News Column

CU Bancorp Updates on Fourth Quarter and Full Year Results

February 16, 2014

CU Bancorp, the parent company of California United Bank, reported net income of $2.8 million, or $0.26 per fully diluted share, for the fourth quarter of 2013, an increase of 14 percent from net income of $2.5 million or $0.23 per fully diluted share for the third quarter of 2013, and up 74 percent from net income of $1.6 million or $0.15 per fully diluted share, for the fourth quarter of 2012.

In a release on February 5, CU Bancorp noted that for the full year 2013, the Company reported net income of $9.8 million, or $0.90 per fully diluted share, an increase of 467 percent from net income of $1.7 million, or $0.21 per fully diluted share, for the full year 2012.

The comparability of annual financial information for 2013 and 2012 is affected by the acquisition of Premier Commercial Bancorp and its subsidiary Premier Commercial Bank, N.A. (collectively "PCB"). Operating results for 2012 include the operations of these acquired entities from July 31, 2012, the date of acquisition.

2013 Highlights

-Net income increased to $9.8 million, or $0.90 per fully diluted share, from net income of $1.7 million, or $0.21 per fully diluted share, for 2012

-Core earnings were $17.6 million for 2013, an increase of $9.3 million or 111 percent from 2012

-Total loans increased to $933 million, up $78 million or 9.2 percent from December 31, 2012

-Total deposits increased to $1.23 billion, up $154 million or 14.3 percent from December 31, 2012

-Non-interest bearing demand deposits increased to $632 million, up $89 million or 16.3 percent from December 31, 2012

-Net interest margin for 2013 increased to 3.96 percent from 3.63 percent for the prior year ended December 31, 2012

-Tangible book value per share increased to $11.11, up $0.74 from December 31, 2012

-Nonperforming assets to total assets decreased to 0.68 percent, at December 31, 2013, from 1.09 percent at December 31, 2012

-Continued status as well-capitalized, the highest regulatory category

Fourth Quarter 2013 Highlights

-Net income increased to $2.8 million, or $0.26 per fully diluted share, from net income of $2.5 million, or $0.23 per fully diluted share, for third quarter of 2013

-Total loans increased $24 million or 2.6 percent from September 30, 2013 to $933 million at December 31, 2013

-Total deposits increased $56 million or 4.8 percent from September 30, 2013 to $1.23 billion at December 31, 2013

-Non-interest bearing demand deposits increased $23 million or 3.7 percent from September 30, 2013, representing 51 percent of total deposits

-Net interest margin declined to 3.69 percent from 3.95 percent for the prior quarter ended September 30, 2013

-Tangible book value per share increased $0.20 over September 30, 2013, to $11.11

"A year ago I stated that with the successful integration of the PCB acquisition behind us and the maturation of our franchise, there was a substantial opportunity in 2013 for increasing our earnings by growing our market share and continuing the rationalization of deposits toward lower funding costs, which would lead to further improvement in our operational efficiency," said David Rainer, President and Chief Executive Officer of CU Bancorp and California United Bank. "I am very pleased to report that our strong execution on each of these strategies has led to four consecutive quarters of record earnings and record annual 2013 earnings of $9.8 million, a 467 percent increase from net income of $1.7 million in 2012.

"For the year, our total loans grew by $78 million or 9 percent to $933 million, including a 14 percent increase in commercial and industrial loans. All new loan growth was funded from the $89 million increase in non-interest bearing deposits, which grew 16 percent to $632 million and account for 51 percent of total deposits. Gain on sale of SBA loans grew from $50 thousand to more than $1 million and overall cost of funds has fallen steadily to 16 basis points in the fourth quarter of 2013, down from 24 basis points in the year ago quarter. As expected, our success in implementing each of these strategies was reflected in the improvement of our efficiency ratio, which declined to 68 percent from 87 percent in the prior year.

"2013 was a very profitable and productive year for us. I believe our results are solid evidence of the validity of our strategy and that we are well positioned for continued growth and profitability going forward, which we expect to result in increased shareholder value."

Full Year and Fourth Quarter 2013 Operating Results

Net Income and Profitability Ratios

Net income was $9.8 million or $0.90 per fully diluted share for the full year of 2013, compared with net income of $1.7 million, or $0.21 per diluted share for the full year of 2012. The increase was driven by an increase in net interest income from the expansion of our loan portfolio, reflecting the acquisition of PCB, as well as organic loan growth and an increase in noninterest income.

Net income was $2.8 million or $0.26 per fully diluted share for the fourth quarter of 2013, compared with net income of $2.5 million, or $0.23 per fully diluted share, for the third quarter of 2013. Among the drivers of the improvement in profitability were an increase in noninterest income and a lower provision for income tax due to favorable tax events.

Net Interest Income and Net Interest Margin

Net interest income before the provision for loan losses totaled $48.8 million for the full year of 2013, an increase of $13 million or 37 percent from the previous year. The increase was due to the higher average loan balances, reflecting the acquisition of PCB, net organic loan growth and a higher net interest margin.

Net interest margin for the full year of 2013 was 3.96 percent, compared to 3.63 percent in the previous year. The increase in net interest margin was largely a result of the higher ratio of average loans to average earning assets in 2013 compared to 2012.

Net interest income before the provision for loan losses totaled $12.3 million for the fourth quarter of 2013, an increase of $582 thousand or 5 percent from the fourth quarter of 2012. The increase was primarily driven by net organic loan growth.

Net interest income before the provision for loan losses for the fourth quarter of 2013 increased $37 thousand, or 0.3 percent from the third quarter of 2013. While the Company experienced strong growth in loan volume period over period, the net interest margin experienced compression as more fully discussed below.

The Company's net interest income continued to be positively impacted in the fourth quarter of 2013 by the recognition of the fair value discount earned on early payoffs of acquired loans. The Company recorded $735 thousand and $571 thousand in discount earned on early loan payoffs/large paydown of acquired loans in the third and fourth quarters of 2013, respectively, with a positive impact on the net interest margin of 24 and 17 basis points, respectively. During the third quarter, the discount was offset by the reversal of $167 thousand of interest income related to an acquired loan relationship that was placed on non-accrual status.

As of December 31, 2013, the Company had $8.6 million of discount remaining on acquired accruing loans.

Net interest margin in the fourth quarter of 2013 was 3.69 percent, compared to 3.87 percent in the fourth quarter of 2012. The decrease in the net interest margin from the prior period was due to the attrition of higher rate loans and their replacement with lower yielding loans.

Net interest margin in the fourth quarter of 2013 was 3.69 percent compared to 3.95 percent in the third quarter of 2013. Although loans on average were $24 million higher than the previous quarter, average deposits also grew $101 million over the previous quarter, which negatively impacted the net interest margin.

The Company's average yield on loans was 5.27 percent in the fourth quarter of 2013, compared to 5.45 percent in the third quarter of 2013. The decrease in average yield from the prior quarter was due to the attrition of higher rate loans and their replacement with lower yielding loans.

The Company's cost of funds was 0.16 percent in the fourth quarter of 2013, a decrease from 0.24 percent in the fourth quarter of 2012 and 0.17 percent for the third quarter of 2013.

Non-interest Income

Non-interest income was $6.5 million in 2013, an increase of $2.6 million or 65 percent from $4 million in the prior year. The increase was due to higher gain on sale from SBA loans, higher income from bank-owned life insurance (BOLI), and higher deposit account service charge income. The Company also received an insurance settlement of $250 thousand in the second quarter of 2013.

Non-interest income was $1.9 million in the fourth quarter of 2013, an increase of $529 thousand or 38 percent from $1.4 million in the same quarter of the prior year. The increase was primarily due to higher gain on sale of SBA loans, and the gain on sale of investment securities in the fourth quarter of 2013, compared to an impairment recorded on investment securities in the fourth quarter of 2012.

Non-interest income in the fourth quarter of 2013 increased $460 thousand or 31 percent over the third quarter of 2013. The increase was primarily due to higher gain on sale of SBA loans and an increase in transaction referral fee income.

Non-interest Expense

Non-interest expense incurred in 2013 was $37.6 million, an increase of $3.1 million, or 9 percent from $34.5 million in the prior year. The increase was primarily attributable to the increased scale of the Company following the merger with PCB on July 31, 2012. Active full-time equivalent employees increased to 176 at December 31, 2013, from 167 at December 31, 2012. Non-interest expense for the fourth quarter of 2013 was $9.6 million, comparable to non- interest expense of $9.5 million for the same period of the prior year.

Non-interest expense for the fourth quarter of 2013 increased $190 thousand or 2.0 percent over the third quarter of 2013. The increase in expense compared to the prior period was related to restricted stock grants and costs associated with loan collection efforts. Included in other operating expenses for the fourth and third quarters of 2013 were costs for loan collection of $107 thousand and $71 thousand, respectively, related to one acquired non- accrual loan relationship.

Income Tax

In the fourth quarter of 2013 the Company's tax rate decreased to an effective rate of 24 percent as a result of nonrecurring items. These items included: an increase on the marginal tax rate of the deferred tax asset, resulting in a reduction of tax expense of $326 thousand; a disqualifying disposition of incentive stock options resulting in a benefit of $151 thousand; and a true-up of $285 thousand related to three tax returns filed in 2013 for PCB, CU Bancorp and California United Bank, that included a low-income housing tax credit under early adoption of ASU 2014-01.

During the third quarter of 2013, the Company was allocated and recorded $215 thousand in tax credits on CRA qualified investments.

Balance Sheet

Assets

Total assets at December 31, 2013 were $1.41 billion, a year- over-year increase of $158 million or 12.7 percent from December 31, 2012, primarily resulting from net organic growth in total deposits. Total assets increased $61 million or 4.6 percent quarter-over- quarter from September 30, 2013, also the result of growth in total deposits.

Loans

Total loans were $933 million at December 31, 2013, an increase of $24 million or 2.6 percent from $910 million at the end of the prior quarter. This also represents an increase of $78 million or 9.2 percent from December 31, 2012. During the fourth quarter of 2013, the Company had approximately $37 million of net organic loan growth, which was partially offset by approximately $13 million in loan run-off from acquired portfolios (from PCB and COSB). The increase in total loans from the end of the prior quarter included a $3 million increase in the commercial and industrial loan portfolio and a $5 million increase in the owner-occupied nonresidential properties portfolio, which together are now 53 percent of total loans, and a $6 million increase in the multifamily residential properties portfolio. The increase in total loans was primarily attributable to the development of new customer relationships.

As in the third quarter, a high proportion of the Company's fourth quarter loan production occurred late in the quarter, which resulted in total end of period loans at December 31, 2013, $21.5 million higher than average loans during the fourth quarter of 2013.

Deposits

Total deposits at December 31, 2013 were $1.23 billion, an increase of $56 million or 4.8 percent from September 30, 2013. This also represents an increase of $154 million or 14.3 percent from December 31, 2012. The increase in total deposits from the end of the prior quarter primarily reflects higher balances across all non- maturing deposit categories, with the largest increases occurring in interest bearing demand deposits, followed by non-interest bearing demand deposits.

Non-interest bearing deposits at December 31, 2013 were $632 million, an increase of $23 million or 3.7 percent from September 30, 2013. Non-interest-bearing deposits represented 51 percent of total deposits at December 31, 2013, down from 52 percent at the end of the prior quarter. Cost of deposits for the quarter was 0.12 percent, down from 0.13 percent in the prior quarter.

Asset Quality

Credit quality remained strong, with the decline of non- performing assets in the fourth quarter and net charge offs of 0.12 percent for the year. Total non-performing assets were $9.6 million, or 0.68 percent of total assets at December 31, 2013, compared with $15.6 million, or 1.16 percent of total assets, at September 30, 2013. The decrease in non-performing assets was largely due to the sale of the Company's sole property in the real estate owned category. The property was carried on the books at $3.1 million and the transaction netted a gain on sale of $22 thousand. Approximately 83 percent of the total non-performing assets at December 31, 2013 were acquired loans that were marked-to-market at the time of acquisition.

Total nonaccrual loans were $9.6 million, or 1.02 percent of total loans, at December 31, 2013, compared with $12.4 million, or 1.37 percent of total loans, at September 30, 2013. Excluding acquired loans, total nonaccrual loans were $1.7 million, or 0.18 percent of total loans, at December 31, 2013, compared with $2.1 million, or 0.23 percent of total loans, at September 30, 2013.

During the fourth quarter of 2013, the Company recorded net charge-offs of $369 thousand, compared with net charge-offs of $5 thousand during the third quarter of 2013. In the third quarter, the Company had gross charge-offs of $785 thousand, which were offset by $780 thousand in recoveries.

The Company recorded a loan loss provision of $934 thousand for the fourth quarter of 2013. The loan loss provision reflects net charge-offs recorded in the quarter, as well as the strong level of organic growth of the loan portfolio.

The allowance for loan losses as a percentage of loans (excluding acquired loans that have been marked to fair value and the related allowance) was 1.50 percent at December 31, 2013, compared with 1.50 percent at September 30, 2013, and 1.54 percent at December 31, 2012.

Capital

CU Bancorp remained well capitalized at December 31, 2013 with total risk weighted assets of $1,135,552,000. All of the Company's capital ratios are above minimum regulatory standards for "well capitalized" institutions. December 31, 2013Minimum Capital to Be Considered

CU Bancorp

"Well-Capitalized" Total Risk-Based Capital Ratio 10 percent 12.80 percent Tier 1 Risk-Based Capital Ratio 6 percent 11.84 percent Tier 1 Leverage Capital Ratio 5 percent 9.57 percent

At December 31, 2013, tangible common equity was $123.1 million with common shares issued and outstanding of 11,081,364 as of the same date, resulting in tangible book value per common share of $11.11. This compares to tangible common equity of $118.3 million with a tangible book value per common share of $10.91 at September 30, 2013. The increase in tangible book value per common share from the prior quarter primarily reflects the net income generated during the fourth quarter of 2013.

During the fourth quarter of 2013, stock options exercised by executive officers increased shares outstanding by 233,000.

CU Bancorp is the parent of California United Bank. 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 offices in the San Fernando Valley, the Santa Clarita Valley, the Conejo Valley, Simi Valley, Los Angeles, South Bay, and Orange County. California United Bank is an SBA Preferred Lender.

More information:

www.cunb.com.

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