UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

☐	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 West 7^th Street, Suite 220 Los Angeles, California		90017
(Address of principal executive offices)		(Zip Code)

(213) 430-7000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 ☒ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 1, 2017 the number of shares outstanding of the registrant’s no par value Common Stock was 17,833,438.

Page 1 of 72

CU BANCORP

March 31, 2017 FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


	ITEM 1.	Financial Statements

		Consolidated Balance Sheets March 31, 2017 (Unaudited) and December 31, 2016	3

		Consolidated Statements of Income Three Months Ended March 31, 2017 and 2016 (Unaudited)	4

		Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2017 and 2016 (Unaudited)	5

		Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2017 and 2016 (Unaudited)	6

		Consolidated Statements of Cash Flows Three Months Ended March 31, 2017 and 2016 (Unaudited)	7

		Notes to the Consolidated Financial Statements (Unaudited)	9

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

		Overview	42

		Results of Operations	47

		Financial Condition	56

		Liquidity	61

		Dividends	63

		Regulatory Matters	64

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	67

	ITEM 4.	Controls and Procedures	69

PART II. OTHER INFORMATION

	ITEM 1.	Legal Proceedings	70

	ITEM 1A.	Risk Factors	70

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

	ITEM 3.	Defaults Upon Senior Securities	70

	ITEM 4.	Mine Safety Disclosures	70

	ITEM 5.	Other Information	71

	ITEM 6.	Exhibits	71

	Signatures		72

Page 2 of 72

CU BANCORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


	March 31, 2017			December 31, 2016
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	51,168		$	41,281
Interest earning deposits in other financial institutions		313,609			167,789

Total cash and cash equivalents		364,777			209,070
Certificates of deposit in other financial institutions		48,795			51,245
Investment securities available-for-sale, at fair value		469,399			469,950
Investment securities held-to-maturity, at amortized cost		40,945			42,027

Total investment securities		510,344			511,977
Loans		2,046,138			2,050,226
Allowance for loan loss		(19,605	)		(19,374	)

Net loans		2,026,533			2,030,852
Premises and equipment, net		3,946			4,184
Deferred tax assets, net		15,329			17,181
Goodwill		64,603			64,603
Core deposit and leasehold right intangibles, net		5,970			6,300
Bank owned life insurance		63,595			51,216
Accrued interest receivable and other assets		39,376			48,132

Total Assets	$	3,143,268		$	2,994,760

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Non-interest bearing demand deposits	$	1,485,730		$	1,400,097
Interest bearing transaction accounts		346,279			332,702
Money market and savings deposits		892,143			845,110
Certificates of deposit		30,623			29,480

Total deposits		2,754,775			2,607,389
Securities sold under agreements to repurchase		11,939			18,816
Subordinated debentures, net		9,896			9,856
Accrued interest payable and other liabilities		20,210			20,514

Total Liabilities		2,796,820			2,656,575

Commitments and Contingencies (Note 13)
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, 16,400 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		16,887			16,995
Common stock – authorized, 75,000,000 shares no par value, 17,834,183 and 17,759,006 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		236,308			235,873
Additional paid-in capital		25,462			25,213
Retained earnings		70,645			63,163
Accumulated other comprehensive loss		(2,854	)		(3,019	)

Total Shareholders’ Equity		346,448			338,185

Total Liabilities and Shareholders’ Equity	$	3,143,268		$	2,994,760

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

Page 3 of 72

CU BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended March 31,
	2017		2016
Interest Income
Interest and fees on loans	$	24,432	$	22,578
Interest on investment securities		2,041		1,232
Interest on interest bearing deposits in other financial institutions		710		439

Total Interest Income		27,183		24,249

Interest Expense
Interest on interest bearing transaction accounts		157		99
Interest on money market and savings deposits		670		511
Interest on certificates of deposit		26		33
Interest on securities sold under agreements to repurchase		9		11
Interest on subordinated debentures		130		117

Total Interest Expense		992		771

Net Interest Income		26,191		23,478
Provision for loan losses		—		622

Net Interest Income After Provision For Loan Losses		26,191		22,856

Non-Interest Income
Gain on sale of securities, net		141		—
Gain on sale of SBA loans, net		202		554
Deposit account service charge income		1,160		1,189
Other non-interest income		1,332		1,077

Total Non-Interest Income		2,835		2,820

Non-Interest Expense
Salaries and employee benefits (includes stock based compensation expense of $773 and $834 for the three months ended March 31, 2017 and 2016, respectively)		11,061		10,153
Occupancy		1,489		1,436
Data processing		656		618
Legal and professional		1,009		475
FDIC deposit assessment		446		350
OREO loss and expenses		—		79
Office services expenses		380		403
Other operating expenses		1,652		1,673

Total Non-Interest Expense		16,693		15,187

Net Income Before Provision for Income Tax Expense		12,333		10,489
Provision for income tax expense		4,550		3,905

Net Income		7,783		6,584
Preferred stock dividends and discount accretion		301		303

Net Income Available to Common Shareholders	$	7,482	$	6,281

Earnings Per Share
Basic earnings per share	$	0.43	$	0.37
Diluted earnings per share	$	0.42	$	0.36

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

Page 4 of 72

CU BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2017			2016
Net Income	$	7,783		$	6,584
Other Comprehensive Income, net of tax:
Net change in unrealized gain on available-for-sale investment securities, net of tax		247			769
Reclassification of gain on investment securities available-for-sale to net income, net of tax		(82	)		—

Other Comprehensive Income		165			769

Comprehensive Income	$	7,948		$	7,353

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

Page 5 of 72

CU BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)


	Preferred Stock					Common Stock
	Issued and Outstanding Shares		Amount			Issued and Outstanding Shares			Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at December 31, 2015		16,400	$	16,995			17,175,389		$	230,688	$	23,017		$	36,923		$	(816	)	$	306,807
Net issuance of restricted stock		—		—			37,809			—		—			—			—			—
Exercise of stock options		—		—			189,489			1,438		—			—			—			1,438
Stock based compensation expense		—		—			—			—		834			—			—			834
Restricted stock repurchase		—		—			(13,304	)		—		(294	)		—			—			(294	)
Preferred stock dividends and discount accretion		—		153			—			—		—			(303	)		—			(150	)
Net income		—		—			—			—		—			6,584			—			6,287
Other comprehensive income		—		—			—			—		—			—			769			769

Balance at March 31, 2016		16,400	$	17,148			17,389,383		$	232,126	$	23,557		$	43,204		$	(47	)	$	315,988


Balance at December 31, 2016		16,400	$	16,955			17,759,006		$	235,873	$	25,213		$	63,163		$	(3,019	)	$	338,185
Net issuance of restricted stock		—		—			60,531			—		—			—			—			—
Exercise of stock options		—		—			27,942			435		—			—			—			435
Stock based compensation expense		—		—			—			—		773			—			—			773
Restricted stock repurchase		—		—			(13,296	)		—		(524	)		—			—			(524	)
Preferred stock dividends and net premium amortization		—		(68	)		—			—		—			(301	)		—			(369	)
Net income		—		—			—			—		—			7,783			—			7,783
Other comprehensive income		—		—			—			—		—			—			165			165

Balance at March 31, 2017		16,400	$	16,887			17,834,183		$	236,308	$	25,462		$	70,645		$	(2,854	)	$	346,448

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

Page 6 of 72

CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income:	$	7,783		$	6,584
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—			622
Provision for unfunded loan commitments		—			102
Stock based compensation expense		773			834
Depreciation		341			361
Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs		(2,240	)		(2,140	)
Net amortization from investment securities		1,505			1,009
Increase in bank owned life insurance		(379	)		(323	)
Amortization of core deposit intangibles		284			321
Net accretion of leasehold right intangible asset and liabilities		(34	)		(22	)
Accretion of subordinated debenture discount		40			40
Loss on sale of OREO		—			14
Gain on sale of securities, net		(141	)		—
Gain on sale of SBA loans, net		(202	)		(554	)
Decrease in deferred tax assets		1,732			2,381
Decrease (increase) in accrued interest receivable and other assets		8,756			(272	)
Increase (decrease) in accrued interest payable and other liabilities		54			(1,622	)
Increase (decrease) in fair value of derivative swap liability		(279	)		561

Net cash provided by operating activities		17,993			7,896

Cash flows from investing activities:
Purchases of investment securities		(32,586	)		(11,312	)
Proceeds from sales of investment securities		10,601			—
Proceeds from repayment and maturities of investment securities		22,540			13,696
Net loan principal payments (net of loan originations)		6,761			(33,080	)
Purchases of premises and equipment		(103	)		(58	)
Proceeds from sale of OREO		—			311
Net decrease in certificates of deposit in other financial institutions		2,450			2,940
Purchase of bank owned life insurance		(12,000	)		—

Net cash used in investing activities		(2,337	)		(27,503	)

Cash flows from financing activities:
Net increase in non-interest bearing demand deposits		85,633			24,213
Net increase (decrease) in interest bearing transaction accounts		13,577			(3,142	)
Net increase in money market and savings deposits		47,033			71,717
Net increase (decrease) in certificates of deposit		1,143			(3,694	)
Net increase (decrease) in securities sold under agreements to repurchase		(6,877	)		7,607
Net proceeds from stock options exercised		435			1,438
Restricted stock repurchase		(524	)		(294	)
Dividends paid on preferred stock		(369	)		(150	)

Net cash provided by financing activities		140,051			97,695

Net increase in cash and cash equivalents		155,707			78,088
Cash and cash equivalents, beginning of period		209,070			222,063

Cash and cash equivalents, end of period	$	364,777		$	300,151

Page 7 of 72


	Three Months Ended March 31,
	2017		2016
Supplemental disclosures of cash flow information:
Cash paid for interest	$	943	$	782
Net cash paid for taxes	$	—	$	1,710
Supplemental disclosures of non-cash investing activities:
Net change in unrealized gain on available-for-sale investment securities, net of tax	$	247	$	769

Page 8 of 72

CU BANCORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

Note 1 - Basis of Financial Statement Presentation

CU Bancorp (the “Company”) is a bank holding company whose operating subsidiary is California United Bank. As a bank holding company, CU Bancorp is subject to regulation of the Federal Reserve Board (“FRB”). The term “Company”, as used throughout this document, refers to the consolidated financial statements 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. Its headquarters office is located in Los Angeles, California. As a state chartered non-member bank, the Bank is subject to regulation by the California Department of Business Oversight (“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.

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 (“SEC”).

CU Bancorp is the common shareholder of Premier Commercial Statutory Trust I, Premier Commercial Statutory Trust II, and Premier Commercial Statutory Trust III. 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 8 – Borrowings and Subordinated Debentures.

Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in the interim consolidated financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with the 2016 Annual Report on Form 10-K. In the opinion of management, the accompanying interim consolidated financial statements contain all necessary adjustments of a normal recurring nature, to present fairly the consolidated financial position of the Company and the results of its operations for the interim periods presented.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with GAAP 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 consolidated 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 on a recurring and nonrecurring basis. 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, among other factors, changes in local economic conditions.

Business Segments

The Company is organized and operates as a single reporting segment, principally engaged in commercial business banking. The Company conducts its lending and deposit operations through nine full service branch offices located in Los Angeles, Orange, Ventura and San Bernardino counties.

Page 9 of 72

Note 2 - Recent Accounting Pronouncements

Recent Accounting Standards Not Yet Effective

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which replaced almost all existing revenue recognition guidance in current GAAP. However, the effects of the new revenue recognition guidance on the financial statements of reporting entities in the financial institution industry will be somewhat limited because, for the most part, financial instruments and related contractual rights and obligations are excluded from its scope. As such, it is anticipated that interest income recognition and measurement, the largest source of revenue for the Company, will not be impacted by Accounting Standards Codification (“ASC”) Topic 606. However, the recognition and measurement of certain non-interest income items such as gain on sale of other real estate owned and deposit-related fees, could be affected by ASC Topic 606.

Under current U.S. GAAP, when full consideration is not expected and financing is required by the buyer to purchase the property, there are very prescriptive requirements in determining when foreclosed real estate property sold by an institution should be derecognized and a gain or loss be recognized. The new guidance that will be applied to these sales is more principles based. For example, as it pertains to the criteria for determining how a contract should be accounted for under the new guidance, judgment will need to be exercised in evaluating if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the buyer has obtained control of the asset, including the significant risks and rewards of the ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized under the new guidance. The initial investment requirement for the buyer along with the various methods for profit recognition are no longer applicable when the new guidance goes into effect. The Company will revise its current policy on the recognition and measurement of gain on sale of other real estate owned to be consistent with the new guidance, but does not expect the new guidance to have a significant impact on the consolidated financial statements of the Company when adopted. Since the inception of the Company, the level of other real estate owned has been very low and in almost all cases, full consideration was received at the time of sale and financing by the Company was not provided.

For deposit-related fees, considering the straightforward nature of the arrangements with the Company’s deposits customers, the Company does not expect the recognition and measurement outcomes of deposit-related fees to be significant differently under the new guidance compared to current GAAP.

ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 and was to be applied on either a modified retrospective or full retrospective basis. In August 2015, the FASB issued ASU 2015-14 which defers the original effective date for all entities by one year. Public business entities should apply the guidance in ASU 2015-14 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements when adopted on January 1, 2018.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The most far-reaching ramification of this ASU is the elimination of the available-for-sale classification for equity securities and the requirement to carry most equity securities at fair value through net income. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities can early adopt the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Early adoption of these provisions can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance.

The Company does not have any equity securities in its available-for-sale portfolio, but only investments in the common stock of PCBB, TIB and the FHLB, the Company’s correspondent banks. Under the current accounting policy, the Company’s investments in these common stock are carried at cost because a readily determinable fair value does not exist for these investments. Under ASU 2016-01, investment in FHLB is specifically excluded from the requirement that equity

Page 10 of 72

securities are to be measured at fair value with unrealized holding gains and losses reflected in net income. Furthermore, the ASU allows entities to make an irrevocable practicality exception whereby entities can make an election, on a security-by-security basis, to account for equity securities that do not have readily determinable fair value at cost, with adjustments to fair value when an observable price change occurs or impairment is identified. As such, the Company intends to continue to measure its investments in Pacific Coast Banker’s Bank (“PCBB”), Texas Independent Bank (“TIB”) and Federal Home Loan Bank (“FHLB”) common stock at cost upon adoption on January 1, 2018. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements when adopted.

In February 2016, the FASB issued ASU 2016-02, Leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. Furthermore, this change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. Examples of changes in the new guidance affecting both lessees and lessors include: (a) defining initial direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) requiring related party leases to be accounted for based on their legally enforceable terms and conditions, (c) eliminating the additional requirements that must be applied today to leases involving real estate and (d) revising the circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor. In addition, both lessees and lessors are subject to new disclosure requirements. ASU 2016-02 is effective for public entities for interim and annual periods beginning after December 15, 2018.

As of March 31, 2017, the Company has 10 operating leases for 10 locations under contract with a term greater than 12 months with future lease payments totaling $11 million. At adoption date, January 1, 2019, the Company will recognize a lease liability for the present value of future lease commitments and a right of use asset. The recognized right of use asset relating to operating leases will consist of the present value of future lease commitments, unamortized initial direct costs, prepaid rent, and the related unamortized balance of lease incentives. The discount rate used to present value future lease payments will be the Company’s incremental borrowing rate at the time of adoption. The Company will take a modified retrospective transition approach with application in all comparative periods presented. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements when adopted.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Current expected credit losses (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Upon adoption, the Company expects the level of ECL will likely be higher, however, the Company is still in the early stages of developing an implementation plan and evaluating the magnitude of the increase and the impact of this ASU on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), which addresses eight classification issues related to the statement of cash flows:

•

Debt prepayment of debt extinguishment costs

•

Settlement of zero-coupon bonds

•

Contingent consideration payments made after a business combination

•

Proceeds from the settlement of insurance claims

•

Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies

Page 11 of 72

•

Distributions received from equity method investees

•

Beneficial interests in securitization transactions

•

Separately identifiable cash flows and application of the predominance principle

ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of Business, which provides guidance on evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard clarifies that when substantially all of the fair value of gross assets acquired is concentrated in a single asset, or a group of similar assets, the asset acquired would not represent a business. The new ASU introduces this initial required screen, if met, eliminates the need for further assessment. For public business entities with a calendar year end, the standard is effective in 2018. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. ASU 2017-04 eliminates step two from the goodwill impairment test, which measures the amount of impairment loss, if any. Instead, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to said reporting unit. For public business entities with a calendar year end, the standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables–Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities, which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. ASU 2017-08 applies to securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. Securities purchased at a discount and mortgage-backed securities in which early repayment is based on prepayment of the underlying assets of the security are outside the scope of ASU 2017-08. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period, and applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

Page 12 of 72

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 common 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 share and per share data):


	March 31, 2017		December 31, 2016
Total Shareholders’ Equity	$	346,448	$	338,185
Less: Preferred stock		16,887		16,955
Less: Goodwill		64,603		64,603
Less: Core deposit and leasehold right intangibles, net		5,970		6,300

Tangible common equity	$	258,988	$	250,327

Common shares issued and outstanding		17,834,183		17,759,006
Book value per common share	$	18.48	$	18.09

Tangible book value per common share	$	14.52	$	14.10

Note 4 - Computation of Earnings per Common Share

In calculating potential common shares used to determine diluted earnings per share, U.S. GAAP requires that assumed proceeds under the treasury stock method to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital.

Basic and diluted earnings per common share were determined by dividing net income available to common shareholders by the applicable basic and diluted weighted average common shares outstanding. The following table shows weighted average basic common shares outstanding, potential dilutive shares related to stock options, unvested restricted stock, and weighted average diluted shares for the periods indicated (dollars in thousands, except share and per share data):


	Three Months Ended March 31,
	2017		2016
Net Income	$	7,783	$	6,584
Less: Preferred stock dividends and discount accretion		301		303

Net Income available to common shareholders	$	7,482	$	6,281

Weighted average basic common shares outstanding		17,532,104		17,041,427
Dilutive effect of potential common share issuances from stock options and restricted stock		224,351		375,733

Weighted average diluted common shares outstanding		17,756,455		17,417,160

Income per common share
Basic	$	0.43	$	0.37
Diluted	$	0.42	$	0.36
Anti-dilutive shares not included in the calculation of diluted earnings per share		4,150		3,000

Page 13 of 72

Note 5 - Investment Securities

The 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, gross unrealized gains and losses, and fair values of investment securities by major category as of the dates indicated (dollars in thousands):


			Gross Unrealized
March 31, 2017	Amortized Cost		Gains		Losses		Fair Market Value
Available-for-sale investment securities:
U.S. Govt Agency and Sponsored Agency - Note Securities	$	10,000	$	—	$	44	$	9,956
U.S. Govt Agency - SBA Securities		121,855		146		687		121,314
U.S. Govt Agency - GNMA Mortgage-Backed Securities		21,122		56		283		20,895
U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities		250,344		75		3,902		246,517
Asset Backed Securities		6,913		4		142		6,775
U.S. Treasury Notes		64,089		—		147		63,942

Total available-for-sale		474,323		281		5,205		469,399
Held-to-maturity investment securities:
Municipal Securities		40,945		229		15		41,159

Total held-to-maturity		40,945		229		15		41,159
								0

Total investment securities	$	515,268	$	510	$	5,220	$	510,558


			Gross Unrealized
December 31, 2016	Amortized Cost		Gains		Losses		Fair Market Value
Available-for-sale investment securities:
U.S. Govt Agency and Sponsored Agency - Note Securities	$	10,000	$	—	$	31	$	9,969
U.S. Govt Agency - SBA Securities		123,224		365		739		122,850
U.S. Govt Agency - GNMA Mortgage-Backed Securities		22,565		70		265		22,370
U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities		243,159		92		4,351		238,900
Asset Backed Securities		7,111		—		215		6,896
U.S. Treasury Notes		69,101		7		143		68,965

Total available-for-sale		475,160		534		5,744		469,950
Held-to-maturity investment securities:
Municipal Securities		42,027		69		159		41,937

Total held-to-maturity		42,027		69		159		41,937

Total investment securities	$	517,187	$	603	$	5,903	$	511,887

Page 14 of 72

The Company’s investment securities portfolio at March 31, 2017 consists of A-rated or above investment-grade securities. At March 31, 2017 and December 31, 2016, securities with a market value of $219 million and $205 million, respectively, were pledged as collateral for securities sold under agreements to repurchase, public deposits, outstanding standby letters of credit, bankruptcy deposits, and other purposes as required by various statutes and agreements. See Note 8 – Borrowings and Subordinated Debentures.

The following tables present the gross unrealized losses and fair values of AFS and HTM investment securities that were in unrealized loss positions, 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
March 31, 2017	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Available-for-sale investment securities:
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,956	$	44	$	—	$	—	$	9,956	$	44
U.S. Govt. Agency SBA Securities		58,673		422		37,546		265		96,219		687
U.S. Govt. Agency – GNMA Mortgage-Backed Securities		9,191		108		7,725		175		16,916		283
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities		217,719		3,821		7,689		81		225,408		3,902
Asset Backed Securities		—		—		4,782		142		4,782		142
U.S Treasury Notes		63,943		147		—		—		63,943		147

Total available-for-sale	$	359,482	$	4,542	$	57,742	$	663	$	417,224	$	5,205

Held-to-maturity investment securities:
Municipal Securities	$	7,162	$	14	$	307	$	1	$	7,469	$	15

Total held-to-maturity	$	7,162	$	14	$	307	$	1	$	7,469	$	15


	< 12 Continuous Months				> 12 Continuous Months				Total
December 31, 2016	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Available-for-sale investment securities:
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,969	$	31	$	—	$	—	$	9,969	$	31
U.S. Govt Agency – SBA Securities		54,302	$	451		39,322		288		93,624		739
U.S. Govt Agency – GNMA Mortgage-Backed Securities		6,652		98		8,264		167		14,916		265
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		215,138		4,172		10,879		179		226,017		4,351
Asset Backed Securities		—		—		6,896		215		6,896		215
U.S. Treasury Notes		51,972		143		—		—		51,972		143

Total available-for-sale	$	338,033	$	4,895	$	65,361	$	849	$	403,394	$	5,744

Held-to-maturity investment securities:
Municipal Securities	$	28,673	$	158	$	310	$	1	$	28,983	$	159

Total held-to-maturity	$	28,673	$	158	$	310	$	1	$	28,983	$	159

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. Accordingly, the Company had no securities that were classified as other-than-temporarily impaired at March 31, 2017 or December 31, 2016, and did not recognize any impairment charges in the consolidated statements of income.

Page 15 of 72

The amortized cost, fair value and the weighted average yield of debt securities at March 31, 2017, 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

•

Municipal Securities – the earlier of the maturity date or the expected call 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.


	March 31, 2017
Maturities Schedule of Securities (Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield
Available-for-sale investment securities:
Due through one year	$	51,271	$	51,239		0.87	%
Due after one year through five years		37,098		36,794		1.02	%
Due after five years through ten years		64,322		63,545		1.79	%
Due after ten years		321,632		317,821		2.02	%

Total available-for-sale	$	474,323	$	469,399		1.78	%
Held-to-maturity investment securities:
Due through one year	$	2,148	$	2,149		1.08	%
Due after one year through five years		35,402		35,600		1.63	%
Due after five years through ten years		1,924		1,921		1.88	%
Due after ten years		1,471		1,489		3.36	%

Total held-to-maturity	$	40,945	$	41,159		1.68	%

Total investment securities	$	515,269	$	510,558		1.77	%

The weighted average yields in the above table are based on effective rates of book balances at the end of the period.

Investment in Federal Home Loan Bank (FHLB) Common Stock

The Company’s investment in the common stock of the FHLB of San Francisco is carried at cost and was $9.1 million at March 31, 2017 and $9.1 million at December 31, 2016. The investment in FHLB stock is included in accrued interest receivable and other assets in the consolidated balance sheets and is periodically evaluated for impairment. Based on the capital adequacy of the FHLB and its overall financial condition, no impairment losses have been recorded.

See Note 8 - Borrowings and Subordinated Debentures for a detailed discussion regarding the Company’s borrowings and the related requirements to hold FHLB common stock.

Page 16 of 72

Note 6 - Loans

The following table presents the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands):


	March 31, 2017
	Principal		Net Unaccreted Discounts, Net Deferred Fees			Total
*Commercial and Industrial Loans:*	$	486,646	$	(2,366	)	$	484,280
*Loans Secured by Real Estate:*
Owner-Occupied Nonresidential Properties		439,730		(3,461	)		436,269
Other Nonresidential Properties		694,637		(5,622	)		689,015
Construction, Land Development and Other Land		193,613		(1,041	)		192,572
1-4 Family Residential Properties		119,853		(1,585	)		118,268
Multifamily Residential Properties		95,854		(371	)		95,483

Total Loans Secured by Real Estate		1,543,687		(12,080	)		1,531,607

*Other Loans:*		30,451		(200	)		30,251

Total Loans	$	2,060,784	$	(14,646	)	$	2,046,138


	December 31, 2016
	Principal		Net Unaccreted Discounts, Net Deferred Fees			Total
*Commercial and Industrial Loans:*	$	505,374	$	(2,737	)	$	502,637
*Loans Secured by Real Estate:*
Owner-Occupied Nonresidential Properties		455,120		(3,798	)		451,322
Other Nonresidential Properties		635,856		(5,693	)		630,163
Construction, Land Development and Other Land		195,215		(1,156	)		194,059
1-4 Family Residential Properties		129,261		(2,097	)		127,164
Multifamily Residential Properties		110,336		(478	)		109,858

Total Loans Secured by Real Estate		1,525,788		(13,222	)		1,512,566

*Other Loans:*		35,246		(223	)		35,023

Total Loans	$	2,066,408	$	(16,182	)	$	2,050,226

Small Business Administration Loans

Included in the loan portfolio is $29 million in loans that were originated under the guidelines of the Small Business Administration (“SBA”) program of which $5 million is guaranteed. The total portfolio of the SBA contractual loan balances serviced by the Company at March 31, 2017 was $102 million, of which $73 million has been sold.

At March 31, 2017, there were no loans classified as held for sale. At March 31, 2017, the balance of SBA 7a loans originated during the quarter is $421 thousand, of which $316 thousand 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.

Page 17 of 72

Allowance for Loan Loss

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


	Three Months Ended March 31,
	2017			2016
Allowance for loan loss at beginning of period	$	19,374		$	15,682
Provision for loan losses		—			622
Net (charge-offs) recoveries:
Charge-offs		—			—
Recoveries		231			241

Net (charge-offs) recoveries		231			241

Allowance for loan loss at end of period	$	19,605		$	16,545

Net (charge-offs) recoveries to average loans		0.01	%		0.01	%


	March 31, 2017			December 31, 2016
Allowance for loan loss to total loans		0.96	%		0.94	%

The following tables present, by portfolio segment, the changes in the allowance for loan loss and the recorded investment in loans as of the dates and for the periods indicated (dollars in thousands):


	Commercial and Industrial			Construction, Land Development and Other Land		Commercial and Other Real Estate		Other			Total
Three Months Ended March 31, 2017
Allowance for loan loss – Beginning balance	$	7,130		$	3,084	$	8,487	$	673		$	19,374
Provision for loan losses		(497	)		63		739		(305	)		—
Net (charge-offs) recoveries:
Charge-offs		—			—		—		—			—
Recoveries		229			—		2		—			231

Net (charge-offs) recoveries		229			—		2		—			231

Ending balance	$	6,862		$	3,147	$	9,228	$	368		$	19,605


	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate			Other			Total
Three Months Ended March 31, 2016
Allowance for loan loss – Beginning balance	$	5,924	$	2,076	$	6,821		$	861		$	15,682
Provision for loan losses		561		635		(448	)		(126	)		622
Net (charge-offs) recoveries:
Charge-offs		—		—		—			—			—
Recoveries		240		—		1			—			241

Net (charge-offs) recoveries		240		—		1			—			241

Ending balance	$	6,725	$	2,711	$	6,374		$	735		$	16,545

Page 18 of 72

The following tables present 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
March 31, 2017
Allowance for loan loss:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		6,862		3,147		9,228		368		19,605
Purchased credit impaired (loans acquired with deteriorated credit quality)		—		—		—		—		—

Total Allowance for Loan Loss	$	6,862	$	3,147	$	9,228	$	368	$	19,605

Loans receivable:
Individually evaluated for impairment	$	243	$	—	$	239	$	—	$	482
Collectively evaluated for impairment		483,758		192,572		1,337,572		30,251		2,044,153
Purchased credit impaired (loans acquired with deteriorated credit quality)		279		—		1,224		—		1,503

Total Loans Receivable	$	484,280	$	192,572	$	1,339,035	$	30,251	$	2,046,138


	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
December 31, 2016
Allowance for loan loss:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		7,130		3,084		8,487		673		19,374
Purchased credit impaired (loans acquired with deteriorated credit quality)		—		—		—		—		—

Total Allowance for Loan Loss	$	7,130	$	3,084	$	8,487	$	673	$	19,374

Loans receivable:
Individually evaluated for impairment	$	378	$	—	$	245	$	—	$	623
Collectively evaluated for impairment		501,960		194,059		1,316,849		35,023		2,047,891
Purchased credit impaired (loans acquired with deteriorated credit quality)		299		—		1,413		—		1,712

Total Loans Receivable	$	502,637	$	194,059	$	1,318,507	$	35,023	$	2,050,226

Page 19 of 72

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.

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):


	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
March 31, 2017
Pass	$	438,605	$	192,572	$	1,315,830	$	30,124	$	1,977,131
Special Mention		20,672		—		7,028		38		27,738
Substandard		25,003		—		16,177		89		41,269
Doubtful		—		—		—		—		—

Total	$	484,280	$	192,572	$	1,339,035	$	30,251	$	2,046,138


	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
December 31, 2016
Pass	$	456,885	$	194,059	$	1,288,154	$	32,128	$	1,971,226
Special Mention		12,774		—		7,557		—		20,331
Substandard		32,978		—		22,796		2,895		58,669
Doubtful		—		—		—		—		—

Total	$	502,637	$	194,059	$	1,318,507	$	35,023	$	2,050,226

Page 20 of 72

Aging Analysis of Past Due and Non-Accrual Loans

The following tables present an aging analysis of the recorded investment of past due loans and non-accrual loans as of the dates indicated (dollars in thousands):


	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
March 31, 2017
Commercial and Industrial	$	86	$	—	$	—	$	86	$	521	$	483,673	$	484,280
Construction, Land Development and Other Land		—		—		—		—		—		192,572		192,572
Commercial and Other Real Estate		209		—		—		209		239		1,338,587		1,339,035
Other		—		—		—		—		—		30,251		30,251

Total	$	295	$	0	$	—	$	295	$	760	$	2,045,083	$	2,046,138


	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
December 31, 2016
Commercial and Industrial	$	—	$	—	$	—	$	—	$	675	$	501,962	$	502,637
Construction, Land Development and Other Land		—		—		—		—		—		194,059		194,059
Commercial and Other Real Estate		212		—		—		212		447		1,317,848		1,318,507
Other		—		—		—		—		—		35,023		35,023

Total	$	212	$	—	$	—	$	212	$	1,122	$	2,048,892	$	2,050,226

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 allowance 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 allowance, if any and any subsequent changes are charged against the allowance for loan loss.

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 the fair value of the loan 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 March 31, 2017 and December 31, 2016.

Page 21 of 72

The following tables present, by loan portfolio segment, 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 $1.5 million and $1.7 million at March 31, 2017 and December 31, 2016, respectively.


	March 31, 2017						December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific allowance recorded:
Commercial and Industrial	$	243	$	639	$	—	$	378	$	1,383	$	—
Commercial and Other Real Estate		239		277		—		245		282		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Total
Commercial and Industrial		243		639		—		378		1,383		—
Commercial and Other Real Estate		239		277		—		245		282		—

Total	$	482	$	916	$	—	$	623	$	1,665	$	—


	Three Months Ended March 31,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and Industrial	$	245	$	—	$	256	$	—
Commercial and Other Real Estate		242		—		666		—
With a specific allowance recorded:
Commercial and Industrial		—		—		—		—
Total:
Commercial and Industrial		245		—		256		—
Commercial and Other Real Estate		242		—		666		—

Total	$	487	$	—	$	922	$	—

The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands):


	Three Months Ended March 31,
	2017		2016
Interest foregone on impaired loans	$	13	$	25
Cash collections applied to reduce principal balance	$	21	$	24
Interest income recognized on cash collections	$	—	$	—

Page 22 of 72

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 stated interest rate, payment extensions, principal forgiveness or other actions.

The modification process includes evaluation of impairment based on the present value of expected future cash flows, discounted at the effective 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 troubled debt restructured loans at March 31, 2017 and March 31, 2016 (dollars in thousands). These tables include TDR loans that were purchased credit impaired (“PCI”). TDR loans that are non-PCI loans are included in the Impaired Loans tables above. As of March 31, 2017, there were two PCI loans that are considered to be TDR loans with a recorded investment of $92 thousand and unpaid principal balances of $258 thousand.


	As of and for the Three Months Ended March 31, 2017
	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized
Commercial and Industrial	$	319	$	534	$	—

Total	$	319	$	534	$	—


	As of and for the Three Months Ended March 31, 2016
	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized
Commercial and Industrial	$	393	$	615	$	—

Total	$	393	$	615	$	—

There were no loans restructured during the three months ended March 31, 2017 or March 31, 2016.

There have been no defaulted restructured loans during the three months ended March 31, 2017 or March 31, 2016 for loans that were restructured in the preceding 12-month periods.

Loans are restructured in an effort to maximize collections. Impairment analyses are performed on the Company’s troubled debt restructured loans in conjunction with the normal allowance for loan loss process. The Company’s troubled debt restructured loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan balance.

There were no commitments to lend additional funds to borrowers whose terms have been modified in troubled debt restructurings at March 31, 2017.

Page 23 of 72

Loans Acquired Through Acquisition

The following table reflects the accretable net discount for acquired loans for the periods indicated (dollars in thousands):


	Three Months Ended March 31,
	2017			2016
Balance, beginning of period	$	9,611		$	14,610
Accretion, included in interest income		(1,115	)		(1,133	)
Reclassifications to non-accretable yield		—			(7	)

Balance, end of period	$	8,496		$	13,470

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.

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):


	March 31, 2017				December 31, 2016
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial and Industrial	$	594	$	279	$	622	$	299
Commercial and Other Real Estate		1,596		1,224		1,997		1,413

Total	$	2,190	$	1,503	$	2,619	$	1,712

The following table reflects the activities in the accretable net discount for PCI loans for the period indicated (dollars in thousands):


	Three Months Ended March 31,
	2017			2016
Balance, beginning of period	$	161		$	246
Accretion, included in interest income		(23	)		(20	)
Reclassifications from non-accretable yield		—			—

Balance, end of period	$	138		$	226

Page 24 of 72

Note 7 – Qualified Affordable Housing Project Investments

The Company’s investment in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits (“LIHTC”) was $6.1 million at March 31, 2017 and $6.2 million at December 31, 2016. The funding liability for the LIHTC at March 31, 2017 and December 31, 2016 was $3.4 million. The amount of tax credits and other tax benefits recognized was $560 thousand and $573 thousand for the three months ended March 31, 2017 and March 31, 2016, respectively. Further, the amount of amortization expense included in the provision for income taxes was $439 thousand and $448 thousand for the three months ended March 31, 2017 and March 31, 2016, respectively.

Note 8 - 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 1 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 value of $50 million and $48 million were pledged to secure the Repos at March 31, 2017 and December 31, 2016, respectively.

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):

March 31, 2017

Date Issued

Amount

Interest Rate

Original
Term

Maturity Date

March 31, 2017

11,939

0.20% – 0.25%

3 days

April 3, 2017

Total

11,939

0.24%

December 31, 2016

Date Issued

Amount

Interest Rate

Original
Term

Maturity Date

December 31, 2016

18,816

0.2% – 0.25%

4 days

January 4, 2017

Total

18,816

0.25%

FHLB 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 $749 million, which represents approximately 25% of the Bank’s total assets, as reported by the Bank in its December 31, 2016 Federal Financial Institution Examination Council (“FFIEC”) Call Report.

As of March 31, 2017, the Company had $1 billion of loan collateral pledged with the FHLB which provides $688 million in borrowing capacity. The Company also has $16 million in investment securities pledged with the FHLB serving as collateral for an additional $14 million in borrowing capacity. In addition, the Company must maintain an investment in the capital stock of the FHLB. 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 March 31, 2017 or December 31, 2016.

Page 25 of 72

Subordinated Debentures

The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated (dollars in thousands):


March 31, 2017
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	%		3.18	%		06/15/17
Trust II		3,093			12/23/05		03/15/36		3 month LIBOR + 1.75	%		2.88	%		06/15/17
Trust III		3,093			06/30/06		09/18/36		3 month LIBOR + 1.85	%		2.98	%		06/15/17

Subtotal		12,372
Unamortized fair value adjustment		(2,476	)

Net	$	9,896


December 31, 2016
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	%		3.01	%		03/15/17
Trust II		3,093			12/23/05		03/15/36		3 month LIBOR + 1.75	%		2.71	%		03/15/17
Trust III		3,093			06/30/06		09/18/36		3 month LIBOR + 1.85	%		2.81	%		03/15/17

Subtotal		12,372
Unamortized fair value adjustment		(2,516	)

Net	$	9,856

The Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at March 31, 2017. 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 London Interbank Offered Rate (“LIBOR”) plus a margin (see tables above). All three subordinated debentures had their interest rates reset in March 2017 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.

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.

Page 26 of 72

Note 9 - 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. The Company has two counterparty banks.

Derivative Financial Instruments Acquired from 1^st Enterprise Bank

At March 31, 2017, the Company has eleven interest rate swap agreements with customers and eleven offsetting interest-rate swaps with a counterparty bank. 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 interest rate risk 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. The interest rate swap derivatives acquired from 1^st Enterprise Bank are subject to a master netting arrangement with one counterparty bank. None of the derivative assets and liabilities are offset in the balance sheet.

The Company believes the risk of loss associated with counterparty borrowers relating 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 the swaps is subject to market and counterparty risk. At March 31, 2017 and December 31, 2016, the total notional amount of the Company’s swaps with the counterparty bank was $21 million and $24 million, respectively. The outstanding swaps have remaining maturities of up to 5 years as of March 31, 2017.

The following tables present the fair values of the asset and liability of the Company’s derivative instruments acquired from 1^st Enterprise Bank as of the dates and periods indicated (dollars in thousands):


	Asset Derivatives
	March 31, 2017		December 31, 2016
Interest rate swap contracts fair value	$	421	$	523

Balance sheet location		Accrued Interest Receivable and Other Assets		Accrued Interest Receivable and Other Assets

	Liability Derivatives
	March 31, 2017		December 31, 2016
Interest rate swap contracts fair value	$	421	$	523

Balance sheet location		Accrued Interest Payable and Other Liabilities		Accrued Interest Payable and Other Liabilities

Page 27 of 72

Derivative Financial Instruments Acquired from PC Bancorp

At March 31, 2017, the Company also has fourteen pay-fixed, receive-variable, interest rate swaps with one counterparty bank that are designed to convert fixed rate loans into variable rate loans.

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 indicated (dollars in thousands):


	Liability Derivatives
	March 31, 2017		December 31, 2016
Fair Value Hedges
Total interest rate contracts notional amount	$	17,392	$	17,642

Derivatives not designated as hedging instruments:
Interest rate swap contracts fair value	$	40	$	95
Derivatives designated as hedging instruments:
Interest rate swap contracts fair value		467		589

Total interest rate contracts fair value	$	507	$	684

Balance sheet location		Accrued Interest Payable and Other Liabilities		Accrued Interest Payable and Other Liabilities

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):


	Three Months Ended March 31,
	2017			2016
Derivatives not designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	55		$	39
Payments on interest rate swap contracts on loans		(54	)		(61	)

Net increase (decrease) in other non-interest income		1			(22	)

Derivatives designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	122		$	23
Increase (decrease) in fair value of hedged loans		(12	)		212
Payment on interest rate swap contracts on loans		(114	)		(230	)

Net increase (decrease) in interest income on loans	$	(4	)	$	5

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 March 31, 2017, the Company has pledged $1.7 million in investment securities, $2.7 million in certificates of deposit, for a total of $4.4 million, as collateral under the swap agreements.

Page 28 of 72

Note 10 – 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 are subject to a master bilateral netting and offsetting arrangement under specific conditions as defined within a master agreement governing all interest rate swap contracts that the Company and the counterparty banks have entered into. In addition, the master agreement 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 a certificate of deposit and investment securities as collateral under the swap agreements. 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 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 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 / Liabilities 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
March 31, 2017
Financial Assets:
Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)	$	421	$	—	$	421	$	421	$	—	$	—

Total	$	421	$	—	$	421	$	421	$	—	$	—

Financial Liabilities:
Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)	$	928	$	—	$	928	$	928	$	4,451	$	3,523
Securities sold under agreements to repurchase (See Note 8 – Borrowings and Subordinated Debentures)		11,939		—		11,939		11,939		49,901		37,962

Total	$	12,867	$	—	$	12,867	$	12,867	$	54,352	$	41,485

Page 29 of 72


	Gross Amounts Recognized in the Consolidated Balance Sheets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets / Liabilities 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, 2016
Financial Assets:
Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)	$	523	$	—	$	523	$	523	$	—	$	—

Total	$	523	$	—	$	523	$	523	$	—	$	—

Financial Liabilities:
Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)	$	1,207	$	—	$	1,207	$	1,207	$	4,555	$	3,348
Securities sold under agreements to repurchase (See Note 8 – Borrowings and Subordinated Debentures)		18,816		—		18,816		18,816		48,204		29,388

Total	$	20,023	$	—	$	20,023	$	20,023	$	52,759	$	32,736

Note 11 - 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 is designed to promote the interest of the Company in aiding the Company to attract and retain employees, officers and non-employee directors who are expected to contribute to the future success of the organization. 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.

At March 31, 2017 future compensation expense related to unvested restricted stock grants are reflected in the table below (dollars in thousands):


Future Restricted Stock Expense
Remainder of 2017	$	2,451
2018		1,596
2019		539
2020		171
Thereafter		22

Total	$	4,779

At March 31, 2017, the weighted-average period over which the total compensation cost related to unvested restricted stock grants not yet recognized is 2.75 years.

Page 30 of 72

Stock Options

The following table summarizes the share option activity under the plans as of the date and for the period indicated:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding stock options at December 31, 2016		47,697		$	12.69		1.43	$	1,102
Granted		—
Exercised		(27,942	)
Forfeited		—
Expired		—

Outstanding stock options at March 31, 2017		19,755		$	8.67		2.13	$	612

Exercisable options at March 31, 2017		19,755		$	8.67		2.13	$	612
Unvested options at March 31, 2017		—

The total intrinsic value of options exercised during the three months ended March 31, 2017 and 2016 was $642 thousand and $2.9 million, respectively.

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 period indicated:


	Number of Shares			Weighted-Average Grant-Date Fair Value per Share
Restricted Stock:
Unvested at December 31, 2016		282,082		$	21.98
Granted		65,615			38.04
Vested		(30,582	)		20.87
Forfeited		(5,084	)		21.59

Unvested at March 31, 2017		312,031		$	25.79

Restricted stock compensation expense was $773 thousand and $834 thousand for the three month period ended March 31, 2017 and 2016, respectively. Restricted stock awards reflected in the table above 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. In 2015, the Company granted 40 thousand shares of Restricted Stock Unit (“RSU”) under the Equity Plan to one of its executive officers. Such grant is reflected in the table above. The shares of common stock underlying the 40 thousand shares of RSU will not be issued until the RSUs vest and meet certain conditions as stipulated in the RSU agreement and are not included in the Company’s shares issued and outstanding as of March 31, 2017. The RSUs 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.

Page 31 of 72

Note 12 – Shareholders’ Equity

Common Stock

Holders of shares of the Company’s common stock are entitled to one vote for each share held of record on all matters voted upon by shareholders. Furthermore, the holders of the Company’s common stock have no preemptive rights to subscribe for new issue securities, and shares of the Company’s common stock are not subject to redemption, conversion, or sinking fund provisions.

With respect to the payment of dividends, after the preferential dividends upon all other classes and series of stock entitled thereto have been paid or declared and set apart for payment, then the holders of the Company’s common stock are entitled to such dividends as may be declared by the Company’s board of directors out of funds legally available under the laws of the State of California.

Upon the Company’s liquidation or dissolution, the assets legally available for distribution to holders of the Company’s shares of common stock, after payment of all the Company’s obligations and payment of any liquidation preference of all other classes and series of stock entitled thereto, including the Company’s preferred stock, are distributable ratably among the holders of the Company’s common stock.

During 2017, the Company issued 27,942 shares of stock from the exercise of stock options for a total value of $435 thousand. The Company also issued 65,615 shares of restricted stock to the Company’s directors and employees, 5,084 shares of unvested restricted stock were forfeited related to employee turnover and 13,296 shares that had a value of $524 thousand were repurchased when employees elected to pay their tax obligation via the repurchase of the stock by the Company. 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

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 the Treasury was converted into 16,400 CU Bancorp preferred shares with substantially identical terms. CU Bancorp Preferred Stock has a liquidation preference amount of $1 thousand 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 CU Bancorp Preferred Stock had an estimated life of four years and the fair value was $16 million at the merger date, resulting in a net discount of $479 thousand. The life-to-date accretion on the net discount as of March 31, 2017 is $1.0 million. The net carrying value of the CU Bancorp Preferred Stock is $17 million ($16 million plus of $0.5 million net premium) as of March 31, 2017.

Dividends on the Company’s Series A Preferred Stock are payable quarterly in arrears if authorized and declared by the Company’s board of directors out of legally available funds, on a non-cumulative basis, on the $1 thousand per share liquidation preference amount. Dividends are payable on January 1, April 1, July 1 and October 1 of each year. The current coupon dividend rate was adjusted to 9% on March 1, 2016 through perpetuity. However, the dividend yield through November 30, 2018 approximates 7% as a result of business combination accounting. Dividends on the Series A Preferred Stock are non-cumulative. There is no sinking fund with respect to dividends on the Series A Preferred Stock. So long as the Company’s Series A Preferred Stock remains outstanding, the Company may declare and pay dividends on the common stock only if full dividends on all outstanding shares of Series A Preferred Stock for the most recently completed dividend period have been or are contemporaneously declared and paid. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders of the Series A Preferred Stock will be entitled to receive for each share of Series A Preferred Stock, out of the Company’s assets or proceeds available for distribution to the Company’s shareholders, subject to any rights of the Company’s creditors, before any distribution of assets or proceeds is made to or set aside for the holders of the common stock, payment of an amount equal to the sum of (i) the $1 thousand liquidation preference amount per share and (ii) the amount of any accrued and unpaid dividends on the Series A Preferred Stock. To the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the liquidation payments owing to the holders of the Series A Preferred Stock and the holders of any other class or series of the stock ranking equally with the Series A Preferred Stock, the holders of the Series A Preferred Stock and such the Company’s stock will share ratably in the distribution. Holders of the Series A Preferred Stock have no right to exchange or convert their shares into common stock or any other securities and do not have voting rights.

Page 32 of 72

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive loss by component for the periods indicated (dollars in thousands):


	Three Months Ended March 31,						Consolidated Statement of Income Line Item for Reclassified Items
	2017			2016
Beginning balance, net of tax	$	(3,019	)	$	(816	)
Net unrealized gain arising during the period		426			1,328
Related tax effect		(179	)		(559	)
Reclassification of gain on investment securities available-for-sale to net income		(141	)		—		Gain on sale of securities, net
Related tax effect		59			—		Provision for income tax expense

Other Comprehensive Income		165			769

Ending balance	$	(2,854	)	$	(47	)

Note 13 - Commitments and Contingencies

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 March 31, 2017, 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

Financial instruments with off balance sheet risk include commitments to extend credit of $986 million and $1 billion at March 31, 2017 and December 31, 2016, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $85 million at March 31, 2017 and December 31, 2016. The Company also has a reserve for estimated losses on unfunded loan commitments of $886 thousand at March 31, 2017 and December 31, 2016. These balances are included in other liabilities on the consolidated balance sheets.

Note 14 - Fair Value Information

Fair Value Hierarchy

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. 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

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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 evaluation 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.

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.

Securities available-for-sale and interest rate swaps are recorded at fair value on a recurring basis. Additionally, certain assets 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 fair value, such as other real estate owned, SBA servicing asset and impaired loans that are collateral dependent.

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 March 31, 2017. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Recurring Fair Value Measurements

The valuation methodologies for estimating the fair value of financial assets and financial liabilities measured and reported at fair value on a recurring basis are discussed below.

Investment Securities Available-for-Sale: The fair value of investment securities available-for-sale are primarily based on price indications provided by nationally recognized, independent pricing sources utilized by the Company’s bond accounting system provider. The fair value of investment securities may be determined by obtaining quoted prices for identical assets in active markets at measurement date (Level 1 financial assets). The Company’s investments in U.S. Treasury Notes are Level 1 financial assets. For the Company’s investments in 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 and corporate bond securities, the fair value may be determined by obtaining quoted market prices for similar assets in active markets at measurement date (Level 2 financial assets), or if quoted market prices are not available, the pricing sources may determine fair value by matrix pricing. Matrix pricing 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). The pricing sources may also determine the fair value of certain debt securities by using an option adjusted spread model with observable inputs such as the treasury yield curve and other interest rate assumptions. Other observable inputs utilized in these alternative valuation techniques or models when quoted prices are not available include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3 financial assets.

Interest Rate Swap Contracts: The fair value of the interest rate swap contracts are provided by independent third party vendors that specialize 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

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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.

The following table presents 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):


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets – March 31, 2017
Investment securities available-for-sale:
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,956	$	—	$	9,956		—
U.S. Govt Agency – SBA Securities		121,314		—		121,314		—
U.S. Govt Agency – GNMA Mortgage-Backed Securities		20,895		—		20,895		—
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		246,517		—		246,517		—
Asset Backed Securities		6,775		—		6,775		—
U.S. Treasury Notes		63,942		63,942		—		—
Interest Rate Swap Contracts		421		—		421		—

	$	469,820	$	63,942	$	405,878	$	—

Financial Liabilities – March 31, 2017
Interest Rate Swap Contracts	$	928	$	—	$	928	$	—
Financial Assets – December 31, 2016
Investment securities available-for-sale:
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,969	$	—	$	9,969		—
U.S. Govt Agency – SBA Securities		122,850		—		122,850		—
U.S. Govt Agency – GNMA Mortgage-Backed Securities		22,370		—		22,370		—
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		238,900		—		238,900		—
Asset Backed Securities		6,896		—		6,896		—
U.S. Treasury Notes		68,965		68,965		—		—
Interest Rate Swap Contracts		523		—		523		—

	$	470,473	$	68,965	$	401,508	$	—

Financial Liabilities – December 31, 2016
Interest Rate Swap Contracts	$	1,207	$	—	$	1,207	$	—

At March 31, 2017 and December 31, 2016, 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). Furthermore, 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 March 31, 2017 or December 31, 2016.

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Nonrecurring Fair Value Measurements

The valuation methodologies for estimating the fair value of certain assets measured and reported at fair value on a nonrecurring basis are discussed below.

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 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. 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 determined based on the historical prepayments of the Company’s SBA loans. The prepayment speeds determine the timing of the cash flows. 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.

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 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.

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The following table presents the balances of assets measured at fair value on a non-recurring basis by level within the fair value hierarchy as of the dates indicated (dollars in thousands):


	Net Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets – March 31, 2017
SBA Servicing Asset	$	876	$	—	$	—	$	876

Total	$	876	$	—	$	—	$	876


	Net Carrying Amount		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, 2016
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)	$	73	$	—	$	—	$	73
SBA Servicing Asset		940		—		—		940

Total	$	1,013	$	—	$	—	$	1,013

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 non-recurring basis for the periods ended March 31, 2017 or December 31, 2016.

The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 assets measured at fair value on a non-recurring basis as of the dates indicated (dollars in thousands):


	Fair Value		Valuation Methodology	Unobservable Valuation Inputs	Unobservable Valuation Input Values
Financial Assets – March 31, 2017
				Discount Rates	13%
SBA Servicing Asset	$	876	Discounted Cash Flow	Estimated Average Remaining Life of SBA Portfolio	39 months

Total	$	876


	Fair Value		Valuation Methodology	Unobservable Valuation Inputs	Unobservable Valuation Input Values
Financial Assets – December 31, 2016
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off	$	73	Credit loss estimate of aged accounts receivable collateral	Credit loss factors on aging of accounts receivable collateral	20%
				Discount Rates	13%
SBA Servicing Asset		940	Discounted Cash Flow	Estimated Average Remaining Life of SBA Portfolio	39 months

Total	$	1,013

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Fair Value of Financial Instruments

The following are the valuation methodologies utilized for estimating the fair value of certain financial instruments presented in the tables below.

Cash and due from banks: The carrying amount is assumed to be the fair value because of the liquidity of these instruments.

Interest earning deposits in other financial institutions: The carrying amount is assumed to be the fair value given the short-term nature of these deposits.

Investment Securities Held-to-Maturity: The fair value of investment securities held-to-maturity are based on price indications provided by nationally recognized, independent pricing sources utilized by the Company’s bond accounting system provider. The Company’s held-to-maturity portfolio consists of municipal securities only. The fair value of the municipal securities are calculated using proprietary pricing models or matrices with inputs such as market information (MSRB reported trade data, bids, offers, new issue data) and benchmark curves (Treasury, Swap, Libor and AAA municipal yield curve). These inputs are observable and as such, municipal securities are classified within the Level 2 fair value hierarchy.

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.

Bank owned life insurance: The carrying amount of bank owned life insurance represents the total cash surrender value of each policy, which approximates fair value.

FHLB Stock: FHLB stock has no trading market, and is required as part of membership and is redeemable at par. FHLB is recorded at cost, which approximates fair value.

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.

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 inputs utilized in determining the fair value of maturing deposits are observable 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 March 31, 2017, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at March 31, 2017. Because all three of the debentures re-priced on March 15, 2017 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 March 31, 2017, 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.

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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 March 31, 2017 and December 31, 2016.

The table below presents the carrying amounts and fair values of certain financial instruments based on their fair value hierarchy indicated (dollars in thousands):


					Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2017
Financial Assets
Cash and due from banks	$	51,168	$	51,168	$	51,168	$	—	$	—
Interest earning deposits in other financial institutions		313,609		313,609		313,609		—		—
Investment securities held-to-maturity		40,945		41,159		—		41,159		—
Loans, net		2,026,533		2,044,209		—		—		2,044,209
Bank owned life insurance		63,595		63,595		—		—		63,595
FHLB Stock		9,182		9,182		—		—		9,182
Financial Liabilities
Certificates of deposit		30,623		30,625		—		30,625		—
Securities sold under agreements to repurchase		11,939		11,939		—		11,939		—
Subordinated debentures		9,896		12,372		—		12,372		—
December 31, 2016
Financial Assets
Cash and due from banks	$	41,281	$	41,281	$	41,281	$	—	$	—
Interest earning deposits in other financial institutions		167,789		167,789		167,789		—		—
Investment securities held-to-maturity		42,027		41,937		—		41,937		—
Loans, net		2,030,852		2,054,701		—		—		2,054,701
Bank owned life insurance		51,216		51,216		—		—		51,216
FHLB Stock		9,182		9,182		—		—		9,182
Financial Liabilities
Certificates of deposit		29,480		29,480		—		29,480		—
Securities sold under agreements to repurchase		18,816		18,816		—		18,816		—
Subordinated debentures		9,856		12,372		—		12,372		—

Note 15 - Subsequent Events

On April 5, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PacWest Bancorp (“PacWest”), wherein CU Bancorp will merge with and into PacWest (the “Merger”), with PacWest surviving the Merger. Immediately following the Merger, CU Bancorp’s wholly-owned bank subsidiary, California United Bank, will merge with and into PacWest’s wholly-owned bank subsidiary, Pacific Western Bank (the “Bank Merger”). Pacific Western Bank will be the surviving bank in the Bank Merger. The Merger Agreement was approved and adopted by the Board of Directors of each of CU Bancorp and PacWest.

Management of the Company has evaluated events that have occurred subsequent to March 31, 2017 and have concluded there are no subsequent events that would require recognition in the accompanying consolidated financial statements.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

See “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” below relating to “forward-looking” statements included in this report.

The following is management’s discussion and analysis of the major factors that influenced the results of the operations and financial condition of CU Bancorp, (“the Company”) for the current period. This analysis should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2016 Annual Report on Form 10-K and with the unaudited financial statements and notes as set forth in this report.

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In addition to the historical information, this Quarterly Report on Form 10-Q (this “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Those sections of the Securities Act and the Exchange 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 management’s plans or objectives for future operations, products or services, and forecasts of the Company’s revenues, earnings or other measures of economic performance. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this report was prepared and 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,” “approximate,” “anticipate,” “project,” “assume,” “plan,” “predict,” “likely,” or variations of these words as well as 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, the pending merger between the Company and PacWest Bancorp, dividends, adequacy of our allowance for loan loss and provision for loan loss, 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 our 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.

•

The effects of trade, monetary and fiscal policies and laws.

•

Possible losses of businesses and population in the 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.

•

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, including but not limited to concentration in real estate related loans and concentrations in deposits.

•

Loss of significant customers.

•

A continued low interest rate environment or 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.

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•

Stability of funding sources and continued availability of borrowings.

•

Changes in legal or regulatory requirements.

•

The inability of our risk management controls to prevent or detect all errors or fraudulent acts.

•

Inability of our framework to manage risks associated with our business, including but not limited to operational risk, regulatory risk, cyber risk, liquidity risk, customer 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”, account takeover, ransomware and identity theft.

•

The effects of man-made and natural disasters, including, but not limited to earthquakes, floods, droughts, brush fires, tornadoes and hurricanes.

•

Our ability to recruit and retain key management and staff.

•

The ability to complete the proposed merger between the Company and PacWest Bancorp, including obtaining regulatory approvals and approval by the shareholders of the Company, or any future transaction, successfully integrating such acquired entities, or achieving expected beneficial synergies and/or operating efficiencies, in each case within expected time-frames or at all.

•

Significant decline in the market value of the Company that could result in an impairment of goodwill.

•

Changes in PacWest Bancorp’s stock price before completion of the merger, including as a result of the financial performance of PacWest Bancorp before closing.

•

Regulatory limits on the Bank’s ability to pay dividends to the Company.

•

The uncertainty of obtaining regulatory approval for various merger and acquisition opportunities.

•

New accounting pronouncements.

•

The impact of federal and state laws 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.

•

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 these risks and uncertainties, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and particularly, Item 1A, titled “Risk Factors.”

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 and specifically disclaims any obligation to revise or update such forward looking statements for any reason, except as may be required by applicable law. You should consider any forward looking statements in light of this explanation, and we caution you about relying on forward-looking statements.

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OVERVIEW

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 in Los Angeles, Orange, Ventura, San Bernardino and Riverside counties, to non-profit organizations, to business principals and entrepreneurs, and to the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers and investors. The Bank opened for business in 2005, with its current headquarters office located in Los Angeles, 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.

Total assets increased $149 million or 5% from December 31, 2016 to $3.1 billion mainly due to deposit growth of $147 million and net income of $7.8 million. During the three months ended March 31, 2017, the Company had $33 million of net organic loan production. Pay downs in the acquired loan portfolios were approximately $37 million during the same quarter. Loans secured by real estate grew $19 million in the first quarter of 2017, compared to the prior quarter, with all of the growth coming in other nonresidential properties. At March 31, 2017, commercial and industrial loans, and owner-occupied real estate loans combined were $921 million or 45% of total loans, compared to $954 million or 47% of total loans at December 31, 2016.

Funding the Company’s asset growth for the three months ended March 31, 2017 were increases in non-interest bearing demand deposits of $86 million, interest bearing transaction accounts of $14 million, and money market and savings deposits of $47 million. At both March 31, 2017 and December 31, 2016, non-interest bearing deposits represented 54% of total deposits. Tangible book value per common share was $14.52, $14.10 and $13.05 at March 31, 2017, December 31, 2016 and March 31, 2016, respectively.

Recent Development

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated 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.

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Our critical accounting policies are described in greater detail in our 2016 Annual Report on Form 10-K, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates. 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 that at March 31, 2017 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 fair value adjustments on loans, core deposit intangible assets, other intangible assets, fair value adjustments to acquired lease obligations, and fair value adjustments on derivatives. The assets and liabilities acquired through acquisitions 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 result in the Company’s fair value declining below its book value, the Company would perform an impairment analysis at that time.

Based on the Company’s 2016 goodwill impairment analysis, no impairment to goodwill has occurred. The Company is a sole reporting unit for evaluation of goodwill.

The core deposit intangibles on non-maturing deposits, which represent the intangible value of depositor relationships resulting from deposit liabilities assumed through acquisitions, are being amortized over the projected useful lives of the deposits. The weighted average remaining life of the core deposit intangible is estimated at approximately 5 years at March 31, 2017. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Loans acquired through acquisition are recorded at fair value at acquisition date without a carryover of the related Allowance. 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. For non-PCI loans, loan fair value adjustments consist of an interest rate premium or discount and a credit component on each individual loan and are amortized to loan interest income based on the effective yield method over the remaining life of the loans. Subsequent decreases to the expected cash flows for both PCI and non-PCI loans will result in a provision for loan losses.

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 March 31, 2017 is adequate to absorb known and probable losses inherent in the loan portfolio.

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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 allowance is established when the realizable value of the impaired loan is lower than the recorded investment 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 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 allowance. The individual loan is evaluated for a specific allowance 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. Impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

•

Not all impaired loans require a specific allowance. 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. In those instances, a specific allowance is not assessed.

Investment Securities

The Company currently classifies its investment securities under the available-for-sale and held-to-maturity classifications. 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. If the Company has the intent and the ability at the time of purchase to hold certain 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

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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 the underlying collateral.

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.

Derivative Financial Instruments and Hedging Activities

All derivative instruments (interest rate swap contracts) are recognized on the consolidated balance sheet at their current fair value. Every derivative instrument (including certain derivative instruments embedded in other contracts) is required to 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. an 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. At inception and on an ongoing basis, the derivatives that are used in hedging transactions are assessed for effectiveness 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

The Company provides for current federal and state income taxes payable and for deferred taxes that result from differences between financial accounting rules and tax laws governing the timing of recognition of various income and expense items. The Company recognizes deferred income tax assets and liabilities for the future tax effects of such temporary differences based on the difference between the financial statement and tax bases of the existing assets and liabilities using the statutory rate expected in the years in which the differences are expected to reverse. The effect on deferred taxes of any enacted change in tax rates is recognized in income in the period that includes the enactment date. 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 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 consolidated

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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. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.

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RESULTS OF OPERATIONS

Key Performance Measures

The following table presents key performance measures for the periods indicated and the dollar and percentage changes between the periods (dollars in thousands, except per share data):


	Three Months Ended March 31,
	Amounts						Increase (Decrease)
	2017			2016			$			%
Net Income Available to Common Shareholders	$	7,482		$	6,281		$	1,201			19.12	%

Earnings per share
Basic	$	0.43		$	0.37		$	0.06			16.22	%
Diluted	$	0.42		$	0.36		$	0.06			16.67	%
Return on average assets (1)		0.97	%		0.93	%		0.04	%		4.30	%
Return on average tangible common equity (2)		11.87	%		11.29	%		0.58	%		5.14	%
Net interest margin (3)		3.67	%		3.77	%		(0.10	)%		(2.65	)%
Efficiency ratio (4)		57.79	%		57.75	%		0.04	%		0.07	%

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

(2)	Return on average tangible common equity is calculated by dividing the Company’s net income available to common shareholders by average tangible common equity for the period. See the tables for return on average tangible common equity calculation and reconciliation to average common equity.

(3)	Net interest margin represents net interest income as a percent of interest earning assets.

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

Non-GAAP Financial Measure - Average Tangible Common Equity (TCE) Calculation and Reconciliation to Total Average Shareholders’ Equity

The Company utilizes the term TCE, a non-GAAP financial measure. The Company’s management believes TCE is useful because it is a measure utilized by both regulators and market analysts in evaluating the Company’s financial condition and capital strength. TCE represents common shareholders’ equity less goodwill and certain intangible assets. Return on Average Tangible Common Equity represents annualized net income available to common shareholders as a percent of average tangible common equity. A calculation of the Company’s Return on Average Tangible Common Equity is provided in the table below for the periods indicated (dollars in thousands):


	Three Months Ended March 31,
	2017			2016
Average Tangible Common Equity Calculation
Total average shareholders’ equity	$	343,217		$	313,014
Less: Average serial preferred stock		16,930			17,088
Less: Average goodwill		64,603			64,603
Less: Average core deposit and leasehold right intangibles		6,132			7,515

Average Tangible Common Equity	$	255,552		$	223,808

Annualized Net Income Available to Common Shareholders	$	30,344		$	25,262
Return on Average Tangible Common Equity		11.87	%		11.29	%

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Operations Performance Summary

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Net income available to common shareholders for the three months ended March 31, 2017 was $7.5 million, or $0.42 per diluted share, compared to $6.3 million, or $0.36 per diluted share for the three months ended March 31, 2016. Net income increased 18% over prior year and earnings per share increased 17% over prior year. The $1.2 million increase, or 19%, was primarily due to a $3.3 million increase in net interest income after provision for loan losses, offset by a $1.5 million increase in non-interest expense and a $645 thousand increase in provision for income tax expense. The increase in net interest income after provision for loan losses was mainly driven by strong organic loan growth. The increase in income tax expense is directionally consistent with the increase in profitability while the effective tax rates are comparable for both periods. Non-interest income had a modest increase of $15 thousand or 0.5% and non-interest expense had an increase of $1.5 million, or 9.9%. Salaries and other benefits expense increased $969 thousand, or 10.4%, as the Company’s active full-time equivalent employees grew to 294 at March 31, 2017, an increase of 21 from March 31, 2016.

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Average Balances, Interest Income and Expense, Yields and Rates

Three Months Ended March 31, 2017 and 2016

The following tables present 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).


	Three Months Ended
	March 31, 2017							March 31, 2016
	Average Balance		Interest		Average Yield/Rate (5)			Average Balance		Interest		Average Yield/Rate (5)
Interest Earning Assets:
Loans (1)	$	2,043,693	$	24,432		4.85	%	$	1,849,201	$	22,578		4.91	%
Investment securities (2)		518,303		2,041		1.58	%		352,929		1,232		1.40	%
Deposits in other financial institutions		334,660		710		0.85	%		301,402		439		0.58	%

Total interest earning assets		2,896,656		27,183		3.81	%		2,503,532		24,249		3.90	%
Non-interest earning assets		218,536							214,581

Total Assets	$	3,115,192						$	2,718,113

Interest Bearing Liabilities:
Interest bearing transaction accounts	$	339,230	$	157		0.19	%	$	270,796	$	99		0.15	%
Money market and savings deposits		878,035		670		0.31	%		726,681		511		0.28	%
Certificates of deposit		29,626		26		0.36	%		55,920		33		0.24	%

Total interest bearing deposits		1,246,891		853		0.28	%		1,053,397		643		0.25	%
Securities sold under agreements to repurchase		15,017		9		0.24	%		20,540		11		0.22	%
Subordinated debentures		9,877		130		5.26	%		9,719		117		4.76	%

Total borrowings		24,894		139		2.26	%		30,259		128		1.70	%
Total interest bearing liabilities		1,271,785		992		0.32	%		1,083,656		771		0.29	%
Non-interest bearing demand deposits		1,480,366							1,305,018

Total funding sources		2,752,151							2,388,674
Non-interest bearing liabilities		19,824							16,425
Shareholders’ Equity		343,217							313,014

Total Liabilities and Shareholders’ Equity	$	3,115,192						$	2,718,113

Excess of interest earning assets over funding sources	$	144,505						$	114,858
Net interest income			$	26,191						$	23,478

Net interest margin (3)						3.67	%						3.77	%
Core net interest margin (4)						3.53	%						3.67	%

(1)	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.

(2)	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.

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

(4)

Core net interest margin is computed by dividing annualized 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 or other significant items based on management’s judgement, by average total interest-earning assets. See the reconciliation table for core net interest margin.

(5)	Annualized.

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Net Changes in Average Balances, Composition, Yields and Rates

Three Months Ended March 31, 2017 and 2016

The following tables set 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):


	Three Months Ended March 31,
	2017								2016								Increase (Decrease)
	Average Balance		% of Total			Average Yield/ Rate (5)			Average Balance		% of Total			Average Yield/ Rate (5)			Average Balance			% of Total			Average Yield/ Rate (5)
Interest Earning Assets:
Loans (1)	$	2,043,693		70.6	%		4.85	%	$	1,849,201		73.9	%		4.91	%	$	194,492			(3.3	)%		(0.06	)%
Investment securities (2)		518,303		17.9	%		1.58	%		352,929		14.1	%		1.40	%		165,374			3.8	%		0.18	%
Deposits in other financial institutions		334,660		11.5	%		0.85	%		301,402		12.0	%		0.58	%		33,258			(0.5	)%		0.27	%

Total interest earning assets	$	2,896,656		100	%		3.81	%	$	2,503,532		100.0	%		3.90	%	$	393,124						(0.09	)%
Interest Bearing Liabilities:
Non-interest bearing demand deposits	$	1,480,366		53.8	%				$	1,305,018		54.6	%				$	175,348			(0.8	)%
Interest bearing transaction accounts		339,230		12.3	%		0.19	%		270,796		11.4	%		0.15	%		68,434			0.9	%		0.04	%
Money market and savings deposits		878,035		31.9	%		0.31	%		726,681		30.4	%		0.28	%		151,354			1.5	%		0.03	%
Certificates of deposit		29,626		1.1	%		0.36	%		55,920		2.3	%		0.24	%		(26,294	)		(1.2	)%		0.12	%

Total deposits		2,727,257		99.1	%		0.13	%		2,358,415		98.7	%		0.11	%		368,842			0.4	%		0.02	%
Securities sold under agreements to repurchase		15,017		0.5	%		0.24	%		20,540		0.9	%		0.22	%		(5,523	)		(0.4	)%		0.02	%
Subordinated debentures		9,877		0.4	%		5.26	%		9,719		0.4	%		4.76	%		158			—	%		0.50	%

Total borrowings		24,894		0.9	%		2.26	%		30,259		1.3	%		1.70	%		(5,365	)		(0.4	)%		0.56	%

Total funding sources	$	2,752,151		100	%		0.15	%	$	2,388,674		100	%		0.13	%	$	363,477						0.02	%

Excess of interest earning assets over funding sources	$	144,505							$	114,858							$	29,647
Net interest margin (3)							3.67	%							3.77	%								(0.10	)%
Core net interest margin (4)							3.53	%							3.67	%								(0.14	)%

(1)	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.

(2)	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.

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

(4)

(5)	Annualized.

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Volume and Rate Variance Analysis of Net Interest Income

Three Months Ended March 31, 2017 and 2016

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):


	Three Months Ended March 31, 2017 vs. 2016
	Increase (Decrease) Due To
	Volume			Rate			Total
Interest Income
Loans	$	2,130		$	(276	)	$	1,854
Investment securities		576			233			809
Deposits in other financial institutions		50			221			271

Total interest income		2,756			178			2,934

Interest Expense
Interest bearing transaction accounts		25			33			58
Money market and savings deposits		98			61			159
Certificates of deposit		(17	)		10			(7	)

Total deposits		106			104			210
Securities sold under agreements to repurchase		(3	)		1			(2	)
Subordinated debentures, net		1			12			13

Total borrowings		(2	)		13			11

Total interest expense		104			117			221

Net Interest Income	$	2,652		$	61		$	2,713

Page 51 of 72

Non-GAAP Financial Measure - Reconciliation of Core Net Interest Income and Core Net Interest Margin to Net Interest Income and Net Interest Margin

The following table represents a reconciliation of GAAP net interest margin to core net interest margin (a non-GAAP financial measure) used by the Company. The table presents the information for the periods indicated (dollars in thousands):


	Three Months Ended March 31,
	2017			2016
Net Interest Income	$	26,191		$	23,478
Less:
Other income recognition due to early payoffs		306			123
Accelerated accretion of fair value adjustment on early loan payoffs of acquired loans		688			528

Core Net Interest Income	$	25,197		$	22,827

Net interest margin		3.67	%		3.77	%
Core net interest margin		3.53	%		3.67	%

Composition of Net Deferred Loan Fees and Net Fair Value Discounts

The following table reflects the composition of the net deferred loan fees, costs and fair value discounts at March 31, 2017 and December 31, 2016 (dollars in thousands):


	March 31, 2017		December 31, 2016
Accretable loan discount	$	8,634	$	9,772
Non-Accretable loan discount		347		390

Remaining loan discount on acquired loans		8,981		10,162
Net deferred loan fees on organic loans		5,629		5,830

Total	$	14,610	$	15,992

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Net interest margin decreased 10 basis points to 3.67% for the three months ended March 31, 2017, compared to 3.77% for the three months ended March 31, 2016. The decrease in net interest margin is primarily due to average loans being a lower percentage of interest-earning assets for the quarter ended March 31, 2017 than for the same quarter a year ago, due to strong growth in average deposits in the first quarter of 2017. For the quarter ended March 31, 2017, the Company recorded $688 thousand in discounts earned on early loan payoffs of acquired loans and other associated payoff benefits of $306 thousand, which had a positive impact on the net interest margin of 14 basis points. For the quarter ended March 31, 2016, the Company recorded $528 thousand in discounts earned on early loan payoffs of acquired loans and other associated payoff benefits of $123 thousand, which had a positive impact on the net interest margin of 11 basis points. Despite a prime rate increase in December 2016, the average rate on paid off loans is higher than the rate on new loans.

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Provision for Loan Losses

Provision for loan losses for the three months ended March 31, 2017 was zero compared to $622 thousand for the three months ended March 31, 2016. The Company had $33 million of net organic loan growth for the quarter ended March 31, 2017, compared to $90 million for the same quarter a year ago. The Company also had less substandard loans at March 31, 2017. Net recoveries for the three months ended March 31, 2017 were $231 thousand, compared to net recoveries of $241 thousand in 2016.

Non-Interest Income

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


	Three Months Ended March 31,				Increase (Decrease)
	2017		2016		$			%
Gain on sale of securities, net	$	141		—	$	141			100	%
Gain on sale of SBA loans, net		202		554		(352	)		(63.5	)%
Deposit account service charge income		1,161		1,189		(28	)		(2.4	)%
Letters of credit income		286		270		16			5.9	%
Interchange fees		147		113		34			30.1	%
Dividend income in equity securities		213		151		62			41.1	%
BOLI income		379		323		56			17.3	%
Other non-interest income		306		220		86			39.1	%

Total Non-Interest Income	$	2,835	$	2,820	$	15			0.5	%

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Non-interest income increased $15 thousand or 0.5% to $2.84 million for the three months ended March 31, 2017 compared to $2.82 million for the three months ended March 31, 2016. The Company’s gain on sale of SBA loans as of March 31, 2017 was $202 thousand, compared to $554 thousand as of March 31, 2016; the gain was lower due to the average loan size being smaller. Decrease of $352 thousand in gain on sale of SBA loans as of March 31, 2017 was offset by increases of $62 thousand in stock dividends and $56 thousand in income from Bank owned life insurance, compared to the same period in 2016. The Bank purchased additional BOLI in February of 2017. Additionally, the Company realized a $141 thousand gain on sale of securities as of March 31, 2017 whereas as the Company had no comparable gain on sale of securities as of March 31, 2016.

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Non-Interest Expense

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


	Three Months Ended March 31,				Increase (Decrease)
	2017		2016		$			%
Salaries and employee benefits	$	10,288	$	9,319	$	969			10.4	%
Stock based compensation expense		773		834		(61	)		(7.3	)%
Occupancy		1,489		1,436		53			3.7	%
Data processing		656		618		38			6.1	%
Legal and professional		1,009		475		534			112.4	%
FDIC deposit assessment		446		350		96			27.4	%
OREO loss and expenses		—		79		(79	)		(100	)%
Office services expenses		380		403		(23	)		(5.7	)%
Core deposit intangible amortization		284		321		(37	)		(11.5	)%
Other operating expenses		1,368		1,352		16			1.2	%

Total Non-Interest Expense	$	16,693	$	15,187	$	1,506			9.9	%

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Non-interest expense increased by $1.5 million or 9.9% to $16.7 million for the three months ended March 31, 2017 compared to $15.2 million for the three months ended March 31, 2016. The increase was largely related to the increases in salaries and employee benefits and legal and professional fees. The increase in salaries and other benefits expense is attributable to the increase in the Company’s active full-time equivalent employees, which grew to 294 at March 31, 2017, an increase of 21 from March 31, 2016, of which 13 were BSA related and 6 were in deposit support services. Legal and professional fee expense increased by $534 as compared to the quarter ended March 31, 2016, primarily related to the impending merger and nonrecurring consulting costs associated with the BSA Consent Order.

Page 54 of 72

Income Taxes

The Company’s effective tax rate is impacted by BOLI income and interest income from tax exempt securities and loans which are excluded from taxable income, and excess tax benefits from exercise or vesting of share-based awards are included as a reduction in provision for income tax expense in the period in which the exercise or vesting occurs. The effective tax rate for the three months ended March 31, 2017 was 36.9% compared to 37.2% for the three months ended March 31, 2016. The tax rate will have more volatility, depending on the volume of vestings and exercises as well as the associated excess tax benefits generated. The amount of excess tax benefits were $424 thousand and $297 thousand for the periods ended March 31, 2017 and 2016, respectively. Without the excess tax benefits in the quarter ended March 31, 2017, the effective tax rate would have been 40%. In addition, 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%.

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FINANCIAL CONDITION

Balance Sheet Analysis

Total assets increased $149 million during the three months ended March 31, 2017, to $3.1 billion due to an increase of $147 million in deposits. Loans were flat from the end of the prior year as the net organic loan production during the period of $33 million was offset by $37 million of payoffs/paydowns in the acquired loan portfolios from the COSB, PC Bancorp acquisitions and the 1^st Enterprise merger.

Funding the asset growth for the Company for the first three months of 2017 was the growth in deposits of $147 million and net income of $7.8 million. Further, the deposit growth of $147 million is the result of an $86 million increase in non-interest bearing deposits, a $14 million increase in interest bearing transaction deposits and a $47 million increase in money market and savings deposits. Non-interest bearing deposits represented 54% of total deposits at both March 31, 2017, and December 31, 2016.

Lending

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


	March 31, 2017					December 31, 2016
	Amount		% of Total			Amount		% of Total
Commercial and Industrial Loans:	$	484,280		24	%	$	502,637		25	%
Loans Secured by Real Estate:
Owner-Occupied Nonresidential Properties		436,269		21	%		451,322		22	%
Other Nonresidential Properties		689,015		34	%		630,163		31	%
Construction, Land Development and Other Land		192,572		9	%		194,059		9	%
1-4 Family Residential Properties		118,268		6	%		127,164		6	%
Multifamily Residential Properties		95,483		5	%		109,858		5	%

Total Loans Secured by Real Estate		1,531,607		75	%		1,512,566		73	%

Other Loans:		30,251		1	%		35,023		2	%

Total Loans	$	2,046,138		100	%	$	2,050,226		100	%

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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):


	March 31, 2017					December 31, 2016
	Amount		% of Total			Amount		% of Total
Real Estate	$	1,139,458		56	%	$	1,096,377		53	%
Manufacturing		166,127		8	%		180,217		9	%
Construction		123,241		6	%		140,270		7	%
Hotel/Lodging		129,912		6	%		120,760		6	%
Wholesale		117,165		6	%		117,444		6	%
Finance		71,093		3	%		83,061		4	%
Professional Services		51,763		3	%		58,766		3	%
Other Services		45,660		2	%		50,425		2	%
Healthcare		45,092		2	%		46,184		2	%
Information		34,441		2	%		32,014		2	%
Retail		28,840		1	%		28,938		1	%
Restaurant/Food Service		24,149		1	%		24,118		1	%
Transportation		20,500		1	%		19,857		1	%
Administrative Services		14,966		1	%		17,090		1	%
Entertainment		11,747		1	%		13,569		1	%
Education		11,474		1	%		10,370		1	%
Management		5,490		—	%		6,455		—	%
Other		5,020		—	%		4,311		—	%

Total Loans	$	2,046,139		100	%	$	2,050,226		100	%

The Company’s loan origination and lending activities continue to be focused primarily on direct contact with its borrowers through the Company’s relationship managers and/or executive officers. We continue to establish new relationships and expand our current business. Total loans were $2.0 billion at March 31, 2017, a decrease of $4 million or 0.20%, from $2.1 billion at December 31, 2016. An overall trend was a higher level of paid off loans this quarter especially in commercial and industrial loans of which some were due to the sale of the business. During the first quarter of 2017, the Company had $33 million of net organic loan production, which was offset by approximately $37 million in loan payoffs/paydowns from the acquired loan portfolios during the same period. Loans secured by real estate grew $19 million in the first quarter of 2017, compared to the prior quarter, with all of the growth coming in other nonresidential properties. This increase was offset by a decrease of $18 million in commercial and industrial loans. The yields on new loans originated during the first quarter of 2017 have averaged 4.17%.

The Company’s total commercial line of credit commitments and related disbursed funds decreased by $21 million and $16 million from December 31, 2016, respectively, resulting in a utilization rate of 40% at March 31, 2017, the same as the end of the previous quarter. Due to the dynamic nature of commercial and industrial lending, actual credit utilization may experience ebbs and flows.

Commercial and industrial loans and owner-occupied real estate loans combined were $921 million or 45% of total loans at March 31, 2017, compared to $954 million or 47% at December 31, 2016. Of the total commercial and industrial loans, 18% and 19% was unsecured at March 31, 2017 and December 31, 2016, respectively.

Other non-residential loans increased by $59 million from the end of the prior year, the largest of which included one new hotel loan located in Fresno for $9 million and four new loans for a total of $25 million on diverse types of non-residential facilities located in Los Angeles County and Orange County with the highest loan to value of 65%. The Company originates other non-residential loans with well-structured terms and guarantees, primarily collateralized by commercial buildings.

The Company had 53 commercial banking relationship managers and 8 commercial real estate relationship managers at March 31, 2017. This compares to 57 commercial banking relationship managers and 9 commercial real estate relationship managers at December 31, 2016 as the Bank experienced some retirements in 2017.

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. In addition,

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we have not made any loans to finance leveraged buyouts. The Company’s real estate construction loans are primarily short-term loans made to finance the construction of 1-4 single family and multifamily residential properties. On occasion, the Company originates loans to finance the construction of single family residences to established developers and owner-occupiers. The Company’s construction lending is to known relationships, doing projects the builder/developer has experience with, and the majority are with recourse and are rarely speculative in nature. 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 loans secured by real property as required by applicable federal law and regulations. There is also a Board of Directors Loan Committee (“BODLC”) 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.

We do not have any concentrations in our loan portfolio except for the level of loans that are secured by real estate and the level of loans to the real estate industry as presented in the tables above. Although the Bank’s real estate concentration this quarter ending March 31, 2017 exceeds 300% of total risk based capital, the Company has maintained its relationship based approach to lending which has resulted in nominal charge-off experience in the real estate portfolio since the Company’s inception. Management plans to continue originating the same quality real estate loans that are currently included in its loan portfolio.

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Allowance for Loan Loss

The Allowance increased by $231 thousand, to $20 million during the quarter ended March 31, 2017, due to net recoveries of $231 thousand. The Allowance as a percentage of total loans was 0.96% at March 31, 2017 and 0.94% at December 31, 2016. The Allowance as a percentage of loans (excluding loan balances and the related Allowance on loans acquired through acquisition) was 1.17% and 1.18%, respectively, at March 31, 2017 and December 31, 2016. During the first quarter of 2017, net organic loan production was $33 million offset by $37 million of payoffs/paydowns in the acquired loan portfolios.

The Company’s management considered the following factors in evaluating the allowance for loan loss at March 31, 2017:

•

During the three months ended March 31, 2017 there were no loan charge-offs and loan recoveries of $231 thousand.

•

There were eight non-accrual loans totaling $760 thousand with no specific allowance required at March 31, 2017, with none individually exceeded $300 thousand

•

Reduced level of substandard loans from December 31, 2016

•

The overall growth and composition of the loan portfolio

•

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

•

Concentrations within the loan portfolio

•

The remaining fair value adjustments on loans acquired through acquisition

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 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 allowance. For loan segments without a meaningful historical loss experience, the analysis is adjusted to consider 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 March 31, 2017 is adequate. Although the Company maintains its Allowance at a level which it considers adequate to provide for probable loan losses, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations.

The following table is a summary of the activity for the Allowance as of the dates and for the periods indicated (dollars in thousands):


	Three Months Ended March 31,
	2017			2016
Allowance for loan loss at beginning of period	$	19,374		$	15,682
Provision for loan losses		—			622
Net (charge-offs) recoveries:
Charge-offs		—			—
Recoveries		231			241

Net recoveries		231			241

Allowance for loan loss at end of period	$	19,605		$	16,545

Net recoveries to average loans		0.01	%		0.01	%

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


	March 31, 2017			December 31, 2016
Loans originated by the Bank on non-accrual	$	—		$	—
Loans acquired through acquisition on non-accrual		760			1,122

Total non-accrual loans		760			1,122
Other Real Estate Owned		—			—

Total non-performing assets	$	760		$	1,122

Net charge-offs (recoveries) year to date	$	(231	)	$	(428	)
Non-accrual loans to total loans		0.04	%		0.05	%
Total non-performing assets to total assets		0.02	%		0.04	%
Allowance for loan losses to total loans		0.96	%		0.94	%
Allowance for loan losses to total loans accounted at historical cost, which excludes loans acquired by acquisition		1.17	%		1.18	%
Allowance for loan losses to non-accrual loans accounted at historical cost, which excludes non-accrual loans acquired by acquisition and related allowance		—			—
Allowance for loan losses to total non-accrual loans		2580	%		1726	%

Deposits

The following table presents the balance of each major category of deposits at the dates indicated (dollars in thousands):


	March 31, 2017					December 31, 2016
	Amount		% of Total			Amount		% of Total
Non-interest bearing demand deposits	$	1,485,730		54	%	$	1,400,097		54	%
Interest bearing transaction accounts		346,279		13	%		332,702		13	%
Money market and savings deposits		892,143		32	%		845,110		32	%
Certificates of deposit		30,623		1	%		29,480		1	%

Total deposits	$	2,754,775		100	%	$	2,607,389		100	%

Total deposits increased $147 million to $2.8 billion at March 31, 2017, primarily due to an $86 million increase in non-interest bearing demand deposits, a $47 million increase in money market and savings deposits, a $14 million increase in interest bearing transaction accounts. Certificates of deposit remained stable. The strong growth in deposits during this period came primarily from existing relationships. We believe some of the increase in total deposits during the first quarter of 2017 is likely related to customers accumulating cash in anticipation of federal and state income tax payments, as well as county property taxes in California. The average size of non-interest bearing and money market accounts continued to grow in the first quarter of 2017. Non-interest bearing deposits represented 54% of total deposits at March 31, 2017 and December 31, 2016.

Management believes one of the strengths of the Company continues to be its core deposit franchise with a cost of deposits of 0.13% for the three months ended March 31, 2017. The Company only realized a small increase in its costs despite three increases in the prime rate since December 2015.

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LIQUIDITY

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


	March 31, 2017			December 31, 2016
	Amount			Amount
Primary Liquidity-On Balance Sheet:
Cash and due from banks	$	51,168		$	41,281
Interest earning deposits in other financial institutions		313,610			167,789
Investment securities available-for-sale		469,399			469,950
Less: pledged cash and due from banks		—			—
Less: pledged investment securities		(219,210	)		(204,855	)

Total primary liquidity	$	614,967		$	474,165

Ratio of primary liquidity to total deposits		22.32	%		18.19	%
Additional Liquidity Not Included In Primary Liquidity:
Certificates of deposit in other financial institutions	$	48,795		$	51,245
Less: Certificate of deposits pledged		(2,731	)		(2,731	)

Total additional liquidity	$	46,064		$	48,514

Secondary Liquidity-Off Balance Sheet:
Available Borrowing Capacity:
Total secured borrowing capacity with FHLB	$	688,055		$	657,955
Fed Funds borrowing lines		72,000			72,000
Secured credit line with the FRBSF		24,703			25,489

Total secondary liquidity	$	784,758		$	755,444

The Company’s primary overnight liquidity consisted of cash and due from banks and interest earning deposits at financial institutions. The amount of funds maintained directly with the Federal Reserve included in interest earning deposits in other financial institutions was $225 million and $90 million, at March 31, 2017 and December 31, 2016, respectively. The next source of liquidity is the money market accounts at other banks. Furthermore, the Company has collateralized borrowings and unsecured borrowing facilities. In addition, the Company has $46 million in unpledged certificates of deposits in other financial institutions where the average maturity is approximately 6 months that could be utilized over time to supplement the liquidity needs of the Company.

The Company’s 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 new and existing customers. Additional sources of funds from the Company’s asset side of the balance sheet include 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 in the form of Fed Funds Borrowing Lines of $72 million 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 used, consecutively and in total during a month, $5 million of these credit facilities require the pledging of investment securities.

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 $749 million at March 31, 2017. The Company currently has no outstanding borrowings with the FHLB. As of March 31, 2017, the Company had $1 billion of loan collateral pledged with the FHLB. This level of loan collateral would provide the Company with $688 million in borrowing capacity. The Company also had $16 million in securities pledged with the FHLB serving as collateral for an additional $14 million in borrowing capacity. Any amount of borrowings in excess of $702 million, up to the Company’s

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borrowing capacity of $749 million, would require the Company to pledge additional collateral. In addition, the Company must maintain a certain investment in the common stock of the FHLB. The Company’s investment in the common stock of the FHLB is $9 million at March 31, 2017. This level of capital would allow the Company to borrow up to $340 million of the $749 million. Any advances from the FHLB in excess of the $340 million would require additional purchases of FHLB common stock.

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 FRBSF. At March 31, 2017, the Company’s available borrowing capacity was $25 million.

The Company maintains investments in short term certificates of deposit with other financial institutions, with an average remaining maturity of approximately 6 months, with various balances maturing monthly. The Company had balances of $49 million and $51 million at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, $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.

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 covenant violations as established in the loan agreement. 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 $986 million and $1 billion at March 31, 2017 and December 31, 2016, respectively.

The holding company liquidity on a stand-alone basis was $8.9 million and $9.7 million, in cash on deposit at the Bank, at March 31, 2017 and December 31, 2016, 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.

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DIVIDENDS

To date, the Company has not paid any cash dividends on its common stock. 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 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 the shareholder made during such period). In addition, the Bank may not pay dividends that would result in its capital being reduced below the minimum requirements for capital adequacy purposes.

The Company completed the merger with 1st Enterprise on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1st Enterprise as part of the Small Business Lending Fund (SBLF) program of the United States Department of the Treasury was converted into 16,400 CU Bancorp preferred shares with substantially identical terms. CU Bancorp Preferred Stock has a liquidation preference amount of $1 thousand 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.

As of March 31, 2017, both CU Bancorp “the holding company” and the Bank had positive retained earnings and positive net income that would allow either of them to declare and pay a dividend as of March 31, 2017. However, neither the holding company nor the Bank has plans to declare and pay a cash dividend on the common stock at the current time.

The Company has a program to repurchase a portion of an employee’s outstanding restricted stock upon the vesting of this restricted stock, but only in amounts necessary to cover the employee tax withholding obligations at the option of the restricted stockholder (employee). This program was designed to provide the Bank’s employees with the financial ability to cover their tax liability obligation associated with the vesting of their restricted stock at the date of vesting. These transactions under the State of California Corporations Code are defined as distributions to shareholders.

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REGULATORY MATTERS

Capital Resources

The Company’s objective is to maintain a level of capital that will support sustained asset and loan growth, provide for anticipated credit risks, and ensure that regulatory guidelines and industry standards are met. The Company and the Bank are subject to certain minimum capital adequacy and minimum well capitalized category guidelines adopted by the FRB and the FDIC. These guidelines relate primarily to the Tier 1 leverage ratio, the Common Equity Tier 1 Ratio (“CET1”), the Tier 1 risk-based capital ratio, and the Total risk-based capital ratio.

On October 26, 2015, the Company filed a Form S-3 registration statement for offerings up to $100 million of certain types of securities. If drawn on, proceeds from the offering could be used for general corporate purposes. The registration statement represents capital resources available to the Company as the registration statement is deemed to be effective by the Securities Exchange Commission (SEC) and will be available for three years.

At March 31, 2017, the respective capital ratios of the Company and the Bank exceeded the minimum percentage requirements to be deemed “well-capitalized” for Prompt Corrective Action (“PCA”) purpose and the Basel III minimum capital ratios with the phase-in 2017 buffer under the current capital guidelines. The following tables present the regulatory capital ratios requirements and the actual capitalization levels of the Company and the Bank as of the dates indicated (dollars in thousands):

CU Bancorp

March 31,
2017

December 31,
2016

Well
Capitalized

Basel III
Minimum with
Buffer

Amount

(greater than or equal to)

Regulatory Capital Ratios:

Tier 1 leverage ratio

Large Accelerated Filer

Accelerated Filer

Non Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

CU Bancorp 10-Q