CU Bancorp

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarity and reduces both diversity in practice, and costs and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. Under ASU 2017-09, an entity should account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

Net income available to common shareholders for the six months ended June 30, 2017 was $16 million, or $0.93 per diluted share, compared to $13 million, or $0.75 per diluted share for the six months ended June 30, 2016. The $3.4 million increase, or 26%, was primarily due to a $4.9 million increase in net interest income, which is primarily the result of the Company’s strong loan growth since the prior period, as well as a $2.7 million increase in non-interest income, primarily related to death benefit claims from bank owned life insurance. Non-interest expense increased by $3.5 million which included $1.5 million in merger expenses; the same period of the prior year had no merger expenses. Salaries and other benefits expense increased $1.6 million as the average full-time equivalent employees grew to 291 as of June 30, 2017, compared to an average of 274 full-time equivalent employees in the year-ago period.

The effective tax rate for the three month ended June 30, 2017 was 34.7% compared to 35.7% for the three months ended June 30, 2016. The effective tax rate for the six months ended June 30, 2017 was 35.7% compared to 36.4% for the six months ended June 30, 2016. The Company’s effective tax rate is impacted by BOLI income and interest income from tax exempt securities and loans which are excluded from taxable income, and excess tax benefits from exercise or vesting of share-based awards are included as a reduction in provision for income tax expense in the period in which the exercise or vesting occurs. The tax rate will have more volatility, depending on the closing share price and the volume of vestings and exercises that impact the associated excess tax benefits. The amount of excess tax benefits were $29 thousand and $475 thousand for the three months ended June 30, 2017 and 2016, respectively, and $453 thousand and $772 thousand for the six months ended June 30, 2017 and 2016, respectively. For both the three months and the six months ended June 30, 2017, the Company’s effective tax rate is further impacted by non-deductible merger expenses of $564 thousand and the tax-exempt death benefit claims of $1 million from the Company’s bank owned life insurance which are excluded from taxable income. In addition, the Company has invested in Qualified Affordable Housing Projects “LIHTC” that generate tax credits and benefits for the Company. Without the tax-exempt death benefit claims, the excess tax benefits and the additional impact as a result of the non-deductible merger expenses, the effective tax rate would have been 39%.

Funding the Company’s asset growth for the six months ended June 30, 2017 was an increase in total deposits of $31 million. After three consecutive quarters in which deposit growth was more than $100 million per quarter, in the second quarter of 2017 the Company experienced a drawdown in deposits of $117 million. This was not totally unexpected, as the Company anticipated withdrawals related to taxes in the second quarter. Deposit growth for the six months ended June 30, 2017 also included an increase of $59 million in non-interest bearing demand deposits which increased to 55% of total deposits at June 30, 2017, from 54% of total deposits at December 31, 2016. Tangible book value per common share was $15.17, $14.10 and $13.46 at June 30, 2017, December 31, 2016 and June 30, 2016, respectively.

Two putative shareholder class action lawsuits have been filed against the Company in connection with the pending merger with PacWest in the United States District Court for the Central District of California. The first action, Parshall v. CU Bancorp et al., Case No. 2:17-cv-04303, was filed on June 9, 2017 and the second action, Klein v. CU Bancorp et al., Case No. 2:17-cv-04353, was filed on June 12, 2017. Both complaints allege that the members of the CUB board of directors violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, based upon alleged omissions and misrepresentations in the initial S-4 registration statement filed by PacWest with the SEC on May 26, 2017, by approving the proposed merger for inadequate consideration and by entering into the merger agreement containing preclusive deal protection devices. The plaintiffs in both of these actions seek injunctive relief prohibiting consummation of the merger, rescission and damages in the event the merger is consummated, an accounting of damages suffered by the plaintiff and the putative class, attorneys’ fees and costs and other, and further relief. At this stage, it is not possible to assess the outcome of these proceedings or their impact on the Company or the merger.