CU Bancorp - FORM 10-K - March 13, 2015

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EX-4.2 - EX-4.2 - CU Bancorp	d856177dex42.htm
EX-23.1 - EX-23.1 - CU Bancorp	d856177dex231.htm
EX-10.6 - EX-10.6 - CU Bancorp	d856177dex106.htm
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EX-32.1 - EX-32.1 - CU Bancorp	d856177dex321.htm
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EX-10.5 - EX-10.5 - CU Bancorp	d856177dex105.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20015

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2014

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

For the transition period from to

CU BANCORP

(Exact name of registrant as specified in its charter)

Commission File Number 001-35683


California		90-0779788
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

818 W. 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)

Securities registered pursuant to Section 12(g) of the Act:

None

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value, The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark whether the registrant is not required to file reports pursuant Section 13 or 15(d) of the Exchange act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, if definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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 June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately $190.5 million based upon the closing price of shares of the registrant’s Common Stock, no par value, as reported by The NASDAQ Stock Market, LLC.

The number of shares outstanding of the registrant’s common stock (no par value) at the close of business on March 9, 2015 was 16,732,061.

DOCUMENTS INCORPORATED BY REFERENCE

The information required to be disclosed pursuant to Part III of this report either shall be (i) deemed to be incorporated by reference from selected portions of CU Bancorp’s definitive proxy statement for the 2015 Annual Meeting of Shareholders, if such proxy statement is filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company’s most recently completed fiscal year, or (ii) included in an amendment to this report filed with the SEC on Form 10-K/A not later than the end of such 120 day period.

TABLE OF CONTENTS


PART I

ITEM 1	Business	5
ITEM 1A	Risk Factors	29
ITEM 1B	Unresolved Staff Comments
ITEM 2	Properties	45
ITEM 3	Legal Proceedings	45
ITEM 4	Mine Safety Disclosures	45

PART II

ITEM 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	46
ITEM 6	Selected Financial Data	49
ITEM 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
ITEM 7A	Quantitative and Qualitative Disclosures About Market Risk	85
ITEM 8	Financial Statements and Supplementary Data	92
ITEM 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	92
ITEM 9A	Controls and Procedures	92
ITEM 9B	Other Information	93

PART III

ITEM 10	Directors, Executive Officers and Corporate Governance	93
ITEM 11	Executive Compensation	93
ITEM 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93
ITEM 13	Certain Relationships and Related Transactions, and Director Independence	93
ITEM 14	Principal Accountant Fees and Services	93

PART IV

ITEM 15	Exhibits and Financial Statement Schedules	94

Signatures		166

Forward Looking Statements

In addition to the historical information, this Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.

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” “anticipates,” “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 and lease losses and provision for loan and lease 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 this 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 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.

•

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.

For a more detailed discussion of some of the risk factors, see the section entitled “Risk Factors” below.

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. You should consider any forward looking statements in light of this explanation, and we caution you about relying on forward-looking statements.

PART I

ITEM 1 — BUSINESS

General

CU Bancorp, headquartered in Downtown Los Angeles, California, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is also a bank holding company within the meaning of Section 1280 of the California Financial Code. Our principal business is to serve as the holding company for our bank subsidiary, California United Bank, which we refer to as “CUB” or the “Bank”. When we say “we”, “our” or the “Company”, we mean the Company on a consolidated basis with the Bank. When we refer to CU Bancorp or the “holding company”, we are referring to the parent company on a stand-alone basis. The shares of CU Bancorp are listed on the NASDAQ Capital Market under the trading symbol “CUNB”.

CU Bancorp was incorporated as a California corporation on November 16, 2011, and became the holding company for California United Bank on July 31, 2012 by acquiring all the voting stock of California United Bank. The creation of the bank holding company for the Bank was approved by the shareholders of the Bank on July 23, 2012.

California United Bank was incorporated on September 30, 2004, under the laws of the State of California and commenced operations on May 23, 2005. The Bank is authorized to engage in the general commercial banking business and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the applicable limits of the law. CUB is a California state-chartered banking corporation and is not a member of the Federal Reserve System.

At year end 2014, the Company had consolidated total assets of $2.3 billion, total loan balances of $1.6 billion, and total deposits of $1.9 billion. Additional information regarding our business, as well as regarding our acquisitions, is included in the information set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Note 2, Business Combinations, of the Notes to Consolidated Financial Statements, and is incorporated herein by reference.

The internet address of the Company’s website is www.cubancorp.com. The Company makes available free of charge through the Company’s website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports. The Company makes these reports available on its website on the same day they appear on the Securities and Exchange Commission (“SEC”) website.

Banking Business

CU Bancorp’s principal business is to serve as the holding company for the Bank and for any other banking or banking related subsidiaries which the Company may establish in the future. We have not engaged in any other material activities to date.

The Bank is a full-service commercial bank offering a broad range of banking products and services designed for small and medium-sized businesses, non-profit organizations, business owners and entrepreneurs, and the professional community, including attorneys, certified public accountants, financial advisors and healthcare providers and investors. Our deposit products include demand, money market, and certificates of deposit; loan products include commercial, real estate construction, commercial real estate, SBA and personal loans. We also provide cash management services, online banking, commercial credit cards and other primarily business-oriented products.

The principal executive offices of the Bank and the Company are located at 818 W. 7th Street, Suite 220, Los Angeles, CA, 90017. In addition to the Los Angeles headquarters office of the Bank, the Bank has nine additional full-service branches in the Ventura/Los Angeles/Orange County/San Bernardino metropolitan area;

those branches are located in Encino, West Los Angeles, Valencia, Simi Valley, Thousand Oaks, Gardena, Anaheim, Irvine/Newport Beach and Ontario. The Los Angeles Headquarters and Ontario full-service branches were acquired as part of the Company’s acquisition of 1st Enterprise Bank in November 2014 (as discussed below). The Anaheim and Irvine/Newport Beach branches were acquired in connection with our acquisition of Premier Commercial Bancorp and Premier Commercial Bank, N.A. in 2012 (as discussed below). The Irvine/Newport Beach branch was relocated in 2013 to ground floor space in a modern office complex into which the former 1st Enterprise Irvine branch was combined in February 2015.

Recent Developments

On November 30, 2014, the Company acquired 1st Enterprise Bank through a merger of 1st Enterprise Bank (“1st Enterprise”) with and into California United Bank. 1st Enterprise common stock was converted, at a ratio of 1.345 shares of CU Bancorp Stock for each share of 1st Enterprise common stock, into approximately 5.2 million shares of CU Bancorp common stock. In addition, CU Bancorp issued 16,400 shares of CU Bancorp Non-Cumulative Perpetual Preferred Stock, Series A (“CU Bancorp Preferred Stock”), to the U.S. Department of the Treasury (“Treasury”) as part of the Small Business Lending Fund program in exchange for 16,400 outstanding shares of 1st Enterprise Non-Cumulative Perpetual Preferred Stock, Series D. The 1st Enterprise merger added $833 million in assets to the Company.

K. Brian Horton (former President and Director of 1st Enterprise) became President and Director of the California United Bank and CU Bancorp following the merger; with David I. Rainer retaining his positions as Chairman of the Board and Chief Executive Officer of the Bank and the Company. Four former 1st Enterprise directors, David C. Holman, K. Brian Horton, Charles R. Beauregard and Jeffrey J. Leitzinger, Ph.D joined the Board of Directors of the Bank and the Company following the merger. Immediately following the transaction, the Company relocated its headquarters to the former Downtown Los Angeles, California headquarters of 1st Enterprise. Three 1st Enterprise branches located in Los Angeles, Ontario, and Irvine began operations as California United Bank effective December 1, 2014. In February 2015, the Irvine branch office was closed and converted to a loan production office, as recognition of the location of CUB’s Irvine/Newport Branch within 1.5 miles and on the same street.

Also in February 2015, the 1st Enterprise data processing system was combined with the Company’s data processing system to provide seamless service and information, as well as access to products and capabilities to all of the Company’s customers.

Strategy

Our strategic objective is to be the premier community-based commercial bank in southern California, with emphasis on the Greater Los Angeles/Orange/Ventura/San Bernardino and Riverside metropolitan and suburban business areas. The Bank’s value proposition is to provide a premier business banking experience through relationship banking, depth of expertise, resources and products. Our objective is to serve most segments of the business community and industries within our market area. We compete actively for deposits, and emphasize solicitation of core deposits, particularly noninterest-bearing deposits. In managing the top line of our business, we focus on making quality loans and gathering low-cost deposits to maximize our net interest margin and to support growth of a strong and stable loan portfolio.

We maintain a strong community bank philosophy of focusing on and understanding the individualized banking needs of the businesses, professionals, entrepreneurs and other of our core constituents. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service, which differentiates us from larger competitors. As a locally managed institution with strong ties to the community, our core customers are primarily comprised of businesses and individuals who prefer to build a banking relationship with a community bank that offers and combines financial strength with high quality, competitively priced banking products and personalized services. Our ability to provide relationship business

banking and our community roots have been further strengthened in 2014 through the merger with 1st Enterprise, which operated with a similar philosophy. Because of our identity and origin as a locally-owned and operated bank and our deep connection to the communities we serve, we believe that our level of personal service provides a competitive advantage over the larger in and out-of-state banks, which tend to consolidate decision-making authority outside local communities. We combine this with experienced, in-market relationship banking officers who provide the full suite of available products to customers. Most of our relationship managers live in their market areas and are active in their communities. These individuals and the Company’s marketing outreach are supplemented by the various Advisory Director Boards which are established in strategic regions of our market and which provide us with knowledge of the business environment in individual communities and access to local business leaders. We have established a Director Emeritus Board to retain the expertise and marked acumen of former members of our Board of Directors and the Boards of Premier Commercial Bank and 1st Enterprise. We are also active in charities and non-profit organizations in our market, with a philosophy which emphasizes outstanding corporate citizenship.

We generate our revenue primarily from the interest received on the various loan products and investment securities and fees from providing deposit services and making loans. In sales of the guaranteed portion of SBA loans, we typically receive gains on sale which is also non-interest income. The Bank relies on a foundation of locally generated and relationship-based deposits to fund loans. Our Bank has a relatively low cost of funds compared to peers due to a high percentage of noninterest-bearing and low cost deposits to total deposits. Other than as discussed herein with regard to reciprocal CDARS^® and the ICS™ deposits, we do not currently utilize brokered deposits. Our operations, similar to other financial institutions with operations predominately focused in Southern California, are significantly influenced by economic conditions in Southern California, including the strength of the commercial real estate market, the fiscal and regulatory policies of the federal and state governments and the regulatory authorities that govern financial institutions. See “Supervision and Regulation” below.

We expect to continue to opportunistically expand and grow our business by building on our business strategy and increasing market share in our key Southern California markets. We believe the demographics and growth characteristics within the communities we serve will provide significant franchise enhancement opportunities to leverage our core competencies while acquisitive growth and hiring will enable us to take advantage of the infrastructure and scalable platform that we have assembled. The Southern California market is dominated by large regional and national financial institutions. Consolidation continues to reduce the number of community based and locally managed banks in operation. We believe this consolidation has presented opportunities for both organic growth and acquisitions and that there is a significant lack of service provided to our target market by larger banks, as well as a lack of ability to service this segment by smaller banks. Through our personal service, and experienced community-based relationship managers and, along with a broad product line, we believe we can continue to achieve internal growth and attract customers from other larger financial institutions, as well as increase business from existing customers.

Products Offered

The Bank offers a full array of competitively priced commercial and personal loan and deposit products, as well as other services delivered directly or through strategic alliances with other service providers. The products offered are aimed at both business and individual customers in our target market.

Loan Products

We offer a diversified mix of business loans encompassing the following loan products: (i) commercial and industrial loans; (ii) commercial real estate loans; (iii) construction loans; and (iv) SBA loans. We also offer home equity lines of credit “HELOCS”, to accommodate the needs of business owners and individual clients, as well as personal loans (both secured and unsecured) for that customer segment. In the event creditworthy loan customers’ borrowing needs exceed our legal lending limit, or house limit (an amount less than our legal limit

which by policy is the highest amount we lend to one borrower, subject to certain exceptions which must be approved by the Chief Credit Officer and the Chief Executive Officer or the President and in limited circumstances (absence of approving officers) by the Chairman of the Board of Directors Loan Committee and the Chief Credit Officer or by the Chairman of the Board of Directors Loan Committee and the Chief Executive Officer or the President), we have the ability to sell participations in those loans to other banks. We encourage relationship banking, obtaining a substantial portion of each borrower’s banking business, including deposit accounts. Other than as set forth below, the Bank does not currently engage in consumer mortgage lending.

Commercial and Industrial Loans. These loans comprise a significant portion of our loan portfolio and are made to businesses located in the Southern California region and surrounding communities whose borrowing needs are generally $5.0 million or less. These loans are directly underwritten by us. These loans are made to finance operations, to provide working capital, or for specific purposes such as to finance the purchase of assets, equipment or inventory. Our commercial and industrial loans may be secured (other than by real estate) or unsecured. They may take the form of single payment, installment, equipment financing loans (secured by the underlying equipment) or lines of credit. These are generally based on the financial strength and integrity of the borrower and guarantor(s) and generally (with some exceptions) are collateralized by short term assets such as accounts receivable, inventory, equipment, real estate or a borrower’s other business assets. Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short-term debt originally used to purchase fixed assets, or, in rare cases, to finance the purchase of businesses.

Construction, Miniperm Loans, Land Development and Other Land Loans. We originate and underwrite interim land and construction loans as well as miniperm loans, collateralized by first or junior deeds of trust on specific commercial properties which are principally in our primary market areas. Land loans are primarily for entitlements and infrastructure. We originate construction, renovation and conversion loans to businesses on commercial, residential and income producing properties, which generally have terms of less than two years. Miniperm loans finance the purchase and/or ownership of commercial properties, including owner-occupied and income producing properties. Miniperm loans are generally made with an amortization schedule ranging from 15 to 25 years with a lump sum balloon payment due in one to ten years. We do not engage in any large tract construction lending. Our construction loans are generally limited to experienced developers who are known to our management. We impose a limit on the loan to value ratio on all real estate lending. The project financed must be supported by current independent third party appraisals (which are reviewed by our appraisal department), environmental reviews where appropriate and other relevant information. We review each loan request and renewal individually.

Commercial and Residential Real Estate Loans. We originate and underwrite commercial property and multi-family loans principally within our service area. Typically, these loans are held in our loan portfolio and collateralized by the underlying property. The property financed must be supported by current independent third party appraisals at the date of origination (which are reviewed by our appraisal department) and other relevant information.

SBA Loans. SBA loans are made through programs designed by the federal government to assist the small business community in obtaining financing from financial institutions that are given government guarantees as an incentive to make the loans. The Bank has been designated as an SBA Preferred Lender. Our SBA loans fall into three categories, loans originated under the SBA’s 7a Program (“7a Loans”), loans originated under the SBA’s 504 Program (“504 Loans”) and SBA “Express” Loans. SBA 7a Loans are commercial business loans generally made for the purpose of purchasing real estate to be occupied by the business owner, providing working capital, and/or purchasing equipment or inventory. SBA 504 Loans are collateralized by commercial real estate and are generally made to business owners for the purpose of purchasing or improving real estate for their use and for equipment used in their business.

SBA lending is subject to federal legislation that can affect the availability and funding of the program. From time to time, this dependence on legislative funding causes limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business.

Home Equity Lines of Credit “HELOCS”. We offer home equity lines of credit “HELOCS”, which are revolving lines of credit collateralized by senior or junior deeds of trust on residential real properties, the applicants for which are generally our individual clientele and the principals and executives of our business customers. They generally bear a rate of interest that floats with the Bank’s base rate or the prime rate and have maturities of five to ten years.

Personal Loans. We offer personal loans. Generally, these are unsecured, but they may be secured by collateral, including deposit accounts or marketable securities. The Bank does not currently originate first trust deed home mortgage loans or home improvement loans.

Deposit Products

As a full-service commercial bank, we focus deposit generation on relationship accounts, encompassing non-interest bearing demand, interest bearing demand, and money market. In order to facilitate generation of non-interest bearing demand deposits, we require, depending on the circumstances and the type of relationship, our borrowers to maintain deposit balances with us as a typical condition of granting loans. We also offer certificates of deposit and savings accounts. We service our attorney clients by offering Interest on Lawyers’ Trust Accounts, “IOLTA” in accordance with the requirements of the California State Bar. We market deposits by offering the convenience of third party “couriers” or, in appropriate cases armored vehicles, which contract with our customers, as well as a “remote deposit capture” product that allows deposits to be made via computer at the customer’s business location. We also offer customers “e-statements” that allows customers to receive statements electronically, which is more convenient and secure, in addition to reducing paper and being environmentally-friendly.

For customers requiring full FDIC insurance on certificates of deposit in excess of $250,000, we offer the CDARS^® program, which allows the Bank to place the certificates of deposit with other participating banks to maximize the customers’ FDIC insurance. We receive a like amount of deposits from other participating financial institutions. In addition, we offer on a limited basis the ICS™ program, an insured deposit “sweep” program for demand deposits which is a product offered by Promontory Interfinancial Network, LLC, which is also the provider of the CDARS^® program. Similarly to the CD’s discussed above, the Bank receives a like amount of deposits from other financial institutions and all customer deposits are insured by the FDIC. These “reciprocal” CDARS^® and ICS deposits are classified as “brokered” deposits in regulatory reports and are currently the only brokered deposits utilized by the Bank; the Bank considers these deposits to be “core” in nature.

Investment Products

We compete with other larger and multi-state institutions for deposits. We have traditionally offered customers requiring either higher yields or more security investment sweeps into multiple types of money market funds provided by Dreyfus Corporation, a wholly owned subsidiary of Bank of New York Mellon Corporation, although this service has been temporarily discontinued. All of the funds invest in short-term securities and seek high current income, the preservation of capital and the maintenance of liquidity and each fund favors stability over growth. As a condition to access these products, we require the customer to maintain a certain level of demand deposits. Furthermore, we have also entered into “repurchase agreements” with sophisticated business customers, many of whom act as fiduciaries and require additional security above FDIC deposit insurance. These are essentially borrowings by the Bank, secured by U.S. Government and Agency securities from its investment portfolio. These are disclosed on the Bank’s financial statements as “Securities Sold under Agreements to Repurchase.” We also offer a “repo sweep” product whereby the deposits of qualifying customers are “swept” into repurchase agreements on a daily basis.

Through a third party arrangement with a registered representative of National Planning Corporation, member FINRA/SIPC we offer customers, upon request, the ability to purchase mutual funds, securities, annuities and insurance. The Bank considers this an ancillary product to its commercial banking activities.

Electronic Banking

While personalized, service-oriented banking is the cornerstone of our business plan, we use technology and the Internet as a secondary means for servicing customers, to compete with larger banks and to provide a convenient platform for customers to review and transact business. We offer sophisticated electronic or “internet banking” opportunities that permit commercial customers to conduct much of their banking business remotely from their home or business. However, our customers will always have the opportunity to personally discuss specific banking needs with knowledgeable bank officers and staff who are directly accessible in the branches and offices as well as by telephone and email.

The Bank offers multiple electronic banking options to its customers. It does not allow the origination of deposit accounts through online banking, nor does it accept loan applications through its online services. All of the Bank’s electronic banking services allow customers to review transactions and statements, review images of paid items, transfer funds between accounts at the Bank, place stop orders, pay bills and export to various business and personal software applications. CUB Online Commercial Banking also allows customers to initiate domestic wire transfers and ACH transactions, with the added security and functionality of assigning discrete access and levels of security to different employees of the client.

Additionally, we offer Positive Pay, an antifraud service that allows businesses to review all issued checks daily and provides them with the ability to pay or reject any item. ACH Positive Pay is also offered to allow customers to review ACH transactions on a daily basis.

Commencing in late 2013, we began to offer our internet banking customers an additional third party product designed to assist in mitigating fraud risk to both the customer and the Bank in internet banking and other internet activities conducted by the customer, at no cost to the customer.

The Bank has its own “home page” address on the World Wide Web as an additional means of expanding our market and providing banking services through the Internet. Members of the public can also communicate with us through the website. Our website address is: www.californiaunitedbank.com or www.cunb.com.

Other Services

In addition to providing a full complement of lending and deposit products and related services, we provide our customers with many additional services, either directly or through other providers, including, but not limited to, commercial and stand-by letters of credit, domestic and international wire transfers, on site Automated Teller Machines (“ATM’s”) and Visa^® Debit Cards and ATM cards. We also provide bank-by-mail services, courier services, armored transport, lock box, cash vault, cash management services, telephone banking, night depositories, credit cards and international services. We reimburse our customers for charges for utilization of other banks’ ATM’s up to a maximum of $20 per month.

Competition

The banking business in California, and in our market area, is highly competitive with respect to both loans and deposits and is dominated by a relatively small number of major financial institutions with many offices operating over a wide geographic area, including institutions based outside of California. The increasingly competitive environment faced by banks is a result primarily of changes in laws and regulations, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. We also compete for loans and deposits with other commercial banks, as well as with finance companies, credit unions, securities and brokerage companies, money market funds and other non-financial institutions. Larger financial institutions offer certain services (such as trust services or wealth management) that we do not offer directly (but some of which we offer indirectly through correspondent institutions or other relationships). These institutions also have the ability to finance extensive advertising campaigns, and have the ability to allocate investment assets to regions of highest yield and demand. By virtue of their greater total

capitalization, such institutions also have substantially higher lending limits¹ than we have. Customers may also move deposits into the equity and bond markets which also compete with us as an investment alternative.

Our ability to compete is based primarily on the basis of relationship, customer service and responsiveness to customer needs. Our “preferred lender” status with the Small Business Administration allows us to approve SBA loans faster than many of our competitors. We distinguish ourselves with the availability and accessibility of our senior management to customers and prospects. In addition, our knowledge of our markets and industries assists us in locating, recruiting and retaining customers. Our ability to compete also depends on our ability to continue to attract and retain our senior management and experienced relationship managers. Further, our ability to compete depends in part on our ability to continue to develop and market new products and services, to provide state-of-the-art features in our internet banking and to differentiate our products and services.

In order to compete with the major financial institutions in our primary service area, we use, to the fullest extent possible, the familiarity of our directors, relationship managers, officers and advisors within our market, its residents, businesses and the flexibility that our independent status will permit. This includes an emphasis on specialized services, local promotional activity, and personal contacts. We also work with the local Chambers of Commerce and professionals such as CPA’s and attorneys to invite local businesses to meet our relationship managers, management and directors. In addition, our directors and shareholders refer customers, as well as bring their own business to the Bank. We also have an active calling program whereby we contact targeted business prospects and solicit both deposit and loan business.

Employees

As of December 31, 2014, we had 250 full-time employees. Our employees are not represented by any union or other collective bargaining agreement.

Financial and Statistical Disclosure

Certain of our statistical information are presented within “Item 6. Selected Financial Data,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Qualitative and Quantitative Disclosure About Market Risk.” This information should be read in conjunction with the consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”

¹	Legal lending limits to each customer are limited to a percentage of a bank’s shareholders’ equity, allowance for loan losses, and capital notes and debentures; the exact percentage depends upon the nature of the loan transaction.

Executive Officers of the Registrant

The names, ages as of December 31, 2014, recent business experience and positions or offices held by each of the executive officers of the Company are as follows:


Name and Position Held	Age		Recent Business Experience
David I. Rainer, Chief Executive Officer and Chairman of the Board		57	Chief Executive Officer and Director of California United Bank since inception in 2005 and of CU Bancorp from inception in 2012. He became Chairman of the Board in June 2009. Mr. Rainer is a member of the Board of Directors of the Federal Reserve Bank of San Francisco, Los Angeles Branch.

K. Brian Horton, President and Director		54	President and Director of CU Bancorp and California United Bank since December 1, 2014. Prior to joining the Company, Mr. Horton was a Director and President of 1st Enterprise Bank (which was acquired by the Company on November 30, 2014). He was a co-founder of 1st Enterprise.

Anne A. Williams, Executive Vice President, Chief Operating Officer, Chief Credit Officer and Director of California United Bank		57	Executive Vice President and Chief Credit Officer of California United Bank since 2005 and of CU Bancorp since 2012. Chief Operating Officer of California United Bank since 2008. Director of California United Bank since January 2009.

Karen A. Schoenbaum, Executive Vice President and Chief Financial Officer		52	Executive Vice President and Chief Financial Officer of California United Bank since October 2009. Executive Vice President and Chief Financial Officer of CU Bancorp since 2012. Prior to joining the Bank, Ms. Schoenbaum served as Executive Vice President and Interim Chief Financial Officer of Premier Business Bank in Los Angeles.

Anita Y. Wolman, Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary		63	Executive Vice President & General Counsel of California United Bank since January 2009 and of CU Bancorp since 2012. In November 2013 she was appointed Chief Administrative Officer. She previously was Senior Vice President Legal/Compliance beginning in 2005.

Supervision and Regulation

General

CU Bancorp and the Bank are subject to significant regulation and restrictions by federal and state laws and regulatory agencies. This regulation is intended primarily for the protection of depositors and the deposit insurance fund, and secondarily for the stability of the U.S. banking system. It is not intended for the benefit of shareholders of financial institutions. The following discussion of statutes and regulations is a summary and does not purport to be complete nor does it address all applicable statutes and regulations. This discussion is also qualified in its entirety by reference to the full text and to the implementation and enforcement of the statutes and regulations referred to in this discussion.

Our profitability, like most financial institutions, is primarily dependent on interest rate differentials (“spreads”). In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on interest-earning assets, such as loans extended to customers and securities held in the investment portfolio, will comprise the major portion of our earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted.

Our business is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve implements national monetary policies through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The monetary policies of the Federal Reserve in these areas influence the growth of loans, investments, and deposits and also affect interest earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on us cannot be predicted.

Initiatives may be proposed or introduced before Congress, the California Legislature, and other government bodies in the future that may further alter the structure, regulation, and competitive relationship among financial institutions and may subject us to increased supervision and disclosure, compliance costs and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation.

It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which the business of the Bank would be affected thereby. In addition, the outcome of examinations, any litigation, or any investigations initiated by state or federal authorities may result in necessary changes in our operations and increased compliance costs.

Legislation and Regulatory Developments

Dodd Frank Wall Street Reform and Consumer Protection Act

The implementation and impact of legislation and regulations enacted since 2008 in response to the U.S. economic downturn and financial industry instability continued in 2014 as a modest recovery was experienced by many institutions in the banking sector. Certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) are now effective and have been fully implemented, including the revisions in the deposit insurance assessment base for Federal Deposit Insurance Corporation (“FDIC”) insurance and the permanent increase in deposit insurance coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of barriers to interstate branching and required disclosure and shareholder advisory votes on executive compensation. Implementation in 2014 of additional Dodd-Frank regulatory provisions included aspects of (i) the final new capital rules, and (ii) the so called “Volcker Rule” restrictions on certain proprietary trading and investment activities. The numerous rules and regulations promulgated pursuant to Dodd-Frank are likely to significantly impact our operations and compliance costs.

In the exercise of their supervisory and examination authority, the regulatory agencies have emphasized corporate governance, stress testing, enterprise risk management and other board responsibilities; anti-money laundering compliance and enhanced high risk customer due diligence; vendor management; cyber security and fair lending and other consumer compliance obligations.

Capital Adequacy Requirements

Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal banking agencies. New capital rules described below were effective on January 1, 2014, and are being phased in over various periods. The basic capital rule changes were fully effective on January 1, 2015, but many elements are being phased in over multiple years. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations (See “Prompt Corrective Action Provisions” below), involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors. At December 31, 2014, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for being considered “well capitalized” institutions. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources.”

The current risk-based capital guidelines for bank holding companies and banks require capital ratios that vary based on the perceived degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Bank holding companies and banks engaged in significant trading activity may also be subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards. To the extent that the new rules are not fully phased in, the prior capital rules continue to apply.

Under the risk-based capital guidelines in place prior to the effectiveness of the new capital rules, there were three fundamental capital ratios: a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage ratio. To be deemed “well capitalized” a bank must have a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage ratio of at least ten percent, six percent and five percent, respectively. Under the capital rules that applied in 2014, there was no Tier 1 leverage requirement for a holding company to be deemed well-capitalized.

The following table sets forth the regulatory capital guidelines and the actual capitalization levels for the Company and the Bank as of December 31, 2014:


	Adequately Capitalized			Well- Capitalized			CU Bancorp			California United Bank
	(greater than or equal to)
Total Risk-Based Capital Ratio		8.0	%		10.0	%		11.6	%		11.2	%
Tier 1 Risk-Based Capital Ratio		4.0	%		6.0	%		11.0	%		10.6	%
Tier 1 Leverage Capital Ratio		4.0	%		5.0	%		12.9	%		12.4	%

Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. Federal regulators may, however, set higher capital requirements when a bank’s particular circumstances warrant and have required many banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well capitalized, in which case institutions may no longer be deemed well capitalized and may therefore be subject to restrictions on taking brokered deposits. As of December 31, 2014, both the Bank’s and the Company’s leverage capital ratios exceeded regulatory minimums.

New Financial Institution Capital Rules and Minimum Capital Ratios

In July 2013, the federal bank regulatory agencies adopted final regulations which revised their risk-based and leverage capital requirements for banking organizations to meet requirements of Dodd-Frank and to implement international agreements reached by the Basel Committee on Banking Supervision intended to improve both the quality and quantity of banking organizations’ capital (“Basel III”). Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them will apply on a phased-in basis to all banking organizations, including the Company and the Bank. Our capital ratios may affect our ability to pay dividends. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividends” and Note 22, Regulatory Matters, of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”

The following are among the new requirements that are phased-in beginning January 1, 2015 under the new capital rules:

•

an increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;

•

a new category and a required 4.50% of risk-weighted assets ratio is established for “common equity Tier 1” as a subset of Tier 1 capital limited to common equity;

•

a minimum non-risk-based leverage ratio is set at 4.00% with no 3.00% exception for higher rated banks;

•

changes in the permitted composition of Tier 1 capital to exclude trust preferred securities (however, trust preferred securities issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets, such as CU Bancorp, will continue to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements; see further discussion below), mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities;

•

the risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures;

•

an additional “countercyclical capital buffer” is required for larger and more complex institutions; and

•

a new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

Including the capital conservation buffer of 2.5%, the new final capital rule would result in the following minimum ratios: (i) a Tier 1 capital ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. While the new final capital rule sets higher regulatory capital standards for the Company and the Bank, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of the new capital rules or more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of additional capital.

While the Company is currently evaluating the final rules and their expected impact on the Company, based upon a preliminary assessment, we believe the Company’s and Bank’s current capital levels at December 31, 2014 would equal or exceed these minimum capital requirements, including the capital conservation buffer, if they were in effect on that date.

Under Dodd Frank, trust preferred securities and cumulative perpetual preferred stock will be 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 will continue to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements.

The 16,400 shares of 1st Enterprise Non-Cumulative Perpetual Preferred Stock, Series D that were converted into the right to receive 16,400 shares of the Company’s Non-Cumulative Perpetual Preferred Stock, Series A in the merger of 1st Enterprise Bank with and into the Bank will continue to constitute Tier 1 capital, because non-cumulative perpetual preferred stock remained classified as Tier 1 capital following the enactment of Dodd Frank.

Final Volcker Rule

In December 2013, the federal bank regulatory agencies adopted final rules that implement a part of the Dodd-Frank Act commonly referred to as the “Volcker Rule.” Under these rules and subject to certain exceptions, banking entities are restricted from engaging in activities that are considered proprietary trading and from sponsoring or investing in certain entities, including hedge or private equity funds that are considered “covered funds.” These rules became effective April 1, 2014, although certain provisions are subject to delayed effectiveness under rules promulgated by the Federal Reserve. The Company and the Bank held no investment positions at December 31, 2014 which were subject to the final rule. Therefore, while these new rules may require us to conduct certain internal analysis and reporting, we believe that they will not require any material changes in our operations or business.

Securities Registration and Listing

CU Bancorp’s common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, CU Bancorp is subject to the information, proxy solicitation, insider trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act, as well as the Securities Act of 1933 (the “Securities Act”), both administered by the SEC. We are required to file annual, quarterly and other current reports with the SEC. The SEC maintains an internet site, http://www.sec.gov, at which all forms accessed electronically may be accessed. Our SEC filings are also available on our website at www.cubancorp.com.

Our securities are listed on the NASDAQ Capital Market and trade under the symbol “CUNB”. As a company listed on the NASDAQ Capital Market, CU Bancorp is subject to NASDAQ standards for listed companies. CU Bancorp is also subject to the Sarbanes-Oxley Act of 2002, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), provisions of the Dodd-Frank Act, and other federal and state laws and regulations which address, among other issues, requirements for executive certification of financial presentations, corporate governance requirements for board audit and compensation committees and their members, as well as disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.

Corporate Governance and the JOBS Act

Pursuant to the Sarbanes-Oxley Act, publicly-held companies such as the Company have significant requirements, particularly in the area of external audits, financial reporting and disclosure, conflicts of interest, and corporate governance. The Dodd-Frank Act has added new corporate governance and executive compensation requirements, including mandated resolutions for public company proxy statements such as an advisory vote on executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes) and new stock exchange listing standards.

However, CU Bancorp is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 ( the “JOBS Act”) and as a result, CU Bancorp is not yet subject to all of these regulations. CU Bancorp also will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act, including the additional level of review of its internal control over financial reporting as may occur when outside auditors attest as to its internal control over financial reporting. The Bank is subject to an additional level of review of its internal controls over financial reporting under FDICIA.

Further, an emerging growth company may elect to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. Such

an election is irrevocable during the period a company is an emerging growth company. At inception, CU Bancorp elected to take advantage of the benefits of this extended transition period to comply with new or amended accounting pronouncements in the same manner as a private company, although prior to 2013 there were no such accounting pronouncements. During 2013, however, the Company “opted-in” to compliance with new or amended accounting pronouncements in the same fashion as other public companies. As a result, for the year ended December 31, 2014, the Company’s financial statements are comparable to companies which complied with such new or revised accounting standards when originally effective.

CU Bancorp may remain an emerging growth company until the earlier of: (i) the last day of the fiscal year in which it has total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933, which is fiscal year 2017; (iii) the date on which CU Bancorp has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which CU Bancorp is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

Dividends

It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. The Federal Reserve has also discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

The terms of our Subordinated Debentures also limit our ability to pay dividends on our common stock. If we are not current in our payment of dividends in our payment of interest on our Subordinated Debentures, we may not pay dividends on our common stock.

Quarterly dividends are paid to the U.S. Department of the Treasury pursuant to the terms of the CU Bancorp Preferred Stock. The payment of preferred dividends does not require approval from the Federal Reserve and other regulatory agencies.

California law additionally limits the Company’s ability to pay dividends. A corporation may make a distribution/dividend from retained earnings to the extent that the retained earnings exceed (a) the amount of the distribution plus (b) the amount if any, of dividends in arrears on shares with preferential dividend rights. Alternatively, a corporation may make a distribution/dividend, if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution/dividend.

The Bank is a legal entity that is separate and distinct from its holding company. The Company is dependent on the performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of the Company and the ability of the Company to pay dividends to shareholders. Subject to the regulatory restrictions which currently further restrict the ability of the Bank to declare and pay dividends, future cash dividends by the Bank will depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors. When effective, the new minimum capital rule may restrict dividends by the Bank, if the additional capital conservation buffer is not achieved.

The powers of the board of directors of the Bank to declare a cash dividend to the Company is subject to California law, which restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the California

Department of Business Oversight (“DBO”) in an amount not exceeding the greatest of (1) retained earnings of the bank; (2) the net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year.

Bank Holding Company Regulation

As a bank holding company, CU Bancorp is registered with and subject to regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, or the BHCA. CU Bancorp is also a bank holding company within the meaning of Section 1280 of the California Financial Code and is subject to examination by, and may be required to file reports with, the DBO.

Federal Reserve policy historically has required bank holding companies to act as a source of financial strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries in circumstances where it might not otherwise do so. Dodd-Frank codified this policy as a statutory requirement. Under this requirement, CU Bancorp is expected to commit resources to support the Bank, including at times when we may not be in a financial position to do so. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to such a commonly controlled institution.

Under the BHCA, we are subject to periodic examination by the Federal Reserve. We are also required to file with the Federal Reserve periodic reports of our operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require. We are also subject to examination by the DBO and are required to file reports with the DBO.

Pursuant to the BHCA, we are required to obtain the prior approval of the Federal Reserve before we acquire all or substantially all of the assets of any bank or ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than 5 percent of such bank. In connection with such transactions, the Federal Reserve is required to consider certain competitive, management, financial, anti-money laundering compliance and other impacts.

Under the BHCA, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries that the Federal Reserve deems to be so closely related to banking as “to be a proper incident thereto.” We are also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking activities or the Federal Reserve determines that the activity is so closely related to banking as to be a proper incident to banking. The Federal Reserve’s approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.

The BHCA and regulations of the Federal Reserve also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Pursuant to the Gramm-Leach-Bliley Act (“GLB Act”) and Dodd-Frank, in order to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be well capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the Community Redevelopment Act (“CRA”), which

requires banks to help meet the credit needs of the communities in which they operate. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company. CU Bancorp has not elected financial holding company status and has not engaged in any activities determined by the Federal Reserve to be financial in nature or incidental or complementary to activities that are financial in nature.

Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal and state law in dealing with their holding companies and other affiliates, specifically under Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W (and similar state statutes). Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral for a loan or extension of credit to any person or company, issue a guarantee or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary’s capital stock and surplus on an individual basis or 20 percent of such subsidiary’s capital stock and surplus on an aggregate basis. Such transactions must be on terms and conditions that are consistent with safe and sound banking practices and on terms no less favorable than those available from unaffiliated persons. A bank holding company banking subsidiary may not purchase a “low-quality asset,” as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral. Dodd-Frank significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization.

Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.

The Federal Reserve has cease and desist powers over parent bank holding companies and non-banking subsidiaries where the action of a parent bank holding company or its non-financial institutions represent an unsafe or unsound practice or violation of law. The Federal Reserve has the authority to regulate debt obligations, other than commercial paper, issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.

In addition to these explicit limitations, the federal regulatory agencies have general authority to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

Subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with the applicable regulations, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring “control” of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 or as we will refer to as the Exchange Act, or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. Our common stock is registered under Section 12 of the Exchange Act. Under California law, a person or entity proposing to directly or indirectly acquire control of a California bank must also obtain permission from the DBO. California statutes define “control” as either (i) indirectly or directly owning, controlling or having power to vote 25% or more of the voting securities of a bank; or (ii) to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or

non-management services), or otherwise; provided, however, that no individual shall be deemed to control a person solely on account of being a director, officer, or employee of such person. For purposes of paragraph (ii), a person who, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the then outstanding voting securities issued by another person is presumed to control such other person.

The Federal Reserve maintains a policy statement on minority equity investments in banks and bank holding companies, that generally permits investors to (i) acquire up to 33% of the total equity of a target bank or bank holding company, subject to certain conditions, including (but not limited to) that the investing firm does not acquire 15% or more of any class of voting securities, and (ii) designate at least one director, without triggering the various regulatory requirements associated with control. As a bank holding company, we are required to obtain prior approval from the Federal Reserve before (i) acquiring all or substantially all of the assets of a bank or bank holding company, (ii) acquiring direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless we own a majority of such bank’s voting shares), or (iii) merging or consolidating with any other bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the CRA. In its most recent examination of its CRA activities the Bank received an “Outstanding” rating.

Stock Redemptions and Repurchases

It is an essential principle of safety and soundness that a banking organization’s redemption and repurchases of regulatory capital instruments, including common stock, from investors be consistent with the organization’s current and prospective capital needs. In assessing such needs, the board of directors and management of a bank holding company should consider the Dividend Factors discussed previously under “Dividends”. The risk-based capital rule directs bank holding companies to consult with the Federal Reserve before redeeming any equity or other capital instrument included in Tier 1 or Tier 2 capital prior to stated maturity, if such redemption could have a material effect on the level or composition of the organization’s capital base. Bank holding companies experiencing financial weaknesses, or that are at significant risk of developing financial weaknesses, must consult with the appropriate Federal Reserve supervisory staff before redeeming or repurchasing common stock or other regulatory capital instruments for cash or other valuable consideration. Similarly, any bank holding company considering expansion, either through acquisitions or through new activities, also generally must consult with the appropriate Federal Reserve supervisory staff before redeeming or repurchasing common stock or other regulatory capital instruments for cash or other valuable consideration. In evaluating the appropriateness of a bank holding company’s proposed redemption or repurchase of capital instruments, the Federal Reserve will consider the potential losses that the holding company may suffer from the prospective need to increase reserves and write down assets from continued asset deterioration and the holding company’s ability to raise additional common stock and other Tier 1 capital to replace capital instruments that are redeemed or repurchased. A bank holding company must inform the Federal Reserve of a redemption or repurchase of common stock or perpetual preferred stock for cash or other value resulting in a net reduction of the bank holding company’s outstanding amount of common stock or perpetual preferred stock below the amount of such capital instrument outstanding at the beginning of the quarter in which the redemption or repurchase occurs. In addition, a bank holding company must advise the Federal Reserve sufficiently in advance of such redemptions and repurchases to provide reasonable opportunity for supervisory review and possible objection should the Federal Reserve determine a transaction raises safety and soundness concerns.

Regulation Y requires that a bank holding company that is not well capitalized or well managed, or that is subject to any unresolved supervisory issues, provide prior notice to the Federal Reserve for any repurchase or redemption of its equity securities for cash or other value that would reduce by 10% or more the holding company’s consolidated net worth aggregated over the preceding 12-month period.

Annual Reporting; Examinations

The holding company is required to file an annual report with the Federal Reserve, and such additional information as the Federal Reserve may require. The Federal Reserve may examine a bank holding company and any of its subsidiaries, and charge the company for the cost of such an examination.

Imposition of Liability for Undercapitalized Subsidiaries

FDICIA requires bank regulators to take “prompt corrective action” to resolve problems associated with insured depository institutions. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company “having control of” the undercapitalized institution “guarantees” the subsidiary’s compliance with the capital restoration plan until it becomes “adequately capitalized.” For purposes of this statute, the holding company has control of the Bank. Under FDICIA, the aggregate liability of all companies controlling a particular institution is limited to the lesser of five percent of the depository institution’s total assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with applicable capital standards. FDICIA grants greater powers to bank regulators in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed distributions, or might be required to consent to a merger or to divest the troubled institution or other affiliates.

State Law Restrictions

As a California corporation, the holding company is subject to certain limitations and restrictions under applicable California corporate law. For example, state law restrictions in California include limitations and restrictions relating to indemnification of directors, distributions and dividends to shareholders (discussed above), transactions involving directors, officers or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.

Bank Regulation

The Bank, as a California state-chartered bank, is subject to primary supervision and examination by the DBO, as well as the FDIC. Under the Federal Deposit Insurance Act (“FDI Act”) and the California Financial Code, California state chartered commercial banks may generally engage in any activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries or subsidiaries of bank holding companies. Further, pursuant to amendments enacted by the GLB Act, California banks may conduct certain “financial” activities in a subsidiary to the same extent as may a national bank, provided the bank is and remains “well-capitalized,” “well-managed” and in satisfactory compliance with the CRA, which requires banks to help meet the credit needs of the communities in which they operate. The Bank currently has no financial subsidiaries.

Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, the nature and amount of and collateral for certain loans, borrowings, capital requirements, certain check-clearing activities, branching, and mergers and acquisitions.

California banks are also subject to various federal statutes and regulations including Federal Reserve Regulation O, Federal Reserve Act Sections 23A and 23B and Regulation W and similar state statutes, which restrict or limit loans or extensions of credit to “insiders”, including officers, directors and principal shareholders, and loans or extension of credit by banks to affiliates or purchases of assets from affiliates, including parent bank holding companies, except pursuant to certain exceptions and terms and conditions at least as favorable to those

prevailing for comparable transactions with unaffiliated parties. Dodd-Frank expanded definitions and restrictions on transactions with affiliates and insiders under Section 23A and 23B and also lending limits for derivative transactions, repurchase agreements and securities lending and borrowing transactions.

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2014, the Bank was in compliance with the FHLB’s stock ownership requirement and our investment in FHLB capital stock totaled $8 million.

In addition to the foregoing, the following summary identifies some of the more significant laws, regulations, and policies that affect our operations; it is not intended to be a complete listing or description of all laws and regulations that apply to us and is qualified in its entirety by reference to the applicable laws and regulations.

Supervision and Enforcement Authority

The federal and California regulatory structure gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an institution’s capital becomes impaired. The guidelines establish operational and managerial standards generally relating to: (1) internal controls, information systems, and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest-rate exposure; (5) asset growth and asset quality; and (6) compensation, fees and benefits. Further, the regulatory agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. If, as a result of an examination, the DBO or the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the DBO and the FDIC, and separately the FDIC, as insurer of the Bank’s deposits, have residual authority to:

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Require affirmative action to correct any conditions resulting from any violation or practice;

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Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the Bank from being deemed well-capitalized and restrict its ability to accept certain brokered deposits;

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Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;

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Enter into informal or formal enforcement orders, including memoranda of understanding, written agreements and consent or cease and desist orders or prompt corrective action orders to take corrective action and cease unsafe and unsound practices;

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Require prior approval of senior executive officer or director changes; remove officers and directors and assess civil monetary penalties; and

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Terminate FDIC insurance, revoke the charter and/or take possession of and close and liquidate the Bank or appoint the FDIC as receiver.

Prompt Corrective Action Authority

The FDI Act provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators. Among other things, it requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that

institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate federal banking regulator under the prompt corrective action rules generally depend upon an institution’s classification within five capital categories as defined in the regulations. The relevant capital measures are the capital ratio, the Tier 1 capital ratio, and the leverage ratio. However, the federal banking agencies have also adopted non-capital safety and soundness standards to assist examiners in identifying and addressing potential safety and soundness concerns before capital becomes impaired. These include operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset quality and growth, (v) earnings, (vi) risk management, and (vii) compensation and benefits.

A depository institution’s capital tier under the prompt corrective action regulations will depend upon how its capital levels compare with various relevant capital measures and the other factors established by the regulations. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratio, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.

The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The regulatory agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

The prompt corrective action standards were changed when the new capital rule ratios become effective as discussed under “Legislative and Regulatory Developments.”

Brokered Deposit Restrictions

Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits. CUB is eligible to accept brokered deposits but, except with regard to reciprocal deposits related to CDARS and ICS products, does not utilize brokered deposits at this time and has no current intention of doing so in the near term.

Loans to One Borrower

With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time (including the obligations to the bank of certain related entities of the borrower) may not exceed 25 percent (and unsecured loans may not exceed 15 percent) of the bank’s shareholders’ equity, allowance for loan loss, and any capital notes and debentures of the bank. The Bank by policy has lower “house limits” that it generally will not exceed without the approval of the Chief Credit Officer and the Chief Executive Officer or the President and in limited circumstances (absence of approving officers) by the Chairman of the Board of Directors Loan Committee and the Chief Credit Officer or by the Chairman of the Board of Directors Loan Committee and the CEO or the President.

Extensions of Credit to Insiders and Transactions with Affiliates

The Federal Reserve Act and Federal Reserve Regulation O place limitations and conditions on loans or extensions of credit to:

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a bank or bank holding company’s executive officers, directors and principal shareholders (i.e., in most cases, those persons who own, control or have power to vote more than 10 percent of any class of voting securities);

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any company controlled by any such executive officer, director or shareholder; or

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any political or campaign committee controlled by such executive officer, director or principal shareholder.

Such loans and leases:

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must comply with loan-to-one-borrower limits;

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require prior full board approval when aggregate extensions of credit to the person exceed specified amounts;

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must be made on substantially the same terms (including interest rates and collateral) and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders;

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must not involve more than the normal risk of repayment or present other unfavorable features; and

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in the aggregate must not exceed the bank’s unimpaired capital and unimpaired surplus.

The California Financial Code and DBO regulations adopt and apply Regulation O to the Bank and provide additional limitations on loans to affiliates.

Affiliate Transactions

The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B, as amended by Dodd-Frank, and Federal Reserve Regulation W on any extensions of credit by the Bank to, or the issuance of a guarantee or letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of any affiliates. Affiliates include parent holding companies; sister banks, sponsored and advised companies, financial subsidiaries (but not operating subsidiaries or other permissible bank subsidiaries) and investment companies where the Bank’s affiliate serves as investment advisor. Sections 23A and 23B and Regulation W generally:

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prevent any affiliates from borrowing from the bank unless the loans are secured by marketable obligations of designated amounts;

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limit such loans and investments to or in any affiliate individually to 10 percent of the bank’s capital and surplus;

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limit such loans and investments to all affiliates in the aggregate to 20 percent of the bank’s capital and surplus; and

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require such loans and investments to or in any affiliate to be on terms and under conditions substantially the same or at least as favorable to the bank as those prevailing for comparable transactions with non-affiliated parties.

Additional restrictions on transactions with affiliates may be imposed on the Bank under the FDI Act’s prompt corrective action regulations and the supervisory authority of the federal and state banking agencies.

Deposit Insurance

The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the Deposit Insurance Fund (the “DIF”) up to prescribed limits for each depositor. Pursuant to Dodd-Frank, the maximum deposit insurance amount has been permanently increased to $250,000 per depositor. As required by Dodd-Frank, the FDIC adopted a DIF restoration plan which became effective on January 1, 2011. Among other things, the plan: (1) raises the minimum designated reserve ratio, which the FDIC is required to set each year, to 1.35 percent (from the former minimum of 1.15 percent) and removes the upper limit on the designated reserve ratio (which was formerly capped at 1.5 percent) and consequently on the size of the fund; (2) requires that the fund reserve ratio reach 1.35 percent by 2020; (3) eliminates the requirement that the FDIC provide dividends from the fund when the reserve ratio is between 1.35 percent and 1.5 percent; and (4) continues the FDIC’s authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.5 percent, but grants the FDIC sole discretion in determining whether to suspend or limit the declaration or payment of dividends. The FDI Act continues to require that the FDIC’s Board of Directors consider the appropriate level for the designated reserve ratio annually and, if changing the designated reserve ratio, engage in notice-and-comment rulemaking before the beginning of the calendar year. The FDIC has set a long-term goal of getting its reserve ratio up to 2% of insured deposits by 2027.

On February 7, 2011, the FDIC approved a final rule, as mandated by Dodd-Frank, changing the deposit insurance assessment system from one that is based on total domestic deposits to one that is based on average consolidated total assets minus average tangible equity. In addition, the final rule creates a scorecard-based assessment system for larger banks (those with more than $10 billion in assets) and suspends dividend payments if the DIF reserve ratio exceeds 1.5 percent, but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. Larger insured depository institutions will likely pay higher assessments to the DIF than under the old system. Additionally, the final rule includes an adjustment for depository institution debt whereby an institution would pay an additional premium equal to 50 basis points on every dollar of long-term, unsecured debt held as an asset that was issued by another insured depository institution to the extent that all such debt exceeds 3 percent of the other insured depository institution’s Tier 1 capital. The new rule became effective for the quarter beginning April 1, 2011. In 2014 our FDIC insurance assessment was $844,000.

The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a bank would also result in the revocation of the bank’s charter by the DBO.

Depositor Preference

The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institutions, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails,

insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured non-deposit creditors, with respect to any extensions of credit they have made to such insured depository institution.

Audit Requirements

The Bank is required to have an annual independent audit, alone or as a part of its bank holding company’s audit, and to prepare all financial statements in accordance with U.S. generally accepted accounting principles. The holding company has an annual independent audit; the Bank does not have a separate independent audit. CU Bancorp’s Audit and Risk Committee serves as the Audit Committee for the Bank and is composed entirely of independent directors. As required by NASDAQ, CU Bancorp has certified that its audit committee has adopted a formal written charter and meets the requisite number of directors, independence, and qualification standards. The combined Audit Committee meets NASDAQ and bank regulatory agency requirements.

Under the Sarbanes-Oxley Act, Management is required to assess the effectiveness of the Bancorp’s internal control over financial reporting as of December 31, 2014. These assessments are included in Part II — Item 9A — “Controls and Procedures.”

Anti-Money Laundering and OFAC Regulation

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations require the Bank to take steps to prevent the use of the Bank or its systems from facilitating the flow of illegal or illicit money and to file suspicious activity reports. Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 (“Patriot Act”) significantly expanded the anti-money laundering (“AML”) and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including “Know Your Customer” and “Enhanced Due Diligence” practices) and other obligations to maintain appropriate policies, procedures and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing.

An institution subject to the Patriot Act must provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its effectiveness. The federal regulatory agencies continue to issue regulations and new guidance with respect to the application and requirements of BSA and AML. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. Based on their administration by Treasury’s Office of Foreign Assets Control (“OFAC”), these are typically known as the “OFAC” rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.

Failure of a financial institution to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Community Reinvestment Act

Under the CRA, the Bank has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with CRA. CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities and to take that record into account in its evaluation of certain applications by such institution, such as applications for charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions or engage in certain activities pursuant to the GLB Act. An unsatisfactory rating may be the basis for denying the application. Based on its most recent examination report in 2013, the Bank received an overall CRA rating of “Outstanding”, the highest rating possible.

Consumer Compliance and Fair Lending Laws

The Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the USA PATRIOT Act of 2001, the Bank Secrecy Act, the Foreign Account Tax Compliance Act (effective 2013), the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of Dodd-Frank and is discussed in further detail below. The enforcement of Fair Lending laws has been an increasing area of focus for regulators. Fair Lending laws related to extensions of credit are included in The Equal Credit Opportunity Act and the Fair Housing Act, which prohibit discrimination in residential real estate and credit transactions based on race, color, national origin, sex, marital status, familial status, religion, age, physical ability, the fact that all or part of the applicant’s income derives from a public assistance program or the fact that the applicant has exercised any right under the Consumer Credit Protection Act. Under the Fair Lending laws, lenders can also be liable for policies which have a disparate impact on, or result in disparate treatment of, a protected class of applicants or borrowers. Lenders are required to have a Fair Lending program that is of sufficient scope to monitor the inherent Fair Lending risk of the institution and that appropriately remediates any issues which are identified. Generally, regulatory agencies are required to refer fair lending violations to the Department of Justice for investigation.

In addition, federal law and certain state laws (including California) currently contain client privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstance, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the GLB Act and certain state laws (including California) companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.

Dodd-Frank provided for the creation of the Consumer Finance Protection Bureau (“CFPB”) as an independent entity within the Federal Reserve with broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The bureau’s functions include investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer financial products and services. CFPB regulations and guidance apply to all financial institutions and banks with $10 billion or more in assets are subject to examination by the CFPB. Banks with less than $10 billion in assets, including the Bank, will continue to be examined for compliance by their primary federal banking agency.

In 2014, the CFPB adopted revisions to Regulation Z, which implement the Truth in Lending Act, pursuant to the Dodd-Frank Act, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans,

reverse mortgages, or temporary loans). The revisions mandate specific underwriting criteria for home loans in order for creditors to make a reasonable, good faith determination of a consumer’s ability to repay and establish certain protections from liability under this requirement for “qualified mortgages” meeting certain standards. In particular, it will prevent banks from making “no doc” and “low doc” home loans, as the rules require that banks determine a consumer’s ability to pay based in part on verified and documented information. Because we do not originate “no doc” or “low doc” loans, we do not believe this regulation will have a significant impact on our operations. As the Bank does not currently originate residential mortgages, it is not expected that the new CFPB rules with regard to residential mortgage lending will have a substantial impact on the Bank or its operations.

Customer Information Security

The Federal Reserve and other bank regulatory agencies have adopted final guidelines for safeguarding confidential, personal customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. We have adopted a customer information security program to comply with such requirements.

Privacy

The Gramm-Leach-Bliley Act of 1999 and the California Financial Information Privacy Act require financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statutes require explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibit disclosing such information except as provided in the Bank’s policies and procedures. CUB has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of the Bank.

Available Information

We maintain an Internet website for CU Bancorp at www.cubancorp.com and a website for CUB at www.californiaunitedbank.com. At www.cubancorp.com and via the “Investor Relations” link at the Bank’s website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You may obtain copies of the Company’s filings on the SEC site. These documents may also be obtained in print upon request by our shareholders to our Investor Relations Department.

We have adopted a written code of ethics that applies to all directors, officers and employees of the Company, including our principal executive officer and senior financial officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission promulgated thereunder. The code of ethics, which we call our Principles of Business Conduct and Ethics, is available on our corporate website, www.cubancorp.com in the section entitled “Corporate Governance.” In the event that we make changes in, or provide waivers from, the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these events on our corporate website in such section. In the Corporate Governance section of our corporate website, we have also posted the charters for our Audit and Risk Committee

and our Compensation, Nominating and Corporate Governance Committee. In addition, information concerning purchases and sales of our equity securities by our executive officers and directors is posted on our website.

Our Investor Relations Department can be contacted at CU Bancorp, 818 W. 7th Street, Suite 220, Los Angeles, CA, 90017, Attention: Investor Relations, telephone (818) 257-7700, or via e-mail to Kschoenbaum@cunb.com.

All website addresses given in this document are for information only and are not intended to be an active link or to incorporate any website information into this document.

ITEM 1A — RISK FACTORS

In addition to the other information on the risks we face and our management of risk contained in this Annual Report on Form 10-K or in our other SEC filings, the following are significant risks which may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also impair our business operations and results.

Readers and prospective investors in our securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report. This report is qualified in its entirety by these risk factors.

RISKS RELATED TO THE BANKING INDUSTRY

Difficult Economic and Market Conditions Have Adversely Affected Our Industry

Our financial performance generally, and the ability of borrowers to pay interest on and repay the principal of outstanding loans and the value of the collateral securing those loans, is highly dependent upon the business and economic conditions in the markets in which we operate and in the United States as a whole. Although the U.S. and local economy continues to show modest signs of improvement, certain sectors, remain soft, and unemployment, although improved, remains high in general and in the markets in which we operate. Local governments and many businesses are still experiencing serious difficulties. In addition, concerns about the performance of international economies, including the potential impact of European debt and economic conditions in Asia, can impact the economy here in the United States. These economic pressures on consumers and businesses may adversely affect our business, financial condition, results of operations and stock price. In particular, we may face the following risks in connection with these events:

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Current deadlock in Congress and failure to address systemic issues.

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Our banking operations are concentrated primarily in southern California. The State of California has experienced significant fiscal challenges the long-term effects of which on the State’s economy cannot be predicted. Further deterioration of the economic conditions in Southern California could impair borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, and erode the value of loan collateral. These conditions could increase the amount of our non-performing assets and have an adverse effect on our efforts to collect our non-performing loans or otherwise liquidate our non-performing assets (including other real estate owned) on terms favorable to us, if at all, and could also cause a decline in demand for our products and services, or a lack of growth or a decrease in deposits, any of which may cause us to incur losses, adversely affect our capital, and hurt our business.

U.S. Financial Markets and Economic Conditions Could Adversely Affect Our Liquidity, Results of Operations and Financial Condition

In the past, the impact of adverse economic events has been particularly acute in the financial sector. Although the Company is well-capitalized and has not suffered any liquidity issues as a result of these events, the

cost and availability of funds may be adversely impacted and the demand for our products and services may decline if the recovery from the recession does not continue. In view of the concentration of our operations and the collateral securing our loan portfolio in Southern California, we may be particularly susceptible to adverse economic conditions in the state of California.

Further Disruptions in the Real Estate Market Could Materially and Adversely Affect Our Business

In conjunction with the financial crisis beginning in 2008, the real estate market experienced a slow-down due to negative economic trends and credit market disruption. While recovery in Southern California real estate appears to be holding, the long-term impact cannot be quantified. At December 31, 2014, 51% and 4% of our total gross loans were comprised of commercial real estate and real estate construction loans, respectively. Of the commercial real estate loans, 41% was owner-occupied. Any further downturn in the real estate market could materially and adversely affect our business because a significant portion of our loans are secured by real estate. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on loans. Substantially all of our real property collateral is located in Southern California. If there is an additional decline in real estate values, especially in Southern California, the collateral for our loans would provide less security. Real estate values could be affected by, among other things, a worsening of economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, continued high levels of unemployment, drought, earthquakes, brush fires and other natural disasters particular to California.

Additional Requirements Imposed by the Dodd-Frank Act and Related Regulation Could Adversely Affect Us

Recent government efforts to strengthen the U.S. financial system have resulted in the imposition of additional regulatory requirements. The Dodd-Frank Act provides for sweeping regulatory changes, including the following:

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the establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment;

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the requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries;

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enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading activities by banks;

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additional corporate governance and executive compensation requirements; enhanced financial institution safety and soundness regulations,

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revisions in FDIC insurance assessment fees and a permanent increase in FDIC deposit insurance coverage to $250,000;

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authorization for financial institutions to pay interest on business checking accounts; and

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the establishment of new regulatory bodies, such as the Bureau of Consumer Financial Protection and the Financial Services Oversight Counsel, to identify emerging systemic risks and improve interagency cooperation.

Many of the provisions remain subject to final rulemaking and/or implementation. Accordingly, we cannot fully assess its impact on our operations and costs until final regulations are adopted and implemented.

Current and future legal and regulatory requirements, restrictions, and regulations, including those imposed under Dodd-Frank, may adversely impact our profitability and may have a material and adverse effect on our business, financial condition, and results of operations. We may also be required to invest significant management attention and resources to evaluate and make changes required by the legislation and related regulations and may make it more difficult for us to attract and retain qualified executive officers and employees.

Further Significant Changes in Banking Laws or Regulations and Federal Monetary Policy Could Materially Affect Our Business

The banking industry is subject to extensive federal and state regulation, and significant new laws or changes in, or repeals of, existing laws may cause results to differ materially. Also, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects our credit conditions, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing, and bank reserve requirements. A material change in these conditions would affect our results. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. For further discussion of the regulation of financial services, see “Supervision and Regulation.”

We cannot predict the substance or impact of any change in regulation, whether by regulators or as a result of legislation, or in the way such statutory or regulatory requirements are interpreted or enforced. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business practices, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.

We are subject to extensive laws, regulations and supervision, and may become subject to future laws, regulations and supervision, if any, that may be enacted, which could limit or restrict our activities, may hamper our ability to increase our assets and earnings, and could adversely affect our profitability.

Bank Clients Could Move Their Money to Alternative Investments Causing Us to Lose a Lower Cost Source of Funding

Demand deposits can decrease when clients perceive alternative investments, as providing a better risk/return tradeoff. Technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts offered by other out-of-area financial institutions or non-bank service providers. Additionally, if the economy continues to trend upward, customers may withdraw deposits to utilize them to fund business expansion or equity investment. Moreover, should interest rates rise this may impact the Bank’s ability to maintain its current percentage of non-interest bearing deposits. When clients move money out of bank demand deposits, particularly non-interest bearing deposits, we lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income.

Several rating agencies publish unsolicited ratings of the financial performance and relative financial health of many banks, including CUB, based on publicly available data. As these ratings are publicly available, a decline in the Bank’s ratings may result in deposit outflows or the inability of the Bank to raise deposits in the secondary market as broker-dealers and depositors may use such ratings in deciding where to deposit their funds.

Our Business Is Subject To Interest Rate Risk and Fluctuations in Interest Rates Could Reduce Our Net Interest Income and Adversely Affect Our Business.

A substantial portion of our income is derived from the differential, or “spread,” between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. The interest rate risk inherent in our lending, investing, and deposit taking activities is a significant market risk to us and our business. Income associated with interest earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in interest rates, events over which we have no control, may have an adverse effect on net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can significantly affect our assets and liabilities. Increases in interest rates may adversely affect the ability of our floating rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-offs.

Generally, the interest rates on our interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent, or on the same basis. Even assets and liabilities with similar maturities or periods of re-pricing may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. Certain assets, such as adjustable rate loans, may have features that limit changes in interest rates on a short-term basis such as floors.

During the third quarter of 2014, the Federal Reserve announced that it will phase out its long-running bond-buying asset purchase program known as quantitative easing. According to the Federal Reserve, it is hoping that by holding its bond balance, it will help maintain accommodative financial conditions in the economy without needing to continue with new purchases. The Federal Reserve also said that it will continue to try to stimulate the economy by keeping interest rates low for a “considerable time” as it credits its asset purchase program with “substantial improvement in the outlook for the labor market since the inception of its currency asset purchase program” and “continues to see sufficient underlying strength in the broader economy.” Accordingly, the Federal Open Market Committee reinforced its expected timeline of increasing interest rates in the middle of 2015; however, if the job market improves more quickly than expected or inflation rises, rate hikes could come sooner, and the Committee could wait longer if the job market or inflation slows. A persistent low interest rate environment likely will adversely affect the interest income we earn on loans and investments.

We seek to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition to obtain the maximum spread. We use interest rate sensitivity analysis and a simulation model to assist us in managing asset-liability composition. However, such management tools have inherent limitations that impair their effectiveness.

The Fiscal and Monetary Policies Of the Federal Government and Its Agencies Could Have a Material Adverse Effect On Our Earnings.

The Federal Reserve regulates the supply of money and credit in the U.S. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. They can also materially decrease the value of financial assets we hold. Federal Reserve policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans, or could adversely create asset bubbles which result from prolonged periods of accommodative policy, and which in turn result in volatile markets and rapidly declining collateral values. Changes in Federal Reserve policies are beyond our control and difficult to predict.

Inflation and Deflation May Adversely Affect Our Financial Performance

The Consolidated Financial Statements and related financial data presented in this report have been prepared in accordance with accounting principles generally accepted in the United States. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation or deflation. The primary impact of inflation on our operations is reflected in increased operating costs. Conversely, deflation will tend to erode collateral values and diminish loan quality. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general levels of inflation or deflation

The Company Has Liquidity Risk

Liquidity risk is the risk that the Company will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate

to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. The Company mitigates liquidity risk by establishing and accessing lines of credit with various financial institutions and having back-up access to the brokered Certificate of Deposits “CD’s” markets (which it has not utilized other than on a testing basis). Results of operations could be affected if the Company were unable to satisfy current or future financial obligations. See Part II, Item 7, “Liquidity” for more information.

Severe Weather, Natural Disasters, Acts of War or Terrorism and Other External Events Could Significantly Impact the Company’s Business

Severe weather, drought, fire, natural disasters such as earthquakes, or tsunamis, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Bank’s deposit base; impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

The Financial Condition of Other Financial Institutions Could Adversely Affect Us

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any such losses could have a material adverse effect on our financial condition and results of operations.

RISKS RELATED TO CREDIT

We May Suffer Losses in Our Loan Portfolio Despite Our Underwriting Practices

We mitigate the risks inherent in our loan portfolio by adhering to sound and proven underwriting practices, managed by experienced and knowledgeable credit professionals. These practices include analysis of a borrower’s prior credit history, financial statements, tax returns, and cash flow projections, valuations of collateral based on reports of independent appraisers and verifications of liquid assets. Although we believe that our underwriting criteria is appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan loss.

Our Allowance for Loan Loss May Not be Adequate to Cover Actual Losses

We maintain an allowance for loan loss on organic loans, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of risk of losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for possible loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; limited loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan

portfolio as well as levels utilized by peers. The determination of the appropriate level of the allowance for loan loss inherently involves a high degree of subjectivity and requires the Bank to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

Deterioration in economic conditions affecting borrowers and collateral, new information regarding existing loans, identification of problem loans and other factors, both within and outside of the Company’s control, may require an increase in the allowance for loan loss. In addition, bank regulatory agencies periodically review the Bank’s allowance for loan loss and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan loss; the Bank will need additional provisions to increase the allowance for loan loss. Any increases in the allowance for loan loss will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company’s financial condition and results of operations. See the section captioned “Allowance for loan loss” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to the Company’s process for determining the appropriate level of the allowance for loan loss.

On December 20, 2012, the FASB issued for public comment a Proposed ASU, Financial Instruments-Credit Losses (Subtopic 825-15) (the Credit Loss Proposal or “CECL), that would substantially change the accounting for credit losses under U.S. GAAP. Under U.S. GAAP’s current standards, credit losses are not reflected in the financial statements until it is probable that the credit loss has been incurred. Under the Credit Loss Proposal, an entity would reflect in its financial statements its current estimate of credit losses on financial assets over the expected life of each financial asset. On March 12, 2014, the FASB modified its plan, deciding that the model would apply only to instruments measured at amortized cost, as opposed to all financial products; distinguishing between debt securities and loans. The Credit Loss Proposal, if adopted as proposed, may have a negative impact on our reported earnings, capital, regulatory capital ratios, as well as on regulatory limits which are based on capital (e.g., loans to one borrower) since it would accelerate the recognition of estimated credit losses.

Liabilities from Environmental Regulations Could Materially and Adversely Affect Our Business and Financial Condition

In the course of the Bank’s business, the Bank may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. The Bank may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clear up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of any contaminated site, the Bank may be subject to common law claims by third parties based on damages, and costs resulting from environmental contamination emanating from the property. If the Bank ever becomes subject to significant environmental liabilities, the Company’s business, financial condition, liquidity, and results of operations could be materially and adversely affected.

California’s Current Drought may Impact the Economy

At December 31, 2014, California continued to experience a severe drought in all areas of the state. According to a recent 2014 report and economic analysis conducted by the University of California at Davis Center for Watershed Science, California’s drought will cost California agriculture $1.5 billion, which amounts to a net revenue loss of about 3% of California’s total agricultural value. The report predicts total statewide economic cost of the 2014 drought to be $2.2 billion and the loss of 17,000 jobs. The drought is likely to continue through 2015, regardless of El Niño conditions. While we do not have a portfolio of agricultural loans which would be most impacted by the drought, it is possible that the overall economy of California may be negatively impacted by the impact of this drought and lack of water or cost, for various businesses and applications which could have a negative impact on the Company’s results, loan quality and collateral.

RISK RELATED TO LEGISLATION AND REGULATION

Significant Changes in Banking Laws or Regulations and Federal Monetary Policy Could Materially Affect Our Business

The banking industry is subject to extensive federal and state regulations, and significant new laws or changes in, or repeals of, existing laws which may cause results to differ materially. Also, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects our credit conditions, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing, and bank reserve requirements. A material change in these conditions would affect our results. Parts of our business are also subject to federal and state securities laws and regulations. Significant changes in these laws and regulations would also affect our business. For further discussion of the regulation of financial services, including a description of significant recently-enacted legislation and other regulatory initiatives taken in response to the recent financial crisis, see “Supervision and Regulation”.

We May Be Subject To More Stringent Capital Requirements

As discussed previously, the Dodd-Frank Act creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital requirements as companies grow in size and complexity. These requirements, and any other new regulations, in addition to regulatory agency requirements, could require us to reduce business levels or to raise capital, including in ways that may adversely affect our results of operations or financial condition.

As discussed previously, in July 2013 U.S. federal bank regulators jointly adopted final regulations which revised their risk-based and leverage capital requirements for banking organizations including banks and bank holding companies, as required by the Dodd-Frank Act. Some of these requirements began to be phased-in on January 1, 2015 and are applicable to the Company and the Bank. Certain of the rules are applicable only to large, internationally active banks and will not directly impact the Company. These rules may result in increased regulatory capital requirements (and the associated compliance costs) for the Company and the Bank which could have a material adverse effect on our business, liquidity, financial condition and results of operations.

Limits on Our Ability to Lend

The Bank’s legal lending limit as of December 31, 2014 was approximately $55 million for secured loans and $33 million for unsecured loans. While we believe we can accommodate the needs of substantially all of our target market, we compete with many financial institutions with larger lending limits.

BUSINESS STRATEGY RISK

We Compete Against Larger Banks and Other Institutions

We face substantial competition for deposits and loans in our market place. Competition for deposits primarily come from other commercial banks, savings institutions, thrift and loan associations, money market and mutual funds and other investment alternatives. Competition for loans come from other commercial banks, savings institutions, mortgage banking firms, thrift and loan associations and other financial intermediaries. Our larger competitors, by virtue of their larger capital resources, have substantially greater lending limits than we have. They also provide certain services for their customers, including trust and international banking, which we only are able to offer indirectly through our correspondent relationships. In addition, they have greater resources and are able to offer longer maturities and on occasion, lower rates on fixed rate loans.

There are Risks Related to Acquisitions

We have engaged in expansion through acquisitions and may consider acquisitions in the future. In November 2014, we completed a merger of 1^st Enterprise into the Bank and in July 2012, we completed a merger with Premier Commercial Bancorp and its subsidiary Premier Commercial Bank, N.A. In December 2010, we

acquired California Oaks State Bank. We cannot predict the frequency, size or timing of any future acquisitions, and we typically do not comment publicly on a possible acquisition until we have signed a definitive agreement. There can be no assurance that our acquisitions will have the anticipated positive results.

There are risks associated with any such expansion. These risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance from customers or employees, being unable to profitably deploy assets acquired in the transaction or litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition or resulting from the acquisition. Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings. To the extent we issue capital stock in connection with additional transactions, if any, these transactions and related stock issuances may have a dilutive effect on earnings per share and share ownership.

While our management is experienced in acquisition strategy and implementation, acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances that could result in loss or give assurances that our investigation or mitigation efforts will be sufficient to protect against any such loss.

In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial institutions with respect to proposed acquisitions.

Issuing Additional Shares Of Our Common Stock To Acquire Other Banks and Bank Holding Companies May Result In Dilution For Existing Shareholders and May Adversely Affect the Market Price Of Our Stock.

In connection with our growth strategy, we have issued, and may issue in the future, shares of our common stock to acquire additional banks or bank holding companies that may complement our organizational structure. Resales of substantial amounts of common stock in the public market and the potential of such sales could adversely affect the prevailing market price of our common stock and impair our ability to raise additional capital through the sale of equity securities. We usually must pay an acquisition premium above the fair market value of acquired assets for the acquisition of banks or bank holding companies. Paying this acquisition premium, in addition to the dilutive effect of issuing additional shares, may also adversely affect the prevailing market price of our common stock.

Impairment of Goodwill or Amortizable Intangible Assets Associated With Acquisitions Would Result In a Charge to Earnings

Goodwill is initially recorded at fair value and is not amortized, but is reviewed at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be fully recoverable. If our estimates of goodwill fair value change, we may determine that impairment charges are necessary. Estimates of fair value are determined based on a complex model using cash flows and company comparisons. If management’s estimates of future cash flows are inaccurate, the fair value determined could be inaccurate and impairment may not be recognized in a timely manner.

Our Decisions Regarding the Fair Value of Assets Acquired Could Be Different Than Initially Estimated Which Could Materially and Adversely Affect Our Business, Financial Condition, Results of Operations, and Future Prospects

We acquired portfolios of loans in the 1^st Enterprise, Premier Commercial Bancorp and California Oaks State Bank acquisitions. Although these loans were marked down to their estimated fair value pursuant to ASC 805 Business Combinations, there is no assurance that the acquired loans will not suffer further deterioration in

value resulting in additional charge-offs. The fluctuations in national, regional and local economic conditions may increase the level of charge-offs in the loan portfolios that we acquired from 1^st Enterprise, Premier Commercial Bancorp and California Oaks State Bank and correspondingly reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition, even if other favorable events occur.

We May Need to Raise Capital to Support Growth or Acquisition

While the Company’s and the Bank’s capital levels are currently in excess of that required to be considered “well capitalized” by regulatory agencies, organic growth or a strategic opportunity may require the Company to raise additional capital and/or to maintain capital levels in excess of “well capitalized”.

We Are Dependent on Key Personnel and the Loss of One or More of Those Key Personnel May Materially and Adversely Affect Our Prospects

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing, compliance and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives and certain other employees.

The Company Plans to Continue to Grow and There are Risks Associated with Growth

The Company intends to increase deposits and loans and to continue to review strategic opportunities which could, if implemented, expand its businesses and operations. Continued growth may present operating and other problems that could adversely affect its individual or combined business, financial condition and results of operations. Its growth may place a strain on its administrative and operational, personnel and financial resources and increase demands on its systems and controls. Our ability to manage growth successfully will depend on its ability to attract qualified personnel and maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms, as well as on factors beyond the our control, such as economic conditions and interest rate trends. If we grow too quickly and are not able to attract qualified personnel, control costs and maintain asset quality, this continued rapid growth could materially adversely affect our financial performance.

Our Deposit Portfolio Includes Significant Concentrations

As a business bank, we provide services to a number of customers whose deposit levels vary considerably and have a significant amount of seasonality. At December 31, 2014, 84 customers maintained balances (aggregating all related accounts, including multiple business entities and personal funds of business owners) in excess of $4 million. This amounted to $859 million or approximately 44 percent of the Bank’s total customer deposit base. These deposits can and do fluctuate substantially. While the loss of any combination of these depositors could have a material impact on the Bank’s results, the Bank expects, in the ordinary course of business, that these deposits will fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing one of these depositors, through additional liquidity, and business generation in the future. However, if a significant number of these customers leave the Bank it could have a material adverse impact on the Bank.

If We Cannot Attract Deposits and Quality Loans Our Growth May Be Inhibited

Our ability to increase our asset base depends in large part on our ability to attract additional deposits at favorable rates. We seek additional deposits by providing outstanding customer service and offering deposit products that are competitive with those offered by other financial institutions in our markets. In addition, our income depends in large part in attracting quality loan customers and loans in which to invest the deposits.

SBA Lending is Subject to Government Funding Which Can be Limited or Uncertain.

The Bank engages in SBA lending through programs designed by the federal government to assist the small business community in obtaining financing from financial institutions that are given government guarantees as an incentive to make the loans. SBA lending is subject to federal legislation that can affect the availability and funding of the program. From time to time, this dependence on legislative funding causes limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business.

OPERATIONAL AND REPUTATIONAL RISK

We Have a Continuing Need to Adapt to Technological Changes

The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology allows us to:

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serve our customers better;

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increase our operating efficiency by reducing operating costs;

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provide a wider range of products and services to our customers; and

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attract new customers.

Our future success will partially depend upon our ability to successfully use technology to provide products and services that will satisfy our customers’ demands for convenience, as well as to create additional operating efficiencies. Our larger competitors already have existing infrastructures or substantially greater resources to invest in technological improvements. We generally arrange for such services through service bureau arrangements or other arrangements with third parties.

Our Controls and Procedures Could Fail or Be Circumvented

Management regularly reviews and updates our internal controls, disclosure controls, procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of our controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect our business, results of operations and financial condition.

The Occurrence Of Fraudulent Activity, Breaches Of Our Information Security Or Cybersecurity-Related Incidents Could Have A Material Adverse Effect On Our Business, Financial Condition Or Results Of Operations.

As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and malware or other cyber-attacks. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, as well as attempts at security breaches and cybersecurity-related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some

cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.

Information pertaining to us and our clients is maintained, and transactions are executed, on the networks and systems of us, our clients and certain of our third party partners, such as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain our clients’ confidence. Breaches of information security also may occur, and in infrequent cases have occurred, through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’ confidential information, including employees. Furthermore, our cardholders use their debit and credit cards to make purchases from third parties or through third party processing services. As such, we are subject to risk from data breaches of such third party’s information systems or their payment processors. Such a data security breach could compromise our account information. We may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers’ card accounts, as well as for other costs related to data security breaches, such as replacing cards associated with compromised card accounts.

In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, our inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our clients; our loss of business and/or clients; damage to our reputation; the incurrence of additional expenses; disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability — any of which could have a material adverse effect on our business, financial condition and results of operations.

More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial condition or results of operations could be adversely affected.

We Could Be Liable For Breaches of Security In Our Online Banking Services. Fear of Security Breaches (including Cybersecurity breaches) Could Limit the Growth of Our Online Services

We offer various internet-based services to our clients, including online banking services. The secure transmission of confidential information over the Internet is essential to maintain our clients’ confidence in our online services. In certain cases, we are responsible for protecting customers’ proprietary information as well as their accounts with us. We have security measures and processes in place to defend against these cybersecurity risks but these cyber attacks are rapidly evolving (including computer viruses, malicious code, phishing or other information security breaches), and we may not be able to anticipate or prevent all such attacks, which could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information. Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology we use to protect client transaction data. In addition, individuals, groups or sovereign countries may seek to intentionally disrupt our online banking services or compromise the confidentiality of customer information with criminal intent. Although we have developed systems and processes that are designed to recognize and assist in preventing security breaches (and periodically test our security), failure to protect against or mitigate breaches of security could adversely affect

our ability to offer and grow our online services, constitute a breach of privacy or other laws, result in costly litigation and loss of customer relationships, negatively impact the Bank’s reputation, and could have an adverse effect on our business, results of operations and financial condition. We may also incur substantial increases in costs in an effort to minimize or mitigate cyber security risks and to respond to cyber incidents.

Our Operations Could be Disrupted

The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our technology and information systems, operational infrastructure and relationships with third parties and our colleagues in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes, but is not limited to, operational or systems failures, disruption of client operations and activities, ineffectiveness or exposure due to interruption in third party support as expected, as well as, the loss of key colleagues or failure on the part of key colleagues to perform properly.

Managing Reputational Risk Is Important To Attracting and Maintaining Customers, Investors, and Employees

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable, illegal, or fraudulent activities of our customers. We have policies and procedures in place that seek to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors, and employees, costly litigation, a decline in revenues and increased governmental regulation.

We Rely On Communications, Information, Operating and Financial Control Systems Technology from Third-Party Service Providers

We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including customer relationship management, internet banking, website, general ledger, deposit, loan servicing and wire origination systems. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, internet banking, website, general ledger, deposit, loan servicing and/or wire origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or interruptions could have a material adverse effect on our business, financial condition, results of operations and cash flows. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

The Costs and Effects of Litigation, Investigations or Similar Matters, or Adverse Facts and Developments Related Thereto, Could Materially Affect Our Business, Operating Results and Financial Condition

We may be involved from time to time in a variety of litigation, investigations or similar matters arising out of our business. Our insurance may not cover all claims that may be asserted against it and indemnification rights to which we are entitled may not be honored, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage, they could have a material adverse effect on our business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are rising. We may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all.

We May Incur Fines, Penalties And Other Negative Consequences From Regulatory Violations, Possibly Even Inadvertent Or Unintentional Violations.

We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations, but there can be no assurance that these will be effective. We may incur fines, penalties and other negative consequences from regulatory violations. We may suffer other negative consequences resulting from findings of noncompliance with laws and regulations, that may also damage our reputation, and this in turn might materially affect our business and results of operations.

Further, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there were in place at the time systems and procedures designed to ensure compliance. For example, we are subject to regulations issued by the OFAC that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations.

CU BANCORP RELATED RISKS

CU Bancorp is an Emerging Growth Company within the Meaning of the Securities Act. Certain Exemptions From Reporting Requirements that are Available to Emerging Growth Companies Could Make Its Common Stock Less Attractive to Investors.

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 ( the “JOBS Act”). CU Bancorp is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about its executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. CU Bancorp is also not subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes- Oxley Act”), including the additional level of review of its internal control over financial reporting as may occur when outside auditors attest as to its internal control over financial reporting. As a result, its shareholders may not have access to certain information they may deem important

Statutory Restrictions and Restrictions by Our Regulators on Dividends and Other Distributions from the Bank May Adversely Impact Us by Limiting the Amount Of Distributions CU Bancorp May Receive

The ability of the Bank to pay dividends to us is limited by various regulations and statutes and our ability to pay dividends on our outstanding stock is limited by various regulations and statutes, including California law.

Various statutory provisions restrict the amount of dividends that the Bank can pay to us without regulatory approval.

The Federal Reserve Board has previously issued Federal Reserve Supervision and Regulation Letter SR-09-4 that states that bank holding companies are expected to inform and consult with the Federal Reserve supervisory staff prior to taking any actions that could result in a diminished capital base, including any payment or increase in the rate of dividends. Further, if we are not current in our payment of interest on our Subordinated Debentures, we may not pay dividends on our common stock.

If the Bank were to liquidate, the Bank’s creditors would be entitled to receive distributions from the assets of the Bank to satisfy their claims against the Bank before Bancorp, as a holder of the equity interest in the Bank, would be entitled to receive any of the assets of the Bank as a distribution or dividend.

The restrictions described above could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our Board of Directors. We have never paid cash dividends on our common stock.

Our Series A Preferred Stock Diminishes the Cash Available To Our Common Shareholders.

On November 30, 2014, the Company entered into an Assignment and Assumption Agreement with the Secretary of the Treasury, pursuant to which the Company issued to the U.S. Treasury 16,400 shares of its Non-Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share and the Company assumed the obligations of 1^st Enterprise Bank in connection with its issuance of the same number and type of securities to the Treasury (which shares were retired in connection therewith). The issuance was pursuant to the Treasury’s SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010, which encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion.

The Series A Preferred Stock is entitled to receive non-cumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1. The current dividend rate is fixed at the current rate of 1% through January 2016.

If the Series A Preferred Stock remains outstanding beyond January 2016, the dividend rate will be fixed at 9%. Depending on our financial condition at the time, this increase in the Series A Preferred Stock annual dividend rate could have a material adverse effect on our liquidity and could also adversely affect our ability to pay dividends on our common shares.

Our Accounting Policies and Processes Are Critical To How We Report Our Financial Condition and Results Of Operations. They Require Management To Make Estimates About Matters That Are Uncertain.

Accounting policies and processes are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Several of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Pursuant to U.S. GAAP, we are required to make certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses.

Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability, or recognizing or reducing a liability. We have established policies and control procedures that are intended to ensure these critical accounting estimates and judgments are controlled and applied

consistently. Because of the uncertainty surrounding our judgments and the estimates pertaining to these matters,

we cannot guarantee that we will not be required to adjust accounting policies or restate prior period financial statements. See “Critical Accounting Policies” in the MD&A and Note 1, “Significant Accounting Policies,” to the Consolidated Financial Statements in this Form 10-K.

Our Disclosure Controls and Procedures May Not Prevent or Detect All Errors or Acts of Fraud.

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accurately accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision making can be faulty, that alternative reasoned judgments can be drawn, or that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected, which could result in a material weakness in our internal controls over financial reporting and the restatement of previously filed financial statements.

RISKS RELATED TO OUR STOCK

The Price of Our Common Stock May Be Volatile or May Decline

The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:

•

actual or anticipated quarterly fluctuations in our operating results and financial condition;

•

publication of research reports and recommendations by financial analysts;

•

failure to meet analysts’ revenue or earnings estimates;

•

speculation in the press or investment community;

•

strategic actions by us or our competitors, such as acquisitions or restructurings;

•

actions by institutional shareholders;

•

fluctuations in the stock price and operating results of our competitors;

•

general market conditions and, in particular, developments related to market conditions for the financial services industry;

•

proposed or adopted regulatory changes or developments;

•

anticipated or pending investigations, proceedings or litigation that involve or affect us;

•

deletion from a well known index; or

•

domestic and international economic factors unrelated to our performance.

The stock market and, in particular, the market for financial institution stocks, may experience significant volatility based on its history. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other

factors identified above in “ Forward-Looking Statements.” A significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.

The Holders Of Our Preferred Stock and Trust Preferred Securities Have Rights That Are Senior To Those Of Our Holders Of Common Stock And That May Impact Our Ability To Pay Dividends On Our Common Stock.

At December 31, 2014, our subsidiary trusts had outstanding $12.4 million of trust preferred securities. These securities are effectively senior to shares of common stock due to the priority of the underlying junior subordinated debt. As a result, we must make payments on our trust preferred securities before any dividends can be paid on our common stock; moreover, in the event of our bankruptcy, dissolution, or liquidation, the obligations outstanding with respect to our trust preferred securities must be satisfied before any distributions can be made to our shareholders. While we have the right to defer dividends on the trust preferred securities for a period of up to five years, if any such election is made, no dividends may be paid to our common or preferred shareholders during that time.

On November 30, 2014, the Company issued and sold 16,400 shares of Series A Preferred Stock to the Treasury in connection with the acquisition of 1^st Enterprise Bank and in replacement for similar securities previously issued to the Treasury by 1^st Enterprise pursuant to the Treasury’s SBLF program. The Series A Preferred Stock is entitled to receive non-cumulative dividends payable quarterly. Such dividends are not cumulative, but the Company may only declare and pay dividends on its common stock if it has declared and paid dividends for the current dividend period on the Series A Preferred Stock.

There Are Also Various Regulatory Restrictions On The Ability Of California United Bank To Pay Dividends Or Make Other Payments To CU Bancorp. In Particular, Federal And State Banking Laws Regulate The Amount Of Dividends That May Be Paid By California United Bank Without Prior Approval.

The Dodd-Frank Act requires federal banking agencies to establish more stringent risk-based capital guidelines and leverage limits applicable to banks and bank holding companies. In July 2013, the federal banking regulators issued final rules, which, among other things, are intended to implement in the United States the Basel Committee on Banking Supervision’s regulatory capital guidelines, including the reforms known as Basel III. The final Basel III capital standards issued by the FRB provide that distributions (including dividend payments and redemptions) on additional Tier 1 capital instruments may only be paid out of net income, retained earnings, or surplus related to other additional Tier 1 capital instruments. The final Basel III capital standards also introduce a new capital conservation buffer on top of the minimum risk-based capital ratios. Failure to maintain a capital conservation buffer above certain levels will result in restrictions on CU Bancorp’s ability to make dividend payments, redemptions or other capital distributions. These requirements, and any other new regulations or capital distribution constraints, could adversely affect the ability of California United Bank to pay dividends to CU Bancorp and, in turn, affect CU Bancorp’s ability to pay dividends on the CU Bancorp common stock and/or the CU Bancorp preferred stock.

The Federal Reserve Board may also, as a supervisory matter, otherwise limit CU Bancorp’s ability to pay dividends on the CU Bancorp common stock and/or the CU Bancorp preferred stock.

In addition, the CU Bancorp common stock and the CU Bancorp preferred stock may be fully subordinate to interests held by the U.S. government in the event of a receivership, insolvency, liquidation, or similar proceeding, including a proceeding under the “orderly liquidation authority” provisions of the Dodd-Frank Act.

CU Bancorp May Be Unable To, Or Choose Not To, Pay Dividends On Its Common Stock.

To date, CU Bancorp has not paid any cash dividends. Payment of stock or cash dividends in the future will depend on the following factors, among others:

•

CU Bancorp may not have sufficient earnings since its primary source of income, the payment of dividends to it by California United Bank, is subject to federal and state laws that limit the ability of California United Bank to pay dividends;

•

Federal Reserve Board policy requires bank holding companies to pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition;

•

Before dividends may be paid on CU Bancorp’s common stock in any year, payments must be made on its subordinated debentures or the CU Bancorp preferred stock issued in connection with the merger with 1^st Enterprise;

•

CU Bancorp’s board of directors may determine that, even though funds are available for dividend payments, retaining the funds for internal uses, such as expansion of its operations, is a better strategy;

If CU Bancorp fails to pay dividends, capital appreciation, if any, of its common stock may be the sole opportunity for gains on an investment in its common stock. In addition, in the event California United Bank becomes unable to pay dividends to it, CU Bancorp may not be able to service its debt, pay its other obligations or pay dividends on its common stock. Accordingly, CU Bancorp’s inability to receive dividends from its bank subsidiary could also have a material adverse effect on its business, financial condition and results of operations and the value of CU Bancorp common stock. Further, the terms of the CU Bancorp preferred stock that was exchanged for 1st Enterprise preferred stock in the merger limit CU Bancorp’s ability to pay dividends on its common stock.

CU Bancorp’s Stock Trading Volume May Not Provide Adequate Liquidity For Investors.

Although shares of CU Bancorp’s common stock are listed for trading on The NASDAQ Capital Market, the average daily trading volume in the common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of a sufficient number of willing buyers and sellers of the common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which CU Bancorp has no control. Given the daily average trading volume of CU Bancorp’s common stock, significant sales of the common stock in a brief period of time, or the expectation of these sales, could cause a decline in the price of its common stock.

ITEM 2 — PROPERTIES

The principal executive offices of the Company are located in Los Angeles, California, and are leased by the Company. All of our branch locations are leased from unaffiliated parties.

We believe that our existing facilities are adequate for our present purposes. The Company leases all its facilities and believes that if necessary, it could secure suitable alternative facilities on similar terms without adversely affecting operations. For additional information on properties, see Note 7 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

ITEM 3 — LEGAL PROCEEDINGS

The Company is not a defendant in any material pending legal proceedings and no such proceedings are known to be contemplated. No director, officer, affiliate, more than 5.0% shareholder of the Company or any associate of these persons is a party adverse to the Company or has a material interest adverse to the Company in any material legal proceeding. See Note 21 — Commitments and Contingencies to the Consolidated Financial Statements included in Item 8 of this 10-K.

ITEM 4 — MINE SAFETY DISCLOSURES

Not applicable

PART II

ITEM 5 — MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

The Company’s shares of common stock trade on the NASDAQ Capital Market under the symbol “CUNB”. The Company’s common stock began trading on the NASDAQ exchange on October 10, 2012, prior to that date the stock traded on the OTCBB.

There are 75,000,000 shares of common stock authorized at no par value, of which 16,683,856 shares and 11,081,364 shares were issued and outstanding at December 31, 2014 and 2013, respectively.

The increase in common stock in the current year was primarily due to the merger with 1st Enterprise Bank (“1^st Enterprise”) that was completed on November 30, 2014. 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 5,240,409 shares of CU Bancorp common stock issued. The fair value of the CU Bancorp common stock issued as part of the consideration paid was $102.7 million and was determined based on the closing market price of $19.60 of CU Bancorp common stock on November 30, 2014. For further information, refer to Note 2, Business Combinations, and Note 16, Stock Options and Restricted Stock included in Item 8, Financial Statements and Supplementary Data.

Preferred Stock

The Company has 50,000,000 shares of serial preferred stock authorized. At December 31, 2014, the Company has 16,400 shares of Series A, non-cumulative perpetual preferred stock authorized, issued and outstanding. Each Series A preferred stock has a liquidation preference of $1,000 per share. No preferred shares were issued or outstanding at December 31, 2013.

Sales Price Information

The information in the following table indicates the highest and lowest sales prices and volume of trading for the Company’s common stock for the two year period starting January 1, 2013 through December 31, 2014 for each quarterly period, and is based upon information provided by either NASDAQ or from the OTC Bulletin Board. The information does not include transactions for which no public records are available. The bid and ask trading prices of the stock may be higher or lower than the prices reported below. These prices are based on the actual prices of stock transactions without retail mark-ups, mark-downs, commissions or adjustments.


Period Ended	High Price		Low Price		Approximate Number of Shares Traded
March 31, 2013	$	13.00	$	11.70		520,627
June 30, 2013	$	15.95	$	12.75		2,794,835
September 30, 2013	$	18.74	$	15.50		1,707,130
December 31, 2013	$	19.30	$	16.91		1,405,179
March 31, 2014	$	18.50	$	17.00		1,320,746
June 30, 2014	$	19.50	$	17.87		1,152,051
September 30, 2014	$	19.50	$	16.49		1,160,006
December 31, 2014	$	22.45	$	18.50		1,172,521

According to information provided by NASDAQ, the most recent trade in our common stock prior to the date of finalizing this Form 10-K occurred on March 9, 2015 at a sales price of $20.92 per share. The high “bid” and low “asked” prices as of March 9, 2015 were $20.98 and $20.80, respectively.

Shareholders

As of March 9, 2015, the Company had 700 common shareholders of record, as listed with its transfer agent.

Dividends

In December 2014, the Board of Directors approved a quarterly dividend payment on the preferred stock in the amount of $41,000 to the United States Department of the Treasury. To date, the Company has not paid any cash dividends on common stock.

The applicable limitations on the payment of dividends are further discussed in Item 8, Financial Statements and Supplementary Data, Note 22, Regulatory Matters.

Common Stock Redemptions

In 2014 and 2013, the Company redeemed 26,317 and 29,863 shares respectively, of employee restricted stock to pay the tax obligation of employees in connection with their restricted stock vesting. The total value of the employee tax obligation remitted by the Company was $471,000 and $422,000 for the years ending December 31, 2014 and 2013, respectively. The Company purchased 110 shares of common stock at an average price per share of $18.50 during the 2014 fourth quarter.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2014 with respect to the shares of our common stock that may be issued under existing equity compensation plans. This table does not reflect the number of restricted shares of stock that have been issued under the Company’s equity compensation plans. The number of shares of common stock remaining available for future issuance under the equity compensation plans has been reduced by both stock option grants and restricted stock issued under the plans.


Plan	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the second column)
Equity Compensation Plans Approved by Security Holders:
Employee Plan (2005) (terminated)		201,000	$	17.54		—
2007 Equity and Incentive Compensation Plan		815,490	$	8.30		699,505

Total		1,016,490	$	10.1318		699,505

As part of the merger with 1st Enterprise, CU Bancorp adopted the 1st Enterprise Bank 2006 Stock Incentive Plan, as amended (“2006 Stock Incentive Plan”), as its own equity plan and all stock options granted by 1^st Enterprise thereunder were fully vested and exercisable and were converted to CU Bancorp stock options on substantially the same terms but adjusted to reflect the exchange ratio set forth in the Merger Agreement. At December 31, 2014, there are 745,757 options outstanding under the 2006 Stock Incentive Plan with a weighted-average exercise price of $7.86 per share. No new equity awards will be granted under the 2006 Stock Incentive Plan.

Performance Graph

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing. The following Performance Graph was prepared for the Company by SNL Financial.

The following graph compares the yearly percentage change in CU Bancorp’s cumulative total shareholder return on common stock, the cumulative total return of the NASDAQ Composite and the SNL Bank and Thrift Index.

The graph assumes an initial investment value of $100 on December 31, 2009. Points on the graph represent the performance as of the last business day of each of the quarters indicated. The graph is not necessarily indicative of future price performance.

LOGO


	Period Ending
Index	12/31/09		12/31/10		12/31/11		12/31/12		12/31/13		12/31/14
CU Bancorp		100.00		113.82		92.63		107.93		161.11		199.91
NASDAQ Composite		100.00		118.15		117.22		138.02		193.47		222.16
SNL Bank and Thrift		100.00		111.64		86.81		116.57		159.61		178.18

ITEM 6 — SELECTED FINANCIAL DATA

The following tables set forth selected historical financial data for CU Bancorp and its wholly-owned subsidiary, California United Bank, for the dates indicated (dollars in thousands except per share and other data). This data should be read in conjunction with CU Bancorp’s consolidated financial statements and related footnotes included in “ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES” contained herein. Historical information can be found in CU Bancorp’s Annual Report on Form 10-K for the years ended December 31, 2013 and 2012, and in reports filed by California United Bank with the FDIC for the previous years.


	As of and for the Years ended December 31,
	2014			2013			2012			2011			2010
Statements of Operations:
Interest income	$	55,177		$	50,846		$	37,496		$	28,756		$	20,566
Interest expense		1,922			2,079			1,797			1,316			2,191

Net interest income		53,255			48,767			35,699			27,440			18,375
Provision for loan losses		2,239			2,852			1,768			1,442			2,542

Net interest income after provision for loan losses		51,016			45,915			33,931			25,998			15,833
Non-interest income		7,709			6,518			3,961			2,362			1,111
Non-interest expense		(43,385	)		(37,640	)		(34,500	)		(25,746	)		(20,370	)

Net income (loss) from operations		15,340			14,793			3,392			2,614			(3,426	)
Provision for income tax (benefit)		6,432			5,008			1,665			1,147			(1,143	)

Net Income (Loss)	$	8,908		$	9,785		$	1,727		$	1,467		$	(2,283	)

Per Share and Other Data:
Basic income (loss) per share	$	0.77		$	0.93		$	0.21		$	0.23		$	(0.45	)
Diluted income (loss) per share		0.75			0.90			0.21			0.22			(0.45	)
Book value per common share (1)		15.78			12.45			11.68			11.63			11.32
Tangible book value per common share (2)		11.37			11.11			10.37			10.61			10.22
Weighted average shares outstanding — Basic		11,393,445			10,567,436			8,283,599			6,460,104			5,110,901
Weighted average shares outstanding — Diluted		11,667,733			10,836,861			8,410,749			6,635,862			5,110,901
Balance Sheet Data:
Investment securities available-for-sale	$	226,962		$	106,488		$	118,153		$	114,091		$	96,174
Investment securities held-to-maturity		47,147			—			—			—			—
Loans, net		1,612,113			922,591			846,082			481,765			415,403
Total Assets		2,265,117			1,407,816			1,249,637			800,204			756,284
Deposits		1,947,693			1,232,423			1,078,076			690,756			657,967
Non-interest bearing demand deposits		1,032,634			632,192			543,527			381,492			277,783
Securities sold under agreements to repurchase		9,411			11,141			22,857			26,187			22,862
Federal Home Loan Bank borrowings		—			—			—			—			5,545
Shareholders’ equity		279,192			137,924			125,623			80,844			67,274
Selected Financial Ratios
Return on Average Assets (3)		0.59	%		0.74	%		0.16	%		0.19	%		(0.42	)%
Return on Average Equity (4)		5.76	%		7.46	%		1.57	%		1.91	%		(3.86	)%
Dividend Payout Ratio		—			—			—			—			—
Equity to Assets Ratio (5)		12.33	%		9.80	%		10.05	%		10.10	%		8.90	%
Tangible Common Equity to Asset Ratio (6)		8.66	%		8.84	%		9.03	%		9.30	%		8.10	%
Loans to Deposits Ratio		83.42	%		75.72	%		79.30	%		70.83	%		64.02	%
Efficiency Ratio (7)		71	%		68	%		87	%		86	%		104	%
Net Interest Margin (8)		3.79	%		3.96	%		3.63	%		3.70	%		3.49	%
Asset Quality
Allowance for loan loss as a % of total loans		0.78	%		1.14	%		1.03	%		1.53	%		1.39	%
Allowance for loan loss as a % of total loans (excluding loans acquired in acquisitions)		1.39	%		1.50	%		1.54	%		1.75	%		1.75	%
Non Performing Assets to Total Assets		0.21	%		0.68	%		0.84	%		0.77	%		1.27	%
Net Charge-offs/(Recoveries) to Average Loans		0.02	%		0.12	%		0.08	%		(0.04	)%		0.49	%
Regulatory Capital Ratios (California United Bank)
Total Risk-Based Capital Ratio		11.2	%		12.0	%		11.6	%		12.1	%		17.5	%
Tier 1 Risk-Based Capital Ratio		10.6	%		11.0	%		10.7	%		11.0	%		16.3	%
Tier 1 Leverage Ratio		12.4	%		8.9	%		8.6	%		9.5	%		12.7	%
Regulatory Capital Ratios (CU Bancorp Consolidated)
Total Risk-Based Capital Ratio		11.6	%		12.8	%		12.4	%
Tier 1 Risk-Based Capital Ratio		11.0	%		11.8	%		11.5	%
Tier 1 Leverage Ratio		12.9	%		9.6	%		9.1	%

(1)

Book value per common share is calculated by dividing shareholders’ equity of $279,192,000 by the total number of shares outstanding (16,683,856 shares) at December 31, 2014, shareholder’s equity of $137,924,000 by the total number of shares outstanding (11,081,364 shares) at December 31, 2013, shareholder’s equity of $125,623,000 by the total number of shares outstanding (10,758,674 shares) at December 31, 2012, shareholders’ equity of $80,844,000 by the total number of shares outstanding (6,950,098 shares) at December 31, 2011, and shareholders’ equity of $67,274,000 by the total number of shares outstanding (5,942,636 shares) at December 31, 2010.

(2)

Tangible book value per common share is calculated by dividing tangible shareholders’ equity (shareholders’ equity less preferred stock, goodwill and core deposit and leasehold right intangibles) of $189,691,000 by the total number of shares outstanding (16,683,856 shares) at December 31, 2014, $123,107,000 by the total number of shares outstanding (11,081,364 shares) at December 31, 2013, $111,584,000 by the total number of shares outstanding (10,758,674 shares) at December 31, 2012, $73,728,000 by the total number of shares outstanding (6,950,098 shares) at December 31, 2011, $60,739,000 by the total number of shares outstanding (5,942,636 shares) at December 31, 2010.

(3)

Return on average assets is calculated by dividing the net income (loss) available to common shareholders by the average assets for the period. The average assets used in the calculations were based on the daily average outstanding assets of the Company for the years ending December 31, 2014, 2013, 2012, 2011, and 2010.

(4)

Return on average equity is calculated by dividing the Company’s net income (loss) available to common shareholders by the average equity for the period. The average equity used in the calculations was based on the daily average outstanding equity of the Company for the years ending December 31, 2014, 2013, 2012, 2011, and 2010.

(5)	The equity to assets ratio was calculated by dividing the Company’s shareholders’ equity by the Company’s total assets for the appropriate period.

(6)

The tangible common equity to assets ratio was calculated by dividing the Company’s shareholders’ equity less preferred stock, goodwill and core deposit and leasehold right intangibles by the Company’s total tangible assets (total assets less goodwill and core deposit and leasehold right intangibles) for the appropriate period.

(7)	The efficiency ratio represents non-interest expense as a percent of net interest income plus non-interest income, excluding gain on sale of securities, net.

(8)	The net interest margin represents net interest income as a percent of interest bearing assets.

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations is intended to provide a better understanding of the significant changes in trends relating to the Company’s financial condition, results of operation, liquidity and interest rate sensitivity. This section should be read in conjunction with the disclosures regarding “Forward-Looking Statements” set forth in “Item I. Business – Forward-Looking Statements,” as well as the discussion set forth in “Item 8. Financial Statements and Supplementary Data,” including the notes to consolidated financial statements.

OVERVIEW

On December 1, 2014, the Company issued a press release announcing the completion of the merger of 1^st Enterprise Bank into California United Bank on November 30, 2014, 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 was converted into the right to receive 1.3450 of a share of the CU Bancorp common stock, resulting in 5.2 million shares of CU Bancorp common stock issued. The fair value of the 5.2 million common stock issued as part of the consideration paid ($102.7 million) was determined based on the basis of 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 (the “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 were fully vested and exercisable, and were converted to CU Bancorp stock options on substantially the same terms but adjusted to reflect the exchange ratio set forth in the Merger Agreement and applicable Internal Revenue Code provisions and related regulations. 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. For further information on the merger, see Note 2 – Business Combinations, and Note 16—Stock Options and Restricted Stock included in Item 8. Financial Statements and Supplementary Data.

The comparability of financial information for the full year of 2014 to 2013 is affected by the Company’s acquisition of 1^st Enterprise effective November 30, 2014. Operating results for the full year of 2014 include the combined operations of both entities from December 1, 2014.

Full Year 2014 Highlights

•

Core earnings of $11.4 million for 2014, an increase of $1.6 million or 16.3% from 2013

•

Net income in 2014 before the provision for income taxes and excluding merger-related charges was $18.8 million, up 27% from the prior year

•

Net interest income increased to $53.3 million for 2014, an increase of $4.5 million, or 9.2% from 2013

•

Total assets increased $833 million to $2.3 billion, as a result of the merger

•

Total loans increased to $1.6 billion, as a result of the merger and organic loan growth

•

Total deposits increased to $1.9 billion, as a result of the merger

•

Non-interest bearing demand deposits were 53% of total deposits

•

Excluding the effect of the 1st Enterprise merger, total loans increased $144.1 million or 15.4% from December 31, 2013, to $1.1 billion funded by excess liquidity of the Company and deposit growth of $26.5 million

•

Nonperforming assets to total assets decreased to 0.21%, at December 31, 2014, from 0.68% at December 31, 2013

•

Continued status as well-capitalized, the highest regulatory category

Total assets increased $857.3 million or 60.9% from December 31, 2013 to $2.3 billion, mainly due to deposit growth of $715.3 million and earnings of $8.9 million. Loan growth during the period was primarily in Commercial and Industrial loans of $229.5 million, Owner-Occupied Nonresidential Properties of $141.7 million and Other Nonresidential Property loans of $209.7 million. Deposit growth during the same period consisted of an increase in non-interest bearing demand deposits of $400.4 million, interest bearing deposits of $50.8 million and money markets and savings deposits of $262.8 million. At December 31, 2014 and December 31, 2013, non-interest bearing deposits represented 56% and 51% 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 accounting for business combinations, evaluation of goodwill for impairment, methodologies that determine our allowance for loan loss, the valuation of impaired loans, the classification and valuation of investment securities, accounting for derivatives financial instruments and hedging activities, and accounting for income taxes.

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:

Business Combinations

The Company has a number of fair value adjustments recorded within the consolidated financial statements at December 31, 2014 that were created from the business combinations with California Oaks State Bank (COSB), Premier Commercial Bancorp (PC Bancorp) and 1^st Enterprise Bank (1^st 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.

Based on the Company’s 2014 goodwill impairment analysis, no impairment to goodwill has occurred. The Company is a sole reporting unit for evaluation of goodwill. We believe the estimated fair value of the Company is above its carrying value at December 31, 2014.

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 weighted remaining life of the core deposit intangible is estimated at approximately 7 years at December 31, 2014. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

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. For non-PCI loans, loan fair value adjustments consist of an interest rate premium or discount on each individual loan and are amortized to loan interest income based on the effective yield method over the remaining life of the loans.

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 charge-offs 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 December 31, 2014 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 reserve is established when the fair 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.

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:

•

are evaluated by comparing the fair value of the collateral less costs to sell, 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.

•

Not all impaired loans require a specific reserve. 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 reserve nor a specific reserve 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 or 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 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. The Company’s investment in the common stock of the FHLB, Pacific Coast Bankers Bank (“PCBB”) and The Independent Banker’s Bank (“TIB”) and the preferred stock of TIB is carried at cost and is included in other assets on the accompanying consolidated balance sheets.

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. and 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.

Income Taxes

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.

Recent Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies in Item 8, Financial Statements and Supplementary Data.

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):


	Years Ended December 31,						Increase / (Decrease)
	2014			2013			$			%
Net Income Available to Common Shareholders	$	8,908		$	9,785		$	(877	)		(9.0	)%

Earnings per share
Basic	$	0.77		$	0.93		$	(0.16	)		(17.2	)%
Diluted	$	0.75		$	0.90		$	(0.15	)		(16.7	)%
Return on average assets (1)		0.59	%		0.74	%		(0.15	)%		(20.3	)%
Return on average equity (2)		5.76	%		7.46	%		(1.70	)%		(22.8	)%
Net interest rate spread (3)		3.62	%		3.95	%		(0.16	)%		(4.1	)%
Net interest margin (4)		3.79	%		3.96	%		(0.17	)%		(4.3	)%
Efficiency ratio (5)		71.00	%		68.00	%		3.00	%		4.4	%


	Years Ended December 31,						Increase / (Decrease)
	2013			2012			$			%
Net Income Available to Common Shareholders	$	9,785		$	1,727		$	8,058			466.6	%

Earnings per share
Basic	$	0.93		$	0.21		$	0.72			342.9	%
Diluted	$	0.90		$	0.21		$	0.69			328.6	%
Return on average assets (1)		0.74	%		0.16	%		0.58	%		362.5	%
Return on average equity (2)		7.46	%		1.57	%		5.89	%		375.2	%
Net interest rate spread (3)		3.78	%		3.43	%		0.52	%		15.2	%
Net interest margin (4)		3.96	%		3.63	%		0.33	%		9.1	%
Efficiency ratio (5)		68.00	%		87.00	%		(19.00	)%		(21.8	)%

(1)	Return on average assets is calculated by dividing the net income (loss) available to common shareholders by the average assets for the period.

(2)	Return on average equity is calculated by dividing the Company’s net income (loss) available to common shareholders by the average equity for the period.

(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)	The net interest margin represents net interest income as a percent of interest bearing assets

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

The Company’s increase in total assets over the last nine years is due to the Company’s execution of its primary business model focusing on businesses, non-profits, entrepreneurs, professionals and investors, supplemented by the mergers with 1^st Enterprise in November 2014, PC Bancorp in July of 2012 and COSB in December of 2010. The Company is organized and operated as a single reporting segment, principally engaged in commercial business banking. At December 31, 2014, the Company conducted its lending and deposit operations through ten branch offices, located in the counties of Los Angeles, Ventura, Orange and San Bernardino in Southern California. The consolidated financial statements, as they appear in this document, represent the grouping of revenue and expense items as they are presented to executive management for use in strategically directing the Company’s operations. The Company’s growth in loans and deposit liabilities during 2014 was the direct result of the 1^st Enterprise merger, and successfully executing its growth strategies by maintaining existing customer relationships, in addition to adding new customer relationships. The increase in the customer base is a result of establishing new customer relationships from referrals from Board members, current customers, and the local communities the Company actively supports. In addition, the Company targets potential customers whose current bank may be unable to provide the same level of customer support that the customer has come to desire.

Operations Performance Summary

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Net income available to common shareholders for the year ended December 31, 2014 was $8.9 million, or $0.75 per diluted share, compared to $9.8 million, or $0.90 per diluted share for the year ended December 31, 2013. The $877,000 decrease, or 9.0%, was primarily due to $3.5 million ($2.6 million, net of taxes) in charges related to the 1^st Enterprise merger. Operating results for the full year of 2014 include the combined operations of both California United Bank and 1^st Enterprise Bank from December 1, 2014. Despite charges related to the merger during 2014, net interest income increased $4.5 million, provision for loan losses decreased $613,000, non-interest income increased $1.2 million, offset by an increase in non-interest expense of $2.2 million excluding the $3.5 million merger-related charge discussed above. The increase in the tax provision of $1.4 million and a higher effective tax rate is primarily due to the inclusion of significant non-deductible merger costs in 2014 related to the 1^st Enterprise merger which were not subject to the same percentage of tax deductibility. Each of these increases and or decreases is more fully described below.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net income for the year ended December 31, 2013 was $9.8 million, or $0.90 per diluted share, compared to $1.7 million, or $0.21 per diluted share for the year ended December 31, 2012. The $8.1 million increase, or 466.6%, was primarily due the acquisition of PC Bancorp in July 2012 having a full year impact on operating results of 2013, coupled with organic loan growth of $137 million. During 2013, net interest income increased $13.1 million, non-interest income increased $2.6 million, offset by an increase in provision for loan losses of $1.1 million and an increase in non-interest expense of $6.2 million excluding a $3.0 million decrease in merger related expenses from 2012. The increase in the tax provision of $3.3 million but a lower effective tax rate is primarily due to the inclusion of significant non-deductible merger costs in 2012 related to the PC Bancorp acquisition which were not subject to the same percentage of tax deductibility. Each of these increases and or decreases is more fully described below.

Average Balances, Interest Income and Expense, Yields and Rates

Years Ended December 31, 2014 and 2013

The following table presents 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).


	Years Ended December 31,
	2014							2013
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
Interest earning Assets:
Deposits in other financial institutions	$	265,076	$	926		0.34	%		245,102		732		0.29	%
Investment securities (1)		129,841		2,369		1.82	%		106,806		1,913		1.79	%
Loans (2)		1,010,030		51,882		5.14	%		878,705		48,201		5.49	%

Total interest earning assets		1,404,947		55,177		3.93	%		1,230,613		50,846		4.13	%

Non-interest earning assets		95,818							91,975

Total assets	$	1,500,765						$	1,322,588

Interest bearing Liabilities:
Interest bearing transaction accounts	$	153,327	$	278		0.18	%	$	130,247	$	238		0.18	%
Money market and savings deposits		390,185		963		0.25	%		361,486		1,027		0.28	%
Certificates of deposit		61,048		216		0.35	%		65,943		255		0.39	%

Total interest bearing deposits		604,560		1,457		0.24	%		557,676		1,520		0.27	%
Subordinated debentures		9,556		431		4.45	%		9,368		485		5.11	%
Securities sold under agreements to repurchase		13,579		34		0.25	%		24,376		74		0.30	%

Total borrowings		23,135		465		2.01	%		33,744		559		1.66	%

Total interest bearing liabilities		627,695		1,922		0.31	%		591,420		2,079		0.35	%

Non-interest bearing demand deposits		704,437							587,637

Total funding sources		1,332,132							1,179,057
Non-interest bearing liabilities		16,133							12,244
Shareholders’ equity		152,500							131,244

Total liabilities and shareholders’ equity	$	1,500,765						$	1,322,588

Net interest income			$	53,255						$	48,767

Net interest rate spread (3)						3.62	%						3.78	%
Net interest margin (4)						3.79	%						3.96	%
Core net interest margin (5)						3.64	%						3.78	%

(1)	Average balances of investment securities available-for-sale are presented on an amortized cost basis and thus do not include the unrealized market gain or loss on the securities.

(2)	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.

(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 net interest income by average total interest earning assets.

(5)

Core net interest margin is computed by dividing 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.

Average Balances, Interest Income and Expense, Yields and Rates

Years Ended December 31, 2013 and 2012


	Years Ended December 31,
	2013							2012
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
Interest earning Assets:
Deposits in other financial institutions	$	245,102	$	732		0.29	%	$	264,687	$	807		0.30	%
Investment securities (1)		106,806		1,913		1.79	%		111,928		2,421		2.16	%
Loans (2)		878,705		48,201		5.49	%		606,142		34,268		5.65	%

Total interest earning assets		1,230,613		50,846		4.13	%		982,757		37,496		3.82	%

Non-interest earning assets		91,975							63,420

Total assets	$	1,322,588						$	1,046,177

Interest bearing Liabilities:
Interest bearing transaction accounts	$	130,247	$	238		0.18	%	$	87,923	$	184		0.21	%
Money market and savings deposits		361,486		1,027		0.28	%		278,635		927		0.33	%
Certificates of deposit		65,943		255		0.39	%		64,964		264		0.41	%

Total interest bearing deposits		557,676		1,520		0.27	%		431,522		1,375		0.32	%
Federal Home Loan Bank borrowings		—		—					—		—
Subordinated debentures		9,368		485		5.11	%		3,825		332		8.68	%
Securities sold under agreements to repurchase		24,376		74		0.30	%		26,027		90		0.35	%

Total borrowings		33,744		559		1.66	%		29,852		422		1.41	%

Total interest bearing liabilities		591,420		2,079		0.35	%		461,374		1,797		0.39	%

Non-interest bearing demand deposits		587,637							477,792

Total funding sources		1,179,057							936,166
Non-interest bearing liabilities		12,244							7,029
Shareholders’ equity		131,244							99,982

Total liabilities and shareholders’ equity	$	1,322,588						$	1,046,177

Net interest income			$	48,767						$	35,699

Net interest rate spread (3)						3.78	%						3.43	%
Net interest margin (4)						3.96	%						3.63	%
Core net interest margin (5)						3.78	%						3.55	%

(1)	Average balances of investment securities available-for-sale are presented on an amortized cost basis and thus do not include the unrealized market gain or loss on the securities.

(2)	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.

(3)	Net interest rate spread represents the yield earned on average total interest earning assets less the rate paid on total average interest bearing liabilities.

(4)	Net interest margin is computed by dividing net interest income by average total interest earning assets.

(5)

Reconciliation of Core Net Interest Margin to Net Interest Margin

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):


	Years Ended December 31,
	2014			2013			2012
Net Interest Income	$	53,255		$	48,767		$	35,699
Less: Interest recovered (reversed) on non-accrual loans		227			(5	)		—
Accelerated accretion of fair value adjustments on early loan payoffs		1,789			2,234			836

Core Net Interest Income	$	51,239		$	46,538		$	34,863

Net interest margin		3.79	%		3.96	%		3.63	%
Core net interest margin		3.64	%		3.78	%		3.55	%

Composition of Net Deferred Loan Fees, Costs and Fair Value Discount

The following table reflects the composition of the net deferred loan fees, costs and fair value discounts at December 31, 2014 and 2013 (dollars in thousands):


	Years Ended December 31,
	2014		2013
Accreting discount	$	21,726	$	7,912
Non accreting loan discount		567		2,683

Acquired loans remaining discount		22,293		10,595
Organic loans net deferred fees		3,471		2,014

Total	$	25,763	$	12,609

Net Changes in Average Balances, Composition, Yields and Rates

Years Ended December 31, 2014 and 2013

The following table sets 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):


	Years Ended December 31,
	2014								2013								Increase (Decrease)
	Average Balance		% of Total			Average Yield/ Rate			Average Balance		% of Total			Average Yield/ Rate			Average Balance			% of Total			Average Yield/ Rate
Interest earning Assets:
Deposits in other financial institutions	$	265,076		18.9	%		0.34	%	$	245,102		19.9	%		0.29	%	$	19,974			(1.0	)%		0.05	%
Investment securities		129,841		9.2	%		1.82	%		106,806		8.7	%		1.79	%		23,035			0.6	%		0.03	%
Loans		1,010,030		71.9	%		5.14	%		878,705		71.4	%		5.49	%		131,325			0.5	%		(0.35	)%

Total interest earning assets	$	1,404,947		100.0	%		3.93	%	$	1,230,613		100.0	%		4.13	%	$	174,334						(0.20	)%

Funding Sources:
Non-interest bearing demand deposits	$	704,437		52.9	%				$	587,637		49.8	%				$	116,800			3.0	%
Interest bearing transaction accounts		153,327		11.5	%		0.18	%		130,247		11.0	%		0.18	%		23,080			0.5	%		0.00	%
Money market and savings deposits		390,185		29.3	%		0.25	%		361,486		30.7	%		0.28	%		28,699			(1.4	)%		(0.03	)%
Certificates of deposit		61,048		4.6	%		0.35	%		65,943		5.6	%		0.39	%		(4,895	)		(1.0	)%		(0.04	)%

Total deposits		1,308,997		98.3	%		0.11	%		1,145,313		97.1	%		0.13	%		163,684			1.1	%		(0.02	)%
Subordinated debentures		9,556		0.7	%		4.45	%		9,368		0.8	%		5.11	%		188			(0.1	)%		(0.66	)%
Securities sold under agreements to repurchase		13,579		1.0	%		0.25	%		24,376		2.1	%		0.30	%		(10,797	)		(1.0	)%		(0.05	)%

Total borrowings		23,135		1.7	%		2.01	%		33,744		2.9	%		1.66	%		(10,609	)		(1.1	)%		0.35	%

Total funding sources	$	1,332,132		100.0	%		0.14	%	$	1,179,057		100.0	%		0.18	%	$	153,075						(0.04	)%

Excess of interest earning assets over funding sources	$	72,815							$	51,556							$	21,259
Net interest rate spread							3.62	%							3.78	%								(0.16	)%
Net interest margin							3.79	%							3.96	%								(0.17	)%
Core net interest margin							3.64	%							3.78	%								(0.15	)%

Net Changes in Average Balances, Composition, Yields and Rates

Years Ended December 31, 2013 and 2012


	Years Ended December 31,
	2013								2012								Increase (Decrease)
	Average Balance		% of Total			Average Yield/ Rate			Average Balance		% of Total			Average Yield/ Rate			Average Balance			% of Total			Average Yield/ Rate
Interest earning Assets:
Deposits in other financial institutions		245,102		19.9	%		0.29	%		264,687		26.9	%		0.30	%		(19,585	)		(7.0	)%		(0.01	)%
Investment securities		106,806		8.7	%		1.79	%		111,928		11.4	%		2.16	%		(5,122	)		(2.7	)%		(0.37	)%
Loans	$	878,705		71.4	%		5.49	%	$	606,142		61.7	%		5.65	%	$	272,563			9.7	%		(0.16	)%

Total interest earning assets	$	1,230,613		100.0	%		4.13	%	$	982,757		100.0	%		3.82	%	$	247,856						0.31	%

Funding Sources:
Non-interest bearing demand deposits	$	587,637		49.8	%				$	477,792		50.9	%				$	109,845			(1.0	)%
Interest bearing transaction accounts		130,247		11.0	%		0.18	%		87,923		9.4	%		0.21	%		42,324			1.7	%		(0.03	)%
Money market and savings deposits		361,486		30.7	%		0.28	%		278,635		29.7	%		0.33	%		82,851			1.0	%		(0.05	)%
Certificates of deposit		65,943		5.6	%		0.39	%		64,964		6.8	%		0.41	%		979			(1.3	)%		(0.02	)%

Total deposits		1,145,313		97.1	%		0.13	%		909,314		96.8	%		0.15	%		235,999			0.3	%		(0.02	)%
Subordinated debentures		9,368		0.8	%		5.11	%		3,825		0.4	%		8.68	%		5,543			0.4	%		(3.43	)%
Securities sold under agreements to repurchase		24,376		2.1	%		0.30	%		26,027		2.8	%		0.35	%		(1,651	)		(0.7	)%		(0.05	)%

Total borrowings		33,744		2.9	%		1.66	%		29,852		3.2	%		1.41	%		3,892			(0.3	)%		0.25	%

Total funding sources	$	1,179,057		100.0	%		0.18	%	$	939,166		100.0	%		0.19	%	$	239,891						(0.01	)%

Excess of interest earning assets over funding sources	$	51,556							$	43,591							$	7,965
Net interest rate spread							3.78	%							3.43	%								0.35	%
Net interest margin							3.96	%							3.63	%								0.33	%
Core net interest margin							3.78	%							3.55	%								0.23	%

Volume and Rate Variance Analysis of Net Interest Income

Years Ended December 31, 2014, 2013 and 2012

The following table presents the dollar amount of changes in interest income and interest expense due to changes in average balances of interest earning assets and interest bearing liabilities and changes in interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (i) changes in volume (i.e. changes in average balance multiplied by prior period rate) and (ii) changes in rate (i.e. changes in rate multiplied by prior period average balance). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the absolute dollar amounts of the changes due to volume and rate (dollars in thousands):


	December 31, 2014 vs. 2013									December 31, 2013 vs. 2012
	Volume			Rate			Total			Volume			Rate			Total
Deposits in other financial institutions	$	60		$	134		$	194		$	15,322		$	(1,399	)	$	13,933
Investment securities		417			39			456			(52	)		(23	)		(75	)
Loans		7,377			(3,696	)		3,681			(112	)		(396	)		(508	)

Total interest income		7,854			(3,523	)		4,331			15,168			(1,818	)		13,350

Interest Expense:
Interest bearing transaction accounts		40			—			40			108			(54	)		54
Money market and savings deposits		74			(138	)		(64	)		266			(166	)		100
Certificates of deposit		(16	)		(23	)		(39	)		4			(13	)		(9	)

Total deposits		98			(161	)		(63	)		378			(233	)		145

Subordinated debentures		9			(63	)		(54	)		473			(320	)		153
Securities sold under agreements to repurchase		(33	)		(7	)		(40	)		(5	)		(11	)		(16	)

Total borrowings		(24	)		(70	)		(94	)		468			(331	)		137

Total interest expense		74			(231	)		(157	)		846			(564	)		282

*Net Interest Income*	$	7,780		$	(3,292	)	$	4,488		$	14,322		$	(1,254	)	$	13,068

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

The net interest margin declined 17 basis points to 3.79% for the year ended December 31, 2014, compared to 3.96% for the year ended December 31, 2013. The decline in net interest margin is primarily due to a 35 basis point decrease in loan yield, offset by a 3 and 4 basis point decline in the money market and savings deposits rate, and certificates of deposits rate, respectively. The lower net interest margin in 2014 is attributable to the continued low interest rate environment, as new loans have been originated at lower interest rates than those loans that have been paid off. This is in addition to a lower level of fair value discounts earned on early payoffs of acquired loans in 2014 compared to 2013. Fair value discounts earned on early payoffs of acquired loans were $1.8 million compared to $2.2 million for 2014 and 2013, respectively. Despite a decline in the net interest margin, net interest income increased $4.5 million mainly due to a higher average loan balance. However, net interest income also included the recovery of $227,000 of interest income on an acquired loan that was on non-accrual status in 2014 and a reversal of $5,000 of interest income on another acquired loan that was put on non-accrual status in 2013. The impact to the Company’s net interest margin from the accelerated accretion and the recovery or reversal of interest income for 2014 and 2013 was 15 basis points and 18 basis points, respectively.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The net interest margin increased 33 basis points to 3.96% for the year ended December 31, 2013, compared to 3.63% for the year ended December 31, 2012. The increase in net interest margin is primarily due to a change in the mix of the Company’s average interest earning assets with loans increasing from 61.7% to 71.4% of total

interest earning assets in 2013 and 2012, respectively. This is a direct result of both the acquisition of PC Bancorp having a full year impact on the operating results in 2013 and strong organic loan growth of the Company. Additionally, the higher net interest margin in 2014 is attributable to a higher level of fair value discounts earned on early payoffs of acquired loans in 2013 compared to 2012. Fair value discounts earned on early payoffs of acquired loans were $2.2 million compared to $836,000 for 2013 and 2012, respectively. Net interest income increased $13.1 million mainly due to a higher average loan balance. Net interest income for 2013 included a reversal of $5,000 of interest income on an acquired loan that was put on non-accrual status in 2013. There was no similar activity in 2012. The impact to the Company’s net interest margin from the accelerated accretion and the recovery or reversal of interest income for 2013 and 2012 was 18 basis points and 8 basis points, respectively.

Provision for Loan Losses

The Company maintains an allowance for loan loss (“Allowance”) to provide for probable losses in the loan portfolio. Additions to the Allowance are made by charges to operating expense in the form of a provision for loan losses. All loans that are judged to be uncollectible are charged against the Allowance, while any recoveries are credited to the Allowance.

Provision for loan losses was $2.2 million, $2.9 million and $1.8 million for the year ended December 31, 2014, 2013 and 2012, respectively. Excluding the loans acquired from acquisitions, the Company had $197 million, $137 million and $115 million of net organic loan growth for 2014, 2013 and 2012, respectively. Net charge-offs were $232,000, $1.1 million and $460,000 in 2014, 2013 and 2012, respectively. See further discussion in Balance Sheet Analysis, Allowance for Loan Loss.

Non-interest Income

The following table lists the major components of the Company’s non-interest income (dollars in thousands):


	Years Ended December 31,					Increase (Decrease)						Years Ended December 31,					Increase (Decrease)
	2014			2013		$			%			2013		2012			$		%
Gain (Loss) on sale of securities, net	$	(47	)	$	47	$	(94	)		(200.0	)%	$	47	$	—		$	47		100.0	%
Total other-than-temporary impairment losses, net		—			—		—			—	%		—		(155	)		155		(100.0	)%
Gain on sale of SBA loans, net		1,221			1,087		134			12.3	%		1,087		50			1,037		2,074	%
Deposit account service charge income		2,744			2,377		367			15.4	%		2,337		2,130			247		11.6	%
Other non-interest income		3,791			3,007		784			26.1	%		3,007		1,936			1,071		55.3	%

Total Non-Interest Income	$	7,709		$	6,518	$	1,191			18.3	%	$	6,518	$	3,961		$	2,557		64.6	%

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Non-interest income increased $1.2 million or 18.3% mainly due to a an improvement in deposit account service charge income of $367,000, $134,000 increase in gain on sale of SBA loans, and an increase of $784,000 in other non-interest income. Included in other non-interest income in 2014 were increases of $339,000 in transaction referral fees, $132,000 in letters of credit fees, and a $225,000 settlement in the second quarter related to an other real estate owned property sold in 2013.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Non-interest income increased $2.6 million or 64.6% mainly due to a $1.0 million increase in gain on sale of SBA loans, a $247,000 increase in deposit account service charge income and a $1.1 million increase in other non-interest income. The increase in deposit account service charge income is primarily driven by an increase in

DDA account analysis fees coupled with the growth in deposit base resulting from the PC Bancorp acquisition in 2012. The increase in other non-interest income of $1.1 million was mainly due to a one-time $250,000 insurance settlement received in 2013 related to a wire fraud that occurred in 2012, a $208,000 increase in SBA loan servicing income, a $351,000 increase in Bank Owned Life Insurance income, a $244,000 increase in other non-interest loan related fees and an increase in dividend income of $203,000. These increases were partially offset by a decrease in derivative income from the non-hedged swap contracts of $320,000. The reduction of the other-than-temporary impairment losses was the result of the sale of the private issue CMO securities in January of 2013. The gain on sale of investment securities in 2013 included the sale of all of the Company’s private issue CMO securities in the first quarter of 2013.

Non-Interest Expense

The following table lists the major components of the Company’s non-interest expense (dollars in thousands):


							2014 vs. 2013						2013 vs. 2012
	Years Ended December 31,						Increase (Decrease)						Increase (Decrease)
	2014		2013		2012		$			%			$			%
Salaries and employee benefits	$	24,820	$	21,782	$	17,609	$	3,038			13.9	%	$	4,173			23.7	%
Stock based compensation expense		1,699		1,088		1,120		611			56.2	%		(32	)		(2.9	)%
Occupancy		4,112		4,194		3,564		(82	)		(2.0	)%		630			17.7	%
Data processing		1,968		1,868		1,905		100			5.4	%		(37	)		(1.9	)%
Legal and professional		2,006		2,166		1,350		(160	)		(7.4	)%		816			60.4	%
FDIC deposit assessment		844		880		719		(36	)		(4.1	)%		161			22.4	%
Merger related expenses		2,302		43		3,058		2,259			5,253.5	%		(3,015	)		(98.6	)%
OREO expenses		15		95		343		(80	)		(84.2	)%		(248	)		(72.3	)%
Office services expenses		1,026		1,034		1,127		(8	)		(0.8	)%		(93	)		(8.3	)%
Other operating expenses		4,593		4,490		3,705		103			2.3	%		785			21.2	%

Total non-interest expense	$	43,385	$	37,640	$	34,500	$	5,745			15.3	%	$	3,140			9.1	%

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Non-interest expense increased by $5.7 million, or 15.3% mainly due to a $3.0 million increase in salaries and employee benefits, a $611,000 increase in stock based compensation expense and a $2.3 million increase in merger related expenses related to the 1^st Enterprise merger. The increase in salaries and employee benefits was attributable to the accrual of bonus and retention incentives related to the 1^st Enterprise merger, as well as an increase in the number of full time employees from 175 at December 31, 2013 to 250 at December 31, 2014. The increase in stock based compensation expense reflects the delay in the annual granting of stock-based compensation in 2013 and additional expense from the granting of stock awards to new executives and employees after the 1^st Enterprise merger in 2014. Merger related expenses included legal fees, investment banking fees, professional fees and contract termination fees.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Non-interest expense increased by $3.1 million, or 9.1% mainly due to a $4.2 million increase in salaries and employee benefits, $630,000 increase in occupancy expense, $816,000 increase in legal and professional expenses, offset by a $3.0 million decrease in merger related expenses. The increase in salaries and employee benefits is due to an increase in average staffing levels during 2013 as a direct result from the PC Bancorp acquisition in July 2012. The Company had 175 full time employees at December 31, 2013 compared to 167 at December 31, 2012. The increase in occupancy cost is due to the acquisition of a branch and office space located in Anaheim and a branch located in Irvine in conjunction with the PC Bancorp acquisition. Occupancy cost for

2013 includes rent, depreciation, utilities, repairs and maintenance for the Anaheim and Irvine locations for the full year of 2013. The increase in legal and professional cost is due to a $207,000 increase in legal fees associated with the establishment of a holding company and litigation matters acquired from PC Bancorp, a $354,000 increase in audit fees due to an increase in the number of internal audits conducted in 2013 compared to 2012 and a $255,000 increase in consulting fees due to the Company’s hiring of two former PC Bancorp executives who provided services to the Company beginning in August 2012.

Income Taxes

The effective tax rate was 41.9%, 33.9% and 49.1% for the year ended December 31, 2014, 2013 and 2012, respectively. The higher effective tax rate for 2014 and 2012 is primarily due to the inclusion of significant non-deductible merger costs which were not subject to the same percentage of tax deductibility. Specifically for 2014, the higher effective tax rate is also attributable to the discontinuance of the California net interest deduction on loans within designated enterprise zones beginning January 1, 2014. Further, the Company’s effective tax rate for all years is impacted by the increase in cash surrender value of bank owned life insurance policies which is excluded from taxable income and the Company has invested in Qualified Affordable Housing Projects “LIHTC” that generate tax credits and benefits for the Company. The Company operates in the Federal and California jurisdictions and the blended statutory tax rate for Federal and California income taxes is 42.05% for 2014 and 2013, and 41.15% for 2012.

Reconciliation of Core Net Income to Net Income

The Company utilizes the term Core Net Income, a non-GAAP financial measure. CU Bancorp’s management believes Core Net Income is useful because it is a measure utilized by market analysts to understand the effects of merger- related expenses and provides an alternative view of the Company’s performance over time and in comparison to the Company’s competitors. Core net income should not be viewed as a substitute for net income. A reconciliation of CU Bancorp’s Net Income to Core Net Income is presented in the table below for the periods indicated (dollars in thousands):


	Years Ended December 31,
	2014		2013
Net Income Available to Common Shareholders	$	8,784	$	9,785
Add back: Merger expenses, net		1,952		43
Add back: Severance and retention, net		693		—

Core Net Income Available to Common Shareholders	$	11,429	$	9,828

Core net income available to common shareholders increased by $1.6 million compared to 2013. The increase in the Company’s core net income during 2014 represented a significant increase in the level of profitability that was driven by quality loan growth, enhanced by the synergies from previous years’ mergers. These results for 2014 reflect the benefit of our increased scale, which provided the Company the opportunity to realize additional operating leverage, as the loan portfolio expanded from both acquisition and organic loan growth in 2014.

FINANCIAL CONDITION

Balance Sheet Analysis

Total assets increased $857 million for the year ended December 31, 2014 to $2.3 billion with net loan growth of $691.5 million, an increase of $120.5 million in investment securities available-for-sale, at fair value, an increase of $47.1 million increase in investment securities held-to-maturity, a $17.5 million increase in Bank owned life insurance and a $51.7 million increase in goodwill. All increases are a direct result of the 1^st Enterprise merger in 2014, with the exception of net organic loan growth of $197 million during 2014. These increases were offset by a net decrease of $108.7 million of cash and cash equivalents and certificates of deposits in other financial institutions due to the use of excess liquidity to fund organic loan growth during 2014. Net organic loan growth during the period was $197 million, partially offset by $58.8 million in runoff of purchased loans from the COSB, PC Bancorp acquisitions and 1^st Enterprise merger. Loan growth for the year of 2014 was across all loan types due to the similarity of loan composition between California United Bank and 1^st Enterprise.

Excluding the deposits acquired from 1^st Enterprise, funding the asset growth for the Company for 2014 was the growth in deposits of $26.5 million and earnings of $8.9 million. Further, the deposits growth of $26.5 million is the result of a $55.5 million increase in non-interest bearing deposits offset by a $32 million decrease in money market and savings deposits. At December 31, 2014 and December 31, 2013, non-interest bearing deposits represented 53% and 51% of total deposits, respectively.

Investment Securities

In order to maintain the Company’s goal of maintaining a high degree of both on-balance sheet and off-balance sheet liquidity, the Company maintains a portion of its investment securities in both readily saleable securities and/or securities that can be pledged as collateral for one or a combination of the Company’s credit facilities. The Company invests in U.S. Treasury Notes, U.S. Agency and U.S. Sponsored Agency issued AAA and AA rated investment-grade callable and non-callable bonds, mortgage-backed pass through securities, asset backed securities and collateralized mortgage obligation “CMO” securities, investment grade corporate bond securities and investment grade municipal securities.

The Company also maintains investable funds with other financial institutions in the form of overnight interest bearing money market accounts and short term maturity certificates of deposit with insured financial institutions. Throughout both 2014 and 2013, the Company has maintained a significant portion of its overnight liquidity directly with the Federal Reserve Bank. At December 31, 2014 the Company had $60.1 million on deposit with the Federal Reserve.

Securities owned by the Company may also be pledged in connection with the Company’s securities sold under agreements to repurchase program that is offered to the Company’s business deposit customers in which a minimum of 102% of the borrowings are collateralized by the fair market value of the investment securities. As of December 31, 2014 and 2013, the carrying value of securities pledged in connection with securities sold under agreements to repurchase was $32.3 million and $12 million, respectively. Securities with a market value of $12.6 million and $11 million were pledged to secure a certificate of deposit of $10 million with the State of California Treasurer’s office throughout 2014 and 2013. Securities with a market value of $42.2 million and $29 million were pledged to secure outstanding standby letters of credit confirmed/issued by a correspondent bank for the benefit of our customers in the amounts of $33.7 million and $22 million at December 31, 2014 and December 31, 2013, respectively. Securities with a market value of $1.1 million and $275,000 were pledged to secure local agency deposits at December 31, 2014 and 2013, respectively. Securities with a market value of $17.8 million and $5.2 million were pledged to secure our Federal Reserve credit facility at December 31, 2014 and 2013, respectively. Securities with a market value of $23.3 million were pledged in connection with its credit facility with the Federal Home Loan Bank “FHLB” at December 31, 2014. The Company had no securities pledged in connection with its credit facility with the FHLB in 2013. Securities with a market value of $18.4 million were pledged in connection with bankruptcy accounts in December 2014. Securities with a market value of $1.1 million were pledged in connection with interest rate swaps acquired from the 1^st Enterprise merger.

As of December 31, 2014 and 2013, the Company’s investment securities portfolio consisted of the following, by issuer (dollars in thousands):

Securities Portfolio at Fair Value, by Issuer


	December 31, 2014		December 31, 2013
Small Business Administration “SBA”	$	54,487	$	50,905
U.S. Treasury		20,025		—
Government National Mortgage Association “GNMA”		62,108		27,378
Corporate Bonds — Various Companies		4,120		5,211
Federal National Mortgage Association “FNMA”		64,106		10,233
Municipals — Various State and Political Subdivisions		48,208		3,628
Federal Home Loan Bank “FHLB”		1,030		1,041
Federal Home Loan Mortgage Corporation “FHLMC”		9,649		3,923
Federal Farm Credit Bank “FFCB”		1,008		3,111
Federal Deposit Insurance Corporation “FDIC”		708		1,058
Sallie Mae “SLMA”		8,672		—

Total	$	274,121	$	106,488

The Corporate Bonds in the above table were issued by two individual companies, and the Municipals include securities issued by one hundred and thirty separate municipalities.

The securities issued by the U.S. Treasury of $20.0 million, SBA of $54.5 million and GNMA of $62.1 million, are fully guaranteed as to the timely payment of both principal and interest by the United States Government. The security issued by the FDIC of $708,000 is fully guaranteed as to the payment of principal and interest by the FDIC.

As part of the merger with 1^st Enterprise Bank in 2014, the Company acquired $154.4 million of investment securities which consisted of 208 individual securities. The Company sold a number of these securities shortly after the merger. The securities sold included two corporate bonds with a fair value of $10.2 million, one municipal security with a fair value of $218,000 and eight mortgage backed securities with a fair value of $4.27 million. No gains or losses associated with the disposition of these securities were recorded.

As of December 31, 2014, the Company had unrealized gains of $1.7 million and unrealized losses of $1.4 million on its investment securities portfolio. The Company regularly evaluates the unrealized losses on its securities as to whether they are temporary or other-than-temporary. At December 31, 2014, the Company determined that there was no Other-Than-Temporary-Impairment (OTTI) within its investment securities portfolio. The Company regularly assesses its securities portfolio and there can be no assurance that there will not be impairment charges in the future.

Composition of Securities Available-for-Sale and Held-to-Maturity, at Fair Value


Available-for-Sale	At December 31, 2014
(Dollars in thousands)	2014					2013					2012
	Amount		Percent			Amount		Percent			Amount		Percent
U.S. Govt Agency and Sponsored Agency — Note Securities	$	2,038		.7	%	$	4,152		3.9	%	$	18,911		16.0	%
U.S. Treasury Note		20,025		7.3	%		—		—	%		—		—	%
U.S. Govt Agency — SBA Securities		54,487		19.9	%		50,905		47.8	%		42,979		36.4	%
U.S. Govt Agency — GNMA Mortgage-Backed Securities		29,342		10.7	%		27,378		25.7	%		22,960		19.4	%
U.S. Govt Sponsored Agency — CMO & Mortgage-Backed Securities		107,228		39.12	%		15,214		14.3	%		13,031		11.0	%
Corporate Securities		4,120		1.5	%		5,211		4.9	%		10,546		8.9	%
Municipal Securities		1,050		.4	%		3,628		3.4	%		6,816		5.8	%
Asset Backed Securities		8,672		3.2	%		—		—	%		—		—	%
Private Issue CMO Securities		—		—	%		—		—	%		2,910		2.5	%
Held-to- Maturity
Municipal Securities		47,159		17.2	%		—		—	%		—		—	%

Total	$	274,121		100.0	%	$	106,488		100.0	%	$	118,153		100.0	%

The amortized cost, estimated fair value and average yield of debt securities at December 31, 2014, are reflected in the table below. 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. Gov. Sponsored Agency CMO or Mortgage-Backed Securities, U.S. Govt. Agency GNMA Mortgage-Backed Securities, Asset Backed Securities and U.S. Govt. Agency SBA Securities, — estimated cash flow taking into account estimated pre-payment speeds

•

Investment grade Corporate Bonds and Municipal securities — maturity date

Although U.S. Government Agency, 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.


(Dollars in thousands)	Maturing
Available-for-Sale	One year or less		Weighted Average Yield			After one year thru five years		Weighted Average Yield			After five years thru ten years		Weighted Average Yield			After ten years		Weighted Average Yield			Balance as of December 31, 2014		Weighted Average Yield			% to total
U.S. Government Agency Securities		1,008		.39	%		1,030		.80	%		—		—	%		—			%		2,038		.60	%		.7
U.S. Government SBA Securities		5,964		1.77	%		18,901		1.88	%		20,286		2.18	%		9,336		2.02	%		54,487		2.01	%		19.9
U.S. Government GNMA Mortgage-Backed Securities		7,669		1.30	%		13,961		1.52	%		5,235		1.80	%		2,477		2.34	%		29,342		1.58	%		10.70
U.S. Government Agency CMO & Mortgage-Backed Securities		13,826		1.82	%		50,158		2.03	%		28,197		2.17	%		15,047		2.89	%		107,228		2.19	%		39.12
Corporate Securities		—		—	%		4,120		2.18	%		—		—	%		—		—	%		4,120		2.18	%		1.5
Municipal Securities					%		1,050		1.81	%		—		—	%		—		—	%		1,050		1.81	%		.4
U.S. Treasury Note		—		—	%		20,025		.51	%		—		—	%		—		—			20,025		.51	%		7.3
Asset Backed Securities		—		—	%		—		—	%		8,672		.61	%		—		—			8,672		.61	%		3.2
Held-to-Maturity																							%
Municipal Securities		6,030		1.57	%		23,566		1.56	%		17,563		1.73	%		—		—			47,159		1.62	%		17.2

Total	$	34,497		1.70	%	$	132,811		1.63	%	$	79,953		1.88	%	$	26,860		2.55	%	$	274,121		1.80	%		100	%

Lending

The following table presents the composition of the loan portfolio at the dates indicated (dollars in thousands):


	December 31,
	2014		2013		2012		2011		2010
*Commercial and Industrial Loans:*	$	528,517	$	299,473	$	262,637	$	185,629	$	170,601

*Loans Secured by Real Estate:*
Owner-Occupied Nonresidential Properties		339,309		197,605		181,844		85,236		71,162
Other Nonresidential Properties		481,517		271,818		246,450		97,730		87,424
Construction, land development and other land		72,223		47,074		48,528		34,380		25,952
1-4 Family Residential Properties		121,985		65,711		62,037		38,674		43,790
Multifamily Residential Properties		52,813		33,780		31,610		25,974		14,201

Total Loans Secured by Real Estate		1,067,847		615,988		570,469		281,994		242,529

*Other Loans:*		28,359		17,733		21,779		21,637		8,133

Total Loans	$	1,624,723	$	933,194	$	854,885	$	489,260	$	421,263

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


	December 31, 2014					December 31, 2013
	Amount		% of Total			Amount		% of Total
Real Estate	$	744,663		46	%	$	381,830		41	%
Manufacturing		161,233		10	%		83,319		9	%
Wholesale		124,336		8	%		60,291		6	%
Construction		113,763		7	%		62,835		7	%
Finance		96,074		6	%		46,393		5	%
Hotel/Lodging		88,269		5	%		76,143		8	%
Professional Services		64,215		4	%		49,739		5	%
Other Services		45,781		3	%		21,448		2	%
Healthcare		43,917		3	%		38,662		4	%
Retail		35,503		2	%		23,157		2	%
Administrative Services		28,016		2	%		15,218		2	%
Restaurant/Food Service		24,525		2	%		35,244		4	%
Transportation		18,158		1	%		9,531		1	%
Information		15,457		1	%		11,709		1	%
Education		10,253		1	%		10,270		1	%
Entertainment		8,284		1	%		6,207		1	%
Other		2,276		0	%		1,198		0	%

Total Loans	$	1,624,723		100	%	$	933,194		100	%

The Company has experienced consistent growth in its loan portfolio over the past 9 ¹/₂ years since opening in 2005. This loan growth is the result of marketing efforts, principally in our market and adjacent areas, supplemented by strategic acquisitions. In 2014, the Company’s loan portfolio increased by $691.5 million to $1.6 billion at December 31, 2014, an increase of 74% over December 31, 2013. This increase reflects $553.2 million of loans acquired from the 1^st Enterprise merger and net organic loan growth of $197 million. Net organic loan growth of $197 million was partially offset by $58.8 million in runoff of acquired loans from the three acquired loan portfolios (COSB, PC Bancorp and 1^st Enterprise). This compares with $137 million of net organic loan growth in 2013 primarily from new business relationships complemented by growth of existing relationships, which was partially offset by $58 million in loan run-off from the two acquired portfolios (PC Bancorp and COSB). Loan growth for the year of 2014 was across all loan types due to the similarity of loan composition between California United Bank and 1^st Enterprise.

The Company’s loan customers are primarily based in the Southern California area with geographical distribution primarily in Los Angeles County, Orange County, Ventura County and San Bernardino County.

At least on a quarterly basis, management reviews a report of loan relationships with balances over $3.5 million which constitute 52% and 48% of the Company’s total loan portfolio as of December 31, 2014 and 2013, respectively. At December 31, 2014, there were 17 loan relationships with balances over $10 million, 33 loan relationships of more than $5 million and less than $10 million and 48 loan relationships of more than $3.5 million and less than $5 million. Of the 17 largest loan relationships, 9 were related to real estate lending relationships, 3 were related to commercial and industrial lending relationships and 2 relationships were related to financial services. Compared to December 31, 2013, there were 16 loan relationships with balances over $10 million, 16 loan relationships of more than $5 million and less than $10 million and 32 loan relationships of more than $3.5 million and less than $5 million. Of the 16 largest loan relationships, 9 were related to real estate lending relationships, 7 were related to commercial and industrial lending relationships and 1 relationship was concentrated in multifamily loans. The growth in the relationships over $5 million and less than $10 million was

primarily from existing customers whose business expanded in the year and relationships acquired from 1^st Enterprise. As of December 31, 2014 and 2013, the average outstanding loan principal balance was $774,000 compared to $695,000.

The Company had 51 commercial banking relationship managers and 9 commercial real estate relationship managers at December 31, 2014, compared to 35 commercial banking relationship managers and 5 commercial real estate relationship managers at December 31, 2013. The Company’s commercial and industrial line of credit utilization was approximately 47% and 49% as of December 31, 2014 and 2013, respectively.

The Company provides commercial loans, including working capital and equipment financing, real estate loans, including residential and construction and consumer loans, generally to business principals, entrepreneurs and professionals. The Company currently does not offer residential mortgages to consumers other than home equity lines of credit. The Company’s lending has been originated primarily through direct contact with the borrowers by the Company’s relationship managers and/or executive officers. The Company’s credit approval process includes an examination of the collateral, cash flow and debt service coverage of the loan, as well as the financial condition and credit references of the borrower and guarantors, where applicable. The Company’s senior management is actively involved in its lending activities, collateral valuation and review process. The Company obtains independent third party appraisals of real property, securing loans as required by applicable federal law and regulations. There is also a loan committee comprised of senior management and outside directors that monitors the loan portfolio on at least a quarterly basis.

The Company believes that it manages credit risk closely in its loan portfolio and uses a variety of policy and procedure guidelines and analytical tools to achieve its asset quality objectives.

The Company’s real estate construction loans are primarily short-term loans made to finance the construction of commercial real estate and multifamily residential property. On occasion, we make loans to finance the construction of single family residences to established developers and owner-occupiers. We do not engage in any single family tract development lending to real estate developers. Our construction lending is to relationships we know, doing projects the builder/developer has experience with, the majority are with recourse and are rarely speculative in nature.

Of the $72 million in construction, land development and other land loans, 65% are for construction, 1% are for tenant improvement and 34% are for land development.

Our other real estate loans consist primarily of loans made based on the borrower’s cash flow, secured by deeds of trust on commercial and residential property to provide an additional source of repayment in the event of default. Maturities on these loans are generally up to ten years (on an amortization ranging from fifteen to twenty-five years with a balloon payment due at maturity). The interest rates on these commercial real estate loans are either fixed or floating, with many of the loans that have maturities greater than five years having re-pricing provisions that adjust the interest rate to market rates at stated times prior to maturity. Owner-occupied nonresidential properties and other nonresidential properties are composed of 17% office buildings, 53% commercial buildings, 12% retail centers and 17% hotel/resorts/other.

Our commercial and industrial loans are made for the purpose of providing working capital, financing for the purchase of equipment or for other business purposes. Such loans include loans with maturities ranging from sixty days to one year and “term loans” which are loans with maturities normally ranging from one to five years.

Small Business Administration “SBA” loans are loans originated under the guidelines of the U. S. Small Business Administration lending programs. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms. These loans are made to finance a small business and its need for working capital, accounts receivable financing, the purchase of equipment and inventory, and or for the purchase of owner-occupied commercial real estate. The Company has a preferred lender status from the SBA to originate SBA loans. The Company acquired its SBA operations with the PC Bancorp acquisition in 2012.

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 investors that purchase 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.

Other loans include personal loans that are generally made for the purpose of financing investments, various types of consumer goods and other personal purposes. Also included are loans to non-depository financial institutions.

Outstanding unused loan commitments consist primarily of commercial, construction and home equity lines of credit which have not been fully disbursed, as well as some standby letters of credit which generally support lease or other direct obligations. Based upon our experience, the outstanding unused loan commitments are expected to decrease in line with increases in loan demand, subject to economic conditions. During 2014, the Company’s percentage of commercial unused loan commitments to total commercial loan commitments has increased slightly. The Company had $662 million in outstanding unused loan commitments, and $58 million in outstanding standby and performance letters of credit, with total off-balance sheet commitments totaling $720 million at December 31, 2014. Comparatively, the Company had $305 million in outstanding unused loan commitments, and $41 million in outstanding standby and performance letters of credit, with total off-balance sheet commitments totaling $346 million at December 31, 2013. The year over year increase is consistent with the continuous growth of the Company’s loan portfolio and customer relationships combined with the 1^st Enterprise merger.

We do not have any concentrations in our loan portfolio by industry or group of industries, except for the level of loans that are secured by real estate as presented in the table above. In addition, we have not made any loans to finance leveraged buyouts or for highly leveraged transactions.

The following tables set forth the maturity distribution of the Company’s outstanding loans at December 31, 2014 and 2013. In addition, the table shows the distribution of loans with current predetermined interest rates (loans that are either fixed rate or loans that are either at or below their floor rate) and those with variable (floating) interest rates. The Company currently utilizes the Wall Street Journal Prime Rate, the 5 year U.S. Treasury Rate, the 5 year FHLB Seattle Rate, the 5 year LIBOR Swap Rate, the 3 Year LIBOR Swap Rate and the One-Month LIBOR to price its variable rate loans. As of December 31, 2014, we had 27 loans with an outstanding total balance of $17 million with remaining maturities greater than twenty years. As of December 31, 2013, we had 89 loans with an outstanding total balance of $45 million with remaining maturities greater than twenty years.


(Dollars in thousands)	Maturing
	Within One Year		One to Five Years		After Five Years		Total
As of December 31, 2014
Commercial and Industrial	$	309,577	$	166,462	$	52,478	$	528,517
Owner-Occupied Nonresidential Properties		17,332		94,313		227,664		339,309
Other Nonresidential Properties		29,338		114,761		337,418		481,517
Construction, Land Development and Other Land		33,378		33,788		5,057		72,223
1-4 Family Residential Properties		26,738		28,769		66,478		121,985
Multifamily Residential Properties		10,739		23,231		18,843		52,813
Other		18,243		4,935		5,181		28,359

Total	$	445,345	$	466,259	$	713,119	$	1,624,723

Loans with pre-determined interest rates (1)	$	181,529	$	318,712	$	384,089	$	884,330
Loans with floating or adjustable interest rates		263,816		147,547		329,030		740,393

Total Loans	$	445,345	$	466,259	$	713,119	$	1,624,723

(1)	Includes approximately $453 million of variable rate loans that are either at or below their floor.

Impaired Loans, Non-Accrual Loans. At December 31, 2014, the Company had 20 loans on non-accrual totaling $3.9 million, or 0.24% of total loans. At December 31, 2013, the Company had 29 loans on non-accrual totaling $9.6 million, or 1.02% of total loans. Approximately 67% of the non-accrual loans balance is made up of 15 commercial and industrial loans totaling $2.6 million at December 31, 2014, compared to 39% consisting of 17 commercial and industrial loans totaling $3.7 million at December 31, 2013. The reduction in the non-accrual loans balance from 2013 is due to sales, payoffs and charge-offs. All loans classified as impaired have been placed on non-accrual status. There were no non-performing assets or loans greater than 90 days past due and accruing interest as of December 31, 2014 and 2013.

The following is a summary of our asset quality data and key ratios at the dates indicated (dollars in thousands):


	December 31, 2014			December 31, 2013
Loans originated by the Bank on non-accrual	$	2,131		$	1,657
Loans acquired through acquisition that are on non-accrual		1,778			7,899

Total non-accrual loans		3,909			9,556
Other Real Estate Owned		850			—

Total non-performing assets	$	4,759		$	9,556

Net charge-offs year to date	$	232		$	1,052
Non-accrual loans to total loans		0.24	%		1.02	%
Total non-performing assets to total assets		0.21	%		0.68	%
Allowance for loan losses to total loans		0.78	%		1.14	%
Allowance for loan losses to total loans accounted at historical cost, which excludes purchased loans acquired by acquisition		1.39	%		1.50	%
Net year to date charge-offs to average year to date loans		0.02	%		0.12	%
Allowance for loan losses to non-accrual loans accounted at historical cost, which excludes non-accrual purchased loans acquired by acquisition and related allowance		591.7	%		639.8	%
Allowance for loan losses to total non-accrual loans		322.6	%		111.0	%

The risk that borrowers will fail, or will be unable to repay their loans, is an inherent part of the banking business. The Company has established guidelines and practices to specifically identify loans that may become past due in the future, either as to interest or principal, for more than 90 days. Such loans are given special attention by our credit officers and additional efforts are made to get the borrowers to bring their loans current or to provide additional collateral to reduce the risk of potential losses on these loans. In addition, the Company may in the future renegotiate the payment terms of loans to permit the borrower to defer interest or principal payments in those instances where it appears that the borrower may be encountering temporary or short-term financial difficulties and we believe that the future deferral would reduce the likelihood of an eventual loss on the loan. When we have reason to believe that continued payment of interest and principal on any loan is unlikely, the loan is placed on a non-accrual status (that is, accrual of interest on the loan is discontinued and any previously accrued but unpaid interest on the loan is reversed and, therefore, the loan ceases to be an earning asset for the Company). The Company has established practices and guidelines to increase its efforts to recover all amounts due us that become delinquent in the future, which may include the initiation of foreclosure proceedings against the collateral securing the loan.

The Company will consider any loan to be impaired when, based upon current information and events, it is probable that interest and principal will not be collected according to the contractual terms of the original loan agreement. In determining impairment, we evaluate, both performing and non-performing loans, which exhibit,

among other characteristics, high loan-to-value ratios, low debt-coverage ratios, delinquent loan payments or other indications that the borrowers are experiencing increased financial difficulties. In general, payment delays of less than 90 days or payment shortfalls of less than 1% are deemed insignificant and, for that reason, would not necessarily result in the classification of such loans as impaired. The Company generally considers all non-accrual and troubled debt restructured loans to be impaired. At December 31, 2014 and 2013, all classified loans within the loan portfolio were evaluated for possible impairment, of which 7 loans for a total of $2.7 million were considered to be impaired at December 31, 2014 and 12 loans for a total of $6.3 million were considered to be impaired at December 31, 2013.

All loans that become identified as impaired are generally placed on a non-accrual status and are evaluated at that time and regularly thereafter to determine whether the carrying value of the loan should be written off or reserved for or partially written-down to its recoverable value (net realizable value), or whether the terms of the loan, including the collateral required to secure the loan, should be renegotiated with the borrower. Impaired loans will be charged-off or partially charged-off when the possibility of collecting the full balance of the loan becomes remote. Information regarding the Company’s allowance for loan loss is set forth below in this section of this report under the caption, “Allowance for Loan Loss.”

In addition, the Company has loans classified as substandard of $30.4 million and $27.0 million at December 31, 2014 and 2013, respectively. This balance includes impaired loans of $2.4 million and purchased credit impaired loans of $1.3 million at December 31, 2014, compared to impaired loans of $6.3 million and purchased credit impaired loans of $4.3 million at December 31, 2013. These potential problem loans are loans that have a well-defined weakness based on objective evidence. For these potential problem loans, there is a possibility that the Company could incur some loss if the weakness is not properly corrected. At December 31, 2014 and 2013, management expects full repayment of principal and interest on all loans that are on accrual status.

Allowance for Loan Loss

We maintain an allowance for loan loss (“Allowance”) to provide for probable charge-offs in the loan portfolio. Additions to the Allowance are made by charges to operating expense in the form of a provision for loan losses. All loans that are judged to be uncollectible are charged-off against the Allowance while any recoveries are credited to the Allowance.

The Allowance is an amount that management believes is adequate to absorb estimated charge-offs related to specifically identified loans, as well as probable loan charge-offs inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior charge-off experience.

The Allowance consists of specific and general components. The specific component relates to loans that are identified as impaired. For such loans that are categorized as impaired, a specific reserve is established when the fair value, as established by the discounted cash flows on the loan or (collateral value if a collateral dependent loan, or observable market price) 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 historical charge-off experience in various loan segments adjusted for qualitative factors.

A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the original loan agreement. Generally these loans are rated substandard or worse. Most impaired loans are classified as nonaccrual. However, there are some loans that are termed impaired due to doubt regarding collectability according to contractual terms, but are both fully secured by collateral and are current in their interest and principal payments. Impaired loans are measured for reserve requirements based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of an impairment reserve, if any and any subsequent increase in impairment is charged against the Allowance. Factors

that contribute to a performing loan being classified as impaired include payment status, collateral value, probability of collecting scheduled payments, delinquent taxes and debts to other lenders that cannot be serviced out of existing cash flow.

A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider for new debt of similar risk. The loan terms which have been modified or restructured due to a borrower’s financial difficulty may include a reduction in the stated interest rate, an extension of the maturity at an interest rate below current market interest rates, a reduction in the face amount of the debt (principal forgiveness), a reduction in the accrued interest or payment amount, or re-aging, extensions, deferrals, renewals, rewrites and other actions intended to minimize potential losses.

The restructured loans may be categorized as “special mention” or “substandard” depending on the severity of the modification. Loans that were paid current at the time of modification may be upgraded in their classification after a sustained period of repayment performance, usually six months or longer.

Loans that are past due at the time of modification are categorized as “substandard” and placed on non-accrual status. Once there is a sustained period of repayment performance (usually six months or longer) and there is a reasonable assurance that the repayment of principal and interest will continue based on a current credit evaluation, those loans may be upgraded in their classification and placed on accrual status.

We have instituted loan policies designed to adequately evaluate and analyze the risk factors associated with our loan portfolio and to enable us to analyze such risk factors prior to granting new loans and to assess the sufficiency of the Allowance. We conduct a critical evaluation of the loan portfolio quarterly and have an external review of the loan portfolio conducted once to twice a year. The Allowance is based on the historical loan loss experience of the portfolio loan segments, however the Bank utilizes Uniform Bank Peer Group (“UBPR”) historical loss data to evaluate potential loss exposure for those loan segments where the Company had no historical loss experience. The Allowance also includes an assessment of the following qualitative factors: the results of any internal and external loan reviews and any regulatory examination, loan charge-off experience, estimated potential charge-off exposure on each classified loan, credit concentrations, changes in the value of collateral for collateral dependent loans, and any known impairment in the borrower’s ability to repay. The Company also evaluates environmental and other factors such as underwriting standards, staff experience, the nature and volume of loans and loan terms, business conditions, political and regulatory conditions, local and national economic trends. The quantitative portion of the Allowance is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcomes inherent in the estimates used for the Allowance.

Each quarter the Company reviews the Allowance and makes additional provisions to the Allowance as needed based on a review of the factors discussed above. At December 31, 2014, the allowance for loan loss was $12.6 million, or 0.78% of total loans. This compares with the Allowance at December 31, 2013 of $10.6 million, or 1.14% of outstanding loans. The significant decrease in the allowance ratio is due to the addition of the 1^st Enterprise loan portfolio acquired in 2014, which was recorded at fair value at acquisition date with no carryover allowance.

Excluding the acquired loans, the Company’s Allowance as a percentage of loans accounted for at historical cost was 1.39% and 1.50% at December 31, 2014 and 2013, respectively. Maintaining the Allowance at this level reflects a number of factors including the modest improvement and stabilization of the U.S. economy during 2014. Our Allowance as a percentage of loans (accounted for at historical cost) outstanding has declined during 2014 and 2013 as a result of improving qualitative factors related to the current economy.

The Company’s management considered the following factors in evaluating the Allowance at December 31, 2014 and 2013:

•

During the year ended December 31, 2014 there were charge-offs of $692,000 and recoveries of $460,000, compared to the year ended December 31, 2013, there were charge-offs of $1.9 million and recoveries of $860,000.

•

There were 20 non-accrual loans totaling $3.9 million at December 31, 2014, compared to 29 non-accrual loans totaling $9.6 million at December 31, 2013

•

The overall growth and composition of the loan portfolio

•

Changes to the overall economic conditions within the markets in which that Company makes loans

•

Concentrations within the loan portfolio, as well as risk conditions within its commercial and industrial loan portfolio

•

The remaining fair value adjustments on loans acquired through acquisition with special attention to the fair value adjustments associated with the purchased credit impaired loans

Management has considered various material elements of potential risk within the loan portfolio, including classified credits, pools of loans with similar characteristics, economic factors, trends in the loan portfolio and modification and changes in the Company’s lending policies, procedures and underwriting criteria. In addition, management recognized the potential for unforeseen events to occur when evaluating the qualitative factors in all categories of its analysis.

The Company analyzes historical net charge-offs in various loan portfolio segments when evaluating the reserves. For loan segments without previous loss experience, the analysis is adjusted to reflect regulatory peer group loss experience in those loan segments. The loss analysis is then adjusted for qualitative factors that may have an impact on loss experience in the particular loan segments.

The Allowance and the reserve for unfunded loan commitments are significant estimates that can and do change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers and applicable economic and environmental conditions, among other factors. In considering all of the above factors, management believes that the Allowance at December 31, 2014 is adequate. Although the Company maintains its Allowance at a level which it considers adequate to provide for probable charge-offs, there can be no assurance that such charge-offs will not exceed the estimated amounts, thereby adversely affecting future results of operations.

Loans acquired through acquisition are recorded at fair value at acquisition date without a carryover of the related Allowance. Loans acquired with deteriorated credit quality are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect principal and interest payments according to contractual terms. These loans are accounted for under ASC Subtopic 310-30 Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and non-accrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the credit loss or non accretable yield. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

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


	December 31,
	2014			2013			2012			2011			2010
Allowance for loan loss at beginning of year	$	10,603		$	8,803		$	7,495		$	5,860		$	4,753
Provision for loan losses		2,239			2,852			1,768			1,442			2,524

Net (charge-offs) recoveries:
Loans charged-off:
Commercial and Industrial		(619	)		(1,704	)		(444	)		(482	)		—
Construction, Land Development and Other Land		—			—			—			(100	)		(1,436	)
Commercial and Other Real Estate		(73	)		(200	)		(233	)		—			—
Consumer and Other		—			(8	)		(10	)		(11	)		—

Total loans charged-off		(692	)		(1,912	)		(687	)		(593	)		(1,436	)

Recoveries:
Commercial and Industrial		354			70			76			786			1
Construction, Land Development and Other Land		—			763			—			—			—
Commercial and Other Real Estate		106			12			139			—			—
Other		—			15			12			—			—

Total recoveries		460			860			227			786			1

Net (charge-offs) recoveries		(232	)		(1,052	)		(460	)		193			(1,435	)

Allowance for loan loss at end of year	$	12,610		$	10,603		$	8,803		$	7,495		$	5,860

As is set forth in the following table, the Allowance is allocated among the different loan categories because there are differing levels of risk associated with each loan category. However, the allowance for loan loss allocated to specific loan categories are not the total amounts available for future charge-offs that might occur within such categories because the total allowance for loan loss is applicable to the entire portfolio.


(Dollars in thousands)	December 31,
	2014					2013					2012					2011					2010
	Allowance for Loan Loss		% of Loans to Total Loans			Allowance for Loan Loss		% of Loans to Total Loans			Allowance for Loan Loss		% of Loans to Total Loans			Allowance for Loan Loss		% of Loans to Total Loans			Allowance for Loan Loss		% of Loans to Total Loans
Commercial and Industrial	$	5,864		32.5	%	$	5,534		32.1	%	$	4,572		30.7	%	$	3,541		37.9	%	$	2,301		40.5	%
Construction, Land Development and Other Land		1,684		4.5			1,120		5.0			2,035		5.7			752		7.0			329		6.2
Commercial and Other Real Estate		4,802		61.3			3,886		61.0			2,084		61.1			2,911		50.7			3,107		51.4
Consumer and Other		260		1.7			63		1.9			112		2.5			291		4.4			123		1.9

Total	$	12,610		100	%	$	10,603		100	%	$	8,803		100	%	$	7,495		100	%	$	5,860		100	%

Deposits

Deposits are the Company’s long term primary source of core liquidity. Total deposits were $1.9 billion at December 31, 2014, an increase of $715 million or 58% from December 31, 2013. The increase in deposits in 2014 was primarily a result of the $704 million of deposits acquired from the 1^st Enterprise merger. Transaction accounts have been defined as non-interest bearing and interest bearing demand deposit accounts. The Company’s core deposits have been defined as non-interest bearing demand deposits, interest-bearing transaction

accounts, money market, and savings accounts. However, a majority of the Company’s certificates of deposit are from its core deposit customer base. Due to the nature of the Company’s deposit base with its orientation to business customers, the period end deposit balances may vary compared to the related average deposit balances. At December 31, 2014 the Company had 84 customers with balances that exceeded $4 million (aggregating all related accounts, including multiple business entities and personal funds of business principals), which aggregated to approximately $859 million or 44%, of the Company’s total customer deposit base at December 31, 2014. These deposits are not concentrated in any one of the ten branches, and are not exclusively associated with any of the Company’s 60 relationship managers. While the loss of any combination of these depositors could have a material impact on the condition of the Company, we believe that the Company has the capability to mitigate this risk through additional liquidity sources and business generation.

The following table summarizes the distribution of total deposits by branch as of December 31, 2014 (dollars in thousands):


	December 31, 2014
Los Angeles	$	324,757
Encino		253,455
West Los Angeles		278,629
Santa Clarita		89,025
Conejo Valley		221,389
South Bay		70,876
Simi Valley		13,066
Anaheim		188,025
Irvine		427,144
Inland Empire		81,327

Total	$	1,947,693

The Company experienced growth in all deposit categories during 2014 mainly due to the similarity of the deposits base acquired from 1^st Enterprise. Non-interest bearing demand deposits increased by $400 million or 63.3% to $1.0 billion and represented 53.0% of total deposits at December 31, 2014, up from 51.3% at December 31, 2013. Average non-interest bearing demand deposits as a percentage of the Company’s average outstanding deposits were 54% and 51% for the years ended December 31, 2014, 2013, respectively.

The Company’s interest bearing transaction accounts increased by $51 million, or 33% to $207 million as of December 31, 2014 compared to the prior year-end. The overall rate paid by the Company on its interest bearing transaction accounts averaged 0.18% in both 2014 and 2013.

The Company’s money market and savings deposits increased by $263 million or 69%, to $644 million as of December 31, 2014 compared to the prior year-end. The overall rate paid by the Company on its money market and savings deposits averaged 0.25% in 2014 compared to 0.28% in 2013.

The Company’s certificates of deposit increased slightly by $1 million, or 2% to $65 million as of December 31, 2014 compared to the prior year-end. At December 31, 2014, $63 million of total time deposits mature within one year. The increase is the net result of $10 million acquired from 1^st Enterprise during 2014, offset by maturity and non-renewal of certificate of deposits acquired as part of the PC Bancorp merger. The overall rate paid by the Company on its certificates of deposit averaged 0.35% in 2014 compared to 0.39% in 2013. Over the past several years, the Company has effectively lowered the rate paid on its maturing certificate of deposits. The Company’s growth in core deposits during the last several years provided the liquidity to absorb the runoff of higher cost certificates of deposit.

The Company’s business is not seasonal in nature and is not dependent upon funds from sources outside the United States. It is the Company’s strategy to rely on deposits from its customers rather than utilizing brokered deposits. Certain types of customers (such as fiduciaries and trustees) may require FDIC insurance coverage greater than what can be offered by one bank under applicable law. In these cases, the Company offers two programs, CDARS^® (Certificate of Deposit Account Registry Service) that places certificates of deposit with participating institutions on a reciprocal basis, which means that the Company receives deposits in amounts and at rates equivalent to those its customers place with CDARS^® participating banks. The second program Insured Cash Sweep^® “ICS^®” deposit program provides for the placement of reciprocal non-interest bearing demand deposits with participating institutions. These reciprocal deposits under both programs, while classified on reports to federal regulatory agencies as “brokered deposits” differ substantially from traditional brokered deposits because they are equivalent to deposits placed by the Company’s customers. These “reciprocal” transactions are facilitated by Promontory Interfinancial Network, LLC. CDARS^® and ICS^® reciprocal deposits are not considered brokered deposits for calculation of FDIC insurance premiums. At December 31, 2014 and 2013, these CDARS^® and ICS^® reciprocal deposits were the only brokered funds held by the Company. The Company has continued to use these programs for customers that must have full FDIC coverage on their deposit balances. CDARS^® certificates of deposit balances remained at $29 million at December 31, 2013 and 2014. During 2013, the Company had one customer that had been maintaining a balance of $14 million in the Company’s repo program, transfer their full balance into the CDARS program. The Company began offering the ICS^® program during 2013, and has a balance of $12.4 million at December 31, 2014. The Company does not engage in any advertising of its certificates of deposit products.

The following table summarizes the distribution of the average deposit balances and the average rates paid on deposits during the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):


	Analysis of Average Deposits
	Years Ended December 31,
	2014					2013					2012
	Amount		% Rate			Amount		% Rate			Amount		% Rate
Non-interest bearing demand deposits	$	704,437		—	%	$	587,637		—	%	$	477,792		—	%
Interest-bearing transaction deposits		153,327		0.18	%		130,247		0.18	%		87,923		0.21	%
Money market and savings deposits		390,185		0.25	%		361,486		0.28	%		278,635		0.33	%
Time deposits		61,048		0.35	%		65,943		0.39	%		64,964		0.41	%

Total Deposits	$	1,308,997		0.11	%	$	1,145,313		0.13	%	$	909,314		0.15	%

Securities Sold Under Agreements to Repurchase

The Company has developed an overnight sweep program in order to accommodate several of our sophisticated business customers, many of whom act as fiduciaries, and thus require additional security in excess of FDIC insurance limits. Under this overnight sweep program, excess funds over a specified amount in the customers demand deposit account are automatically swept into securities sold under agreements to repurchase, (“repos”). For these business customers, the Company enters into certain transactions, the legal forms of which are sales of securities under agreements to repurchase at a later date at a set price. Repos are classified as secured borrowings and generally mature the next business day (“overnight repos”) but may extend the maturity up to 180 days (“term repos”) from the issue date. The Company’s repos at December 31, 2014 and 2013 have been concentrated in the overnight repo program. Under the overnight repo program, the Company’s business deposit customer’s have their excess deposit balances over an established limit automatically swept into this product on an overnight basis. The following business day, the repos mature and the matured fund balances are re-deposited back into the customer’s demand deposit account. At December 31, 2014, the Company had $9.4 million in the overnight repo program (repos maturing on January 2, 2014). The repo balances decreased by $1.7 million, or 15%, to $9.4 million at December 31, 2014, from the $11.1 million at December 31, 2013. The Company pledges certain investment securities as collateral for the Repo program. Securities with a fair market value of $32.3

million and $11.8 million were pledged to secure the repos at December 31, 2014 and 2013, respectively. The Company considers the funds maintained under the overnight repo program to be a stable and reliable source of funding for the Company. The Company does not advertise this product and generally limits it to businesses and other sophisticated customers.

Details regarding the Company’s repos are reflected in the table below (dollars in thousands):


	2014							2013							2012
	Balances at Year- end		Average Balance		Weighted Average Rate			Balances at Year- end		Average Balance		Weighted Average Rate			Balances at Year- end		Average Balance		Weighted Average Rate
Securities sold under agreements to repurchase	$	9,411	$	13,579		0.19	%	$	11,141	$	24,376		0.30	%	$	22,857	$	26,027		0.29	%

The maximum amount of outstanding repos at any month-end was $15.7 million, $30.0 million and $32.5 million in 2014, 2013 and 2012, respectively.

Capital Resources

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Company currently includes in Tier 1 capital an amount of subordinated debentures equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity less goodwill, core deposit intangibles and a portion of the SBA servicing assets. On July 2, 2013, the Board of Governors of the Federal Reserve System (“Federal Reserve”) approved a final rule (the “Final Rule”) that revises the current capital rules for U.S. banking organizations including the capital rules for the Company. The FDIC adopted the rule as an “interim final rule” on July 9, 2013. The Final Rule implements the regulatory capital reforms recommended by the Basel Committee. The Final Rule permanently grandfathers non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 Risk-Based Capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009, such as the Company. As a result the Company’s trust preferred securities will continue to be included in Tier 1 Risk-Based Capital. The Company also currently includes in its Tier 1 capital an amount of Non-Cumulative Perpetual Preferred Stock, Series A issued under the SBLF program. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. Under the Final Rule, the CU Bancorp Preferred Stock will continue to be included in Tier 1 Risk-Based Capital.

As of December 31, 2014, the Company and the Bank are categorized as well-capitalized under the regulatory framework for Prompt Corrective Action. To be categorized as well-capitalized the Company and Bank must maintain minimum Total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios, as set forth in the following table.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts (as set forth in the table below) of Total capital and Tier 1 capital (as defined in the regulations) and ratios of Total capital and Tier 1 capital to risk-weighted assets (as defined) and to average assets (as defined).

The following tables present the Total Risk-Based Capital Ratio, Tier 1 Risk-Based Capital Ratio and the Tier 1 Leverage Ratio of the Consolidated Company in addition to the Bank as of December 31, 2014, and December 31, 2013, and compare the actual ratios to the capital requirements imposed by government regulations. All amounts reflected in the table below are stated in thousands, except percentages:

CU Bancorp Consolidated:


	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized Under Prompt Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2014
Total Risk-Based Capital Ratio	$	231,228		11.61	%	$	159,363		8.0	%	$	199,204		10.0	%
Tier 1 Risk-Based Capital Ratio		218,147		10.95	%		79,682		4.0	%		119,523		6.0	%
Tier 1 Leverage Ratio		218,147		12.92	%		67,564		4.0	%		84,455		5.0	%

As of December 31, 2013
Total Risk-Based Capital Ratio	$	145,372		12.80	%	$	90,844		8.0	%	$	113,555		10.0	%
Tier 1 Risk-Based Capital Ratio		134,440		11.84	%		45,422		4.0	%		68,133		6.0	%
Tier 1 Leverage Ratio		134,440		9.57	%		56,172		4.0	%		70,215		5.0	%

California United Bank:


	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized Under Prompt Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2014
Total Risk-Based Capital Ratio	$	223,112		11.20	%	$	159,300		8.0	%	$	199,125		10.0	%
Tier 1 Risk-Based Capital Ratio		210,031		10.55	%		79,650		4.0	%		119,475		6.0	%
Tier 1 Leverage Ratio		210,031		12.44	%		67,532		4.0	%		84,415		5.0	%

As of December 31, 2013
Total Risk-Based Capital Ratio	$	135,682		11.96	%	$	90,772		8.0	%	$	113,465		10.0	%
Tier 1 Risk-Based Capital Ratio		124,750		10.99	%		45,386		4.0	%		68,079		6.0	%
Tier 1 Leverage Ratio		124,750		8.90	%		56,082		4.0	%		70,102		5.0	%

Liquidity

The following table provides a summary of the Bank’s primary and secondary liquidity levels at the dates indicated (dollars in thousands):


	December 31, 2014			December 31, 2013
	Amount			Amount
Primary Liquidity — On Balance Sheet:
Cash and due from banks	$	33,996		$	23,156
Interest-earning deposits in other financial institutions		98,590			218,131
Investment securities available-for-sale		226,962			106,488
Less: pledged cash and due from banks		(1,500	)		(1,500	)
Less: pledged investment securities		(148,805	)		(92,800	)

Total primary liquidity	$	209,243		$	253,475

Ratio of primary liquidity to total deposits		10.7	%		21.5	%

Additional Liquidity Not Included In Primary Liquidity :
Certificates of deposit in other financial institutions	$	76,433		$	60,307
Less: Certificate of deposits pledged		(2,731	)		(4,341	)

Total additional liquidity	$	73,702		$	55,966

Secondary Liquidity — Off-Balance Sheet:
Available Borrowing Capacity:
Total secured borrowing capacity with FHLB	$	484,669		$	292,000
Fed Funds borrowing lines		71,000			54,500
Secured credit line with the FRBSF		17,528			5,245

Total secondary liquidity	$	446,215		$	351,745

As of December 31, 2014, the Company’s primary overnight source of liquidity consisted of the balances reflected in the table above. The Company’s primary liquidity consisted of cash and due from banks and interest-earning deposits in other financial institutions. The amount of funds maintained directly with the Federal Reserve included in interest-earning deposits in other financial institutions was $60.1 million and $197.7 million, at December 31, 2014 and December 31, 2013, respectively. The next source of liquidity is the Company’s collateralized borrowings and unsecured borrowing facilities. In addition, the Company has $76.4 million of certificates of deposits in other financial institutions where the weighted average maturity is approximately 5.9 months that could be utilized over time to supplement the liquidity needs of the Company.

The Company’s primary long term source of funding has come from the liability side of the balance sheet and has historically been through the growth in non-interest bearing and interest bearing core deposits from its customers. Additional sources of funds from the Company’s asset side of the balance sheet have included Federal Funds sold, interest-earning deposits with other financial institutions, balances maintained with the Federal Reserve Bank, certificates of deposit in other financial institutions and payments of principal and interest on loans and investment securities. While maturities and scheduled principal amortization on loans are a reasonably predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition.

As an additional source of liquidity, the Company maintains credit facilities, “Fed Funds Borrowing Lines,” of $71 million and $54.5 million at December 31, 2014 and December 31, 2013, respectively, with its primary correspondent banks for the purchase of overnight Federal funds. The lines are subject to availability of funds and have restrictions as to the number of days and length used during a month. At December 31, 2014 and December 31, 2014, $5 million of these credit facilities required the pledging of investment securities collateral.

The Company has established a secured credit facility with the FHLB of San Francisco which allows the Bank to borrow up to 25% of the Bank’s total assets, which equates to a credit line of approximately $362.7 million at December 31, 2014. The Company currently has no outstanding borrowings with the FHLB. As of December 31, 2014, the Company had $952.1 million of loan collateral pledged with the FHLB. This level of loan collateral would provide the Company with $462.9 million in borrowing capacity. Any amount of borrowings in excess of the $462.9 million would require the Company to pledge additional collateral. In addition, the Company must maintain a certain investment level in the common stock of the FHLB. The Company’s investment in the common stock of the FHLB is $8 million at December 31, 2014. This level of capital would allow the Company to borrow up to $170.5 million. Any advances from the FHLB in excess of the $170.5 million would require additional purchases of FHLB common stock. The Company had $23.3 million pledged with the FHLB at December 31, 2014.

The Company maintains a secured credit facility with the Federal Reserve Bank of San Francisco (“FRBSF”) which is collateralized by investment securities pledged with the FRB. At December 31, 2014, the Company’s available borrowing capacity was $17.5 million.

The Company maintains investments in certificates of deposit with other financial institutions, with various balances maturing monthly. The Company had balances of $76.4 million and $60.3 million at December 31, 2014 and December 31, 2013, respectively. At December 31, 2014, $2.7 million of the Company’s certificates of deposit with other financial institutions were pledged as collateral as credit support for the interest rate swap contracts and are not available as a source of liquidity.

At December 31, 2014 and December 31, 2013, $1.5 million of the Company’s due from bank balances was pledged as collateral as credit support for the interest rate swap contracts and is not available as a source of liquidity.

The Company’s commitments to extend credit (off-balance sheet liquidity risk) are agreements to lend funds to customers as long as there are no violations as established in the loan agreement. Many of the commitments are expected to expire without being drawn upon, and as such, the total commitment amounts do not necessarily represent future cash requirements. Financial instruments with off-balance sheet risk for the Company include both undisbursed loan commitments, as well as undisbursed letters of credit. The Company’s exposure to extend credit was $720 million and $346 million at December 31, 2014 and December 31, 2013, respectively.

Holding Company Liquidity

The primary sources of liquidity for CU Bancorp (“the holding company”), on a stand-alone basis, include the ability to raise capital through the issuance of capital stock, issue subordinated debt, secure outside borrowings and receive dividend payments from the Bank. The payment of dividends from the Bank to the holding company is the primary source of liquidity. The ability of the holding company to obtain funds for the payment of dividends to our stockholders and for the payment of holding company expenses is largely dependent upon the Bank’s earnings and retained earnings. The Bank is subject to restrictions under certain federal and state laws and regulations which limit its ability to transfer funds to the holding company through cash dividends, intercompany loans and or advances.

Dividends paid by state banks, such as California United Bank, are regulated by the California Department of Business Oversight “DBO” under its general supervisory authority, as it relates to a bank’s capital requirements. A state bank may declare a dividend without the approval of the DBO as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net profits for three previous fiscal years less any dividends paid during such period. The Bank has never paid a dividend to the holding company.

CU Bancorp’s liquidity on a stand-alone basis was $4.6 million and $4.3 million, in cash on deposit at the Bank, at December 31, 2014 and December 31, 2013, respectively. Management believes this amount of cash is currently sufficient to fund the holding company’s cash flow needs over at least the next twelve to twenty-four months.

Aggregate Contractual Obligations

The following table summarizes the aggregate contractual obligations as of December 31, 2014 (amounts in thousands):


	Maturity/Obligation by Period
	Total		Less than One Year		One Year to Three Years		Four Years to Five Years		After Five Years
Deposits	$	1,947,693	$	1,945,744	$	1,949	$	—	$	—
Securities sold under agreements to repurchase		9,411		9,411		—		—		—
Subordinated debentures		12,372		—		—		—		12,372
Operating leases		19,435		3,186		6,015		4,168		6,066

Total	$	1,980,459	$	1,957,378	$	5,983	$	2,045	$	15,053

For deposits, securities sold under agreements to repurchase and subordinated debentures, the dollar balances reflected in the table above are categorized by the maturity date of the obligation.

Deposits represent both non-interest bearing and interest bearing deposits. Non-interest bearing demand deposits include demand deposit accounts which represent 53% of the total deposit balances at December 31, 2014. Interest bearing deposits include interest bearing transaction accounts, money market and savings deposits and certificates of deposit.

Securities sold under agreements to repurchase “Repos” represent sales of securities under agreements to repurchase at a later date at a set price. While Repos have fixed maturity dates, the majority of the Company’s repos mature on an overnight “next business day” basis.

Subordinated debentures represent notes issued to capital trusts which were formed solely for the purpose of issuing trust preferred securities. These subordinated debentures were acquired as a part of the merger with PC Bancorp. The aggregate amount indicated above represents the full amount of the contractual obligation and does not include a purchase accounting fair value discount of $3.0 million. All of these securities are variable rate instruments. Each series has a maturity of 30 years from their approximate date of issue. All of these securities are currently callable at par with no prepayment penalties.

For operating leases, the dollar balances reflected in the table above are categorized by the due date of the lease payments. Operating leases represent the total minimum lease payments under non-cancelable operating leases.

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk arises primarily from credit risk, operational risk and interest rate risk inherent in our lending, investments, borrowings, and deposit taking activities. Risk management is an important part of the Company’s operations and a key element of its overall financial results. The FDIC, in recent years, has emphasized appropriate risk management, prompting banks to have adequate systems to identify, monitor and manage risks. The Company’s Board of Directors and committees meet on a regular basis to oversee operations. The Company’s business activities are monitored and various strategies to manage risk exposure are applied. The Board of Directors has adopted various policies and has empowered the committees with oversight responsibility concerning different aspects of our operations. The Company’s Audit and Risk Committee is responsible for overseeing internal auditing functions and for interfacing with independent outside auditors as well as compliance and related risk. The Company’s Loan Committee reviews large loans made by management, concentrations, portfolio and trend reports, minutes of management’s problem loan and OREO committee meetings and reviews with Audit and Risk Committee the external loan review reports on behalf of the Board of

Directors. The Company’s Management Asset/Liability Risk Committee establishes the Investment Policy, Liquidity Policy and the Asset/Liability Policy, reviews investments purchased, and monitors the investment portfolio, interest rate risk, and liquidity management. All committees regularly report to the Board of Directors.

Credit risk

Credit risk is defined as the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on a counter party, issuer or borrower performance. Credit risk arises through the extension of loans, deposits in other financial institutions, certain securities, other assets and letters of credit.

Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Company’s policies. Policy limitations on industry concentrations and house lending limits on aggregate customer borrowings, as well as underwriting standards to ensure loan quality are designed to reduce loan credit risk. Senior Management, Directors’ Loan Committees and the Board of Directors are provided with information to appropriately identify, measure, control and monitor the credit risk of the Company.

Credit risk in the investment securities area is addressed by the Company through a review of the Company’s securities by management on a quarterly basis. Credit risk within the securities portfolio is the risk that the Company will not be able to recover all of the principal value on its investment securities. This credit review process starts with the Company evaluating the securities portfolio to determine if there has been an other-than-temporary impairment on each of the individual securities in the investment securities portfolio. To determine if an other-than-temporary impairment exists on a debt security, the Company first 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 an other-than-temporary impairment 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 impairments 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 accumulated other comprehensive income (loss). Significant judgment of management 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

Implicit in lending activities is the risk that losses will occur and that the amount of such losses will vary over time. Consequently, we maintain an allowance for loan loss (“Allowance”) by charging a provision for loan losses to earnings. Loans determined to be losses are charged against the Allowance. Our Allowance is maintained at a level considered by us to be adequate to provide for estimated probable losses inherent in the existing portfolio.

The Allowance is based upon estimates of probable losses inherent in the loan portfolio. The nature of the process by which we determine the appropriate Allowance requires the exercise of considerable judgment. The amount of losses (actual charge-offs) realized with respect to the Company’s loan portfolio can vary significantly from the estimated amounts. We employ a systematic methodology that is intended to reduce the differences between estimated and actual losses.

The Company’s methodology for assessing the appropriateness of the Allowance is conducted on a quarterly basis and considers all loans. The systematic methodology consists of two major elements.

The first major element includes a detailed analysis of the loan portfolio in two phases. Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan. Impairment is measured as either the

expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent or an observable market price of the loan (if one exists). Upon measuring the impairment, we will ensure an appropriate level of Allowance is present or established.

Central to the first phase of our credit risk management is our loan risk rating system. The originating relationship officer assigns borrowers an initial risk rating, which is reviewed and confirmed or possibly changed by Credit Management, which is based primarily on a thorough analysis of each borrower’s financial capacity and the loan underwriting structure, in conjunction with industry and economic trends. Approvals are granted based upon the amount of acceptable inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in payment performance or in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

The Company augments its credit review function by engaging an outside party to review our loans twice a year. In 2014, the Company had two loan reviews conducted during the year by an outside third party. The first loan review was based on loan data as of April 30, 2014 and the second review was based on loan data as of September 30, 2014. The final loan review report was issued in August 2014 for the first review and in November 2014 for the second review. The purpose of this review is to assess loan risk ratings, to determine if there is any deterioration in the credit quality of the portfolio and to assess the adequacy of the Allowance.

The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics. In this second phase, groups of loans are reviewed to evaluate the historical loss experience, adjusted for qualitative factors in each category of loans, and then aggregated to determine a portfolio Allowance. Uniform Bank Peer Group loss experience is considered for those loan segments where the Company had no historical loss experience. The quantitative portion of the Allowance is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcomes inherent in the estimates used for the Allowance.

In the second major element of the analysis, all known relevant internal and external factors that may affect a loan’s collectability are considered. We also perform an evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowance. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the Allowance include, but are not limited to the following conditions that existed as of the balance sheet date:

•

then-existing general economic and business conditions affecting the key lending areas of the Company

•

then-existing economic and business conditions of areas outside the lending areas, if any

•

credit quality trends (including trends in non-performing loans expected to result from existing conditions)

•

collateral values

•

loan volumes and concentrations

•

seasoning of the loan portfolio

•

specific industry conditions within portfolio segments

•

recent loss experience in particular segments of the portfolio

•

duration of the current business cycle

•

bank regulatory examination results and

•

findings of the Company’s external credit review examiners

To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, our estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, our evaluation of the inherent loss related to such condition is reflected in the second major element of the Allowance. The relationship of the two major elements of the Allowance to the total Allowance may fluctuate from period to period. Although we have allocated a portion of the Allowance to specific loan categories, the adequacy of the Allowance must be considered in its entirety. See Lending and Allowance for Loan Losses section of Item 7, Management’s Discussion and Analysis on Financial Condition and Results of Operations for further discussion.

Interest Rate Risk

Interest rate risk is the exposure of a Company’s financial condition, both earnings and the market value of assets and liabilities, to adverse movements in interest rates. Interest rate risk results from differences in the maturity or timing of interest earning assets and interest bearing liabilities, changes in the slope of the yield curve over time, imperfect correlation in the adjustment of rates earned and paid on different instruments with otherwise similar characteristics (e.g. three-month Treasury bill versus three-month LIBOR) and from interest-rate-related options embedded in bank products (e.g. loan prepayments, floors and caps, callable investment securities, customers redeploying non-interest bearing to interest bearing deposits, etc).

The potential impact of interest rate risk is significant because of the liquidity and capital adequacy consequences that reduced earnings or net operating losses caused by a reduction in net interest income could imply. We recognize and accept that interest rate risk is a routine part of bank operations and will from time to time impact our profits and capital position. The objective of interest rate risk management is to control exposure of net interest income to risks associated with interest rate movements in the market, to achieve consistent growth in net interest income and to profit from favorable market opportunities.

The careful planning of asset and liability maturities and the matching of interest rates to correspond with this maturity matching is an integral part of the active management of an institution’s net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may be affected. Even when interest earning assets are perfectly matched to interest-bearing liabilities from a repricing standpoint, risks remain in the form of prepayment of assets, and the possibility of timing lags between when the assets reprices and the liabilities reprice (the repricing between the assets and liabilities may not happen at exactly the same time), and the possibility that the assets may not reprice to the same extent that the liabilities reprice due to different pricing indices that the products are tied to. In our overall attempt to match assets and liabilities, we take into account rates and maturities to be offered in connection with our certificates of deposit and our fixed rate as well as variable rate loans. Because of our ratio of rate sensitive assets to rate sensitive liabilities, the Company will be positively affected by an increasing interest rate market.

Variable rate loans make up 73% of the loan portfolio; however, the Company has floors on some of its loans. At December 31, 2014, 37% of variable rate loans are at the floor and thus an increase in the underlying index may not necessarily result in an increase in the coupon until the loans index plus margin exceeds that floor. At December 31, 2014, the Company has approximately $205 million in variable rate loans tied to prime, that are at their interest rate floor. The prime rate index would have to increase by more than 44 basis points on average before the loans would re-price.

The Company had 22 pay-fixed, receive-variable interest rate contracts that were designed to convert fixed rate loans into variable rate loans, with remaining maturities extending out for up to nine years These swaps were acquired as a result of the PC Bancorp acquisition. The majority (twenty of the twenty-two interest rate swap contracts) are designated as accounting hedges at December 31, 2014. The total notional amount of the outstanding swaps contracts as of December 31, 2014 is $29 million. Additionally, at December 31, 2014, 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 1^st 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 volatility in the Company’s earnings. At December 31, 2014, the total notional amount of the Company’s swaps acquired from 1^st Enterprise was $35.7 million.

Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone cannot be used to evaluate our interest rate sensitivity position. To supplement traditional gap analysis, we perform simulation modeling to estimate the potential effects of changing interest rates. The process allows us to explore the complex relationships within the gap over time and various interest rate environments.

The following table is a summary of the Company’s one-year GAP as of the dates indicated (dollars in thousands):


	December 31,
	2014		2013		Increase (Decrease)
Total interest-sensitive assets maturing or repricing within one year (“one-year assets”)	$	1,256,339	$	831,743	$	424,596
Total interest-sensitive liabilities maturing or repricing within one year (“one-year liabilities”)		932,143		618,378		313,765

One-year GAP	$	324,196	$	213,365	$	110,831

The following tables present the Company’s GAP information as of the date indicated (dollars in thousands):


	Maturity or Repricing Data
December 31, 2014	Three Months or Less			Over Three Through Twelve Months			Over One Year Through Three Years			Over Three Years			Non-Interest Bearing			Total
Interest-Sensitive Assets:
Cash and due from banks	$	—		$	—		$	—		$	—		$	33,996		$	33,996
Interest earning deposits in other financial institutions		98,590			—			—			—			—			98,590
average yield		0.30	%		—			—			—			—			0.30	%
Certificates of deposit in other financial institutions		23,560			52,873						—			—			76,433
average yield		0.52	%		0.66	%					—			—			0.62	%
Investment securities		9,974			65,077			62,241			136,817			—			274,109
average yield		1.56	%		1.43	%		1.38	%		2.32	%		—			1.87	%
Loans, gross (1)		890,389			115,876			200,705			417,753			—			1,624,723
average yield (2)		3.96	%		4.86	%		4.67	%		4.60	%		—			4.28	%

Total interest-sensitive assets	$	1,022,513		$	233,826		$	262,946		$	554,570		$	33,996		$	2,107,851

Interest-Sensitive Liabilities:
Non-interest bearing demand deposits	$	—		$	—		$	—		$	—		$	1,032,634		$	1,032,634
Interest-bearing transaction accounts		206,544			—			—			—			—			206,544
average rate		0.17	%		—			—			—			—			0.17	%
Money market and Savings deposits		643,675			—			—			—			—			643,675
average rate		0.24	%		—			—			—			—			0.24	%
Certificates of deposit		11,461			51,514			1,865						—			64,840
average rate (3)		0.30	%		0.26	%		0.68	%					—			0.28	%
Securities sold under agreements to repurchase		9,411			—			—			—			—			9,411
average rate		0.20	%		—			—			—			—			0.20	%
Subordinated debentures		9,538			—			—			—			—			9,538
average rate (4)		4.49	%		—			—			—			—			4.49	%

Total interest-sensitive liabilities	$	880,629		$	51,514		$	1,865		$	—		$	1,032,634		$	1,966,642

GAP	$	141,884		$	182,312		$	261,081		$	554,570		$	(998,638	)	$	141,209

Cumulative GAP	$	141,884		$	324,196		$	585,277		$	1,139,847		$	141,209

(1)	Variable rate loans at or below their floor are categorized based on their maturity date.

(2)	Excludes amortization of the net deferred loan fees and loan discount accretion.

(3)	Excludes amortization of the fair value adjustments on the PC Bancorp certificates of deposit.

(4)	Includes amortization of the fair value adjustments on these subordinated debentures.

We also utilize the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The simulation model estimates the impact of changing interest rates on the interest income from all interest earning assets and the interest expense paid on all interest bearing

liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 100 and 400 basis point upward and 200 basis point downward shift in interest rates.

The following depicts the Company’s net interest income sensitivity analysis as of December 31, 2014:


Simulated Rate Changes	Estimated Net Interest Income Sensitivity (dollars in thousands)
+ 400 basis points		37.9	%	$	27,538
+ 100 basis points		9.0	%	$	6,566
- 200 basis points (1)		(4.4	)%	$	(3,178	)

(1)

The simulated rate change under the -200 basis points reflected above actually reflects only a maximum negative 25 basis points or less decline in actual rates based on the targeted Fed Funds target rate by the government of 0% to 0.25%. The -200 simulation model reflects repricing of liabilities of between 0% to 0.25% with little to no repricing of the Company’s interest earning assets at the current levels.

The Company is currently asset sensitive. The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

Because of our ratio of rate sensitive assets to rate sensitive liabilities, we tend to benefit from an increasing interest rate market and, conversely, suffer in a decreasing interest rate market. As such, the management of interest rates and inflation through national economic policy may have an impact on our earnings. Increases in interest rates may have a corresponding impact on the ability of borrowers to repay loans with us.

Inflation

The impact of inflation on a financial institution can differ significantly from that exerted on other companies. Banks, as financial intermediaries, have many assets and liabilities that may move in concert with inflation both as to interest rates and value. However, financial institutions are affected by inflation’s impact on non-interest expenses, such as salaries and occupancy expenses.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CU BANCORP

INDEX TO FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES


	Page
Report of Independent Registered Public Accounting Firm		95
Consolidated Financial Statements
Consolidated Balance Sheets		96
Consolidated Statements of Income		97
Consolidated Statements of Comprehensive Income		98
Consolidated Statements of Shareholders’ Equity		99
Consolidated Statements of Cash Flows		100
Notes to Consolidated Financial Statements		102

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A — CONTROLS AND PROCEDURES

a) Evaluation of disclosure controls and procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of our fiscal year. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

b) Changes in internal controls over financial reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified during the fiscal quarter that ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f). Our internal control system was designed to provide reasonable assurance to management and the board of directors regarding the effectiveness of our internal control processes over the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2014 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission (COSO) issued in 2013. Based on our assessment, we believe that, as of December 31, 2014, our internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

ITEM 9B — OTHER INFORMATION

None

PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3).

The additional information required by this item will appear in the Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders (the “2015 Proxy Statement”), and such information either shall be (i) deemed to be incorporated herein by reference from that portion of the 2015 Proxy Statement, if filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the Company’s most recently completed fiscal year, or (ii) included in an amendment to this report filed with the SEC on Form 10-K/A not later than the end of such 120 day period.

Item 11. Executive Compensation

The information required by this item will appear in the 2015 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2015 Proxy Statement, if filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the Company’s most recently completed fiscal year, or (ii) included in an amendment to this report filed with the SEC on Form 10-K/A not later than the end of such 120 day period.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

See Item 14. below.

Item 13. Certain Relationship and Related Transactions, and Director Independence

See Item 14. below

Item 14. Principal Accountant Fees and Services.

Pursuant to General Instruction G(3), the information required to be furnished by ITEMS 12, 13 and 14 of Part III will appear in the 2015 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2015 Proxy Statement, if filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the Company’s most recently completed fiscal year, or (ii) included in an amendment to this report filed with the SEC on Form 10-K/A not later than the end of such 120 day period.

Employee Code of Conduct

CU Bancorp has adopted a Code of Conduct (the CU Bancorp Principles of Business Conduct and Ethics) that applies to all employees, directors and officers, including the Company’s principal executive officer, principal financial and accounting officer. The Code of Conduct is also applicable to the Board of Directors and can also be located on the Company’s website by visiting www.cunb.com under Investor Relations. A copy of the Code of Conduct is available, without charge, upon written request to CU Bancorp, Human Resources, 15821 Ventura Blvd., Suite 100, Encino, CA 91436.

PART IV

ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

Documents Filed as Part of this Report

Financial Statements

Reference is made to the Index to Financial Statements for a list of financial statements filed as part of this Report.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

CU Bancorp

We have audited the accompanying consolidated balance sheets of CU Bancorp and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

/s/McGladrey LLP

Irvine, California

March 13, 2015

CU BANCORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	December 31,
	2014			2013
ASSETS
Cash and due from banks	$	33,996		$	23,156
Interest earning deposits in other financial institutions		98,590			218,131

Total cash and cash equivalents		132,586			241,287
Certificates of deposit in other financial institutions		76,433			60,307
Investment securities available-for-sale, at fair value		226,962			106,488
Investment securities held-to-maturity, at amortized cost		47,147			—

Total investment securities		274,109			106,488
Loans		1,624,723			933,194
Allowance for loan loss		(12,610	)		(10,603	)

Net loans		1,612,113			922,591
Premises and equipment, net		5,377			3,531
Deferred tax assets, net		16,504			11,835
Other real estate owned, net		850			—
Goodwill		63,950			12,292
Core deposit and leasehold right intangibles		9,547			2,525
Bank owned life insurance		38,732			21,200
Accrued interest receivable and other assets		34,916			25,760

Total Assets	$	2,265,117		$	1,407,816

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Non-interest bearing demand deposits	$	1,032,634		$	632,192
Interest bearing transaction accounts		206,544			155,735
Money market and savings deposits		643,675			380,915
Certificates of deposit		64,840			63,581

Total deposits		1,947,693			1,232,423
Securities sold under agreements to repurchase		9,411			11,141
Subordinated debentures, net		9,538			9,379
Accrued interest payable and other liabilities		19,283			16,949

Total Liabilities		1,985,925			1,269,892

Commitments and Contingencies (Note 21)
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 December 31, 2014 and 0 shares issued and outstanding at December 31, 2013		16,004			—
Common stock – authorized, 75,000,000 shares no par value, 16,683,856 and 11,081,364 shares issued and outstanding at December 31, 2014 and 2013, respectively		226,389			121,675
Additional paid-in capital		19,748			8,377
Retained earnings		16,861			8,077
Accumulated other comprehensive income (loss)		190			(205	)

Total Shareholders’ Equity		279,192			137,924

Total Liabilities and Shareholders’ Equity	$	2,265,117		$	1,407,816

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

CU BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)


	Years Ended December 31,
	2014			2013		2012
Interest Income
Interest and fees on loans	$	51,882		$	48,201	$	34,268
Interest on investment securities		2,369			1,913		2,421
Interest on interest bearing deposits in other financial institutions		926			732		807

Total Interest Income		55,177			50,846		37,496

Interest Expense
Interest on interest bearing transaction accounts		278			238		184
Interest on money market and savings deposits		963			1,027		927
Interest on certificates of deposit		216			255		264
Interest on securities sold under agreements to repurchase		34			74		90
Interest on subordinated debentures		431			485		332

Total Interest Expense		1,922			2,079		1,797

Net Interest Income		53,255			48,767		35,699
Provision for loan losses		2,239			2,852		1,768

Net Interest Income After Provision For Loan Losses		51,016			45,915		33,931
Non-Interest Income
Gain (Loss) on sale of securities, net		(47	)		47		—
Other-than-temporary impairment losses		—			—		(155	)
Gain on sale of SBA loans, net		1,221			1,087		50
Deposit account service charge income		2,744			2,377		2,130
Other non-interest income		3,791			3,007		1,936

Total Non-Interest Income		7,709			6,518		3,961

Non-Interest Expense
Salaries and employee benefits (includes stock based compensation expense of $1,699, $1,088 and $1,120 for the years ended December 31, 2014, 2013 and 2012, respectively)		26,519			22,870		18,729
Occupancy		4,112			4,194		3,564
Data processing		1,968			1,868		1,905
Legal and professional		2,006			2,166		1,350
FDIC deposit assessment		844			880		719
Merger expenses		2,302			43		3,058
OREO valuation write-downs and expenses		15			95		343
Office services expenses		1,026			1,034		1,127
Other operating expenses		4,593			4,490		3,705

Total Non-Interest Expense		43,385			37,640		34,500
Net Income Before Provision for Income Tax Expense		15,340			14,793		3,392

Provision for income tax expense		6,432			5,008		1,665
Net Income		8,908			9,785		1,727
Preferred stock dividends and discount accretion		124			—		—

Net Income available to common shareholders	$	8,784		$	9,785	$	1,727

Earnings Per Share
Basic earnings per share	$	0.77		$	0.93	$	0.21
Diluted earnings per share	$	0.75		$	0.90	$	0.21

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

CU BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)


	Years Ended December 31
	2014		2013			2012
Net Income	$	8,908	$	9,785		$	1,727
Other Comprehensive Income (Loss), net of tax:
Non-credit portion of other-than-temporary impairments arising during the period		—		(22	)		464
Net unrealized gains (losses) on investment securities arising during the period		395		(1,577	)		40

Other Comprehensive Income (Loss)		395		(1,599	)		504

Comprehensive Income	$	9,303	$	8,186		$	2,231

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

CU BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Years Ended December 31, 2014

(Dollars and shares in thousands)


	Preferred Stock				Common Stock
	Outstanding Shares		Amount		Outstanding Shares			Amount		Additional Paid in Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2011		—	$	—		6,950		$	77,225	$	6,164		$	(3,435	)	$	890		$	80,844

Net Issuance of restricted stock		—		—		110			—		—			—			—			—
Issuance of stock for purchase of PC Bancorp, net of $199 in issuance costs		—		—		3,721			41,660		—			—			—			41,660
Stock based compensation expense related to employee stock options and restricted stock		—		—		—			—		1,120			—			—			1,120
Restricted stock repurchase		—		—		(22	)		—		(228	)		—			—			(228	)
Excess tax deficiency – Stock based compensation		—		—		—			—		(4	)		—			—			(4	)
Net Income		—		—		—			—		—			1,727			—			1,727
Other Comprehensive Income		—		—		—			—		—			—			504			504

Balance at December 31, 2012		—		—		10,759		$	118,885	$	7,052		$	(1,708	)	$	1,394		$	125,623

Net issuance of restricted stock		—		—		69			—		—			—			—			—
Exercise of stock options		—		—		282			2,790		—			—			—			2,790
Stock based compensation expense related to employee stock options and restricted stock		—		—		—			—		1,088			—			—			1,088
Restricted stock repurchase		—		—		(29	)		—		(422	)		—			—			(422	)
Excess tax benefit – stock based compensation		—		—		—			—		659			—			—			659
Net Income		—		—		—			—		—			9,785			—			9,785
Other Comprehensive (Loss)		—		—		—			—		—			—			(1,599	)		(1,599	)

Balance at December 31, 2013		—	$	—		11,081		$	121,675	$	8,377		$	8,077		$	(205	)	$	137,924

Net issuance of restricted stock				—		168			—		—			—			—			—
Exercise of stock options		—		—		221			2,029		—			—			—			2,029
Issuance of preferred stock for 1^st Enterprise merger, net of fair value discount		16,400		15,921		—			—		—			—			—			15,921
Issuance of common stock for 1^st Enterprise merger, net of $27 of issuance costs		—		—		5,240			102,685		—			—			—			102,685
Issuance of replacement stock options for 1^st Enterprise merger		—		—		—			—		9,561			—			—			9,561
Stock based compensation expense related to employee stock options and restricted stock		—		—		—			—		1,699			—			—			1,699
Restricted stock repurchase		—		—		(26	)		—		(471	)		—			—			(471	)
Excess tax benefit – stock based compensation		—		—		—			—		582			—			—			582
Preferred stock dividends and discount accretion		—		83		—			—		—			(124	)		—			(41	)
Net Income		—		—		—			—		—			8,908			—			8,908
Other Comprehensive Income		—		—		—			—		—			—			395			395

Balance at December 31, 2014		16,400	$	16,004		16,684		$	226,389	$	19,748		$	16,861		$	190		$	279,192

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

CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


	Years Ended December 31,
	2014			2013			2012
Cash flows from operating activities:
Net income:	$	8,908		$	9,785		$	1,727
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,239			2,852			1,768
Provision for unfunded loan commitments		142			73			34
Stock based compensation expense		1,699			1,088			1,120
Depreciation		1,019			1,082			1,022
Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs		(5,360	)		(6,158	)		(3,654	)
Net amortization from investment securities		1,677			1,642			1,403
Increase in bank owned life insurance		(661	)		(617	)		(267	)
Amortization of core deposit intangibles		391			309			219
Amortization of time deposit premium		(42	)		(141	)		(140	)
Net amortization of leasehold right intangible asset and liabilities		142			(313	)		(315	)
Accretion of subordinated debenture discount		159			210			94
Loss on disposal of fixed assets		7			15			5
OREO valuation write-downs		—			—			232
Gain on sale of OREO		—			(23	)		—
Net other-than-temporary impairment losses recognized in operations		—			—			155
Loss (gain) on sale of securities, net		47			(47	)		—
Gain on sale of SBA loans, net		(1,221	)		(1,087	)		(50	)
Decrease (increase) in deferred tax assets		732			3,101			(751	)
Decrease (increase) in accrued interest receivable and other assets		2,428			(7,558	)		(668	)
Increase in accrued interest payable and other liabilities		2,041			6,459			1,282
Net excess in tax benefit on stock compensation		(582	)		—			—
Decrease in fair value of derivative swap liability		(1,147	)		(2,095	)		(599	)

Net cash provided by operating activities		12,618			8,577			2,888

Cash flows from investing activities:
Cash and cash equivalents acquired in acquisition, net of cash paid		8,650			—			41,716
Purchases of available-for-sale investment securities		(52,042	)		(36,318	)		(7,255	)
Proceeds from sales of available-for-sale investment securities		25,156			6,968			17,278
Proceeds from repayment and maturities from available-for-sale investment securities		23,080			36,703			29,720
Loans originated, net of principal payments		(132,846	)		(72,116	)		(84,387	)
Purchases of premises and equipment		(1,042	)		(1,206	)		(823	)
Proceeds from sale of OREO		—			3,135			—
Net (increase) decrease in certificates of deposit in other financial institutions		(4,572	)		(33,301	)		12,849
Purchase of bank owned life insurance		—			—			(14,000	)
Net redemption of FHLB and other bank stock		—			150			866

Net cash used in investing activities		(133,616	)		(95,985	)		(4,036	)

Cash flows from financing activities:
Net increase in non-interest bearing demand deposits		67,591			88,665			82,080
Net increase in interest bearing transaction accounts		8,033			42,988			40,893
Net (decrease) increase in money market and savings deposits		(55,236	)		40,449			(38,646	)
Net decrease in certificates of deposit		(8,433	)		(17,614	)		(30,951	)
Net decrease in securities sold under agreements to repurchase		(1,730	)		(11,716	)		(3,330	)
Net proceeds from stock options exercised		2,029			2,790			—
Issuance costs of common stock for 1^st Enterprise merger		(27	)		—			—
Restricted stock repurchase		(471	)		(422	)		(228	)
Dividends paid on preferred stock		(41	)		—			—
Net (deficiency) excess in tax benefit on stock compensation		582			659			(4	)

Net cash provided by financing activities		12,297			145,799			49,814

Net increase (decrease) in cash and cash equivalents		(108,701	)		58,391			48,666
Cash and cash equivalents, beginning of year		241,287			182,896			134,230

Cash and cash equivalents, end of year	$	132,586		$	241,287		$	182,896

100

CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)


	Years Ended December 31,
	2014		2013			2012
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$	1,801	$	2,029		$	1,681
Net cash paid (refunds received) during the year for taxes	$	3,725	$	(270	)	$	2,685
Supplemental disclosures of non-cash investing activities:
Net increase (decrease) in unrealized gains (losses) on investment securities, net of tax	$	395	$	(1,577	)	$	504
Loans transferred to other real estate owned	$	850	$	—		$	—
Supplemental disclosures related to acquisitions:
Assets acquired	$	833,497	$	—		$	397,030
Liabilities assumed	$	705,214	$	—		$	354,708
Issuance of 16,400 shares of preferred stock	$	15,921	$	—		$	—
Cash paid for fractional and dissenter shares and stock options	$	89	$	—		$	456

The accompanying notes are an integral part of these financial statements

101

CU BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

Note 1 – Summary of Significant Accounting Policies

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”). See Note 2 – Business Combinations. 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, 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 headquarters office located in Encino, 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.

Basis of Financial Statement Presentation

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. For more detail, see Note 13 – Borrowings and Subordinated Debentures.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 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 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.

102

Business Combinations

The Company has a number of fair value adjustments recorded within the consolidated financial statements at December 31, 2014 that relate to the business combinations with California Oaks State Bank (COSB), Premier Commercial Bancorp (PC Bancorp) and 1^st Enterprise Bank (1^st 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. 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 the Company’s fair value declining to below its book value, the Company would perform an impairment analysis at that time.

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.

Cash and Cash Equivalents

Within the Consolidated Statements of Cash Flows, cash and cash equivalents include cash, due from banks and interest earning deposits in other financial institutions. Cash flows from loans, deposits, securities sold under agreements to repurchase and certificates of deposit in other financial institutions are reported on a net basis.

Restricted Cash

Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. Reserve balances of $12,450,000 and $1,129,000 were required by the Federal Reserve Bank of San Francisco as of December 31, 2014 and 2013, respectively. As of December 31,

103

2014, the Bank was in compliance with all known U.S. Federal Reserve Bank (“Federal Reserve”) reporting and reserve requirements. At December 31, 2014 and 2013 respectively, the Company had $4.1 million and $4.3 million pledged as collateral for its interest rate swap agreements with two counterparty banks.

Interest Earning Deposits in Other Financial Institutions

Interest earning deposits in other financial institutions represent short term interest earning deposits, which include money market deposit accounts with other financial institutions, including interest earning deposits with the Federal Reserve. These deposits and investments can generally provide the Company with immediate liquidity and generally can be liquidated the same day as is the case with the Federal Reserve and up to seven days on money market deposit accounts with other financial institutions.

Certificates of Deposit in Other Financial Institutions

The Company’s investments in certificates of deposit issued by other financial institutions are generally fully insured by the FDIC up to the applicable limit of $250,000 and have original maturity of between 30 days and 12 months. The current remaining maturities of the Company’s certificates of deposit at December 31, 2014 range from 2 days to 12 months with a weighted average maturity of 5.9 months and a weighted average yield of 0.62%.

Concentrations and Credit Risk in Other Financial Institutions

The Company maintains certain deposits in other financial institutions in amounts that exceed federal deposit insurance coverage. At December 31, 2014, the amount of deposits in other financial institutions that the Company did not maintain with either the Federal Reserve Bank or the Federal Home Loan Bank and were not covered by FDIC insurance was $30.0 million in non-interest bearing accounts, $30.8 million in interest bearing accounts, and $2.5 million in certificates of deposit in other financial institutions. Based on management’s evaluation of the credit risk of maintaining balances and transactions with these correspondent financial institutions, management does not believe that the Company is exposed to any significant credit risk on these balances.

Investment Securities

104

Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank of San Francisco (“FHLB”), the Bank is required to maintain an investment in capital stock of the FHLB. The stock does not have a readily determinable fair value and as such is carried at cost and evaluated for impairment. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the changes in (increases or declines) in the net assets of the FHLB as compared to the capital stock amount and the length of time these changes (situation) has persisted, (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.

The FHLB has reported earnings for the years ended December 31, 2014, 2013, and 2012, and remains in compliance with its regulatory capital and liquidity requirements. See Note 5 – Investment Securities, Investments in FHLB Common Stock. With consideration given to these factors, management concluded that the stock was not impaired at December 31, 2014, 2013 or 2012.

The Company’s investment in FHLB stock is included in other assets on the accompanying balance sheets.

105

Loans and Interest and Fees on Loans

The Company extends commercial, Small Business Administration, commercial real estate, construction and personal loans to business principals and entrepreneurs, to small and medium-sized businesses, to non-profit organizations, to the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers, and to investors. Loans that the Company has the ability and intent to hold until maturity are stated at their outstanding unpaid principal balances, net of deferred loan fees, unearned discounts, fair value credit valuation allowance and net of the allowance for loan loss. The Company recognizes loan origination fees to the extent they represent reimbursement for initial direct costs, as income at the time of loan boarding. The excess of fees over costs, if any, is deferred and recognized in interest income using the level yield method.

Interest on loans is accrued daily and credited to income based on the principal amount outstanding. Interest is calculated using the terms of the loan according to the contractual note agreements. A small number of loans have been identified and designated as hedged items by the Company. For a detailed discussion of the accounting related to the loans designated as hedged items, see Note 1 – Summary of Significant Accounting Policies under “Derivative Financial Instruments and Hedging Activity.”

Nonaccrual loans: For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and the accrual of interest on loans is discontinued when the loan has become delinquent by more than 90 days or when management determines that the full repayment of principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent, if the loan is well secured by collateral and in the process of collection.

When a loan is placed on nonaccrual status or has been charged-off, all interest income that has been accrued but not yet collected, is reversed against interest income. Subsequent payments received from the customer are applied to principal and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required.

Impaired loans: A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the original loan agreement. Generally, these loans are rated substandard or worse. Most impaired loans are classified as nonaccrual. However, there are some loans that are designated impaired due to doubt regarding collectability according to contractual terms, but are both fully secured by collateral and are current in their interest and principal payments. These impaired loans that are not classified as nonaccrual continue to pay as agreed. Impaired loans are measured for reserve requirements based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of an impairment reserve, if any, and any subsequent changes are charged against the allowance for loan loss. Factors that contribute to a performing loan being classified as impaired include payment status, collateral value, probability of collecting scheduled payments, delinquent taxes, and debts to other lenders that cannot be serviced out of existing cash flow.

Troubled debt restructurings: A loan is classified as a troubled debt restructuring when a borrower experiences financial difficulties that lead to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. The loan terms which have been modified or restructured due to a borrower’s financial difficulty may include a reduction in the stated interest rate, an extension of the maturity at an interest rate below current market interest rates, a reduction in the face amount of the debt (principal forgiveness), a reduction in the accrued interest, or re-aging, extensions, deferrals, renewals, rewrites and other actions intended to minimize potential losses.

106

Troubled debt restructurings are considered impaired loans and are evaluated for the amount of impairment, with the appropriate allowance for loan loss.

In determining whether a debtor is experiencing financial difficulties, the Company considers if the debtor is in payment default or would be in payment default in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor will continue as a going concern, the debtor’s entity-specific projected cash flows will not be sufficient to service its debt, or the debtor cannot obtain funds from sources other than the existing creditors at a market rate for debt with similar risk characteristics.

In determining whether the Company has granted a concession, the Company assesses, if it does not expect to collect all amounts due, whether the current value of the collateral will satisfy the amounts owed, whether additional collateral or guarantees from the debtor will serve as adequate compensation for other terms of the restructuring, and whether the debtor otherwise has access to funds at a market rate for debt with similar risk characteristics.

A loan that is modified at a market rate of interest will not be classified as a troubled debt restructuring in the calendar year subsequent to the restructuring if it is in compliance with the modified terms and the expectation exists for continued performance going forward. Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that the borrower can meet the new terms. This may result in the loan being returned to accrual at the time of restructuring. The Company generally requires a period of sustained repayment for at least six months for return to accrual status.

Loans Held for Sale and Servicing Assets

Loans held for sale are loans originated by the Company and include the principal amount outstanding net of unearned income and the loans are carried at the lower of cost or fair value on an aggregate basis. A decline in the aggregate fair value of the loans below their aggregate carrying amount is recognized through a charge to earnings in the period of such decline. Unearned income on these loans is taken into earnings when they are sold. At December 31, 2014 and 2013, the Company had no loans classified as held for sale.

Gains or losses resulting from sales of loans are recognized at the date of settlement and are based on the difference between the cash received and the carrying value of the related loans less transaction costs. A transfer of financial assets in which control is surrendered is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in the exchange. Assets, liabilities, derivative financial instruments, or other retained interests issued or obtained through the sale of financial assets are measured at estimated fair value, if practicable.

The most common retained interest related to loan sales is a servicing asset. Servicing assets are amortized in proportion to and over the period of the estimated future net servicing income. The amortization of the servicing asset and the servicing income are included in noninterest income. The fair value of the servicing assets is estimated by discounting the future cash flows using market-based discount rates and prepayment speeds. The Company’s servicing asset is evaluated regularly for impairment. The servicing asset is stratified based on the original term to maturity and the year of origination of the underlying loans for purposes of measuring impairment. If the fair value of the servicing asset is less than the amortized carrying value, the asset is considered to be impaired and an impairment charge will be taken against earnings. The servicing asset is included in other assets on the consolidated balance sheets.

Allowance for Loan Loss

107

While the general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative factors as discussed in Note 6 – Loans, 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 reserves. The individual loan is evaluated for a specific reserve 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. Impaired loans are evaluated by comparing the fair value of the collateral less costs to sell, 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.

•

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which range from three to ten years for furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for improvements or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.

Other Real Estate Owned

Real estate properties that are acquired through, or in lieu of, loan foreclosure are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of the cost basis or fair value less estimated costs to sell. Revenue and expenses from operations and additions to the valuation allowance are included in other expenses.

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Goodwill and Other Intangible Assets

Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination determined to have an indefinite useful life are not amortized, but tested for impairment at least annually, or more frequently if events and circumstances exist that indicate that an impairment test should be performed. The Company has selected October 1^st as the date to perform its annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet. There was no impairment as of December 31, 2014 or 2013. The increase in goodwill in 2014 was the result of the merger with 1^st Enterprise Bank on November 30, 2014. For more discussion, see Note 2 – Business Combinations.

Core deposit intangible assets arising from business combinations are amortized using an accelerated method over their estimated useful lives and are classified under core deposit and leasehold right intangibles on the Company’s balance sheet.

Leasehold right intangible is the difference in the fair value of an acquired lease and the amount of payments required to be made under the lease obligation. The leasehold intangible asset is amortized to expense over the life of the lease and is classified under core deposit and leasehold right intangibles on the Company’s balance sheet.

Qualified Affordable Housing Project Investments

The Company has made investments in qualified affordable housing projects that are defined within the industry and here as investments in Low Income Housing Tax Credits (“LIHTC”). The investment in LIHTC provides the Company with tax credits and tax benefits which are designed to encourage investments in the construction and rehabilitation of low-income housing. The Company’s investments are made to limited partnerships that manage or invest in qualified affordable housing projects primarily to receive both tax credits and benefits in addition to CRA credits. In December 2013, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). ASU 2014-1 modifies the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost method to account for qualified affordable housing project investments. If the modified conditions are met, the amendments permit an entity to amortize the initial cost of the investment in proportion to the amount of the tax credits and tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The four conditions that must be met to utilize the proportional amortization method are: (a) it is probable that the tax credits allocable to the investor will be available, (b) the investor does not have the ability to exercise significant influence over the operating and financial policies of the limited partnership, and substantially all of the projected benefits are from tax credits and tax benefits, (c) the investor’s projected yield based solely on the cash flows from the tax credits and tax benefits is positive and (d) the investor is a limited partnership investor in the limited liability entity for both legal and tax purposes, and the investor is limited to its capital investment. The Company believes that all the above conditions are met to qualify the Company to account for its investments in LIHTC under ASU 2014-1. In addition, the Company is required to evaluate its investments in LIHTC for impairment, when there are events or changes in circumstances indicating it is more likely than not that the carrying amount of the Company’s investment would not be realized either through the receipt of tax credits and tax benefits or through a sale. Management does not believe there is any impairment of its LIHTC investments at December 31, 2014. See Note 11 – Investments in Qualified Affordable Housing Projects for details on the Company’s investments in LIHTC’s.

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Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Derivative Financial Instruments and Hedging Activities

Income Taxes and Other 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.

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Comprehensive Income

The Company has adopted accounting guidance issued by FASB that requires all items recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This also requires that an entity classify items of other comprehensive income by their nature in an annual financial statement. Other comprehensive income includes unrealized gains and losses, net of tax, on marketable securities classified as available-for-sale.

Earnings per Share (“EPS”)

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the dilutive effect of potential common stock using the treasury stock method only if the effect on earnings per share is dilutive. See Note 4 – Computation of Earnings per Common Share.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure (a consensus of the FASB Emerging Issues Task Force). The objective of this Update is to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. These amendments are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt these amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on the Company’s financial position or results of operations.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, to address investor concerns about the distinction in generally accepted accounting principles between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. ASU 2014-11 aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions all will be accounted for as secured borrowings. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a

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contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. ASU 2014-11 also requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Further, the ASU requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes are effective for public companies for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2014. Earlier application for a public company is prohibited, but all other companies and organizations may elect to apply the requirements for interim periods beginning after December 15, 2014. We do not expect the adoption of this ASU to have an impact on the Company’s financial position or results of operations.

In August 2014, the FASB issued ASU No. 2014-14, Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This ASU will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the ASU is effective for annual periods ending after December 15, 2015, and interim periods within annual periods thereafter. An entity can elect a prospective or a modified retrospective transition method, but must use the same transition method that it elected under FASB ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Early adoption, including adoption in an interim period, is permitted if the entity already adopted ASU 2014-04. We do not expect the adoption of this ASU to have a material impact on the Company’s financial position or results of operations.

In November 2014, the FASB issued 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. We do not expect the adoption of this ASU to have an impact on the Company’s financial position or results of operations.

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Note 2 – Business Combinations

On November 30, 2014, the Company completed the merger with 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 the CU Bancorp common stock, resulting in 5.2 million shares of CU Bancorp common stock issued. The fair value of the 5.2 million common stock issued as part of the consideration paid ($102.7 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 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.

The results of 1st Enterprise’s operations are included in the Consolidated Statements of Income from the date of acquisition. 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	$	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 have complementary business models and both have developed strong commercial banking platforms and production capabilities, low-

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cost deposit bases and robust credit cultures. The merger offers further delivery of sophisticated personal service to their target, small and middle-market business, entrepreneurs, non-profits and professional customers. The merger will provide the combined institution with financial benefits that include reduced combined operating expenses and synergies.

In accordance with GAAP, the Company expensed approximately $2.3 million of merger expenses and recorded $51.7 million of goodwill and $7.4 million of other intangible assets. The $2.3 million merger expense is included in the Company’s historical income statement for the year ended December 31, 2014. 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). For tax purposes, acquisition accounting adjustments, including goodwill are not taxable or deductible.

The following table summarizes the fair value of the total consideration transferred as part of the merger with 1st Enterprise as well as the fair value adjustments to 1st Enterprise’s balance sheet as of the acquisition date and the resulting goodwill:


				November 30, 2014
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
Net assets of 1st Enterprise at November 30, 2014					75,205
Fair value adjustments:
Investment securities	$	1,779
Loans, net		(12,362	)
Premises and equipment		(377	)
Deferred taxes		3,019
Core deposits and leasehold intangibles		7,424
Other assets		(52	)
Other liabilities		1,989

Total fair value adjustments					1,420

Fair value of net assets acquired				$	76,625

Excess of consideration paid over fair value of net assets acquired (goodwill)				$	51,658

We estimated the fair value for most loans acquired from 1^st 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.

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There was no carryover of 1^st 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 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 presents the fair value of loans pursuant to accounting standards for PCI and non-PCI loans as of the 1^st 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

Pro Forma Financial Information

The following table presents financial information regarding 1^st Enterprise operations included in our consolidated statement of income from the date of acquisition, November 30, 2014, through December 31, 2014. The following table also presents unaudited pro forma information for the periods indicated as though the 1^st Enterprise merger had been completed as of January 1, 2013. The 2014 pro forma net income excludes historical non-recurring merger expenses net of taxes, totaling approximately $3.2 million for the Company and 1^st Enterprise (dollars in thousands, except per share data).


	1^st Enterprise actual results from acquisition date through		Proforma Year ended December 31,			Proforma Year ended December 31,
	December 31, 2014		2014			2013
Net interest income after provision for loan losses	$	2,023	$	77,140		$	68,771
Net income		766	$	17,218		$	15,299

Preferred stock dividends and discount accretion				(1,234	)		(889	)

Net income available to common shareholders			$	15,984		$	14,410

Diluted earnings per share			$	0.94		$	0.87

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The accompanying financial statements below include the accounts of PC Bancorp since the acquisition date July 31, 2012. The following unaudited pro forma information presents select financial information for the periods indicated as though the PC Bancorp merger had been completed as of January 1, 2011. The 2012 and 2011 pro forma net income excludes non-recurring merger expenses, net of taxes of approximately $2.6 million and $183,000, respectively (dollars in thousands, except for per share data).


Supplemental Proforma Financial Data PC Bancorp Merger	Twelve Months Ended December 31,
	2012		2011
Net interest income	$	42,939	$	41,529
Net income	$	2,281	$	2,787
Diluted earnings per share	$	0.21	$	0.27

The above proforma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the merged companies that would have been achieved had the acquisition occurred at January 1, 2013 for 1^st Enterprise and January 1, 2011 for PC Bancorp, nor are they intended to represent or be indicative of future results of operations. The proforma results do not include expected operating cost savings as a result of the acquisitions. These proforma results require significant estimates and judgments particularly as it relates to valuation and accretion of income associated with acquired loans.

Note 3 – 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 and outstanding. Tangible book value per common share was calculated by dividing tangible shareholders’ equity by the number of common shares issued and outstanding. 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 per share data):


	Years Ended December 31,
	2014		2013
Total Shareholders’ Equity	$	279,192	$	137,924
Less: Preferred stock		16,004		—
Less: Goodwill		63,950		12,292
Less: Core deposit and leasehold right intangibles		9,547		2,525

Tangible Shareholders’ Equity	$	189,691	$	123,107

Common shares issued and outstanding		16,683,856		11,081,364
Book value per common share	$	15.78	$	12.45

Tangible book value per common share	$	11.37	$	11.11

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Note 4 – Computation of Earnings per Common Share

Basic and diluted earnings per common share were determined by dividing the net income available to common stockholders 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 weighted average diluted shares for each of the periods indicated (dollars in thousands, except per share data):


	Years Ended December 31,
	2014		2013		2012
Net Income	$	8,908	$	9,785	$	1,727
Less: Preferred stock dividends and discount accretion		124		—		—

Net Income available to common shareholders	$	8,784	$	9,785	$	1,727

Weighted average basic common shares outstanding		11,393,445		10,567,436		8,283,599
Dilutive effect of potential common share issuances from stock options and restricted stock		274,288		269,425		127,150

Weighted average diluted common shares outstanding		11,667,733		10,836,861		8,410,749

Income per common share
Basic	$	0.77	$	0.93	$	0.21
Diluted	$	0.75	$	0.90	$	0.21

Anti-dilutive shares not included in the calculation of diluted earnings per share		79,000		81,000		245,833

Note 5 – Investment Securities

The Company’s 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 and estimated fair values of investment securities by major category as of the dates indicated (dollars in thousands):


			Gross Unrealized
December 31, 2014	Amortized Cost		Gains		Losses		Estimated 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

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			Gross Unrealized
December 31, 2013	Amortized Cost		Gains		Losses		Estimated Fair Value
Available-for-sale:
U.S. Govt Agency and Sponsored Agency – Note Securities	$	4,153	$	1	$	2	$	4,152
U.S. Govt Agency – SBA Securities		50,521		875		491		50,905
U.S. Govt Agency – GNMA Mortgage-Backed Securities		28,107		180		909		27,378
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		15,348		345		479		15,214
Corporate Securities		5,086		125		—		5,211
Municipal Securities		3,621		9		2		3,628

Total available-for-sale		106,836		1,535		1,883		106,488

Total investment securities	$	106,836	$	1,535	$	1,883	$	106,488

The Company’s investment securities portfolio at December 31, 2014, consists of U.S. Treasury Notes, U.S. Agency and U.S. Sponsored Agency issued AAA and AA rated investment-grade callable and non-callable bonds, mortgage-backed pass through securities, asset backed securities and collateralized mortgage obligation “CMO” securities, investment grade corporate bond securities and investment grade municipal securities. As of December 31, 2014 and December 31, 2013, securities with a fair value of $89.3 million and $53.98 million were pledged as collateral for securities sold under agreements to repurchase, public deposits, outstanding standby letters of credit and other purposes as required by various statutes and agreements.

The Company had no securities that were classified as other-than-temporarily impaired at December 31, 2014 or 2013. The following tables present investment securities with unrealized losses that are considered to be temporarily-impaired, 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
December 31, 2014	Fair Value		Net Unrealized Loss		Fair Value		Net Unrealized Loss		Fair Value		Net 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

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	< 12 Continuous Months				> 12 Continuous Months				Total
December 31, 2013	Fair Value		Net Unrealized Loss		Fair Value		Net Unrealized Loss		Fair Value		Net Unrealized Loss
Temporarily-impaired available-for-sale investment securities:
U.S. Govt. – Agency and Sponsored Agency Note Securities	$	1,041	$	2	$	—	$	—	$	1,041	$	2
U.S. Govt. Agency – SBA Securities		11,686		491		—		—		11,686		491
U.S. Govt. Agency – GNMA Mortgage-Backed Securities		15,693		721		1,864		188		17,557		909
U.S. Govt. Sponsored Agency CMO & Mortgage-Backed Securities		7,650		479		—		—		7,650		479
Municipal Securities		—		—		1,029		2		1,029		2

Total temporarily-impaired available-for-sale investment securities	$	36,070	$	1,693	$	2,893	$	190	$	38,963	$	1,883

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.

The amortized cost, estimated fair value and average yield of debt securities at December 31, 2014, 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 – maturity 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.


	December 31, 2014
Maturities Schedule of Securities	Amortized Cost		Fair Value		Weighted Average Yield
Due through one year	$	28,307	$	28,467		1.73	%
Due after one year through five years		109,021		109,245		1.65	%
Due after five years through ten years		62,641		62,389		1.91	%
Due after ten years		26,665		26,861		2.55	%

Total	$	226,634	$	226,962		1.83	%

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	December 31, 2013
Maturities Schedule of Securities	Amortized Cost		Fair Value		Weighted Average Yield
Due through one year	$	17,574	$	17,759		1.69	%
Due after one year through five years		37,733		38,168		2.04	%
Due after five years through ten years		25,486		24,952		2.41	%
Due after ten years		26,043		25,609		2.75	%

Total	$	106,836	$	106,488		2.24	%

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

During the years ended December 31, 2014, 2013 and 2012 the Company recognized gross gains and (losses) on sales of available-for-sale securities and held-to-maturity securities in the amount of $(47,000), $47,000 and $0, respectively. The Company had net proceeds from the sale of available-for-sale securities and held-to-maturity securities of $25.2 million $7.0 million and $17.3 million during the years ended December 31, 2014, 2013 and 2012, respectively.

Investments in FHLB Common Stock

The Company’s investment in the common stock of the FHLB is carried at cost and was $8.0 million and $4.7 million as of December 31, 2014 and 2013, respectively. See Note 13 – Borrowings and Subordinated Debentures for a detailed discussion regarding the Company’s borrowings and the requirements to purchase FHLB common stock.

The FHLB has declared and paid cash dividends in 2013 and 2014. The Company has received cash dividends from the FHLB of $320,000 and $199,000 for the years ending December 31, 2014 and 2013, respectively. The Company acquired $3.8 million of FHLB common stock in 2014 as part of the acquisition of 1^st Enterprise. The FHLB made common stock redemptions of $150,300 during the year ending December 31, 2013. There was no such activity during the year ended December 31, 2014.

The FHLB has been classified as one of the Company’s primary correspondent banks and is evaluated on a quarterly basis as part of the Company’s evaluation of its correspondent banking relationships under Federal Reserve Board Regulation F.

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. No impairment losses have been recorded through December 31, 2014 and based on the current financial condition of the FHLB, no impairment losses appear necessary or warranted.

The Company’s investment in FHLB stock is included in other assets on the accompanying balance sheets.

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Note 6 – Loans

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


	December 31,
	2014		2013
*Commercial and Industrial Loans:*	$	528,517	$	299,473
*Loans Secured by Real Estate:*
Owner-Occupied Nonresidential Properties		339,309		197,605
Other Nonresidential Properties		481,517		271,818
Construction, Land Development and Other Land		72,223		47,074
1-4 Family Residential Properties		121,985		65,711
Multifamily Residential Properties		52,813		33,780

Total Loans Secured by Real Estate		1,067,847		615,988

*Other Loans:*		28,359		17,733

Total Loans	$	1,624,723	$	933,194

Loans are made to individuals, as well as commercial and tax exempt entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in Southern California where a majority of the Company’s loan customers are located.

The Company’s extensions of credit are governed by its credit policies which are established to control the quality, structure and adherence to applicable law of the Company’s loans. These policies are reviewed and approved by the Board of Directors on a regular basis.

Commercial and Industrial Loans: Commercial credit is extended primarily to middle market businesses, professional enterprises and their owners for business purposes. Typical loan types are working capital loans, loans for financing capital expenditures, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or in a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.

Commercial Real Estate Loans: The Company’s goal is to create and maintain a high quality portfolio of commercial real estate loans with customers who meet the quality and relationship profitability objectives of the Company. These loans include owner-occupied nonresidential properties and other nonresidential properties. Owner-occupied nonresidential property loans are subject to underwriting standards and processes similar to commercial and industrial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the business. Other nonresidential property loans are also subject to strict underwriting standards and processes. For these loans the Company looks at the underlying cash flows from these properties, which include: the debt service coverage, the cash flow from the existing tenants in the property, the historical vacancy of the property, the financial strength of the tenants, and the type and duration of signed leases. Loan performance of commercial real estate loans may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

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Construction and Land Development Loans: The Company defines construction loans as loans where the loan proceeds are controlled by the Company and used for the improvement of real estate in which the Company holds a deed of trust. Land development loans are loans on vacant land that may be developed by the owner of the property sometime in the future. Due to the inherent risk in this type of loan, they are subject to other specific underwriting policy guidelines outlined in the Company’s Credit Risk Policy and are monitored closely.

Residential Loans: The Company originates residential real estate loans as either home equity lines of credit or multifamily “apartment loans.” Home equity lines of credit (“HELOCs”) are made to individuals and to business principals with whom the Company maintains, in most cases, either a business lending or deposit relationship. The underwriting standards are typical of home equity products with loan to value and debt service considerations. Multifamily loans are underwritten based on the projected cash flows of the property with consideration of market conditions and values where the property is located.

Other Loans: The Company originates loans to individuals for personal expenditures and investments that the Company maintains in most cases either a deposit or business relationship with. Also included in this category are loans to non-depository financial institutions.

Purchased loans: Loans acquired in acquisitions are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan loss. Loans acquired with deteriorated credit quality are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect principal and interest payments according to the contractual terms of the original loan agreement. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and non-accrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the credit loss. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

Restructured loans: Loans may be restructured in an effort to maximize collections. The Company may use various restructuring techniques, including, but not limited to, deferral of past due interest or principal, redeeming past due taxes, reduction of interest rates, extending maturities and modification of amortization schedules. The Company does not typically forgive principal balances or past due interest prior to pay-off or surrender of the property.

Concentrations

The Company makes commercial, construction, commercial real estate, and consumer home equity loans to customers primarily in Los Angeles, Orange, San Bernardino and Ventura Counties. As an abundance of caution, the Company may require commercial real estate collateral on a loan classified as a commercial loan. At December 31, 2014, loans secured by real estate collateral accounted for approximately 66% of the loan portfolio. Of these loans, 94% are secured by first trust deed liens and 6% are secured by second trust deed liens. In addition, 32% are secured by owner-occupied non-residential properties. Loans secured by first trust deeds on commercial real estate generally have an initial loan to value ratio of not more than 75%, except for SBA guaranteed loans which may exceed this level. The Company’s policy for requiring collateral is to obtain collateral whenever it is available or desirable; depending upon the degree of risk in the proposed credit transaction. In addition, 25% of total loans have been secured by a UCC filing on the business property of the borrower. Approximately 7% of loans are unsecured. The Company’s loans are expected to be repaid from cash flows or from proceeds from the sale of selected assets of the borrowers.

A substantial portion of the Company’s customers’ ability to honor their contracts is dependent on the economy in the area. The Company’s goal is to continue to maintain a diversified loan portfolio, which requires the loans to be well collateralized and supported by cash flows.

122

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


	December 31,
	2014		2013
Real Estate	$	744,663	$	381,830
Manufacturing		161,233		83,319
Wholesale		124,336		60,291
Construction		113,763		62,835
Finance		96,074		46,393
Hotel/Lodging		88,269		76,143
Professional Services		64,215		49,739
Other Services		45,781		21,448
Healthcare		43,917		38,662
Retail		35,503		23,157
Administrative Management		28,016		15,218
Restaurant/Food Service		24,525		35,244
Transportation		18,158		9,531
Information		15,457		11,709
Education		10,253		10,270
Entertainment		8,284		6,207
Other		2,276		1,198

Total	$	1,624,723	$	933,194

Small Business Administration 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 December 31, 2014 was $107.4 million, of which $72.2 million has been sold. Of the $35.2 million remaining on the Company’s books, $24.1 million is not guaranteed and $11.1 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.

While there were no loans classified as held for sale at December 31, 2014, the Company has originated approximately $5.0 million in SBA 7a loans, of which $3.8 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 allowance for loan loss is a reserve established through a provision for loan losses charged to expense, which represents managements’ best estimate of probable losses that exist within the loan portfolio. The Allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, Receivables and allowance allocations calculated in accordance with ASC Topic 450, Contingencies. Accordingly, the methodology is based on historical loss experiences by type of credit, specific homogeneous risk pools, and specific loss allocations, with adjustments for current events

123

and conditions. During the 4^th quarter of 2012, management enhanced its allowance methodology to expand the number of loan segments evaluated for historical losses and utilized peer historical loss data to evaluate potential loss exposure for those loan segments where the Company had no historical loss experience. There was no change in the quantitative effect on the portfolio segments. In loan segments where the Company has no historical loss experience, the loss experience of the Company’s peer banks, as reflected in the Uniform Bank Peer Report (“UPBR”) has been utilized. The Company’s process for determining the appropriate level of the allowance for loan loss is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual, past due, potential problem and criticized loans. Net charge-offs and recoveries, are also factored into the provision for loan losses. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan loss related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowance for specific loans or loan pools.

The level of the Allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the Allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the Allowance is dependent upon a variety of factors beyond the Company’s control, including among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

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


	December 31,
	2014			2013			2012
Allowance for loan loss at beginning of year	$	10,603		$	8,803		$	7,495
Provision for loan losses		2,239			2,852			1,768
Net (charge-offs) recoveries:
Charge-offs		(692	)		(1,912	)		(687	)
Recoveries		460			860			227

Net (charge-offs) recoveries		(232	)		(1,052	)		(460	)

Allowance for loan loss at end of year	$	12,610		$	10,603		$	8,803

Net (charge-offs) recoveries to average loans		(0.02	)%		(0.12	)%		(0.08	)%
Allowance for loan loss to total loans		0.78	%		1.14	%		1.03	%
Allowance for loan loss to total loans accounted for at historical cost, which excludes purchased loans acquired by acquisition		1.39	%		1.50	%		1.54	%

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 December 31, 2014 and 2013 was $719.6 million and $345.9 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 balance sheets and not as part of the allowance for loan loss in the above table. The allowance for the loss on unfunded loan commitments to extend credit was $471,000 and $329,000 at December 31, 2014 and 2013, respectively.

124

The following table presents, by loan portfolio segment, the changes in the allowance for loan loss for the dates and periods indicated (dollars in thousands):


	Commercial and Industrial			Construction, Land Development and Other Land		Commercial and Other Real Estate			Other		Total
Year ended – December 31 2014
Allowance for loan loss – Beginning balance	$	5,534		$	1,120	$	3,886		$	63	$	10,603
Provision for loan losses		595			564		883			197		2,239
Net (charge-offs) recoveries:
Charge-offs		(619	)		—		(73	)		—		(692	)
Recoveries		354			—		106			—		460

Total net (charge-offs) recoveries		(265	)		—		33			—		(232	)

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


	Commercial and Industrial			Construction, Land Development and Other Land			Commercial and Other Real Estate			Other			Total
Year ended – December 31 2013
Allowance for loan loss – Beginning balance	$	4,572		$	2,035		$	2,084		$	112		$	8,803
Provision for loan losses		2,596			(1,678	)		1,990			(56	)		2,852
Net (charge-offs) recoveries:
Charge-offs		(1,704	)		—			(200	)		(8	)		(1,912	)
Recoveries		70			763			12			15			860

Total net (charge-offs) recoveries		(1,634	)		763			(188	)		7			(1,052	)

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

The following table presents 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
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

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	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
December 31, 2013
Allowance for loan loss:
Individually evaluated for impairment	$	4	$	—	$	—	$	—	$	4
Collectively evaluated for impairment		5,520		1,120		3,886		63		10,589
Purchased credit impaired (loans acquired with deteriorated credit quality)		10		—		—		—		10

Total Allowance for Loan Loss	$	5,534	$	1,120	$	3,886	$	63	$	10,603


Loans receivable:
Individually evaluated for impairment	$	2,640	$	—	$	3,680	$	—	$	6,320
Collectively evaluated for impairment		295,787		47,074		561,952		17,733		922,546
Purchased credit impaired (loans acquired with deteriorated credit quality)		1,046		—		3,282		—		4,328

Total Loans Receivable	$	299,473	$	47,074	$	568,914	$	17,733	$	933,194

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.

126

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):


December 31, 2014	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
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


December 31, 2013	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
Pass	$	289,594	$	47,074	$	547,600	$	17,731	$	901,999
Special Mention		1,540		—		2,613		—		4,153
Substandard		8,339		—		18,701		2		27,042
Doubtful		—		—		—		—		—

Total	$	299,473	$	47,074	$	568,914	$	17,733	$	933,194

Age Analysis of Past Due and Non-Accrual Loans

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


December 31, 2014	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
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	$	0	$	779	$	3,909	$	1,620,035	$	1,624,723


December 31, 2013	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
Commercial and Industrial	$	—	$	241	$	—	$	241	$	3,682	$	295,550	$	299,473
Construction, Land Development and Other Land		—		—		—		—		—		47,074		47,074
Commercial and Other Real Estate		—		—		—		—		5,874		563,040		568,914
Other		—		—		—		—		—		17,733		17,733

Total	$	—	$	241	$	—	$	241	$	9,556	$	923,397	$	933,194

127

Included in the non-accrual column above are purchased credit impaired loans of $1.3 million and $3.2 million as of December 31, 2014 and 2013, respectively. Included in the current column are purchased credit impaired loans that have been returned to accrual status of $1.1 million as of December 31, 2014 and 2013.

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 fair 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 December 31, 2014 and 2013.

The following tables include 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 $2.4 million and $4.3 million at December 31, 2014 and 2013, respectively.

Year ended December 31, 2014


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and Industrial	$	520	$	609	$	—	$	869	$	—
Commercial and Other Real Estate		737		739		—		1,058		—
With an allowance recorded:
Commercial and Industrial		1,394		1,546		222		1,428		—
Total
Commercial and Industrial		1,914		2,155		222		2,297		—
Commercial and Other Real Estate		737		739		—		1,058		—

Total	$	2,651	$	2,894	$	222	$	3,355	$	—

Year ended December 31, 2013


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and Industrial	$	2,540	$	5,347	$	—	$	1,835	$	—
Construction, Land Development and Other Land		—		—		—		879		—
Commercial and Other Real Estate		3,680		6,112		—		4,216		—
With an allowance recorded:
Commercial and Industrial		100		355		4		137		—
Total
Commercial and Industrial		2,640		5,702		4		1,972		—
Construction, Land Development and Other Land		—		—		—		879		—
Commercial and Other Real Estate		3,680		6,112		—		4,216		—

Total	$	6,320	$	11,814	$	4	$	7,067	$	—

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


	Year Ended December 31,
	2014		2013
Average recorded investment in impaired loans	$	4,991	$	7,067
Interest foregone on impaired loans	$	421	$	710
Cash collections applied to reduce principal balance	$	3,014	$	5,057
Interest income recognized on cash collections	$	—	$	—

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 contractual 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 TDR loans for the periods indicated (dollars in thousands). This table includes two TDR loans that were purchased credit impaired. As of December 31, 2014, these loans had a recorded investment of $204,000 and unpaid principal balances of $384,000.


Year ended December 31, 2014	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized
Commercial and Industrial	$	530	$	719	$	—
Commercial and Other Real Estate		114		115		—

Total	$	644	$	834	$	—

Year ended December 31, 2013
Commercial and Industrial	$	541	$	843	$	—
Commercial and Other Real Estate		2,173		2,785		—

Total	$	2,714	$	3,628	$	—

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


Year ended December 31, 2014	Number of Loans		Pre-Modification Recorded Investment		Post- Modification Recorded Investment
Reduced Interest Rate and Lengthened Amortization:
Commercial and Industrial		1	$	224	$	224
Commercial and Other Real Estate		1		114		114

Total		2	$	338	$	338

Year ended December 31, 2013
Reduced Interest Rate and Lengthened Amortization:
Commercial and Industrial		1	$	310	$	310
Commercial and Other Real Estate		—		—		—

Total		1	$	310	$	310

Loans are restructured in an effort to maximize collections. There was no financial impact for specific reserves or from charge-offs for the modified loans included in the table above. Impairment analyses are performed on the Company’s TDR loans in conjunction with the normal allowance for loan loss process. The Company’s TDR loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan balance.

There have been no payment defaults in 2014 subsequent to modification on TDR 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):


	Year Ended December 31,
	2014			2013
Balance, beginning of year	$	7,912		$	12,189
Accretion, included in interest income		(3,023	)		(3,754	)
Additions, due to acquisition		16,562			—
Sold acquired loans		—			—
Reclassifications to non-accretable yield		(49	)		(523	)

Balance, end of year	$	21,402		$	7,912

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.

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.

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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):


	December 31, 2014				December 31, 2013
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial and Industrial	$	1,205	$	693	$	1,599	$	1,046
Commercial and Other Real Estate		3,018		1,692		5,611		3,282
Other		62		—		—		—

Total	$	4,285	$	2,385	$	7,210	$	4,328

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


	Year Ended December 31, 2014			Year Ended December 31, 2013
Balance, beginning of year	$	395		$	9
Accretion, included in interest income		(71	)		(33	)
Reclassifications from non-accretable yield		—			419

Balance, end of year	$	324		$	395

Note 7 – Premises and Equipment and Lease Commitments

Premises and equipment are stated at cost less accumulated depreciation and amortization. The following major classifications of premises and equipment are summarized as follows as of the dates indicated (dollars in thousands):


	December 31,
	2014			2013
Furniture and equipment	$	8,489		$	5,252
Leasehold improvements		7,009			6,730

Total		15,498			11,982
Less: Accumulated depreciation and amortization		(10,121	)		(8,451	)

Total	$	5,377		$	3,531

Total depreciation expense for the years ended December 31, 2014, 2013, and 2012 was $1.0 million, $1.1 million, and $1.0 million , respectively.

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The following is a schedule of future minimum lease payments for operating leases for office and branch space based upon obligations at December 31, 2014 (dollars in thousands):


Year	Amount
2015	$	3,186
2016		3,034
2017		2,981
2018		2,162
2019		2,006
Thereafter		6,066

Total	$	19,435

Total rental expense on facilities for the years ended December 31, 2014, 2013 and 2012 was $2.2 million, $2.2 million , and $1.8 million, respectively.

Note 8 – Goodwill, Core Deposit and Leasehold Right Intangibles

Goodwill

At December 31, 2014, the Company had goodwill of $64.0 million, of which $51.7 million was related to the 1^st Enterprise merger. See Note 2 – Business Combinations. The following table presents changes in the carrying value of goodwill for the periods indicated (dollars in thousands):


	Year Ended December 31,
	2014		2013
Balance, beginning of year	$	12,292	$	12,292
Goodwill acquired during the year		51,658		—
Impairment losses		—		—

Balance, end of year	$	63,950	$	12,292

Accumulated impairment losses at end of year	$	—	$	—

The Company’s goodwill was evaluated for impairment during the fourth quarter of 2014, with no impairment loss recognition considered necessary.

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Core Deposit Intangibles (“CDI”)

The weighted average amortization period remaining for our core deposit intangibles is 7.2 years. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $1.7 million, $1.3 million, $1.1 million, $936,000, and $692,000. The Company’s core deposit intangibles were evaluated for impairment at December 31, 2014, taking into consideration the actual deposit runoff of acquired deposits to the level of deposit runoff expected at the date of merger. Based on the Company’s evaluation, no impairment has taken place on the core deposit intangibles. The following table presents the changes in the gross amounts of core deposit intangibles and the related accumulated amortization for the dates and periods indicated (dollars in thousands):


	Year Ended December 31,
	2014			2013			2012
Gross amount of CDI:
Balance, beginning of year	$	2,103		$	2,103		$	1,098
Additions due to acquisitions		7,143			0			1,005

Balance, end of year		9,246			2,103			2,103

Accumulated Amortization:
Balance, beginning of year		(665	)		(356	)		(137	)
Amortization		(391	)		(309	)		(219	)

Balance, end of year		(1,056	)		(665	)		(356	)

Net CDI, end of year	$	8,190		$	1,438		$	1,747

Leasehold Right Intangibles

The leasehold right intangibles represent the difference between the fair value of the Company’s leases at acquisition and the contractual lease payments over the term of the leases. The Company recorded a leasehold right intangible of $390,000 related to the Los Angeles headquarter lease as part of the 1^st Enterprise merger. The recorded value of the Company’s leasehold right intangibles at December 31, 2014 was $1.4 million.

The amortization of the leasehold right intangibles is recorded within the income statement under occupancy expense. The net amortization of the leasehold right intangible assets and liabilities resulted in expense of $142,000, income of $313,000 and $315,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Note 9 – Bank Owned Life Insurance

At December 31, 2014 and 2013 the Company had $38.7 million and $21.2 million, respectively of Bank-Owned Life Insurance (“BOLI”). The Company recorded non-interest income associated with the BOLI policies of $660,000, $617,000 and $267,000 for the years ending December 31, 2014, 2013 and 2012, respectively. The increase in the Company’s balance in 2014 by $17.5 million to $38.7 million was from the $16.9 million BOLI policies acquired from 1^st Enterprise and a $618,000 increase in the cash surrender value of the policies during 2014. The increase in the Company’s balance in 2013 by $617,000 to $21.2 million was from the increase in the cash surrender value of the policies during 2013.

BOLI involves the purchasing of life insurance by the Company on a selected group of employees where the Company is the owner and beneficiary of the policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash surrender value of these policies, as well as a portion of the insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. At December 31, 2014, the $38.7 million was allocated between seven individual insurance

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companies, with balances ranging from approximately 1% to 32% of the Company’s outstanding BOLI balances. On an annual basis, the Company reviews the financial stability and ratings of all the individual insurance companies to ensure they are adequately capitalized, and that there is minimal risk to the BOLI assets.

Note 10 – Investment in California Organized Investment Network (“COIN”)

During 2013, the Company made investments of $1.1 million in 60 month term, 0% interest rate deposits. The Company made a $1.0 million investment with Rural Community Assistance Corporation (“RCAC”), that generated a $200,000 tax credit, and a $75,000 investment with Pacific Coast Regional Small Business Development Corporation (“PCR”) that generated a $15,000 tax credit. These investments qualified the Company for a $215,000 Qualified Investment Tax Credit that was applied to the Company’s 2013 and 2014 tax provision. During 2009, the Company made an investment in a $1.0 million, 60 month term, 0% interest rate deposit with Clearinghouse CDFI (“Clearinghouse”) that qualified the Company for a $200,000 Qualified Investment Tax Credit. Both investments made in 2013 and the one investment made in 2009 qualified as Community Redevelopment Act (“CRA”) investments under CRA investment guidelines.

All three entities, the RCAC, the PCR and the Clearinghouse are certified Community Development Financial Institutions (“CDFI”) as defined and recognized by the United States Department of Treasury and are defined and recognized by the California Organized Investment Network (“COIN”) within the California Department of Insurance.

Based on these investments being certified by the California Department of Insurance, the investments made in 2013 qualified for a 20% or $215,000 State of California income tax credit in the year made. If the Company were to redeem this deposit prior to its contractual and stated maturity date, the Company would lose the benefit of the tax credit taken in prior years. The investment, to qualify for this specific tax credit, must be for a minimum term of sixty months. In addition, the tax credit is required to be applied during the year in which the investments were made. The deposit made in 2013 matures in 2018, while the deposit made in 2009 matured in 2014. These deposits are not insured by the FDIC, and are included in other assets on the balance sheet of the Company. The Company’s intentions are to hold these investments to their contractual maturity dates. These investments were also made to meet CRA investment goals.

Note 11 – Qualified Affordable Housing Project Investments

The Company’s investment in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits at December 31, 2014 was $4.1 million with a recorded liability of $2.5 million in funding obligations. The Company has invested in three separate LIHTC projects which provide the Company with CRA credit. Additionally, the investment in LIHTC projects provides the Company with tax credits and with operating loss tax benefits over an approximately 10 year period. None of the original investment will be repaid. The tax credits and the operating loss tax benefits that are generated by each of the properties are expected to exceed the total value of the investment made by the Company and provide a return on the investment between 5.0% to 6.0%. The investment in LIHTC projects is being accounted for using the proportional amortization method, under which the Company amortizes the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).

See Note 1 – Summary of Significant Accounting Policies, “Qualified Affordable Housing Project Investments” regarding how the Company accounts for its investments in LIHTC projects.

The following table presents the Company’s original investment in the LIHTC projects, the current recorded investment balance, and the unfunded liability balance of each investment at December 31, 2014 and 2013. In addition, the table reflects the tax credits and tax benefits recorded by the Company during 2014 and 2013, the

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amortization of the investment and the net impact to the Company’s income tax provision for 2014 and 2013. Also see Note 19 – Income Tax, for the impact of these investments on the Company’s effective tax rate (dollars in thousands):


Qualified Affordable Housing Projects at December 31, 2014	Original Investment Value		Current Recorded Investment		Unfunded Liability Obligation		Tax Credits and Benefits (1)		Amortization of Investments (2)		Net Income Tax Benefit
Enterprise Green Communities West II LP	$	1,000	$	704	$	162	$	127	$	84	$	43
Enterprise Housing Partners Calgreen II Fund LP		2,050		1,588		635		229		174		55
Enterprise Housing Partners XXIV LP		2,000		1,849		1,685		160		112		48

Total – Investments in Qualified Affordable Housing Projects	$	5,050	$	4,141	$	2,482	$	516	$	370	$	146


Qualified Affordable Housing Projects at December 31, 2013	Original Investment Value		Current Recorded Investment		Unfunded Liability Obligation		Tax Credits and Benefits (1)		Amortization of Investments (2)		Net Income Tax Benefit
Enterprise Green Communities West II LP	$	1,000	$	787	$	190	$	236	$	160	$	76
Enterprise Housing Partners Calgreen II Fund LP		2,050		1,735		1,817		390		314		76
Enterprise Housing Partners XXIV LP		2,000		1,988		1,983		14		11		3

Total - Investments in Qualified Affordable Housing Projects	$	5,050	$	4,510	$	3,990	$	640	$	485	$	155

(1)	The amounts reflected in this column represent both the tax credits, as well as the tax benefits generated by the Qualified Affordable Housing Projects operating loss for the year.

(2)	This amount reduces the tax credits and benefits generated by the Qualified Affordable Housing Projects.

The following table reflects the anticipated net income tax benefit that is expected to be recognized by the Company over the next several years (dollars in thousands):


Qualified Affordable Housing Projects	Enterprise Green Communities West II LP		Enterprise Housing Partners Calgreen II Fund LP		Enterprise Housing Partners XXIV LP		Total Net Income Tax Benefit
Anticipated net income tax benefit less amortization of investments:
2015	$	44	$	43	$	53	$	140
2016		43		39		55		137
2017 and thereafter		245		304		414		963

Total – anticipated net income tax benefit in Qualified Affordable Housing Projects	$	332	$	386	$	522	$	1,240

Note 12 – Deposits

At December 31, 2014, 84 customers maintained balances (aggregating all related accounts, including multiple business entities and personal funds of business principals) in excess of $4 million. The aggregate amount of such deposits amounted to $859.2 million or approximately 44% of the Company’s total customer deposit base. The depositors are not concentrated in any industry or business. At December 31, 2014 and 2013, the Company had “reciprocal” CDARS^® and ICS^® deposits that are classified as “brokered” deposits in regulatory reports. These “reciprocal” CDARS^® and ICS^® deposits are the only brokered deposits utilized by the Company, and the Company considers these deposits to be “core” in nature.

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At December 31, 2014, $62.9 million out of total time deposits of $64.8 million mature within one year.

At December 31, 2014 and 2013, the Company had certificates of deposit with balances $100,000 or more of $60.7 million and $59.0 million, respectively, and certificates of deposits with balances $250,000 or more of $19.6 million and $20.5 million, respectively.

The following table shows the maturity of the Company’s time deposits of $100,000 or more at December 31, 2014.


Maturity of Time Deposits of $100,000 or More*
(Dollars in thousands)
Three months or less	$	10,376
Over three through six months		16,476
Over six through twelve months		32,278
Over twelve months		1,605

Total	$	60,735

*	includes CDARS^® reciprocal time deposits of $100,000 or more. Total CDARS^® reciprocal time deposits included in the table above are $29.4 million.

ICS^® Reciprocal Non-Interest Bearing Demand Deposits

During 2013 the Company began participating as a member of the Insured Cash Sweep^® (“ICS^®”) deposit program. Through ICS^®, the Company may accept non-interest bearing deposits in excess of the FDIC insured maximum from a depositor and place the deposits through the ICS^® network into other member banks in increments of less than the FDIC insured maximum in order to provide the depositor full FDIC insurance coverage. The Company receives an equal dollar amount of deposits from other ICS^® member banks in exchange for the deposits the Company places into the ICS^® network. These deposits are recorded on the Company’s balance sheet as ICS^® reciprocal deposits. At December 31, 2014, the ICS^® reciprocal deposits totaled $12.4 million.

CDARS^® Reciprocal Time Deposits

The Company participates and is a member of the Certificate of Deposit Account Registry Service (CDARS^®) deposit product program. Through CDARS^®, the Company may accept deposits in excess of the FDIC insured maximum from a depositor and place the deposits through a network to other CDARS^® member banks in increments of less than the FDIC insured maximum to provide the depositor full FDIC insurance coverage. Where the Company receives an equal dollar amount of deposits from other CDARS^® member banks in exchange for the deposits the Company places into the network, the Company records these as CDARS^® reciprocal deposits. At December 31, 2014 and 2013, CDARS^® reciprocal deposits totaled $29.9 million and $28.9 million, respectively.

Note 13 – 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 one day to 180 days from the issue date and are routinely renewed.

As discussed in Note 5 – Investment Securities, the Company has pledged certain investments as collateral for these agreements. Securities with a fair market value of $32.3 million and $11.8 million were pledged to

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secure the Repos at December 31, 2014 and December 31, 2013, respectively. The Company segregates both the principal and accrued interest on these securities with the Company’s third party safekeeping custodians. All principal and interest payments on the investment securities that are pledged as collateral on the Repo program are received directly by the safekeeping custodian.

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):

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%

December 31, 2013

Date Issued

Amount

Interest Rate

Original
Term

Maturity Date

December 3, 2013

750

0.10%

62 days

February 3, 2014

December 31, 2013

10,391

0.10% – 0.40%

2 days

January 2, 2014

Total

11,141

0.30%

Federal Home Loan Bank Borrowings

The Company maintains a secured credit facility with the FHLB, allowing the Company to borrow on an overnight and term basis. The Company’s credit facility with the FHLB is $362.6 million, which represents approximately 25% of the Bank’s total assets, as reported by the Bank in its September 30, 2014 FFIEC Call Report.

As of December 31, 2014, the Company had $700 million of loan collateral pledged with the FHLB which provides $463 million in borrowing capacity. The Company has $23.3 million in investment securities pledged with the FHLB to support its credit facility. In addition, the Company must maintain an investment in the capital stock of the FHLB. The Company is required to purchase FHLB common stock to support its FHLB advances. 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 December 31, 2014 or 2013.

Interest on FHLB advances is generally paid monthly, quarterly or semi-annually depending on the terms of the advance, with principal and any accrued interest due at maturity. The Company had no FHLB borrowings during 2014 or 2013, except for the annual testing of the borrowing lines. The Company is required to purchase FHLB common stock to support its FHLB advances. At December 31, 2014 and 2013, the Company had $8.0 million and $4.7 million of FHLB common stock, respectively. The current value of the FHLB common stock of $8.0 million would support FHLB advances up to $170.5 million. Any advances from the FHLB in excess of $170.5 million would require additional purchases of FHLB common stock.

The FHLB has historically repurchased a portion to all of its excess capital from each bank where the level of capital is in excess of that bank’s current average borrowings above a certain minimum. The FHLB’s program whereby the FHLB analyzes each member bank’s capital requirement and returns each bank’s excess capital above a certain minimum not needed for current borrowings resulted in the repurchase of the Company’s FHLB common stock during 2013 and 2012 by the FHLB. The FHLB repurchased $0, and $150,300 of the Company’s investment in FHLB capital stock during 2014 and 2013, respectively. The Company acquired FHLB capital stock of $3.8 million in 2014 from the acquisition of 1^st Enterprise.

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The FHLB has paid or declared dividends on its capital stock for all four quarters of the years ending December 31, 2014, 2013 and 2012.

Subordinated Debentures

The following table summarizes the terms of each issuance of subordinated debentures outstanding as of December 31, 2014:


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	%		2.291	%		3/17/15
Trust II		3,093			12/23/05		03/15/36		3 month LIBOR+1.75	%		1.991	%		3/17/15
Trust III		3,093			06/30/06		09/15/36		3 month LIBOR+1.85	%		2.091	%		3/17/15

Subtotal		12,372
Unamortized fair value adjustment		(2,834	)

Net	$	9,538

The Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at December 31, 2014. 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 December 2014 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.

The original fair value adjustment related to the subordinated debentures was $3.3 million. The Company recorded $159,000 and $209,700 in amortization expense related to the fair value adjustment in 2014 and 2013, respectively. At December 31, 2014 the Company is estimating a remaining life of approximately 21 years on the subordinated debentures and is amortizing the fair value adjustment based on this estimated average remaining life. The Company is projecting annual amortization expense of approximately $159,000 related to the fair value adjustment on the subordinated debentures.

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.

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Short-term Borrowings

Details regarding the Company’s short-term borrowings for the dates and periods indicated are reflected in the table below (dollars in thousands):


	Year Ended December 31,
	2014							2013
	Balance		Average Balance		Weighted Average Rate			Balance		Average Balance		Weighted Average Rate
Securities sold under agreements to repurchase	$	9,411	$	13,579		0.25	%	$	11,141	$	24,376		0.30	%

The maximum amount of short-term borrowings outstanding at any month-end was $15.7 million and $30.0 million in 2014 and 2013, respectively.

Note 14 – 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. At December 31, 2014, 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 1^st 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 volatility 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 1^st 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.

We believe our risk of loss associated with our counterparty borrowers related 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 our swaps is subject to market and counterparty risk. At December 31, 2014, the total notional amount of the Company’s swaps acquired from 1^st Enterprise was $35.7 million.

Balance Sheet Classification of Derivative Financial Instruments Acquired from 1^st Enterprise Bank

The following table presents the fair values of the asset and liability of the Company’s derivative instruments acquired from 1^st Enterprise as of December 31, 2014 (dollars in thousands):


	Asset Derivatives		Liability Derivatives
	December 31, 2014		December 31, 2014
Interest rate swap contracts fair value	$	719	$	719

Balance sheet location		Accrued Interest Receivable and Other Assets		Accrued Interest Payable and Other Liabilities

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At December 31, 2014, the Company also has twenty two 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. At December 31, 2014, twenty-two of the original twenty-four interest rate swap contracts acquired from the PC Bancorp acquisition are outstanding.

The Company, as part of its acquisition of PC Bancorp, had to formally document all relationships between the hedging instruments and the hedged items, as well as its risk management objective and strategy for re-designating the interest rate swap contract as a hedge transaction. This process included linking all derivatives that were designated as fair value hedges to specific assets on the balance sheet. 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. At December 31, 2014, the twenty-two hedging relationships are determined to be effective.

Prior to the merger with PC Bancorp, the Company did not utilize interest rate swaps to manage its interest rate risk position. All of the interest rate swap contracts acquired from PC Bancorp are with the same counterparty bank. The total notional amount of the outstanding swap contracts as of December 31, 2014 is $29.3 million. The outstanding swaps have original maturities of up to 15 years.

Balance Sheet Classification of Derivative Financial Instruments Acquired from PC Bancorp

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 and periods indicated (dollars in thousands):


	Liability Derivatives
	December 31, 2014		December 31, 2013
Fair Value Hedges
Total interest rate contacts notional amount	$	29,289	$	31,914

Derivatives not designated as hedging instruments:
Interest rate swap contracts fair value	$	519	$	738
Derivatives designated as hedging instruments:
Interest rate swap contracts fair value		2,277		3,205

Total interest rate contracts fair value	$	2,796	$	3,943

Balance sheet location		Accrued Interest Payable and Other Liabilities		Accrued Interest Payable and Other Liabilities

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The Effect of Derivative Instruments on the Consolidated Statements of Income

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


	Year Ended December 31,
	2014			2013
Derivatives not designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	219		$	306
Payments on interest rate swap contracts on loans		(273	)		(289	)

Net increase (decrease) in other non-interest income		(54	)		17

Interest rate swap contracts – subordinated debenture
Increase in fair value of interest rate swap contracts		—			70
Payments on interest rate swap contracts on subordinated debentures		—			(70	)

Net increase in other non-interest income		—			—

Net increase (decrease) in other non-interest income	$	(54	)	$	17

Derivatives designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	927		$	1,719
Increase (decrease) in fair value of hedged loans		315			(554	)
Payments on interest rate swap contracts on loans		(1,256	)		(1,294	)

Net (decrease) in interest income on loans	$	(14	)	$	(129	)

The interest rate swap contract originally associated with the subordinated debenture that was scheduled to mature in June 2013 was liquidated prior to maturity during the first quarter of 2013.

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 December 31, 2014, the Company had $1.1 million in investment securities, $2.7 million in certificates of deposit and $1.7 million in non-interest bearing balances for a total of $5.5 million with two counterparty banks. Of this amount, $4.1 million is pledged as collateral.

Note 15 – 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 that were acquired from PC Bancorp and 1^st Enterprise are subject to master bilateral netting and offsetting arrangements under specific conditions as defined within master agreements governing all interest rate swap contracts that the Company and the counterparty banks have entered into. In addition, the master agreements 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 as collateral, investment securities, a certificate of deposit and cash that is maintained in a due from bank account. 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 individual 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

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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)
	Gross Amounts Recognized in the Consolidated Balance Sheets		Gross Amounts Offset in the Consolidated Balance Sheets				Financial Instruments		Collateral Pledged
December 31, 2014
Financial Assets:
Interest rate swap contracts fair value (see Note 14 – Derivative Financial Instruments)	$	719	$	—	$	719	$	719	$	—	$	—

Total	$	719	$	—	$	719	$	719	$	—	$	—

Financial Liabilities:
Interest rate swap contracts fair value (see Note 14 – Derivative Financial Instruments)	$	3,515	$	—	$	3,515	$	3,515	$	4,150	$	635
Securities sold under agreements to repurchase		9,411		—		9,411		9,411		32,304		22,893

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


December 31, 2013
Financial Liabilities:
Interest rate swap contracts fair value (see Note 14 – Derivative Financial Instruments)	$	3,943	$	—	$	3,943	$	3,943	$	4,194	$	251
Securities sold under agreements to repurchase		11,141		—		11,141		11,141		11,750		609

Total	$	15,084	$	—	$	15,084	$	15,084	$	15,944	$	860

Note 16 – 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

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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.

Upon the adoption of the Equity Plan, the Company concurrently terminated both its earlier 2005 equity compensation plans. All the remaining unissued shares of common stock under both 2005 equity compensation plans were rolled into the 2007 Equity and Incentive Plan. No further shares were issued under these older plans. All option shares issued under the existing plans remain in force until the shares are either exercised, expire or are cancelled.

The Equity Plan was amended and restated in 2014 to (i) permit the grant of performance-based awards that are not subject to the deduction limitations of Section 162(m) of the Internal Revenue Code, including both equity compensation awards and cash bonus payments, (ii) prohibit the repricing of previously granted options; (iii) eliminate a provision of the Equity Plan that provides for an automatic annual increase in the shares of common stock available for awards under the Equity Plan; and (iv) extend the term of the plan to July 31, 2024.

Pursuant to the merger with 1^st Enterprise as discussed in Note 2 above, CU Bancorp adopted the 1^st Enterprise 2006 Stock Incentive Plan, as amended (“2006 Stock Incentive Plan”), as its own equity plan and all stock options granted by 1^st Enterprise thereunder were fully vested and exercisable and were converted to CU Bancorp stock options on substantially the same terms but adjusted to reflect the exchange ratio set forth in the Merger Agreement and applicable Internal Revenue Code provisions and related regulations. No new equity awards will be granted under the 2006 Stock Incentive Plan. A total of 802,766 converted 1^st Enterprise stock options were adopted into CU Bancorp stock options under the Equity Plan with a fair value of $9.6 million and an intrinsic value of $11.1 million at the merger date.

Under the Equity Plan, there are a total of 1,490,547 shares authorized. A total of 855,083 shares have been issued out of the plan, with 64,041 of these issued shares subsequently cancelled and returned back into the plan, leaving 699,505 available to be issued.

All non-qualified and incentive stock options granted under the current Equity Plan and the earlier 2005 equity compensation plans, have been issued with the exercise prices of the stock options equal to the fair market value of the underlying shares at the date of grant.

The Equity Plan and the original 2005 equity compensation plans provided for the issuance of non-qualified and incentive stock options. These plans provided that each option must have an exercise price not less than the fair market value of the stock at the date of grant and terms to expiration not to exceed ten years. All options granted under the plans require continuous service and have been issued with vesting increments of between 20% through 50% per year. All stock options issued under the original 2005 equity compensation plans that have not expired remain outstanding with no changes in their vesting, maturity date or rights.

During 2014, the Company had a combined federal and state tax benefit of $582,000, related to the vesting of restricted stock and the exercise of stock options during 2014, of which $233,000 was related to restricted stock and $349,000 was related to stock options. This tax benefit was recorded to additional paid in capital during the year ending December 31, 2014.

During 2013, the Company had a combined federal and state tax benefit of $659,000, related to the vesting of restricted stock and the exercise of stock options during 2013, of which $96,000 was related to restricted stock and $563,000 was related to stock options. This tax benefit was recorded to additional paid in capital during the year ending December 31, 2013.

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During 2012, the Company had a combined federal and state tax deficiency of $57,000, related to the vesting of restricted stock during 2012, of which $53,000 was recorded as additional tax expense and $4,000 was recorded to additional paid in capital. There were no tax benefits or deficiencies related to the exercise or cancellation of stock options during 2012.

At December 31, 2014, future compensation expense related to non-vested stock option and restricted stock grants aggregated to the amounts reflected in the table below (dollars in thousands):


Future Stock Based Compensation Expense	Stock Options		Restricted Stock		Total
2015	$	2	$	1,946	$	1,948
2016		—		1,034		1,034
2017		—		323		323
2018		—		93		93
Thereafter		—		—		—

Total	$	2	$	3,396	$	3,398

The estimated fair value of both incentive stock options and non-qualified stock options granted in prior years, have been calculated using the Black-Scholes option pricing model. There have been no incentive stock options and no non-qualified stock options issued in 2012, 2013 or 2014. The following is the listing of the input variables and the assumptions utilized by the Company for each parameter used in the Black-Scholes option pricing model in prior years:

Risk-free Rate – The risk-free rate for periods within the contractual life of the option have been based on the U.S. Treasury rate that matures on the expected assigned life of the option at the date of the grant.

Expected Life of Options – The expected life of options have either been calculated using a formula from the Securities and Exchange Commission “SEC” for companies that do not have sufficient historical data to calculate the expected life, or from the estimated life of options granted by the Company. The formula from the SEC calculation of expected life is specifically based on the following: the expected life of the option is equal to the average of the contractual life and the vesting period of each option.

Expected Volatility –Beginning in 2009, the expected volatility has been based on the historical volatility for the Company’s shares.

Dividend Yield – The dividend yield has been based on historical experience and expected future changes on dividend payouts. The Company has not declared or paid dividends on its common stock in the past and does not expect to declare or pay dividends on its common stock within the foreseeable future.

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Stock Options

There were no stock options granted by the Company in 2012, 2013 or 2014.

The following table summarizes the stock option activity under the plans for the year ended December 31, 2014:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding stock options at December 31, 2013		434,740		$	13.89		2.1	$	1,913
Adoption of 1^ST Enterprise 2006 Stock Incentive Plan		802,766		$	7.84		1.6	$	11,121
Granted		—
Exercised		(221,016	)
Forfeited		—
Expired		—

Outstanding stock options at December 31, 2014		1,016,490		$	10.13		1.6	$	11,770

Exercisable options at December 31, 2014		1,010,290		$	10.12		1.6	$	11,711
Unvested options at December 31, 2014		6,200		$	12.20		2.3	$	59
Outstanding, vested and expected to vest at December 31, 2014		1,016,490		$	10.13		1.6	$	11,770

The Company recorded stock option expense of $10,000, $21,000 and $54,000, for the years ended December 31, 2014, 2013, and 2012, respectively.

During 2013, four executive officers of the Company elected and adopted to exercise outstanding stock options under Rule 10b5-1(c)(1) “10b5 Plans” under the Securities Exchange Act of 1934, as amended. Under the 10b5 Plans, the officers elected to sell a portion or all of their outstanding nonqualified and incentive stock options that expire though May of 2015. A total of 320,764 stock options were made subject to the 10b5 Plans. Of the total 221,016 options that were exercised in 2014, 88,344 options were exercised under the 10b5 Plans. As of December 31, 2014, there were no further options remaining under the 10b5 Plans to be exercised or sold.

The total intrinsic value of options exercised during the years ended December 31, 2014 and 2013 was $2.1 million and $2.3 million, respectively. No options were exercised in 2012.

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 year ended December 31, 2014:


	Number of Shares			Weighted-Average Grant-Date Fair Value per Share
Restricted Stock:
Unvested, at December 31, 2013		266,050		$	13.49
Granted		172,900			19.39
Vested		(124,428	)		13.75
Cancelled and forfeited		(5,016	)		14.88

Unvested, at December 31, 2014		309,506		$	16.66

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Compensation expense of $1.7 million, $1.1 million, and $1.1 million was recorded related to the above restricted stock grants for the years ended December 31, 2014, 2013 and 2012, respectively. Restricted stock awards 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. The aggregate fair value at the date of vesting of the 124,428 shares of restricted stock that vested in 2014 was $2.3 million.

Note 17 – Supplemental Executive and Director Retirement Plans

Supplemental Executive Retirement Plan

The Company adopted a non-qualified supplemental executive retirement plan (“SERP”) for certain executives of the Company effective October 1, 2012. In addition, the Company acquired several SERP plans from the 2012 PC Bancorp acquisition. These SERP plans provide the designated executives with retirement benefits. Pre-retirement survivor benefits are provided for designated beneficiaries of participants who do not survive until retirement in an amount equal to the lump sum actuarial equivalent of the participant’s accrued benefit under the SERP. The SERP is considered an unfunded plan for tax and ERISA purposes. All obligations arising under the SERP are payable from the general assets of the Company. At December 31, 2014 and 2013, the SERP plan had accrued liabilities of $3.2 million and $2.6 million, respectively.

As a result of its acquisition of 1^st Enterprise in 2014, the Company acquired a deferred compensation plan with a liability balance of $622,000 at December 31, 2014. This deferred compensation plan was established in which eligible employees can elect to defer a percentage of salary of bonuses to be paid after terminating employment with the Company. Payments can be made in lump sum or equal installments for as long as 10 years. A deferral account is established for each participant and the account will earn interest quarterly based on the Company’s established crediting rate. Participants are immediately and 100% vested for the amount of their deferral account.

The Company acquired, as a result of its acquisition of PC Bancorp, a Supplemental Employee Salary Continuation Plan, a Deferred Director Fee Plan, and a Split Dollar Employee Insurance Plan for certain executive officers and one Director of PC Bancorp. At December 31, 2014, the accrued liability of the PC Bancorp Supplemental Employee Salary Plan was $1.6 million, and the accrued liability of the Deferred Director Fee Plan was $313,000. The Company recorded a total of $705,000, $661,000 and $217,000 in deferred salary compensation expense for the years ended December 31, 2014, 2013 and 2012, respectively, related to the deferred compensation plans.

Split Dollar Employee Insurance Plan

The Company’s accrued liability for the Split Dollar Employee Insurance Plan was $1.2 and $1.1 million at December 31, 2014 and 2013, respectively. The Company recorded split dollar life insurance expense of $38,000, $36,000, $47,000 in 2014, 2013 and 2012 respectively, related to the split dollar policies.

Note 18 - Defined Contribution Plan 401(k)

The Company has a 401(k) defined contribution plan for the benefit of its employees. The plan allows eligible employees to contribute a portion of their income to a trust for investment on a pre-tax basis until retirement. Participants are 100% vested in their own deferrals. Effective as of January 1, 2013, the Company changed from a safe harbor election for employer contributions to an “employer match” type of contribution for the benefit of the employees covered under the plan. During 2012, the Company made “safe harbor” non-elective employer contributions, to all employees eligible under the plan. Under the employer match type of contribution that began in January of 2013, the Company has matched $0.50 on the dollar for every dollar the employee contributed to the plan, up to maximum of 4% of the employee’s eligible compensation. The dollar amount an individual employee may contribute to his plan has regulatory limits.

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For 2012, the Company elected to make “safe harbor” or Guaranteed Company Contribution of 3% of salary to all employees. Safe harbor contributions are immediately vested. The decision to make a Guaranteed Company Contribution is made by the Company on an annual basis.

The Company’s expense relating to the contributions made to the 401(k) plan for the benefit of its employees was $418,000, $431,000 and $383,000 for the years ended December 31, 2014, 2013, and 2012, respectively.

Note 19 - Income Taxes

The Company’s income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis plus Federal and California net operating losses and credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be realized, recovered and or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The future realization of any of the Company’s deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. Based on historical and future expected taxable earnings and available tax strategies, the Company considers the future realization of these deferred tax assets more likely than not.

The tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. The Company believes that there are no material uncertain tax positions at December 31, 2014, 2013, and 2012. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.

Income tax expense (benefit) consists of the following (dollars in thousands):


	Year Ended December 31,
	2014		2013		2012
Current provision
Federal	$	4,517	$	1,669	$	2,497
State		1,183		238		265

Total current provision		5,700		1,907		2,762
Deferred provision (benefit)
Federal		382		2,674		(917	)
State		350		427		(180	)

Total deferred provision (benefit)		732		3,101		(1,097	)

Total current and deferred provision	$	6,432	$	5,008	$	1,665

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The following is a summary of the components of the net deferred tax asset recognized in the accompanying balance sheets as of the dates indicated (dollars in thousands):


	December 31,
	2014			2013
Deferred Tax Assets
Federal tax operating loss carryforward	$	99		$	317
State tax operating loss carryforward		162			168
Allowance for loan loss		5,823			4,726
Purchase accounting and loan fair value adjustments		9,430			5,558
Accruals and other liabilities		1,457			1,570
Stock compensation and deferred compensation costs		6,703			3,145
Net unrealized loss on securities available-for-sale		—			143
Start up, organizational and other costs		612			255

Total deferred tax assets		24,286			15,882

Deferred Tax Liabilities
Net unrealized gain on securities available-for-sale		(138	)		—
State tax liability		(1,041	)		(1,270	)
Unamortized fair value on subordinated debentures		(1,310	)		(1,402	)
Core deposit intangibles		(3,754	)		(478	)
Prepaid expense and other		(1,524	)		(815	)

Total deferred tax liabilities		(7,767	)		(3,965	)

Valuation allowance		(15	)		(82	)

Deferred tax assets, net	$	16,504		$	11,835

The Company’s deferred tax assets and deferred tax liabilities include balances associated with the acquisition of 1^st Enterprise in 2014, PC Bancorp in 2012 and COSB in 2010, which are non-taxable business combinations. These balances represent temporary differences for which deferred tax assets and liabilities are recognized because the financial statement carrying amounts of the acquired assets and assumed liabilities generally are their respective fair values at the date of the acquisition, whereas the tax basis equals the acquiree’s former tax basis (carryover tax basis).

The largest component of the combined net federal and state deferred tax assets consist of the fair value purchase accounting adjustment related to loans acquired in the mergers. The remaining deferred tax asset from the fair value purchase accounting adjustment on loans was $9.7 million at December 31, 2014 and $4.3 million at December 31, 2013.

The Company has federal net operating loss carryforwards attributable to the COSB acquisition of $282,000 and $906,000 and state net operating loss carryforwards of $165,000 and $789,000 at December 31, 2014, and 2013, respectively. The decrease in both the federal and state net operating loss carryforwards was attributable to the Company being able to utilize $624,000 in both federal and state net operating loss carryforwards in the 2014 tax provision. The federal and state net operating loss carryforwards from the COSB acquisition are subject to an annual limitation of $624,000 due to the ownership change on December 31, 2010. These net operating losses expire in 2030.

In addition, the Company has a state tax capital loss carryforward acquired from the PC Bancorp acquisition of $54,000 at December 31, 2014 and $761,000 at December 31, 2013, and $707,000 of the $761,000 of capital loss carryforward at December 31, 2013 expired during 2014 and the remaining expires in 2016.

The Company has a $1.3 million state net operating loss carryforward at CU Bancorp that arose from CU Bancorps’s 2012 unconsolidated tax return. The ability to utilize this net operating loss is dependent upon

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allocation of sufficient consolidated income to CU Bancorp in the future based on a three-factor formula. The Company was able to utilize an additional $1.3 million of federal net operating losses and $7,000 of state net operating losses during 2013 that arose from CU Bancorp’s unconsolidated 2012 operating loss. These net operating losses expire in 2032. Between the utilization of the COSB net operating loss carryforwards and the CU Bancorp previously unconsolidated net operating loss carryforwards, the Company was able to effectively utilize approximately $624,000 federal and state net operating losses in 2014 and approximately $1.9 million in net federal and $631,000 state operating loss carryforwards during 2013.

Due to the uncertainty surrounding the ability to fully utilize certain California deferred tax assets, a valuation allowance has been established.

The Company’s investments in Qualified Affordable Housing Projects generated low income housing tax credits and benefits net of investment amortization of $119,000 and $155,000 in 2014 and 2013, respectively. See Note 11- Investments in Qualified Affordable Housing Projects for a discussion on the investments.

The Company recorded an excess tax benefit related to the vesting of its restricted stock, the exercise of non-qualifying stock options and the recording of disqualifying dispositions following the exercises of incentive stock options in 2014 and in 2013. The federal and state excess tax benefits associated with the vesting of restricted stock was $232,000 and $96,000 during 2014 and 2013, respectively and was recorded to APIC. The federal and state excess tax benefit associated with exercise of non-qualified stock options was $287,000 and $359,000 during 2014 and 2013, respectively, and was recorded to APIC. The federal and state tax benefit associated with the disqualifying disposition of incentive stock options exercised in 2014 was $63,000 and in 2013 was $355,000. In 2014, $63,000 of the tax benefit associated with the disqualifying disposition of incentive stock options was recorded to APIC and $64,000 was recorded as a benefit to income tax expense. In 2013, $204,000 of the tax benefit associated with the disqualifying disposition of incentive stock options was recorded to APIC and $151,000 was recorded as a benefit to income tax expense. The total excess tax benefits recorded to APIC related to restricted stock and stock options was $582,000 and $659,000 during 2014 and 2013, respectively.

Included in the 2013 tax provision for the year ended December 31, 2013 was a tax benefit of $326,000 related to the re-valuing of the Company’s deferred tax assets and liabilities using a federal statutory rate of 34% in 2012 to 35% in 2013. This 1% change in the federal statutory rate positively impacted the 2013 provision by $326,000. The increase in the statutory rate is due to increased profitability which causes the federal tax rate to move to the maximum bracket of 35% versus the 34% bracket utilized in prior years.

The following table presents a reconciliation of the statutory income tax rate to the consolidated effective income tax rate for each of the periods indicated (dollars in thousands):


	For Years Ended December 31,
	2014						2013						2012
	Amount			Percent			Amount			Percent			Amount			Percent
Federal income tax expense at statutory rate	$	5,369			35.00	%	$	5,178			35.00	%	$	1,187			35.00	%
State franchise taxes, net of federal benefit, excluding LIHTC investments		1,209			7.88			524			3.54			315			9.29
Effect of rate change on net deferred tax asset		—			—			(326	)		(2.20	)		—			—
Release of state valuation allowance on use of net operating loss		(68	)		(0.44	)		(68	)		(0.46	)		(150	)		(4.43	)
Meals and entertainment, dues and other non-deductible items		75			0.49			54			0.37			47			1.39
Cash surrender life insurance		(231	)		(1.51	)		(210	)		(1.42	)		(91	)		(2.68	)
Stock compensation expense		(53	)		(0.35	)		(126	)		(0.85	)		39			1.15
LIHTC investments		(119	)		(0.77	)		(155	)		(1.05	)		0			0.00
Merger costs		515			3.36			5			0.03			300			8.84
Other		(265	)		1.73			132			0.89			18			0.53

	$	6,432			41.93	%	$	5,008			33.85	%	$	1,665			49.09	%

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The Company’s federal income tax returns for the years ended December 31, 2011 through 2013 are open for examination by federal taxing authorities and the Company’s state income tax returns for the years ended December 2010 through 2013 are open for examination by state taxing authorities. The Company is undergoing an examination of its federal tax returns for the year ended December 31, 2012. At year-end, the examination was close to conclusion with one adjustment which will not result in additional income tax expense.

The Company is undergoing an examination by the California Franchise Tax Board of the Enterprise Zone net interest deduction that the Company took in its California 2011 and 2012 tax returns. The Franchise Tax Board has requested and the Company has supplied information related to the composition and calculation of the net interest deduction taken by the Company in 2011 and 2012. The Franchise Tax board has not yet notified the Company of their findings.

The Company was notified during 2014 of an examination of the 2010 and 2011 California tax return of Premier Commercial Bancorp by the California Franchise Tax Board. The California Franchise Tax Board has requested support for the calculation of the bad debt deduction and the California Enterprise Zone net interest deduction. The Company is in the process of providing this information.

The Company has not been notified of any other pending tax examinations by taxing authorities.

The consolidated effective tax rate reflected within these financial statements is dependent on the composition of taxable earnings in the period. A number of expenses such as certain merger related expenses, certain business and entertainment expenses, country club dues, etc. are not allowable as an expense for either federal or state purposes and are classified as permanent differences. In addition, the Company has several items included in income, that are excluded from taxable income, such as interest on municipal bonds, interest on loans to municipalities, increases in the cash surrender value of life insurance policies, and for state tax purposes through 2013, the net interest income on loans within the State of California Enterprise Zone designated areas. Because of these differences, the Company’s effective tax may vary considerably between reporting years. During 2012 and 2014, due to the inclusion of significant nondeductible merger related costs, the Company had an effective tax rate in excess of its statutory rate. In 2013, the Company invested $1.1 million in Community Redevelopment Act “CRA” 60 month term, 0% interest rate deposits that made the Company eligible for a $215,000 Qualified Investment Tax Credit, which was received in the third quarter of 2013. The Company has invested in LIHTCs that generate tax credits and benefits for the Company. See Note 1 and Note 11 – Investments in Qualified Affordable Housing Projects. The Company’s consolidated effective tax rate was 41.93%, 33.85% and 49.09% for the year ended December 31, 2014, 2013 and 2012, respectively.

Based on legislation enacted during the second quarter of 2013, the California State Legislature has repealed the net interest deduction on interest income for loans within the designated State of California Enterprise Zones. The effective date of this legislation is January 1, 2014. As a result, the Company is no longer eligible for the net interest deduction when calculating its state income tax provision which increased the effective state tax rate for 2014.

Note 20 - Shareholders’ Equity

Common Stock

The Company’s outstanding common stock increased by 5,602,492 shares, from 11,081,364 shares at December 31, 2013 to 16,683,856 at December 31, 2014. As discussed in Note 2, Business Combinations, the Company completed the merger with 1^st Enterprise on November 30, 2014. Pursuant to the terms and conditions set forth in the Merger Agreement, each outstanding share of 1^st Enterprise common stock was converted into the right to receive 1.3450 of a share of CU Bancorp

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common stock, resulting in 5,240,409 shares of CU Bancorp common stock issued. The fair value of the CU Bancorp common stock issued as part of the consideration paid was $102.7 million and was determined based on the closing market price of $19.60 of CU Bancorp common stock on November 30, 2014. During 2014, the Company issued 221,016 shares of stock from the exercise of employee stock options for a total value of $2.0 million. The Company also issued 172,900 shares of restricted stock to the Company’s directors and employees, cancelled 5,016 shares of unvested restricted stock related to employee turnover and cancelled 26,317 shares of restricted stock that had a value of $471,000, when employees elected to pay their tax obligation via the repurchase of the stock by the Company. The net issuance of restricted stock for 2014 was 167,884 shares. See Note 16 – Stock Options and Restricted Stock under “Equity Compensation Plans” for a more detailed analysis related to the issuances of these shares.

During 2013, the Company issued 282,031 shares of stock from the exercise of employee stock options for a total value of $2.8 million. In addition, the Company issued 81,050 shares of restricted stock to the Company’s directors and employees, cancelled 11,600 shares of unvested restricted stock related to employee turnover and cancelled 28,791 shares of restricted stock that had a value of $422,000, when employees elected to pay their tax obligation via the repurchase of the stock by the Company. The net issuance of restricted stock for 2013 was 69,450 shares.

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 2, Business Combinations, the Company completed the merger with 1^st Enterprise on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1^st Enterprise as part of the Small Business Lending Fund (SBLF) program of the United States Department of Treasury was converted into substantially 16,400 identical 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 fair value of CU Bancorp Preferred Stock was $15.9 million at the merger date. 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, for restrictions on dividends.

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
Year ended December 31, 2014
Net unrealized gains (losses) on investment securities:
Beginning balance	$	(348	)	$	143		$	(205	)

Non-credit portion of other-than-temporary impairments arising during the period		—			—			—
Net unrealized gain (losses) arising during the period		681			(286	)		395

Net other comprehensive loss		681			(286	)		395

Ending balance	$	333		$	(143	)	$	190

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	Before Tax			Tax Effect			Net of Tax
Year ended December 31, 2013
Net unrealized gains (losses) on investment securities:
Beginning balance	$	2,369		$	(975	)	$	1,394

Non-credit portion of other-than-temporary impairments arising during the period		(41	)		17			(24	)
Net unrealized losses arising during the period		(2,629	)		1,082			(1,547	)

Other comprehensive loss before reclassification		(2,670	)		1,099			(1,571	)
Reclassification adjustment for gains realized in net income		(47	)		19			(28	)

Net other comprehensive loss		(2,717	)		1,118			(1,599	)

Ending balance	$	(348	)	$	143		$	(205	)

Note 21 - Commitments and Contingencies

The Company follows accounting guidance related to “Accounting for Contingencies” which provides criteria for determining whether a company must accrue or disclosure a loss contingency. Under these guidelines, a loss contingency is defined as “an existing condition, situation, or set of circumstances involving uncertainty to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. A potential loss resulting from pending litigation is to be accrued when it is probable that one or more future events will occur confirming the fact of the loss and when “the amount of the loss can be reasonably estimated.” If an enterprise determines that one or both of these conditions have not been met, accounting guidance requires an enterprise to disclose a loss contingency when “there is at least a reasonable possibility that a loss may have occurred.” This disclosure “shall give an estimate of the possible loss or range of losses or state that such an estimate cannot be made.” Neither accrual nor disclosure is required when the probability of the future events occurring that would trigger the loss for the enterprise is considered to be remote.

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 December 31, 2014, 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

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Some of the Company’s commitments are expected to expire without being drawn upon, with the total commitment amounts not necessarily representing future cash funding requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and properties under construction.

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Financial instruments with off balance sheet risk include commitments to extend credit of $720 million and $346 million at December 31, 2014 and 2013, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $57.2 million and $40.6 million at December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the Company had established an allowance for unfunded loan commitments of $471,000 and $329,000, respectively. These balances are included in other liabilities on the balance sheet.

Note 22 - Regulatory Matters

The Company currently includes in Tier 1 capital an amount of subordinated debentures equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity less goodwill, core deposit intangibles and a portion of the SBA servicing assets. On July 2, 2013, the Board of Governors of the Federal Reserve System (“Federal Reserve”) approved a final rule (the “Final Rule”) that revises the current capital rules for U.S. banking organizations including the capital rules for the Company. The FDIC adopted the rule as an “interim final rule” on July 9, 2013. The Final Rule implements the regulatory capital reforms recommended by the Basel Committee. The Final Rule permanently grandfathers non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 Risked-Based Capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009, such as the Company. As a result, the Company’s trust preferred securities will continue to be included in Tier 1 Risk-Based Capital. The Company also currently includes in its Tier 1 capital an amount of Non-Cumulative Perpetual Preferred Stock, Series A issued under the SBLF program. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. Under the Final Rule, the CU Bancorp Preferred Stock will continue to be included in Tier 1 Risk-Based Capital.

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CU Bancorp Consolidated:


	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized Under Prompt Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2014
Total Risk-Based Capital Ratio	$	231,228		11.61	%	$	159,363		8.0	%	$	199,204		10.0	%
Tier 1 Risk-Based Capital Ratio		218,147		10.95	%		79,682		4.0	%		119,523		6.0	%
Tier 1 Leverage Ratio		218,147		12.92	%		67,564		4.0	%		84,455		5.0	%
As of December 31, 2013
Total Risk-Based Capital Ratio	$	145,372		12.80	%	$	90,844		8.0	%	$	113,555		10.0	%
Tier 1 Risk-Based Capital Ratio		134,440		11.84	%		45,422		4.0	%		68,133		6.0	%
Tier 1 Leverage Ratio		134,440		9.57	%		56,172		4.0	%		70,215		5.0	%

California United Bank:


	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized Under Prompt Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2014
Total Risk-Based Capital Ratio	$	223,112		11.20	%	$	159,300		8.0	%	$	199,125		10.0	%
Tier 1 Risk-Based Capital Ratio		210,031		10.55	%		79,650		4.0	%		119,475		6.0	%
Tier 1 Leverage Ratio		210,031		12.44	%		67,532		4.0	%		84,415		5.0	%
As of December 31, 2013
Total Risk-Based Capital Ratio	$	135,682		11.96	%	$	90,772		8.0	%	$	113,465		10.0	%
Tier 1 Risk-Based Capital Ratio		124,750		10.99	%		45,386		4.0	%		68,079		6.0	%
Tier 1 Leverage Ratio		124,750		8.90	%		56,082		4.0	%		70,102		5.0	%

Restrictions on Dividends

Payment of stock or cash dividends in the future will depend upon earnings, liquidity, financial condition and other factors deemed relevant by our Board of Directors. Notification to the FRB is required prior to declaring and paying a dividend to shareholders that exceeds earnings for the period for which the dividend is being paid. 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

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adequacy, liquidity, future earnings projections, capital planning and credit concentrations. Should the FRB object to dividend payments, the Company would be precluded from declaring and paying dividends until approval is received or the Company no longer needs to provide notice under applicable guidance.

California law also limits the Company’s ability to pay dividends. A corporation may make a distribution/dividend from retained earnings to the extent that the retained earnings exceed (a) the amount of the distribution plus (b) the amount if any, of dividends in arrears on shares with preferential dividend rights. Alternatively, a corporation may make a distribution/dividend, if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution/dividend.

The Bank is subject to certain restrictions on the amount of dividends that may be declared without regulatory approval. Such dividends shall not exceed the lesser of the Bank’s retained earnings or net income for its last three fiscal years less any distributions to shareholders made during such period. In addition, the Bank may not pay dividends that would result in its capital being reduced below the minimum requirements shown above for capital adequacy purposes.

Note 23 - Fair Value Information

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.

•

Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions 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.

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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: The fair value of securities available-for-sale 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.

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.

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

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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: Interest Rate Swap Contracts: The fair value of the interest rate swap contracts are provided by an independent third party vendor 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.

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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 rates being paid on organic certificates of deposit at December 31, 2014 and December 31, 2013, were generally identical to the market interest rates for comparable terms and thus both the carry amount and fair value are generally considered approximately identical as of the reporting dates. The deposits acquired from PC Bancorp and 1^st Enterprise were initially adjusted to their fair value at the date of acquisition. The interest rates used to calculate the fair value adjustments on the PCB certificates were considered to be the market rates at the date of acquisition. The inputs utilized in determining the fair value of maturing deposits are unobservable 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.

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 December 31, 2014, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at December 31, 2014. Because all three of the debentures re-priced on December 16, 2014 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 December 31, 2014, 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 December 31, 2014 and 2013.

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.

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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):


	Total 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 – 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	$	—
Financial Assets – December 31, 2013
Investment securities available-for-sale	$	106,488	$	—	$	106,488	$	—
Financial Liabilities – December 31, 2013
Interest Rate Swap Contracts	$	3,943	$	—	$	3,943	$	—

At December 31, 2014 and 2013, 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 periods ended December 31, 2014 and 2013.

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.

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 – December 31, 2014
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)	$	1,173	$	—	$	—	$	1,173
Other real estate owned		850		—		—		850

Total	$	2,023	$	—	$	—	$	2,023

Financial Assets – December 31, 2013
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs offs (non-purchased credit impaired loans)	$	264	$	—	$	—	$	264

Total	$	264	$	—	$	—	$	264

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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 at December 31, 2014		Valuation Methodology	Significant Unobservable Inputs	Significant Unobservable Input Values
Financial Assets – December 31, 2014
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off		$1,173	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%

	$	2,023


	Fair Value at December 31, 2013		Valuation Methodology	Significant Unobservable Inputs	Significant Unobservable Input Values
Financial Assets – December 31, 2013
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off	$	45	Credit loss estimate of aged accounts receivable collateral	Credit loss factors on aging of accounts receivable collateral	80%

		219	Commercial real estate appraisal	Sales approach Estimated selling costs	8%

Total	$	264

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 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 December 31, 2014 and December 31, 2013. 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 financial instruments measured at fair value and for estimating fair value for financial instruments not recorded at fair value has been described above.

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The table below presents the level in the fair value hierarchy for the financial instruments estimated fair values, as of the dates indicated (dollars in thousands):


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


					Fair Value Measurements
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2013
Financial Assets
Investment securities available-for-sale	$	106,488	$	106,488	$	—	$	106,488	$	—
Loans, net		922,591		926,500		—		—		926,500
Financial Liabilities
Certificates of deposit		63,581		63,680		—		63,680		—
Securities sold under agreements to repurchase		11,141		11,141		—		11,141		—
Subordinated debentures		9,379		12,372		—		12,372
Interest rate swap contracts		3,943		3,943		—		3,943		—

Note 24 – Reclassification

Certain amounts in the prior year’s financial statements and related disclosures were reclassified to conform to the current year presentation with no effect on previously reported net income or shareholders’ equity.

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Note 25 – Summary Quarterly Data (unaudited)


	2014 Quarters Ended								2013 Quarters Ended
(Dollars in thousands, except per share data)	Dec. 31		Sept. 30		June 30		Mar. 31		Dec. 31		Sept. 30		June 30		Mar. 31
Interest income	$	16,264	$	13,238	$	13,039	$	12,636	$	12,841	$	12,822	$	13,114	$	12,069
Interest expense		528		470		461		463		498		516		534		531

Net interest income		15,736		12,768		12,578		12,173		12,343		12,306		12,580		11,538
Provision for loan losses		1,721		35		408		75		934		631		1,153		134

Net interest income after provision for loan losses		14,015		12,733		12,170		12,098		11,409		11,675		11,427		11,404

Non-interest income		2,132		2,004		1,783		1,790		1,931		1,471		1,690		1,426

Non-interest expense		14,107		10,031		9,698		9,549		9,620		9,430		9,281		9,309

Net income before provision for income tax expense		2,040		4,706		4,255		4,339		3,720		3,716		3,836		3,521
Provision for income tax		733		2,157		1,869		1,673		888		1,239		1,515		1,366

Net Income	$	1,307	$	2,549	$	2,386	$	2,666	$	2,832	$	2,477	$	2,321	$	2,155

Preferred stock dividends and discount accretion	$	124	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Net Income Available to Common Shareholders	$	1,183	$	2,549	$	2,386	$	2,666	$	2,832	$	2,477	$	2,321	$	2,155

Basic income per share	$	0.09	$	0.23	$	0.22	$	0.25	$	0.26	$	0.24	$	0.22	$	0.21

Diluted income per share	$	0.09	$	0.23	$	0.21	$	0.24	$	0.26	$	0.23	$	0.22	$	0.20

Note 26 – Condensed Financial Information of Parent Company

CU Bancorp, a California Corporation, was formed to facilitate a reorganization to create a bank holding company for the Bank in 2012. CU Bancorp became the parent of the Bank through a reorganization that occurred at the end of business on July 31, 2012. The following tables present the parent company only condensed balance sheets and the related statements of income and condensed statements of cash flows for the dates and periods indicated (dollars in thousands):


Parent Company Only Condensed Balance Sheets	December 31,
	2014		2013
ASSETS
Cash and due from banks	$	4,612	$	4,348
Loans		1,410		1,786
Investment in subsidiary		284,216		141,020
Accrued interest receivable and other assets		103		207

Total Assets	$	290,341	$	147,361

LIABILITIES
Subordinated debentures	$	9,538	$	9,379
Accrued interest payable and other liabilities		1,611		58

Total Liabilities		11,149		9,437
SHAREHOLDERS’ EQUITY		279,192		137,924

Total Liabilities and Shareholders’ Equity	$	290,341	$	147,361

162


Parent Company Only Condensed Statements of Income	Years Ended December 31,
	2014			2013
Interest Income	$	165		$	172

Interest Expense		430			485
Operating Expenses		911			556

Total Expenses		1,341			1,041

Loss Before Income Tax Benefit and Equity in Undistributed Earnings of Subsidiary		(1,176	)		(869	)
Income tax benefit		257			371
Loss Before Equity in Undistributed Earnings of Subsidiary		(919	)		(498	)

Equity in undistributed earnings of subsidiary		9,827			10,283

Net Income	$	8,908		$	9,785


Parent Company Only Condensed Statements of Cash Flows	Years Ended December 31,
	2014			2013
Cash flows from operating activities:
Net income:	$	8,908		$	9,785
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of subsidiary		(9,827	)		(10,283	)
Provision for loan losses		(100	)		—
Net accretion of discounts/premiums		(26	)		(36	)
Accretion of subordinated debenture discount		159			210
Net change in fair value of interest rate contract		—			(70	)
Decrease (increase) in accrued interest receivable and other assets		1,351			(226	)
Decrease in accrued interest payable and other liabilities		396			32

Net cash provided by operating activities		861			588

Cash flows from investing activities:
Cash paid for 1^st Enterprise fractional shares and dissenting shareholder		(89	)		—
Capital contribution made to subsidiary		(2,500	)		—
Maturity of certificate of deposit		—			370
Net decrease in loans		502			721

Net cash (used in) provided by investing activities		(2,087	)		1,091

Cash flows from financing activities:
Net proceeds from exercise of stock options		2,029			2,790
Issuance costs of common stock for 1^st Enterprise merger		(27	)		—
Restricted stock repurchase		(471	)		(422	)
Dividends paid on preferred stock		(41	)		—

Net cash provided by financing activities		1,490			2,368

Net increase in cash		264			2,871
Cash, beginning of year		4,348			1,477

Cash, end of year	$	4,612		$	4,348

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	270		$	281

Cash paid during the period for taxes	$	1		$	1

163

PART IV

ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(b) Index to Exhibits


Exhibit Number		Description

2.1		Agreement and Plan of Merger by and Among CU Bancorp and California United Bank and 1^st Enterprise Bank Dated as of June 2, 2014¹

2.2		Amendment No. 1 to Agreement and Plan of Merger²

2.3		Amendment No. 2 to Agreement and Plan of Merger³

3.1		Articles of Incorporation of CU Bancorp⁴

3.2		Bylaws of CU Bancorp⁵

3.3		Certificate of Determination of Non-Cumulative Perpetual Preferred Stock, Series A of CU Bancorp⁶

4.1		Specimen form of Certificate for CU Bancorp Common Stock⁷

4.2		Assignment & Assumption Agreement

10.1*		2014 CU Bancorp Executive Performance Incentive Plan Amendment # 1 — April 24, 2014⁸

10.2*		Separation and Consulting Agreement⁹

10.3*		CU Bancorp 2007 Equity Incentive Plan as Restated July 31, 2012 and Form of Stock Option Agreement and Form of Restricted Stock Bonus Award Agreement¹⁰

10.4*		CU Bancorp 2007 Equity and Incentive Plan as Amended and Restated July 31, 2014

10.5*		1^st Enterprise Bank 2006 Stock Incentive Plan as Amended and Restated March 18, 2009

10.6*		Amendment of the 1^st Enterprise Bank 2006 Stock Incentive Plan, July 31, 2014

10.7*		California United Bank 2005 Stock Option Plan¹¹

10.8*		CU Bancorp 2012 Change in Control Severance Plan¹²

10.9*		Executive Salary Continuation Plan / Agreement and Schedule of Participants and Benefits¹³

10.10*		2013 California United Bank Executive Performance Cash Incentive Plan¹⁴

10.11*		2014 California United Bank Executive Performance Cash Incentive Plan¹⁵

10.12*		Form of Director / Officer Indemnification Agreement and Schedule of Agreements¹⁶

12.1		Ratio of Earnings to Fixed Charges¹⁷

14.1		CU Bancorp Principles of Business Conduct & Ethics¹⁸

14.2		CU Bancorp Code of Ethics — Financial Officers¹⁹

21.1		Subsidiaries of the Registrant²⁰

23.1		Consent of Independent Registered Public Accounting Firm

24.1		Power of Attorney (see signature page hereto)

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32.1		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

164

*	Refers to management contracts or compensatory plans or arrangements

Attached hereto

1	Incorporated by reference from Exhibit 2.1 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.

2	Incorporated by reference from Exhibit 2.1 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.

3	Incorporated by reference from Exhibit 2.2 to CU Bancorp Current Report on Form 8-K filed November 17, 2014.

4	Incorporated by reference from Exhibit 3.1 to CU Bancorp Registration Statement on Form S-4 as filed on April 13, 2012.

5	Incorporated by reference from Exhibit 3.2 to CU Bancorp Registration Statement on Form S-4 as filed on April 13, 2012.

6	Incorporated by reference from Exhibit 3.3 to CU Bancorp Current Report on Form 8-K filed November 24, 2014.

7	Incorporated by reference from Exhibit 4.1 to CU Bancorp Registration Statement on Form S-4 as filed on April 13, 2012.

8	Incorporated by reference from Exhibit 10.1 to CU Bancorp Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2014.

9	Incorporated by reference from Exhibit 10.5 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.

10	Incorporated by reference from Exhibit 10.2 to CU Bancorp Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2013.

11	Incorporated by reference from Exhibit 10.1 to CU Bancorp Registration Statement on Form S-4 as filed on April 13, 2012.

12	Incorporated by reference from Exhibit 10.3 to CU Bancorp Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2013.

13	Incorporated by reference from Exhibit 10.4 to CU Bancorp Annual Report on Form 10-K filed March 13, 2014.

14	Incorporated by reference from Exhibit 99.1 to CU Bancorp Current Report on Form 8-K filed February 7, 2014.

15	Incorporated by reference from Exhibit 10.6 to CU Bancorp Annual Report on Form 10-K filed March 13, 2014.

16	Incorporated by reference from Exhibit 10.7 to CU Bancorp Annual Report on Form 10-K filed March 13, 2014.

17	Incorporated by reference from Exhibit 12.1 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.

18	Incorporated by reference from Exhibit 14.1 to CU Bancorp Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2013.

19	Incorporated by reference from Exhibit 14.2 to CU Bancorp Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2013.

20	Incorporated by reference from Exhibit 21.1 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.

165

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


						CU BANCORP

Dated: March 13, 2015						/s/ DAVID I. RAINER
						David I. Rainer
						Chief Executive Officer

						/s/ KAREN A. SCHOENBAUM
						Karen A. Schoenbaum
						Executive Vice President and Chief Financial Officer

POWERS OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Anita Y. Wolman, Karen A. Schoenbaum, and Anne Williams, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Dated: March 13, 2015						/s/ ROBERTO E. BARRAGAN
						Roberto E. Barragan Director

Dated: March 13, 2015						/s/ CHARLES R. BEAUREGARD
						Charles R. Beauregard Director

Dated: March 13, 2015						/s/ KENNETH J. COSGROVE
						Kenneth J. Cosgrove Director

Dated: March 13, 2015						/s/ DAVID C. HOLMAN
						David C. Holman Director

Dated: March 13, 2015						/s/ K. BRIAN HORTON
						K. Brian Horton Director and President

Dated: March 13, 2015						/s/ ERIC S. KENTOR
						Eric S. Kentor Director

Dated: March 13, 2015						/s/ JEFFREY J. LEITZINGER, Ph.D.
						Jeffrey J. Leitzinger, Ph.D. Director

166


Dated: March 13, 2015						/s/ DAVID I. RAINER
						David I. Rainer Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Dated: March 13, 2015						/s/ ROY A. SALTER
						Roy A. Salter Director

Dated: March 13, 2015						/s/ KAREN A. SCHOENBAUM
						Karen A. Schoenbaum Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Dated: March 13, 2015						/s/ DANIEL F. SELLECK
						Daniel F. Selleck Director

Dated: March 13, 2015						/s/ LESTER M. SUSSMAN
						Lester M. Sussman Director

Dated: March 13, 2015						/s/ CHARLES H. SWEETMAN
						Charles H. Sweetman Director

167