CU Bancorp : Reports Record Second Quarter Earnings of $5.3 Million Driven by Record Revenues

CU Bancorp (NASDAQ: CUNB), the parent company of wholly owned California United Bank, today reported financial results for the second quarter of 2015.

The comparability of financial information for the second quarter of 2015 to the second quarter of 2014 is affected by the Company’s acquisition of 1^st Enterprise Bank (“1^st Enterprise”), which was accomplished by a merger of California United Bank with 1^st Enterprise (“the merger”), effective November 30, 2014.

Second Quarter 2015 Highlights

• Diluted core earnings per share of $0.30, up 20% from the prior quarter
• Total revenues increased to $24.4 million, up $1.1 million or 4.8% from prior quarter
• Core net income available to common shareholders increased to a record $5.1 million, up $896 thousand or 21% from the prior quarter
• Net interest income increased to $21.3 million, up $631 thousand or 3% from the prior quarter
• Core efficiency ratio improved to 60% from 62% in the prior quarter
• Return on average tangible common equity of 10%, up from 8% in the prior quarter
• Core return on average assets increased to 0.85%, up from 0.73% in the prior quarter
• Tangible book value per share increased $0.32 to $11.97 per share, exceeding pre-merger tangible book value per share
• Total assets increased to $2.5 billion, up $64 million or 2.7% from the prior quarter or an annualized rate of 10.6%
• Total loans increased to $1.7 billion, up $48 million or 2.9% from the prior quarter or an annualized rate of 11.5%
• Total deposits increased to $2.1 billion, up $54 million or 2.6% from the prior quarter or an annualized rate of 10.4%
• Non-interest bearing demand deposits were 53% of total deposits
• Continued status as well-capitalized, the highest regulatory category

“CUB’s record second quarter earnings represent both increased revenues from strong organic loan growth, as well as stable non-interest expense on a linked-quarter basis,” said David Rainer, Chairman and Chief Executive Officer of CU Bancorp and California United Bank. “The resulting operating leverage has driven our core efficiency ratio down to 60%, which we believe is evidence of the cost savings realized from the merger, even as we’ve added to our workforce by hiring both revenue generators and back-office personnel to support the strong growth CUB has experienced in both loans and deposits since the two banks merged last November.

“Further evidence of the traction we are getting as a combined entity is the improvement in the return on average tangible common equity, which at 10% is the highest in Company history.”

“CUB has generated annualized double-digit loan growth for three consecutive quarters since the merger,” said K. Brian Horton, President of CU Bancorp and California United Bank. “This is the synergy we anticipated from the combination of two high performing business banking franchises in one of the most attractive commercial banking markets in the country. As we grow, we continue to focus on prudent underwriting practices and delivering the highest level of customer service in relationship-based business banking.”

Second Quarter 2015 Summary Results

Net Income and Profitability Ratios

Net income for the second quarter of 2015 was $5.3 million and net income available to common shareholders was $5.0 million or $0.29 per fully diluted share, compared with net income of $2.4 million or $0.21 per fully diluted share for the second quarter of 2014. Merger-related expenses in the second quarter of 2015 were $246 thousand, compared to $497 thousand in the year-ago quarter. The loan loss provision for the second quarter of 2015 was $683 thousand, compared to $408 thousand in the year-ago quarter.

Core net income available to common shareholders for the second quarter of 2015 was $5.1 million or $0.30 per fully diluted share, compared to core net income of $2.9 million or $0.26 per fully diluted share, for the second quarter of 2014.

Net income for the second quarter of 2015 was $5.3 million and net income available to common shareholders was $5.0 million or $0.29 per fully diluted share, compared with net income of $4.2 million and net income available to common shareholders of $3.9 million or $0.23 per fully diluted share in the first quarter of 2015. Second quarter 2015 merger-related expenses were $246 thousand, compared to $464 thousand in the first quarter of 2015. The loan loss provision for the second quarter of 2015 was $683 thousand, compared to $1.4 million in the first quarter of 2015.

Core net income available to common shareholders for the second quarter of 2015 was $5.1 million or $0.30 per fully diluted share, compared to core net income available to common shareholders of $4.2 million in the prior quarter or $0.25 per fully diluted share.

The Company calculates core net income by adding back the tax-effected merger-related charges to GAAP earnings for the periods presented, because the Company believes the use of core net income, a non-GAAP measure, facilitates the assessment of its banking operations and peer comparability. A reconciliation to GAAP is included in tabular form at the end of this release.

The following table shows certain of the Company’s performance ratios for the second quarter of 2015, the first quarter of 2015 and the second quarter of 2014, as well as a column calculating performance ratios based on core net income for all three quarters:

Net Interest Income and Net Interest Margin

Net interest income totaled $21.3 million for the second quarter of 2015, an increase of $8.7 million or 69% from the second quarter of 2014. The increase was primarily driven by the merger and strong net organic loan growth over the last year.

The Company’s net interest income was positively impacted in both the second quarter of 2015 and the second quarter of 2014 by the recognition of fair value discount earned on early payoffs of acquired loans. The Company recorded $474 thousand and $483 thousand in discount earned on early loan payoffs of acquired loans in the second quarter of 2015 and 2014, respectively, with a positive impact on the net interest margin of 9 basis points and 15 basis points, respectively.

The net interest margin in the second quarter of 2015 was 3.87%, compared to 3.88% in the second quarter of 2014. While the Company has experienced compression in the yields on its loan portfolio, growth in average loans has kept the net interest margin stable.

Net interest income for the second quarter of 2015 increased $631 thousand or 3% from the first quarter of 2015. The Company recorded $474 thousand and $110 thousand in discount earned on early loan payoffs of acquired loans in the second quarter of 2015 and first quarter of 2015, respectively.

The net interest margin in the second quarter of 2015 was 3.87%, compared to 3.95% in the first quarter of 2015. The decrease was largely the result of growth in average deposits exceeding growth in average loans. In the first quarter of 2015 the net interest margin benefited 4 basis points from the recognition of income due to the early pay off of organic loans. The core loan yield for the second quarter of 2015 was 4.84%, compared to 4.81% in the first quarter of 2015.

“Net interest income increased in the second quarter due to solid growth in average loans,” said Karen Schoenbaum, Chief Financial Officer of CU Bancorp and California United Bank. “CUB’s balance sheet remains asset sensitive and net interest income will also benefit when the prime rate begins to rise.”

As of June 30, 2015, the Company had $18.5 million of discount remaining on acquired accruing loans.

The Company’s cost of funds was 0.13% in the second quarter of 2015, a decrease from 0.15% in the second quarter of 2014 and equal to 0.13% in the first quarter of 2015.

Non-interest Income

Non-interest income was $3.1 million in the second quarter of 2015, an increase of $1.3 million or 74% from $1.8 million in the same quarter of the prior year. The overall increase was primarily due to an increase of $523 thousand in deposit account service charge income as a result of the merger. Additionally, other non-interest income included $380 thousand in transaction fee referral income generated by the SBA lending group and a special dividend of $296 thousand on capital stock from the Federal Home Loan Bank of San Francisco. Non-interest income in the year ago period benefited from a $225 thousand settlement included in other non-interest income.

Non-interest income in the second quarter of 2015 increased $487 thousand or 19% over the first quarter of 2015. The overall increase was primarily due to other non-interest income of $380 thousand earned on transaction referral fee income generated by the SBA lending group, compared to $28 thousand in the prior quarter, and the special dividend of $296 thousand on capital stock from the Federal Home Loan Bank of San Francisco. Increases in other non-interest income were partially offset by a decrease of $208,000 on the gain on sale of SBA loans from the prior quarter.

Non-interest Expense

Non-interest expense for the second quarter of 2015 was $14.9 million, an increase of $5.2 million or 54%, compared to non-interest expense of $9.7 million for the same period of the prior year. The increase in year-over-year non-interest expense is the result of the combined operations of the two banks after the merger in November 2014. The second quarter of 2015 included merger-related expenses of $246 thousand, compared to $497 thousand in the year ago period, and $358 thousand for three months of core deposit intangible amortization related to the merger.

Non-interest expense for the second quarter of 2015 of $14.9 million was equal to non-interest expense of $14.9 million for the first quarter of 2015. Merger-related expenses in the second quarter of 2015 decreased by $218 thousand to $246 thousand, compared to $464 thousand in the prior quarter, but were offset by a $294 thousand increase in stock-based compensation expense, commensurate with stock grants issued at the end of the first quarter for executive retention purposes.

The significant increase in loans and deposits, as well as the addition of new banking relationships since the merger, has improved the Company’s core efficiency ratio to 60%. In the first quarter of 2014, the quarter prior to the merger announcement and in which neither legacy bank had any merger expenses, their efficiency ratios were 67% and 68%.

At June 30, 2015, the Company had 263 active full-time equivalent employees.

Income Tax

The Company’s merger-related expenses in 2015 were tax deductible, resulting in an effective tax rate of 40% year to date.

Balance Sheet

Assets

Total assets at June 30, 2015, were $2.5 billion, a year-over-year increase of $1.0 billion from June 30, 2014. The increase was primarily due to the addition of $782 million in assets from the 1^st Enterprise merger, as well as strong organic growth in total deposits.

Loans

Total loans were $1.7 billion at June 30, 2015, an increase of $48 million from the end of the prior quarter. This also represents an increase of $730 million from June 30, 2014. The increase in loans from the prior quarter was due to organic loan growth; the increase in loans from the year ago period was primarily due to the merger.

During the second quarter of 2015, the Company had approximately $91 million of net organic loan production. Pay downs and payoffs in the acquired loan portfolios were approximately $43 million in the same quarter.

Total commercial and industrial line of credit commitments increased from the prior quarter, primarily from new relationships, with utilization remaining the same; however, commercial and industrial loans outstanding, which include term loans, declined from the prior quarter.

Growth in loans secured by real estate grew 4% in the second quarter of 2015, compared to the prior quarter, of which 62% was in owner-occupied nonresidential properties and 46% was associated with new relationships to the Bank. During the second quarter of 2015 growth in loans secured by real estate was diversified by property type and regional office.

At June 30, 2015, commercial and industrial loans, and owner-occupied real estate loans combined were $886 million or 52% of total loans, compared to $868 million or 52% of total loans at March 31, 2015.

Deposits

Total deposits at June 30, 2015 were $2.1 billion, an increase of $54 million from the end of the prior quarter. The increase in total deposits for the linked-quarter period was primarily related to existing relationships and net of the decrease of $52 million of a $68 million deposit that came in during the first quarter. As disclosed in the first quarter, that deposit was related to an existing relationship and was expected to be reinvested by the customer.

Total deposits increased $892 million from June 30, 2014. The increase from the prior year was primarily the result of the merger with 1^st Enterprise, as well as strong organic deposit growth in the first two quarters of 2015.

Non-interest bearing deposits at June 30, 2015 were $1.1 billion or 53% of total deposits, compared to $1.1 billion or 53% of total deposits at March 31, 2015. Cost of deposits for the quarter was 0.11%, the same as the prior quarter.

Asset Quality

Total non-performing assets were $5.8 million or 0.24% of total assets at June 30, 2015, compared with $5.8 million or 0.24% of total assets at March 31, 2015.

Total nonaccrual loans were $5.0 million or 0.29% of total loans at June 30, 2015, compared with $5.0 million or 0.30% of total loans at March 31, 2015. Of the total non-performing assets at June 30, 2015, the other real estate owned category consisted of one single-family residence located in Washington State, which is being carried on the books at $850 thousand, the estimated fair value less costs of disposition.

During the second quarter of 2015, the Company recorded net recoveries of $194 thousand, compared with net charge-offs of $806 thousand during the first quarter of 2015.

The Company recorded a loan loss provision of $683 thousand for the second quarter of 2015. The loan loss provision reflects strong loan growth during the quarter.

The allowance for loan losses as a percentage of loans (excluding acquired loans that have been marked to fair value and their related allowance) was 1.33% at June 30, 2015, compared with 1.36% at March 31, 2015, and 1.45% at June 30, 2014.

Capital

CU Bancorp remained well capitalized at June 30, 2015 with total risk-weighted assets of $2,220,170,000. All of the Company’s capital ratios are above minimum regulatory standards for “well capitalized” institutions.

At June 30, 2015, tangible common equity was $201.6 million with common shares issued of 16,840,859 as of the same date, resulting in tangible book value per common share of $11.97. This compares to tangible common equity of $195.8 million with a tangible book value per common share of $11.65 at March 31, 2015. At September 30, 2014, prior to the merger, the per share tangible book value of CU Bancorp stock was $11.95.

About CU Bancorp and California United Bank

CU Bancorp is the parent of California United Bank. Founded in 2005, California United Bank provides a full range of financial services, including credit and deposit products, cash management, and internet banking to businesses, non-profits, entrepreneurs, professionals, and investors throughout Southern California from its headquarters office in Downtown Los Angeles and additional full-service offices in the San Fernando Valley, the Santa Clarita Valley, the Conejo Valley, Simi Valley, Los Angeles, South Bay, Orange County, and the Inland Empire. California United Bank is an SBA Preferred Lender. To view CU Bancorp’s most recent financial information, please visit the Investor Relations section of the Company’s Web site. Information on products and services may be obtained by calling 818-257-7700 or visiting the Company’s Web site at www.cunb.com.

FORWARD-LOOKING STATEMENTS

This press release contains certain forward-looking information about CU Bancorp (the “Company”) that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. Forward-looking statements speak only as of the date they are made and we assume no duty to update such statements. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to: lower than expected revenues; credit quality deterioration or a reduction in real estate values which could cause an increase in the allowance for credit losses and a reduction in net earnings; increased competitive pressure among depository institutions; the Company’s ability to complete future acquisitions, successfully integrate acquired entities, or achieve expected beneficial synergies and/or operating efficiencies within expected time-frames or at all; the cost of additional capital is more than expected; a change in the interest rate environment reduces net interest margins; asset/liability repricing risks and liquidity risks; legal matters could be filed against the Company and could take longer or cost more than expected to resolve or may be resolved adversely to the Company; general economic conditions, either nationally or in the market areas in which the Company does or anticipates doing business, are less favorable than expected; environmental conditions, including natural disasters and drought, may disrupt our business, impede our operations, negatively impact the values of collateral securing the Company’s loans and leases or impair the ability of our borrowers to support their debt obligations; the economic and regulatory effects of the continuing war on terrorism and other events of war; legislative or regulatory requirements or changes adversely affecting the Company’s business; changes in the securities markets; regulatory approvals for any capital activities cannot be obtained on the terms expected or on the anticipated schedule; and other risks that are described in CU Bancorp’s public filings with the U.S. Securities and Exchange Commission (the “SEC”). If any of these risks or uncertainties materializes or if any of the assumptions underlying such forward-looking statements proves to be incorrect, CU Bancorp’s results could differ materially from those expressed in, implied or projected by such forward-looking statements. CU Bancorp assumes no obligation to update such forward-looking statements. For a more complete discussion of risks and uncertainties, investors and security holders are urged to read CU Bancorp’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other reports filed by CU Bancorp with the SEC. The documents filed by CU Bancorp with the SEC may be obtained at CU Bancorp’s website at www.cubancorp.com or at the SEC’s website at www.sec.gov. These documents may also be obtained free of charge from CU Bancorp by directing a request to: CU Bancorp c/o California United Bank, 15821 Ventura Boulevard, Suite 100, Encino, CA 91436. Attention: Investor Relations. Telephone 818-257-7700.

As of June 30, 2015, there were no restructured loans or loans over 90 days past due and still accruing.