CU Bancorp : Reports Record Annual Net Income for 2015

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

The comparability of financial information for the fourth quarter and full year of 2015 to 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. Operating results for fourth quarter and full year 2014 included the combined operations of both entities from November 30, 2014.

Full Year and Fourth Quarter 2015 Highlights

• Net income in 2015 was $21 million, up 138% from the prior year
• Return on average tangible common equity of 9.86%, up from 6.50% in the prior year
• Efficiency ratio improved to 58%, from 59% in the prior quarter
• Tangible book value per share increased $1.30 per share or 11.4% to $12.67 from the prior year
• Total assets increased $370 million from 2014 to $2.6 billion
• Record net organic loan growth of $104 million in the fourth quarter
• Total loans increased to $1.8 billion, an increase of $208 million or 13% from 2014
• Total deposits at year end 2015 increased to $2.3 billion, an increase of $339 million or 17% from 2014
• Non-interest bearing demand deposits were 56% of total deposits at year-end 2015
• Year-end average deposits per branch increased to $254 million
• Nonperforming assets to total assets decreased to 0.09%, at December 31, 2015, from 0.21% at December 31, 2014
• Continued status as well-capitalized, the highest regulatory category

“We are very pleased with the results from the first full year of combined operations since the merger of California United Bank and 1^st Enterprise,” said David Rainer, Chairman and Chief Executive Officer of CU Bancorp and California United Bank. “The integration of our two high-performing business banks was virtually seamless and the expected synergies of the merger have been realized, as seen in both the improvement in our efficiency ratio and double-digit loan growth in every quarter of 2015. We’ve built an efficient low-cost funding platform with an average cost of deposits of 0.10% and an average deposit balance of $254 million per branch.

“In the fourth quarter of 2015 CUB achieved net organic loan growth of $104 million, the highest in Company history. With nearly all of the loan production booked in December, the fourth quarter’s interest income didn’t fully benefit from our strong performance; however, we believe that the first quarter’s interest income will reflect that loan growth. Expenses remained flat from the previous quarter while revenues grew 3%, improving the Company’s efficiency ratio to a record low of 58%. Net income in the quarter was negatively impacted by a higher provision for loan losses due to strong organic loan growth and unusually higher net charge-offs. As a result of the net charge-offs, the Company’s nonperforming asset ratio at the end of 2015 was just 0.09%, one of the lowest of publicly-held West Coast banks.”

“Throughout 2015 we remained focused on our relationship-based, business-banking franchise model, which resulted in increases in total commercial and industrial lines of credit commitments for the quarter and the year,” said Brian Horton, President of CU Bancorp and California United Bank. “While commercial and industrial loan balances outstanding are up only modestly for the year, this reflects our commitment to disciplined underwriting, which we believe helps to maintain a low risk profile throughout the business cycle. Loan growth in the fourth quarter primarily came from owner-occupied nonresidential properties, an important element of our business banking focus, and from our construction lending portfolio, which is largely made up of long-term relationships with the Bank.”

“While we continue to evaluate opportunities for growth through additional strategic acquisitions, our total net organic loan growth of $350 million in 2015 is evidence that we can continue to grow and improve our performance and profitability organically,” said Rainer. “Going forward, we believe CUB’s strong growth in outstanding loans and the recent increase in the prime rate—positively affecting just under one-third of the Company’s loan portfolio—as well as our strong pipeline going into the first quarter, all position the Company well for solid earnings growth in 2016.”

Full Year and Fourth Quarter 2015 Operating Results

Net Income and Profitability Ratios

Net income for 2015 was $21.2 million, compared with net income of $8.9 million for 2014. Net income available to common shareholders for 2015 was $20.1 million or $1.18 per fully diluted share, compared with net income available to common shareholders of $8.8 million or $0.75 per fully diluted share for 2014. The increases were primarily related to the successful execution of the merger with 1^st Enterprise at the end of November 2014. Excluding merger-related charges, core net income available to common shareholders for the full year of 2015 was $20.6 million or $1.21 per fully diluted share, an increase of 23% in earnings per share compared to core net income available to common shareholders of $11.4 million or $0.98 per fully diluted share for the full year of 2014. Merger-related expenses were $921 thousand in 2015, compared to $3.5 million in 2014.

Net income available to common shareholders for the fourth quarter of 2015 was $5.2 million or $0.30 per fully diluted share, compared with net income available to common shareholders of $1.2 million or $0.09 per fully diluted share for the fourth quarter of 2014. Core net income available to common shareholders for the fourth quarter of 2015 was $5.2 million or $0.30 per fully diluted share, an increase of 50% in earnings per share compared to core net income available to common shareholders of $2.7 million or $0.20 per fully diluted share for the fourth quarter of 2014. There were no merger-related expenses in the fourth quarter of 2015, compared to $2.4 million in the year-ago quarter. The loan loss provision for the fourth quarter of 2015 was $2.2 million, compared to $1.7 million in the year ago quarter.

Net income for the fourth quarter of 2015 was $5.5 million and net income available to common shareholders was $5.2 million or $0.30 per fully diluted share, compared with net income of $6.3 million and net income available to common shareholders of $6.0 million or $0.35 per fully diluted share in the third quarter of 2015. Revenues in the fourth quarter of 2015 were up $751 thousand or 3% over the third quarter of 2015 while expenses remained flat. Without the impact of the provision for loan losses in the fourth quarter of 2015, pretax income would have increased by $745 thousand or 7%, compared to prior quarter. The loan loss provision in the fourth quarter of 2015 was $2.2 million, compared to $705 thousand in the prior quarter; the increase was due to a combination of higher charge-offs and record loan growth. In the fourth quarter of 2015 quarterly dividends from the Federal Home Loan Bank of San Francisco were $219 thousand and benefits from discrete tax credits were $133 thousand, compared to $409 thousand and $465 thousand, respectively, in the third quarter of 2015.

The Company calculates core net income available to common shareholders 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 available to common shareholders, 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 based on net income for the fourth and third quarters of 2015, and core net income for the fourth quarter of 2014 and the full years of 2015 and 2014.

Net Interest Income and Net Interest Margin

Net interest income totaled $87.4 million for the full year of 2015, an increase of $34.2 million or 64% from the previous year. The increase was due to higher average loan balances, the result of the merger with 1^st Enterprise, as well as strong net organic loan growth.

Net interest margin for the full year of 2015 was 3.83%, compared to 3.79% in the previous year. The increase was due to average loans being a higher percentage of average earning assets in 2015 than in 2014.

The net interest margin in the fourth quarter of 2015 was 3.72%, compared to 3.78% in the fourth quarter of 2014. The decrease was primarily driven by a decrease in the loan yield in the fourth quarter of 2015 compared to the fourth quarter of 2014.

Net interest income for the fourth quarter of 2015 increased $700 thousand or 3% from the third quarter of 2015, the result of the Company recognizing higher fair value discounts earned, as well as higher average loan balances outpacing loan yield compression in the fourth quarter.

The Company’s net interest income was positively impacted in both the fourth quarter of 2015 and the third quarter of 2015 by the recognition of fair value discount earned on early payoffs of acquired loans. In the fourth quarter of 2015 the Company recorded $1.0 million in discount earned on early loan payoffs of acquired loans, largely related to two loans, and other associated payoff benefits aggregating to $294 thousand, with a positive impact on the net interest margin of 21 basis points. In the third quarter of 2015 the Company recorded $560 thousand in discount earned on early loan payoffs of acquired loans and other associated payoff benefits aggregating to $321 thousand, with a positive impact on the net interest margin of 15 basis points.

The net interest margin in the fourth quarter of 2015 was 3.72%, compared to 3.79% in the third quarter of 2015. The decrease was largely due to average loans representing a smaller percentage of average earning assets in the fourth quarter than the third quarter.

As of December 31, 2015, the Company had $14.9 million of discount remaining on acquired accruing loans.

The Company’s cost of funds was 0.12% in the fourth quarter of 2015, a decrease from 0.13% in the fourth quarter of 2014 and the same as 0.12% in the third quarter of 2015.

Non-interest Income

Non-interest income was $11.7 million in 2015, an increase of $4 million or 52% from $7.7 million in the prior year. The increase in year-over-year non-interest income is the result of the combined operation of the two banks after the merger in November 2014.

Non-interest income was $3 million in the fourth quarter of 2015, an increase of $907 thousand or 43% from $2.1 million in the same quarter of the prior year. The increase in non-interest income from the prior year is the result of the combined operation of the two banks after the merger in November 2014.

Non-interest income in the fourth quarter of 2015 increased $51 thousand or 2% over the third quarter of 2015. The increase was primarily due to an increase of $112 thousand in gain on sale of securities, as well as increases in deposit account service charge income of $32 thousand, partially offset by a decrease of $121 thousand in gain on sale of SBA loans, which were the highest in Company history in the third quarter of 2015.

Non-interest Expense

Non-interest expense incurred in 2015 was $60 million, an increase of $16.6 million, or 38% from $43.4 million in the prior year. The increase in year-over-year non-interest expense is the result of the combined operation of the two banks after the merger in November 2014.

Non-interest expense for the fourth quarter of 2015 was $15.1 million. Non-interest expense for the fourth quarter of 2014 was $14.1 million, which reflected only one month of combined operations after the merger, and merger-related expenses of $2.4 million.

Non-interest expense for the fourth quarter of 2015 was $15.1 million, the same as the third quarter of 2015; in the second quarter of 2015, non-interest expense was $14.9 million. “Since the conversion was completed in the first quarter, the Company has been fully integrated and able to capitalize on operating leverage as revenues grow and expenses remain flat, which can be seen in the improvement of our efficiency ratio,” said Karen Schoenbaum, Chief Financial Officer of CU Bancorp and California United Bank.

At December 31, 2015, the Company had 266 active full-time equivalent employees, unchanged from the previous quarter.

Income Tax

In the fourth and third quarters of 2015, the Company realized combined one-time discrete tax benefits of $133 thousand and $465 thousand, respectively. The fourth quarter benefit was primarily related to California Organized Investment Network (“COIN”) credits. For the full year of 2015 the Company’s effective tax rate, without the discrete benefits, was 39%.

Balance Sheet

Assets

Total assets at December 31, 2015, were $2.6 billion, a year-over-year increase of $370 million from December 31, 2014. The increase was primarily due to strong deposit growth throughout 2015.

During the fourth quarter of 2015, the Company purchased investment securities with a weighted average life of 3.5 years, reducing its balances at the Federal Reserve to $101 million at December 31, 2015. The purchases reflect management’s outlook that rates in the two to five year segment of the yield curve will remain relatively flat for the foreseeable future.

Loans

Total loans were $1.8 billion at December 31, 2015, an increase of $62 million or 14% annualized from the end of the prior quarter. This also represents an increase of $208 million or 13% from December 31, 2014. The increases in total loans from the prior year and the prior quarter were due to strong loan growth.

During the fourth quarter of 2015, the Company had $104 million of net organic loan growth. Pay downs and payoffs in the acquired loan portfolios were approximately $42 million in the same quarter.

Included in loan growth in the fourth quarter was a $31 million increase in the construction lending portfolio, which consists predominantly of residential construction projects in Los Angeles County undertaken by customers that have long-term relationships with the Company.

Total commercial and industrial line of credit commitments increased from the prior quarter; however, commercial and industrial loans outstanding, which include term loans, declined from the prior quarter. Utilization of commercial and industrial line of credit commitments was 46%.

At December 31, 2015, commercial and industrial loans, and owner occupied real estate loans combined were $945 million or 52% of total loans, compared to $933 million or 53% at September 30, 2015. At December 31, 2014, commercial and industrial loans, and owner occupied real estate loans combined were $868 million or 53% of total loans.

Deposits

Total deposits at December 31, 2015 were $2.3 billion, an increase of $27 million from the end of the prior quarter and $339 million from the prior year. The strong growth in total deposits for the year was largely in non-interest bearing deposits. Non-interest bearing deposits at December 31, 2015 were $1.3 billion or 56% of total deposits, an all-time high for the Bank, compared to $1.2 billion or 55% of total deposits at September 30, 2015.

Cost of deposits for the quarter and the full year of 2015 was 0.10%.

With the closure of the branch in Simi Valley in December of 2015, the average deposits per branch are $254 million dollars, an outstanding platform for an efficient commercial banking franchise. No cost savings are expected from the branch closure, as the location will remain in use as an administrative office. Former Simi Valley customers will be served by the Company’s Conejo Valley branch.

Asset Quality

Total non-performing assets were $2.4 million, or 0.09% of total assets, at December 31, 2015, compared with $5.6 million, or 0.21% of total assets, at September 30, 2015. The decrease was largely due to net charge-offs of $1.5 million, as well as the disposition of an other real estate owned property at approximately net book value.

Net charge-offs in the fourth quarter were dominated by one commercial and industrial loan relationship, which had been on nonaccrual status since May 2013 and recently converted to Chapter 7 bankruptcy.

2015 net charge-offs of 0.12% were primarily related to two commercial and industrial loan charge-offs in the first and fourth quarters. Including 2015, CUB’s net loan charge-offs for the last 5 years have averaged only 0.06%.

The Company recorded a loan loss provision of $2.2 million for the fourth quarter of 2015. The loan loss provision reflects $1.5 million in net charge-offs, as well as the provisioning for strong net organic loan growth of $104 million during the fourth quarter.

Total nonaccrual loans were $2.0 million, or 0.11% of total loans, at December 31, 2015, compared with $4.3 million, or 0.24% of total loans, at September 30, 2015. Of the remaining nonaccrual loans, none individually exceeds $400 thousand.

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 1.25% at December 31, 2015, compared with 1.30% at September 30, 2015, and 1.39% at December 31, 2014.

Capital

CU Bancorp remained well capitalized at December 31, 2015 with total risk-weighted assets of $2,329,770,000. All of the Company’s capital ratios are above minimum regulatory standards for “well capitalized” institutions.

At December 31, 2015, tangible common equity was $217.5 million with common shares issued of 17,175,389 as of the same date, resulting in tangible book value per common share of $12.67. This compares to tangible common equity of $209.5 million with a tangible book value per common share of $12.42 at September 30, 2015. In the fourth quarter of 2015, the Company increased goodwill by $653 thousand, which reduced tangible book value per share by $0.03. The increase in goodwill was due to a write-down of $1.1 million taken when the Company finalized the fair value estimate of a loan relationship acquired in the merger with 1^st Enterprise.

In the fourth quarter of 2015, 295,704 stock options with a weighted average strike price of $9.49 were exercised and 416,543 stock options with a weighted average strike price of $9.21 will expire in 2016. The majority of options in both periods are related to the rollover of 1^st Enterprise options.

Non-GAAP Financial Disclosures

This press release contains certain non-GAAP financial disclosures. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Given the use of tangible common equity amounts and ratios is prevalent among banking regulators, investors and analysts, we disclose our tangible common equity ratio in addition to equity-to-assets ratio. Please refer to the tables at the end of this release for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.

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, 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 December 31, 2015, there were no restructured loans or loans over 90 days past due and still accruing.