

Individually evaluated for impairment

   $ 577       $ —         $ —         $ —         $ 577   

Collectively evaluated for impairment

     6,025         1,978         5,901         484         14,388   

Purchased credit impaired

(loans acquired with deteriorated credit quality)

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Allowance for Loan Loss

   $ 6,602       $ 1,978       $ 5,901       $ 484       $ 14,965   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

           

Individually evaluated for impairment

   $ 3,446       $ —         $ 99       $ —         $ 3,545   

Collectively evaluated for impairment

     552,634         94,353         1,081,258         37,641         1,765,886   

Purchased credit impaired

(loans acquired with deteriorated credit quality)

     382         —           1,534         —           1,916   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans Receivable

   $ 556,462       $ 94,353       $ 1,082,891       $ 37,641       $ 1,771,347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Commercial
and

Industrial
     Construction,
Land
Development
and

Other Land
     Commercial
and

Other
Real Estate
     Other      Total  

December 31, 2014

           

Allowance for loan loss:

           

Individually evaluated for impairment

   $ 222       $ —         $ —         $ —         $ 222   

Collectively evaluated for impairment

     5,642         1,684         4,802         260         12,388   

Purchased credit impaired

(loans acquired with deteriorated credit quality)

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Allowance for Loan Loss

   $ 5,864       $ 1,684       $ 4,802       $ 260       $ 12,610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

           

Individually evaluated for impairment

   $ 1,914       $ —         $ 737       $ —         $ 2,651   

Collectively evaluated for impairment

     525,910         72,223         993,195         28,359         1,619,687   

Purchased credit impaired

(loans acquired with deteriorated credit quality)

     693         —           1,692         —           2,385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans Receivable

   $ 528,517       $ 72,223       $ 995,624       $ 28,359       $ 1,624,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 72


Table of Contents

Credit Quality of Loans

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

The Company’s internally assigned grades are as follows:

 

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

 

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

 

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

 

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

 

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

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

 

     Commercial
and

Industrial
     Construction,
Land
Development
and
Other Land
     Commercial
and
Other
Real Estate
     Other      Total  

September 30, 2015

              

Pass

   $ 527,311       $ 94,353       $ 1,054,807       $ 37,640       $ 1,714,111   

Special Mention

     11,862         —           8,103         —           19,965   

Substandard

     17,289         —           19,981         1         37,271   

Doubtful

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 556,462       $ 94,353       $ 1,082,891       $ 37,641       $ 1,771,347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

              

Pass

   $ 502,624       $ 72,223       $ 977,525       $ 28,358       $ 1,580,730   

Special Mention

     8,738         —           4,878         —           13,616   

Substandard

     17,155         —           13,221         1         30,377   

Doubtful

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 528,517       $ 72,223       $ 995,624       $ 28,359       $ 1,624,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Page 21 of 72


Table of Contents

Age Analysis of Past Due and Non-Accrual Loans

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

 

     31-60
Days
Past Due
     61-90
Days
Past Due
     Greater
than

90 Days
Past Due
and
Accruing
     Total
Past Due
and
Accruing
     Total
Non-
Accrual
     Current      Total
Loans
 

September 30, 2015

                    

Commercial and Industrial

   $ 85       $ 11       $ —         $ 96       $ 3,826       $ 552,540       $ 556,462   

Construction, Land Development and Other Land

     —           —           —           —           —           94,353         94,353   

Commercial and Other Real Estate

     —           391         —           391         478         1,082,022         1,082,891   

Other

     —           —           —           —           —           37,641         37,641   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 85       $ 402       $ —         $ 487       $ 4,304       $ 1,766,556       $ 1,771,347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     31-60
Days
Past Due
     61-90
Days
Past Due
     Greater
than

90 Days
Past Due
and
Accruing
     Total
Past Due
and
Accruing
     Total
Non-
Accrual
     Current      Total
Loans
 

December 31, 2014

                    

Commercial and Industrial

   $ 192       $ 233       $ —         $ 425       $ 2,604       $ 525,488       $ 528,517   

Construction, Land Development and Other Land

     —           —           —           —           —           72,223         72,223   

Commercial and Other Real Estate

     354         —           —           354         1,305         993,965         995,624   

Other

     —           —           —           —           —           28,359         28,359   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 546       $ 233       $ —         $ 779       $ 3,909       $ 1,620,035       $ 1,624,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 22 of 72


Table of Contents

Impaired Loans

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

A valuation allowance is established for an impaired loan when the realizable value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable, in the table below as impaired loans “with no specific allowance recorded.” The valuation allowance disclosed below is included in the allowance for loan loss reported in the consolidated balance sheets as of September 30, 2015 and December 31, 2014.

The following tables present, by loan category, the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, for the dates and periods indicated (dollars in thousands). This table excludes purchased credit impaired loans (loans acquired in acquisitions with deteriorated credit quality) of $3 million and $2 million at September 30, 2015 and December 31, 2014, respectively.

 

     September 30, 2015      December 31, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no specific allowance recorded:

                 

Commercial and Industrial

   $ 2,118       $ 3,629       $ —         $ 520       $ 609       $ —     

Commercial and Other Real Estate

     99         105         —           737         739         —     
           —              

With a specific allowance recorded:

                 

Commercial and Industrial

     1,328         1,479         577         1,394         1,546         222   

Total

                 

Commercial and Industrial

     3,446         5,108         577         1,914         2,155         222   

Commercial and Other Real Estate

     99         105         —           737         739         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,545       $ 5,213       $ 577       $ 2,651       $ 2,894       $ 222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2015     2014     2015     2014  
    Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
 

With no specific allowance recorded:

               

Commercial and Industrial

  $ 2,118      $ —        $ 1,051      $ —        $ 1,757      $ —        $ 1,035      $ 34   

Commercial and Other Real Estate

    99        —          2,960        —          104        —          3,207        —     

With a specific allowance recorded:

               

Commercial and Industrial

    1,328        —          1,494        —          1,328        —          1,533        —     

Commercial and Other Real Estate

    413          —          —          550          —          —     

Total:

               

Commercial and Industrial

    3,446        —          2,545        —          3,085        —          2,568        34   

Commercial and Other Real Estate

    512        —          2,960        —          654        —          3,207        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,958      $ —        $ 5,505      $ —        $ 3,739      $ —        $ 5,775      $ 34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 23 of 72


Table of Contents

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Interest foregone on impaired loans

   $ 81       $ 72       $ 238       $ 346   

Cash collections applied to reduce principal balance

   $ 23       $ 18       $ 186       $ 2,889   

Interest income recognized on cash collections

   $ —         $ —         $ —         $ 34   

Troubled Debt Restructuring

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

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

The following tables include the recorded investment and unpaid principal balances for troubled debt restructured loans at September 30, 2015 and December 31, 2014 (dollars in thousands). These tables include TDR loans that were purchased credit impaired (“PCI”). As of September 30, 2015, there were two PCI loans that are considered to be TDR loans with a recorded investment of $161,000 and unpaid principal balances of $344,000.

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Interest
Income
Recognized
 

As of and for the period ended

September 30, 2015

        

Commercial and Industrial

   $ 1,780       $ 2,385       $ —     

Commercial and Other Real Estate

     99         105         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,879       $ 2,490       $ —     
  

 

 

    

 

 

    

 

 

 

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Interest
Income
Recognized
 

As of and for the year ended

December 31, 2014

        

Commercial and Industrial

   $ 530       $ 719       $ —     

Commercial and Other Real Estate

     114         115         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 644       $ 834       $ —     
  

 

 

    

 

 

    

 

 

 

 

Page 24 of 72


Table of Contents

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

 

     Three Months Ended
September 30,
 
     2015      2014  
     Number
of

Loans
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Number
of

Loans
     Pre-Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Troubled Debt Restructured Loans:

                 

Commercial and Industrial

     3       $ 1,335       $ 1,335         —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 1,335       $ 1,335         —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
 
     2015      2014  
     Number
of

Loans
     Pre-Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Number
of

Loans
     Pre-Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Troubled Debt Restructured Loans:

                 

Commercial and Industrial

     3       $ 1,335       $ 1,335         1       $ 224       $ 224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 1,335       $ 1,335         1       $ 224       $ 224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There was no interest income recognized for the above troubled debt restructured loans during the three months and nine months ended September 30, 2015 or September 30, 2014.

Three loans were modified or restructured during the three and nine months ended September 30, 2015. There were no loans restructured during the three months ended September 30, 2014. One loan was modified or restructured during the nine months ended September 30, 2014.

Loans are restructured in an effort to maximize collections. Impairment analyses are performed on the Company’s troubled debt restructured loans in conjunction with the normal allowance for loan loss process. The Company’s troubled debt restructured loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan balance.

There have been no payment defaults in nine months ended September 30, 2015 or September 30, 2014 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months.

Loans Acquired Through Acquisition

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Balance, beginning of period

   $ 18,255       $ 6,412       $ 21,402       $ 7,912   

Accretion, included in interest income

     (1,463      (813      (4,140      (2,264

Reclassifications (to) from non-accretable yield

     (5      —           (475      (49
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 16,787       $ 5,599       $ 16,787       $ 5,599   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Page 25 of 72


Table of Contents

Purchased Credit Impaired Loans

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

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

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

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

 

     September 30, 2015      December 31, 2014  
     Unpaid
Principal
Balance
     Carrying
Value
     Unpaid
Principal
Balance
     Carrying
Value
 

Commercial and Industrial

   $ 710       $ 382       $ 1,205       $ 693   

Commercial and Other Real Estate

     2,262         1,534         3,018         1,692   

Other

     —           —           62         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,972       $ 1,916       $ 4,285       $ 2,385   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Balance, beginning of period

   $ 286       $ 360       $ 324       $ 395   

Accretion, included in interest income

     (20      (18      (58      (53

Reclassifications from non-accretable yield

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 266       $ 342       $ 266       $ 342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 8 - Qualified Affordable Housing Project Investments

The Company’s investment in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits (“LIHTC”) was $3.8 million at September 30, 2015 and $4.2 million at December 31, 2014. The funding liability for the LIHTC was $1 million at September 30, 2015 compared to $3 million at December 31, 2014. The amount of tax credits and other tax benefits recognized was $436,000 and $443,000 for the nine months ended September 30, 2015 and September 30, 2014, respectively. Further, the amount of amortization expense included in the provision for income taxes was $343,000 and $348,000 for the nine months ended September 30, 2015 and September 30, 2014, respectively. See Note 11 – Qualified Affordable Housing Project Investments in the Company’s 10-K financial statements at December 31, 2014 for additional detail regarding the Company’s investment in LIHTC.

 

Page 26 of 72


Table of Contents

Note 9 - Borrowings and Subordinated Debentures

Securities Sold Under Agreements to Repurchase

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

As discussed in Note 6 – Investment Securities, the Company has pledged certain investments as collateral for these agreements. Securities with a fair value of $49 million and $32.3 million were pledged to secure the Repos at September 30, 2015 and December 31, 2014, respectively.

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

 

     September 30, 2015  

Date Issued

   Amount      Interest Rate     Original
Term
     Maturity Date  

September 30, 2015

   $ 16,698         0.10% – 0.25     1 day         October 1, 2015   
  

 

 

         

Total

   $ 16,698         0.22     
  

 

 

         

 

     December 31, 2014  

Date Issued

   Amount      Interest Rate     Original
Term
     Maturity Date  

December 31, 2014

   $ 9,411         0.13% – 0.25     2 days         January 2, 2015   
  

 

 

         

Total

   $ 9,411         0.20     
  

 

 

         

Federal Home Loan Bank Borrowings

The Company maintains a secured credit facility with the Federal Home Loan Bank of San Francisco “FHLB”, allowing the Company to borrow on an overnight and term basis. The Company’s credit facility with the FHLB is $618 million, which represents approximately 25% of the Bank’s total assets, as reported by the Bank in its June 30, 2015 FFIEC Call Report.

As of September 30, 2015, the Company had $795 million of loan collateral pledged with the FHLB which provides $526 million in borrowing capacity. The Company has $20 million in investment securities pledged with the FHLB to support this credit facility. In addition, the Company must maintain an investment in the Capital Stock of the FHLB. Under the FHLB Act, the FHLB has a statutory lien on the FHLB capital stock that the Company owns and the FHLB capital stock serves as further collateral under the borrowing line.

The Company had no outstanding advances (borrowings) with the FHLB as of September 30, 2015 or December 31, 2014.

Subordinated Debentures

The following table summarizes the terms of each issuance of subordinated debentures outstanding as of September 30, 2015:

 

Series

   Amount
(in
thousands)
    Issuance
Date
     Maturity
Date
     Rate Index     Current
Rate
    Next
Reset
Date
 

Trust I

   $ 6,186        12/10/04         03/15/35         3 month LIBOR + 2.05     2.39     12/15/15   

Trust II

     3,093        12/23/05         03/15/36         3 month LIBOR + 1.75     2.09     12/15/15   

Trust III

     3,093        06/30/06         09/18/36         3 month LIBOR + 1.85     2.19     12/15/15   
  

 

 

             

Subtotal

     12,372               

Unamortized fair value adjustment

     (2,715            
  

 

 

             

Net

   $ 9,657               
  

 

 

             

 

Page 27 of 72


Table of Contents

The Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at September 30, 2015. These subordinated debentures were acquired as part of the PC Bancorp merger and were issued to trusts originally established by PC Bancorp, which in turn issued trust preferred securities. These subordinated debentures were issued in three separate series. Each issuance had a maturity of 30 years from their approximate date of issue. All three subordinated debentures are variable rate instruments that reprice quarterly based on the three month LIBOR plus a margin (see tables above). All three subordinated debentures had their interest rates reset in September 2015 at the current three month LIBOR plus their index, and will continue to reprice quarterly through their maturity date. All three subordinated debentures are currently callable at par with no prepayment penalties.

Under Dodd Frank, trust preferred securities are excluded from Tier 1 capital, unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. CU Bancorp assumed approximately $12.4 million of junior subordinated debt securities issued to various business trust subsidiaries of Premier Commercial Bancorp and funded through the issuance of approximately $12.0 million of floating rate capital trust preferred securities. These junior subordinated debt securities were issued prior to May 19, 2010. Because CU Bancorp has less than $15 billion in assets, the trust preferred securities that CU Bancorp assumed from Premier Commercial Bancorp continue to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements.

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

 

Page 28 of 72


Table of Contents

Note 10 - Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. The Company has two counterparty banks.

Derivative Financial Instruments Acquired from 1st Enterprise

At September 30, 2015, the Company has thirteen interest rate swap agreements with customers and thirteen offsetting interest-rate swaps with a counterparty bank that were acquired as a result of the merger with 1st Enterprise on November 30, 2014. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Company a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating significant interest rate risk in the Company’s earnings.

The structure of the swaps is as follows: The Company enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Company enters into a swap with the counterparty bank to allow the Company to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Company to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations. Our interest rate swap derivatives acquired from 1st Enterprise are subject to a master netting arrangement with one counterparty bank. None of our derivative assets and liabilities are offset in the balance sheet.

The Company believes the risk of loss associated with counterparty borrowers relating to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of the swaps is subject to market and counterparty risk. At September 30, 2015 and December 31, 2014, the total notional amount of the Company’s swaps acquired from 1st Enterprise was $35 million and $36 million, respectively.

The following tables present the notional amount and the fair values of the asset and liability of the Company’s derivative instruments acquired from 1st Enterprise as of the dates and periods indicated (dollars in thousands):

 

     Asset Derivatives  
     September 30,
2015
     December 31,
2014
 

Interest rate swap contracts fair value

   $ 1,298       $ 719   
  

 

 

    

 

 

 

Balance sheet location

    

 

 

Accrued Interest

Receivable and Other

Assets

  

  

  

    

 

 

Accrued Interest

Receivable and Other

Assets

  

  

  

The following table presents the fair values of the liability of the Company’s derivative instruments acquired from 1st Enterprise as of the dates indicated (dollars in thousands):

 

     Liability Derivatives  
     September 30,
2015
     December 31,
2014
 

Interest rate swap contracts fair value

   $ 1,298       $ 719   
  

 

 

    

 

 

 

Balance sheet location

    
 
 
Accrued Interest
Payable and Other
Liabilities
  
  
  
    
 
 
Accrued Interest
Payable and Other
Liabilities
  
  
  

 

Page 29 of 72


Table of Contents

Derivative Financial Instruments Acquired from PC Bancorp

At September 30, 2015, the Company also has nineteen pay-fixed, receive-variable, interest rate contracts that are designed to convert fixed rate loans into variable rate loans. The Company acquired these interest rate swap contracts on July 31, 2012 as a result of the merger with PC Bancorp. All of the interest rate swap contracts acquired from PC Bancorp are with the same counterparty bank. The outstanding swaps have original maturities of up to 15 years.

The following table presents the notional amount and the fair values of the asset and liability of the Company’s derivative instruments acquired from PC Bancorp as of the dates indicated (dollars in thousands):

 

     Liability Derivatives  
     September 30,
2015
     December 31,
2014
 

Fair Value Hedges

     

Total interest rate contacts notional amount

   $ 26,226       $ 29,289   
  

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

     

Interest rate swap contracts fair value

   $ 394       $ 519   

Derivatives designated as hedging instruments:

     

Interest rate swap contracts fair value

     1,694         2,277   
  

 

 

    

 

 

 

Total interest rate contracts fair value

   $ 2,088       $ 2,796   
  

 

 

    

 

 

 

Balance sheet location

    

 

Accrued Interest Payable

and Other Liabilities

  

  

    

 

Accrued Interest Payable

and Other Liabilities

  

  

The Effect of Derivative Instruments on the Consolidated Statements of Income

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Derivatives not designated as hedging instruments:

           

Interest rate swap contracts – loans

           

Increase in fair value of interest rate swap contracts

   $ 41       $ 86       $ 124       $ 179   

Payments on interest rate swap contracts on loans

     (66      (69      (198      (205
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in other non-interest income

   $ (25    $ 17       $ (74    $ (26
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives designated as hedging instruments:

           

Interest rate swap contracts – loans

           

Increase in fair value of interest rate swap contracts

   $ 142       $ 361       $ 583       $ 663   

Increase (decrease) in fair value of hedged loans

     191         (104      279         135   

Payment on interest rate swap contracts on loans

     (275      (317      (846      (950
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in interest income on loans

   $ 58       $ (60    $ 16       $ (152
  

 

 

    

 

 

    

 

 

    

 

 

 

Under all of the Company’s interest rate swap contracts, the Company is required to pledge and maintain collateral for the credit support under these agreements. At September 30, 2015, the Company has pledged $2 million in investment securities and $3 million in certificates of deposit, for a total of $5 million, as collateral under the swap agreements.

 

Page 30 of 72


Table of Contents

Note 11 – Balance Sheet Offsetting

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

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

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

 

     Gross
Amounts
Recognized
in the
Consolidated
Balance
Sheets
     Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
     Net Amounts
of Assets
Presented

in the
Consolidated
Balance
Sheets
     Gross Amounts
Not Offset in the
Consolidated Balance Sheets
     Net Amount
(Collateral
over liability
balance
required to
be pledged)
 
            Financial
Instruments
     Collateral
Pledged
    

September 30, 2015

                 

Financial Assets:

                 

Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments)

   $ 1,298       $ —         $ 1,298       $ 1,298       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,298       $ —         $ 1,298       $ 1,298       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities:

                 

Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments)

   $ 3,386       $ —         $ 3,386       $ 3,386       $ 4,306       $ 920   

Securities sold under agreements to repurchase (See Note 9 – Borrowings and Subordinated Debentures)

     16,698         —           16,698         16,698         49,139         32,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,084       $ —         $ 20,084       $ 20,084       $ 53,445       $ 33,361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 31 of 72


Table of Contents
     Gross
Amounts
Recognized
in the
Consolidated
Balance
Sheets
     Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
     Net
Amounts of
Assets
Presented

in the
Consolidated
Balance
Sheets
     Gross Amounts
Not Offset in the
Consolidated Balance Sheets
     Net Amount
(Collateral
over liability
balance
required to
be pledged)
 
            Financial
Instruments
     Collateral
Pledged
    

December 31, 2014

                 

Financial Assets:

                 

Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments)

   $ 719       $ —         $ 719       $ 719       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 719       $ —         $ 719       $ 719       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities:

                 

Interest rate swap contracts fair value (See Note 10 – Derivative Financial Instruments)

   $ 3,515       $ —         $ 3,515       $ 3,515       $ 4,150       $ 635   

Securities sold under agreements to repurchase (See Note 9 – Borrowings and Subordinated Debentures)

     9,411         —           9,411         9,411         32,304         22,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,926       $ —         $ 12,926       $ 12,926       $ 36,454       $ 23,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 12 - Stock Options and Restricted Stock

Equity Compensation Plans

The Company’s 2007 Equity and Incentive Plan, “Equity Plan,” was adopted by the Company in 2007 and replaced two prior equity compensation plans. The Equity Plan provides for significant flexibility in determining the types and terms of awards that may be made to participants. The Equity Plan was revised and approved by the Company’s shareholders in 2011 and adopted by the Company as part of the Bank holding company reorganization. This plan is designed to promote the interest of the Company in aiding the Company to attract and retain employees, officers and non-employee directors who are expected to contribute to the future success of the organization. The Equity Plan is intended to provide participants with incentives to maximize their efforts on behalf of the Company through stock-based awards that provide an opportunity for stock ownership. This plan provides the Company with a flexible equity incentive compensation program, which allows the Company to grant stock options, restricted stock, restricted stock award units and performance units. Certain options and share awards provide for accelerated vesting, if there is a change in control, as defined in the Equity Plan. These plans are described more fully in Note 16 - Stock Options and Restricted Stock in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

At September 30, 2015, future compensation expense related to unvested restricted stock grants are reflected in the table below (dollars in thousands):

 

Restricted Stock Expense

      

Remainder of 2015

   $ 676   

2016

     1,879   

2017

     760   

2018

     273   

2019

     31   

Thereafter

     —     
  

 

 

 

Total

   $ 3,619   
  

 

 

 

 

Page 32 of 72


Table of Contents

There was no future compensation expense related to stock options as of September 30, 2015. All stock options outstanding at September 30, 2015 are vested.

Stock Options

There were no stock options granted by the Company in 2012, 2013, 2014, or during the nine months ended September 30, 2015.

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

 

     Shares      Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term

(in years)
     Aggregate
Intrinsic
Value

(in thousands)
 

Outstanding stock options at December 31, 2014

     1,016,490       $ 10.13         1.6       $ 11,770   

Granted

     —              

Exercised

     (158,315         

Forfeited

     (5,000         

Expired

     —              
  

 

 

          

Outstanding stock options at September 30, 2015

     853,175       $ 10.26         0.9       $ 10,467   
  

 

 

          

Exercisable options at September 30, 2015

     853,175       $ 10.26         0.9       $ 10,467   

Unvested options at September 30, 2015

     —              

The Company recorded stock option compensation expense of $0 and $2,000 for the three months ended September 30, 2015 and 2014, and $1,700 and $8,000 for the nine months period September 30, 2015 and 2014, respectively.

The total intrinsic value of options exercised during the three months ended September 30, 2015 and 2014 was $2 million and $1 million, respectively.

Restricted Stock

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

 

     Number of Shares      Weighted-Average
Grant-Date Fair Value
per Share
 

Restricted Stock:

     

Unvested at December 31, 2014

     309,506       $ 16.41   

Granted

     77,800         20.95   

Vested

     (99,750      13.42   

Cancelled and forfeited

     (9,175      16.50   
  

 

 

    

Unvested at September 30, 2015

     278,381       $ 18.74   
  

 

 

    

Restricted stock compensation expense related to the restricted stock grants reflected in the table above was $745,000 and $443,000 for the three month period ended September 30, 2015 and 2014 and $2 million and $1 million for the nine month period ended September 30, 2015 and 2014, respectively. Restricted stock awards reflected in the table above are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed. During the three months and nine months ended September 30, 2015, the Company granted 40,000 shares of Restricted Stock Unit (“RSU”), respectively, under the Equity Plan to one of its executive officers. Such grant is not reflected in the table above. The shares of common stock underlying the 40,000 shares of RSU

 

Page 33 of 72


Table of Contents

will not be issued until the RSUs vest but are outstanding as of September 30, 2015. The RSUs are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed.

Note 13 – Shareholders’ Equity

Common Stock

During the first three quarters of 2015, the Company’s issued common stock increased by 187,080 shares, from 16,683,856 shares at December 31, 2014, to 16,870,936 shares at September 30, 2015. During the nine months ended September 30, 2015, the Company issued 158,315 shares of stock from the exercise of employee stock options for a total value of $1,434,000. The Company also granted 77,800 shares of restricted stock awards to the Company’s directors and employees and cancelled 9,175 shares of unvested restricted stock related to employee turnover, resulting in a net issuance of restricted stock of 68,625 shares. Further, the Company cancelled 39,860 shares of restricted stock that had a value of $856,000 when employees elected to pay their tax obligation via the repurchase of the stock by the Company.

The Equity Plan, as amended, allows employees to make an election to have a portion of their restricted stock that became vested during the year repurchased by the Company to provide funds to pay the employee’s tax obligation related to the vesting of the stock.

Preferred Stock

As discussed in Note 3 - Business Combinations, the Company completed the merger with 1st Enterprise on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1st Enterprise as part of the Small Business Lending Fund (SBLF) program of the United States Department of the Treasury was converted into substantially 16,400 identical CU Bancorp shares with identical terms. CU Bancorp Preferred Stock has a liquidation preference amount of $1,000 per share, designated as the Company’s Non-Cumulative Perpetual Preferred Stock, Series A. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. The CU Bancorp Preferred Stock had an estimated life of four years and the fair value was $15.9 million at the merger date, resulting in a net discount of $479,000. The life-to-date and the year-to-date accretion on the net discount as of September 30, 2015 is $818,000 and $735,000, respectively. The net carrying value of the CU Bancorp Preferred Stock is $16.7 million ($16.4 million plus of $0.3 million net premium) as of September 30, 2015. Dividends on the CU Bancorp Preferred Stock are paid to the U.S. Department of the Treasury on a quarterly basis. See Note 22 - Regulatory Matters, in the Company’s 2014 Form 10-K, for restrictions on dividends.

The Company currently includes the Non-Cumulative Perpetual Preferred Stock, Series A, in its Tier 1 capital. Under Basel III, the CU Bancorp Preferred Stock continues to be included in Tier 1 capital because non-cumulative perpetual preferred stock remained classified as Tier 1 capital following the enactment of Dodd Frank.

Other Comprehensive Income (Loss)

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

 

     Before Tax      Tax Effect      Net of Tax  

Three Months Ended – September 30, 2015

        

Net unrealized gains (losses) on investment securities:

        

Beginning balance

   $ (82    $ (34    $ (48

Net unrealized gains arising during the period

     536         225         311   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 454       $ 191       $ 263   
  

 

 

    

 

 

    

 

 

 
     Before Tax      Tax Effect      Net of Tax  

Three Months Ended – September 30, 2014

        

Net unrealized gains (losses) on investment securities:

        

Beginning balance

   $ 331       $ 136       $ 195   

Net unrealized gains arising during the period

     19         11         8   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 350       $ 147       $ 203   
  

 

 

    

 

 

    

 

 

 

 

Page 34 of 72


Table of Contents
     Before Tax      Tax Effect      Net of Tax  

Nine Months Ended – September 30, 2015

        

Net unrealized gains (losses) on investment securities:

        

Beginning balance

   $ 333       $ 143       $ 190   

Net unrealized gains arising during the period

     121         48         73   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 454       $ 191       $ 263   
  

 

 

    

 

 

    

 

 

 
     Before Tax      Tax Effect      Net of Tax  

Nine Months Ended – September 30, 2014

        

Net unrealized gains (losses) on investment securities:

        

Beginning balance

   $ (348    $ (143    $ (205

Net unrealized gains arising during the period

     698         290         408   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 350       $ 147       $ 203   
  

 

 

    

 

 

    

 

 

 

Note 14 - Commitments and Contingencies

Litigation

From time to time the Company is a party to claims and legal proceedings arising in the ordinary course of business. The Company accrues for any probable loss contingencies that are estimable and discloses any material losses. As of September 30, 2015, there were no legal proceedings against the Company the outcome of which are expected to have a material adverse impact on the Company’s financial position, results of operations or cash flows, as a whole.

Financial Instruments with Off Balance Sheet Risk

See Note 21 – Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Financial instruments with off balance sheet risk include commitments to extend credit of $765 million and $720 million at September 30, 2015 and December 31, 2014, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $70 million and $57 million at September 30, 2015 and December 31, 2014, respectively.

Note 15 - Fair Value of Assets and Liabilities

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value, and for estimating the fair value of financial assets and financial liabilities not recorded at fair value, are discussed below.

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

 

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

 

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

 

Page 35 of 72


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

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

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

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

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

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

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

 

Page 36 of 72


Table of Contents

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

Interest Rate Swap Contracts: The fair value of the interest rate swap contracts are provided by independent third party vendors that specializes in interest rate risk management and fair value analysis using a model that utilizes current market data to estimate cash flows of the interest rate swaps utilizing the future London Interbank Offered Rate (“LIBOR”) yield curve for accruing and the future Overnight Index Swap Rate (“OIS”) yield curve for discounting through the maturity date of the interest rate swap contract. The future LIBOR yield curve is the primary input in the valuation of the interest rate swap contracts. Both the LIBOR and OIS yield curves are readily observable in the marketplace. Accordingly, the interest rate swap contracts are classified within Level 2 of the fair value hierarchy.

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

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

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

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

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

 

Page 37 of 72


Table of Contents

Subordinated Debentures: The fair value of the three variable rate subordinated debentures (“debentures”) is estimated using a discounted cash flow calculation that applies the three month LIBOR plus the margin index at September 30, 2015, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at September 30, 2015. Because all three of the debentures re-priced on September 11, 2015 based on the current three month LIBOR index rate plus the index margin at that date, and with relatively little to no change in the three month LIBOR index rate from the re-pricing date through September 30, 2015, the current face value of the debentures and their calculated fair value are approximately equal. The inputs utilized in determining the fair value of subordinated debentures are observable and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.

Fair Value of Commitments: Loan commitments that are priced on an index plus a margin to a market rate of interest are reported at the carrying value of the loan commitment. Loan commitments on which the committed fixed interest rate is less than the current market rate were insignificant at September 30, 2015 and December 31, 2014.

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

     Fair
Value
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets – September 30, 2015

           

Investment securities available-for-sale

   $ 256,085       $ —         $ 256,085       $ —     

Interest Rate Swap Contracts

     1,298         —           1,298         —     

Financial Liabilities – September 30, 2015

           

Interest Rate Swap Contracts

   $ 3,386       $ —         $ 3,386       $ —     

Financial Assets – December 31, 2014

           

Investment securities available-for-sale

   $ 226,962       $ —         $ 226,962       $ —     

Interest Rate Swap Contracts

     719         —           719         —     

Financial Liabilities – December 31, 2014

           

Interest Rate Swap Contracts

   $ 3,515       $ —         $ 3,515       $ —     

At December 31, 2014 and at September 30, 2015 the Company had no financial assets or liabilities that were measured at fair value on a recurring basis that required the use of significant unobservable inputs (Level 3). Additionally, there were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a recurring basis for the three months and nine months ended September 30, 2015 and 2014.

Assets Measured at Fair Value on a Non-recurring Basis

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

 

Page 38 of 72


Table of Contents

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a non-recurring basis for the three and nine months ended September 30, 2015.

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

 

     Recorded
Investment
Carrying
Value
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets – September 30, 2015

           

Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)

   $ 751       $ —         $ —         $ 751   

Other real estate owned

     1,292         —           —           1,292   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,043       $ —         $ —         $ 2,043   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Assets – December 31, 2014

           

Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)

   $ 1,172       $ —         $ —         $ 1,172   

Other real estate owned

     850         —           —           850   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,022       $ —         $ —         $ 2,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Fair
Value
     Valuation
Methodology
   Valuation Model
and/or Factors
   Unobservable
Input Values

Financial Assets – September 30, 2015

           

Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off

   $ 751       Credit loss estimate of
aged accounts receivable
collateral
   Credit loss factors on
aging of accounts
receivable collateral
   20%-80%
         Estimated selling costs    16%

Other real estate owned

     1,292       Commercial real estate
appraisal;

Executed sale contract

   Sales approach

Estimated selling costs

   6%
  

 

 

          

Total

   $ 2,043            
  

 

 

          

Financial Assets – December 31, 2014

           

Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off

   $ 1,172       Credit loss estimate of
aged accounts receivable
collateral
   Credit loss factors on
aging of accounts
receivable collateral
   10%-80%
         Estimated selling costs    15%

Other real estate owned

     850       Residential real estate
appraisal
   Sales approach

Estimated selling costs

   6%
  

 

 

          

Total

   $ 2,022            
  

 

 

          

 

Page 39 of 72


Table of Contents

Fair Value of Financial Assets and Liabilities

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or on a non-recurring basis. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of September 30, 2015 and December 31, 2014. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The description of the valuation methodologies used for assets and liabilities measured at fair value and for estimating fair value for financial instruments not recorded at fair value has been described above.

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

 

                   Fair Value Measurements  
     Carrying
Amount
     Fair Value      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

September 30, 2015

              

Financial Assets

              

Investment securities available-for-sale

   $ 256,085         256,085       $ —         $ 256,085       $ —     

Investment securities held-to-maturity

     43,269         43,422         —           43,422         —     

Loans, net

     1,756,382         1,797,338         —           —           1,797,338   

Interest rate swap contracts

     1,298         1,298         —           1,298         —     

Financial Liabilities

              

Certificates of deposit

     62,320         62,320         —           62,320         —     

Securities sold under agreements to repurchase

     16,698         16,698         —           16,698         —     

Subordinated debentures

     9,657         12,372         —           12,372         —     

Interest rate swap contracts

     3,386         3,386         —           3,386         —     

December 31, 2014

              

Financial Assets

              

Investment securities available-for-sale

   $ 226,962         226,962       $ —         $ 226,962       $ —     

Investment securities held-to-maturity

     47,147         47,159         —           47,159         —     

Loans, net

     1,612,113         1,627,717         —           —           1,627,717   

Interest rate swap contracts

     719         719         —           719         —     

Financial Liabilities

              

Certificates of deposit

     64,840         64,857         —           64,857         —     

Securities sold under agreements to repurchase

     9,411         9,411         —           9,411         —     

Subordinated debentures

     9,538         12,372         —           12,372         —     

Interest rate swap contracts

     3,515         3,515         —           3,515         —     

 

Page 40 of 72


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

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

The following is management’s discussion and analysis of the major factors that influenced the results of the operations and financial condition of CU Bancorp, (“the Company”) for the current period. This analysis should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2014 Annual Report on Form 10-K and with the unaudited financial statements and notes as set forth in this report.

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

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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

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

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

 

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

 

    The effects of trade, monetary and fiscal policies and laws.

 

    Possible losses of businesses and population in Los Angeles, Orange, Ventura, San Bernardino or Riverside Counties.

 

    Loss of customer checking and money-market account deposits as customers pursue other higher-yield investments, particularly in a rising interest rate environment.

 

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

 

    Competitive market pricing factors.

 

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

 

    Risks associated with concentrations in real estate related loans.

 

    Risks associated with concentrations in deposits.

 

    Loss of significant customers.

 

    Market interest rate volatility.

 

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

 

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

 

    Compression of our net interest margin.

 

    Stability of funding sources and continued availability of borrowings to the extent necessary.

 

Page 41 of 72


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

 

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

 

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

 

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

 

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

 

    The effect of labor and port slowdowns on small businesses.

 

    Risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs.

 

    Lack of take-out financing or problems with sales or lease-up with respect to our construction loans.

 

    Our ability to recruit and retain key management and staff.

 

    Availability of, and competition for, acquisition opportunities.

 

    Risks associated with merger and acquisition integration.

 

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

 

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

 

    New accounting pronouncements.

 

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

 

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

 

    Increased regulation of the securities markets, including the securities of the Company, whether pursuant to the Sarbanes-Oxley Act of 2002, or otherwise.

 

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

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

For a more complete discussion of these risks and uncertainties, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and particularly, Item 1A, titled “Risk Factors.”

OVERVIEW

CU Bancorp (the “Company”) is a bank holding company whose operating subsidiary is California United Bank. As a bank holding company, CU Bancorp is subject to regulation of the Federal Reserve Board (“FRB”). The term “Company”, as used throughout this document, refers to the consolidated balance sheets and consolidated statements of income of CU Bancorp and California United Bank.

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

 

Page 42 of 72


Table of Contents

Total assets increased $389 million or 15% from December 31, 2014 to $2.6 billion at September 30, 2015, mainly due to deposit growth of $312 million and earnings available to common shareholders of $15 million. Loan growth during the period was concentrated primarily in Commercial and Industrial loans of $28 million, Owner-Occupied Nonresidential Property loans of $37 million and Other Nonresidential Property loans of $34 million. Funding the loan growth of the Company for the nine months ended September 30, 2015 were increases in non-interest bearing demand deposits of $216 million, interest bearing deposits of $51 million and money market and savings deposit of $48 million. At September 30, 2015 and December 31, 2014, non-interest bearing deposits represented 55% and 53% of total deposits, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Our critical accounting policies are described in greater detail in the Company’s 2014 Annual Report on Form 10-K, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies and Estimates. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessment, are as follows:

Allowance for Loan Loss

The allowance for loan loss (“Allowance”) is established by a provision for loan losses that is charged against income, increased by charges to expense and decreased by charge-offs (net of recoveries). Loan charge-offs are charged against the Allowance when management believes the collectability of loan principal becomes unlikely. Subsequent recoveries, if any, are credited to the Allowance.

The Allowance is an amount that management believes will be adequate to absorb estimated charge-offs related to specifically identified loans, as well as probable loan losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. Management carefully monitors changing economic conditions, the concentrations of loan categories and collateral, the financial condition of the borrowers, the history of the loan portfolio, as well as historical peer group loan loss data to determine the adequacy of the Allowance. The Allowance is based upon estimates, and actual charge-offs may vary from the estimates. No assurance can be given that adverse future economic conditions will not lead to delinquent loans, increases in the provision for loan losses and/or charge-offs. These evaluations are inherently subjective, as they require estimates that are susceptible to significant revisions as conditions change. In addition, regulatory agencies, as an integral part of their examination process, may require additions to the Allowance based on their judgment about information available at the time of their examinations. Management believes that the Allowance as of September 30, 2015 is adequate to absorb known and probable losses in the loan portfolio.

The Allowance consists of specific and general components. The specific component relates to loans that are categorized as impaired. For loans that are categorized as impaired, a specific allowance is established when the realizable value of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on the type of loan and historical charge-off experience adjusted for qualitative factors.

 

Page 43 of 72


Table of Contents

While the general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative factors, the change in the Allowance from one reporting period to the next may not directly correlate to the rate of change of nonperforming loans for the following reasons:

 

    A loan moving from the impaired performing status to an impaired non-performing status does not mandate an automatic increase in the allowance. The individual loan is evaluated for a specific allowance requirement when the loan moves to the impaired status, not when the loan moves to non-performing status. In addition, the impaired loan is reevaluated at each subsequent reporting period. Impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

 

    Not all impaired loans require a specific allowance. The payment performance of the borrower may require an impaired classification, but the collateral evaluation may support adequate collateral coverage. For a number of impaired loans in which borrower performance is in question, the collateral coverage may be sufficient because a partial charge off of the loan has been taken. In those instances, neither a general allowance nor a specific allowance is assessed.

Investment Securities

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

As of each reporting date, the Company evaluates the securities portfolio to determine if there has been an other-than-temporary impairment (“OTTI”) on each of the individual securities in the investment securities portfolio. If it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an OTTI shall be considered to have occurred. Once an OTTI is considered to have occurred, the credit portion of the loss is required to be recognized in current earnings, while the non-credit portion of the loss is recorded as a separate component of shareholders’ equity.

In estimating whether an other-than-temporary impairment loss has occurred, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the current liquidity and volatility of the market for each of the individual security categories, (iv) the current slope and shape of the Treasury yield curve, along with where the economy is in the current interest rate cycle, (v) the spread differential between the current spread and the long-term average spread for that security category, (vi) the projected cash flows from the specific security type, (vii) any financial guarantee and financial condition of the guarantor and (viii) the intent and ability of the Company to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value.

If it’s determined that an OTTI exists on a debt security, the Company then determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Company will recognize the amount of the OTTI in earnings equal to the difference between the security’s fair value and its adjusted cost basis. If neither of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the portion of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The portion of total impairment related to all other factors is included in other comprehensive income. Significant judgment is required in this analysis that includes, but is not limited to assumptions regarding the collectability of principal and interest, future default rates, future prepayment speeds, the amount of current delinquencies that will result in defaults and the amount of eventual recoveries expected on these defaulted loans through the foreclosure process.

Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method

 

Page 44 of 72


Table of Contents

over the expected maturity term of the securities. For mortgage-backed securities, the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The amount of prepayments varies from time to time based on the interest rate environment and the rate of turnover of mortgages.

Derivative Financial Instruments and Hedging Activities

All derivative instruments (interest rate swap contracts) were recognized on the consolidated balance sheet at their current fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and hedged item related to the hedged risk are recognized in earnings. ASC Topic 815 establishes the accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. ASC Topic 815 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

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

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

Business Combinations

The Company has a number of fair value adjustments recorded within the consolidated financial statements at September 30, 2015 that were created from the business combinations with California Oaks State Bank (COSB), Premier Commercial Bancorp (PC Bancorp) and 1st Enterprise Bank (1st Enterprise) on December 31, 2010, July 31, 2012 and November 30, 2014, respectively. These fair value adjustments include the Company’s goodwill, fair value adjustments on loans, core deposit intangible assets, other intangible assets, fair value adjustments to acquired lease obligations, fair value adjustments to high rate certificates of deposit and fair value adjustments on derivatives. The assets and liabilities acquired through acquisition have been accounted for at fair value as of the date of the acquisition. The goodwill that was recorded on the transactions represented the excess of the purchase price over the fair value of net assets acquired. If the consideration paid would have been less than the fair value of the net assets acquired, the Company would have recorded a bargain purchase gain. Goodwill is not amortized and is reviewed for impairment on October 1st of each year. If an event occurs or circumstances change that results in it being probable that the Company’s fair value has declined below its book value, the Company would perform an impairment analysis at that time.

The core deposit intangibles on non-maturing deposits, which represent the intangible value of depositor relationships resulting from deposit liabilities assumed through acquisition, are being amortized over the projected useful lives of the deposits. The average remaining life of the core deposit intangible is estimated at approximately 7 years at September 30, 2015. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Page 45 of 72


Table of Contents

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

Income Taxes

Deferred income tax assets and liabilities are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to the extent necessary to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax assets or benefits will be realized. Realization of tax benefits for deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryback and carryforward period and that current tax law will allow for the realization of those tax benefits.

The Company is required to account for uncertainty associated with the tax positions it has taken or expects to be taken on past, current and future tax returns. Where there may be a degree of uncertainty as to the tax realization of an item, the Company may only record the tax effects (expense or benefits) from an uncertain tax position in the financial statements if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. The Company does not believe that it has any material uncertain tax positions taken to date that are not more likely than not to be realized.

 

Page 46 of 72


Table of Contents

RESULTS OF OPERATIONS

Key Profitability Measures

The following table presents key profitability measures for the periods indicated and the dollar and percentage changes between the periods (dollars in thousands, except per share data):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     Amounts     Increase
(Decrease)
    Amounts     Increase
(Decrease)
 
     2015     2014     $     %     2015     2014     $     %  

Net Income Available to Common Shareholders

   $ 5,970      $ 2,549      $ 3,421        134.21   $ 14,852      $ 7,601      $ 7,251        95.40
  

 

 

   

 

 

       

 

 

   

 

 

     

Earnings per share

                

Basic

   $ 0.36      $ 0.23      $ 0.13        56.52   $ 0.90      $ 0.70      $ 0.20        28.57

Diluted

   $ 0.35      $ 0.23      $ 0.12        52.17   $ 0.88      $ 0.68      $ 0.20        29.41

Return on average tangible common equity

     11.48     7.52     3.96     53     9.95     7.77     2.18     28.06

Return on average assets

     0.93     0.69     0.24     34.78     0.82     0.72     0.10     13.89

Net interest rate spread

     3.65     3.53     0.12     3.40     3.73     3.62     0.11     3.04

Net interest margin

     3.79     3.70     0.09     2.43     3.87     3.80     0.07     1.84

Efficiency ratio (1)

     59.34     67.91     8.57     (12.62 )%      61.49     67.95     (6.46 )%      (9.51 )% 

 

(1) Efficiency ratio is defined as non-interest expense as a percent of net interest income plus non-interest income, excluding gain on sale of securities, net.

Operations Performance Summary

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Net income available to common shareholders for the three months ended September 30, 2015 was $6.0 million, or $0.35 per diluted share, compared to $2.5 million, or $0.23 per diluted share for the three months ended September 30, 2014. The $3.4 million increase, or 134%, was primarily due to a $9.0 million increase in net interest income after provision for loan losses and a $984,000 increase in non-interest income, offset by a $5.0 million increase in non-interest expense and a $1.2 million increase in provision for income tax expense. These increases are due to strong organic loan growth, coupled with the merger with 1st Enterprise on November 30, 2014. Salaries and employee benefits increased $3.7 million for the three months ended September 30, 2015, due to a larger employee base as a result of the merger. Occupancy expense also increased $466,000 for the same period due to additional locations. Further, core deposit intangible amortization increased $354,000 for the three months ended September 30, 2015, mainly due to the $7.4 million core deposit intangible recognized from the 1st Enterprise merger. Merger expenses were lower by $485,000 compared to the three months ended September 30, 2014. Each of these increases and or decreases is more fully described below.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Net income available to common shareholders for the nine months ended September 30, 2015 was $14.9 million, or $0.88 per diluted share, compared to $7.6 million, or $0.68 per diluted share for the nine months ended September 30, 2014. The $7.3 million increase, or 95%, was primarily due to a $24.5 million increase in net interest income after provision for loan losses and a $3.1 million increase in non-interest income, offset by a $15.6 million increase in non-interest expense and a $3.9 million increase in provision for income tax expense. These increases are due to strong organic loan growth coupled with the merger with 1st Enterprise on November 30, 2014. Salaries and employee benefits increased $10.3 million for the nine months ended September 30, 2015, due to a larger employee base as a result of the merger. Occupancy expense also increased $1.3 million for the same period due to additional locations. Further, core deposit intangible amortization increased $1.1 million for the nine months ended September 30, 2015, mainly due to the $7.4 million core deposit intangible recognized from the 1st Enterprise merger. Provision for loan losses also increased $2.3 million, as a result of strong organic loan growth and net charge-offs of $476,000. Merger expenses were lower by $630,000 compared to the nine months ended September 30, 2014. Each of these increases and or decreases is more fully described below.

 

Page 47 of 72


Table of Contents

Average Balances, Interest Income and Expense, Yields and Rates

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

 

     Three Months Ended  
     September 30, 2015     September 30, 2014  
     Average
Balance
     Interest      Average
Yield/Rate

(5)
    Average
Balance
     Interest      Average
Yield/Rate

(5)
 

Interest Earning Assets:

                

Deposits in other financial institutions

   $ 329,640       $ 293         0.35   $ 278,623       $ 248         0.35

Investment securities (2)

     281,476         1,124         1.60     121,124         589         1.95

Loans (1)

     1,735,977         21,689         4.96     969,668         12,401         5.07
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     2,347,093         23,106         3.91     1,369,415         13,238         3.84

Non-interest-earning assets

     212,301              91,123         
  

 

 

         

 

 

       

Total Assets

   $ 2,559,394            $ 1,460,538         
  

 

 

         

 

 

       

Interest Bearing Liabilities:

                

Interest bearing transaction accounts

   $ 268,877       $ 105         0.15   $ 150,160       $ 70         0.18

Money market and savings deposits

     701,189         427         0.24     363,693         225         0.25

Certificates of deposit

     61,243         53         0.34     59,362         58         0.39
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Bearing Deposits

     1,031,309         585         0.23     573,215         353         0.24

Securities sold under agreements to repurchase

     15,306         9         0.23     14,210         8         0.22

Subordinated debentures

     9,703         110         4.44     9,740         109         4.38
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Bearing Liabilities

     1,056,318         704         0.26     597,165         470         0.31

Non-interest bearing demand deposits

     1,190,170              699,592         
  

 

 

         

 

 

       

Total funding sources

     2,246,488              1,296,757         

Non-interest bearing liabilities

     17,717              16,041         

Shareholders’ Equity

     295,189              147,740         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ Equity

   $ 2,559,394            $ 1,460,538         
  

 

 

         

 

 

       

Excess of interest-earning assets over funding sources

   $ 100,605            $ 72,658         

Net interest income

      $ 22,402            $ 12,768      

Net interest rate spread (3)

           3.65           3.53

Net interest margin (4)

           3.79           3.70

Core net interest margin (6)

           3.64           3.58

 

(1) Average balances of loans are calculated net of deferred loan fees and fair value discounts, but would include non-accrual loans which have a zero yield.
(2) Average balances of investment securities are presented on an amortized cost basis and thus do not include the unrealized market gain or loss on the securities.
(3) Net interest rate spread represents the yield earned on average total interest-earning assets less the rate paid on average total interest bearing liabilities.
(4) Net interest margin is computed by dividing annualized net interest income by average total interest-earning assets.
(5) Annualized
(6) Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed on non-accrual loans, by average total interest-earning assets. See the reconciliation table for core net interest margin.

 

Page 48 of 72


Table of Contents
     Nine Months Ended  
     September 30, 2015     September 30, 2014  
     Average
Balance
     Interest      Average
Yield/Rate

(5)
    Average
Balance
     Interest      Average
Yield/Rate
(5)
 

Interest Earning Assets:

                

Deposits in other financial institutions

   $ 264,560       $ 741         0.37   $ 261,617       $ 665         0.34

Investment securities (2)

     272,820         3,355         1.64     109,160         1,557         1.90

Loans (1)

     1,686,967         62,239         4.93     950,427         36,691         5.16
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     2,224,347         66,335         3.99     1,321,204         38,913         3.94

Non-interest-earning assets

     209,094              91,283         
  

 

 

         

 

 

       

Total Assets

   $ 2,433,441            $ 1,412,487         
  

 

 

         

 

 

       

Interest Bearing Liabilities:

                

Interest bearing transaction accounts

   $ 254,092       $ 303         0.16   $ 142,575       $ 194         0.18

Money market and savings deposits

     681,852         1,218         0.24     363,603         681         0.25

Certificates of deposit

     61,875         150         0.32     61,013         169         0.37
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Bearing Deposits

     997,819         1,671         0.22     567,191         1,044         0.25

Securities sold under agreements to repurchase

     12,896         21         0.22     13,870         27         0.26

Subordinated debentures

     9,624         326         4.47     9,527         323         4.47
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Bearing Liabilities

     1,020,339         2,018         0.26     590,588         1,394         0.32

Non-interest bearing demand deposits

     1,106,491              661,883         
  

 

 

         

 

 

       

Total funding sources

     2,126,830              1,252,471         

Non-interest bearing liabilities

     17,892              15,787         

Shareholders’ Equity

     288,719              144,229         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ Equity

   $ 2,433,441            $ 1,412,487         
  

 

 

         

 

 

       

Excess of interest-earning assets over funding sources

   $ 97,517            $ 68,733         

Net interest income

      $ 64,317            $ 37,519      

Net interest rate spread (3)

           3.73           3.62

Net interest margin (4)

           3.87           3.80

Core net interest margin (6)

           3.77           3.65

 

(1) Average balances of loans are calculated net of deferred loan fees and fair value discounts, but would include non-accrual loans which have a zero yield.
(2) Average balances of investment securities are presented on an amortized cost basis and thus do not include the unrealized market gain or loss on the securities.
(3) Net interest rate spread represents the yield earned on average total interest-earning assets less the rate paid on average total interest bearing liabilities.
(4) Net interest margin is computed by dividing annualized net interest income by average total interest-earning assets.
(5) Annualized
(6) Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed on non-accrual loans or other nonrecurring items based on management’s judgment, by average total interest-earning assets. See the reconciliation table for core net interest margin.

 

Page 49 of 72


Table of Contents

The following table represents a reconciliation of GAAP net interest margin to core net interest margin used by the Company. The table presents the information for the periods indicated (dollars in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net Interest Income

   $ 22,402      $ 12,768      $ 64,317      $ 37,519   

Less: Accelerated accretion of fair value adjustment on early loan payoffs and other associated payoff benefits

     881        403        1,666        1,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Core Net Interest Income

   $ 21,521      $ 12,365      $ 62,651      $ 36,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.79     3.70     3.87     3.80

Core net interest margin

     3.64     3.58     3.77     3.65
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table reflects the composition of the net deferred loan fees, costs and fair value discounts at September 30, 2015 and December 31, 2014 (dollars in thousands):

 

     September 30,
2015
     December 31,
2014
 

Accreting loan discount

   $ 17,053       $ 21,726   

Non-accreting loan discount

     934         567   
  

 

 

    

 

 

 

Acquired loans remaining discount

     17,987         22,293   

Organic loans net deferred fees

     4,085         3,471   
  

 

 

    

 

 

 

Total

   $ 22,072       $ 25,763   
  

 

 

    

 

 

 

 

Page 50 of 72


Table of Contents

Net Changes in Average Balances, Composition, Yields and Rates

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

 

    Three Months Ended September 30,        
    2015     2014     Increase (Decrease)  
    Average
Balance
    % of
Total
    Average
Yield/
Rate
    Average
Balance