-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iw9mlSuqHBn2DLPgLYcDmFUJ74hu1SzCn/w5h3sg8Y3afvnFZJfRvYPn2v9WtdCg 6xSQ7hFjBIKHtsyEEd4cyw== 0000950148-96-000476.txt : 19960401 0000950148-96-000476.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950148-96-000476 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CU BANCORP CENTRAL INDEX KEY: 0000356050 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953657045 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11008 FILM NUMBER: 96541684 BUSINESS ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 BUSINESS PHONE: 8189079122 MAIL ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 FORMER COMPANY: FORMER CONFORMED NAME: LINCOLN BANCORP DATE OF NAME CHANGE: 19900814 10-K405 1 ANNUAL REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995. OR [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________. Commission file number 0-11008 CU BANCORP ----------- (Exact name of registrant as specified in its charter) California 95-3657044 (State or other jurisdiction) (I.R.S. Employer of incorporation or organization) Identification Number) 16030 Ventura Boulevard Encino, California 91436 ---------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (818) 907-9122 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (title of class) Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 month (or for shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 220.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K [ x ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1996: $53,134,221 ----------- Common Stock, no par value - - ---------------------------- The number of shares outstanding of the issuer's classes of common stock as of February 28, 1996: Common Stock, no par value 5,285,333 shares - ------------------------------------------- 1 2 DOCUMENTS INCORPORATED BY REFERENCE Part III is hereby incorporated by reference from sections of the Registrant's Definitive Proxy Statement which will be filed within 120 days of fiscal year ended December 31, 1995. This document contains 60 pages. Exhibit Page begins on Page 61 2 3 TABLE OF CONTENTS
Item Part Number Item Page - -------------------------------------------------------------------------------------- I 1. Business 4 I 2. Properties 21 I 3. Legal Proceedings 22 I 4. Submission of Matters to a Vote 22 of Security Holders I 4.A. Executive Officers of the Registrant 22 II 5. Market for the Company's Common Stock 25 and Related Stockholder Matters II 6. Selected Financial Data 25 II 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 II 8. Financial Statements and Supplementary Data 38 II 9. Changes in and Disagreements with * Accountants on Accounting and Financial Disclosure III 10. Directors and Executive Officers of ** the Company III 11. Executive Compensation ** III 12. Security Ownership of Certain ** Beneficial Owners and Management III 13. Certain Relationships and Related ** Transaction IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 58
* This item is omitted because it is either inapplicable or the answer thereto is in the negative. ** Incorporated by reference from the Company's proxy statement which will be filed within 120 days of fiscal year ended December 31, 1995. 3 4 PART I Item 1. BUSINESS General Development of Business CU Bancorp, (the "Company") was incorporated under the laws of the State of California on September 3, 1981. It is the parent of California United Bank, a National Banking Association (the "Bank") which is a wholly owned subsidiary of the Company and the sole subsidiary of the Company. DESCRIPTION OF BUSINESS Commercial Banking Business CU Bancorp is a California corporation incorporated in 1981 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company does not conduct any activities other than in connection with its ownership of the Bank which is CU Bancorp's sole subsidiary. The company functions primarily as the sole stockholder of the Bank and establishes general policies and activities for the Bank. The Bank was founded in April 1982 and provides an extensive range of commercial banking services. The Bank is a commercial bank which delivers a mix of banking products and services to middle market businesses, the entertainment industry and high net worth individuals. The Bank offers lending, deposit, accounts receivable financing, letters of credit, cash management, SBA and international trade services from seven full -service offices. The Bank's primary focus is to engage in middle market lending to businesses, professionals, the entertainment industry, and high net-worth individuals. While the Bank does not actively solicit retail or consumer banking business, it offers these services primarily to owners, officers, and employees of its business customers, and customers of accounting and business management firms with which the Bank regularly does business. The Entertainment Division specializes in meeting the banking needs of Southern California's entertainment industry, including motion picture and television financing, record labels, talent agencies, business managers, commercial houses and a variety of other related business activities. This division offers certain specialty products aimed at the entertainment industry and related individuals. The SBA division offers financing alternatives to businesses in the Bank's market through the use of government guaranteed loans. This division offers both term and shorter term credit products. The International Trade Services Group offers a broad range of services to support the import/export activities of customers. The division has direct correspondent relationships with major overseas banks, providing business customers with a broad international reach. The division facilitates a wide variety of international banking transactions, including letters of credit, short term trade related financing, domestic and foreign collections, wire transfers, standby commitments and government assisted programs. The Bank attracts customers and deposits by offering a personalized approach and a high degree of service. The key to the Bank's deposit generation is personal contacts and services rather than rate competition. A significant portion of its business is with business customers who conduct substantially all of their banking business with the Bank. Either alone or in concert with correspondent banks, the Bank offers a wide variety of credit and deposit services to its customers. Management believes that its current and prospective customers favorably respond to the individualized tailored banking services that the Bank provides. Deposit services, 4 5 which the Bank offers, include personal and business checking accounts and savings accounts, insured money market deposit accounts, interest-bearing negotiable orders of withdrawal ("NOW") accounts, and time certificates of deposit, along with IRA and Keogh accounts. The Bank offers sophisticated on line banking capabilities to customers through its electronic banking programs. The Bank has not requested and does not have regulatory approval to offer trust services; nor does it have any present intention to seek such approval. The Bank has made arrangements with a number of trust companies to refer prospective customers, in connection with which the Bank may receive a referral fee. Continued development of a diversified commercial oriented deposit and lending base is the Bank's highest priority. Loans and time and demand deposits are actively solicited by the directors, officers, and employees of the Bank. The executive and senior officers of the Bank have had substantial experience in soliciting bank deposits and in serving the comprehensive banking needs of small and mid-size businesses. During 1995, the Bank serviced the commercial banking business from five offices including: its head office at 16030 Ventura Boulevard, in Encino, California 91436, a suburb of Los Angeles; an office in West Los Angeles, located at 10880 Wilshire Boulevard, Los Angeles California 90024, in the Westwood commercial and retail district, with close freeway access; a Ventura County (Camarillo) Regional Office; a South Bay Regional office in Gardena, California; and a San Gabriel Valley Regional Office, located in City of Industry, which serves the San Gabriel Valley and northern Orange County. In January 1996, the Bank added branches in Santa Ana and Anaheim in Orange County as a result of its merger with Corporate Bank. In January 1996, the Company completed the acquisition of Corporate Bank of Santa Ana California which was merged into the Bank. Corporate Bank served both small and mid market business entities, as well as offering certain consumer based products such as home equity lines of credit and auto loans and leases. It is contemplated that upon full integration of the Corporate Bank business that the business of these offices will mirror those of the Bank as a whole. On January 10, 1996, the Bank announced an agreement to merge with Home Interstate Bancorp, parent of Home Bank, based in the South Bay. The merger with Home Bank is expected to be completed in mid - 1996, and will create a Bank with 22 branches and over $800 million in assets. Historical Regulatory Matters In 1992, the Bank and Bancorp both consented to agreements with their primary regulators, a Formal Agreement with the OCC and a Memorandum of Understanding with the Federal Reserve Bank of San Francisco. In June of 1992, a new management team replaced substantially all of prior management. In November of 1993, following the first OCC examination subsequent to new management's implementation of internal controls and other new management techniques, the OCC released The Bank from the Formal Agreement and later that same month the Federal Reserve Bank of San Francisco determined that Bancorp had met all the requirements of the Memorandum of Understanding and terminated that document. The Bank's capital ratios, as of December 31, 1995, are in excess of all minimums imposed by law and regulation and qualify to rate the Bank as a "well capitalized" bank. For further information see Note 16 to the Financial Statements. The Formal Agreement required the implementation of certain policies and procedures for the operation of the Bank to improve lending operations and management of the loan portfolio. The Formal Agreement required the Bank to maintain a Tier 1 risk weighted capital ratio of 10.5% and a 6% Tier 1 capital ratio based on adjusted total assets. The Formal Agreement mandated the adoption of a written program to essentially reduce criticized assets, maintain adequate loan loss reserves and improve bank administration, real estate appraisal, asset review management and liquidity policies, and restricted the payment of dividends. 5 6 The agreement specifically required the Bank to: 1) create a compliance committee; 2) have a competent chief executive officer and senior loan officer, satisfactory to the OCC, at all times; 3) develop a plan for supervision of management; 4) create and implement policies and procedures for loan administration; 5) create a written loan policy; 6) develop and implement an asset review program; 7) develop and implement a written program for the maintenance of an adequate Allowance for Loan and Lease Losses, and review the adequacy of the Allowance; 8) eliminate criticized assets; 9) develop and implement a written real estate appraisal policy; 10) obtain and improve procedures regarding credit and collateral documentation; 11) develop a strategic plan; 12) develop a capital program to maintain adequate capital (this provision also restricts the payment of dividends by the Bank unless :(a) the Bank is in compliance with its capital program; (b) the Bank is in compliance with 12 U.S.C. Sections 55 and 60; and (c) with the prior written approval of the OCC Regional Administrator; 13) develop and implement a written liquidity, asset and liability management policy; 14) document and support the reasonableness of any management and other fees to any director or other party; 15) correct violations of law; and 16) provide reports to the OCC regarding compliance. The Company's Memorandum of Understanding ("MOU") with the Federal Reserve required: 1) a plan to improve the financial condition of CU Bancorp and the Bank; 2) development of a formal policy regarding the relationship of CU Bancorp and the Bank, with regard to dividends, intercompany transactions, tax allocation and management or service fees; 3) a plan to assure that CU Bancorp has sufficient cash to pay its expenses; 4) ensure that regulatory reporting is accurate and submitted on a timely basis; 5) prior approval of the Federal Reserve Bank prior to the payment of dividends; 6) prior approval of the Federal Reserve Bank prior to CU Bancorp incurring any debt and 7) quarterly reporting regarding the condition of the Company and steps taken regarding the Memorandum of Understanding. The release of both agreements indicates that the Company has complied with the Formal Agreement and the Memorandum of Understanding, including improvement of asset and management quality, the development and implementation of policies and procedures as well as reporting methodologies and the maintenance of the required capital ratios. The Company Bancorp is a legal entity separate and distinct from the Bank. There are various legal limitations on the ability of the Bank to finance or otherwise supply funds to Bancorp. In particular, under federal banking law, a national bank, such as the Bank, may not declare a dividend that exceeds undivided profits, and the approval of the OCC is required if the total of all dividends declared in any calendar year exceeds such bank's net profits, as defined, for that year combined with its retained net profits for the preceding two years. In addition, federal law significantly limits the extent to which the Bank may supply funds to Bancorp, whether through direct extensions of credit or through purchases of securities or assets, issuance of guarantees or the like. Generally, any loan made by the Bank to Bancorp must be secured by certain kinds and amounts of collateral and is limited to 10% of the Bank's capital and surplus (as defined), and all loans by the Bank to Bancorp are limited to 20% of the Bank's capital and surplus. The Bank may extend credit to Bancorp without regard to these restrictions to the extent such extensions of credit are secured by specific kinds of collateral such as obligations of or guaranteed by the U.S. Government or its agencies and certain bank deposits. Mortgage Banking Until November 1993, the Bank operated in two distinct segments, commercial banking and mortgage banking. The Bank sold the origination portion of its mortgage banking division in November 1993 to Republic Bancorp of Ann Arbor Michigan. This division had been established in February of 1988. The purpose of this division was to underwrite residential mortgages and subsequently sell them into the secondary market. Mortgages were originated on both a servicing retained and servicing released basis. 6 7 Substantially all the loans originated by this division were presold to institutional investors or government agencies and are only originated subject to this forward commitment. The Bank retained the mortgage servicing portfolio after the sale of the division, although it retained the former division to service the loans. At December 31, 1995 substantially all of the mortgage loan servicing portfolio had been sold. See Management's Discussion and Analysis for further amplification on operating contributions of this division and the effect of the sale. Entertainment Division The Bank's entertainment division, based in its West Los Angeles Regional Office, is designed specifically to serve the needs of accountants and business managers serving artists and other entertainment industry related companies and individuals, while providing a more diverse source of deposits for the Bank as a whole. Customers and Business Concentration The Bank believes that there is no single customer whose loss would have a material adverse effect on the Bank. At year end 1995, the Bank obtained approximately 7.2% of its deposits from companies associated with the real estate business, primarily title and escrow companies. While this appears to be a significant deposit concentration, because these deposits are attributable to a large number of companies in a diverse market (from small single family homes to larger projects), the Bank does not believe there is a problematical concentration in any one industry. To account for seasonal and economic variations in this industry, the Bank has taken a number of steps to insure liquidity. Regarding business concentrations in both lending and deposit activities, see Management's Discussion and Analysis. Competition The Company does not conduct any business unrelated to the business of the Bank and thus is affected by competition only in the Banking industry. The Bank's primary commercial banking market area consists of the area encompassed in an approximately sixty mile radius from the downtown Los Angeles area, including much of Ventura County, the San Fernando Valley, Beverly Hills, West Los Angeles, the San Gabriel Valley, the South Bay area and metropolitan areas of the City and County of Los Angeles. The Bank also serves Orange County. The banking and financial services business in California generally, and in the Bank's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The Bank competes for loans and deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Bank. In order to compete with the other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers' needs. In those instances where the Bank is unable to accommodate a customer's needs, the Bank will arrange for those services to be provided by its correspondents. To compete with major financial institutions, the Bank relies upon specialized services, responsive handling of customer needs, local promotional activity, and personal contacts by its officers, directors, and staff, as opposed to large multi-branch banks which compete primarily by rate and location of branches. 7 8 For customers whose loan demands exceed the Bank's lending limit, the Bank seeks to arrange for such loans on a participation basis with correspondent banks. In the past, an independent bank's principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations, and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies, and insurance companies. In the past several years, the trend has been for other financial intermediaries to offer financial services traditionally offered by banks. Other institutions, such as brokerage houses, credit card companies, and even retail establishments, have offered new investment vehicles such as money-market funds or cash advances on credit card accounts. This led to increased cost of funds for most financial institutions. Even within the Banking industry, the trend has been towards offering more varied services, such as discount brokerage, often through affiliate relationships. The direction of federal legislation seems to favor and foster competition between different types of financial institutions and to encourage new entrants into the financial services market. However, it is not possible to forecast the impact such developments will have on commercial banking in general, or on the Bank in particular. Effect of Governmental Policies and Recent Legislation Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Company are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The likelihood of any major legislative changes and the impact such changes might have on the Company are impossible to predict. See "Item 1. Business - Supervision and Regulation." Supervision and Regulation Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. The Company The Company, as a registered bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is required to file with the Federal 8 9 Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may conduct examinations of the Company and its subsidiaries. The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the BHCA and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See "Item 1. Business - Supervision and Regulation - Capital Standards." The Company is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company. The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company, subject to the prior approval of the Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making any such determination, the Federal Reserve Board is required to consider whether the performance of such activities by the Company or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The FRB has determined, by regulation, that certain activities are so closely related to banking as to be a proper incident thereto within the meaning of the BHC Act. These activities include, but are not limited to: opening an industrial loan company, industrial bank, Morris Plan Bank, mortgage company, finance company, credit card company, or factoring company; performing certain data processing operations; providing investment and financial advice; operation as a trust company in certain instances; selling traveler's checks, U.S. Savings Bonds, and certain money orders; providing certain courier services; providing real estate appraisals; providing management consulting advice to non affiliated depository institutions in some instances; acting as an insurance agent for certain types of credit related insurance; leasing property or acting as agent, broker, or advisor for leasing property on a "full payout basis"; acting as a consumer financial counselor, including tax planning and return preparation; performing futures, options, and advisory services, check guarantee services and discount brokerage activities; operating a collection or credit bureau; or performing personal property appraisals. Recent amendments to this list allow bank holding companies to own savings associations, arrange commercial real estate equity financing, engage in certain securities brokerage activities, underwrite and deal in government obligations and money market instruments, conduct foreign exchange advisory and transactional services, act as a futures commission merchant, provide investment advice on financial futures 9 10 and options on futures, provide consumer financial counseling, provide tax planning and preparation, operate a check guarantee service, operate a collection agency, and operate a credit bureau. The Company has no present intention to engage in any of such newly permitted activities. The FRB has determined that certain other activities are not so closely related to banking as to be a proper incident thereto within the meaning of the BHC Act. Such activities include: real estate brokerage and syndication; real estate development; property management; underwriting of life insurance not related to credit transactions; and, with certain exceptions previously noted, securities underwriting and equity funding. The area of securities underwriting is under review and will likely be expanded. In the future, the FRB may add or delete from the list of activities permissible for bank holding companies. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. This doctrine has become known as the "source of strength" doctrine. Although the United States Court of Appeals for the Fifth Circuit found the Federal Reserve Board's source of strength doctrine invalid in 1990, stating that the Federal Reserve Board had no authority to assert the doctrine under the BHCA, the decision, which is not binding on federal courts outside the Fifth Circuit, was recently reversed by the United States Supreme Court on procedural grounds. The validity of the source of strength doctrine is likely to continue to be the subject of litigation until definitively resolved by the courts or by Congress. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California State Banking Department. Finally, the Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, including but not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission. The Bank The Bank, as a national banking association, is subject to primary supervision, examination and regulation by the Comptroller of the Currency (the "Comptroller"). If, as a result of an examination of a Bank, the Comptroller should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the Comptroller. Such remedies include the power to enjoin "unsafe or unsound practices," to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate a Bank's deposit insurance in the absence of action by the Comptroller and upon a finding that a Bank is in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that its conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors. The Bank is not currently subject to any such actions by the Comptroller or the FDIC. The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. See "Item 1. Business - Supervision and Regulation Premiums for Deposit Insurance." The Bank is also subject to certain regulations of the 10 11 Federal Reserve Board and applicable provisions of California law, insofar as they do not conflict with or are not preempted by federal banking law. Various other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and disclosure obligations to depositors and borrowers. Further, the Bank is required to maintain certain levels of capital. See "Item 1. Business - Supervision and Regulation - Capital Standards." Restrictions on Transfers of Funds to the Company by the Bank The Company is a legal entity separate and distinct from the Bank. The Company's ability to pay cash dividends is limited by state law. There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Bank. The prior approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits (as defined) for the preceding two years, less any transfers to surplus. The Comptroller also has authority to prohibit the Bank from engaging in activities that, in the Comptroller's opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the Comptroller could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the Comptroller and the Federal Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. The Superintendent may impose similar limitations on the conduct of California-chartered banks. See "Item 1. Business - Supervision and Regulation - Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and - "Capital Standards" for a discussion of these additional restrictions on capital distributions. At present, substantially all of the Company's revenues, including funds available for the payment of dividends and other operating expenses, is, and will continue to be, primarily dividends paid by the Bank and exercise of options and warrants to purchase shares of the Company. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliate is limited to 10% of the Bank's capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of the Bank's capital and surplus (as defined by federal regulations). Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "Item 1. Business - - Supervision and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms." Capital Standards The Federal Reserve Board, the Comptroller and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and 11 12 transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In August 1995, the federal banking agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the federal banking agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by-case basis by the examiner and the appropriate federal banking agency. Because this proposal has only recently been issued, the Bank currently is unable to predict the impact of the proposal on the Bank if the policy statement is adopted as proposed. In January 1995, the federal banking agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. 12 13 Federally supervised banks and savings associations are currently required to report deferred tax assets in accordance with SFAS No. 109. See "Item 1. Business -- Supervision and Regulation -- Accounting Changes." The federal banking agencies recently issued final rules, effective April 1, 1995, which limit the amount of deferred tax assets that are allowable in computing an institution's regulatory capital. The standard has been in effect on an interim basis since March 1993. Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 Capital and total assets and regulatory capital calculations. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. The banking agencies have issued a final rule which requires them to revise their risk based capital guidelines to ensure that their standards take adequate account of interest rate risk ("IRR"). These amendments to risk-based capital guidelines had not been finalized for banks as of December 31, 1995. The following table presents the amounts of regulatory capital and the capital ratios for the Bank, compared to its minimum regulatory capital requirements as of December 31, 1995.
December 31, 1995 ----------------- Minimum Capital Requirement Actual Ratio ----------- ------ ----- Leverage ratio 10.52% 4.0% Tier 1 risk-based ratio 14.92 4.0 Total risk-based ratio 16.19 8.0
Prompt Corrective Action and Other Enforcement Mechanisms Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. 13 14 In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of federal law. An insured depository institution generally will be classified in the following categories based on capital measures indicated below: "Well capitalized" "Adequately capitalized" ------------------ ------------------------ Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4% (3% if the institution receives the highest rating from its primary regulator) "Undercapitalized" "Significantly undercapitalized" ------------------ -------------------------------- Total risk-based capital less than 8%; Total risk-based capital less than 6%; Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or Leverage ratio less than 4% (3% if the Leverage ratio less than 3%. institution receives the highest rating from its primary regulator) "Critically undercapitalized" ----------------------------- Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt correction action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is 14 15 subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease and desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Safety and Soundness Standards In July 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. 15 16 In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective on March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. Appraisals for "real estate related financial transactions" must be conducted by either state certified or state licensed appraisers for transactions in excess of certain amounts. State certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing or refinancing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. Premiums for Deposit Insurance Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The result of these provisions is that the assessment rate on deposits of BIF members could increase in the future. The FDIC also has authority to impose special assessments against insured deposits. The FDIC implemented a final risk-based assessment system, as required by FDICIA, effective January 1, 1994, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," 1.25%, the total amount raised from BIF members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were .023% of deposits. On August 8, 1995, the FDIC announced that the designated reserve ratio had been achieved and, accordingly, issued final regulations adopting an assessment rate schedule for BIF members of 4 to 31 basis points effective on June 1, 1995. On November 14, 1995, the FDIC further reduced deposit insurance premiums to a range of 0 to 27 basis points effective for the semi-annual period beginning January 1, 1996. 16 17 Under the risk-based assessment system, a BIF member institution such as the Bank is categorized into one of three capital categories (well capitalized, adequately capitalized, and undercapitalized) and one of three categories based on supervisory evaluations by its primary federal regulator (in the Bank's case, the Comptroller). The three supervisory categories are: financially sound with only a few minor weaknesses (Group A), demonstrates weaknesses that could result in significant deterioration (Group B), and poses a substantial probability of loss (Group C). The capital ratios used by the Comptroller to define well-capitalized, adequately capitalized and undercapitalized are the same in the Comptroller's prompt corrective action regulations. The BIF assessment rates are summarized below; assessment figures are expressed in terms of cents per $100 in deposits. Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C ------------------------------------- Well Capitalized . . . . . . . . . . . . 23 26 29 Adequately Capitalized . . . . . . . . . 26 29 30 Undercapitalized . . . . . . . . . . . . 29 30 31
Assessment Rates Effective through the Second Half of 1995
Group A Group B Group C ------------------------------------- Well Capitalized . . . . . . . . . . . . 4 7 21 Adequately Capitalized . . . . . . . . . 7 14 28 Undercapitalized . . . . . . . . . . . . 14 28 31
Assessment Rates Effective January 1, 1996
Group A Group B Group C ------------------------------------- Well Capitalized . . . . . . . . . . . . 0* 3 17 Adequately Capitalized . . . . . . . . . 3 10 24 Undercapitalized . . . . . . . . . . . . 10 24 27
*Subject to a statutory minimum assessment of $1,000 per semi-annual period (which also applies to all other assessment risk classifications). At December 31, 1995, the Bank was well capitalized (Group A). A number of proposals have recently been introduced in Congress to address the disparity in bank and thrift deposit insurance premiums. On September 19, 1995, legislation was introduced and referred to the House Banking Committee that would, among other things: (i) impose a requirement on all SAIF member institutions to fully recapitalize the SAIF by paying a one-time special assessment of approximately 85 basis points on all assessable deposits as of March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread the responsibility for FICO interest payments across all FDIC-insured institutions on a pro-rata basis, subject to certain exceptions; (iii) require that deposit insurance premium assessment rates applicable to SAIF member institutions be no less than deposit insurance premium assessment rates applicable to BIF member institutions; (iv) provide for a merger of the BIF and the SAIF as of January 1, 1998; (v) require savings associations to convert to state or national bank charters by January 1, 1998; (vi) require savings associations to divest any activities not permissible for commercial banks within five years; (vii) eliminate the bad-debt reserve deduction for 17 18 savings associations, although savings associations would not be required to recapture into income their accumulated bad-debt reserves; (viii) provide for the conversion of savings and loan holding companies into bank holding companies as of January 1, 1998, although unitary savings and loan holding companies authorized to engage in activities as of September 13, 1995 would have such authority grandfathered (subject to certain limitations); and (ix) abolish the OTS and transfer the OTS' regulatory authority to the other federal banking agencies. The legislation would also provide that any savings association that would become undercapitalized under the prompt corrective action regulations as a result of the special deposit premium assessment could be exempted from payment of the assessment, provided that the institution would continue to be subject to the payment of semiannual assessments under the current rate schedule following the recapitalization of the SAIF. The legislation was considered and passed by the House Banking Committee's Subcommittee on Financial Institutions on September 27, 1995, and has not yet been acted on by the full House Banking Committee. On September 20, 1995, similar legislation was introduced in the Senate, although the Senate bill does not include a comprehensive approach for merging the savings association and commercial bank charters. The Senate bill remains pending before the Senate Banking Committee. The future of both these bills is linked with that of pending budget reconciliation legislation since some of the major features of the bills are included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill, which was passed by both the House and Senate on November 17, 1995 and vetoed by the President on December 6, 1995, would: (i) recapitalize the SAIF through a special assessment of between 70 and 80 basis points on deposits held by institutions as of March 31, 1995; (ii) provide an exemption to this rule for weak institutions, and a 20% reduction in the SAIF-assessable deposits of so-called "Oakar banks;" (iii) expand the assessment base for FICO payments to include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1, 1998, only if no insured depository institution is a savings association on that date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi) prohibit the FDIC from setting semiannual assessments in excess of the amount needed to maintain the reserve ratio of any fund at the designated reserve ratio. The bill does not include a provision to merge the charters of savings associations and commercial banks. In light of ongoing debate over the content and fate of the budget bill, the different proposals currently under consideration and the uncertainty of the Congressional budget and legislative processes in general, management cannot predict whether any or all of the proposed legislation will be passed, or in what form. Accordingly, the effect of any such legislation on the Bank cannot be determined. Interstate Banking and Branching In September 1994, the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. 18 19 The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. In October 1995, California adopted "opt in" legislation under the Interstate Act that permits out-of-state banks to acquire California banks that satisfy a five-year minimum age requirement (subject to exceptions for supervisory transactions) by means of merger or purchases of assets, although entry through acquisition of individual branches of California institutions and de novo branching into California are not permitted. The Interstate Act and the California branching statute will likely increase competition from out-of-state banks in the markets in which the Company operates, although it is difficult to assess the impact that such increased competition may have on the Company's operations. Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. The Bank's compliance with CRA is monitored by the Comptroller, which assigns the Bank a publicly available CRA rating. An assessment of CRA compliance is required by both the Comptroller and the Federal Reserve Board in connection with applications for approval of certain activities such as mergers with or acquisitions of other banks or bank holding companies. In April of 1995, the federal regulatory agencies issued a comprehensive revision to the rules governing CRA compliance. In assigning a CRA rating to a bank, the new regulations place greater emphasis on measurements of performance in the areas of lending (specifically the bank's home mortgage, small business, small farm and community development loans), investment (the bank's community development investments) and service (the bank's community development services and the availability of its retail banking services), although examiners are still given a degree of flexibility in taking into account unique characteristics and needs of the bank's community and its capacity and constraints in meeting such needs. The new regulations also require increased collection and reporting of data regarding certain kinds of loans. Although the new regulations became generally effective on July 1, 1995, various provisions have different effective dates, and the new CRA evaluation criteria will go into effect for examinations beginning on July 1, 1997. Although management cannot predict the impact of the substantial changes in the new rules on the Bank's CRA rating, it will continue to take steps to comply with the requirements in all respects. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. The Comptroller has rated the Bank "satisfactory" in complying with its CRA obligations. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the Federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will 19 20 use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. Accounting Changes In February 1992, the Financial Accounting Standards Board ("FASB") issued SFAS No. 109, "Accounting for Income Taxes," which superseded SFAS No. 96 of the same title. SFAS No. 109, which was adopted by the Company effective January 1, 1993, employs an asset and liability approach in accounting for income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements and as measured by the provisions of enacted tax laws. Adoption by the Company of SFAS No. 109 did not have a material impact on the Company's results of operations. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 prescribes the recognition criterion for loan impairment and the measurement methods for certain impaired loans and loans whose terms are modified in troubled debt restructurings. SFAS No. 114 states that a loan is impaired when it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contracted terms of the loan agreement. A creditor is required to measure impairment by discounting expected future cash flows at the loan's effective interest rate, or by reference to an observable market price, or by determining that foreclosure is probable. SFAS No. 114 also clarifies the existing accounting for in-substance foreclosures by stating that a collateral-dependent real estate loan would be reported as real estate owned only if the lender had taken possession of collateral. SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing methods for recognizing interest income on an impaired loan. To accomplish that it eliminated the provisions in SFAS No. 114 that described how a creditor should report income on an impaired loan. SFAS No. 118 did not change the provisions in SFAS No. 114 that require a creditor to measure impairment 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 observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to require information about the recorded investments in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. The Company adopted SFAS No. 114 and No. 118 as of January 1, 1995. The Bank had previously measured the allowance for loan losses using methods similar to that prescribed in SFAS 114. As a result, no additional provision was required by the adoption of this pronouncement. In December 1990, FASB issued SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions" effective for fiscal years beginning after December 15, 1992. In November 1992, FASB issued Statement of Financial Standards No. 112, "Employers' Accounting For Post-Employment Benefits," effective for fiscal years beginning after December 15, 1993. SFAS No. 106 and SFAS No. 112 focus primarily on post-retirement health care benefits. The Company does not provide post-retirement benefits, and SFAS No. 106 and SFAS No. 112 will have no impact on net income in 1996. In May 1993, the FASB issued SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" addressing the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments would be classified in three categories and accounted for as follows: (i) debt and equity securities that the entity has the positive intent and ability to hold to maturity would be classified as "held to maturity" and reported at amortized cost; (ii) debt and equity securities that are held for current resale would be classified as trading securities and reported at fair value, with unrealized gains and losses included in operations; and (iii) debt and equity securities not classified as either securities 20 21 held to maturity or trading securities would be classified as securities available for sale, and reported at fair value, with unrealized gains and losses excluded from operations and reported as a separate component of shareholders' equity. The Company adopted SFAS No. 115 in 1993. The adoption of SFAS 115 did not have a material impact on the financial position or results of operations of the Bank. EMPLOYEES As of December 31, 1995, the Company had three employees, its President ,Chief Executive Officer and Chief Financial Officer. At December 31, 1995, the Bank had 115 full-time employees or equivalents. Of these employees, 11 held titles of senior vice president or above. At December 31, 1995, none of the executive officers of the Bank served pursuant to written employment agreements. None of the Company's or the Bank's employees are represented by a labor union. The Company considers its relationship and the Bank's relationship with each company's respective employees to be excellent. Item 2. PROPERTIES The principal offices of the Company are located in a multi-story office building located at 16030 Ventura Boulevard, Encino, California 91364 for which it pays a monthly rental of $60,000. The lease contains a ceiling on cost on living adjustments of 5% per year. The lease is renewable. The Bank also has certain month to month or short term leases for offices in West Los Angeles, the South Bay, Ventura and the San Gabriel Valley. Each of these leases is short term in nature and is not material to the Company. Management believes that the existing leases will provide for their space requirements for the foreseeable future, at least until the completion of the proposed merger with Home Interstate Bancorp. 21 22 Item 3. LEGAL PROCEEDINGS In the normal course of business the Bank occasionally becomes a party to litigation. In the opinion of management, based upon consultation with legal counsel, pending or threatened litigation involving the Bank will have no adverse material effect upon its financial condition, or results of operations. For further information, see Note 15 to the Consolidated Financial Statements of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were presented for a vote of shareholders during fourth quarter 1995. Item 4(A). EXECUTIVE OFFICERS OF THE COMPANY Set forth below are brief summaries of the background and business experience of each of the directors and executive officers of the Company and the Bank as of December 31, 1995:
POSITION AND POSITION AND DIRECTOR OF ------------ ------------ ----------- OFFICE WITH CU OFFICE WITH THE COMPANY AND BANK -------------- --------------- ---------------- NAME AGE BANCORP BANK SINCE: ---- --- ------- ---- ------ Kenneth L. Bernstein 53 Director Director 1994 Stephen G. Carpenter 56 Chairman, Chief Chairman, Chief 1992 Executive Officer Executive Officer Richard H. Close 51 Director, Director, 1981 Secretary Secretary Paul W. Glass 50 Director Director 1984 Ronald S. Parker 51 Director Director 1993 David I. Rainer 39 Director, Director, 1992 President, Chief President, Chief Operating Officer Operating Officer
None of the directors or officers of CU Bancorp or CU Bank were selected pursuant to any arrangement or understanding other than with the directors and officers of CU Bancorp and CU Bank acting in their capacities as such. There are no family relationships between any two or more of the directors, or officers. Set forth below are brief summaries of the background and business experience, including principal occupation, of the directors. KENNETH L. BERNSTEIN, was elected to the Board of CU Bancorp and CU Bank in December 1993, and assumed the positions in February 1994. He is the President of BFC Financial Corporation and has served in such capacity since 1965. BFC Financial Corporation performs a variety of service for both the finance industry and clients of that industry. 22 23 STEPHEN G. CARPENTER, joined CU Bank in 1992 from Security Pacific National Bank where he was Vice Chairman in charge of middle market lending from July 1989 to June 1992. Mr. Carpenter was previously employed at Wells Fargo Bank from July 1980 to July 1989, where he was an Executive Vice President. He assumed the additional role of Chairman of CU Bank in February, 1994 and Chairman of CU Bancorp in 1995. RICHARD H. CLOSE has been a principal in the law firm of Shapiro, Rosenfeld & Close, a Professional Corporation, in Los Angeles, California, since 1977. PAUL W. GLASS is a certified public accountant and has been a principal in the accountancy firm of Glass & Rosen, in Encino, California, since 1980. RONALD S. PARKER has been the Chairman of Parker, Mulcahy & Associates, a regional merchant banking firm, since May 1992. Prior to that he was the Executive Vice President and Group Head of the Corporate Banking Group of Security Pacific National Bank from March of 1991 to May of 1992. He held a similar position at Wells Fargo National Bank from 1984 to 1991. Mr. Parker resigned from the Board in December 1993. He was reappointed in 1994. DAVID I. RAINER was appointed Executive Vice President of CU Bank in June 1992 and assumed the position of Chief Operating Officer in late 1992. He assumed the additional title of President of CU Bank in February, 1994 and President and Chief Operating Officer of CU Bancorp in 1995. He was elected to the Board of Directors of CU Bancorp and California United Bank in 1993. From July 1989 to June 1992, Mr. Rainer was employed by Bank of America (Security Pacific National Bank) where he held the position of Senior Vice President. From March 1989 to July 1989, Mr. Rainer was a Senior Vice President at Faucet & Company, where he co-managed a stock and bond portfolio. From July 1982 to March 1989, Mr. Rainer was employed by Wells Fargo Bank, where he held the positions of Vice President and Manager. No director, officer or affiliate of CU Bancorp or of CU Bank, no owner of record or beneficially of more than five percent of any class of voting securities of CU Bancorp or no associate of any such director, officer or affiliate is a party adverse to CU Bancorp or CU Bank in any material pending legal proceed The following are officers of CU Bancorp and the Bank as of December 31, 1995:
POSITION AND POSITION AND OFFICES WITH THE OFFICES WITH OFFICER NAME AGE COMPANY THE BANK SINCE ---- --- ------- --------- ----- STEPHEN G. CARPENTER 56 Director, Chief Chairman, Chief 1992 Executive Officer Executive Officer DAVID I. RAINER 39 Director, Director, 1992 President, Chief President, Chief Operating Officer Operating Officer ANNE WILLIAMS 38 Chief Credit Chief Credit 1992 Officer Officer PATRICK HARTMAN 46 Chief Financial Chief Financial 1992 Officer Officer
23 24 Set forth below are brief summaries of the background and business experience, including principal occupation, of the executive officers of CU Bancorp who have not previously been discussed herein. PATRICK HARTMAN has been employed by CU Bank since November, 1992. Prior to assuming his present positions he was Senior Vice President/Chief Financial Officer for Cenfed Bank for a period during 1992. Mr. Hartman held the post of Senior Vice President/Chief Financial Officer of Community Bank, Pasadena, California, for thirteen years. ANNE WILLIAMS joined CU Bank in 1992 as Senior Loan Officer. She was named to the position of Chief Credit Officer in July 1993. Prior to that time she spent five years at Bank of America / Security Pacific National Bank, where she was a credit administrator in asset based lending, for middle market in the Los Angeles Area. Ms. Williams was trained at Chase Manhattan Bank in New York, and was a commercial lender at Societe Generale in Los Angeles and Boston Five Cents Savings Bank where she managed the corporate lending group. 24 25 PART II ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information relative to the market for the Company's Common Stock. Holders of Company's Common Stock As of the close of business on December 31, 1995 there were 416 record holders of the Company's issued and outstanding Common Stock. ITEM 6. SELECTED FINANCIAL DATA CU BANCORP AND SUBSIDIARY Amounts in thousands of dollars, except per share data and amounts expressed as percentages
AS OF THE YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- CONSOLIDATED BALANCE SHEET DATA Securities held to maturity $ 66,735 $ 74,153 $ 88,034 $ 84,724 $ 59,533 Securities available for sale 6,345 Net loans 183,696 167,175 134,148 193,643 273,126 Total earning assets 289,276 261,328 251,559 281,723 429,480 Total assets 325,309 304,154 279,206 353,923 516,762 Total deposits 284,510 264,181 238,928 318,574 473,125 Total shareholders' equity 33,006 29,744 26,990 24,632 32,598 Regulatory risk based capital ratio 16.19% 15.40% 16.71% 12.87% 12.31% Regulatory capital leverage ratio 10.52% 10.44% 9.16% 6.12% 6.91% Allowance for loan losses to: Period end total loans 3.64% 4.25% 4.63% 6.28% 4.33% Nonperforming loans 677% 20,631% 473% 95% 75% Nonperforming assets 677% 20,631% 283% 95% 59% CONSOLIDATED OPERATING RESULTS Net interest income $ 15,536 $ 13,881 $ 14,431 $ 20,625 $ 25,681 Other operating income 2,065 5,408 26,423 21,499 10,537 Provision for loan losses 0 0 450 17,090 14,267 Operating expenses 12,554 14,735 36,883 37,493 27,843 Net income (loss) 2,894 2,574 2,098 (8,190) (3,637) Fully diluted income/(loss) per $ .60 $ .56 $ 0.47 $ (1.90) $ (0.83) common & equivalent share Net interest margin 5.68% 5.99% 5.86% 6.07% 6.99% Return on average shareholders' 9.38% 9.12% 8.12% (26.06)% (10.27)% equity Return on average assets 0.97% 0.97% 0.69% (1.89)% (0.76)% Cash dividends per common share $ .08 ----- ----- ----- $ 0.150
26 ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW The Company earned $2.9 million, or $0.60 per share, during in 1995, compared to $2.6 million, or $0.56 per share, in 1994 and $2.1 million, or $.47 per share in 1993. Composition of the earnings has changed substantially in 1995. Prior to that, a substantial portion of the Bank's earnings had been attributable to the Mortgage Banking operation, which was sold in November 1993. The Mortgage origination operation contributed about two thirds of the earnings for 1993, and approximately 56% of the earnings in 1994 were attributable to a gain on the sale of mortgage servicing rights retained when the origination operation was sold. Since then, the earnings of the core commercial bank have grown steadily as the mortgage related income has been eliminated. For the year ended December 31, 1995, income related to sales of mortgage servicing was less than 8% of the Bank's earnings. The Bank's asset quality ratios continue to be exceptionally strong. At December 31, 1995, nonperforming assets were $1 million, compared with $36 thousand in 1994. The Bank did not have any real estate acquired through foreclosure at December 31, 1995 or December 31, 1994. The Bank's allowance for loan losses as a percent of both nonperforming loans and nonperforming assets at December 31, 1995 was 677%, compared to 1994 levels of 20,631%. Capital ratios are strong, substantially exceeding levels required for the "well capitalized" category established by bank regulators. The Total Risk-Based Capital Ratio was 16.19%, the Tier 1 Risk-Based Capital Ratio was 14.92%, and the Leverage Ratio was 10.52% at December 31, 1995, compared to 15.40%, 14.12%, and 10.44%, respectively, at year-end 1994. Regulatory requirements for Total Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum of 8%, 4%, and 3%, respectively, and for classification as well capitalized, 10%, 6%, and 5%, respectively. The Bank's strong capital and asset quality position allows the Bank to continue to grow its core business which provides relationship based services to middle market customers and positions the Bank for its acquisition strategy. During the year ended December 31, 1995, the Bank generated approximately $135 million in new loan commitments, compared with about $121 million and $101 million for the comparable periods of 1994 and 1993. The Bank announced actions taken in 1995 and early 1996 that supplement the Bank's successful internal growth with strategically selected mergers and acquisitions. In March of 1995, the Bank had announced the signing of an agreement to acquire Corporate Bank, a Santa Ana based community bank with approximately $70 million in assets. This purchase was completed in January of 1996. In January 1996, the Bank also announced the signing of an agreement to merge with Home Interstate Bancorp, the parent of Home Bank, based in the South Bay. This merger, targeted to be completed near the end of the second quarter of 1996, would create a combined bank with over $800 million in assets and 22 branches. BALANCE SHEET ANALYSIS LOAN PORTFOLIO COMPOSITION AND CREDIT RISK The Bank's loan portfolio at December 31, 1995 has maintained the high standards of credit quality that have been established as the commercial loan portfolio has been built over the past three years. Non performing assets have been reduced to insignificant levels and exposures to real estate have been greatly reduced to consist primarily of loans secured by real estate made to the Bank's core middle market customers as a secondary part of their total business relationship. Total loans at December 31, 1995 increased by $16 million during the year. Portfolio growth in the last three quarters of 1995 were partially offset by the decline of $6 million in the first quarter of 1995. Loan paydowns for the first quarter were unusually high, with Entertainment related loans declining $7 million as a number of project related loans paid off, combined with normal payoffs and seasonality in the commercial portfolio. 26 27 The Bank's focus on middle market lending, in its infancy at year-end 1992, gained momentum in 1993 and further accelerated in 1994. Total loans increased $34 million during 1994. Offsetting this, the remaining Held for Sale mortgages of $10.4 million at December 31, 1993 were sold in the first quarter of 1994. Excluding this planned liquidation, loans increased by $44 million, or 34%, for the year ended December 31, 1994. TABLE 1 LOAN PORTFOLIO COMPOSITION Amounts in thousands of dollars
1995 1994 1993 1992 1991 -------------------------------------------------------------------------------------- Commercial & Industrial Loans $164,966 87% $142,885 82% $ 93,549 67% $ 87,999 43% $127,553 45% Real Estate Loans: Commercial 20,190 10 26,528 15 28,901 21 35,751 17 38,437 1 Held for Sale 0 0 10,426 7 40,167 19 40,350 14 Mortgages 5,470 3 4,773 3 6,559 5 36,320 18 52,785 19 Construction 0 416 1,226 2,392 1 14,368 5 Term federal funds sold 0 0 0 4,000 2 12,000 4 -------- --- -------- --- -------- --- -------- --- -------- --- Total loans net of unearned fees $190,626 100% $174,602 100% $140,661 100% $206,629 100% $285,493 100% ======== === ======== === ======== === ======== === ======== ===
TABLE 1A: LOAN PORTFOLIO MATURITIES AT DECEMBER 31, 1995 (in Thousands)
WITHIN AFTER ONE AFTER ONE BUT WITHIN FIVE YEAR FIVE YEARS YEARS TOTAL -------- ---------- ------ -------- Commercial & Industrial Loans $126,834 $33,029 $5,103 $164,966 Real Estate - Commercial & Mortgage 6,918 15,797 2,945 25,660 -------- ------- ------ -------- Total loans $133,752 $48,826 $8,048 $190,626 ======== ======= ====== ======== Loans due after one year with predetermined interest rates $3,911 $1,464 Loans due after one year with floating or adjustable rates 44,915 6,584 ------- ------ $48,826 $8,048 ======= ======
Table 1a above summarizes the maturities of the loan portfolio based upon the contractual terms of the loans. The Bank does not automatically rollover any loans at maturity. Maturing loans must go through the Bank's normal credit approval process in order to receive a new maturity date. The Bank lending effort is focused on business lending to middle market customers. Current credit policy permits commercial real estate lending generally only as part of a complete commercial banking relationship with a middle market customer. Commercial real estate loans are secured by first or second liens on office buildings and other structures. The loans are secured by real estate that had appraisals in excess of loan amounts at origination. Monitoring and controlling the Bank's allowance for loan losses is a continuous process. All loans are assigned a risk grade, as defined by credit policies, at origination and are monitored to identify changing circumstances that could modify their inherent risks. These classifications are one of the criteria considered in determining the adequacy of the allowance for loan losses. 27 28 The amount and composition of the allowance for loan losses is as follows: TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES Amounts in thousands of dollars
DECEMBER 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Amounts in thousands of dollars Commercial & Industrial Loans $6,594 $7,096 $5,699 $11,597 $11,147 Real estate loans - Held for Sale 0 0 67 368 90 Real estate loans - Mortgages 0 0 225 249 28 Real estate loans - Construction 0 0 10 62 100 Other loans 0 0 0 19 0 ------ ------- ------ ------- ------- Loans 6,594 7,096 6,001 12,295 11,365 Unfunded commitments and letters of credit 336 331 512 691 1,002 ------ ------ ------ ------- ------- Total Allowance for loan losses $6,930 $7,427 $6,513 $12,986 $12,367 ====== ====== ====== ======= =======
Adequacy of the allowance is determined using management's estimates of the risk of loss for the portfolio and individual loans. Included in the criteria used to evaluate credit risk are, wherever appropriate, the borrower's cash flow, financial condition, management capabilities, and collateral valuations, as well as industry conditions. A portion of the allowance is established to address the risk inherent in general loan categories, historic loss experience, portfolio trends, economic conditions, and other factors. Based on this assessment a provision for loan losses may be charged against earnings to maintain the adequacy of the allowance. The allocation of the allowance based upon the risks by type of loan, as shown in Table 2, implies a degree of precision that is not possible when using judgments. While the systematic approach used does consider a variety of segmentations of the portfolio, management considers the allowance a general reserve available to address risks throughout the entire loan portfolio. Activity in the allowance, classified by type of loan, is as follows: TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSSES Amounts in thousands of dollars
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Balance at January 1 $7,427 $6,513 $12,986 $12,367 $4,128 ----- ----- ------ ------ ----- Loans charged off: Real estate secured loans 529 486 3,266 4,425 1,220 Commercial loans secured and unsecured loans 543 820 6,582 12,562 5,422 Loans to individuals, installment and other loans 17 107 901 813 258 -- --- --- --- --- Total charge-offs 1,089 1,413 10,749 17,800 6,900 ----- ----- ------ ------ ----- Recoveries of loans previously charged off: Real estate secured loans 58 586 393 249 15 Commercial loans secured and unsecured 522 1,735 3,189 1,001 819 Loans to individuals, installment and 12 6 244 79 38 -- - --- ---- ---- Total recoveries of loans previously charged off 592 2,327 3,826 1,329 872 --- ----- ----- ----- ---- Net charge-offs 497 (914) 6,923 16,471 6,028 Provision for loan losses 0 0 450 17,090 14,267 -- - --- ------ ------ Balance at December 31 $6,930 $7,427 $6,513 $12,986 $12,367 ===== ===== ===== ====== ====== Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the year ended December 31 .28% (0.61)% 3.49% 6.70% 2.36% ==== ======= ===== ===== =====
The Bank's policy concerning nonperforming loans is more conservative than is generally required. It defines nonperforming assets as all loans ninety days or more delinquent, loans classified nonaccrual, and foreclosed, or in substance foreclosed real estate. Nonaccrual loans are those whose interest accrual has been discontinued because the loan has become ninety days or more past due. In addition, it includes loans where there exists reasonable doubt as to 28 29 the full and timely collection of principal or interest. When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against operating results. Subsequent payments on nonaccrual loans are treated as principal reductions. At December 31, 1995, nonperforming loans amounted to $1 million compared with $36 thousand at December 31, 1994. Potential problem loans are defined as loans as to which there are serious doubts about the ability of the borrowers to comply with present loan repayment terms. It is the policy of the Bank to place all potential problem loans on nonaccrual status. At December 31, 1995, therefore, the Bank had no potential problem loans other than those disclosed in Table 4 as nonperforming loans. TABLE 4: NONPERFORMING ASSETS Amounts in thousands of dollars
DECEMBER 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Loans not performing (1) $1,024 $36 $ 378 $ 8,978 $14,955 Insubstance foreclosures 0 0 1,000 4,652 1,512 ------ --- ------- ------- ------- Total nonperforming loans 1,024 36 1,378 13,630 16,467 Other real estate owned 0 0 920 0 4,564 ------ --- ------- ------- ------- Total nonperforming assets $1,024 $36 $2,298 $13,630 $21,031 ====== ==== ====== ======= ======= Allowance for loan losses as a percent of: Nonperforming loans 677% 20,631% 473% 95% 75% Nonperforming assets 677 20,631 283 95 59 Nonperforming assets as a percent of total assets 0.3 0 0.8 3.8 4.2 Nonperforming loans as a percent of total loans 0.5 0 1.0 6.6 5.8 Note 1: Loans not performing $1,024 $36 $ 9 $ 2,895 $4,783 Performing as agreed 0 0 369 1,075 1,531 Partial performance 0 0 0 5,008 8,641 ------ --- ------- ------- -------- Not performing $1,024 $36 $ 378 $ 8,978 $14,955 ====== === ======= ======= ======== Nonaccrual: Loans $1,024 $36 $ 378 $ 7,728 $11,357 Troubled debt restructurings 0 0 0 1,250 1,326 Loans past due ninety or more days(a): 0 0 0 0 2,272
(a) Past due with respect to principal and/or interest and continuing to accrue interest. SECURITIES The Securities Held to Maturity portfolio totaled $67 million at December 31, 1995, compared with $74 million at year-end 1994. In the fourth quarter of 1995, the Bank performed a one-time reassessment of the designations of securities as held to maturity or available for sale, in accordance with a special report issued by the Financial Accounting Standards Board on the subject of investments. As a result of this assessment, $5.9 million of collateralized mortgage obligations were transferred out of the held to maturity portfolio into the available for sale portfolio. The Securities Available for Sale portfolio totaled $6.3 million at December 31, 1995, with no investments being included in this category in 1994. Included in the December 31, 1995 balance is an unrealized gain of $143 thousand. There have been no realized gains or losses on securities in 1995 or 1994. Gains of $77 thousand were realized in 1993. At December 31, 1995, there were unrealized gains of $623 thousand and losses of $244 thousand in the securities held to maturity portfolio. Additional information concerning securities is provided in the footnotes to the accompanying financial statements. 29 30 OTHER REAL ESTATE OWNED There was no Other Real Estate Owned on the Bank's balance sheet at December 31, 1995 and 1994. The Bank's policy is to carry properties acquired in foreclosure at fair value less estimated selling costs, which is determined using recent appraisal values adjusted, if necessary, for other market conditions. Loan balances in excess of fair value are charged to the allowance for loan losses when the loan is reclassified to other real estate. Subsequent declines in fair value are charged against a valuation allowance for other real estate owned, created by charging a provision to other operating expenses. The Bank has not had any significant expenses related to Other Real Estate Owned in 1995 or 1994. In 1993, expenses related to Other Real Estate Owned totaled $234 thousand. DEPOSIT CONCENTRATION Prior to 1992, the Bank's focus on real estate-related activities resulted in a concentration of deposit accounts from title insurance and escrow companies. As the Bank has changed its focus to commercial lending, the amounts of title and escrow related deposits has declined for the past three years. These deposits are generally noninterest bearing transaction accounts that contribute to the Bank's interest margin. Noninterest expense related to these deposits is included in other operating expense. The Bank monitors the profitability of these accounts through an account analysis procedure. The Bank offers products and services allowing customers to operate with increased efficiency. A substantial portion of the services, provided through third party vendors, are automated data processing and accounting for trust balances maintained on deposit at the Bank. These and other banking related services, such as deposit courier services, will be limited or charged back to the customer if the deposit relationship profitability does not meet the Bank's expectations. Noninterest bearing deposits represent nearly the entire title and escrow relationship. These balances have been reduced substantially as the Bank focused on middle market business loans. The balance at December 31, 1995, was $20 million compared to $44 million at December 31, 1994. The bank has greatly reduced their reliance on title and escrow deposits, with these relationships representing approximately 7% of deposits in 1995, and 17% at year end 1994. TABLE 5 REAL ESTATE ESCROW AND TITLE INSURANCE COMPANY DEPOSITS AMOUNTS IN THOUSANDS OF DOLLARS
AVERAGE BALANCE YEAR ENDED 12 MONTHS ENDED DECEMBER 31, 1995 DECEMBER 31, 1995 ----------------- ----------------- PERCENT OF PERCENT PERCENT OF PERCENT TOTAL OF TOTAL OF AMOUNT DEPOSITS CLASS AMOUNT DEPOSITS CLASS -------- --------------- ------ ------ --------------- -------- 1995 Balances Noninterest bearing demand deposits $19,633 6.9% 20.9% $21,747 7.6% 23.1% Interest-bearing demand & savings deposits 877 .3 .5 1,274 .5 .7 ------- --- ------- Total deposit concentration $20,510 7.2% $23,021 8.1% ======= ==== ======= ==== 1994 Balances $45,645 17.3% $46,171 19.8% ======= ===== ======= =====
The Bank had $45 million in certificates of deposit larger than $100 thousand dollars at December 31, 1995. The maturity distribution of these deposits is relatively short term, with $31 million maturing within 3 months and $43 million maturing within 12 months. 30 31 LIQUIDITY AND INTEREST RATE SENSITIVITY The objective of liquidity management is to ensure the Bank's ability to meet cash requirements. The liquidity position is managed giving consideration to both on and off-balance sheet sources and demands for funds. Sources of liquidity include cash and cash equivalents (net of Federal Reserve requirements to maintain reserves against deposit liabilities), securities eligible for pledging to secure borrowings from dealers pursuant to repurchase agreements, loan repayments, deposits, and borrowings from a $25 million overnight federal funds line available from a correspondent bank. Potential significant liquidity requirements are withdrawals from noninterest bearing demand deposits and funding of commitments to loan customers. From time to time the Bank may experience liquidity shortfalls ranging from one to several days. In these instances, the Bank will either purchase federal funds, and/or sell securities under repurchase agreements. These actions are intended to bridge mismatches between funding sources and requirements, and are designed to maintain the minimum required balances. The Bank has had no Fed Funds purchased or borrowings under repurchase agreements during 1994 or 1995. During 1994 and 1995, loan growth for the Bank outpaced growth of deposits from the Banks commercial customers. The Bank funded this growth, combined with the Bank's reduced concentration in title and escrow deposits, in part with certificates of deposit from customers from outside the Bank's normal service area. These out of area deposits are certificates of deposit of $90,000 or greater, that are priced competitively with similar certificates from other financial institutions throughout the country. At December 31, 1995, the Bank had approximately $83 million of these out of area deposits, up from $55 million at December 31, 1994. The Bank's experience with raising out of area deposits for the past two years indicates that the balances are quite stable when priced to the current market. The Bank's portfolio of large certificates of deposit (those of $100 thousand or more), includes both deposits from its base of commercial customers and out of area deposits. At December 31, 1995 this funding source was 17% of average deposits, compared to 16% at December 31, 1994. TABLE 6 INTEREST RATE MATURITIES OF EARNING ASSETS AND FUNDING LIABILITIES AT DECEMBER 31, 1995 Amounts in thousands of dollars
AMOUNTS MATURING OR REPRICING IN ------------------------------------------------------------------------- MORE THAN MORE THAN MORE THAN 3 MONTHS BUT 6 MONTHS BUT 9 MONTHS BUT LESS THAN LESS THAN LESS THAN LESS THAN 12 MONTHS 3 MONTHS 6 MONTHS 9 MONTHS 12 MONTHS & OVER Amounts in thousands of dollars ----------- ------------ ------------ ----------- --------- Earning Assets Gross Loans $184,535 $ 421 $ 294 $ 82 $ 5,293 Investments 6,973 4,505 5,049 5,109 51,444 Federal funds sold & other 32,500 0 0 0 0 -------- -------- ------- ------- ------- Total earning assets 224,008 4,926 5,343 5,191 56,738 -------- -------- ------- ------- ------- Interest bearing deposits: Savings and interest bearing demand 74,413 0 0 0 0 Time certificates of deposit: Under $100 33,766 17,141 5,451 7,390 7,118 $100 or more 31,164 8,233 1,100 2,351 2,284 Non interest bearing demand deposits 13,920 0 0 0 0 -------- -------- ------- ------- ------- Total interest bearing liabilities 153,263 25,374 6,551 9,741 9,402 -------- -------- ------- ------- ------- Interest rate sensitivity gap 70,745 (20,448) (1,208) (4,550) 47,336 -------- -------- ------- ------- ------- Cumulative interest rate sensitivity gap 70,745 50,297 49,089 44,539 91,875 Off balance sheet financial instruments 0 0 0 0 0 - - -- - - Net cumulative gap $ 70,745 $ 50,297 $49,089 $44,539 $91,875 ======== ======== ======= ======= ======= Adjusted cumulative ratio of rate sensitive assets to rate sensitive liabilities(1) 1.46% 1.28% 1.27% 1.23% 1.45% ===== ===== ===== ==== =====
(1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios less than 1.0 indicate a liability sensitive position. A ratio of 1.0 indicates risk neutral position. 31 32 Assets and liabilities shown on Table 5 are categorized based on contractual maturity dates. Maturities for those accounts without contractual maturities are estimated based on the Bank's experience with these customers. Noninterest bearing deposits of title and escrow companies, having no contractual maturity dates, are considered subject to more volatility than similar deposits from commercial customers. The net cumulative gap position shown in the table above indicates that the Bank does not have a significant exposure to interest rate fluctuations during the next twelve months. CAPITAL Total shareholders' equity was $33 million at December 31, 1995, compared to $30 million at year-end 1994. This increase was due to earnings, plus the exercise of stock options and warrants. The Bank is guided by statutory capital requirements, which are measured with three ratios, two of which are sensitive to the risk inherent in various assets and which consider off-balance sheet activities in assessing capital adequacy. During 1995 and 1994, the Bank's capital levels substantially exceeded the "well capitalized" standards, the highest classification established by bank regulators. TABLE 7 CAPITAL RATIOS
REGULATORY STANDARDS -------------------- DEC 31, DEC 31, WELL - 1995 1994 CAPITALIZED MINIMUM ------- ------- ----------- -------- Total Risk Based Capital 16.19% 15.40% 10.00% 8.00% Tier 1 Risk Based Capital 14.92 14.12 6.00 4.00 Equity to Average Assets 10.52 10.44 5.00 3.00
In February of 1995, the Company declared a dividend of $.02 per share payable March 13, 1995 to shareholders of record February 20, 1995. The Company also declared a dividend of $.02 per share for the quarter ended June 30, 1995, payable September 4, 1995 to shareholders of record August 15, 1995. During the third quarter, the company declared a dividend $.02 per share, payable November 27 to shareholders of record November 13. For the fourth quarter of 1995, the company declared a dividend of $.02 per share, payable February 28 to shareholders of record January 31. The dividend payout ratio was 13% for the year ending December 31, 1995. No dividends were paid in 1994 . The common stock of the Company is listed on the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market Systems where it trades under the symbol CUBN. TABLE 8 STOCK PRICES - UNAUDITED
1995 1994 ------------------- ------------------ HIGH LOW HIGH LOW ----- ----- ----- ----- First Quarter $7.50 $6.75 $7.50 $6.50 Second Quarter 7.50 6.88 7.00 5.75 Third Quarter 8.75 6.94 7.50 6.00 Fourth Quarter 10.25 8.38 8.00 6.75
32 33 EARNINGS BY LINE OF BUSINESS Prior to the sale of the mortgage origination operation in November, 1993, the Bank operated a commercial bank and a mortgage bank as two distinct business segments. Since 1994, real estate lending is generally only done as part of a commercial banking relationship. After 1993, therefore, the Bank operates as only a single segment, the commercial banking operation. Table 9 shows the pre-tax operating contributions. TABLE 9 PRE-TAX OPERATING CONTRIBUTION BY LINE OF BUSINESS (i) Amounts in thousands of dollars
1995 1994 1993 ------ ------ -------------------------------------------- COMMERCIAL MORTGAGE CONSOLIDATED CONSOLIDATED CONSOLIDATED BANKING BANKING ------------ ------------ ------------ ------- ------- Net interest income $15,536 $13,881 $14,431 $13,844 $587 Provisions for loan losses 0 0 450 200 250 - - --- --- --- Risk adjusted net interest income 15,536 13,881 13,981 13,644 337 Noninterest revenue 1,682 2,836 24,940 1,032 23,908 ----- ----- ------ ----- ------ Total revenues 17,218 16,717 38,921 14,676 24,245 ------ ------ ------ ------ ------ Salaries and related benefits 6,834 6,335 11,020 6,151 4,869 Other operating expenses 5,720 7,800 25,416 7,738 17,678 ----- ----- ------ ----- ------ Total operating expenses 12,554 14,135 36,436 13,889 22,547 ------ ------ ------ ------ ------ Operating income 4,664 2,582 2,485 787 1,698 Gain on sale of mortgage origination 1,483 operation Gain on sale of mortgage servicing 383 2,572 portfolio Restructuring charge (600) Reserve for branch relocation - - (447) ------ ------ ------ Income before taxes $5,047 $4,554 $3,521 $787 $1,698 ====== ====== ====== ==== ======
(i) Inter-divisional transactions for 1993 have been eliminated at the division level. 33 34 NET INTEREST INCOME AND INTEREST RATE RISK Net interest income is the difference between interest and fees earned on earning assets and interest paid on funding liabilities. Net interest income was $15.5 million for the year ended December 31, 1995 compared to $13.9 million in 1994 and $14.4 million in 1993. The change in 1995 is attributable to changes in volume and deposit mix. The Bank's net interest income has improved with the growth of the commercial loan portfolio from 1994 to 1995. This improvement was offset in part by the change in deposit mix away from non interest bearing title and escrow deposits, and the increase in certificates of deposit. The change in 1994 is primarily attributable to lower levels of average loans and deposits in 1994 being offset by favorable rate variations. TABLE 10 ANALYSIS OF CHANGES IN NET INTEREST INCOME (1) Amounts in thousands of dollars Increases(Decreases)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1995 COMPARED TO 1994 1994 COMPARED TO 1993 --------------------------------- ------------------------------------- Volume Rate Total Volume Rate Total ------ ----- ------ ------- ------ ------- Interest Income Loans, net $3,032 $1,625 $4,657 $(4,466) $2,015 $(2,451) Investments 124 691 815 1,149 175 1,324 Federal Funds Sold 531 444 975 213 251 464 ----- ------ ------ ------- ------ ------ Total interest income 3,687 2,760 6,447 (3,104) 2,441 (663) ----- ------ ------ ------- ------ ------ Interest Expense Interest bearing deposits: Demand 341 (457) (116) 185 (49) 136 Savings (22) 40 18 (73) 13 (60) Time Certificates of deposit: Under $100 2,761 531 3,292 (179) 197 18 $100 or more 1,129 557 1,686 (177) 166 (11) Federal funds purchased/Repos 0 0 0 (79) (0) (79) Other borrowings (70) (18) (88) (135) 18 (117) ----- ------ ------ ------- ------ ------ Total interest expense 4,139 653 4,792 (458) 345 (113) ----- ------ ------ ------- ------ ------ Net interest income $(452) $2,107 $1,655 $(2,646) $2,096 $ (550) ====== ====== ====== ======== ====== ========
(1) The change in interest income or interest expense that is attributable to both change in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of the changes in each. Yields on earning assets were approximately 8.9% for the year ended December 31, 1995, compared to 7.8% in 1994 and 7.6% in 1993. The higher average yield on earning assets in 1995 is the result of both an increase in the prime rate from an average of 7.1% in 1994 to an average of 8.8% in 1995, and an increasing percentage of assets being held in loans. The higher average yield on earning assets in 1994 is largely due to the higher yield on loans as the prime rate began to rise in 1994. The average prime rate of 7.1% compares with 6% for 1993. Through October 8, 1993, net interest income continued to benefit from an interest rate swap agreement, discussed below. Rates on interest bearing liabilities resulted in an average cost of funds of 4.2% in 1995, compared with 3.0% for the comparable period of 1994 and 2.9% for 1993. In addition to the generally higher level of interest rates in 1995, certificates of deposit represent a higher proportion of the funding liabilities, rather than lower cost money market or savings accounts. Expressing net interest income as a percent of average earning assets is referred to as margin. Margin was 5.66% for 1995, compared to 5.99% in 1994 and 5.85% for 1993. The Bank's margin is strong because it has funded itself with a 34 35 significant amount of noninterest bearing deposits. Margin in 1995 is somewhat lower than 1994 due to the lower level of non interest bearing title and escrow deposits in the current year. Margin in 1994 was higher than 1993 as the benefits of rising interest rates offset the maturing of the interest rate swap agreement discussed below. Through October 8, 1993, the Bank continued to benefit from an interest rate swap agreement entered into October 8, 1991, which had a notional amount of $100 million. Under this arrangement, the Bank received a fixed rate of 8.18% and paid interest at prime rate, which was 6.0% during 1993. The income earned from the interest rate swap agreement was $0 in 1994 and 1995, compared to $1.7 million in 1993. TABLE 11 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME Amounts in thousands of dollars
1995 1994 1993 ------------------------------ ------------------------------ ------------------------------ Interest Interest Interest Income or Yield or Income or Yield or Income or Yield or Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- -------- ---- ------- ------- ---- Interest Earning Assets Loans, Net(1) $170,511 $18,693 10.96% $141,878 $14,036 9.89% $188,967 $16,487 8.72% Investments(2) 70,569 3,818 5.41 66,891 2,966 4.43 37,534 1,558 4.15 Certificates of Deposit in other banks 48 2 4.17 1,010 39 3.88 4,102 123 3.00 Federal Funds Sold 32,614 1,893 5.80 22,100 918 4.15 15,927 454 2.85 -------- ------- ----- -------- ------- ----- -------- ------- ---- Total Earning Assets 273,742 24,406 8.92 231,879 17,959 7.74 246,530 18,622 7.55 ------- ----- ------- ---- ------- ---- Non Earning Assets Cash & Due From Banks 22,294 29,559 41,243 Other Assets 7,774 7,351 15,645 -------- -------- -------- Total Assets $303,810 $268,789 $303,418 ======== ======== ======== Interest Bearing Liabilities Demand $ 87,815 1,614 1.84 $ 71,821 1,730 2.41 $ 64,179 1,594 2.48 Savings 9,101 273 3.00 9,893 255 2.58 12,741 315 2.47 Time Certificates of Deposits Less Than $100 68,103 4,289 6.30 22,144 997 4.50 26,577 979 3.68 More Than $100 40,959 2,459 6.00 19,713 773 3.92 24,737 784 3.17 Federal Funds Purchased/ Repos 0 0 0 0 0 0 2,712 79 2.91 -------- ------- ----- -------- ------- ---- -------- ------- ---- Total Interest Bearing Liabilities 205,978 8,635 4.19 123,571 3,755 3.04 130,945 3,751 2.86 Non Interest Bearing Deposits 58,088 0 0 109,004 0 0 137,485 0 0 -------- ------- ----- -------- ------- ---- -------- ------- ---- Total Deposits 264,066 8,635 3.27 232,575 3,755 1.61 268,431 3,751 1.40 Other Borrowings 3,791 235 6.20 4,909 323 6.58 6,964 440 6.32 -------- ------- ----- -------- ------- ---- -------- ------- ---- Total Funding Liabilities 267,857 8,870 3.31 237,484 4,078 1.72 275,395 4,191 1.52 ------- ----- ------- ---- ------- ---- Other Liabilities 5,085 3,264 2,175 Shareholders' Equity 30,868 28,006 25,848 -------- -------- -------- Total Liabilities and Shareholders' Equity $303,810 $268,754 $303,418 ======== ======== ======== Net Interest Income $15,536 5.68% $13,881 5.99% $14,431 5.85% ======= ==== ======= ==== ======= ==== Shareholders' Equity to Total Assets 10.16% 10.42% 8.52% ===== ===== ====
(1) Non-accrual loans are included in average loan balances, and loan fees earned have been included in interest income on loans. (2) Tax exempt securities do not materially affect reported yields. OTHER OPERATING INCOME A significant portion of other operating income in 1994 was earned as mortgage servicing rights were sold for a gain of $2.6 million. The Bank reported a gain of $383 thousand on the sale of mortgage servicing in 1995, representing final 35 36 settlement payments received related to open issues on servicing sales from prior quarters. At year end 1995, the Bank did not own any further servicing rights. The majority of other operating income for 1993 was earned as the Mortgage Banking Operation originated and sold mortgage loans. The Mortgage Banking Operation earned fee income on loans originated and gains as loans were sold to permanent investors. Loans for which servicing was retained were conventional mortgages under approximately $200 thousand which were sold to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and other institutional investors. Excess servicing rights were capitalized, and related gains recognized, based on the present value of the servicing cash flows discounted over a period of seven years. When loan prepayments occurred within this period, the remaining capitalized cost associated with the loan was written off. The servicing rights were retained by the Bank following sale of the mortgage origination operation. The Bank entered into an agreement with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to dispose of any remaining portion of this portfolio by the end of 1994 because, with the sale of the mortgage origination operation, the Bank was no longer a qualified seller/servicer of such loans. During 1994, the bank sold the retained servicing rights realizing gains of $2.6 million in 1994 and $383 thousand in 1995. The trends and composition of other operating income are shown in the following table. TABLE 12 OTHER OPERATING INCOME Amounts in thousands of dollars
1995 1994 1993 ---- ---- ---- COMMERCIAL MORTGAGE CONSOLIDATED CONSOLIDATED BANKING BANKING CONSOLIDATED ------------ ------------ -------- -------- ------------ Documentation fees $104 $99 $104 $826 $930 Gain on sale of SBA loans 262 65 Other service fees and charges 1,177 1,100 851 399 1,250 Gain on sale of mortgage servicing 383 2,572 Gain on sale of other real estate owned 139 585 Gain on sale of mortgage origination operation 1,483 1,483 Processing fees 1,143 1,143 Capitalization of excess servicing rights 207 207 Fees on loans sold 15 1,182 1,182 Premium on sales of mortgage loans (8) 18,022 18,022 Gain on sale of securities 77 77 Service income 980 2,129 2,129 ------ ------ ------ ------- ------- Total $2,065 $5,408 $1,032 $25,391 $26,423 ====== ====== ====== ======= =======
OPERATING EXPENSE Total operating expenses for the Bank were $12.6 million year ended December 31, 1995 , compared to $14.7 million in 1994 and $36.9 million for 1993. The year ended December 31, 1995 reflected lower expenses, in part because of a reduction in FDIC insurance premiums paid, from $.23 to $.04 per $100 of deposits. The current level of operating expense is deemed to be adequate and will be leveraged further as the core middle market business is expanded. The Bank restructured its branch operations functions in 1994, re-engineering its entire work flow and information handling activities. This resulted in a one time charge of $600 thousand for severance pay and other expenses associated with the changes to the operating policies and procedures. Operating expense for the commercial bank excluding this charge was 36 37 $12.6 million in 1995, compared to $14.1 million in 1994 and $13.9 million in 1993. Operating expenses for the consolidated Bank declined in 1994, primarily due to the sale of the mortgage origination operation at the end of 1993. Expenses for the Mortgage Banking Division were $22.5 million in 1993. Premium on sales of mortgage loans included in other operating income is directly related to these expenses and subject to the same factors and conditions. The premium on sales of mortgage loans was $18.0 million in 1993. PROVISION FOR LOAN LOSSES The Bank has made no provision for loan losses in 1995 or 1994 , compared with $450 thousand for 1993. No loan loss provision has been deemed necessary for 1995 and 1994, due to the declining levels of nonperforming assets, net recoveries received in 1994, and the strong reserve position. The relationship between the level and trend of the allowance for loan losses and nonperforming assets, combined with the results of the ongoing review of credit quality, determine the level of provisions. LEGAL AND REGULATORY In the normal course of business the Bank occasionally becomes a party to litigation. In the opinion of management, based upon consultation with legal counsel, the Bank believes that pending or threatened litigation involving the Bank will have no adverse material effect upon its financial condition, or results of operations. Since June 1992, the Bank has developed a very positive and proactive relationship with its primary regulators. Results of regular safety and soundness examinations have documented the progress the Bank has achieved. Management is committed to the continuation of this process and maintaining our high standing with our regulators. The following comments refer to regulatory situations that existed in prior years that are reflected in the prior period financial statements provided herein. All of these situations have been successfully resolved and repaired as management transitioned the Bank to its present condition and performance. In June 1992, the Bank entered into an agreement with the Office of the Comptroller of the Currency (OCC), the Bank's primary federal regulator, which required the implementation of certain policies and procedures for the operation of the bank to improve lending operations and management of the loan portfolio. In November 1993, after completion of its annual examination, the OCC released the Bank from the Formal Agreement. Following this, the Federal Reserve Bank of San Francisco ("Fed") notified the Company on November 29, 1993, that the Memorandum of Understanding, which it had signed, was terminated because the requirements of the agreement were satisfied. MARKET EXPANSION AND ACQUISITIONS The Bank is committed to expanding the market penetration of the commercial bank, including the creation of new branches and pursuing acquisition opportunities. During 1995, the Bank converted its former loan production offices in Ventura County, the San Gabriel Valley and the South Bay to full service banking offices in improved facilities. This expanded the Bank's branch system to five full service locations serving the greater Los Angeles area. 37 38 In March, 1995, the Company entered into an agreement to acquire Santa Ana based Corporate Bank. The agreement was subsequently amended in October 1995 and the transaction was completed on January 12, 1996 for stock and cash. This acquisition brings two Orange County branches to the Bank, representing an important geographic expansion. Table 13 is an approximation of how the Bank's balance sheet would have appeared had the acquisition of Corporate Bank closed by December 31, 1995: On January 10, 1996, the Bank announced an agreement to merge with Home Interstate Bancorp, parent of Home Bank, based in the South Bay. The merger with Home Bank is expected to be completed in mid - 1996, and will create a Bank with 22 branches and over $800 million in assets. Table 13: Pro Forma Balance Sheet
Pro Forma California United Corporate Bank Combined ----------------- --------------- -------- Bank ---- Cash and due from banks $28,376 $ 4,479 $ 32,855 Federal funds sold 32,500 13,000 45,500 ------ ------ ------ Total cash and cash equivalents 60,876 17,479 78,355 Securities held to maturity 66,735 66,735 Securities available for sale 6,345 4,336 10,681 Loans, net 183,696 46,079 228,675 Other real estate owned 0 0 0 Premises and other assets 7,657 1,635 13,186 ----- ----- ------ Total Assets $325,309 $69,529 $397,632 ======== ======= ======== Demand deposits $ 94,099 $26,354 $120,453 Savings and interest bearing demand 74,413 22,511 96,924 Time deposits 115,998 12,258 128,256 ------- ------ ------- Total deposits 284,510 61,123 345,633 Other Liabilities 7,796 1,628 12,504 Shareholders' equity 33,003 6,778 39,495 ------ ----- ------- Total Liabilities and shareholders' equity $325,309 $69,529 $397,632 ======== ======= ========
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page - --------------------------------------------------- ---- 1. Report of Independent Public Accountants dated January 19, 1996 39 2. Consolidated Statements of Financial Condition as of December 31, 1995 and 1994; 40 3. Consolidated Statements of Income for the Years Ended December 31, 1995, 1994, and 1993, 41 4. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994, and 1993; 42 5. Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994, and 1993; 43 6. Notes to Consolidated Financial Statements - December 31, 1995 44
38 39 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of CU Bancorp and Subsidiary: We have audited the accompanying consolidated statements of financial conditions of CU Bancorp and Subsidiary (the Company) as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CU Bancorp and Subsidiary as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California January 19, 1996 39 40 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION CU BANCORP AND SUBSIDIARY
DECEMBER 31, Amounts in thousands of dollars, except share data 1995 1994 ----- ----- ASSETS Cash and due from banks $28,376 $35,397 Federal funds sold 32,500 20,000 ------ ------ Total cash and cash equivalents 60,876 55,397 Securities held to maturity (Market value of $67,114 and $71,423 66,735 74,153 at December 31, 1995 and 1994, respectively) Securities available for sale, at market value 6,345 0 ----- - Total Securities 73,080 74,153 Loans, (Net of allowance for loan losses of $6,930 and $7,427 at December 31, 1995 and 1994, respectively) 183,696 167,175 Premises and equipment, net 1,111 996 Other real estate owned, net 0 0 Accrued interest receivable and other assets 6,546 6,433 ----- ----- Total Assets $325,309 $304,154 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, non-interest bearing $94,099 $112,034 Savings and interest bearing demand 74,413 67,896 Time deposits under $100 70,866 47,836 Time deposits of $100 or more 45,132 36,415 ------ ------ Total deposits 284,510 264,181 Accrued interest payable and other liabilities 7,793 10,229 ----- ------ Total liabilities 292,303 274,410 ------- ------- Commitments and contingencies Shareholders' equity: Preferred stock, no par value: Authorized -- 10,000,000 shares No shares issued or outstanding in 1995 or 1994 -- -- Common stock, no par value: Authorized - 24,000,000 shares Issued and outstanding - 4,636,462 in 1995, and 4,467,318 in 1994 27,264 26,430 Retained earnings 5,841 3,314 Unrealized gain on securities available for sale, net of taxes 83 -- Unearned Compensation (182) -- ----- --- Total Shareholders' equity 33,006 29,744 ------ ------ Total liabilities and shareholders' equity $325,309 $304,154 ======== ========
The accompanying notes are an integral part of these consolidated statements. 40 41 CONSOLIDATED STATEMENTS OF INCOME CU BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, Amounts in thousands of dollars, except per share data 1995 1994 1993 -------- -------- -------- REVENUE FROM EARNING ASSETS: Interest and fees on loans $18,693 $14,036 $14,761 Benefits of interest rate hedge transactions 0 0 1,726 Interest on taxable investment securities 3,781 2,947 1,525 Interest on tax exempt securities 37 19 33 Interest on time deposits with other financial institutions 2 39 123 Interest on federal funds sold 1,893 918 454 ------ ------ ------ Total revenue from earning assets 24,406 17,959 18,622 ------ ------ ------ COST OF FUNDS: Interest on savings and interest bearing demand 1,887 1,985 1,909 Interest on time deposits under $100 4,289 997 979 Interest on time deposits of $100 or more 2,459 773 784 Interest on federal funds purchased & securities sold under 0 0 79 agreements to repurchase Interest on other borrowings 235 323 440 ------ ------ ------ Total cost of funds 8,870 4,078 4,191 ------ ------ ------ Net revenue from earning assets before provision for loan 15,536 13,881 14,431 losses PROVISION FOR LOAN LOSSES 0 0 450 ------ ------ ------ Net revenue from earning assets 15,536 13,881 13,981 ------ ------ ------ OTHER OPERATING REVENUE: Capitalization of excess servicing rights 0 0 207 Servicing income - mortgage loans sold 0 980 2,129 Service charges and other fees 1,682 1,121 955 Fees on loans sold 0 15 1,182 Premium on sales of mortgage loans 0 (8) 18,022 Other fees and charges - mortgage 0 143 2,368 Gain on sale of mortgage servicing portfolio 383 2,572 0 Gain on sale of mortgage origination operation 0 0 1,483 Gain on sale of other real estate owned 0 585 0 Gain on sale of investment securities (before taxes of $11 in 1993) 0 0 28 Gain on sale of securities available for sale (before taxes of $20 in 0 0 49 1993) - - -- Total other operating revenue 2,065 5,408 26,423 ----- ------ ------ OTHER OPERATING EXPENSES: Salaries and related benefits 6,834 6,335 11,020 Selling expenses - mortgage loans 0 333 12,193 Restructuring Charge 0 600 0 Other operating expenses 5,720 7,467 13,670 ------ ------ ------ Total operating expenses 12,554 14,735 36,883 ------ ------ ------ Income before provision for income taxes 5,047 4,554 3,521 Provision for income taxes 2,153 1,980 1,423 ------ ------ ------ NET INCOME $2,894 $2,574 $2,098 ====== ====== ====== EARNINGS PER COMMON AND EQUIVALENT SHARE $0.60 $0.56 $ 0.47 ===== ===== ======
The accompanying notes are an integral part of these consolidated financial statements. 41 42 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CU BANCORP AND SUBSIDIARY COMMON STOCK ---------------------------------------------------------------------------- Amounts in thousands of dollars except share data UNREALIZED GAIN NUMBER RETAINED ON SECURITIES UNEARNED OF SHARES AMOUNT EARNINGS AVAILBLE FOR SALE COMPENSATION TOTAL ---------------------------------------------------------------------------- Balance at December 31, 1992 4,366,850 $25,990 $(1,358) $24,632 Exercise of stock options 57,456 260 0 260 Net income for the year 0 0 2,098 2,098 --------- ------- ------- --- ----- ------- Balance at December 31, 1993 4,424,306 26,250 740 26,990 Exercise of stock options 1,000 5 0 5 Exercise of director warrants 42,012 175 0 175 Net Income for the year 0 0 2,574 2,574 --------- ------- ------- --- ----- ------- Balance at December 31, 1994 4,467,318 26,430 3,314 29,744 Exercise of stock options 15,120 87 87 Exercise of director warrants 135,024 562 562 Cash dividend declared ($.08 per share) (367) (367) Restricted stock issued 19,000 185 $(185) 0 Compensation expense 3 3 Unrealized gains on securities available of sale, net of tax $83 83 Net Income for the year 0 0 2,894 0 0 2,894 --------- ------- ------- --- ----- ------- Balance at December 31, 1995 4,636,462 $27,264 $ 5,841 $83 $(182) $33,006 ========= ======= ======= === ===== =======
The accompanying notes are an integral part of these consolidated statements 42 43 CONSOLIDATED STATEMENTS OF CASH FLOWS CU BANCORP AND SUBSIDIARY
Amounts in thousands of dollars FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993 ----- ----- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $2,894 $2,574 $2,098 ------ ------ ------ Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 553 459 821 Amortization of real estate mortgage servicing rights 0 15 983 Provision for losses on loans and other real estate owned 0 0 450 Provision (benefit) of deferred taxes 1,138 (1,180) 1,510 Gain on sale of investment securities, net 0 0 (77) Increase/(decrease) in other assets (785) 3,781 2,628 Increase/(decrease) in other liabilities (2,845) (3,035) 2,582 (Increase)/decrease in accrued interest receivable (526) (766) 494 Increase/(decrease) in deferred loan fees (130) 160 48 Capitalization of excess mortgage servicing rights 0 0 (207) Increase/(decrease) in accrued interest payable 412 (24) (11) Net amortization of (discount)/premium on investment securities 610 972 48 Accrued benefits from interest rate hedge transactions 0 0 485 ------ ------ ------ Total adjustments (1,573) 382 9,754 ------ ------ ------ Net cash provided by operating activities 1,321 2,956 11,852 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investment securities sold or matured 17,782 52,882 78,545 Purchase of investment securities (17,176) (39,973) (81,826) Net decrease in time deposits with other financial institutions 0 1,377 1,979 Net (increase)/decrease in loans (16,391) (33,187) 58,997 Purchases of premises and equipment, net (668) (531) 290 ------ ------ ------ Net cash provided (used in) by investing activities (16,453) (19,432) 57,985 -------- -------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase/(decrease) in demand and savings deposits (11,418) (11,949) (81,848) Net increase/(decrease) in time certificates of deposit 31,747 37,202 2,202 Proceeds from exercise of stock options and director warrants 649 180 260 Cash dividend paid (367) 0 0 ------ ------ ------ Net cash provided (used) by financing activities 20,611 25,433 (79,386) ------ ------ -------- Net increase (decrease) in cash and cash equivalents 5,479 8,957 (9,549) Cash and cash equivalents at beginning of year 55,397 46,440 55,989 ------ ------ ------- Cash and cash equivalents at end of year $60,876 $55,397 $46,440 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year: Interest $8,457 $4,102 $4,179 Taxes 2,400 2,201 Supplemental disclosure of noncash investing activities: Loans transferred to OREO 0 700 1,503
The accompanying notes are an integral part of these consolidated statements 43 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CU BANCORP AND SUBSIDIARY DECEMBER 31, 1995 (Amounts in thousands unless otherwise specified) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CU Bancorp, a bank holding company (the Company), is a California corporation. The accounting and reporting policies of the Company and its subsidiary conform with generally accepted accounting principles and general practice within the banking industry. The following comments describe the more significant of those policies. (a) Principles of consolidation -- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, California United Bank N.A. (the Bank). All significant transactions and accounts between the Company and the Bank have been eliminated in the consolidated financial statements. (b) Investment portfolio -- The Bank's investment portfolio is separated into two groups, Securities Held to Maturity and Securities Available for Sale. Securities are segregated in accordance with management's intention regarding their retention. Accounting for each group of securities follows the requirements of SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities". The adoption of SFAS 115 in 1993 did not have a material impact on the financial position or results of operations of the Bank. The Bank has the intent and ability to hold Securities Held to Maturity until maturity. Securities in this classification are carried at cost, adjusted for amortization of premiums and accretion of discounts on a straight-line basis. This approach approximates the effective interest method. Gains and losses recognized on the sale of investment securities are based upon the adjusted cost and determined using the specific identification method. Securities Available for Sale are those where management has the willingness to sell under certain conditions. This category of securities is carried at current market value with unrealized gains or losses recognized as a tax affected adjustment to shareholders' equity in the statement of financial condition. (c) Loans -- Loans are carried at face amount, less payments collected, allowance for loan losses, and unamortized deferred fees. Interest on loans is accrued monthly on a simple interest basis. The general policy of the Bank is to discontinue the accrual of interest and transfer loans to non-accrual (cash basis) status where reasonable doubt exists with respect to the timely collectibility of such interest. Payments on non-accrual loans are accounted for using a cost recovery method. No interest income is recorded on non-accrual loans. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can reasonably be anticipated. Management considers the nature of the portfolio, current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. The allowance is based on estimates and ultimate losses may differ from current estimates. These estimates are reviewed periodically and as adjustments become necessary, they are charged to earnings in the period in which they become known. The allowance is increased by provisions charged to operating expenses, increased for recoveries of loans previously charged-off, and reduced by charge-offs. The Bank adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," as of January 1, 1995. SFAS 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. When the measure of the impaired loan is less than the recorded balance of the loan, the impairment is 44 45 recorded through a valuation allowance included in the allowance for loan losses. The Bank had previously measured the allowance for loan losses using methods similar to the prescribed in SFAS 114. As a result, no additional provision was required by the adoption of this pronouncement. The Bank considers all loans where reasonable doubt exists as to the payment of interest or principal to be impaired loans. All loans that are ninety days or more past due are automatically included in this category. An impaired loan will be charged off when the Bank determines that repayment of principal has become unlikely or subject to a lengthy collection process. All loans that are six months or more past due and not well secured or in the process of collection are charged off. (d) Mortgage Banking Division -- The bank's real estate Mortgage Banking Division became operational in 1988. The mortgage origination operation was sold November 10, 1993. The Bank carried the first trust deed loans generated and held for sale by this Operation at the lower of aggregate cost or market. As of December 31, 1993, cost approximated market value. All loan inventory held for sale by this division had been sold prior to the end of 1994. During 1993, the Bank capitalized $207 in connection with the right to service real estate mortgage loans originated in that Operation. This excess servicing asset, included in other assets, was initially capitalized at its discounted present value and amortized over a period of five to seven years. Amortization for 1995, 1994, and 1993, was $0, $15, and $983 respectively. (e) Premises and equipment -- Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful life of the asset. Amortization is computed on the straight-line method over the useful life of leasehold improvements or the remaining term of the lease, whichever is shorter. (f) Other real estate owned -- Other real estate owned, acquired through direct foreclosure or deed in lieu of foreclosure, is recorded at the lower of the loan balance or estimated fair market value. When a property is acquired, any excess of the loan balance over the estimated fair market value is charged to the allowance for loan losses. Subsequently, the assets are recorded at the lower of the new cost basis at foreclosure or fair market value less estimated selling expenses. Subsequent write-downs, if any, are included in other operating expenses in the period in which they become known. Gains or losses on sales are recorded in conformity with standards which apply to accounting for sales of real estate. The Bank had no real estate owned at December 31, 1995, and at December 31, 1994. (g) Interest Rate Derivatives -- The Company enters into interest rate hedge agreements which involve the exchange of fixed and floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rate change and recognized over the life of the agreements as an adjustment to interest expense. Fees received in connection with loan commitments are deferred in other liabilities until the loan is advanced and are then recognized over the term of the loan as an adjustment of the yield. Fees on commitments that expire unused are recognized in fees and commission revenue at expiration. Fees received for guarantees are recognized as fee revenue over the term of the guarantees. (h) Income taxes -- As discussed in Note 8, effective January 1, 1993, the Bank adopted the Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. 45 46 (i) Earnings per share (amounts in whole numbers) -- Earnings per share are computed based on the weighted average number of shares and common stock equivalents outstanding during each year of 4,857,221 in 1995, 4,593,103 in 1994, and 4,489,861 in 1993, retroactively restated for stock dividends and stock splits. Common stock equivalents include the number of shares issuable on the exercise of outstanding options and warrants reduced by the number of shares that could have been purchased with the proceeds from the exercise of the options and warrants plus any tax benefits, based on the average price of common stock. (j) Statements of cash flows -- The Company presents its cash flows using the indirect method and reports certain cash receipts and payments arising from customer loans and deposits, and deposits placed with other financial institutions on a net basis. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. (k) Post-retirement benefits -- The Company provides no post-retirement benefits. Accordingly, the accounting prescribed by Statement of Financial Accounting Standards No. 106 "Accounting for Post-Retirement Benefits" has no effect on the Company's consolidated financial statements. (l) Stock-Based Compensation In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation". SFAS 123 requires all companies to change what they disclose about their employee stock-based compensation plans, recommends that they change how they account for these plans and requires those companies who do not change their accounting to disclose what their earnings and earnings per share would have been if they had changed their method of accounting pursuant to this pronouncement. The Company has elected to continue to account for their Stock-Based Compensation in accordance with Accounting Principles Board Opinion (APBO 25) and to adopt only the disclosure requirements of SFAS 123. As a result, the adoption of SFAS 123 will not have an impact on the financial position or results of operations of the company. (m) Reclassifications -- Certain amounts have been reclassified in the prior years to conform to classifications followed in 1995. (n) Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. NATURE OF OPERATIONS -- The Bank engages in the commercial banking business serving the greater Southern California metropolitan area, with offices located in the San Fernando Valley, West Los Angeles, the San Gabriel Valley , the South Bay portion of the County of Los Angeles, and Ventura County. The Bank's primary focus is to engage in middle market lending to businesses, professionals, the entertainment industry and high net-worth individuals. Retail or consumer banking business is generally limited to the owners, officers and employees of its commercial customers, and customers of accounting and business management firms with which the Bank regularly does business. Deposit services which the Bank offers include personal and business checking accounts and savings accounts, insured money market deposit accounts, NOW accounts, and time certificates of deposits, along with IRA and Keogh accounts. The Bank also provides other customary banking services incidental to maintaining the commercial customer relationships. 46 47 3. AVERAGE FEDERAL RESERVE BALANCES -- The average cash reserve balances required to be maintained at the Federal Reserve Bank, under the Federal Reserve Act and Regulation D, were approximately $2.4 million and $6.0 million for the years ended December 31, 1995 and 1994, respectively. 4. INVESTMENT PORTFOLIO -- A summary of Securities Held to Maturity at December 31, 1995 and 1994, is as follows:
HELD TO MATURITY GROSS GROSS BOOK UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE ----- ----- ------ ----- 1995 U.S. Treasury securities $66,704 $623 $ (244) $67,083 U.S. Government agency securities 31 -- 31 ------- ---- ------- ------- Total investment portfolio $66,735 $623 $ (244) $67,114 ======= ==== ======= ======= 1994 U.S. Treasury securities $67,140 -- $(2,535) $64,605 U.S. Government agency securities 105 -- -- 105 State and municipal bonds 750 $ 9 -- 759 Mortgage-backed securities 5,725 -- (204) 5,521 Federal Reserve Bank stock 433 -- -- 433 ------- ---- ------- ------- Total investment portfolio $74,153 $ 9 $(2,739) $71,423 ======= ==== ======= =======
A summary of Securities Available for Sale for December 31, 1995 is as follows:
AVAILABLE FOR SALE GROSS GROSS BOOK UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE ------ ---- -- ------ 1995 Mortgage -backed securities $5,769 $143 $5,912 Federal Reserve Bank stock 433 -- -- 433 ------ ---- -- ------ $6,202 $143 $0 $6,345 ====== ==== == ======
Investments with a book value of $27,900 and $29,200 were pledged as of December 31, 1995 and 1994, respectively, to secure court deposits and for other purposes as required or permitted by law. Included in interest on investments in 1995, 1994, and 1993, is $0, $19, and $33, respectively, of interest from tax-exempt securities. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and market value of Securities Held to Maturity as of December 31, 1995, by maturity, are shown below.
AMORTIZED MARKET COST YIELD VALUE ---- ----- ----- Due in one year or less $21,714 5.3% $21,691 Due after one through five years 45,021 5.6 45,423 ------- ------- $66,735 $67,114 ======= =======
47 48 At December 31, 1995, the securities available for sale portfolio consisted of Federal Reserve Bank stock and mortgage backed securities. The Federal Reserve Bank stock, with a 6% yield, has no stated maturity. The actual maturity of the mortgage-backed securities is determined by the rate of repayment of the loan pools collateralizing the securities. Actual cash maturities of the Bank's mortgage-backed securities, with an approximate yield of 7%, are expected to be from one to five years. In December 1995, as permitted by a Special report of the Financial Accounting Standards Board "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", the Bank made a one time transfer of investment securities into the Available for Sale portfolio. These securities had an amortized cost and market value of $5,769 and $5,912, respectively. At December 31, 1994, there were no Securities Available for Sale. Proceeds from the sales and maturities of debt securities during 1995, 1994, and 1993 were $17,722, $52,882, and $78,545, respectively. Gains of $0, $0, and $77 were realized on those transactions. There were no realized losses on sales in 1995, 1994, and 1993. 5. LOANS -- The loan portfolio, net of unamortized deferred fees of $522 at December 31, 1995, and $652 at December 31, 1994, consisted of the following:
DECEMBER 31, 1995 1994 ------------ -------- Commercial and industrial loans $164,966 $142,885 Commercial real estate loans 20,190 26,528 Real estate loans -- mortgages 5,470 4,773 Real estate loans -- construction 0 416 -------- -------- Gross Loans 190,626 174,602 Less - Allowance for loan losses (6,930) (7,427) -------- -------- Net loans $183,696 $167,175 ======== ========
At December 31, 1995, the Bank had $1,000 in impaired loans, against which a loss allowance of $318 has been provided. The recorded loss allowance for all impaired loans has been calculated based on the present value of expected cash flows discounted at the loan's effective interest rate. All impaired loans are on nonaccrual status, and as such no interest income is recognized. The Bank had an average investment in impaired loans of approximately $352 for the year ended December 31, 1995. Total non-performing loans were $4,000 and $36 at December 31, 1995 and 1994, respectively. The interest income, which would have been recognized had non-accrual loans been current, amounted to $ 82, $6, and $469, in 1995, 1994, and 1993, respectively. No interest income has been reported on non-accrual loans for the years 1995, 1994, or 1993. An analysis of the activity in the allowance for loan losses is as follows:
1995 1994 1993 ------ -------- -------- Balance, beginning of period $ 7,427 $ 6,513 $ 12,986 Loans charged off (1,089) (1,413) (10,749) Recoveries on loans previously charged off 592 2,327 3,826 Provision for loan losses 0 0 450 ------- ------- -------- Balance, end of period $ 6,930 $ 7,427 $ 6,513 ======= ======= ========
48 49 6. LOANS TO RELATED PARTIES -- There were no loans to directors and their affiliates for the years ended 1995 and 1994. 7. PREMISES AND EQUIPMENT -- Book value of premises and equipment is as follows:
December 31, 1995 1994 ------ ------ Furniture, fixtures and equipment $4,056 $3,796 Leasehold improvements 834 690 ------ ------ Cost 4,890 4,486 Less - accumulated depreciation and amortization 3,779 3,490 ------ ------ Net Book Value $1,111 $ 996 ====== ======
The amounts of depreciation and amortization included in noninterest expense were $553, $459, and $821 for the years ended December 31, 1995, 1994 and 1993, respectively, and are based on estimated lives of 1 to 10 years for furniture, fixtures and equipment, and leasehold improvements. The Bank leases facilities under renewable operating leases. Rental expense for premises included in occupancy expenses were $833 in 1995, $741 in 1994, $1,133 in 1993. As of December 31, 1995, the approximate future lease payable under the lease commitments is as follows: Year ended December 31,-- 1996 $ 851 1997 851 1998 811 1999 790 2000 215 Thereafter 0 ------ $3,518 ======
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments are defined as cash, evidence of an ownership interest in an entity or a contract that both imposes contractual obligations and rights to exchange cash, and/or other financial instruments on the parties to the transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash, Due From Banks and Federal Funds Sold For these short term investments, the carrying amount is a reasonable estimate of fair value. Securities Quoted market prices are available for substantially all of the securities owned by the Bank, both in the Held to Maturity and Available for Sale portfolios. These market quotes have been used to estimate fair value. 50 Loans The fair value of loans was estimated by discounting the future cash flows using current market rates adjusted for approximated credit risk, operating costs and interest rate risk inherent in the portfolios. Future cash flows are aggregated based upon the payment terms and maturities of the loans. The discount rate is calculated as the sum of the risk-free rate, a credit quality factor, an operating expense factor and a prepayment option price. The risk-free rate is based on the U.S. treasury curve for the stated maturity. The credit quality factor is based on a combination of the Bank's loss experience and industry standards for various categories of loans. The operating expense factor is based on an internal analysis of the Bank's costs to deliver and service products. Deposit Liabilities Fair value for deposit liabilities without contractual maturities is equal to the carrying value of those liabilities. This includes the bank's demand deposits, NOW, savings and money market accounts. Fair value for certificates of deposit are calculated by discounting the future cash flows using a current market rate. The Bank's certificate of deposit portfolio has a fair value which reasonably approximates carrying value, due to the short duration of the portfolio. Off Balance Sheet Items The Bank's loan commitments are generally for variable rate loans representing current market rates of interest. The Bank's letters of credit are generally short term and are at terms consistent with the current market. Current valuation of these off balance sheet instruments is immaterial. See footnote 11 for further description of these commitments.
DECEMBER 31, 1995 DECEMBER 31, 1994 BOOK VALUE, ESTIMATED BOOK VALUE, ESTIMATED NET FAIR VALUE NET FAIR VALUE ----------- ---------- ----------- ---------- Cash & Due From Banks $ 28,376 $ 28,376 $ 35,397 $ 35,397 Federal Funds Sold 32,500 32,500 20,000 20,000 Securities 72,937 73,459 74,153 71,423 Loans 183,696 191,352 167,175 175,023 Certificates of Deposit 115,998 116,798 84,251 84,251 Other Deposit Liabilities 168,512 168,512 179,930 179,930 Other Borrowed Money 3,768 3,768 3,794 3,794 Off Balance Sheet Items 0 0 0 0
Estimations of fair value of financial instruments are subject to significant uncertainty because active and liquid markets do not exist for a majority of them. The estimates include assumptions concerning financial conditions, risk characteristics, expected future losses, and market interest levels, among other factors, and if changed could have a significant impact on them. The resulting presentations of estimated fair value is not necessarily indicative of the value realizable in an actual exchange of financial instruments. 9. INCOME TAXES - The provisions (benefits) for income taxes for the years ended December 31, 1995, 1994 and 1993 for financial reporting were as follows:
1995 1994 1993 ------ ------ ------ Current - Federal $ 614 $ 2,876 $ (89) State 401 284 2 ------ ------ ------ Total current provision 1,015 3,160 (87) ------ ------ ------ Deferred - Federal 891 (1,404) 1,268 State 247 224 242 ------ ------ ------ Total deferred provisions 1,138 (1,180) 1,510 ------ ------ ------ Total provisions for income taxes $2,153 $1,980 $1,423 ====== ====== ======
50 51 As of December 31, 1995 and 1994, the temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows:
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ Allowance for loan losses $ 3,084 $ 3,348 Deferred loan fees 0 294 Depreciation 138 196 Other expense accruals 898 1,631 -------- ------- Total deferred tax assets 4,120 5,469 -------- ------- Accretion of discounts on securities (140) 0 Unrealized gain on securities available for sale (60) 0 State tax expense (188) (353) Other (1) (1) -------- ------- Total deferred tax liabilities (389) (354) Valuation allowance (1,218) (1,404) -------- ------- Net deferred tax asset $ 2,513 $ 3,711 ======== =======
The Bank maintains a valuation reserve against net deferred tax assets to reflect the inherent uncertainty of the ultimate realization of those assets. The value of the Bank's largest deferred tax assets represent expenses, such as the loan loss provision, which will become deductible on a future tax return when an actual loss is incurred. Realization of deferred tax assets are dependent on the availability of taxable income in the future or prior years to offset these deductions. Because the State of California does not currently allow net operating loss carrybacks, realization of deferred tax assets related to California Franchise Taxes is subject to a greater degree of uncertainty. The provisions (benefits) for income taxes varied from the Federal statutory rate of 34% for 1995, 1994, and 1993, for the following reasons:
1995 1994 1993 -------------------- ------------------ ---------------------- Amount Rate Amount Rate Amount Rate ------ ----- ------ ---- ------ ------ Provisions (benefit) for income at $1,716 34.0% $1,548 34.0% $1,198 34.0 % statutory rate Interest on state and municipal bonds and other tax exempt transactions (22) (.5%) (25) (.5%) (25) (.7)% State franchise taxes, net of federal income tax benefit 428 8.5% 335 7.3% 256 7.3 % Other, net 31 .6% 122 2.7% (6) (0.2)% ------ ---- ------ ---- ------ ---- $2,153 42.6% $1,980 43.5% $1,423 40.4 % ====== ==== ====== ==== ====== ====
The total net deferred tax of $2,513 in 1995 and $3,711 in 1994 is included in Other Assets in the Consolidated Statements of Financial Condition. At December 31, 1993, the Company had a California Franchise Tax carryforward of $1.9 million, with the entire operating loss carryforward being utilized in 1994. The Bank had no operating loss carryforwards at December 31, 1994 or 1995. 10. SHAREHOLDERS' EQUITY - The Company has three employee stock option plans. The 1983 plan, which authorized the issuance of 400,075 shares of common stock, and the 1985 plan, which authorized the issuance of 350,000 shares of common stock, expired in 1993 and 1995 respectively. The 1993 plan, authorizing the issuance of 400,000 shares of common stock, expires in 2003. Options are granted at a price not less than the fair market value of the stock at the date of grant. Options under these 51 52 plans expire up to ten years after the date of grant. The options granted under the 1983 and 1985 plans are incentive stock options, as defined in the Internal Revenue Code. Options under the 1993 plan can be either incentive stock options or non- qualified options. No shares remain available for future grants for the 1983 and 1985 plans, although outstanding options remain and are exercisable over the period designated by those plans. In 1987, a special stock option plan was approved that is limited to directors of the Company and provides for the issuance of 120,960 shares of common stock. The plan expires in 1997. Options granted under the plan are non-qualified stock options. Each of the directors of the Company, at the time the special stock option plan was approved, received stock options to purchase 15,120 shares at $5.78 per share, which was in excess of the then prevailing market price. Options expire 10 years after the date of grant. There are no remaining options available for grant under the 1987 special stock plan. In 1994, a non-employee director stock option plan was approved that provides for the issuance of 200,000 shares of common stock. The plan expires in 2004. Options granted under the plan are non-qualified stock options. During 1994, options were granted to purchase 27,500 shares at $6.25 per share , which was equal to the market price at the date of grant. During 1995, 27,500 options were granted at $6.88 per share. Options expire 10 years from the date of grant The following table summarizes information on stock options outstanding for the years ended December 31, 1995 and 1994, as follows:
1995 1994 ---- ---- Average Average Price Shares Price Shares ----- ------ ----- ------ Options outstanding beginning of year $5.98 629,410 $5.55 355,906 Granted $7.07 125,500 $6.59 289,500 Exercised $5.78 (15,120) $4.75 (1,000) Canceled $8.91 (8,270) $7.78 (14,996) ------- ------- End of year $6.14 731,520 $5.98 629,410 ======= =======
During 1994, 1,000 non-qualified stock options under the 1985 plan were exercised at $4.75 per share. In 1995, 15,120 non-qualified stock options under the 1987 plan were exercised at $5.78 per share. No other stock options were exercised in 1994 or 1995. The following information is presented concerning the stock option plans as of December 31, 1995:
SHARES SUBJECT TO NUMBER OF SHARES OPTION RANGE OF EXERCISE PRICES EXERCISABLE ----------------- ------------------------ ---------------- Employee plans 1983 Plan 49,030 $5.00 29,418 1985 Plan 243,250 $4.75 - $15.21 139,690 1993 Plan 256,000 $6.63 - $7.13 68,603 Non employee directors plan 1987 Plan 30,240 $5.78 30,240 1994 Plan 153,000 $6.25 - $6.85 6,875
In 1984, certain members of the Board of Directors were granted warrants to purchase up to 360,067 shares of common stock at $4.17 per share, primarily for guaranteeing a capital note issued by the Company. These warrants became exercisable when the capital note was paid off in 1987, and had a maturity date of February 15, 1995. During 1995, all outstanding warrants were exercised. During 1995 and 1994, warrants for 135,024 and 57,012 shares were 52 53 exercised. In 1994, warrants to purchase 7,500 shares of common stock at the fair market value at date of grant of $7.00 per share, with an expiration date of February 1, 1999 , were issued to the former chairman of the board. On June 29, 1995, the Company's shareholders approved adoption of a CU Bancorp 1995 Restricted Stock Plan, providing for the issuance of Common Stock to employees, subject to restrictions on sale or transfer. The restrictions on sale or transfer expire over a period of five years. During 1995, 19,000 restricted shares were issued with a market value of $185. This amount was recorded as unearned compensation and is shown as a separate component of shareholders' equity. Unearned compensation is being amortized to expense over the five year vesting period, with expense of $3 recorded for 1995. 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND COMMITMENTS AND CONTINGENCIES -- The consolidated statements of financial condition do not reflect various commitments relating to financial instruments which are used in the normal course of business. These instruments include commitments to extend credit, standby and commercial letters of credit, and interest rate floor and swap agreements. Management does not anticipate that the settlement of these financial instruments will have a material adverse effect on the Bank's financial position. These financial instruments carry various degrees of credit and market risk. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. Market risk is the possibility that future changes in market prices may make a financial instrument less valuable. The Bank primarily grants commercial and real estate loan commitments with variable rates of interest and maturities of one year or less to customers in the greater Los Angeles area. The contractual amounts of commitments to extend credit and standby and commercial letters of credit represent the amount of credit risk. Since many of the commitments and letters of credit are expected to expire without being drawn, the contractual amounts do not necessarily represent future cash requirements. For interest rate floor and swap agreements, the notional amounts do not represent exposure to credit loss. Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the borrower. The Bank evaluates the creditworthiness of each customer. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based upon management's evaluation. Collateral held varies, but may include securities, accounts receivable, inventory, personal property, equipment, and income- producing commercial or residential property. Standby letters of credit are provided to customers to guarantee their performance, generally in the production of goods and services or under contractual commitments in the financial markets. Standby letters of credit generally have terms of up to one year. Commercial letters of credit are issued to customers to facilitate foreign and domestic trade transactions. They represent a substitution of the Bank's credit for the customer's credit. Such letters of credit are generally short term in nature and are collateralized by the merchandise covered by the transaction. At December 31, 1995 and 1994 there were $1.0 million and $1.5 million outstanding, respectively. These amounts reduce the availability under the applicable customer's loan facility. Interest rate swaps and floors may be created to hedge certain assets and liabilities of the Bank. These transactions involve either an exchange of fixed or floating rate payment obligations on an underlying notional amount. In the case of a rate floor, there is a guaranteed payment of a rate differential on a notional amount, should a specific market rate fall below a specific agreed upon level. Credit risk related to interest rate swaps is limited to the interest receivable from the counterparty less the interest owed that party or, in the case of rate floors, to interest receivable on the differential between the specific rate contracted in the floor agreement and actual rates in effect at various settlement dates. Market risk fluctuates with interest rates. 53 54 The following is a summary of various financial instruments with off-balance sheet risk at December 31,1995 and 1994:
DECEMBER 31, ------------ AMOUNTS IN MILLIONS OF DOLLARS 1995 1994 ---- ---- Standby letters of credit $ 3 $ 7 Undisbursed loans 87 69
In response to continued economic declines and anticipating interest rate declines, the Bank entered into an interest rate swap agreement effective October 8, 1991, for $100 million. Terms of this agreement were that the Bank would receive a fixed rate of 8.18% over two years in exchange for paying the average prime rate. Accrued benefits from this transaction amounted to $1,726 in 1993, and are included in interest income. Amounts due the Bank or counterparty were settled quarterly. This agreement expired on October 8, 1993. In the normal course of business, the Company occasionally becomes a party to litigation. See footnote 15. 12. OTHER OPERATING EXPENSES -- Other operating expenses included the following:
1995 1994 1993 ---- ---- ---- Promotional expenses $273 $264 $393 Data processing for customers 564 737 920 Director and advisory fees 104 107 146 Legal fees 109 455 1,370 Other professional fees 356 419 495 Messenger services 357 408 583 Other data processing fees 438 301 455 Regulatory assessments 357 648 1,036 Expenses for other real estate owned 1 22 234 Amortization of mortgage servicing rights 0 15 983 Occupancy expense 1,840 1,710 2,488 Reserve for branch relocation 0 58 447 Other 1,321 2,323 4,120 ------ ------ ------- Total operating expenses $5,720 $7,467 $13,670 ====== ====== =======
13. CONDENSED FINANCIAL INFORMATION OF CU BANCORP -- At December 31, 1995 and 1994, the condensed unconsolidated balance sheets of the Company are as follows:
DECEMBER 31, 1995 1994 ---- ---- Balance Sheets Cash $ 590 $ 426 Prepaid expenses 0 0 Investment in California United Bank N.A. 32,681 29,507 ------ ------ Total assets $33,271 $29,933 ======= ======= Other liabilities $268 $189 Shareholders' equity 33,003 29,744 ------ ------ Total liabilities and shareholders' equity $33,271 $29,933 ======= =======
54 55 For the years ended December 31, 1995, 1994, and 1993, the condensed unconsolidated statements of income of the Company are as follows:
DECEMBER 31, 1995 1994 1993 ---- ---- ---- Statements of Income Equity in earnings of the Bank $3,090 $2,785 $2,265 Operating expenses 210 221 167 Interest Income 14 9 0 ------ ------ ------ Net income $2,894 $2,573 $2,098 ====== ====== ======
For the years ended December 31, 1995, 1994 and 1993, the condensed unconsolidated statements of cash flows are as follows: Amounts in thousands of dollars
1995 1994 1993 ---- ---- ---- Cash flows from operating activities Net income $ 2,894 $ 2,573 $ 2,098 Equity in undistributed earnings of subsidiaries (3,090) (2,785) (2,265) Other, net 78 115 85 ------- ------- ------- Net cash (used) by operations (118) (97) (82) Cash flows from financing activities Proceeds from exercise of stock options and director warrants 649 180 260 Cash dividend paid (367) -- -- ------- ------- ------- Net cash provided by financing activities 282 180 260 Net increase in cash and cash equivalents 164 83 178 Cash and cash equivalents at beginning of the year 426 343 165 ------- ------- ------- Cash and cash equivalents at end of year $ 590 $ 426 $ 343 ======= ======= =======
Under National banking law, the Bank is limited in its ability to declare dividends to the Company to the total of its net income for the year, combined with its retained net income for the preceding two years less any required transfers to surplus. The effect of this law was to preclude the bank from declaring any dividends at December 31, 1994 and 1993. The Bank has received permission from the OCC to pay dividends to the Company in 1995, in anticipation of the cash dividends paid by the Company. No dividends were actually paid by the Bank in 1995,1994 or 1993. 14. SUBSEQUENT EVENTS In March of 1995, the Bank had announced the signing of an agreement to acquire Corporate Bank, a Santa Ana based community bank with approximately $70 million in assets. This purchase was completed in January 1996, with Corporate Bank being acquired in exchange for the issuance of approximately 649 thousand shares of CU Bancorp common stock and $1.7 million cash. The acquisition of Corporate Bank will be reflected using the purchase method of accounting in the first quarter of 1996. Also in January 1996, the Bank announced the signing of an agreement to merge with Home Interstate Bancorp, the parent of Home Bank, based in the South Bay. Home Bank provides retail and business banking from its principal office in Signal Hill and fourteen additional branch locations. The agreement with Home Bank provides for the combination to be effected through the exchange of common stock, and is expected to be accounting for as a pooling of interests. This merger, which is targeted to be completed near the end of the second quarter of 1996, would create a combined bank with over $800 million in assets and 22 branches. 55 56 15. LEGAL MATTERS In the normal course of business the Bank occasionally becomes a party to litigation. In the opinion of management, based upon consultation with legal counsel, the Bank believes that pending or threatened litigation involving the Bank will have no adverse material effect upon its financial condition, or results of operations. Until third quarter 1995, the Bank was a defendant in multiple lawsuits related to the failure of two real estate investment companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consisted of a federal action by investors in PMC and SLGH (the "Federal Investor Action"), at least three state court actions by groups of Investors (the "State Investor Actions"), and an action filed by the Resolution Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action was filed by an individual investor and his related pension and profit sharing plans (the "Individual Investor Action"). Other defendants in these multiple actions and in related actions include financial institutions, title companies, professionals, business entities and individuals, including the principals of PMC and SLGH. The Bank was a depository bank for PMC, SLGH and related companies and was a lender to certain principals of PMC and SLGH ("Individual Loans"). Plaintiffs alleged that PMC/SLGH was or purported to be engaged in the business of raising money from investors by the sale and issuance of interests in loans evidenced by promissory notes secured by real property. Plaintiffs alleged that false representations were to the Bank's conduct with regard to the depository accounts, the lending relationship with the principals and certain collateral taken , pledged by PMC and SLGH in conjunction with the Individual Loans. The lawsuits alleged inter alia violations of federal and state securities laws, fraud, negligence, breach of fiduciary duty, and conversion as well as conspiracy and aiding and abetting counts with regard to these violations. The Bank denied all allegations of wrongdoing. Damages in excess of $100 million were alleged, and compensatory and punitive damages were sought generally against all defendants, although no specific damages were prayed for with regard to the Bank. A former officer and director of the Bank was also been named as a defendant. The Bank entered into a settlement agreement with the representatives of the various plaintiffs, which has now been consummated, with the dismissal of all of the above referenced cases, with prejudice, against the Bank, its officers and directors, with the exception of the officer/director previously named pending. Court approval of these settlements has been received. In connection with the settlement, the Bank released its security interest in certain disputed collateral and cash proceeds thereof, which the Bank received from PMC, SLGH, or the principals, in connection with the Individual Loans. This collateral had been a subject of dispute in the Neilson Action, with both the Bank and the representatives of PMC/SLGH asserting the right to such collateral. All the Individual Loans have been charged off. The Bank also made a cash payment to the Plaintiffs in connection with the settlement. The effect of this settlement on CU Bancorp or the Bank's financial statements was immaterial. In connection with the settlement the Bank assigned its rights, if any, under various insurance policies, to the Plaintiffs. The settlement does not resolve the claims asserted against the officer/director. The Bank is still providing a defense to its former director/officer who continues as a defendant and who retains his rights of indemnity, if any, against the Bank arising out of his status as a former employee. At this time the only viable claims which appear to remain against the former director/employee are claims of negligence in connection with certain depository relationships with PMC/SLGH. While the Bank's Director and Officer Liability Insurer has not acknowledged coverage of any potential judgment or cost of defense, the Insurer is on notice of the action and has participated in various aspects of the case. 16. REGULATORY MATTERS Since June 1992, the Bank has developed a very positive and proactive relationship with its primary regulators. Results of regular safety and soundness examinations have documented the progress the Bank has achieved. Management is committed to the continuation of this process and maintaining a high standing with the regulators. The following comments refer to regulatory situations that existed in prior years that are reflected in the prior period financial statements provided herein. All of these situations have been successfully resolved and repaired as management transitioned the Bank to its present condition and performance. 56 57 On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"), after completion of their annual examination of the Bank, terminated the Formal Agreement entered into in June, 1992. In December 1993, the Fed terminated the Memo of Understanding entered into in August, 1992. The Formal Agreement had been entered into in June 1992 and required the implementation of certain policies and procedures for the operation of the Bank to improve lending operations and management of the loan portfolio. The Formal Agreement required the Bank to maintain a Tier 1 Risk Weighted Capital ratio of 10.5% and a 6.0% Tier 1 Leverage Ratio. The Formal Agreement mandated the adoption of a written program to essentially reduce criticized assets, maintain adequate loan loss reserves and improve bank administration, real estate appraisal, asset review management and liquidity policies, and restricted the payment of dividends. The agreement specifically required the Bank to: 1) create a compliance committee; 2) have a competent chief executive officer and senior loan officer, satisfactory to the OCC, at all times; 3) develop a plan for supervision of management; 4) create and implement policies and procedures for loan administration; 5) create a written loan policy; 6) develop and implement an asset review program; 7) develop and implement a written program for the maintenance of an adequate Allowance for Loan and Lease Losses, and review the adequacy of the Allowance; 8) eliminate criticized assets; 9) develop and implement a written real estate appraisal policy; 10) obtain and improve procedures regarding credit and collateral documentation; 11) develop a strategic plan; 12) develop a capital program to maintain adequate capital (this provision also restricts the payment of dividends by the Bank unless (a) the Bank is in compliance with its capital program; (b) the Bank is in compliance with 12 U.S.C. Section 55 and 60 and (c) the Bank receives the prior written approval of the OCC District Administrator); 13) develop and implement a written liquidity, asset and liability management policy; 14) document and support the reasonableness of any management and other fees to any director or other party; 15) correct violations of law; and 16) provide reports to the OCC regarding compliance. The Memorandum of Understanding was executed in August 1992 and required 1) a plan to improve the financial condition of CU Bancorp and the Bank; 2) development of a formal policy regarding the relationship of CU Bancorp and the Bank, with regard to dividends, inter-company transactions, tax allocation and management or service fees; 3) a plan to assure that CU Bancorp has sufficient cash to pay its expenses; 4) ensure that regulatory reporting is accurate and submitted on a timely basis; 5) prior approval of the Federal Reserve Bank prior to the payment of dividends; 6) prior approval of the Federal Reserve Bank prior to CU Bancorp incurring any debt and 7) quarterly reporting regarding the condition of the Company and steps taken regarding the Memorandum of Understanding. 57 58 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES NONE. Part III Incorporated by reference from Registrant's definitive proxy statement to be filed within 120 days of fiscal year ended December 31, 1995. Part IV. Exhibits, Financial Statement Schedules and Reports on Form 8 K. (A) (1) and (2) Financial Statements and Financial Statement Schedules - See index at Item 8 of this report. (3) Exhibits 2. Plan of Acquisition, Reorganization arrangement, liquidation or succession. a) Amended and Restated Agreement and Plan of Reorganization between CU Bancorp, California United Bank, N.A. and Corporate Bank dated October 11, 1995 -- incorporated by reference from Registrant's Registration Statement on Form S-4 dated October 26, 1995 (33-63729). b) Agreement and Plan of Reorganization dated January 10, 1996 between CU Bancorp and California United Bank, N.A. and Home Interstate Bancorp and Home Bank and Exhibits thereto. c) Amendment Number One to Agreement and Plan of Reorganization between CU Bancorp and California United Bank, N.A. and Home Interstate Bancorp and Home Bank. 10. Material Contracts a) CU Bancorp Restricted Stock Plan 11. Statements re computation of per share earnings See footnote 1(i) to the financial statements included at Item 8 of this report. 21. Subsidiaries of the Registrant 27. Financial Data Schedule 58 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 1996 C U BANCORP STEPHEN G. CARPENTER By Stephen G. Carpenter President and Chief Executive Officer PATRICK HARTMAN By Patrick Hartman Chief Financial Officer 59 60 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ------- ---- KENNETH BERNSTEIN Director March 28, 1996 _________________ Kenneth Bernstein STEPHEN G. CARPENTER __________________________________ Director, March 28, 1996 Stephen G. Carpenter Chairman/ Chief Executive Officer ________________________________ Director March 28, 1996 Richard H. Close Secretary PAUL W. GLASS ___________________________________ Director March 28, 1996 Paul W. Glass RONALD S. PARKER Director March 28, 1996 ____________________ Ronald S. Parker DAVID I. RAINER ____________________ Director, March 28, 1996 David I. Rainer President, Chief Operating Officer
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrant Which Have Not Registered Securities Pursuant to Section 12 of the Act. The proxy statement with respect to the annual meeting of the shareholders shall be furnished to shareholder subsequent to the filing of this Form 10-K and shall also be furnished to the Securities and Exchange Commission. 60 61 EXHIBIT INDEX 2. Plan of Acquisition, Reorganization arrangement, liquidation or succession. a) Amended and Restated Agreement and Plan of Reorganization between CU Bancorp, California United Bank, N.A. and Corporate Bank dated October 11, 1995 -- incorporated March 28, 1996 by reference from Registrant's Registration Statement on Form S-4 dated October 26, 1995 (33-63729). b) Agreement and Plan of Reorganization dated January 10, 1996 between CU Bancorp and California United Bank, N.A. and Home Interstate Bancorp and Home Bank and Exhibits thereto. c) Amendment Number One to Agreement and Plan of Reorganization between CU Bancorp and California United Bank, N.A. and Home Interstate Bancorp and Home Bank. 10. Material Contracts a) CU Bancorp Restricted Stock Plan 11. Statements re computation of per share earnings See footnote 1(i) to the financial statements included at item 8 to this report. 21. Subsidiaries of the Registrant 27. Financial Data Schedule 61 EX-2.(A) 2 PLAN OF ACQUISITION 1 EXHIBIT 2.(a) AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION By and Among CU BANCORP; CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION; and CORPORATE BANK OCTOBER 11, 1995 1 2 AGREEMENT AND PLAN OF REORGANIZATION This Amended and Restated Agreement and Plan of Reorganization ("Agreement") is made and entered into as of October 11, 1995 by and among CU Bancorp, a California corporation ("Bancorp"); California United Bank, National Association, a national banking association and a wholly-owned subsidiary of Bancorp ("CUB"); and Corporate Bank, a California state chartered bank ("CorpBank"), replacing, amending and restating that certain Agreement and Plan of Reorganization dated as of March 27, 1995 by and among the same parties. RECITALS This Agreement provides for the acquisition of CorpBank by Bancorp by means of a merger ("Merger") of CorpBank with and into CUB, all in accordance with the terms of this Agreement and an agreement of merger to be entered into by and among Bancorp, CorpBank and CUB substantially in the form of Exhibit A hereto ("Agreement of Merger"). The parties hereto have previously entered into an Agreement and Plan of Reorganization dated March 27, 1995, which is hereby replaced, amended and restated in its entirety by the following. In consideration of the mutual covenants, agreements and representations contained herein, the parties hereto agree as follows: 1. THE MERGER AND RELATED MATTERS 1.1 The Merger. The Merger shall become effective upon the filing of the Agreement of Merger with the Office of the Comptroller of the Currency ("OCC") and the Secretary of State of the State of California, in accordance with the provisions of the National Banking Act, the California Corporations Code and the California Financial Code. The date and time of the filing with the OCC is referred to herein as the "Effective Time of the Merger." At the Effective Time of the Merger the following transactions will be deemed to have occurred simultaneously: (a) Merger of CorpBank Into CUB. CorpBank shall be merged with and into CUB (the "Bank Merger"), and the separate corporate existence of CorpBank shall cease. CUB as the entity surviving the Merger is sometimes referred to herein as the "Surviving Association." 1 3 (b) Purchase Price / Conversion of Shares. At the Effective Time of the Merger: (i) Purchase Price. The Purchase Price shall be equal to CorpBank's Shareholders' Equity, (as defined in Subsection (v) below) as of November 30, 1995 (the "Audit Date"), plus or minus, as the case may be, an amount equal to the pro rata net income or net loss from operations for the eleven month period prior to the Audit Date (the "Audit Period") (which pro rata net income shall not include extraordinary gains which for purposes of this measurement shall include, but not be limited to, any recovery from the Bond Claim, as defined below) for the period from the Audit Date to the Calculation Date (the "Applicable Period"). There shall be added to the Purchase Price the amount of any net recovery under the Bond Claim during the Applicable Period (after taxes, expenses and retention), all as determined by Arthur Andersen LLP ("AA") as set forth below. To the extent that the Closing Date is scheduled at a time which is more than seventy-five (75) days after the Audit Date, AA shall conduct an additional review of the period from November 30, 1995 through the month end prior to such Closing Date, and any adjustments to Corporate's internally prepared financial statements for such period which are required by AA as a result thereof, shall be included in the Purchase Price as if they occurred prior to the Audit Date. (ii) Subject to Sections 1.2, 1.4 and clause (iv) of this Section 1.1 (b), each outstanding share of CorpBank Stock (as defined in Section 3.2) will be converted into the right to receive: (A) a number of shares of Bancorp common stock, without par value ("Bancorp Common"), equal to the "Conversion Ratio" plus an amount of cash set forth below. The Conversion Ratio shall be a fraction of which the numerator shall be not less than seventy five percent (75%) and not more than ninety percent (90%) (hereinafter referred to as the "Elected Stock Percentage") of the Purchase Price Per Share and the denominator ("Denominator") shall be $8.00 ("Bancorp Stock Value"); and (B) cash in an amount equal to not more than twenty-five percent (25%) and not less than ten percent (10%) (hereinafter referred to as the "Elected Cash Percentage") of the Purchase Price Per Share. (iii) Purchase Price Per Share shall be a fraction of which the numerator is the Purchase Price and the Denominator is the number of outstanding shares of CorpBank on the Calculation Date on a fully diluted basis. Dissenting Shares, as defined in Section 1.4 below, shall be considered outstanding in calculating the number of outstanding shares on the Calculation Date. (iv) The Elected Stock Percentage shall be not less than seventy-five percent (75%) and not more than ninety percent (90%) and the Elected Cash 2 4 Percentage shall not be less than ten percent (10%) and not more than twenty five percent (25%). The Elected Stock Percentage plus the Elected Cash Percentage shall equal one hundred percent (100%), and shall both be determined by Bancorp, in its sole discretion, no later than the Closing Date. The Elected Stock Percentage and the Elected Cash Percentage shall collectively be referred to herein as the "Elected Percentage". (v) Except as specifically set forth in this Agreement to the contrary, Shareholders' Equity shall be defined pursuant to Generally Accepted Accounting Principles, consistently applied ("GAAP") as set forth in CorpBank's audited financial statements as of the Audit Date. Arthur Andersen, LLP ("AA") shall perform an audit of the CorpBank financial statements and results of operations for the Audit Period (or such later date as the parties shall agree to, in writing) and as of the Audit Date. The examination shall be accompanied by AA's unqualified opinion as to the financial statements. The determination of AA as to CorpBank's shareholders' equity, net income (loss) (which shall for the purposes set forth herein include all expenses and legal fees of the transaction contemplated herein, (including, due inquiry into expenses which can be ascertained, whether or not yet billed) and the net after tax effect of any sale or recovery of the "Bond Claim" as defined below (whether or not it occurs prior to the Audit Date or during the Applicable Period) shall be binding on both parties, subject to Section 8.1 herein. To the extent that the Closing Date is scheduled at a time which is more than seventy-five (75) days after November 30, 1995, an additional review shall be conducted by AA and the determination of AA as to appropriate adjustments to CorpBank's internally prepared financial statements as a result of such review shall be binding on both parties, subject to Section 8.1 herein. (vi) Audits (A) The audit to be conducted by AA shall include a review of the loan and lease portfolio with the scope equal to: all loans in principal amount in excess of $10,000 classified: doubtful, substandard or "especially mentioned" (or a similar rating); non accrual loans and loans past due 30 days or more, in principal amount in excess of $25,000; all loans in excess of $100,000; all construction loans; all REO; and such sampling of other loans such that 65% of the aggregate principal dollar amount of the total loan and lease portfolio should be reviewed. (B) In addition, CorpBank shall cause Buccola and Associates to conduct a review of the loan and lease portfolio of similar scope to that required in Subsection (vi)(A) above, as of October 12, 1995 (to be completed by November 30, 1995). To the extent the Closing is scheduled to take place more than forty-five (45) days after November 30, 1995, Buccola and Associates shall be required to update their review to the extent of all new credits, all credits which in the interim 3 5 are reclassified or which are 60 days or more delinquent and such other matters as may be agreed to among the parties. (vii) The Calculation Date shall be the last business day of the week preceding the Closing Date or such other date as may be mutually agreed upon. The Calculation Date shall not be more than five (5) business days prior to the Closing Date, except pursuant to the mutual agreement of the parties hereto. (c) Exception for Shares Held by Bancorp or CorpBank. Each share of CorpBank Stock which immediately prior to the Effective Time of the Merger is owned by CorpBank or Bancorp or their wholly-owned subsidiaries (other than shares held in a fiduciary capacity) shall, at the Effective Time of the Merger, be canceled and retired and cease to exist, without the payment of any consideration therefor or any conversion thereof into Bancorp Common. For purposes of this Agreement, a Bank shall be deemed wholly-owned by CorpBank or Bancorp if all of such Bank's stock is owned directly by CorpBank or Bancorp (as applicable) or indirectly through one or more other wholly-owned subsidiaries. (d) Effect on CorpBank Stock Options. In accordance with Section 5.12 and prior to the Closing Date (as defined in Section 2.1), CorpBank shall make arrangements satisfactory to Bancorp and CUB for the exercise, surrender or cancellation of all outstanding options to purchase CorpBank Stock, such cancellation to become effective at the Effective Time of the Merger. Any exercise of options must take place prior to the Calculation Date. (e) Effect on CorpBank Fixed Rate, Non-Convertible 8.5% Subordinated Capital Notes Maturing June 30, 1997. In accordance with the provisions of the capital notes (the "Capital Notes"), CUB will assume the Capital Notes. 1.2 No Fractional Shares. No fractional shares of Bancorp Stock shall be issued. Bancorp will pay or cause to be paid cash in lieu of fractional shares of Bancorp Stock which would otherwise be issuable pursuant to Section 1.1. 1.3 Conversion of CorpBank Stock / Exchange of Certificates. (a) Election Procedures. Subject to the terms of this Agreement, each record holder of shares of CorpBank Stock will have the right to specify such holder's election to have his shares of CorpBank Stock converted into Bancorp Common or cash, or to specify that such holder has no election, in accordance with the following procedures: (i) Not later than the Closing Date, a form of letter of transmittal 4 6 and election statement providing for such a specification of election and for the tender to the Exchange Agent (as defined in Section 1.3 (c) herein) of the related share certificates (an "Election Statement") will be mailed to the holders of record of CorpBank Stock as of a date determined by Bancorp and CorpBank. CorpBank will also provide forms of the Election Statement to all persons who become holders of record of CorpBank Stock during the period between such record date and the Election Deadline (as defined in subsection (iv) below) and will make such forms available at its executive offices and such other places as Bancorp and CorpBank deem appropriate. (ii) Any record holder of CorpBank Stock may specify, in an Election Statement meeting the requirements of this SubArticle that, as to all shares of CorpBank Stock covered by such Election Statement: (A) All such shares shall be converted to Bancorp Common ("Stock Election Shares"); (B) All shares shall be converted to cash ("Cash Election Shares"); or (C) A designated portion of such shares shall be converted to cash as Cash Election Shares and a portion of such shares shall be converted to Bancorp Common as Stock Election Shares; or (D) The shareholder has no preference and accordingly makes no election. (iii) Any record holder of CorpBank Stock who is holding such shares for a beneficial owner, or as a nominee for one or more beneficial owners, may submit an Election Statement on behalf of any such beneficial owners. Any beneficial owner of CorpBank Stock on whose behalf a record owner of CorpBank Stock has submitted an Election Statement in accordance with this SubArticle, will be considered a separate holder of CorpBank Stock for purposes of this Agreement. (iv) An Election Statement will be effective only if a properly completed and signed copy thereof accompanied by stock certificates for the shares of CorpBank Stock which such Election Statement covers, shall have been actually received by the Exchange Agent no later than 5:00 P.M., Pacific Time, on the business day mutually selected by Bancorp and CorpBank (such time and day being herein referred to as the "Election Deadline"). If no such day is mutually agree to, the Election Deadline shall be the date fifteen (15) days following the mailing of the form of letter of transmittal and election statement to the CorpBank shareholders. An Election Statement which meets the requirements of this provision is hereinafter referred to as an "Effective Election Statement." 5 7 (v) Shares of CorpBank Stock as to which a record holder makes no election pursuant to an Effective Election Statement, or as to which no Effective Election Statement is filed, are hereinafter referred to as "No Election Shares". (vi) Any record holder of CorpBank Stock who has submitted an Effective Election Statement may at any time until the Election Deadline amend such Election Statement if the Exchange Agent actually receives, no later than the Election Deadline, a later-dated, properly completed and signed, amended Effective Election Statement. (vii) Any record holder of CorpBank Stock may at any time prior to the Election Deadline revoke his Election Statement and withdraw certificates for shares of CorpBank Stock deposited therewith by written notice actually received by the Exchange Agent no later than the Election Deadline. Any notice of withdrawal shall be effective only if it is executed and specifies the record holder of the shares to be withdrawn and the serial numbers shown on the certificates representing the shares to be withdrawn. All Election Statements shall automatically be revoked if the Merger is abandoned for any reason, whereupon the certificates (or guarantees of delivery, as the case may be) for the shares of CorpBank Stock to which each Election Statement relates shall be promptly returned to the person submitting the same. The stock transfer books of CorpBank will be closed and no share transfers will be permitted after the Election Deadline unless the Merger is subsequently abandoned by the parties. (viii) Bancorp and CorpBank will have the right to make rules, not inconsistent with the terms of this Agreement, governing the form, terms and contents of Election Statements, the validity and effectiveness of Election Statements and the manner and extent to which they are to be taken into account in making the determination prescribed by Section 1.3 (b) herein, the issuance and delivery of certificates evidencing Bancorp's Common and cash into which shares of CorpBank Stock are converted in the Merger pursuant to SubArticles 1.1(b) (ii) and (iv) and the payment for fractional interests as prescribed by Section 1.2 herein. (b) Allocation Procedures. The allocation among holders of CorpBank Stock of Bancorp Common or cash pursuant to this Section 1.3 shall be effected as follows: (i) Not less than the Elected Percentage of the CorpBank Shares issued and outstanding at the Effective Time of the Merger (including dissenting Shares) will be converted into Bancorp Common (the "Stock Conversion Number"). 6 8 (ii) If less than the Elected Percentage of CorpBank Stock issued and outstanding at the Effective Time of the Merger (including Dissenting Shares) are Stock Election Shares, allocation of Bancorp Common and cash will be made as follows: (A) First, all Stock Election Shares shall be converted into Bancorp Common; (B) Second, the Exchange Agent shall convert all No Election Shares to Stock Election Shares ("Additional Stock Election Shares") in the event that the aggregate No Election Shares so converted, when added to shares converted into Bancorp Common pursuant to clause (ii) (A) above, are equal to or less than the Stock Conversion Number; (C) Third, in the event that conversion of all No Election Shares to Additional Stock Election Shares pursuant to clause (ii) (B) would result in the issuance of a number of shares of Bancorp Common, when added to the shares of Bancorp Common to be issued in respect of the Stock Election Shares, in excess of the Stock Conversion Number, the number of No Election Shares converted to Additional Stock Election Shares shall be reduced so that the aggregate number of shares of Bancorp Common to be issued as a result of the Merger does not exceed the Stock Conversion Number; and the aggregate Additional Stock Election Shares created upon the conversion of No Election Shares shall then be allocated pro rata to each holder of No Election Shares in the proportion the total No Election Shares of such holder bears to the total number of No Election Shares of all shareholders; (D) Fourth, in the event that conversion of all No Election Shares to Additional Stock Election Shares pursuant to clause (ii) (B) would result in the issuance of a number of shares of Bancorp Common to be issued in respect of the Stock Election, which is less than the Stock Conversion Number, in addition to all No Election Shares, the Exchange Agent shall convert an aggregate number of Cash Election Shares to Additional Stock Election Shares, such that the aggregate number of Stock Election Shares and all Additional Stock Election Shares shall equal the Stock Conversion Number; and the aggregate Additional Stock Election Shares to be created upon the conversion of Cash Election Shares shall then be allocated pro rata to each holder of Cash Election Shares in the proportion that the total Cash Election Shares of such holder bear to the total number of Cash Election Shares of all shareholders; and (E) Fifth, after the allocation in clauses (ii) (A) through (D) have been made, all remaining shares of CorpBank Stock shall be converted into cash. (iii) If more than the Elected Percentage of the total number of shares of CorpBank Stock issued and outstanding at the Effective Time of the Merger (including Dissenting Shares) are Stock Election Shares, allocation of Bancorp Common and cash will be made as follows: 7 9 (A) First, all Cash Election Shares and No Election Shares shall be converted into cash; (B) Second, the Exchange Agent shall convert an aggregate number of Stock Election Shares to Cash Election Shares ("Additional Cash Shares") so that the aggregate number of shares to be converted into cash as a result of the Merger equals the total number of shares of CorpBank Stock immediately prior to the Effective Time of the Merger minus the Stock Conversion Number; and the aggregate Additional Cash Election Shares created upon conversion of Stock Election Shares shall then be allocated pro rata to each holder of Stock Election Shares in the proportion that the total Stock Election Shares of such holder have to the total number of Stock Election Shares of all shareholders; and (C) Any Stock Election Shares not converted to Additional Cash Election Shares pursuant to clause (iii) (B) above shall be converted into Bancorp Common. (c) Exchange Procedures. (i) On or before the Effective Time of the Merger, Bancorp will (i) promptly deliver to a financial institution designated by it to serve as exchange agent (the "Exchange Agent") certificates, registered in the name of the Exchange Agent in its capacity as exchange agent, representing the Bancorp Common issuable in the Merger and cause the Exchange Agent to distribute shares of Bancorp Common in accordance with this Section 1.3, (ii) provide to the Exchange Agent on a timely basis funds necessary to pay cash payable pursuant to Section 1.1 and any cash payable in lieu of fractional shares of Bancorp Common as provided in Section 1.2 and cause the Exchange Agent to distribute such funds in accordance with paragraph (a) of this Section 1.3 and (iii) cause the Exchange Agent to distribute funds on account of dividends and other distributions in accordance with paragraph (b) of this Section 1.3. (ii) Bancorp and the Exchange Agent shall agree that the Exchange Agent shall, with respect to any matter on which the holders of record of Bancorp Common determined as of a record date after the day on which the Effective Time of the Merger occurred shall be entitled to vote or consent, (A) request instructions from the holders of record immediately prior to the Effective Time of the Merger of certificates which immediately prior to the Effective Time of the Merger represented shares of CorpBank Stock and which have not yet been surrendered to the Exchange Agent in exchange for Bancorp Common as to how or whether to vote or consent with respect to the shares of Bancorp Common to which such holders are entitled and which are then held by the Exchange Agent and (B) vote or express consent in writing with respect to any shares of Bancorp 8 10 Common held by it from time to time hereunder only in accordance with such instructions. Bancorp and the Exchange Agent shall further agree that the Exchange Agent shall receive and hold all dividends and other distributions paid with respect to such shares for the account of the persons entitled thereto. (iii) As soon as practicable after the Election Deadline, the Exchange Agent will implement the procedures set forth in Section 1.3(b) and send written notice to each record holder of certificates representing shares of CorpBank Stock converted pursuant to Section 1.3(b) of the results thereof. (iv) Upon surrender for cancellation to the Exchange Agent (either prior to the Election Deadline or otherwise duly surrendered after the Election Deadline) of one or more certificates for shares of CorpBank Stock ("Old Certificates"), accompanied by a duly executed letter of transmittal in proper form, the Exchange Agent shall, promptly after the Effective Time of the Merger, in the case of Old Certificates surrendered prior to the Election Deadline, and as promptly as practical in the case of Old Certificates surrendered after the Election Deadline, deliver to each holder of such surrendered Old Certificates new certificates representing the appropriate number of shares of Bancorp Common ("New Certificates") or checks for the appropriate amount of cash, as applicable, together with checks for payment of cash in lieu of fractional interests to be issued in respect of the Old Certificates. No holder of any Old Certificate shall have any rights as a holder of Bancorp Common until such Old Certificate is surrendered for exchange as provided herein. The holder of an Old Certificate(s) shall have no rights with respect to such shares other than to surrender such certificate or certificates pursuant to this Section 1.3 or to perfect the right of appraisal which such holder may have pursuant to Section 1300 et. seq. of the California Corporations Code ("Section 1300") and 12 U.S.C. Section 215a ("Section 215a"). (v) Unless and until any Old Certificate shall have been surrendered and exchanged as herein provided for New Certificates, each outstanding Old Certificate shall represent, on and after the Effective Time of the Merger, the right to receive the shares of Bancorp Common and/or the cash into which the shares of CorpBank Stock shown thereon have been converted. No dividend or other distribution payable to the holders of record of Bancorp Common as of any time subsequent to the Effective Time of the Merger shall be paid to the holder of any Old Certificate prior to such exchange, but upon such surrender of any Old Certificate there shall be paid to the record holder of the Old Certificate, the amount of dividends or other distributions which theretofore became payable with respect to the number of shares of Bancorp Stock represented by the certificate or certificates so issued in exchange. 9 11 (vi) No transfer taxes shall be payable by any shareholder in respect of the issuance of Certificates for Bancorp Common, except that if any certificates for Bancorp Common is to be issued in a name other than that in which the CorpBank Certificate surrendered shall have been registered, it shall be a condition of such issuance that the that the person requesting such issuance shall properly endorse the certificate or certificates and shall pay to Bancorp any transfer taxes payable by reason thereof, or any prior transfer of such surrendered certificate or establish to the satisfaction of Bancorp that such taxes have been paid or are not payable. (vii) Notwithstanding anything to the contrary set forth herein, if the holder of CorpBank Stock shall be unable to surrender his certificates because such certificates have been lost or destroyed, such holder may deliver in lieu thereof an indemnity bond in form and substance and with surety satisfactory to Bancorp. 1.4 Dissenting Shares. Notwithstanding anything to the contrary contained in this Agreement, shares of CorpBank Stock which are issued and outstanding immediately prior to the Effective Time of the Merger and which are held by shareholders who have not voted such shares in favor of adoption and approval of this Agreement and the Agreement to Merge and have properly exercised their dissenters' rights under Section 1300 and Section 215a ("Dissenting Shares") shall not be converted into or be exchangeable for the right to receive shares of Bancorp Stock and cash or cash in lieu of fractional shares provided for in Section 1.2 herein, but shall be entitled to receive such consideration as shall be determined pursuant to Section 1300 and 215a; provided, however, that if any holder of such shares shall have failed to perfect or shall have effectively withdrawn or lost the holder's right to dissent and receive payment under Section 1300 and 215a, such holder's shares shall thereupon be deemed to have been converted into and to have become exchangeable for, at the Effective Time of the Merger, the right to receive shares of Bancorp Common and cash and cash in lieu of fractional shares pursuant to Section 1.2 herein, without any interest thereon. No payment for Dissenting Shares may be made prior to the Calculation Date. 1.5 Effect of the Merger. By virtue of the Merger and at the Effective Time of the Merger, all of the rights, privileges, powers and franchises and all property and assets of every kind and description of CorpBank shall be vested in and be held and enjoyed by the Surviving Association, without further act or deed, and all the estates and interests of every kind of CorpBank, including all debts due to it, shall be as effectively the property of the Surviving Association as they were of CorpBank, and the title to any real estate vested by deed or otherwise in CorpBank shall not revert or be in any way impaired by reason of the Merger; and all rights of creditors and liens upon any property of CorpBank shall be preserved unimpaired 10 12 and all debts, liabilities and duties of CorpBank shall be debts, liabilities and duties of the Surviving Association and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it, and none of such debts, liabilities or duties shall be expanded, increased, broadened or enlarged by reason of the Merger. 1.6 Name of Surviving Association. The name of the Surviving Association shall be "California United Bank, National Association". 1.7 Articles of Association and Bylaws of Surviving Association. The Articles of Association and Bylaws of CUB as in effect immediately prior to the Effective Time of the Merger shall continue to be the Articles of Association and Bylaws of the Surviving Association. 1.8 Directors and Officers of Surviving Association. The directors of CUB immediately prior to the Effective Time of the Merger shall be the directors of the Surviving Association until their successors have been chosen and qualified in accordance with the Certificate of Incorporation and Bylaws of the Surviving Association. The officers of CUB immediately prior to the Effective Time of the Merger shall be the officers of the Surviving Association until they resign or are replaced or terminated by the Board of Directors of the Surviving Association or otherwise in accordance with the Surviving Association's Articles of Association or Bylaws. 1.9 Special Agreements. Pursuant to Section 6.2(i), not later than five (5) business days after the Execution Date, as a condition subsequent to Bancorp and CUB entering into this Agreement and as a material inducement for Bancorp and CUB to enter into this Agreement, all directors of CorpBank, and all Shareholders of CorpBank holding more than 5% of the outstanding shares of CorpBank Stock (the "Shareholders") shall each enter into separate agreements with Bancorp and CUB substantially in the form attached hereto as Exhibit B pursuant to which each of the Shareholders shall agree to vote or cause to be voted all such shares of CorpBank Stock with respect to which each such Shareholder has voting power on the date hereof or hereafter to approve the transactions contemplated hereby and all requisite matters related thereto and pursuant to which each of the Shareholders shall make certain representations and warranties to Bancorp and CUB. Additionally, each director of CorpBank shall agree not to sell Bancorp stock received pursuant to the transactions contemplated in the Agreement for a period of two full calendar quarters, following the quarter in which the Effective Date occurs. Further each director of CorpBank shall agree to either (i) designate his shares as Stock Election Shares or (ii) designate his shares as part Stock Election Shares and Cash Election Shares in no less than the proportion the Elected Stock 11 13 Percentage bears to the Elected Cash Percentage. 1.10 Adjustment to Shareholders' Equity /Bond Claim / Additional Payment. (a) Bond Claim. CorpBank filed a Bond Claim approximately September 29, 1995 to demand reimbursement under its Bankers' Blanket Bond Policy (Carrier - Chubb and Policy Number 81193606-H) for losses incurred in connection with the actions of former officers as detailed in that certain report and exhibits prepared by The Audit Group and dated July 12, 1995 and supplemented in a letter from CorpBank's counsel (the "Bond Claim"). (b) In the event a recovery under the Bond Claim is received prior to the Calculation Date, the balance, net of taxes, costs, expenses and retention, shall be treated as required by GAAP, as if such recovery occurred prior to the Audit Date. AA shall prepare a calculation of Shareholders' Equity including the effect of the Bond Claim recovery, if any. For purposes of this provision, a recovery shall have been deemed to occur in the event the Carrier makes a payment or payments to CorpBank or CorpBank receives consideration from some third party for the assignment and sale of the Bond Claim. This provision shall be deemed to provide a waiver from provisions below restricting CorpBank's ability to sell assets other than in the ordinary course of business, for the sale of the Bond Claim in any manner deemed prudent and appropriate by CorpBank, and in accordance with such principals of law and regulation as may be applicable thereto. (c) Additional Payment. In the event that there is no recovery from the Bond Claim prior to the Calculation Date, the Purchase Price shall be increased by $200,000. (d) Sale to third party. In the event of an assignment and sale of the Bond Claim to a third party, whether or not related to CorpBank or an affiliate of CorpBank, CorpBank shall provide CUB and Bancorp with the following: (i) The assignment and sale is in accordance and compliance with all provisions of applicable law, including but not limited to the California Financial Code and California Corporations Code; (ii) CorpBank has received the non disapproval of all necessary governmental or regulatory agencies, including but not limited to California Superintendent of Banks and the Federal Deposit Insurance Corporation, if required; (iii) CUB shall have received an opinion of counsel to CorpBank as to compliance with subsections (i) and (ii) above. 12 14 (e) Indemnity. In the event of a sale and assignment of the Bond Claim, CUB and Bancorp shall be indemnified and held harmless by the Purchaser, against any damage, costs, expenses, actions, claims or other matter relative to the Bond Claim. Such indemnity shall include reimbursement for costs and expenses, including outside legal fees incurred in connection with any claim against CUB or Bancorp in connection with the Bond Claim or requests for documents, testimony or other action on the part of CUB or Bancorp. 1.11 Other Agreements (a) All prior agreements between Bancorp and CUB on the one hand and Corporate and / or its affiliates (as "affiliates" are defined under Federal Securities Laws and Regulations, including but not limited to the Securities and Exchange Act of 1934, as amended) are hereby terminated in their entirety, except to the extent that confirmations in the form of Exhibit 1.11 herein, as applicable are received from affiliates within five (5) days of execution of this Amended and Restated Agreement and Plan of Reorganization. (b) All parties intend that this transaction qualify as a tax-free reorganization under Internal Revenue Code Section 368(a)(1)(A) and 368(a)(2)(D), (the forward triangular merger provision), and corresponding state provisions. AA will review all tests for qualification as a tax-free reorganization immediately prior to the Closing Date. If, based on the review of these tests, the parties to the Agreement believe there is a significant risk of the transaction disqualifying as a tax-free reorganization, the parties will amend the Agreement to reduce such risks. 2. THE CLOSING 2.1 Closing Date; Transactions Contemplated by this Agreement. (a) Date of Closing. Consummation of the transactions contemplated by this Agreement ("Closing") shall, unless another date or place is agreed in writing by the parties hereto, take place at the offices of CUB, 16030 Ventura Boulevard, Encino, California 91436, on the first Friday following the business week in which the following occurred: the last to occur of (i) the receipt of all approvals and consents and expiration of all waiting periods specified in Sections 6.1(a) and (c) hereof and (ii) satisfaction of the conditions precedent set forth in Section 6.2(t) or written waiver of such conditions by Bancorp and CUB in their sole discretion (the "Closing Date"). (b) Transactions Contemplated. The transactions contemplated by this 13 15 Agreement include, without limitation, the Bank Merger (as defined in Section 1.1 (a). 14 16 2.2 Execution of Agreement of Merger. Prior to the Closing Date, and as soon as practicable after adoption and approval of this Agreement by the shareholders of CorpBank and the shareholder of CUB, the Agreement of Merger (as amended, if necessary, to conform to any requirements of any regulatory authority having authority over the Merger) shall be executed by Bancorp, CUB and CorpBank. On the Closing Date, the Agreement of Merger, together with all requisite certificates, shall be duly filed with the OCC in accordance with applicable laws and regulations and with the California Secretary of State. 2.3 Documents to be Delivered. At the Closing, the parties shall deliver, or cause to be delivered, such documents or certificates as may be necessary, in the reasonable opinion of counsel for any of the parties, to effectuate the transactions called for in this Agreement. If, at any time after the Effective Time of the Merger, Bancorp or the Surviving Association or its successors or assigns shall determine that any further conveyance, assignment or other documents or any further action is necessary or desirable to further effectuate the transactions set forth herein or contemplated hereby, the officers and directors of the parties hereto shall execute and deliver, or cause to be executed and delivered, all such documents as may be reasonably required to effectuate such transactions. 3. REPRESENTATIONS AND WARRANTIES OF CORPBANK AND CORPBANK SUBSIDIARIES CorpBank and CorpBank Subsidiaries (as defined in Section 3.3) represent and warrant to Bancorp and CUB as follows (exceptions to the representations and warranties set forth below and reflected in a Schedule shall be clearly labeled to identify the Schedule to which they apply and shall only be necessary at inception of the Agreement to the extent that the schedules as of August 1, 1995 previously provided shall require updating, thereafter schedules shall be updated as required herein): 3.1 Organization, Standing and Power. CorpBank is a California corporation, duly chartered as a California state chartered bank, duly organized, validly existing and in good standing under the laws of the state of California. CorpBank has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted. CorpBank is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all states or other jurisdictions (all of which are listed in Schedule 3.1(a)) in which such qualification or authorization is necessary, and there has not been any claim by any other state or jurisdiction to the effect that CorpBank is required to qualify or otherwise be authorized to do business as a foreign corporation therein. Schedule 3.1(b) contains true and correct copies of CorpBank's Articles of 15 17 Incorporation and Bylaws, as amended and in effect as of the date hereof. 3.2 Capitalization. As of the date of this Agreement, the authorized capitalization of CorpBank consists solely of Five Million (5,000,000) shares of common stock, without par value ("CorpBank Stock"), of which Five Hundred Thousand (500,000) shares are issued and outstanding and One Million Dollars ($1,000,000) in principal amount of capital notes due June 30, 1997 ("Capital Notes"). All outstanding shares of capital stock of CorpBank are duly authorized and validly issued and are fully paid and nonassessable except, as provided for in Section 662 of the California Financial Code. The capital notes are validly issued and are held by eleven (11) holders. Except for stock options covering not more than 92,500 shares of CorpBank Stock granted pursuant to CorpBank's 1991 Employee Stock Option Plan, there are no outstanding options, warrants, commitments, agreements or other rights in or with respect to the unissued shares of CorpBank Stock, CorpBank Preferred Stock, or stock of any CorpBank Subsidiary or any other securities convertible into CorpBank Stock, CorpBank Preferred Stock, or stock of any CorpBank Subsidiary. 92,500 shares of CorpBank Stock are reserved for exercise of outstanding stock options under the 1991 Employee Stock Option Plan. Schedule 3.2(b) sets forth the name of each holder of a CorpBank Stock option, the number of shares of CorpBank Stock covered by each such holder's option, the exercise price per share and the expiration date of each such holder's option. Immediately prior to the Effective Time of the Merger, all issued and outstanding CorpBank Stock will have been either outstanding on the date of this Agreement, or issued upon exercise of stock options outstanding pursuant to the 1991 Employee Stock Option Plan. 3.3 Subsidiaries. CorpBank does not own, directly or indirectly (except as pledgee pursuant to loans which are not in default), any equity position or other voting interest in any corporation, partnership, joint venture or other entity, except as set forth on Schedule 3.3. Schedule 3.3 correctly lists each Subsidiary of CorpBank (individually "CorpBank Subsidiary" or collectively "CorpBank Subsidiaries"). Each CorpBank Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation as stated in Schedule 3.3 and has the corporate power and authority to carry on its business as it is now conducted and to own, lease and operate its properties. Each CorpBank Subsidiary is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all states or other jurisdictions (all of which are listed in Schedule 3.3) in which such qualification or authorization is necessary, and there has not been any claim by any other state or jurisdiction to the effect that an CorpBank Subsidiary is required to qualify or otherwise be authorized to do business as a foreign corporation therein. Except as set forth in Schedule 3.3, CorpBank owns of record and beneficially 100% of each class of the 16 18 outstanding capital stock of each CorpBank Subsidiary free and clear of any lien, encumbrance or security interest and of any adverse claim of any kind. 3.4 Corporate Bank. CorpBank is authorized by the California Superintendent of Banks (the "Superintendent") to conduct a general banking business. CorpBank is not a member of the Federal Reserve System. CorpBank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") in the manner and to the full extent provided by law. 3.5 Reports and Financial Statements. CorpBank has previously furnished to CUB true and complete copies of its (i) Annual Report to Shareholders for the years ended December 31, 1994, 1993 and 1992, (ii) Quarterly Call Reports for the calendar quarters ended March 31, and June 30, 1995 (iii) proxy statements relating to all meetings of shareholders (whether special or annual) during 1995, 1994, 1993 and 1992, and (iv) all other reports, registration statements or filings made by CorpBank with the Superintendent, the FDIC or the Securities and Exchange Commission ("SEC") since January 1, 1992 (collectively the "CorpBank Filings"). As of their respective dates, the CorpBank Filings and any other materials distributed to shareholders, including but not limited to proxy statements for annual shareholder meetings in 1992, 1993, 1994, and 1995, were in compliance, in all material respects, with the requirements of their respective forms and were true and complete in all material respects and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. CorpBank has also furnished to CUB its audited consolidated financial statements for the years ended December 31, 1992 and 1993, certified by Grant Thornton ("GT"). The audited consolidated financial statements of CorpBank provided to CUB or to be provided in the future and the unaudited consolidated interim financial statements previously furnished to CUB or included in the CorpBank Filings (collectively the "CorpBank Financial Statements") were (or will be) prepared in accordance with generally accepted accounting principles applied on a consistent basis ("GAAP") and except as disclosed in the CorpBank Financial Statements or the notes thereto and present fairly the consolidated financial position of CorpBank and the CorpBank Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flow for the periods then ended, subject, in the case of the unaudited consolidated interim financial statements, to normal recurring adjustments. Neither the financial statements referred to above nor any report (including, without limitation, annual reports to shareholders, prospectus or definitive proxy statement), or any amendment or supplement thereto, filed, or to be filed, prior to the Effective Time of the Merger with the Superintendent, FDIC, OCC, or SEC by or on behalf of CorpBank contains (or will contain when furnished or filed) any untrue statement 17 19 of a material fact or omits (or will omit when furnished or filed) to state a material fact necessary in order to make the statements contained therein not misleading. 3.6 CorpBank's and CorpBank Subsidiaries' Authority. The execution and delivery by CorpBank and CorpBank Subsidiaries of this Agreement and the Agreement of Merger and, subject to the requisite approval of the shareholders of CorpBank, the consummation of the transactions contemplated hereunder or thereunder have been duly and validly authorized by all necessary corporate action on the part of CorpBank and CorpBank Subsidiaries, and this Agreement is, and the Agreement of Merger will be upon due certification, execution, acknowledgment and filing thereof in accordance with applicable law, a valid and binding obligation of CorpBank and CorpBank Subsidiaries, enforceable in accordance with their terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles. Except as set forth in Schedule 3.6, neither the execution and delivery by CorpBank and CorpBank Subsidiaries of this Agreement or the Agreement of Merger, nor the consummation of the transactions contemplated herein or therein, nor compliance by CorpBank and CorpBank Subsidiaries with the provisions hereof or thereof, will (i) conflict with or result in a breach of any provision of their respective Articles of Incorporation or Bylaws; (ii) constitute a breach of, or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which CorpBank or any CorpBank Subsidiary is a party, or by which CorpBank or any CorpBank Subsidiary or any of their respective properties or assets are bound, except where such breach or default would not have a material adverse effect on the consolidated financial condition, results of operations or prospects of CorpBank; (iii) constitute a breach of, or result in a default (or give rise to any rights of termination, acceleration or cancellation, or any right to acquire any securities or assets) under any material agreement to which CorpBank or any CorpBank Subsidiary or any of their respective properties or assets are bound; or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to CorpBank or any CorpBank Subsidiary. No consent or approval of, notice to or filing with any governmental authority having jurisdiction over any aspect of the business or assets of CorpBank or any CorpBank Subsidiary, and except as set forth in Schedule 3.6 no consent or approval of or notice to or filing with any other person or entity, is required in connection with the execution and delivery by CorpBank and CorpBank Subsidiaries of this Agreement or the Agreement of Merger or the consummation by CorpBank and CorpBank Subsidiaries of the transactions contemplated hereunder or thereunder, except approval of the Merger by the 18 20 shareholders of CorpBank, and such approvals as may be required by the OCC pursuant to Sections 215a and 1828(c) of Title 12 of the United States Code or any successor statutes ("Merger Statutes") or the Superintendent pursuant to California Financial Code Section 2071 or otherwise with respect to the Merger, or other applicable law; and the declaration by the SEC and state securities law regulatory authorities that the Registration Statement (as defined in Section 5.11) is effective and that Bancorp Stock to be issued in connection with the Merger is qualified under applicable state securities laws. 3.7 Insurance. Except as set forth in Schedule 3.7, CorpBank and the CorpBank Subsidiaries have, and at all times within five years of the date of this Agreement have had, in full force and effect policies of insurance and bonds (including, without limitation, bankers' blanket bond, fidelity coverage, director and officer liability, fire, third party liability, use and occupancy) with respect to their respective assets and businesses and against casualties and contingencies which in the judgment of CorpBank and the CorpBank Subsidiaries are adequate and appropriate to cover their respective assets and businesses and are in amounts and coverages customarily provided for by similar institutions. Set forth in Schedule 3.7 is a schedule of all policies of insurance and bonds (other than title or credit insurance) carried and owned by CorpBank and the CorpBank Subsidiaries, showing the name of the insurance or bonding company, a summary of the coverage, the amounts, the deductible feature, the annual premiums and the expiration dates. If any such policy or bond is changed, terminated or modified following the date of this Agreement, such termination, change or modification shall be promptly disclosed to Bancorp and CUB in writing. Neither CorpBank nor any CorpBank Subsidiary is in default under any such policy of insurance or bond such that it could be canceled and all material claims thereunder have been filed in timely fashion. CorpBank and each CorpBank Subsidiary have filed claims with or given notice of claim to their respective insurers or bonding companies with respect to all material matters and occurrences for which they believe they have coverage. 3.8 Proxy Statement. The Proxy Statement required pursuant to Section 5.11 and any other documents to be filed with the Superintendent, OCC, FDIC, the SEC or any regulatory authority in connection with the transactions contemplated by this Agreement with respect to all information set forth therein relating to CorpBank and the CorpBank Subsidiaries, the Merger and in respect to this Agreement and the Agreement of Merger will, at the respective times such documents are filed or become effective, and with respect to the Proxy Statement, at the time of mailing to shareholders, and at the time of the shareholders' meeting: (a) comply in all material respects with the provisions of all applicable 19 21 regulations issued by the SEC or the OCC pursuant to the Securities Exchange Act of 1934, as amended ("1934 Act"), and all other applicable laws and regulations; and (b) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or omit any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which have become false or misleading. 3.9 Books and Records. (a) The minute books of CorpBank and the CorpBank Subsidiaries contain (i) true, accurate and complete records of all meetings and actions taken by the respective Boards of Directors, Board committees and shareholders of CorpBank and the CorpBank Subsidiaries and (ii) true and complete copies of their respective charter documents and bylaws and all amendments thereto. The books and records of CorpBank and the CorpBank Subsidiaries accurately reflect in all material aspects their respective businesses and affairs. (b) CorpBank and each of the CorpBank Subsidiaries have records which accurately and validly reflect, in all material respects, their respective transactions and accounting controls sufficient to insure that such transactions are (i) in all material respects, executed in accordance with management's general or specific authorization, and (ii) recorded in conformity with GAAP; such records, to the extent they contain important information pertaining to CorpBank or any CorpBank Subsidiary which is not easily and readily available elsewhere, have been duplicated, and such duplicates are stored safely and securely pursuant to procedures and techniques reasonably adequate for companies of the sizes of CorpBank and the CorpBank Subsidiaries and in the respective businesses in which CorpBank and the CorpBank Subsidiaries are engaged; and the data processing equipment, data transmission equipment, related peripheral equipment and software used by CorpBank and the CorpBank Subsidiaries in the operations of their respective businesses (including any disaster recovery facility) to generate and retrieve such records are reasonably adequate for companies of the sizes of CorpBank and the CorpBank Subsidiaries and in the respective businesses in which CorpBank and the CorpBank Subsidiaries are engaged. 3.10 Title to Assets. CorpBank and the CorpBank Subsidiaries have good and marketable title to all material properties and assets, other than real property, owned or purported to be owned by CorpBank and CorpBank Subsidiaries free 20 22 and clear of all mortgages, liens, encumbrances, pledges or charges of any kind or nature, except for (i) liens for current taxes not yet due and payable; (ii) liens incurred in the ordinary course of business and which do not materially impair the business of CorpBank or any CorpBank Subsidiary or materially detract from the usefulness of the properties subject thereto; or (iii) such liens as are disclosed in the CorpBank Financial Statements of December 31, 1994 or in Schedule 3.10. 3.11 Real Estate. (a) Schedule 3.11(a) contains a list of all real property, including leaseholds, owned by CorpBank and CorpBank Subsidiaries. True, correct and complete copies of all such leases are included in Schedule 3.11(a). Schedule 3.11(b) contains, among other things, an accurate summary of all material commitments which CorpBank or any CorpBank Subsidiary has to improve real estate owned by it. Schedule 3.11(c) contains a list of other real estate owned ("OREO") by CorpBank and CorpBank Subsidiaries. CorpBank and CorpBank Subsidiaries have good and marketable title to all the real property and valid leasehold interests in the leaseholds described in Schedules 3.11(a), (b) and (c), free and clear of all mortgages, covenants, conditions, restrictions, easements, liens, security interests, charges, claims, assessments and encumbrances, except for (i) rights of lessors, co-lessees or sublessees in such matters which are reflected in the leases; (ii) current taxes not yet due and payable; (iii) such as are described in any title policies delivered pursuant to this Section 3.11; (iv) such imperfections of title and encumbrances, if any, as do not in the aggregate materially and adversely detract from the value of or materially and adversely interfere with the present use of such property; and (v) as described in Schedule 3.11(d). True, correct and complete copies of title policies for properties described in Schedules 3.11(a) and (c) as owned by CorpBank or any CorpBank Subsidiary are included therein. To the best knowledge of CorpBank and CorpBank Subsidiaries, the activities of CorpBank and CorpBank Subsidiaries with respect to all real property and leaseholds owned by any of them for use in connection with their respective operations are in all material respects permitted and authorized by applicable zoning laws, ordinances and regulations and all laws and regulations of any governmental department or agency relative to environmental matters affecting such properties, except as otherwise disclosed in Schedule 3.11(e). CorpBank and CorpBank Subsidiaries enjoy peaceful and undisturbed possession under all material leases to which they are parties, and all of such leases are valid and in full force and effect. Except as set forth in Schedule 3.11 (g) neither CorpBank or any CorpBank Subsidiary are engaged in real estate development or in any business other than commercial banking, and have not been so engaged since August 1, 1991. 21 23 (b) Except as set forth in Schedule 3.11(f), there has not been any generation, use, handling, transportation, treatment, storage, release or disposal of any Hazardous Substance in connection with the conduct of the business of CorpBank or any CorpBank Subsidiary that has or might result in any liability under any Environmental Law and there has never been a use of any of the real property owned by CorpBank or any CorpBank Subsidiary, that has or might result in any liability under any Environmental Law; no underground storage tanks or surface impoundments are on or in the real property owned by CorpBank or any CorpBank Subsidiary; and no asbestos or polychlorinated biphenyls are contained or located on any of the real property owned by CorpBank or any Corp Bank Subsidiary. The term "Hazardous Substances" as used herein shall mean (i) substances that are defined or listed in, or otherwise classified pursuant to, or the use or disposal of which are regulated by, any Environmental Law as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity;" (ii) oil, petroleum or petroleum derived from substances and drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources; (iii) any flammable substances or explosives, any radioactive materials, any hazardous wastes or substances, any toxic wastes or substances or any other materials or pollutants which pose a hazard to any property or to Persons on or about such property; and (iv) asbestos in any form or electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. The term "Environmental Law" as used herein shall mean any federal, state, provincial or local statute, law, ordinance, rule, regulation, order, consent, decree, judicial or administrative decision or directive of the United States or other jurisdiction whether now existing or as hereinafter promulgated, issued or enacted relating to: (A) pollution or protection of the environment, including natural resources; (B) exposure of persons, including employees, to Hazardous Substances or other products, materials or chemicals; (C) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of chemical or other substances from industrial or commercial activities; or (D) regulation of the manufacture, use or introduction into commerce of substances, including, without limitation, their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage and disposal. For the purposes of this definition the term "Environmental Law" shall include, without limiting the foregoing, the following statutes, as amended from time to time: (1) the Clean Air Act, as amended, 42 U.S.C. Section 7401 et seq.; (2) the Federal Water Pollution 22 24 Control Act, as amended, 33 U.S.C. Section 1251 et seq.; (3) the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et seq., (4) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (including the Superfund Amendments and Reauthorization Act of 1986), 42 U.S.C. Section 2601 et seq.; (5) the Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq.; (6) the Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651; (7) the Emergency Planning and Community Right-To-Know Act of 1986, 42 U.S.C. Section 1101 et seq.; (8) the Mine Safety and Health Act of 1977, as amended, 30 U.S.C. Section 801 et seq.; (9) the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; and (10) all comparable state and local laws, laws of other jurisdictions or orders and regulations including, but not limited to, the Carpenter-Presley-Tanner Hazardous Substance Account Act, Cal. Health & Safety Code Section 25300 et seq. 3.12 Legal Proceedings; Agreements with Banking Authorities. (a) Except as set forth on Schedule 3.12(a), there is no private or governmental suit, claim, action, arbitration or proceeding pending, nor any private or governmental suit, claim, action, arbitration or proceeding to CorpBank's or any CorpBank Subsidiary's knowledge threatened, nor does CorpBank or any CorpBank Subsidiary know of any facts or circumstances which would form a basis for any such suit, claim, action, arbitration or proceeding against CorpBank or any CorpBank Subsidiary or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of CorpBank or any CorpBank Subsidiary. Also, except as provided on Schedule 3.12(a), there are no judgments, decrees, stipulations or orders against CorpBank or any CorpBank Subsidiary enjoining it or any of its respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. Schedule 3.12(b) contains summary reports of CorpBank's and CorpBank Subsidiaries' attorneys on all pending litigation to which CorpBank or any CorpBank Subsidiary is a party and which names CorpBank or any CorpBank Subsidiary as a defendant or cross-defendant. Schedule 3.12(c) contains a true, correct and complete list of all pending litigation in which CorpBank or any CorpBank Subsidiary is a named party. (b) Except as set forth on Schedule 3.12(d), neither CorpBank nor any CorpBank Subsidiary is a party to any agreement or memorandum of understanding with any federal, state or foreign governmental or regulatory authority charged with the supervision or regulation of banks or bank holding companies or engaged in the insurance of bank deposits that restricts the conduct of its business, or in any manner relates to its capital adequacy, its credit or investment policies or its management. 23 25 3.13 Taxes. Except as set forth on Schedule 3.13, (i) all federal income tax returns, all state tax returns, and all real and personal property, sales, use and other tax returns and reports that are required by law to be filed by or on behalf of CorpBank or any CorpBank Subsidiary have been duly prepared and filed; (ii) all taxes shown to be due and payable by CorpBank or any CorpBank Subsidiary on those returns, or which are otherwise due and payable, whether disputed or not, have been paid or the liability therefor is reflected in the CorpBank Financial Statements; (iii) CorpBank and CorpBank Subsidiaries have paid or deposited all taxes, tax penalties or interest owed by them or which they are obligated to withhold and deposit from amounts paid to any employee, creditor, depositor or third party; and (iv) CorpBank and CorpBank Subsidiaries have complied with all reporting requirements of the Internal Revenue Code of 1986 or its predecessor statutes as applicable (the "Code") including, but not limited to, obtaining taxpayer identification numbers. The current status of any audits of those returns by the Internal Revenue Service or other applicable agencies is as set forth in Schedule 3.13. There are no agreements by CorpBank or any CorpBank Subsidiary waiving a statute of limitations or extending the time for assessment or payment of any taxes payable by any of them. 3.14 Compliance with Laws and Regulations. (a) Except as set forth on Schedule 3.14, neither CorpBank nor any CorpBank Subsidiary is in default under or in breach of any law, ordinance, rule, regulation, order, judgment or decree applicable to it promulgated by any governmental agency having authority over it, where such default or breach would have the lesser of: (I)a material adverse effect on the consolidated financial condition, results of operations, business or prospects of CorpBank; or (ii) a $15,000 cost or penalty. (b) CorpBank and each of the CorpBank Subsidiaries have conducted their businesses in accordance with all applicable federal, foreign, state and local laws, regulations and orders including, without limitation, disclosure, usury, equal credit opportunity, truth in lending, equal employment, fair credit reporting, antitrust, licensing and other laws, regulations and orders, and the forms, procedures and practices used by CorpBank and each of the CorpBank Subsidiaries are in compliance with such laws, regulations and orders except for such violations or non-compliance as will not have a material adverse effect on the consolidated financial condition, results of operations, business or prospects of CorpBank. 3.15 Performance of Obligations. Except as set forth on Schedule 3.15, CorpBank and CorpBank Subsidiaries have performed in all respects all of the 24 26 obligations required to be performed by them to date and are not in default under or in breach of any term or provision of any covenant, contract, lease, indenture or any other covenant to which CorpBank or any CorpBank Subsidiary is a party or is subject or is otherwise bound, and no event has occurred which, with the giving of notice or the passage of time or both, would constitute such default or breach, where such default or breach would have a material adverse effect on the consolidated financial condition, results of operations, business or prospects of CorpBank. No party with whom CorpBank or any CorpBank Subsidiary has an agreement which is material to the consolidated financial condition, results of operations or prospects of CorpBank is in default thereunder, except for certain loans made by the Bank which have been identified to Bancorp and CUB. 3.16 Employees. Except as set forth in Schedule 3.16(a), there are no understandings for the employment of any officer or employee of CorpBank or any CorpBank Subsidiary which are not terminable by CorpBank or any CorpBank Subsidiary without liability on not more than 30 days' notice. Except as set forth in Schedule 3.16(b), there are no material controversies pending or threatened between (i) CorpBank or any CorpBank Subsidiary and (ii) any of their respective current or former employees. Except as disclosed in the CorpBank Financial Statements at December 31, 1993 or 1994 or on Schedule 3.16(c), all material sums due for employee compensation and benefits (including vacation and sick leave ) have been duly and adequately paid or provided for and all deferred compensation obligations are fully funded. Neither CorpBank nor any CorpBank Subsidiary is a party to any collective bargaining agreement with respect to any of their respective employees or any labor organization to which their employees or any of them belong. Except as set forth on Schedule 3.16(c), no director, officer or employee of CorpBank or any CorpBank Subsidiary is entitled to receive any payment of any amount under any existing employment agreement, severance plan or other benefit plan as a result of the consummation of any transaction contemplated by this Agreement. 3.17 Brokers and Finders. Neither CorpBank nor any CorpBank Subsidiary is a party to any agreement with any investment banker, broker or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for or contemplated herein will result in any liability to any such investment banker, broker or finder. CorpBank agrees to indemnify and hold Bancorp and CUB harmless from and against any and all claims, liabilities or obligations with respect to any fees, commissions or expenses asserted by any person on the basis of any act, statement, agreement or commitment alleged to have been made by CorpBank or any CorpBank Subsidiaries or affiliates relating to the employment of any such investment broker, broker or finder relating to the execution of this Agreement or the consummation 25 27 of the transactions contemplated hereby. 3.18 Material Contracts. Except as set forth on Schedule 3.18 or excepted below, neither CorpBank nor any CorpBank Subsidiary is a party to any material contract, agreement, understanding, commitment or offer, whether written or oral, which may become a binding obligation if accepted by another person (collectively referred to as an "Understanding") including the following: (a) Any loan, letter of credit, pledge, security agreement, lease (excluding leases of real property listed on Schedule 3.11(a)), guarantee, commitment or subordination agreement or other similar or related type of Understanding as to which CorpBank or any CorpBank Subsidiary is a debtor, pledgor, lessee or obligor; (b) Any Understanding dealing with advertising, brokerage, licensing, dealership, representative or agency relationships providing for an aggregate annual payment in excess of $5,000; (c) Any profit-sharing, group insurance, bonus, deferred compensation, stock option, severance pay, pension, retirement or other employee benefit plan; (d) Any written correspondent banking contracts; (e) Any Understanding (other than this Agreement) for the sale of their respective assets other than in the ordinary course of business or for the grant of any preferential right to purchase any of their respective assets, properties or rights, or any Understanding which requires the consent of any third party to the transfer and assignment of any assets, properties or rights; (f) Any Understanding which provides for an annual payment in excess of $5,000 in the aggregate to purchase, sell or provide services, materials, supplies, merchandise, facilities or equipment and which is not terminable without penalty on not more than 30 days' notice; (g) Any Understanding for any one capital expenditure or series of capital expenditures which is in excess of $5,000 individually or $10,000 in the aggregate; (h) Any Understanding to make, renew or extend the term of a loan (not fully disbursed or funded as of DECEMBER 31, 1994) to any person or to any affiliate of such person, which undisbursed or unfunded amounts, when aggregated with all outstanding indebtedness of such person or any affiliate of such person to 26 28 CorpBank or any CorpBank Subsidiary, would exceed $25,000. The term "person" as used herein and throughout this Agreement shall mean any individual, corporation, association, partnership, joint venture or other entity or any government or governmental department or agency. The term "affiliate of" or a person "affiliated with" a specific person as used herein and throughout this Agreement shall mean a person that directly or indirectly through one or more intermediaries controls or is controlled by or under common control with the persons specified; (i) Any Understanding of any kind, except for deposit relationships, with any director or officer of CorpBank or any CorpBank Subsidiary or with any affiliate or any member of the immediate family of any such director or officer. Such understandings shall include, but not be limited to, any director or officer indemnification agreements. The term "immediate family" as used herein and throughout this Agreement shall mean a person's spouse, parents, in-laws, children and siblings; (j) Any Understanding which would be terminable other than by CorpBank or any CorpBank Subsidiary as a result of the consummation of the transactions contemplated by this Agreement; (k) Any contract of participation with any other bank in any loan entered into by CorpBank or any CorpBank Subsidiary subsequent to December 31, 1994 in excess of $100,000 or any sales of assets of CorpBank or any CorpBank Subsidiary with recourse of any kind to CorpBank or any CorpBank Subsidiary except the sale of mortgage loans, servicing rights, repurchase or reverse repurchase agreements, securities or other financial transactions in the ordinary course of business; (l) Any Understanding of any kind that binds CorpBank or any CorpBank Subsidiary and contains a covenant not to compete or restricts in any other manner the ability of CorpBank to engage in or conduct any activity; or (m) Any Understanding not otherwise disclosed or excepted pursuant to this Section 3.18 which is material to the consolidated financial condition, results of operations, assets or business of CorpBank. True and correct copies of all documents relating to the foregoing Understandings are attached as Schedule 3.18. 3.19 Absence of Certain Changes. Except as set forth on Schedule 3.19, since JUNE 30, 1995 the businesses of CorpBank and CorpBank Subsidiaries have been 27 29 conducted diligently and only in the ordinary course, in the same manner as theretofore conducted, and there has not been any: (a) Material adverse change in, or development which is likely to result in a material adverse change in or affect, the business, prospects, financial position, management, shareholders' equity or results of operations of CorpBank on a consolidated basis; (b) Damage, destruction or loss to property (whether or not covered by insurance) individually or in the aggregate that materially and adversely affects the financial condition, property, business or prospects of CorpBank on a consolidated basis; (c) Material contract, agreement, license or understanding which CorpBank or any CorpBank Subsidiary has entered into or to which CorpBank or any CorpBank Subsidiary is a party which has been terminated or amended other than in the ordinary course of business; (d) Capital expenditure exceeding $5,000 individually or $25,000 in the aggregate; (e) Labor trouble, dispute or problem of any character involving employees having a material adverse effect upon the financial condition, property, business or prospects of CorpBank on a consolidated basis; (f) Change in accounting policies or practices; (g) Material revaluation by CorpBank on a consolidated basis of any of its assets except as required by GAAP; (h) Increase in the salary schedule, compensation, rate, fees or commissions, or the declaration, payment, commitment or obligation of any kind directly or indirectly through the payment by CorpBank or any CorpBank Subsidiary of a bonus or other additional salary, compensation, fee or commission to any person, except for additional sums for increases paid in accordance with employment contracts disclosed in Schedule 3.18 or paid in a manner consistent with past practice in accordance with policies of CorpBank and CorpBank Subsidiaries disclosed to Bancorp and CUB in writing prior to the date hereof; (i) Sale, assignment or transfer of any asset of CorpBank or any CorpBank Subsidiary except in the usual and ordinary course of business; 28 30 (j) Mortgage, pledge or encumbrance of any asset of CorpBank or any CorpBank Subsidiary other than liens for taxes not yet due, pledges or security interests given in connection with the acceptance of repurchase agreements or government deposits, and as set forth in Sections 3.10 and 3.11; (k) Declaration, setting aside or payment of any interest or dividend with respect to any CorpBank security; (l) Waiver or release of any right or claim of CorpBank or any CorpBank Subsidiary except in the usual and ordinary course of business; or (m) Declaration, setting aside or payment of any dividend or distribution with respect to CorpBank Stock, or the stock of any CorpBank Subsidiary or the issuance of any shares of, or options to purchase, CorpBank Stock, or any other securities of CorpBank or any securities of any CorpBank Subsidiary, or the direct or indirect redemption, acquisitions, repurchase or other acquisition of securities of CorpBank or any CorpBank subsidiary by CorpBank or any CorpBank subsidiary. 3.20 Licenses and Permits. CorpBank and CorpBank Subsidiaries have all licenses and permits which are necessary for the conduct of their respective businesses and such licenses are in full force and effect. The properties and operations of CorpBank and CorpBank Subsidiaries are and have been maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. 3.21 Undisclosed Liabilities. Neither CorpBank nor any CorpBank Subsidiaries have any liabilities or obligations, either accrued or contingent, which are material to CorpBank on a consolidated basis and which have not been either (i) reflected or disclosed in the CorpBank Financial Statements as of December 31, 1994 or as of June 30, 1995; (ii) incurred subsequent to December 31, 1994 in the ordinary course of business; or (iii) disclosed in Schedule 3.21. CorpBank knows of no basis for the assertion against it or any CorpBank Subsidiary of any liability, obligation or claim (including, without limitation, that of any regulatory authority or Environmental Law or Hazardous Substance) that might result in or cause material adverse change in the consolidated financial condition, results of operations or prospects of CorpBank which is not fairly reflected in the CorpBank Financial Statements or otherwise disclosed in the Schedules to this Agreement. 3.22 Loans and Investments. All loans and investments of CorpBank and CorpBank Subsidiaries are in all material respects legal, enforceable and authorized under applicable federal and state laws and regulations except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium or 29 31 other similar laws affecting the rights of creditors generally and by general equitable principles. Except as set forth in Schedule 3.22, no loans or investments held by CorpBank or CorpBank Subsidiaries are, at June 30, 1995 (i) more than 60 days past due with respect to any scheduled payment of principal or interest; (ii) classified as "loss," "doubtful," "substandard," "special mention" or "criticized" by federal or state banking regulators; or (iii) on a non-accrual status in accordance with CorpBank and CorpBank Subsidiaries' loan review procedures. None of such investments are subject to any restriction, contractual, statutory or other, that would materially impair the ability of the entity holding such investment to dispose freely of any such investment at any time, except restrictions on the public distribution or transfer of such investments under the Securities Act of 1933, as amended ("Securities Act"), and the regulations thereunder, or state securities laws. (a) As to the loans made by CorpBank and each of them, except as set forth on Schedule 3.22(a): (i) CorpBank is the sole owner and holder of each such loan and the documents related thereto; (ii) CorpBank has full right and authority to sell, assign and transfer such Loan, in the event such a sale is desired; (iii) No participation has been sold in such loan; (iv) Such loan complied, as of its date of origination with, or is exempt from, applicable state or federal laws, regulations and other requirements pertaining to usury, any and all other requirements of any federal, state or local laws, including, without limitation, truth in lending, real estate settlement procedures, equal credit opportunity or disclosure laws, all laws applicable to such loans have been complied with since the date of origin of such loan; (v) The origination, servicing and collection practices used by CorpBank with respect to each Loan have been in all respects legal, proper and prudent and have met customary standards utilized by lenders in their relevant lending business; (vi) Each of the related note and other agreements executed in connection therewith with regard to any loan, is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting he enforcement of creditors' rights generally, and by general principles of equity, and there is no offset, defense, counterclaim or right 30 32 to rescission with respect to the note, any guaranty, pledge or other agreements; (vii) The loan or any of the terms or conditions thereof have not been waived, modified, altered, satisfied, canceled or subordinated in any respect or rescinded and no collateral for the loan has been released in whole or in any part, except as set forth in the written loan records of CorpBank; (viii) There is no default, breach, violation or event of acceleration existing under the Loan or the related documents or note, and no event (other than payments due but not yet delinquent) has occurred which, with the passage of time or with notice and the expiration of any grace or cure period, would, constitute a default, breach, violation or event of acceleration which is not set forth in the books and records of CorpBank; CorpBank has not waived any material default, breach, violation or event of acceleration of any of the foregoing, except as set forth in the books and records of CorpBank; and (ix) The related note and other agreements contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization of the benefits of any security or collateral. 3.23 Employee Benefit Plans. (a) Neither CorpBank nor any CorpBank Subsidiary has, or contributes to, any pension, profit-sharing, option, other incentive plan, or any other type of Employee Benefit Plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), or has any obligation or customary arrangement with employees for bonuses, incentive compensation, vacations, severance pay, insurance, or other benefits, except as set forth in Schedule 3.23(a). Attached as Schedule 3.23(b) are true and correct copies signed by the Chief Executive Officer and Chief Financial Officer of CorpBank of all documents evidencing plans, obligations or arrangements referred to in Schedule 3.23(a) (or true and correct written summaries as initialed of such plans, obligations or arrangements to the extent not evidenced by documents) and true and correct copies of all documents evidencing trusts related to any such plans. The documents attached to Schedule 3.23(a) shall include: (i) the Form 5500 which was filed in each of the three most recent plan years or such shorter period of time during which each of the plans was in existence, including without limitation all schedules thereto; (ii) the most recent determination letter from the Internal Revenue Service; (iii) the statement of assets and liabilities as of the most recent valuation date for each of the defined benefit pension plans; (iv) the most recent plan document, together with all amendments; (v) the most recent summary plan description for each plan, to the extent it is required by law, and (vi) the most 31 33 recent trust agreement for each plan, to the extent required by law, together with all amendments. (b) If any Employee Benefit Plan of CorpBank or any CorpBank Subsidiary were to be terminated not later than the day prior to the date of the Closing, (i) no liability under Title IV of ERISA would be incurred by CorpBank or any CorpBank Subsidiary and (ii) all benefits accrued to such day prior to the Closing Date (whether or not vested) under any defined benefit plan would be fully funded in accordance with the assumptions contained in the regulations of the Pension Benefit Guaranty Corporation governing the funding of terminated defined benefit plans. All accrued liabilities (for contributions or otherwise) of CorpBank or any CorpBank Subsidiary as of the Closing Date to each Employee Benefit Plan and with respect to each obligation to or customary arrangement with employees for bonuses, incentive compensation, vacations, severance pay, insurance or other benefits have been paid and no payment to any such Employee Benefit Plan or with respect to any such obligation or arrangement since December 31, 1994 has been disproportionately large compared to prior payments. For purposes of the preceding sentence, accrued liabilities shall include a pro rata contribution to each Employee Benefit Plan or with respect to each such obligation or arrangement for that portion of a plan year or other applicable period which precedes the Closing Date, and accrued liabilities for any portion of a plan year or other applicable period shall be determined by multiplying the liability for the entire such year or period by a fraction, the numerator of which is the number of days preceding the date of the Closing Date in such year or period and the denominator of which is the number of days in such year or period, as the case may be. (c) There has been no violation of the reporting and disclosure requirements imposed either under ERISA or the Code for which a penalty has been or may be imposed with respect to any such Employee Benefit Plan of CorpBank or any CorpBank Subsidiary. No such Employee Benefit Plan or related trust has any liability of any nature, accrued or contingent, including without limitation liabilities for federal, state, local or foreign taxes, other than for routine payments to be made in due course to participants and beneficiaries, except as set forth in Schedule 3.23(c). There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal) or investigation pending, or to the knowledge of CorpBank or any CorpBank Subsidiary, threatened (or any basis therefor known to CorpBank or any CorpBank Subsidiary) with respect to any such Employee Benefit Plan or related trust or with respect to any fiduciary, or to the knowledge of CorpBank or any CorpBank Subsidiary, administrator or sponsor (in its capacity as such) of any such Employee Benefit Plan. No such Employee Benefit Plan or related trust and no obligation or arrangement is in violation of, or in default 32 34 with respect to, any law, rule, regulation, order, judgment or decree nor is CorpBank or any CorpBank Subsidiary or any such Employee Benefit Plan or any related trust required to take any action in order to avoid violation or default. No event has occurred or (to the knowledge of CorpBank and CorpBank Subsidiaries) is threatened or about to occur which would constitute a prohibited transaction under Section 406 of ERISA. (d) The Internal Revenue Service has issued determinative letters to the effect that each Pension Plan (as defined in Section 3(2) of ERISA) maintained for the employees of CorpBank or any CorpBank Subsidiary that is intended by CorpBank to be a qualified plan under Section 401(a) of the Code and any related trust is an exempt trust under Section 501 of the Code. and nothing has occurred that would jeopardize the tax qualified status of such Pension Plan or the tax exempt status of its associated trust. No event has occurred that will subject any such Pension Plan to a material amount of tax under Section 511 of the code. Any such Pension Plan which has engaged in a merger, consolidation with any other plan or transfer of assets or liabilities from any other plan, has done so incompliance with applicable law in all material respects. Each such Pension Plan has been operated in accordance with its terms. To the best knowledge of CorpBank and CorpBank Subsidiaries, no investigation or review by the Internal Revenue Service is currently pending or is contemplated in which the Internal Revenue Service has asserted or may assert that any such Pension Plan which is intended by CorpBank to be qualified is not qualified under Section 401(a) of the Code or that any related trust is not exempt under Section 501 of the Code. No assessment of any federal income taxes has been made or (to the knowledge of CorpBank and CorpBank Subsidiaries) is contemplated against any CorpBank- or any CorpBank Subsidiary-related trust or any Pension Plan or the basis of a failure of such qualification or exemption. Form 5500's have been timely filed with respect to all such Pension Plans to the extent required under applicable law. No event has occurred or (to the knowledge of CorpBank and CorpBank Subsidiaries) is threatened or about to occur which would constitute a reportable event within the meaning of Section 4043(b) of ERISA. No notice of termination has been filed by the plan administrator pursuant to Section 4041 of ERISA or issued by the Pension Benefit Guaranty Corporation pursuant to Section 4042 of ERISA with respect to any such Pension Plan. (e) Neither CorpBank nor any CorpBank Subsidiary contributes to any multi-employer Pension Plan within the meaning of Section 3(37) of ERISA. (f) Each Pension Plan maintained by CorpBank or to which CorpBank contributes has been amended to comply with the requirements of the Tax Reform Act of 1986 and later legislation on a timely basis and has been submitted or will be 33 35 submitted to the Internal Revenue Service for a determination on such Pension Plan's qualifies status prior to the expiration of the remedial amendment period set forth under Section 401(b) of the Code. (g) Neither CorpBank nor any CorpBank subsidiary sponsor or participate in, and has not sponsored or participated in, any employee benefit pension plan to which Section 4021 of ERISA applies that would create a material amount of liability to CorpBank or any CorpBank Subsidiary under Title IV of ERISA. (h) All group health plans of CorpBank have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code in all material respects, to the extent such requirements are applicable. (i) Except as referred to on Schedule 3.23(a) CorpBank does not maintain any employee benefit plan or employment agreement pursuant to which any material benefit or other payment will be required to be made by CorpBank or pursuant to which any other material benefit will accrue on or vest in any director, officer or employee of CorpBank, in either case solely as a result of consummation of the transactions contemplated in this Agreement. 3.24 Loan Servicing Portfolio. Except as set forth on Schedule 3.24, neither CorpBank nor any CorpBank Subsidiary services loans owned in whole or in part by other persons. 3.25 Filings. Since January 1, 1995, CorpBank and each CorpBank Subsidiary have filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (a) the Superintendent (b) the Federal Reserve Bank of San Francisco ("Fed") or any Federal Reserve Bank, (c) the FDIC, and (d) any other applicable federal, foreign, state or local governmental or regulatory authorities. Since January 1, 1993, CorpBank and each CorpBank Subsidiary have filed all required call reports of condition and income with all appropriate bank regulatory agencies. All such reports, registrations and filings are collectively referred to as the "CorpBank Regulatory Filings." Upon request by CUB and subject to applicable legal restrictions, CorpBank will promptly provide to CUB all CorpBank Regulatory Filings filed by CorpBank or any CorpBank Subsidiary since January 1, 1993 together with copies of any orders or other administrative actions taken in connection with such CorpBank Regulatory Filings. As of their respective dates, each of the past CorpBank Regulatory Filings (a) was true and complete in all material respects (or was amended so as to be so promptly following discovery of any discrepancy); and (b) complied in all material respects with all of the statutes, rules and 34 36 regulations enforced or promulgated by the governmental or regulatory authority with which it was filed (or was amended so as to be so promptly following discovery of any such noncompliance) and none contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any of such Filings that was intended to present the financial position of the entities or entity to which it related fairly presented the financial position of such entities or entity and was prepared in accordance with GAAP or applicable banking regulations consistently applied except as stated therein during the periods involved. 3.26 Powers of Attorney. No material power of attorney or similar authorization given by CorpBank or any CorpBank Subsidiary is presently in effect or outstanding other than powers of attorney given in the ordinary course of business with respect to routine matters. 3.27 Accuracy and Current Status of Information Furnished. The representations and warranties made by CorpBank and CorpBank Subsidiaries hereby or in the Schedules attached hereto and or the schedule previously delivered as of August 1, 1995 (which are incorporated herein by reference and which fully disclose any exceptions to CorpBank warranties for the period from December 31, 1994 to August 1, 1995, as if required and set forth herein), contain no statements of fact which are untrue or misleading, or omit any material fact which is necessary under the circumstances to prevent the statements contained herein or in such Schedules from being misleading. CorpBank and CorpBank Subsidiaries hereby covenant that they shall, not later than the 15th day of each calendar month between the date hereof and the Closing Date, amend or supplement the Schedules prepared and delivered pursuant to this Article 3 to ensure that the information set forth in such Schedules accurately reflects the then-current status of CorpBank and all CorpBank Subsidiaries. CorpBank and CorpBank Subsidiaries shall further amend or supplement the Schedules as of the Closing Date if necessary to reflect any additional changes in the status of CorpBank or any CorpBank Subsidiary. 3.28 Effective Date of Representations, Warranties, Covenants and Agreements. Each representation, warranty, covenant and agreement of CorpBank and CorpBank Subsidiaries set forth in this Agreement shall be deemed to be made on and as of the date hereof (unless otherwise set forth in the Schedules hereto) and as of the Closing Date. The representations, warranties, covenants and agreements of CorpBank set forth in the Schedules previously delivered as of August 1, 1995, shall be deemed to made on and as of the date hereof (unless otherwise set forth in the Schedules hereto) and of the Closing Date. 35 37 3.29 Sale of Real Estate Development Subsidiary. The sale of Corporate Investment Company by CorpBank was a sale of all the outstanding shares and interests held by CorpBank in such entity. Such sale was without recourse and all representations or warranties made by CorpBank in connection with such transaction have been terminated. CorpBank has no indemnity obligations to any party for breaches of representations, warranties, covenants or any agreements in connection with such sale. 3.30 Information furnished by CorpBank and CorpBank Subsidiaries. No information relating to CorpBank or CorpBank Subsidiaries furnished to CUB or Bancorp for the Registration Statement referred to in Section 5.11, including al amendments and supplements thereto, will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading. In the event of any occurrence prior to the effective date of the Registration Statement which would cause any material information relating to CorpBank or CorpBank subsidiaries to be untrue or misleading, CorpBank shall so notify CUB and Bancorp and shall furnish CUB and Bancorp with such information as may be necessary to correct any such deficiencies. 4. REPRESENTATIONS AND WARRANTIES OF BANCORP AND CUB Bancorp and CUB represent and warrant to CorpBank as follows (exceptions to the representations and warranties herein shall be listed on schedules as listed below and shall be necessary only to the extent of changes from those schedules previously delivered to CorpBank by Bancorp and CUB): 4.1 Organization, Standing and Power. Bancorp is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted. CUB is a national banking association, duly organized and validly existing and in good standing under the laws of the United States of America and has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted. 4.2 Bancorp Capital Stock. The authorized capital stock of Bancorp at December 31, 1994 consisted of 20,000,000 shares of Bancorp Stock, without par value ("Bancorp Common Stock"), of which there were 4,467,318 issued and outstanding, and 10,000,000 shares of preferred stock, without par value ("Bancorp Preferred Stock"), of which there were none issued and outstanding. All of the outstanding shares of Bancorp Stock are duly authorized, validly issued and are fully 36 38 paid and nonassessable. When issued, Bancorp Stock to be issued pursuant to the Merger will have been duly and validly authorized, issued and outstanding and will be fully paid and nonassessable. 4.3 Subsidiaries. With the exception of CUB, Bancorp does not own, directly or indirectly (except as pledgee pursuant to loans which are not in default), any equity position or other voting interest in any corporation, partnership, joint venture or other entity. Bancorp owns of record and beneficially 100% of each class of the outstanding capital stock of CUB free and clear of any lien, encumbrance or security interest and of any adverse claim of any kind. 4.4 California United Bank, National Association. CUB is authorized by the OCC to conduct a general banking business. CUB is a member of the Federal Reserve System. CUB's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") in the manner and to the full extent provided by law. The authorized capital stock of CUB at December 31, 1994, consisted of 540,000 shares of CUB Common Stock, $5.00 par value, of which there were 472,973 issued and outstanding. All of the outstanding shares of CUB Stock are validly issued, fully paid and nonassessable, except as provided for in Section 55 of Title 12 of the United States Code. 4.5 Bancorp Reports. Bancorp has previously furnished to CorpBank true and complete copies of its (i) Annual Report on Form 10-K for the years ended December 31, 1994, 1993 and 1992, (ii) Quarterly Reports on Form 10-Q for the calendar quarters ended March 31, and June 30, 1995, (iii) proxy statements relating to all meetings of shareholders (whether special or annual) during 1994 and 1995, and (iv) all other reports, registration statements or filings made by Bancorp with the SEC since January 1, 1993. Such reports, registration statements and other filings, together with any amendments thereof, are collectively referred to as the "Bancorp SEC Filings". As of their respective dates, the Bancorp SEC Filings were (or will be when filed) in compliance, in all material respects, with the requirements of their respective forms and were (or will be when filed) true and complete in all material respects and did not (or will not when filed) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and the unaudited interim financial statements included in the Bancorp SEC Filings were (or will be) prepared in accordance with GAAP and present (or will present) fairly the consolidated financial position of Bancorp and its subsidiaries as of the dates thereof and the consolidated results of their operations and cash flow for the periods then ended, subject, in the case of the unaudited interim financial statements, to normal recurring adjustments. Neither the financial statements 37 39 referred to above nor any report (including, without limitation, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K), prospectus, or any amendment or supplement thereto, filed, or to be filed, prior to the Effective Time of the Merger with the SEC by or on behalf of Bancorp contained (or will contain when furnished or filed) any untrue statement of a material fact or omitted (or will omit when furnished or filed) to state a material fact necessary in order to make the statements contained therein not misleading. 4.6 Bancorp's and Bancorp Subsidiaries' Authority. The execution and delivery by Bancorp and CUB of this Agreement and the Agreement of Merger and, subject to the requisite approval of the shareholder of CUB, the consummation of the transactions contemplated hereunder or thereunder, have been duly and validly authorized by all necessary corporate action on the part of Bancorp and CUB, and this Agreement is, and the Agreement of Merger will be upon due certification, execution, acknowledgment and filing thereof in accordance with applicable law, a valid and binding obligation of Bancorp and CUB, enforceable in accordance with their terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles. Except as set forth in Schedule 4.6, neither the execution and delivery by Bancorp and CUB of this Agreement or the Agreement of Merger, nor the consummation of the transactions contemplated herein or therein, nor compliance by Bancorp and CUB with the provisions hereof or thereof, will (i) conflict with or result in a breach of any provision of their respective Articles of Incorporation, Articles of Association or Bylaws; (ii) constitute a breach of, or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which Bancorp CUB is a party, or by which Bancorp or CUB or any of their respective properties or assets are bound, except where such breach or default would not have a material adverse effect on the consolidated financial condition, results of operations or prospects of Bancorp; (iii) constitute a breach of, or result in a default (or give rise to any rights of termination, acceleration or cancellation, or any right to acquire any securities or assets) under any material agreement to which Bancorp or CUB or any of their respective properties or assets are bound; or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Bancorp or CUB. No consent or approval of, notice to or filing with any governmental authority having jurisdiction over any aspect of the business or assets of Bancorp or CUB, and except as set forth in Schedule 4.6 no consent or approval of or notice to or filing with any other person or entity, is required in connection with the execution and delivery by Bancorp and CUB of this Agreement or the Agreement of Merger or the consummation by Bancorp and CUB of the 38 40 transactions contemplated hereunder or thereunder, except approval of the Merger by the shareholder of CUB, and such approvals as may be required by the OCC pursuant to Sections 215a and 1828(c) of Title 12 of the United States Code or any successor statutes ("Merger Statutes") with respect to the Bank Merger; such approvals as may be required by the Federal Reserve Board with respect to the transactions contemplated herein and in the Merger Agreement, such approvals by the Superintendent as may be required and the declaration by the SEC and state securities law regulatory authorities that the Registration Statement (as defined in Section 5.11) is effective and that Bancorp Stock to be issued in connection with the Merger is qualified under applicable state securities laws. 4.7 Insurance. Except as set forth in Schedule 4.7, Bancorp and CUB have, and at all times within two years of the date of this Agreement have had, in full force and effect policies of insurance and bonds (including, without limitation, bankers' blanket bond, fidelity coverage, director and officer liability, fire, third party liability, use and occupancy) with respect to their respective assets and businesses and against casualties and contingencies which in the judgment of Bancorp and CUB are adequate and appropriate to cover their respective assets and businesses and are in amounts and coverages customarily provided for by similar institutions. Set forth in Schedule 4.7 is a schedule of all policies of insurance and bonds (other than title or credit insurance) carried and owned by Bancorp and CUB, showing the name of the insurance or bonding company, a summary of the coverage, the amounts, the deductible feature, the annual premiums and the expiration dates. Neither Bancorp nor CUB is in default under any such policy of insurance or bond such that it could be canceled and all material claims thereunder have been filed in timely fashion. Bancorp and CUB have filed claims with or given notice of claim to their respective insurers or bonding companies with respect to all material matters and occurrences for which they believe they have coverage. 4.8 Registration Statement. The Registration Statement required pursuant to Section 5.11 and any other documents to be filed with the OCC, the SEC or any regulatory authority in connection with the transactions contemplated by this Agreement with respect to all information set forth therein relating to Bancorp and CUB, the Merger and in respect to this Agreement and the Agreement of Merger will, at the respective times such documents are filed or become effective, and with respect to the Proxy Statement, at the time of mailing to shareholders, and at the time of the shareholders' meeting: (a) comply in all material respects with the provisions of all applicable regulations issued by the SEC or the OCC pursuant to the Securities Exchange Act of 1934, as amended ("1934 Act"), and all other applicable laws and regulations; 39 41 and (b) do not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or omit any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which have become false or misleading. 4.9 Books and Records. (a) The minute books of Bancorp and CUB contain (i) true, accurate and complete records of all meetings and actions taken by the respective Boards of Directors, Board committees and shareholders of Bancorp and CUB and (ii) true and complete copies of their respective charter documents and bylaws and all amendments thereto. The books and records of Bancorp and CUB accurately reflect in all material aspects their respective businesses and affairs. (b) Bancorp and CUB have records which accurately and validly reflect, in all material respects, their respective transactions and accounting controls sufficient to insure that such transactions are (i) in all material respects, executed in accordance with management's general or specific authorization, and (ii) recorded in conformity with GAAP; such records, to the extent they contain important information pertaining to Bancorp or CUB which is not easily and readily available elsewhere, have been duplicated, and such duplicates are stored safely and securely pursuant to procedures and techniques reasonably adequate for companies of the sizes of Bancorp and CUB and in the respective businesses in which Bancorp and CUB are engaged; and the data processing equipment, data transmission equipment, related peripheral equipment and software used by Bancorp and CUB in the operations of their respective businesses (including any disaster recovery facility) to generate and retrieve such records are reasonably adequate for companies of the sizes of Bancorp and CUB and in the respective businesses in which Bancorp and CUB are engaged. 4.10 Title to Assets. Bancorp and CUB have good and marketable title to all material properties and assets, other than real property, owned or purported to be owned by Bancorp and CUB free and clear of all mortgages, liens, encumbrances, pledges or charges of any kind or nature, except for (i) liens for current taxes not yet due and payable; (ii) liens incurred in the ordinary course of business and which do not materially impair the business of Bancorp or CUB or materially detract from the usefulness of the properties subject thereto; or (iii) such liens as are disclosed in the Bancorp Financial Statements of December 31, 1994 or in Schedule 4.10. 40 42 4.11 Real Estate. Schedule 4.11(a) contains a list of all real property, including leaseholds, owned by Bancorp and CUB. True, correct and complete copies of all such leases are included in Schedule 4.11(a). Schedule 4.11(b) contains, among other things, an accurate summary of all material commitments which Bancorp or CUB has to improve real estate owned by it. Schedule 4.11(c) contains a list of other real estate owned ("OREO") by Bancorp and CUB. Bancorp and CUB have good and marketable title to all the real property and valid leasehold interests in the leaseholds described in Schedules 4.11(a), (b) and (c), free and clear of all mortgages, covenants, conditions, restrictions, easements, liens, security interests, charges, claims, assessments and encumbrances, except for (i) rights of lessors, co-lessees or sublessees in such matters which are reflected in the leases; (ii) current taxes not yet due and payable; (iii) such as are described in any title policies delivered pursuant to this Section 4.11; (iv) such imperfections of title and encumbrances, if any, as do not in the aggregate materially and adversely detract from the value of or materially and adversely interfere with the present use of such property; and (v) as described in Schedule 4.11(d). True, correct and complete copies of title policies for properties described in Schedules 4.11(a) and (c) as owned by Bancorp or any Bancorp Subsidiary are included therein. To the best knowledge of Bancorp and CUB, the activities of Bancorp and CUB with respect to all real property and leaseholds owned by any of them for use in connection with their respective operations are in all material respects permitted and authorized by applicable zoning laws, ordinances and regulations and all laws and regulations of any governmental department or agency relative to environmental matters affecting such properties, except as otherwise disclosed in Schedule 4.11(e). Bancorp and CUB enjoy peaceful and undisturbed possession under all material leases to which they are parties, and all of such leases are valid and in full force and effect. 4.12 Legal Proceedings; Agreements with Banking Authorities. (a) Except as set forth on Schedule 4.12(a), there is no private or governmental suit, claim, action, arbitration or proceeding pending, nor any private or governmental suit, claim, action, arbitration or proceeding to Bancorp's or CUB's knowledge threatened, nor does Bancorp or CUB know of any facts or circumstances which would form a basis for any such suit, claim, action, arbitration or proceeding against Bancorp or CUB or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of Bancorp or CUB which individually, or in the aggregate, could have a material adverse effect upon the consolidated financial condition, business or results of operations of Bancorp or the transactions contemplated hereunder. Also, except as provided on Schedule 4.12(a), there are no judgments, decrees, stipulations or orders against Bancorp or CUB enjoining it or 41 43 any of its respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. Schedule 4.12(b) contains summary reports of Bancorp's and CUB' attorneys on all pending litigation to which Bancorp or CUB is a party and which names Bancorp or CUB as a defendant or cross-defendant. Schedule 4.12(c) contains a true, correct and complete list of all pending litigation in which Bancorp or CUB is a named party. (b) Neither Bancorp nor CUB is a party to any agreement or memorandum of understanding with any federal, state or foreign governmental or regulatory authority charged with the supervision or regulation of banks or bank holding companies or engaged in the insurance of bank deposits that restricts the conduct of its business, or in any manner relates to its capital adequacy, its credit or investment policies or its management. 4.13 Taxes. Except as set forth on Schedule 4.13, (i) all federal income tax returns, all state tax returns, and all real and personal property, sales, use and other tax returns and reports that are required by law to be filed by or on behalf of Bancorp or CUB have been duly prepared and filed; (ii) all taxes shown to be due and payable by Bancorp or CUB on those returns, or which are otherwise due and payable, whether disputed or not, have been paid or the liability therefor is reflected in the Bancorp Financial Statements; (iii) Bancorp and CUB have paid or deposited all taxes, tax penalties or interest owed by them or which they are obligated to withhold and deposit from amounts paid to any employee, creditor, depositor or third party; and (iv) Bancorp and CUB have complied with all reporting requirements of the Internal Revenue Code of 1986 or its predecessor statutes as applicable (the "Code") including, but not limited to, obtaining taxpayer identification numbers. The current status of any audits of those returns by the Internal Revenue Service or other applicable agencies is as set forth in Schedule 4.13. There are no agreements by Bancorp or CUB waiving a statute of limitations or extending the time for assessment or payment of any taxes payable by any of them. 4.14 Compliance with Laws and Regulations. (a) Except as set forth on Schedule 4.14, neither Bancorp nor CUB is in default under or in breach of any law, ordinance, rule, regulation, order, judgment or decree applicable to it promulgated by any governmental agency having authority over it, where such default or breach would have a material adverse effect on the consolidated financial condition, results of operations, business or prospects of Bancorp. 42 44 (b) Bancorp and CUB have conducted their businesses in accordance with all applicable federal, foreign, state and local laws, regulations and orders including, without limitation, disclosure, usury, equal credit opportunity, equal employment, fair credit reporting, antitrust, licensing and other laws, regulations and orders, and the forms, procedures and practices used by Bancorp and CUB are in compliance with such laws, regulations and orders except for such violations or non-compliance as will not have a material adverse effect on the consolidated financial condition, results of operations, business or prospects of Bancorp. 4.15 Performance of Obligations. Except as set forth on Schedule 4.15, Bancorp and CUB have performed in all respects all of the obligations required to be performed by them to date and are not in default under or in breach of any term or provision of any covenant, contract, lease, indenture or any other covenant to which Bancorp or CUB is a party or is subject or is otherwise bound, and no event has occurred which, with the giving of notice or the passage of time or both, would constitute such default or breach, where such default or breach would have a material adverse effect on the consolidated financial condition, results of operations, business or prospects of Bancorp. No party with whom Bancorp or CUB has an agreement which is material to the consolidated financial condition, results of operations or prospects of Bancorp is in default thereunder, except for certain loans made by the Bank which have been identified to Bancorp and CUB. 4.16 Employees. Except as set forth in Schedule 4.16(a), there are no understandings for the employment of any officer or employee of Bancorp or CUB which are not terminable by Bancorp or CUB without liability on not more than 30 days' notice. Except as set forth in Schedule 4.16(b), there are no material controversies pending or threatened between (i) Bancorp or CUB and (ii) any of their respective employees. Except as disclosed in the Bancorp Financial Statements at December 31, 1994 or on Schedule 4.16(c), all material sums due for employee compensation and benefits have been duly and adequately paid or provided for and all deferred compensation obligations are fully funded. Neither Bancorp nor CUB is a party to any collective bargaining agreement with respect to any of their respective employees or any labor organization to which their employees or any of them belong. Except as set forth on Schedule 4.16(c), no director, officer or employee of Bancorp or CUB is entitled to receive any payment of any amount under any existing employment agreement, severance plan or other benefit plan as a result of the consummation of any transaction contemplated by this Agreement. 4.17 Brokers and Finders. Neither Bancorp nor CUB is a party to any agreement with any investment banker, broker or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for or contemplated herein will result 43 45 in any liability to any such investment banker, broker or finder. Bancorp agrees to indemnify and hold CorpBank harmless from and against any and all claims, liabilities or obligations with respect to any fees, commissions or expenses asserted by any person on the basis of any act, statement, agreement or commitment alleged to have been made by Bancorp or CUB relating to the employment of any such investment broker, broker or finder relating to the execution of this Agreement or the consummation of the transactions contemplated hereby. 4.18 Material Contracts. Except as set forth on Schedule 4.18 or excepted below, neither Bancorp nor CUB is a party to any material contract, agreement, understanding, commitment or offer, whether written or oral, which may become a binding obligation if accepted by another person (collectively referred to as an "Understanding") including the following: (a) Any loan, letter of credit, pledge, security agreement, lease (excluding transactions in the ordinary course of the banking business and leases of real property listed on Schedule 4.11(a)), guarantee, commitment or subordination agreement or other similar or related type of Understanding as to which Bancorp or CUB is a debtor, pledgor, lessee or obligor; (b) Any Understanding dealing with advertising, brokerage, licensing, dealership, representative or agency relationships providing for an aggregate annual payment in excess of $25,000; (c) Any profit-sharing, group insurance, bonus, deferred compensation, stock option, severance pay, pension, retirement or other employee benefit plan; (d) Any written correspondent banking contracts; (e) Any Understanding (other than this Agreement) for the sale of their respective assets other than in the ordinary course of business or for the grant of any preferential right to purchase any of their respective assets, properties or rights, or any Understanding which requires the consent of any third party to the transfer and assignment of any assets, properties or rights. For purposes of this provisions sales of CUB's mortgage servicing portfolio shall be considered to be in the ordinary course of business; (f) Any Understanding which provides for an annual payment in excess of $250,000 in the aggregate to purchase, sell or provide services, materials, supplies, merchandise, facilities or equipment and which is not terminable without penalty on not more than 30 days' notice; 44 46 (g) Any Understanding for any one capital expenditure or series of capital expenditures which is in excess of $200,000 individually or $500,000 in the aggregate; (h) Any Understanding to make, renew or extend the term of a loan (not fully disbursed or funded as of December 31, 1994) to any person or to any affiliate of such person, which undisbursed or unfunded amounts, when aggregated with all outstanding indebtedness of such person or any affiliate of such person to Bancorp or CUB, would exceed $2,500,000. The term "person" as used herein and throughout this Agreement shall mean any individual, corporation, association, partnership, joint venture or other entity or any government or governmental department or agency. The term "affiliate of" or a person "affiliated with" a specific person as used herein and throughout this Agreement shall mean a person that directly or indirectly through one or more intermediaries controls or is controlled by or under common control with the persons specified; (i) Any Understanding of any kind, except for deposit relationships, and overdraft lines of credit or credit cards not exceeding $25,000 individually, with any director or officer of Bancorp or CUB or with any affiliate or any member of the immediate family of any such director or officer. The term "immediate family" as used herein and throughout this Agreement shall mean a person's spouse, parents, in-laws, children and siblings; (j) Any Understanding which would be terminable other than by Bancorp or CUB as a result of the consummation of the transactions contemplated by this Agreement; (k) Any contract of participation with any other bank in any loan entered into by Bancorp or CUB subsequent to December 31, 1994 in excess of $2,500,000 or any sales of assets of Bancorp or CUB with recourse of any kind to Bancorp or CUB except the sale of mortgage loans, servicing rights, repurchase or reverse repurchase agreements, securities or other financial transactions in the ordinary course of business; (l) Any Understanding of any kind that binds Bancorp or CUB and contains a covenant not to compete; or (m) Any Understanding not otherwise disclosed or excepted pursuant to this Section 4.18 which is material to the consolidated financial condition, results of operations, assets or business of Bancorp. True and correct copies of all documents relating to the foregoing Under- 45 47 standings are attached as Schedule 4.18. 4.19 Absence of Certain Changes. Except as set forth on Schedule 4.19, since December 31, 1994 the businesses of Bancorp and CUB have been conducted diligently and only in the ordinary course, in the same manner as theretofore conducted, and there has not been any: (a) Material adverse change in, or development which is likely to result in a material adverse change in or affect, the business, prospects, financial position, management, shareholders' equity or results of operations of Bancorp on a consolidated basis; (b) Damage, destruction or loss to property (whether or not covered by insurance) individually or in the aggregate that materially and adversely affects the financial condition, property, business or prospects of Bancorp on a consolidated basis; (c) Material contract, agreement, license or understanding which Bancorp or CUB has entered into or to which Bancorp or CUB is a party which has been terminated or amended other than in the ordinary course of business; (d) Capital expenditure exceeding $200,000 individually or $500,000 in the aggregate; (e) Labor trouble, dispute or problem of any character involving employees having a material adverse effect upon the financial condition, property, business or prospects of Bancorp on a consolidated basis; (f) Change in accounting policies or practices; (g) Material revaluation by Bancorp on a consolidated basis of any of its assets except as required by GAAP; (h) Increase in the salary schedule, compensation, rate, fees or commissions, or the declaration, payment, commitment or obligation of any kind directly or indirectly through the payment by Bancorp or CUB of a bonus or other additional salary, compensation, fee or commission to any person, except for additional sums for increases paid in accordance with employment contracts disclosed in Schedule 4.18 or paid in the ordinary course of business in a manner consistent with past practice (which provides for annual performance reviews during the first quarter of each year and which may result in salary increases and/or bonuses at such time); 46 48 (i) Sale, assignment or transfer of any asset of Bancorp or CUB except in the usual and ordinary course of business; (j) Mortgage, pledge or encumbrance of any asset of Bancorp or CUB other than liens for taxes not yet due, pledges or security interests given in connection with the acceptance of repurchase agreements or government deposits; (k) Waiver or release of any right or claim of Bancorp or CUB except in the usual and ordinary course of business; or (l) Declaration, setting aside or payment of any dividend or distribution with respect to Bancorp Stock, or the stock of Bancorp or the issuance of any shares of, or options to purchase, Bancorp Stock, or any other securities of Bancorp or any securities of Bancorp with the exception of not more than $.02 per share dividend per quarter, $90,000 dividends to the shareholder of CUB per quarter and the issuance of stock options to employees and directors and set forth in respective stock option plans and in accordance with the ordinary conduct of their respective businesses. 4.20 Licenses and Permits. Bancorp and CUB have all licenses and permits which are necessary for the conduct of their respective businesses and such licenses are in full force and effect. The properties and operations of Bancorp and CUB are and have been maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. 4.21 Undisclosed Liabilities. Neither Bancorp nor CUB have any liabilities or obligations, either accrued or contingent, which are material to Bancorp on a consolidated basis and which have not been either (i) reflected or disclosed in the Bancorp Financial Statements as of December 31, 1994; (ii) incurred subsequent to December 31, 1994 in the ordinary course of business; or (iii) disclosed in Schedule 4.21. Bancorp knows of no basis for the assertion against it or CUB of any liability, obligation or claim (including, without limitation, that of any regulatory authority) that might result in or cause material adverse change in the consolidated financial condition, results of operations or prospects of Bancorp which is not fairly reflected in the Bancorp Financial Statements or otherwise disclosed in the Schedules to this Agreement. 4.22 Loans and Investments. All loans and investments of Bancorp and CUB are in all material respects legal, enforceable and authorized under applicable federal and state laws and regulations except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of 47 49 creditors generally and by general equitable principles. Except as set forth in Schedule 4.22, no loans or investments held by Bancorp or CUB are, at December 31, 1994 (i) more than 90 days past due with respect to any scheduled payment of principal or interest; (ii) classified as "loss," "doubtful," "substandard," "special mention" or "criticized" by federal banking regulators; or (iii) on a non-accrual status in accordance with Bancorp and CUB' loan review procedures. None of such investments are subject to any restriction, contractual, statutory or other, that would materially impair the ability of the entity holding such investment to dispose freely of any such investment at any time, except restrictions on the public distribution or transfer of such investments under the Securities Act of 1933, as amended ("Securities Act"), and the regulations thereunder, or state securities laws. 4.23 Employee Benefit Plans. (a) Neither Bancorp nor CUB has, or contributes to, any pension, profit-sharing, option, other incentive plan, or any other type of Employee Benefit Plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), or has any obligation or customary arrangement with employees for bonuses, incentive compensation, vacations, severance pay, insurance, or other benefits, except as set forth in Schedule 4.23(a). Attached as Schedule 4.23(b) are true and correct copies signed by the Chief Executive Officer and Chief Financial Officer of Bancorp of all documents evidencing plans, obligations or arrangements referred to in Schedule 4.23(a) (or true and correct written summaries as initialed of such plans, obligations or arrangements to the extent not evidenced by documents) and true and correct copies of all documents evidencing trusts related to any such plans. (b) There has been no material violation of the reporting and disclosure requirements imposed either under ERISA or the Code for which a material penalty has been or may be imposed with respect to any such Employee Benefit Plan of Bancorp or CUB. No such Employee Benefit Plan or related trust has any material liability of any nature, accrued or contingent, including without limitation liabilities for federal, state, local or foreign taxes, other than for routine payments to be made in due course to participants and beneficiaries, except as set forth in Schedule 4.23(c). There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal) or investigation pending, or to the knowledge of Bancorp or CUB, threatened (or any basis therefor known to Bancorp or CUB) with respect to any such Employee Benefit Plan or related trust or with respect to any fiduciary, or to the knowledge of Bancorp or CUB, administrator or sponsor (in its capacity as such) of any such Employee Benefit Plan. No such Employee Benefit Plan or related trust and no obligation or arrangement is in material violation of, or in default with respect to, any law, rule, regulation, order, judgment or decree nor 48 50 is Bancorp or CUB or any such Employee Benefit Plan or any related trust required to take any action in order to avoid violation or default. No event has occurred or (to the knowledge of Bancorp and CUB) is threatened or about to occur which would constitute a prohibited transaction under Section 406 of ERISA. (c) The Internal Revenue Service has issued determinative letters to the effect that each Pension Plan (as defined in Section 3(2) of ERISA) maintained for the employees of Bancorp or CUB that is intended by Bancorp to be a qualified plan under Section 401(a) of the Code and any related trust is an exempt trust under Section 501 of the Code. Each such Pension Plan has been operated materially in accordance with its terms. To the best knowledge of Bancorp and CUB, no investigation or review by the Internal Revenue Service is currently pending or is contemplated in which the Internal Revenue Service has asserted or may assert that any such Pension Plan which is intended by Bancorp to be qualified is not qualified under Section 401(a) of the Code or that any related trust is not exempt under Section 501 of the Code. No assessment of any federal income taxes has been made or (to the knowledge of Bancorp and CUB) is contemplated against any Bancorp- or CUB-related trust or any Pension Plan or the basis of a failure of such qualification or exemption. Form 5500's have been timely filed with respect to all such Pension Plans to the extent required under applicable law. No event has occurred or (to the knowledge of Bancorp and CUB) is threatened or about to occur which would constitute a reportable event within the meaning of Section 4043(b) of ERISA. No notice of termination has been filed by the plan administrator pursuant to Section 4041 of ERISA or issued by the Pension Benefit Guaranty Corporation pursuant to Section 4042 of ERISA with respect to any such Pension Plan. (d) Neither Bancorp nor CUB contributes to any multi-employer Pension Plan within the meaning of Section 3(37) of ERISA. 4.24 Loan Servicing Portfolio. Except as set forth on Schedule 4.24, neither Bancorp nor CUB services loans owned in whole or in part by other persons. 4.25 Filings. Since January 1, 1994, Bancorp and CUB have filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (a) the Office of the Comptroller of the Currency (b) the Federal Reserve Bank of San Francisco ("Fed") or any Federal Reserve Bank, (c) the FDIC, (d) the Securities and Exchange Commission and; (e) any other applicable federal, foreign, state or local governmental or regulatory authorities. Since January 1, 1994, Bancorp and each Bancorp Subsidiary have filed all required call reports of condition and income with all appropriate regulatory agencies. All such reports, registrations and filings are 49 51 collectively referred to as the "Bancorp Regulatory Filings." Upon request by CorpBank and subject to applicable legal restrictions, Bancorp will promptly provide to CorpBank all Bancorp Regulatory Filings filed by Bancorp or CUB since January 1, 1990 together with copies of any orders or other administrative actions taken in connection with such Bancorp Regulatory Filings. As of their respective dates, each of the past Bancorp Regulatory Filings (a) was true and complete in all material respects (or was amended so as to be so promptly following discovery of any discrepancy); and (b) complied in all material respects with all of the statutes, rules and regulations enforced or promulgated by the governmental or regulatory authority with which it was filed (or was amended so as to be so promptly following discovery of any such noncompliance) and none contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any of such Filings that was intended to present the financial position of the entities or entity to which it related fairly presented the financial position of such entities or entity and was prepared in accordance with GAAP or applicable banking regulations consistently applied except as stated therein during the periods involved. 4.26 Powers of Attorney. No material power of attorney or similar authorization given by Bancorp or CUB is presently in effect or outstanding other than powers of attorney given in the ordinary course of business with respect to routine matters. 4.27 Accuracy and Current Status of Information Furnished. The representations and warranties made by Bancorp and CUB hereby or in the Schedules attached hereto contain no statements of fact which are untrue or misleading, or omit any material fact which is necessary under the circumstances to prevent the statements contained herein or in such Schedules from being misleading. Bancorp and CUB hereby covenant that they shall, not later than the 15th day of each calendar quarter between the date hereof and the Closing Date, amend or supplement the Schedules prepared and delivered pursuant to this Article 4 to ensure that the information set forth in such Schedules accurately reflects the then-current status of Bancorp and CUB. Bancorp and CUB shall further amend or supplement the Schedules as of the Closing Date if necessary to reflect any additional changes in the status of Bancorp or CUB. 4.28 Effective Date of Representations, Warranties, Covenants and Agreements. Each representation, warranty, covenant and agreement of Bancorp and CUB set forth in this Agreement shall be deemed to be made on and as of the date hereof (unless otherwise set forth in the Schedules hereto) and as of the Closing Date. 50 52 4.29 Bancorp's and CUB's Authority. The execution and delivery by Bancorp and CUB of this Agreement and the Agreement of Merger and the consummation of the transactions contemplated hereunder or thereunder have been duly and validly authorized by all necessary corporate action on the part of Bancorp and CUB, and this Agreement is, and the Agreement of Merger will be upon due certification, execution, acknowledgment and filing thereof in accordance with applicable provisions of the National Banking Act and the Bank Merger Act, a valid and binding obligation of Bancorp and CUB, enforceable in accordance with their terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles. Except as set forth in Schedule 4.29, neither the execution and delivery by Bancorp and CUB of this Agreement or the Agreement of Merger, nor the consummation of the transactions contemplated herein or therein, nor compliance by Bancorp and CUB with the provisions hereof or thereof, will (i) conflict with or result in a breach of any provision of their respective Certificates of Incorporation, Certificate of Association or Bylaws; (ii) constitute a breach of, or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which Bancorp or CUB is a party, or by which Bancorp or CUB or any of their properties or assets is bound; or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Bancorp or CUB. No consent or approval of, notice to or filing with any governmental authority having jurisdiction over any aspect of the business or assets of Bancorp or CUB, and no consent or approval of or notice to any other person or entity, is required in connection with the execution and delivery by Bancorp and CUB of this Agreement or the Agreement of Merger or the consummation by Bancorp and CUB of the transactions contemplated hereunder or thereunder, except such approvals as may be required by Bancorp as the sole shareholder of Bank; the Fed pursuant to the applicable requirements of the BHCA; the OCC pursuant to the Merger Statutes with respect to the Bank Merger (as defined in Section 1.1(a); the filing of the Agreement of Merger with the OCC; and the declaration by the SEC and state securities law regulatory authorities that the Registration Statement (as defined in Section 5.11) is effective and that Bancorp Stock to be issued in connection with the Merger is qualified under applicable state securities law. 4.30 No Material Change. There has been no material adverse change in the financial condition, results of operation or prospects of Bancorp since December 31, 1994. There are no facts or circumstances that, individually or in the aggregate, materially and adversely has affected or is so affecting, or, may reasonably be 51 53 expected in the future to affect the financial condition or results of operations or prospects of Bancorp that have not been disclosed in the Bancorp SEC Filings, excluding changes in laws or regulations or economic conditions which affect banking institutions generally. 4.31 Accuracy of Information Furnished. The representations and warranties made by Bancorp and CUB hereunder or in the Schedules hereto contain no material statements of fact which are untrue or misleading, or omit any material fact which is necessary under the circumstances to prevent the statements contained herein or in such Schedules from being misleading. 4.32 Registration Statement. The Registration Statement required pursuant to Section 5.8 and any other documents to be filed with the SEC or any regulatory authority in connection with the transactions contemplated by this Agreement with respect to all information set forth therein relating to Bancorp, the Merger and in respect to this Agreement and the Agreement of Merger will, at the respective times such documents are filed or become effective: (a) comply in all material respects with the provisions of the Securities Act and the regulations thereunder, and all other applicable laws and regulations; and (b) (except with regard to information furnished by CorpBank) not contain any untrue statement of a material fact and will not omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.33 Information Furnished by Bancorp and CUB. No information relating to Bancorp or CUB furnished to CorpBank by Bancorp and CUB for inclusion in the Proxy Statement or the applications referred to in Section 5.11, including all amendments and supplements thereto, will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading. In the event of any occurrence prior to the CorpBank shareholders' meeting which would cause any material information relating to Bancorp and CUB included in the Proxy Statement to be untrue or misleading, Bancorp or CUB shall so notify CorpBank and shall furnish CorpBank such information as may be necessary to correct any such deficiencies. 52 54 ARTICLE 5. CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME OF MERGER 5.1 Access. (a) Bancorp and CUB and CorpBank, respectively, shall have the right, on reasonable notice and during ordinary business hours, to examine through their agents, auditors or attorneys all of the books, records and properties of the respective party, including, but not limited to, all loan, investment, accounting, property and legal records and files. Such examination shall be made in a manner that will not unreasonably interfere with the conduct of the business. CUB and CorpBank shall provide adequate space and facilities, to the end that such examination shall be completed expeditiously, completely and accurately. All parties shall retain in strict confidence all information gained thereby, and shall not reveal it to anyone except as may be necessary for the accomplishment of the purposes of such examination and the consummation of the transactions provided for hereby. In the event the Merger provided for hereby is not consummated for any reason, Bancorp and CUB and CorpBank, respectively, shall not, directly or indirectly: (i) utilize for their own benefit any Proprietary Information (as hereinafter defined) or (ii) disclose to any person any Proprietary Information, except as such disclosure may be required in connection with this Agreement or by law. "Proprietary Information" shall mean all confidential business information concerning the pricing, costs, profits and plans for the future development of any party's business and the identity, requirements, preferences, practices and methods of doing business of specific customers of any party or otherwise relating to the business and affairs of any party, other than information which (i) was lawfully in the possession of a party prior to January 1, 1995; (ii) is obtained by any party after the date hereof from a source other than a party hereto not under an obligation of confidentiality; or (iii) is in the public domain when received or thereafter enters the public domain through no action of the other party. In the event the Merger is not consummated for any reason, each party shall return to the other all copies, notes and records obtained in the course of such examination. (b) CorpBank agrees that on and after the date that all requisite regulatory approvals are obtained, CUB, acting through its agents, employees and representatives, may, at CUB's option and at CUB's own expense, on notice to CorpBank and in a manner reasonably calculated to avoid undue interruption of any operations of CorpBank, have reasonable access to the premises of the Bank for the purposes of (i) training CorpBank's employees in the procedures, techniques, 53 55 methods or other banking practices of CUB; (ii) (subject to CUB's obligation to bear the expense of removal and restoration should this Agreement be terminated) installing telecommunications equipment, lines and facilities, including, without limitation, telephones, branch terminal systems and telecopiers; and (iii) (subject to CUB's obligation to bear the expense of removal and restoration should this Agreement be terminated) installing automated teller machines and comparable customer service equipment. 5.2 Limitation on Conduct of CorpBank and CorpBank Subsidiaries Prior to Closing. Between the date hereof and the Effective Time of the Merger: (a) CorpBank agrees to conduct its business and to cause the CorpBank Subsidiaries to conduct their respective businesses only in the normal and customary manner and in accordance with sound business practices and with respect to CorpBank, in accordance with safe and sound banking practices; (b) CorpBank shall not, without the prior written consent of CUB and Bancorp (which consent shall not be unreasonably withheld and which consent shall be deemed granted if within five (5) business days of receipt of notice by CUB written notice of objection is not received by CorpBank) take any of the following actions or allow any CorpBank Subsidiary to take any of the following actions: (i) carry on its business except in substantially the same manner as heretofore conducted or introduce any new method of management or operation in respect of its business and properties, except in a manner consistent with prior practice and in the ordinary course of business; (ii) amend, modify, or, except as they may be terminated in accordance with their terms, terminate any Understanding or materially default in the performance of any of its obligations under any Understanding where such action would have a material adverse effect on the consolidated financial condition, results of operations or prospects of CorpBank; (iii) terminate or unilaterally fail to renew any existing insurance or bonding coverage; (iv) amend, modify, terminate or fail to renew or preserve its business organization, material rights, franchises, permits and licenses, or take any action which would jeopardize the continuance of the goodwill of its customers where such action would have a material adverse effect on the consolidated financial condition, results of operations or prospects of CorpBank; 54 56 (v) enter into any Understanding, except (A) deposits incurred, and short-term debt securities (obligations maturing within one year) issued, in the ordinary course of business and consistent with prior practice, and liabilities arising out of, incurred in connection with, or related to the consummation of this Agreement, (B) commitments to make loans or other extensions of credit in compliance with clauses (vii) or (xii) of this subsection (b) and (C) loan sales in the ordinary course of business, without any recourse except to a reserve account funded by an interest rate spread otherwise payable to the servicer of the loans sold, provided that no commitment to sell loans shall extend beyond the Effective Time of the Merger; (vi) enter into any new leases (regardless of dollar amount) or contracts requiring annual payments of more than $1,000, or having a term in excess of six months without prior approval of CUB, which approval shall not be unreasonably withheld or enter into any leases or contracts requiring annual payments of more than $10,000, which are not new, without the prior approval of CUB, which approval shall not be unreasonably withheld; (vii) make any loan or other extension of credit, or enter into any commitment to make any loan or other extension of credit or enter into any agreement, with or to any CorpBank or CorpBank Subsidiary director, officer or employee or 5% shareholder, except in accordance with existing practice or policy; (viii) except as required by any existing contract, grant any general or uniform increase in the rates of pay of employees or employee benefits or any increase in salary or employee benefits of any officer, employee or agent or pay any bonus to any person; (ix) sell, transfer, mortgage, encumber or otherwise dispose of any assets or any liabilities except in the ordinary course of business and consistent with prior practice or as required by any existing contract or for ordinary repairs, renewals or replacements or as contemplated by this Agreement; (x) except pursuant to the exercise of outstanding stock options, issue, sell, redeem or acquire for value, or agree to do so, any debt securities or any shares of the capital stock or other ownership interests, or securities convertible into or options, rights or warrants exercisable for such shares or interests, of CorpBank or any CorpBank Subsidiary or declare, issue or pay any dividend or other distribution of assets, whether consisting of money, CorpBank Stock, CorpBank Preferred Stock, other personal property, real property or other things of value, to CorpBank's shareholders or with respect to the Bank's stock or the stock of any other CorpBank 55 57 Subsidiary that is not directly or indirectly wholly owned by CorpBank, or split, subdivide combine or reclassify any shares of its stock or other equity security; (xi) change or amend its charter documents or bylaws; (xii) make its credit underwriting policies, standards or practices relating to the making of loans and other extensions of credit, or commitments to make loans and other extensions of credit, less stringent than those in effect on June 30, 1995; (xiii) make any capital expenditures, or commitments with respect thereto, except those in the ordinary course of business which do not exceed $5,000 individually or $10,000 in aggregate; (xiv) make special or extraordinary payments to any person or enter into any agreement which could result in such special or extraordinary payments other than $20,000 payments to each of the President and Vice Chairman / Executive Vice President and $15,000 to the Chief Financial Officer of CorpBank as of the Closing, or as contemplated, or as disclosed, in this Agreement as of the date hereof; (xv) except for transactions in the ordinary course of business, make any material investments, by purchase of stock or securities, contributions to capital, property transfers, purchases of any property or assets or otherwise, in any other individual, corporation or other entity; (xvi) compromise or otherwise settle or adjust any assertion or claim of a deficiency in taxes (or interest thereon or penalties in connection therewith) or file any appeal from an asserted deficiency except in a form previously approved by CUB in writing or file or amend any federal, foreign or state tax return or report or make any tax election or change any method or period of accounting unless required by GAAP or applicable law; (xvii) except as contemplated in this Agreement, terminate any plan or enter into any new employment agreement or other employee benefit arrangement, or modify any employment agreement or other employee benefit arrangement in effect on the date of this Agreement to which CorpBank or any CorpBank Subsidiary is a party; or (xviii) agree to take or make any commitment to take any actions prohibited by this Section 5.2. 56 58 5.3 Limitation on Conduct of Bancorp and CUB Prior to Closing. Between the date hereof and the Effective Time of the Merger: (a) Bancorp agrees to conduct its business and to cause the Bancorp Subsidiaries to conduct their respective businesses only in the normal and customary manner and in accordance with sound business practices and with respect to the CUB, in accordance with safe and sound banking practices; (b) Bancorp shall not, without the prior written consent of CorpBank (which consent shall not be unreasonably withheld and which consent shall be deemed granted if within five (5) business days of receipt of notice by CorpBank written notice of objection is not received by Bancorp) take any of the following actions or allow any Bancorp Subsidiary to take any of the following actions: (i) carry on its business except in substantially the same manner as heretofore conducted or introduce any new method of management or operation in respect of its business and properties, except in a manner consistent with prior practice and in the ordinary course of business. Acquisition of additional banking offices or banking assets or mergers or combinations with other BIF insured banking institutions shall be deemed to be in the ordinary course of business; (ii) amend, modify, or, except as they may be terminated in accordance with their terms, terminate any Understanding or materially default in the performance of any of its obligations under any Understanding where such action would have a material adverse effect on the consolidated financial condition, results of operations or prospects of Bancorp; (iii) terminate or unilaterally fail to renew any existing insurance or bonding coverage, providing however, that CUB may change carriers and coverage relative to any insurance or bonding coverage, and no notice need be given unless the amount of coverage is materially less than that held by CUB at the date of this Agreement; (iv) amend, modify, terminate or fail to renew or preserve its business organization, material rights, franchises, permits and licenses, or take any action which would jeopardize the continuance of the goodwill of its customers where such action would have a material adverse effect on the consolidated financial condition, results of operations or prospects of Bancorp; (v) make any loan or other extension of credit, or enter into any commitment to make any loan or other extension of credit, to any Bancorp or CUB Subsidiary director, officer or employee or 5% shareholder, except in accordance 57 59 with existing practice or policy; (vi) except in the ordinary course of business and consistent with prior practice or as required by any existing contract, grant any general or uniform increase in the rates of pay of employees or employee benefits or any increase in salary or employee benefits of any officer, employee or agent or pay any bonus to any person; (vii) sell, transfer, mortgage, encumber or otherwise dispose of any assets or any liabilities except in the ordinary course of business and consistent with prior practice or as required by any existing contract or for ordinary repairs, renewals or replacements or as contemplated by this Agreement; (viii) make any capital expenditures, or commitments with respect thereto, except those in the ordinary course of business which do not exceed $200,000 individually or $500,000 in aggregate; (ix) make special or extraordinary payments to any person other than as contemplated, or as disclosed, in this Agreement as of the date hereof; (x) compromise or otherwise settle or adjust any material assertion or claim of a material deficiency in taxes (or interest thereon or penalties in connection therewith) or file any appeal from an asserted material deficiency except in a form previously approved by CorpBank in writing or file or amend in any material manner, any federal, foreign or state tax return or report or make any material tax election or change any material method or period of accounting unless required by GAAP or applicable law; or (xi) agree to take or make any commitment to take any actions prohibited by this Section 5.3. 5.4 Certain Loans and Other Extensions of Credit. (a) CorpBank will promptly inform CUB of the amounts and categories of any loans, leases or other extensions of credit that have been classified by any bank regulatory authority or by any unit of CorpBank as "Criticized," "Specially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification ("Classified Credits"). CorpBank will furnish to CUB, as soon as practicable, and in any event within fifteen days after the end of each calendar month, schedules including the following: (a) Classified Credits (including with respect to each credit in an amount equal to or greater than $25,000, its classification category, its type, and the originating unit), and by type and originating unit, the aggregate dollar 58 60 amount of classified credits of less than $25,000; (b) nonaccrual credits (including, with respect to each credit in an amount equal to or greater than $25,000, its type and the originating unit), and by type and originating unit, the aggregate dollar amount of nonaccrual credits of less than $25,000; (c) accrual exception credits that are delinquent 90 or more days and have not been placed on nonaccrual status (including with respect to each accrual exception credit in an amount equal to or greater than $25,000, its type and the originating unit), and by type and originating unit, the aggregate dollar amount of such accrual exception credits of less than $25,000; (d) delinquent credits (including with respect to each delinquent credit in an amount equal to or greater than $25,000, its type and the originating unit), including an aging into 30-59, 60-89, 90-119, and 120+ day categories, and by type and originating unit, the aggregate dollar amount of delinquent credits of less than $25,000; (e) participating loans and leases, stating, with respect to each, whether it is purchased or sold, the loan or lease type, and the originating unit; (f) loans or leases (including any commitments) by CorpBank or any CorpBank Subsidiary to any CorpBank or CorpBank Subsidiary director, officer, employee, or shareholder holding 10% or more of the capital stock of CorpBank, including with respect to each such loan or lease the identity and, to the best knowledge of CorpBank, the relation of the borrower to CorpBank or any CorpBank Subsidiary, the loan or lease type and the outstanding and undrawn amounts; (g) letters of credit (including with respect to each letter of credit in a face amount equal to or greater than $25,000, the type and originating unit), and by type and originating unit, the aggregate dollar amount of all letters of credit of less than $25,000; (h) loans or leases charged off during the previous month (including with respect to each such loan or lease, its type and the originating unit), and by type and originating unit, the aggregate dollar amount of such loans or leases less than $25,000; (i) loans or leases written down during the previous month, including with respect to each the original amount, the write off amount, its type and originating unit; and (j) other real estate or assets owned, stating with respect to each its type. (b) CUB will promptly inform CorpBank of the amounts and categories of any loans, leases or other extensions of credit that have been classified by any bank regulatory authority or by CUB as "Criticized," "Specially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification ("Classified Credits"). CUB will furnish to CorpBank, as soon as practicable, and in any event within fifteen days after the end of each calendar month, schedules including the following: (a) Classified Credits (including with respect to each credit in an amount equal to or greater than $25,000, its classification category), and the aggregate dollar amount of classified credits of less than $25,000; (b) nonaccrual credits (including, with respect to each credit in an amount equal to or greater than $25,000, its classification category, and the aggregate dollar amount of nonaccrual credits of less than $25,000); (c) accrual exception credits that are delinquent 90 59 61 or more days and have not been placed on nonaccrual status (including with respect to each accrual exception credit in an amount equal to or greater than $25,000, its classification category), and the aggregate dollar amount of such accrual exception credits of less than $25,000; (d) delinquent credits (including with respect to each delinquent credit in an amount equal to or greater than $25,000, its classification category ), including an aging into 30-59, 60-89, 90-119, and 120+ day categories, and the aggregate dollar amount of delinquent credits of less than $25,000; (e) participating loans and leases, stating, with respect to each, whether it is purchased or sold, the loan or lease type, and the originating unit; (f) loans or leases (including any commitments) by CUB to any Bancorp or CUB Subsidiary director, officer, employee, or shareholder holding 10% or more of the capital stock of Bancorp, including with respect to each such loan or lease the identity and, to the best knowledge of CUB, the relation of the borrower to Bancorp or CUB, the loan or lease type and the outstanding and undrawn amounts; (g) letters of credit (including with respect to each letter of credit in a face amount equal to or greater than $25,000, the classification category), and by type classification category, the aggregate dollar amount of all letters of credit of less than $25,000; (h) loans or leases charged off during the previous month (including with respect to each such loan or lease, its classification category), and by classification category, the aggregate dollar amount of such loans or leases less than $25,000; (i) loans or leases written down during the previous month, including with respect to each the original amount, the write off amount, its classification category; and (j) other real estate or assets owned, stating with respect to each its type. 5.5 Negotiations With Other Parties. (a) CorpBank shall not, nor shall it authorize or knowingly permit any of its representatives or CorpBank Subsidiaries, directly or indirectly, to, entertain, solicit or encourage or participate in any discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group (other than Bancorp, CUB and their representatives) concerning any Acquisition Proposal (as hereinafter defined) other than the Acquisition Proposal set forth in this Agreement. CorpBank shall notify CUB immediately in the manner set forth in Section 9.3 if any such inquiry or Acquisition Proposal is received by CorpBank or any CorpBank Subsidiary, including the terms thereof. For purposes of this Agreement, "Acquisition Proposal" means any (i) proposal pursuant to which any corporation, partnership, person or other entity or group, other than Bancorp or CUB, would acquire or participate in a merger or other business combination involving CorpBank or any CorpBank Subsidiary; (ii) proposal by which any corporation, partnership, person or other entity or group, other than Bancorp or CUB, would acquire the right to vote 5% or more of the capital stock of CorpBank or any CorpBank Subsidiary entitled to vote thereon for the election of directors, 60 62 other than persons designated as proxy holders by the Board of Directors of CorpBank or any CorpBank Subsidiary; (iii) acquisition of the assets of CorpBank or any CorpBank Subsidiary other than in the ordinary course of business; or (iv) acquisition in excess of five percent (5%) of the outstanding capital stock of CorpBank or any CorpBank Subsidiary, other than as contemplated by this Agreement. 5.6 Affirmative Conduct of CorpBank Prior to Closing. Between the date hereof and the Effective Time of the Merger, CorpBank shall do the following and shall cause the CorpBank Subsidiaries to do the following: (a) Use their respective commercially reasonable best efforts, or cooperate with others, to expeditiously bring about the satisfaction of the conditions specified in Article 6 hereof; (b) Use and devote their respective commercially reasonable efforts consistent with this Agreement to maintain and preserve intact their respective present business organizations and to maintain and preserve their relationships and goodwill with account holders, borrowers, employees and others having business relationships with them; (c) Advise CUB promptly in writing of any material adverse change known to CorpBank or any CorpBank Subsidiary in the capital structure, financial condition or business prospects of CorpBank or any CorpBank Subsidiary, or of any other materially adverse change known to CorpBank respecting the business and operations of CorpBank on a consolidated basis, or of any matter which would make the representations and warranties set forth in Article 3 hereof not true and correct in any material respect at the Closing, or which make the conditions or other transactions contemplated in this Agreement impossible to perform or substantially unlikely to be complied with; (d) Keep in full force and effect all of the existing permits and licenses of CorpBank and CorpBank Subsidiaries; (e) Use their respective commercially reasonable best efforts to maintain insurance or bonding coverage on all properties for which they are responsible and on their respective business operations, and carry not less than the same coverage for fidelity, director and officer liability, public liability, personal injury, property damage and other risks equal to that which is now in effect; and notify CUB in writing promptly of any facts or circumstances which could affect CorpBank's or any CorpBank Subsidiary's ability to maintain such insurance or bonding coverage; 61 63 (f) Perform their respective material contractual obligations and not become in material default on any of such obligations; (g) Duly observe and conform to all legal requirements applicable to their respective businesses; (h) Duly and timely file all reports and returns required to be filed with any federal, state or local governmental authority, unless any extensions have been duly granted by such authority; (i) Maintain their respective assets and properties in good condition and repair, normal wear and tear excepted; (j) Promptly advise CUB in writing of any event or any other transaction within CorpBank's or any CorpBank Subsidiary's knowledge whereby any person or related group of persons acquires, directly or indirectly, record or beneficial ownership (as defined in Rule 13d-3 promulgated by the SEC pursuant to the 1934 Act) or control of 5% or more of the outstanding shares of CorpBank Stock prior to the record date fixed for the CorpBank shareholders' meeting or any adjourned meeting thereof to approve the transactions contemplated herein; (k) Promptly notify CUB of any event of which CorpBank obtains knowledge which may materially and adversely affect the financial condition, results of operations, or business prospects of CorpBank or any CorpBank Subsidiary, or in the event it determines that the Merger will not be consummated because of any inability to meet the conditions to the performance of CUB set forth in Sections 6.2; (l) Charge off all loans, receivables and other assets, or portions thereof, deemed uncollectible in accordance with GAAP, applicable law or regulation, or classified as "loss" or as directed by any regulatory authority; and maintain the allowance for credit losses of CorpBank at a level which is adequate to provide for all known and reasonably expected losses on assets outstanding and other inherent risks in CorpBank's loan portfolio; (m) Furnish to CUB, as soon as practicable, and in any event within ten days after it is prepared, (i) a copy of any report submitted to the board of directors of CorpBank or any CorpBank Subsidiary and access to the working papers related thereto and copies of other operating or financial reports prepared for management of any of their businesses and access to the working papers thereto, provided, however, that CorpBank need not furnish CUB communications of CorpBank's legal counsel regarding CorpBank's rights against and obligations to 62 64 CUB or its affiliates under this Agreement, (ii) copies of all reports, renewals, filings, certificates, statements and other documents filed with or received from the Superintendent, SEC, Fed, any Federal Reserve Bank, FDIC, or any other governmental or regulatory body, (iii) separate consolidated monthly unaudited statements of condition and statements of operations for CorpBank, consolidated monthly statements of changes in consolidated shareholders' equity for CorpBank, and separate quarterly unaudited consolidated and consolidating statements of condition and statements of operations for CorpBank and statements of changes in consolidated shareholders' equity for CorpBank, in each case prepared in a manner consistent with past practice, and (iv) such other reports as CUB may reasonably request relating to CorpBank. Each of the financial statements delivered pursuant to this subsection (m), except as stated therein, shall be prepared in accordance with GAAP, except that such financial statements may omit statements of cash flow and footnote disclosures required by GAAP. Each of the financial statements of CorpBank or any CorpBank Subsidiary delivered pursuant to this subsection (m) shall be accompanied by a certificate of each of the Chief Executive Officer and the Chief Financial Officer of CorpBank to the effect that such financial statements fairly present the financial condition and results of operations of CorpBank or the CorpBank Subsidiary, as appropriate, for the periods covered, and reflect all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation; (n) CorpBank agrees that through the Effective Time of the Merger, as of their respective dates, (i) each of the CorpBank Filings will be true and complete in all material respects; and (ii) each of the CorpBank Filings will comply in all material respects with all of the statutes, rules and regulations enforced or promulgated by the governmental or regulatory authority with which it will be filed and none will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they will be made, not misleading. Any financial statement contained in any of such CorpBank Filings that is intended to present the financial position of the entities or entity to which it relates will fairly present the financial position of such entities or entity and will be prepared in accordance with GAAP or applicable banking regulations consistently applied, except as stated therein, during the periods involved; (o) Maintain proper reserves for contingent liabilities in accordance with GAAP; (p) Promptly notify CUB of the filing of any litigation, governmental or regulatory action, or similar proceeding or notice of any claims against CorpBank or any CorpBank Subsidiary or any of their assets; 63 65 (q) At any time within 60 days of the day on which the Effective Time of the Merger is expected to occur, at the written request of CUB and on CUB's certification that it knows of no circumstance that would entitle it to terminate this Agreement, (i) give, or cause to be given, any written notice to the employees of CorpBank that CUB reasonably deems necessary or appropriate under the Worker Adjustment and Retraining Notification Act ("WARN") ; (ii) take such other actions, as CUB shall reasonably deem necessary or appropriate, to comply with WARN; and (iii) give notice to its data processing vendors of termination of the data processing contract at the end of the minimum notice period provided for therein. (r) Forward to CUB, not later than the 15th day of each calendar quarter, CorpBank's list of holders of CorpBank Stock, certified by CorpBank's transfer agent; (s) Cooperate with CUB to enable the transactions contemplated by this Agreement to qualify for the accounting treatment desired by CUB. (t) Give three business days prior written notice to CUB prior to approving any loans or leases in excess of $100,000, subsequent to the Execution Date. Such notice must include copies of the description of the loan utilized for consideration of the loan by CorpBank and copies of relevant financial statements and other financial documents utilized by CorpBank in its review. Notwithstanding the above, CorpBank is not required to obtain CUB's prior "non disapproval" of any renewals of existing loans, regardless of amount, and is not required to obtain CUB's prior approval of automobile secured loans, whether or not such loans are part of a borrowing relationship in excess of $100,000. CorpBank shall give CUB notice of all loans made, (including renewals) in excess of $100,000 within ten (10) days of approval thereof. To the extent that CUB does not "non disapprove" a loan which CorpBank is obligated to submit hereunder, CUB reserves the right to place a 100% reserve against such loan, without explanation, as part of its final due diligence provided for herein. Notwithstanding anything herein to the contrary, CUB shall not have any power to direct CorpBank to make particular loans or to refrain from making particular loans and the effect of any comments on CorpBank loans in connection with this provision shall be limited as set forth herein. CUB agrees that it will review submitted loans promptly and will advise CorpBank of its determination regarding any such loan within 3 business days of receipt of request therefore. (u) Make its best efforts to obtain written general releases, in form satisfactory to counsel for CUB, from all employees terminated for any reason subsequent to March 1, 1995, including release of federal, state and common law causes of action, with the exception of Richard Brown, Gary Wrigley and Elizabeth Peters. 64 66 (v) Settle or otherwise conclude all litigation as to which CorpBank or any agent is a defendant and obtain general releases and dismissals with prejudice in form and content satisfactory to counsel for CUB. (w) Obtain all necessary consents and opinions from GT and AA to allow three years audited financial statements with unqualified opinions to be included in the Registration Statement, if determined to be necessary by Bancorp. (x) CorpBank shall purchase a three year tail on its Director and Officer Liability Insurance, extending at least equivalent coverage to that currently held by CorpBank to directors of CorpBank after the Merger, whether or not they are directors of the Surviving Bank." 5.7 Affirmative Conduct of Bancorp Prior to Closing. Between the date hereof and the Effective Time of the Merger, Bancorp shall do the following and shall cause CUB to do the following: (a) Use their respective commercially reasonable best efforts, or cooperate with others, to expeditiously bring about the satisfaction of the conditions specified in Article 6 hereof; (b) Use and devote their respective commercially reasonable efforts consistent with this Agreement to maintain and preserve intact their respective present business organizations and to maintain and preserve their relationships and goodwill with account holders, borrowers, employees and others having business relationships with them; (c) Advise CorpBank promptly in writing of any material adverse change known to Bancorp or CUB in the capital structure, financial condition or business prospects of Bancorp or CUB, or of any other materially adverse change known to Bancorp respecting the business and operations of Bancorp on a consolidated basis, or of any matter which would make the representations and warranties set forth in Article 4 hereof not true and correct in any material respect at the Closing; (d) Keep in full force and effect all of the existing permits and licenses of Bancorp and CUB; (e) Use their respective commercially reasonable best efforts to maintain insurance or bonding coverage on all properties for which they are responsible and on their respective business operations, and carry not less than the same coverage for fidelity, public liability, personal injury, property damage and other risks equal 65 67 to that which is now in effect; and notify CorpBank in writing promptly of any facts or circumstances which could affect Bancorp's or CUB's ability to maintain such insurance or bonding coverage; (f) Perform their respective material contractual obligations and not become in material default on any of such obligations; (g) Duly observe and conform to all legal requirements applicable to their respective businesses; (h) Duly and timely file all reports and returns required to be filed with any federal, state or local governmental authority, unless any extensions have been duly granted by such authority; (i) Maintain their respective assets and properties in good condition and repair, normal wear and tear excepted; (j) Promptly notify CorpBank of any event of which Bancorp obtains knowledge which may materially and adversely affect the financial condition, results of operations, or business prospects of Bancorp or CUB, or in the event it determines that the Merger will not be consummated because of any inability to meet the conditions to the performance of CorpBank set forth in Sections 6.2(d), (g) and (l); (k) Charge off all loans, receivables and other assets, or portions thereof, deemed uncollectible in accordance with GAAP, applicable law or regulation, or classified as "loss" or as directed by any regulatory authority; and maintain the allowance for credit losses of CUB at a level which is adequate to provide for all known and reasonably expected losses on assets outstanding and other inherent risks in the Bancorp and CUB's loan portfolio; (l) Furnish to CorpBank, as soon as practicable, and in any event within ten days after it is prepared, (i) a copy of any report submitted to the board of directors of Bancorp or CUB, provided, however, that CUB need not furnish communications of CUB's legal counsel regarding CUB's rights against and obligations to CorpBank or its affiliates under this Agreement, (ii) copies of all reports, renewals, filings, certificates, statements and other documents filed with or received from the SEC, OCC, Fed, any Federal Reserve Bank, FDIC, or any other governmental or regulatory body (except that copies shall not be provided of Reports of Examination), (iii) copies of monthly financial statements provided to Bancorp and CUB's Boards of Directors, and (iv) such other reports as CorpBank may reasonably request relating to Bancorp. Each of the financial statements 66 68 delivered pursuant to this subsection (m), except as stated therein, shall be prepared in accordance with GAAP, except that such financial statements may omit statements of cash flow and footnote disclosures required by GAAP. Each of the financial statements of Bancorp or CUB delivered pursuant to this subsection (m) shall be accompanied by a certificate of each of the Chief Executive Officer and the Chief Financial Officer of Bancorp to the effect that such financial statements fairly present the financial condition and results of operations of Bancorp or CUB, as appropriate, for the periods covered; (m) Bancorp agrees that through the Effective Time of the Merger, as of their respective dates, (i) each of the Bancorp Filings will be true and complete in all material respects; and (ii) each of the Bancorp Filings will comply in all material respects with all of the statutes, rules and regulations enforced or promulgated by the governmental or regulatory authority with which it will be filed and none will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they will be made, not misleading. Any financial statement contained in any of such Bancorp Filings that is intended to present the financial position of the entities or entity to which it relates will fairly present the financial position of such entities or entity and will be prepared in accordance with GAAP or applicable banking regulations consistently applied, except as stated therein, during the periods involved; (n) Maintain proper reserves for contingent liabilities in accordance with GAAP; and (o) Promptly notify CorpBank of the filing of any material litigation, governmental or regulatory action, or similar proceeding or notice of any claims against Bancorp or CUB or any of their assets; (p) Registration Statement and Applications. Bancorp and CUB will use commercially reasonable efforts to prepare and file or cause to be prepared and filed: (i) with the SEC, the Registration Statement; (ii) with the Fed, an application for approval of the Merger or related aspects thereof; (iii) with the OCC, the required documents for approval of, and to effect, the change in control of CorpBank and the Bank; and (iv) with the OCC, applications for approval of the Bank Merger, except that Bancorp shall have no obligation to file a new registration statement or a post-effective amendment to the Registration Statement covering any reoffering of Bancorp Stock by CorpBank Affiliates. Bancorp and CUB will cooperate with CorpBank in the preparation of the Proxy Statement and covenant and agree that all information furnished by Bancorp and CUB for inclusion in the Proxy Statement, all applications to appropriate regulatory agencies for approval 67 69 of or consent to the Merger , and all information furnished by Bancorp and CUB to CorpBank pursuant to this Agreement, will comply in all material respects with the provisions of applicable law, including the Securities Act and the 1934 Act and the rules and regulations of the SEC thereunder, and will not contain any untrue statement of a material fact and will not omit to state any material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading; (q) Blue Sky. Bancorp covenants and agrees to use its commercially reasonable best efforts to have the shares of Bancorp Stock qualified or registered for offering and sale under the securities or Blue Sky laws of each jurisdiction in which shareholders of CorpBank reside. (r) Action of Sole Shareholder. Prior to the Effective Time of the Merger, Bancorp, as sole shareholder of CUB, will take all action necessary or advisable for the consummation of the Merger by CUB and the carrying out by CUB of the transactions contemplated hereby; (s) Stock Exchange Listing. Bancorp will use its commercially reasonable best efforts to have the shares of Bancorp Stock to be issued pursuant to the Merger duly listed, subject to official notice of issuance, on the Nasdaq Stock Exchange. 5.8 CorpBank Accountants. Promptly upon request of CUB, CorpBank will request its independent accountants to permit CUB or its representatives to review and examine the work papers relating to CorpBank and CorpBank's audited financial statements for the years ended December 31, 1992 and 1993, 1994 and permit such independent accountants to discuss with CUB any matter relating to the audits of CorpBank. In addition, CorpBank will make available to CUB copies of each management letter or other letter delivered to CorpBank, or any CorpBank Subsidiary by Grant Thornton or by AA in connection with such financial statements or relating to any review of the internal controls of CorpBank, or any CorpBank Subsidiary since January 1, 1992, and has instructed each of them to make available to CUB for inspection by CUB or its representatives all reports and working papers produced or developed by in connection with their examination of such financial statements, as well as all such reports and working papers for any periods for which any tax of CorpBank, or CorpBank Subsidiary has not been finally determined or barred by applicable statutes of limitation. 5.9 Bancorp Accountants. Bancorp will make available to CorpBank copies of each management letter or other letter delivered to Bancorp by Arthur Andersen & Co. ("AA") in connection with such financial statements or relating to any review by AA of the internal controls of Bancorp or CUB since January 1, 1994. 68 70 5.10 Submission to Shareholders. Subject to satisfaction of applicable federal and state securities laws, not later than December 15, 1995 (or such earlier date as is reasonably possible), unless extended with the mutual written consent of the parties, CorpBank shall hold a shareholder meeting for the approval of its shareholders of the transactions contemplated herein and all matters incident thereto. CorpBank hereby agrees that it shall unqualifiedly recommend that its shareholders vote in favor of approval of the transactions contemplated hereby. 5.11 Preparation of Registration Statement, Proxy Statement, Application for Approval by Regulatory Authorities and Redemption Materials. (a) CorpBank will cooperate with Bancorp in the preparation of a registration statement (the "Registration Statement") to be filed with the SEC under the Securities Act for the registration of the Bancorp Stock to be issued in connection with the Merger, in connection with any listing application to be filed with the Nasdaq Stock Exchange with respect to the Bancorp Stock, in the preparation of a proxy statement to be filed with the SEC that will be used by CorpBank to solicit proxies of its shareholders in connection with the approval and adoption of the Agreement and the Agreement of Merger (the "Proxy Statement") and in connection with any statements or applications to any governmental body in connection with the transactions contemplated by this Agreement. In connection therewith, CorpBank will furnish all financial or other information, including accountant comfort letters relating thereto, certificates, consents, and opinions of counsel concerning CorpBank and CorpBank Subsidiaries reasonably deemed necessary by Bancorp for the filing or preparation for filing of the Registration Statement and related matters. (b) CorpBank will cooperate with Bancorp and provide such information as may be necessary or advisable for Bancorp or CUB to make its applications required for regulatory approvals and for any other consents or approvals or to take any other action necessary or, in the reasonable judgment of Bancorp, advisable to consummate the Merger and the Bank Merger. (c) CorpBank covenants and agrees that all information furnished by CorpBank or any CorpBank Subsidiary for inclusion in the Registration Statement, the Proxy Statement, all applications to appropriate regulatory agencies for approval of or consent to the Merger and the Bank Merger, and all information furnished by CorpBank or any CorpBank Subsidiary to Bancorp or CUB pursuant to this Agreement, will comply in all material respects with the provisions of applicable law, including the Securities Act and the 1934 Act and the rules and regulations of the SEC thereunder, and will not contain any untrue statement of a material fact 69 71 and will not omit to state any material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. (d) Bancorp will cooperate with CorpBank in the preparation of a proxy statement to be filed with the Superintendent and the FDIC that will be used by CorpBank to solicit proxies of its shareholders in connection with the approval and adoption of the Agreement and the Agreement of Merger (the "Proxy Statement") and in connection with any statements or applications to any governmental body in connection with the transactions contemplated by this Agreement. In connection therewith, Bancorp will furnish all financial or other information, including accountant comfort letters relating thereto, certificates, consents, and opinions of counsel concerning Bancorp and CUB reasonably deemed necessary by CorpBank for the filing or preparation for filing of the Proxy Statement and related matters. (e) Bancorp covenants and agrees that all information furnished by Bancorp or CUB for inclusion in the Registration Statement, the Proxy Statement, all applications to appropriate regulatory agencies for approval of or consent to the Merger and the Bank Merger, and all information furnished by Bancorp or CUB to CorpBank pursuant to this Agreement, will comply in all material respects with the provisions of applicable law, including the Securities Act and the 1934 Act and the rules and regulations of the SEC thereunder, and will not contain any untrue statement of a material fact and will not omit to state any material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 5.12 Termination of CorpBank Employee Stock Option Plans. CorpBank will take all steps necessary to cause its stock option plans to be terminated as of or prior to the Effective Time of the Merger, will grant no additional options under said plans prior to the Effective Time of the Merger, and will cause any options outstanding thereunder (irrespective of their exercise price and whether or not then presently exercisable or fully vested) to be exercised prior to the Calculation Date or canceled prior to the Calculation Date together with a release of all claims against CorpBank or Surviving Association related to such options. 5.13 Agreement of CorpBank Affiliates. CorpBank agrees to use its best efforts to cause each person who is a CorpBank "affiliate" as defined pursuant to Rule 145 promulgated by the SEC under the Securities Act ("CorpBank Affiliate"), at least 30 days prior to the Effective Time of the Merger, to enter into an Affiliate Agreement, in the form attached hereto as Exhibit E, which provides that, among other things: (i) the CorpBank Stock owned by the CorpBank affiliate may not be sold or 70 72 transferred for a period of not less than 30 days prior to the Effective Time of the Merger; (ii) the Bancorp Stock to be acquired by an CorpBank Affiliate upon consummation of the Merger (such shares of Bancorp Stock being sometimes referred to for purposes of this Section 5.13 as "Acquired Shares") will not be acquired with a view to the sale or distribution thereof except as permitted by Rule 145 promulgated by the SEC under the Securities Act ("Rule 145"); (iii) the Acquired Shares will not be disposed of in such a manner as to violate the Securities Act or the Affiliate Agreement and without Bancorp having first received an opinion of counsel reasonably satisfactory to Bancorp to the foregoing effect or other evidence of compliance with Rule 145 and the Affiliate Agreement, in each case reasonably satisfactory to Bancorp; (iv) none of the shares of CUB Common Stock received by the CorpBank Affiliate pursuant to the Merger will be sold, transferred or otherwise disposed of and the CorpBank Affiliate will not in any other way reduce their risk of ownership or investment in any of the shares of CUB Common Stock so received until the later of: (i) financial results covering a period of at least thirty (30) days of combined operations of CUB and CorpBank following the Effective Time of the Merger have been published by CUB (provided that the CorpBank Affiliate may make bona fide gifts or distributions without consideration so long as the recipients thereof agree not to sell, transfer or otherwise dispose of the CUB Common Stock except as provided in the Affiliate Agreement);(v) the certificates representing the Acquired Shares may bear a legend referring to the foregoing restrictions on disposition, and Bancorp may issue to its transfer agent appropriate stop transfer instructions with respect to the Acquired Shares; and (vi) each CorpBank Affiliate will obtain an agreement, and deliver a copy of such to Bancorp, from each transferee of Acquired Shares which is substantially similar to an Affiliate Agreement, unless such transferee may under the Securities Act dispose of the Acquired Shares transferred to him without registration under the Securities Act. Notwithstanding anything in this Section 5.13 to the contrary, in the event that such affiliate is also a director of CorpBank, they shall enter into an agreement in the form attached hereto as Exhibit E1, which shall provide, inter alia, that such person will not sell or transfer the Bancorp Stock to be acquired upon consummation of the Merger for a period of not less than six months following the publication of financial information for a mimimum of 30 days of combined operation of CUB and CorpBank. 5.14 Bank Merger. At CUB's request, CorpBank and each CorpBank Subsidiary shall take all necessary corporate and other action including publication required under the Merger Statutes to approve and to permit the consummation of the Bank Merger, on the Closing Date. CorpBank agrees that it will execute, deliver and, when appropriate, file, and will cause each CorpBank Subsidiary to execute, deliver and, when appropriate, file, any and all agreements, applications and instruments necessary or desirable to permit the consummation of the Merger on 71 73 the Closing Date, including, but not limited to, agreements of merger relating to the Merger, and will take, and will cause each CorpBank Subsidiary to take, such other action as CUB may reasonably request to permit the consummation of any transactions contemplated in connection with the Merger. CorpBank shall not take any action or allow any CorpBank Subsidiary to take any action which would prevent performance of agreements of merger or any transactions contemplated in connection with the Merger. 5.15 Resignations. CorpBank shall obtain the resignations, to be effective as of the Effective Time of the Merger, of the directors and officers of CorpBank and the directors of all CorpBank Subsidiaries. Not less than ten (10) days prior to the Closing, CUB shall provide CorpBank with a list of CorpBank officers whose resignations will not be required. 5.16 Corporate Action. The parties shall each take or cause to be taken all necessary corporate action required to carry out the transactions contemplated in this Agreement and the Agreement of Merger. 5.17 Regulatory Approvals. Promptly following execution of this Agreement, the parties hereto shall prepare, submit and file, or cause to be prepared, submitted and filed, all applications for approvals and consents as may be required of any of them, respectively, by applicable law and regulations with respect to the transactions contemplated by this Agreement and by the Agreement of Merger, including without limitation any and all applications required to be filed with the OCC, the Fed and such other governmental or regulatory authorities as Bancorp may reasonably believe necessary. Each party shall cooperate with the others in the preparation of all of those applications and will furnish promptly upon request all documents, information, financial statements or other materials as may be required in order to complete said applications. Each party hereto shall afford the others a reasonable opportunity to review all such applications (except confidential portions thereof) and all amendments and supplements thereto before filing. 5.18 Necessary Consents. In addition to the regulatory approvals referred to in Section 5.17, the parties hereto shall each apply for and diligently seek to obtain all other third party consents or approvals which may be necessary for the consummation of the Merger, including, without limitation, the written consent of any lessors of real and personal property which property cannot be assigned without the written consent of the other such lessors. 5.19 Further Assurances. The parties agree that from time to time, whether prior to, at or after the Effective Time of the Merger, they will execute and deliver such 72 74 further instruments of conveyance and transfer and take such other action as may reasonably be expected to consummate the transactions contemplated hereby. Bancorp, CUB, CorpBank and CorpBank Subsidiaries each agree to take such further action as may reasonably be requested by any other party in order to consummate the transactions contemplated by this Agreement and that are not inconsistent with the other provisions hereof. ARTICLE 6. CONDITIONS PRECEDENT TO CONTEMPLATED TRANSACTIONS 6.1 General Conditions. The obligations of each of the parties hereto to consummate the transactions contemplated herein are further subject to the satisfaction, on or before the Closing Date, of the following conditions precedent: (a) Shareholder Approval. The transactions contemplated hereby shall have received all requisite approvals of the shareholders of CorpBank, Bancorp, and CUB. (b) No Proceedings. No legal, administrative, arbitration, investigatory or other proceeding by any governmental authority shall have been instituted and, at what would otherwise have been the Effective Time of the Merger, remain pending by or before a court or any governmental authority to restrain or prohibit the transactions contemplated hereby. (c) Regulatory Approvals. To the extent required by applicable law or regulation, all approvals or consents of any governmental authority, including without limitation, those of the OCC, Fed and Superintendent shall have been obtained or made for the transactions contemplated hereby, and the applicable waiting period under the BHCA and the Bank Merger Act shall have expired. All other statutory or regulatory requirements for the valid completion of the transactions contemplated hereby shall have been satisfied. (d) Stock Exchange Listing. The shares of Bancorp Stock deliverable pursuant to this Agreement shall have been duly authorized for listing, subject to official notice of issuance, on the Nasdaq Stock Exchange. (e) Registration Statement and Proxy Statement. The Registration Statement shall have become effective under the Securities Act and copies of the Proxy Statement shall have been mailed to every shareholder of record of CorpBank on the record date not less than 20 days prior to the date of the shareholders' meeting called to act upon the Merger. 73 75 6.2 Conditions to Obligations of Bancorp and CUB. The obligations of Bancorp and CUB to effect the transactions contemplated hereby shall be subject to the following conditions, any of which may be waived in writing by Bancorp and CUB: (a) Representations and Warranties; Performance of Covenants. Each of the representations and warranties of CorpBank and CorpBank Subsidiaries set forth herein shall be true and correct as of the Effective Time of the Merger in all material respects, as if made on such date; and CorpBank and CorpBank Subsidiaries shall have performed in all material respects all of the covenants to be performed by them on or prior to the Effective Time of the Merger. (b) Opinion of Counsel for CorpBank. Bancorp and CUB shall have received from Knecht & Hansen, counsel to CorpBank, an opinion dated the Effective Time of the Merger in substantially the form attached hereto as Exhibit F. (c) Authorization of Merger. All action necessary to authorize the execution, delivery and performance of this Agreement by CorpBank and the CorpBank Subsidiaries and the consummation of the transactions contemplated hereunder shall have been duly and validly taken by the Boards of Directors and shareholders of CorpBank, and the CorpBank Subsidiaries including without limitation approval by a vote of the holders of at least two thirds of the outstanding shares of CorpBank Stock pursuant to the National Bank Act and the California Corporations Code, and CorpBank shall have full power and right to merge pursuant to the Agreement of Merger. (d) Dissenters' Rights. Not more than 5% of the outstanding shares of CorpBank Stock shall have been determined to be "dissenting shares" as defined in the California Corporations Code, the National Banking Act and other applicable law and regulation. (e) Regulatory Approvals and Related Conditions. Any governmental and regulatory approvals and consents referred to in Sections 6.1(c) and any other section of this Agreement shall have been granted without the imposition of conditions that are or would have become applicable to Bancorp, or the Surviving Association and that Bancorp reasonably and in good faith concludes would adversely affect the financial condition or operations of Bancorp, or the Surviving Association, or otherwise would be burdensome. (f) Third Party Consents. CorpBank shall have obtained all consents of other parties to their material mortgages, notes, leases, franchises, agreements, licenses and permits as may be necessary to permit the transactions contemplated herein to be consummated, without default, acceleration, breach or loss of rights 74 76 or benefits thereunder. (g) Absence of Certain Changes. As of the Closing Date there shall not exist any of the following: (i) any change(s) in the consolidated financial condition, results of operation or prospects of CorpBank since June 30, 1995 which individually is or in the aggregate are materially adverse to CorpBank on a consolidated basis; or (ii) any damage, destruction, loss or event materially and adversely affecting the properties, business or prospects of CorpBank on a consolidated basis. (h) Termination of Stock Option Plans. CorpBank shall have caused its stock option plans to be terminated as of the Calculation Date and shall have obtained the consents or agreements specified in, and otherwise shall have complied with the terms of, Section 5.12. (i) Shareholders' Agreements. All directors of CorpBank and all Shareholders specified in Section 1.9 shall have entered into agreements in substantially the form attached hereto as Exhibit B concurrently with the execution of this Agreement, and each of the persons executing such agreement shall have performed in all material respects the obligations to be performed by him under the agreement. (j) Officers' Certificate. There shall have been delivered to Bancorp on the Closing Date a certificate executed by the Chairman of the Board, Vice Chairman of the Board, Chief Executive Officer and the Chief Financial Officer of CorpBank certifying, to the best of their knowledge, compliance with all of the provisions of Sections 6.2(a), (c), (d), (f), (g), (h) and (i). (k) Validity of Transactions. The validity of all transactions herein contemplated, as well as the form and substance of all opinions, certificates, instruments of transfer and other documents to be delivered to Bancorp and CUB hereunder, shall be subject to the approval, to be reasonably exercised, of counsel for Bancorp and CUB. (l) Accountants' Letters. (i) Bancorp shall have received from AA, letters, dated the date of mailing of the Proxy Statement and the Effective Time of the Merger, in form and substance satisfactory to Bancorp: (i) confirming that they are independent public accountants with respect to CorpBank and CorpBank Subsidiaries within the meaning of the Securities Act and the published rules and regulations thereunder; (ii) stating that, in their opinion, the audited consolidated financial statements of CorpBank and CorpBank Subsidiaries, examined by them and included or 75 77 incorporated by reference in the Proxy Statement and Registration Statement and reported therein by them, comply as to form in all material respects with the applicable accounting requirements of the 1934 Act, the Securities Act and the applicable published rules and regulations thereunder, as appropriate; (iii) stating in effect that they have made a review of the unaudited consolidated interim financial statements included or incorporated by reference in the proxy statement or registration statement for periods subsequent to the most recent audited consolidated financial statements included or incorporated by reference in the Proxy Statement and the Registration Statement in accordance with standards established by the American Institute of Certified Public Accountants and nothing came to their attention that caused them to believe that such unaudited consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the 1934 Act and the Securities Act, as appropriate, or are not presented in conformity with generally accepted accounting principles applied on a basis consistent in all material respects with that of the most recent audited consolidated financial statements included or incorporated by reference in the Proxy Statement and the Registration Statement; (iv) stating in effect that, on the basis of certain procedures and inquiries including a reading of the latest available unaudited consolidated interim financial statements of CorpBank and CorpBank Subsidiaries, inquiries of officials of CorpBank and CorpBank Subsidiaries responsible for financial and accounting matters, and a reading of the minutes of the meetings of the Boards of Directors and shareholders of CorpBank and CorpBank Subsidiaries (which procedures and inquiries do not constitute an examination made in accordance with generally accepted auditing standards and would not necessarily reveal material adverse changes in the consolidated financial position or results of operations of CorpBank and CorpBank Subsidiaries ), nothing came to their attention that caused them to believe that (A) the unaudited consolidated financial statements of CorpBank and the CorpBank Subsidiaries incorporated by reference in the Proxy Statement and the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1934 Act and the Securities Act, as appropriate, or that the unaudited consolidated financial statements are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements or that at a specified date not more than five days prior to the date of mailing of the Proxy Statement or Effective Date of the Registration Statement and the Effective Time of the Merger, as applicable, there has been any material change in the capital stock, other equity securities or other ownership interests of CorpBank or any of the CorpBank Subsidiaries , or any increase in consolidated long-term debt of CorpBank or any of the CorpBank Subsidiaries, or any reduction in consolidated shareholders' equity (excluding unrealized gain or loss on marketable equity securities) or other ownership interests as compared with the amounts of 76 78 those items set out in the audited consolidated statement of condition at December 31, 1994 and with any subsequent unaudited consolidated statement of condition included or incorporated by reference in the Proxy Statement and Registration Statement, except for changes and the amount of such reduction, if any, which are described in such letter or are set forth in the Proxy Statement and Registration Statement, or (B) since December 31, 1994 any dividends were paid on the CorpBank Stock except as described in such letter; and (v) in addition to the review referred to in clause (iii) above and the limited procedures referred to in clause (iv) above, they have carried out certain specified procedures, if any, not constituting an audit, with respect to certain amounts or percentages and financial information which appear in the Proxy Statement and Registration Statement and which have been reasonably specified by Bancorp or CorpBank, as described in such letter. (m) Covenants Not to Compete. Each director of CorpBank who is a shareholder of CorpBank shall have entered into an "Agreement Not to Compete" in substantially the form attached hereto as Exhibits G(1), and G(2)(Stanley Pawlowski). (n) Registration Statement. The Registration Statement shall have been declared effective, no stop-order with respect to the Registration Statement shall have been received by Bancorp and no proceeding for such purpose shall be pending or threatened before the SEC. (o) Blue Sky Qualification. The sale of the Bancorp Stock referred to herein shall have been qualified or registered with the appropriate authorities of all states in which qualification or registration is required under the state securities or Blue Sky laws, and such qualifications or registrations shall not have been suspended or revoked. (p) Rule 145 Affiliate Agreements. CorpBank shall have delivered to Bancorp not later than 30 days prior to the Effective Date, all of the executed Affiliate Agreements specified in Section 5.13. (q) Resignations. CorpBank shall have delivered the resignations required by Section 5.15. (r) Regulatory Approvals for Bank Merger. All approvals or consents of any governmental authority shall have been obtained or made for the Bank Merger and all applicable waiting periods shall have expired. All other statutory or regulatory requirements for the valid completion of the Bank Merger shall have been satisfied. 77 79 (s) General Releases. The general releases and dismissals of litigation set forth in Section 5.6 (u) shall have been received and are acceptable to CUB. (t) Pawlowski. Stanley Pawlowski shall agree that at the Closing he will become an employee of CUB, on terms and conditions to be agreed upon by CUB and Pawlowski. He will further agree that in the event CUB or Bancorp offers him a position as a director of either or both companies, he will accept such appointment. 6.3 Conditions to Obligations of CorpBank. The obligations of CorpBank to effect the transactions contemplated hereunder shall be subject to the following conditions, any of which may be waived in writing by CorpBank: (a) Representations and Warranties; Performance of Covenants. Each of the representations and warranties of Bancorp and CUB set forth herein shall be true and correct as of the Effective Time of the Merger in all material respects, as if made on such date; and Bancorp and CUB shall have performed in all material respects all of the covenants to be performed by them on or prior to the Effective Time of the Merger. (b) Authorization of Merger. All actions necessary to authorize the execution, delivery and performance of this Agreement by Bancorp and CUB and the consummation of the transactions contemplated hereby shall have been duly and validly taken by the Board of Directors of each of Bancorp and CUB, and CUB shall have full power and right to merge pursuant to the Agreement of Merger. (c) Officers' Certificate. There shall have been delivered to CorpBank on the Closing Date a certificate executed by the Chief Executive Officer and the Chief Financial Officer of each of Bancorp and CUB certifying, to the best of their knowledge, compliance with all of the provisions of Sections 6.3(a) and (c). (d) Third Party Consents. Bancorp and CorpBank shall have obtained all consents of other parties to their material mortgages, notes, leases, franchises, agreements, licenses and permits as may be necessary to permit the transactions contemplated herein to be consummated, without default, acceleration, breach or loss of rights or benefits thereunder. (e) Absence of Certain Changes. As of the Closing Date there shall not exist any of the following: (i) any change(s) in the consolidated financial condition, results of operation or prospects of Bancorp since December 31, 1994 which individually is or in the aggregate are materially adverse to Bancorp on a 78 80 consolidated basis; or (ii) any damage, destruction, loss or event materially and adversely affecting the properties, business or prospects of Bancorp on a consolidated basis. (f) Fairness Opinion. Within ten (10) days of the execution of this Agreement, CorpBank shall have received a letter from The Findley Group or such other party as may be acceptable to the parties, substantially in the form attached hereto as Schedule 6.3(f), to the effect that the transactions contemplated by this Agreement are fair from a financial point of view to the shareholders of CorpBank. (g) Validity of Transactions. The validity of all transactions herein contemplated, as well as the form and substance of all opinions, certificates, instruments of transfer and other documents to be delivered to CorpBank hereunder, shall be subject to the approval, to be reasonably exercised, of counsel for CorpBank. ARTICLE 7. EMPLOYEE BENEFITS PLANS 7.1 Termination of CorpBank Employee Benefit Plans. Prior to the Effective Time of the Merger, CorpBank will take, and will cause all CorpBank Subsidiaries to take, all actions necessary to terminate their respective employee benefit plans and pension plans as of the Effective Time of the Merger. Contributions under the employee benefit plans and pension plans will be made at the rate provided in those respective plans through the Effective Time of the Merger. Except for amendments that are required by the Tax Reform Act of 1986 and later legislation, no amendments to the employee benefit plans and pension plans shall be made which increase the obligations of employers under any of the plans. Distributions from the plans will be made to the participants as soon as practicable after the termination of the plans in accordance with requirements of ERISA and the Code. 79 81 ARTICLE 8. TERMINATION 8.1 Termination of this Agreement. (a) This Agreement may be terminated: (i) By mutual agreement of the parties, in writing; (ii) By (A) Bancorp immediately upon the expiration of 30 days from the date that Bancorp has given notice to CorpBank of a material breach or default by CorpBank or any CorpBank Subsidiary in the performance of any covenant, agreement, representation, warranty, duty or obligation hereunder or (B) CorpBank immediately upon the expiration of 30 days from the date that CorpBank has given notice to Bancorp of a material breach or default by Bancorp or CUB in the performance of any covenant, agreement, representation, warranty, duty or obligation hereunder; provided, however, that no such termination shall be effective if, within such 30-day period, the breaching or defaulting party shall have substantially corrected and cured the grounds for the termination as set forth in said notice of termination. (iii) By Bancorp or CUB if any governmental or regulatory authority denies or refuses to grant the approvals, consents or authorizations required to be obtained in order to consummate the transactions covered and contemplated by this Agreement, or if any such approval contains conditions which, in the reasonable opinion of Bancorp or CUB, are materially burdensome to its ongoing operations. (iv) By CorpBank if any governmental or regulatory authority denies or refuses to grant the approvals, consents or authorizations required to be obtained in order to consummate the transactions covered and contemplated by this Agreement other than the Merger. (v) By Bancorp or CUB at any time prior to the Effective Time of the Merger, if (A) the Board of Directors of CorpBank approves a transaction (or CorpBank executes a letter of intent or other document) pursuant to which any person or entity or related group of persons or entities acquires, directly or indirectly, record or beneficial ownership (as defined in Rule 13d-3 promulgated by the SEC pursuant to the 1934 Act) or control of 5% or more of the outstanding shares of CorpBank Stock; (B) any person or entity or related group of persons or entities seeks to acquire 5% or more of the outstanding shares of CorpBank Stock by tender offer 80 82 or otherwise, and the Board of Directors of CorpBank does not advise CorpBank's shareholders that the Board does not support such tender offer or acquisition and that it does support the Merger; (C) if CorpBank violates its covenant pursuant to Section 5.7(j); or (D) the Merger does not receive the requisite approval of CorpBank shareholders. (vi) By CUB in the event of any change)s) in the financial condition, results of operation, business, property, assets (including loan portfolios), prospects, operations, liquidity, income or condition (financial or otherwise) or prospects of CorpBank since December 31, 1994 (except those events related to the Audit Group Report dated June 12, 1995) which individually or in the aggregate are materially adverse to CorpBank or any damage, destruction, loss, or event materially and adversely affecting the properties, business or prospects of CorpBank (a "material adverse change"). For purposes of this section, only, and with regard only to matters the effect of which can be reasonably quantified, an event, occurrence, or circumstances shall be deemed to have occurred if the average Core Deposits for the three month period prior to the end of the month just prior to the Closing, do not equal or exceed 85% of the Core Deposits of CorpBank at December 31, 1994. For purposes of this provision, Core Deposits shall include non interest bearing demand deposit accounts, interest bearing demand deposit accounts, savings accounts and money market accounts, but shall not include Certificate of Deposits. Additionally, for purposes of this provision, CUB shall perform a review of CorpBank's loan portfolio prior to Closing to determine if a material adverse change has occurred in CorpBank's loan portfolio. A material adverse change will have occurred if the reserves which need to be allocated in CUB's opinion and pursuant to its loan grading and allowance for loan and lease losses policy, uniformly applied, exceed CorpBank's allowance for loan and lease losses by approximately 15%. CUB shall also conduct a legal audit prior to Closing to determine if any legal matters or events constitute a material adverse change. A material adverse change will also be deemed to have occurred if there is a 10% negative change in any two or more of the factors affecting the business and prospects of CorpBank, including but not limited to Core Deposits, allowance for loan and lease losses or legal exposure. (vii) By CorpBank in the event of any change(s) in the consolidated financial condition, results of operation, business, property, assets (including loan portfolios), prospects, operations, liquidity, income or condition (financial or otherwise) or prospects of CUB since December 31, 1994, which individually or in the aggregate are materially adverse to CUB or any damage, destruction, loss, or event materially and adversely affecting the properties, business or prospects of CUB on a consolidated basis (a "material adverse change"). 81 83 (viii) By CorpBank or CUB if either reasonably disapproves the determinations of AA with regard to CorpBank shareholders' equity, net income (loss), and the net after tax effect of any sale or distribution of the Bond Claim, providing that the terminating party shall be required to set forth the reasons for such disapproval in writing. (b) This Agreement shall be terminated if any conditions specified in Article VI have not been satisfied or waived in writing by the party authorized to waive such conditions by February 28, 1996 unless mutually extended by the parties hereto. (c) This Agreement may be terminated by Bancorp or CUB if Schedules provided by CorpBank disclose material contracts, liabilities or potential liabilities not previously disclosed orally or in writing by CorpBank to CUB or fail to disclose material contracts, liabilities or potential liabilities which come to CUB's attention in any other manner. 8.2 Effect of Termination; Survival. No termination of this Agreement under this Article VIII for any reason or in any manner shall release, or be construed as so releasing, any party hereto from its obligations pursuant to Sections 5.1, 9.1 or 9.2 hereof or from any liability or damage to any other party hereto arising out of, in connection with or otherwise relating to, directly or indirectly, said party's material breach, default or failure in performance of any of its covenants, agreements, duties or obligations arising hereunder, or any breaches of any representation or warranty contained herein arising prior to the date of termination of this Agreement. ARTICLE 9. GENERAL PROVISIONS 9.1 Indemnification. (a) CorpBank agrees to defend, indemnify and hold harmless Bancorp and CUB, their officers and directors, their attorneys, and each person who controls Bancorp within the meaning of the Securities Act from and against any costs, damages, liability and expenses of any nature, insofar as such costs, damages, liabilities and expenses arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Proxy Statement or in the Registration Statement or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that CorpBank shall be liable in any 82 84 such case only to the extent that any such cost, damage, liability or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in said Proxy Statement or Registration Statement or amendments or supplements thereto, in reliance upon and in conformity with information with respect to CorpBank or CorpBank Subsidiaries furnished to Bancorp by or on behalf of CorpBank specifically for use therein. (b) Bancorp and CUB agree to defend, indemnify and hold harmless CorpBank, its officers and directors, its attorneys, accountants and each person who controls CorpBank within the meaning of the Securities Act from and against any costs, damages, liabilities and expenses of any nature, insofar as any such costs, damages, liabilities or expenses arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Proxy Statement or in the Registration Statement or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make statements therein not misleading; provided, however, that neither Bancorp nor Bank will be liable in any such case to the extent that any such cost, damage, liability or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in said Proxy Statement or Registration Statement, or amendments or supplements thereto, in reliance upon and in conformity with information with respect to CorpBank or CorpBank Subsidiaries furnished to Bancorp by or on behalf of CorpBank specifically for use therein. 9.2 Expenses. Each party hereto shall pay its own costs and expenses, including, but not limited to, those of its attorneys and accountants, in connection with this Agreement and the transactions covered and contemplated hereunder. 9.3 Notices. All notices, demands or other communications hereunder shall be in writing or by telex or facsimile transmission and shall be deemed to have been duly given on the date of service if delivered (i) in person or by telex or facsimile transmission (provided that telexed or telecopied notices are also mailed by first class, certified or registered mail, postage prepaid); or (ii) 72 hours after mailing by United States mail, first-class, certified or registered, with return receipt requested and postage prepaid, and properly addressed as follows: (a) If to CorpBank: Corporate Bank 2740 North Grand Avenue Santa Ana, California 94105 83 85 Attention: Allan Stokke, Chairman Stanley Pawlowski, Vice Chairman With copies to: Richard Knecht, Esq. Knecht & Hansen 1301 Dove Street, Suite 900 Newport Beach, California 92660 fax: (714) 851 1732 84 86 (b) If to Bancorp and CUB: CU Bancorp and California United Bank, National Association 16030 Ventura Boulevard Encino, California 90071 Attention: Stephen G. Carpenter. Chief Executive Officer Telecopier Number (818) 907-5024 With copies to: Anita Y. Wolman, Esq. General Counsel California United Bank, N.A. 16030 Ventura Boulevard Encino, California 91436 Telecopier No. (818) 907-5024 The persons or addresses to which mailings or deliveries shall be made may change from time to time by notice given pursuant to the provisions of this Section 9.3. 9.4 Successors and Assigns. All terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective transferees, successors and assigns; provided, however, that, except as otherwise contemplated herein, this Agreement and all rights, privileges, duties and obligations of the parties hereto may not be assigned or delegated by any party hereto without the prior written consent of the other parties to this Agreement and any purported assignment in violation of this Section 9.4 shall be null and void. 9.5 Third Party Beneficiaries. Each party hereto intends that this Agreement shall not benefit, or create any right or cause of action in or on behalf of, any person other than the parties hereto. As used in this Agreement, the term "party" or "parties" shall refer only to Bancorp, CUB, CorpBank, CorpBank Subsidiaries, the Surviving Association or any of them. 9.6 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one instrument. 9.7 Governing Law. This Agreement is made and entered into in the State of California and, except to the extent that the provisions of the National Banking Act 85 87 are mandatorily applicable, the laws of the State of California shall govern the validity and interpretation hereof and the performance of the parties hereto of their respective duties and obligations hereunder. The parties hereto agree to venue in the city of Los Angeles, State of California. 9.8 Captions. The captions contained in this Agreement are for convenience of reference only and do not form a part of this Agreement. 9.9 Waiver and Modification. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision or condition of this Agreement. This Agreement and the Agreement of Merger, when executed and delivered, may be modified or amended by action of the Boards of Directors of Bancorp, CUB, CorpBank or CorpBank Subsidiaries without action by their respective shareholders. This Agreement may be modified or amended only by an instrument of equal formality signed by the parties or their duly authorized agents. 9.10 Attorneys' Fees. In the event any of the parties to this Agreement brings an action or suit against any other party by reason of any breach of any covenant, agreement, representation, warranty or other provision hereof, or any breach of any duty or obligation created hereunder by such other party, the prevailing party, as determined by the court or other body having jurisdiction, shall be entitled to have and recover of and from the losing party, as determined by the court or other body having jurisdiction, all reasonable costs and expenses incurred or sustained by such prevailing party in connection with such suit or action, including, without limitation, legal fees and court costs (whether or not taxable as such). 9.11 Jury Waiver. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY MATTER ARISING OUT OF THIS AGREEMENT OR RELATED TO THIS AGREEMENT OR IN CONNECTION WITH ANY TRANSACTION OR MATTER CONTEMPLATED IN THIS AGREEMENT. 9.12 Entire Agreement. The making, execution and delivery of this Agreement by the parties hereto have not been induced by any representations, statements, warranties or agreements other than those herein expressed. This Agreement embodies the entire understanding of the parties and there are no further or other agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof, unless expressly referred to by reference herein. 9.13 Severability. Whenever possible, each provision of this Agreement and every related document shall be interpreted in such manner as to be valid under applicable law. However, if any provision of any of the foregoing shall be invalid 86 88 or prohibited under said applicable law, it shall be construed, interpreted and limited to effectuate its purpose to the maximum legally permissible extent. If it cannot be so construed and interpreted so as to be valid under such law, such provision shall be ineffective to the extent of such invalidity or prohibition without invalidating the remainder of such provision or the remaining provisions of this Agreement, and this Agreement shall be construed to the maximum extent possible to carry out its terms without such invalid or unenforceable provision or portion thereof. 9.14 Effect of Disclosure. Any list, statement, document, writing or other information set forth in, referenced to or attached to any Schedule or Exhibit delivered pursuant to any provision of this Agreement shall be deemed to constitute disclosure for purposes of any other Schedule or Exhibit required to be delivered pursuant to any other provision of this Agreement. 9.15 Publicity. The parties hereto agree that they will coordinate on any publicity concerning this Agreement, and the transactions contemplated hereby. Except as may be required by law, no party shall issue any press release, publicity statement or other public notice relating in any way to this Agreement or any of the transactions contemplated hereby without obtaining the prior consent of the others, which consent shall not be unreasonably withheld. 9.16 Knowledge. Whenever any statement herein or in any schedule, exhibit, certificate or other documents delivered to any party pursuant to this Agreement is made "to the knowledge" or "to the best knowledge" of any party or other person, such party or other person shall make such statement only after conducting an investigation reasonable under the circumstances of the subject matter thereof, and each such statement shall constitute a representation that such investigation has been conducted. 9.17 Schedules. Notwithstanding anything to the contrary herein, Schedules to this Reorganization Agreement may be submitted not more than ten (10) business days following execution of this Reorganization Agreement. If a party does not object to any Schedule within 3 business days of receipt thereof, it shall be deemed acceptable. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. 87 89 Bancorp: CU BANCORP By: /s/ STEPHEN G. CARPENTER -------------------------------- Name: STEPHEN G. CARPENTER Title: PRESIDENT By: /s/ PATRICK HARTMAN -------------------------------- Name: PATRICK HARTMAN Title: CHIEF FINANCIAL OFFICER CUB: CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION By: /s/ STEPHEN G. CARPENTER -------------------------------- Name: STEPHEN G. CARPENTER Title: CHIEF EXECUTIVE OFFICER By: /s/ DAVID I. RAINER -------------------------------- Name: DAVID I. RAINER Title: PRESIDENT CorpBank: CORPORATE BANK By: /s/ C. ELLIS PORTER -------------------------------- Name: C. ELLIS PORTER Title: PRESIDENT By: /s/ JAMES HANSEN -------------------------------- Name: JAMES HANSEN Title: VICE PRESIDENT 88 EX-2.(B) 3 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.(b) AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG HOME INTERSTATE BANCORP, HOME BANK, CU BANCORP AND CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION January 10, 1996 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS................................................................................. 1 ARTICLE II THE MERGER AND RELATED MATTERS.............................................................. 7 2.1. The Merger.................................................................................. 7 2.2. Fractional Shares........................................................................... 8 2.3. Exchange Procedures......................................................................... 8 2.4. Dissenting Shares........................................................................... 9 2.5. Effect of Merger. ......................................................................... 9 2.6. Name of Surviving Company................................................................... 9 2.7. Articles of Incorporation and Bylaws of Surviving Company................................... 9 2.8. Directors and Officers of Surviving Company. ............................................... 9 2.9. Options..................................................................................... 10 2.10. Warrant ................................................................................... 10 ARTICLE III THE CLOSING................................................................................. 11 3.1. Closing Date. ............................................................................. 11 3.2. Execution of Merger Agreements.............................................................. 11 3.3. Documents to be Delivered................................................................... 11 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HOME AND HOME BANK........................................ 11 4.1. Incorporation, Standing and Power. ........................................................ 11 4.2. Capitalization.............................................................................. 12 4.3. Subsidiaries. ............................................................................. 12 4.4. Financial Statements. ..................................................................... 12 4.5. SEC/Regulatory Filings. ................................................................... 12 4.6. Authority of Home and Home Bank............................................................. 13 4.7. Insurance................................................................................... 13 4.8. Title to Assets. .......................................................................... 14 4.9. Real Estate. ............................................................................... 14 4.10. Litigation. ............................................................................... 14 4.11. Taxes....................................................................................... 14 4.12. Compliance with Laws and Regulations. ..................................................... 15 4.13. Performance of Obligations.................................................................. 15 4.14. Employees. ................................................................................ 16 4.15. Brokers and Finders. ...................................................................... 16 4.16. Material Contracts. ........................................................................ 16
i 3 TABLE OF CONTENTS (CONT'D.)
PAGE ---- 4.17. Absence of Material Change. .............................................................. 18 4.18. Licenses and Permits. ..................................................................... 18 4.19. No Material Liabilities; Environmental...................................................... 18 4.20. Employee Benefit Plans...................................................................... 18 4.21. Corporate Records. ........................................................................ 21 4.22. Offices and ATMs............................................................................ 21 4.23. Operating Losses............................................................................ 21 4.24. Loan Portfolio. .......................................................................... 21 4.25. Power of Attorney. ........................................................................ 22 4.26. Disclosure Documents and Applications. .................................................... 22 4.27. Accuracy and Currentness of Information Furnished. ........................................ 22 4.28. Loan Servicing Portfolio.................................................................... 22 4.29. Certain Interests........................................................................... 22 4.30. Investment Securities....................................................................... 22 ARTICLE V REPRESENTATIONS AND WARRANTIES OF CU AND CU BANK............................................ 23 5.1. Incorporation, Standing and Power........................................................... 23 5.2. Capitalization.............................................................................. 23 5.3. Subsidiaries. ............................................................................. 23 5.4. Financial Statements........................................................................ 24 5.5. SEC/Regulatory Filings...................................................................... 24 5.6. Authority of CU and CU Bank. .............................................................. 24 5.7. Insurance. ................................................................................ 25 5.8. Title to Assets............................................................................. 25 5.9. Real Estate................................................................................. 25 5.10. Litigation. ............................................................................... 25 5.11. Taxes....................................................................................... 26 5.12. Compliance with Laws and Regulations........................................................ 27 5.13. Performance of Obligations.................................................................. 27 5.14. Employees. ................................................................................ 27 5.15. Brokers and Finders......................................................................... 27 5.16. Material Contracts.......................................................................... 27 5.17. Absence of Material Change. .............................................................. 29 5.18. Licenses and Permits. ..................................................................... 29 5.19. No Material Liabilities; Environmental...................................................... 29 5.20. Employee Benefit Plans...................................................................... 30 5.21. Corporate Records........................................................................... 32 5.22. Offices and ATMs............................................................................ 32 5.23. Operating Losses. ......................................................................... 32 5.24. Loan Portfolio.............................................................................. 32 5.25. Power of Attorney........................................................................... 33
ii 4 TABLE OF CONTENTS (CONT'D.)
PAGE ---- 5.26. Disclosure Documents and Applications....................................................... 33 5.27. Accuracy and Currentness of Information Furnished........................................... 33 5.28. Loan Servicing Portfolio.................................................................... 33 5.29. Certain Interests........................................................................... 33 5.30. Investment Securities. .................................................................... 34 ARTICLE VI COVENANTS OF HOME AND HOME BANK PENDING EFFECTIVE TIME OF THE MERGERS......................................................................... 34 6.1. Limitation on Home's and Home Bank's Conduct Prior to Effective Time. ..................... 34 6.2. No Solicitation, etc........................................................................ 36 6.3. Affirmative Conduct of Home and Home Bank Prior to Effective Time........................... 36 6.4. Access to Information....................................................................... 38 6.5. Filings. .................................................................................. 38 6.6. Notices; Reports. ......................................................................... 38 6.7. Home Shareholders' Meeting. .............................................................. 39 6.8. Bank Merger. .............................................................................. 39 6.9. Filings; Applications....................................................................... 39 6.10. Certain Loans and Other Extensions of Credit. ............................................ 39 6.11. Termination of Home Stock Option Plan. ..................................................... 40 6.12. Environmental Audit. ...................................................................... 40 6.13. D&O Coverage. ............................................................................. 40 ARTICLE VII COVENANTS OF CU AND CU BANK PENDING EFFECTIVE TIME OF THE MERGERS.............................................................................. 40 7.1. Limitation on CU's and CU Bank's Conduct Prior to Effective Time............................ 40 7.2. No Solicitation, etc........................................................................ 42 7.3. Affirmative Conduct of CU and CU Bank Prior to Effective Time............................... 43 7.4. Access to Information....................................................................... 45 7.5. Filings. .................................................................................. 45 7.6. Notices; Reports............................................................................ 45 7.7. CU Shareholders' Meeting.................................................................... 46 7.8. Bank Merger................................................................................. 46 7.9. Filings; Applications....................................................................... 46 7.10. Certain Loans and Other Extensions of Credit................................................ 46 7.11. CU Stock Option Plan........................................................................ 47 7.12. Dividends. ................................................................................ 47 7.13. Articles of Incorporation................................................................... 47
iii 5 TABLE OF CONTENTS (CONT'D.)
PAGE ---- ARTICLE VIII GENERAL COVENANTS........................................................................... 47 8.1. Best Efforts................................................................................ 47 8.2. Public Announcements........................................................................ 47 8.3. S-4 and the Proxy Statement................................................................. 47 8.4. Merger of Home Bank and CU Bank............................................................. 47 ARTICLE IX CONDITIONS PRECEDENT TO THE MERGERS......................................................... 48 9.1. Shareholder Approval........................................................................ 48 9.2. No Judgments or Orders...................................................................... 48 9.3. Regulatory Approvals........................................................................ 48 9.4. Tax Opinion................................................................................. 48 9.5. Pooling of Interests Accounting Treatment................................................... 48 9.6. S-4 and Proxy Statement..................................................................... 48 9.7. Dissenters.................................................................................. 48 ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF HOME AND HOME BANK .................................................................................. 49 10.1. Legal Opinion............................................................................... 49 10.2. Representations and Warranties; Performance of Covenants.................................... 49 10.3. Authorization of Mergers; Option Plan....................................................... 49 10.4. Absence of Certain Changes.................................................................. 49 10.5. Officers' Certificate....................................................................... 49 10.6. Fairness Opinion............................................................................ 50 10.7. Directors' Voting Agreements................................................................ 50 10.8. Home Warrant Agreement...................................................................... 50 10.9. Appointment of Directors.................................................................... 50 10.10. Validity of Transactions.................................................................... 50 10.11. Third Party Consents........................................................................ 50 10.12. NASDAQ Listing.............................................................................. 50 10.13. CU Board.................................................................................... 50 10.14. Non-Performing Loans. ..................................................................... 50 ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATIONS OF CU AND CU BANK....................................... 50 11.1. Legal Opinion............................................................................... 51 11.2. Representations and Warranties; Performance of Covenants.................................... 51 11.3. Authorization of Mergers.................................................................... 51 11.4. Regulatory Approvals and Related Conditions................................................. 51 11.5. Third Party Consents........................................................................ 51
iv 6 TABLE OF CONTENTS (CONT'D.)
PAGE ---- 11.6. Absence of Certain Changes.................................................................. 51 11.7. Officers' Certificate....................................................................... 51 11.8. Fairness Opinion............................................................................ 51 11.9. Validity of Transactions.................................................................... 52 11.10. Blue Sky Matters............................................................................ 52 11.11. Insurance Coverage.......................................................................... 52 11.12. Directors' Voting Agreements................................................................ 52 11.13. CU Warrant Agreement........................................................................ 52 11.14. Affiliate Agreements........................................................................ 52 11.15. Non-Performing Loans........................................................................ 52 11.16. Absence of Excess Remediation............................................................... 52 ARTICLE XII EMPLOYEE BENEFITS........................................................................... 52 12.1. Employee Benefits........................................................................... 52 ARTICLE XIII TERMINATION................................................................................. 53 13.1. Termination................................................................................. 53 13.2. Termination Date............................................................................ 53 13.3. Effect of Termination....................................................................... 54 ARTICLE XIV MISCELLANEOUS............................................................................... 54 14.1. Expenses.................................................................................... 54 14.2. Notices..................................................................................... 54 14.3. Successors and Assigns...................................................................... 55 14.4. Counterparts................................................................................ 55 14.5. Effect of Representations and Warranties.................................................... 55 14.6. Third Parties............................................................................... 55 14.7. Lists; Exhibits; Integration................................................................ 55 14.8. Knowledge................................................................................... 55 14.9. Governing Law............................................................................... 55 14.10. Schedules................................................................................... 55 14.11. Captions.................................................................................... 55 14.12. Severability................................................................................ 55 14.13. Waiver and Modification..................................................................... 56 14.14. Attorney's Fees............................................................................. 56 14.15. Jury Waiver................................................................................. 57
v 7 TABLE OF CONTENTS (CONT'D.)
PAGE ---- EXHIBITS Exhibit A Agreement of Merger Exhibit B Bank Merger Agreement Exhibit C CU Warrant Agreement Exhibit D Home Warrant Agreement Exhibit E CU Legal Opinion Exhibit F CU Shareholders' Agreement Exhibit G Manatt, Phelps & Phillips Legal Opinion Exhibit H Home Shareholders' Agreement Exhibit I Home Affiliate Letter ANNEX I List of Home Directors Signing Affiliate Agreement
vi 8 AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered into as of the 10th day of January, 1996, by and between Home Interstate Bancorp, a California corporation ("Home"), and Home Bank, a California chartered commercial bank ("Home Bank"), and CU Bancorp, a California corporation ("CU"), and California United Bank, National Association, a national banking association ("CU Bank"). R E C I T A L S WHEREAS, Home and CU desire to effect a merger (the "Merger") in accordance with the terms of this Agreement and the Agreement of Merger (as defined herein). WHEREAS, the respective Boards of Directors of Home and CU believe that the proposed Merger, on the terms and conditions set forth herein, is in the best interests of their respective corporations and shareholders. WHEREAS, Home and CU intend to cause the Merger (the "Bank Merger") of Home Bank and CU Bank at the Effective Time (as hereinafter defined) or as soon thereafter as practicable. WHEREAS, Home, Home Bank, CU Bancorp and CU Bank desire to make certain representations, warranties, covenants and agreements in connection with the transactions contemplated by this Agreement. NOW, THEREFORE, on the basis of the foregoing recitals and in consideration of the mutual representations, warranties, covenants and agreements contained herein, the parties hereto do agree as follows: ARTICLE I DEFINITIONS Except as otherwise expressly provided for in this Agreement, or unless the context otherwise requires, as used throughout this Agreement the following terms shall have the respective meanings specified below: 1.1. "Affiliate" of, or a person "Affiliated" with, a specific person is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. 1.2. "Agreement of Merger" means the Agreement of Merger to be entered into by and between Home and CU substantially in the form of Exhibit A hereto, but subject to any changes that may be necessary to conform to any requirements of any regulatory agency having authority over the Merger. 1.3. "Alternative Transaction" means any of the following involving Home or Home Bank for purposes of Section 6.2 or CU or CU Bank for purposes of Section 7.2: any merger, consolidation, share 9 exchange or other business combination; a sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets of Home or Home Bank or CU or CU Bank (as applicable) representing 10% or more of consolidated assets; a sale of shares of capital stock (or securities convertible or exchangeable into or otherwise evidencing, or any agreement or instrument evidencing, the right to acquire capital stock), representing 10% or more of the voting power of Home or Home Bank or CU or CU Bank (as applicable); a tender offer or exchange offer for at least 10% of the outstanding shares of Home or CU (as applicable); a solicitation of proxies in opposition to approval of the Merger by Home's shareholders or CU's shareholders (as applicable); or a public announcement of a proposal, plan, or intention to do any of the foregoing. 1.4. "Arthur Andersen" means Arthur Andersen, LLP. 1.5. "ATM" has the meaning set forth in Section 4.22. 1.6. "Average Price of CU Stock" means the average of the Closing Price of CU Stock (as defined below) for the 10 consecutive trading days immediately preceding the one trading day prior to the Effective Time (subject to adjustment as provided below). The term "trading day" shall mean a day on which trading generally takes place on the NASDAQ and on which trading in CU Stock has not been halted or suspended. In the event CU pays, declares or otherwise effects a stock split, reverse stock split, reclassification or stock dividend or distribution with respect to the CU Stock between the date of this Agreement and the Effective Time, appropriate adjustments will be made to the Average Price of CU Stock. 1.7. "Bank Merger" means the merger of Home Bank with and into CU Bank. 1.8. "Bank Merger Agreement" means the Agreement of Merger between CU Bank and Home Bank, substantially in the form of Exhibit B hereto. 1.9. "BHC Act" means the Bank Holding Company Act of 1956, as amended. 1.10. "Business Day" means any day other than Saturday, Sunday or a day on which commercial banks in California are authorized or required to be closed. 1.11. "California Secretary" means the Secretary of State of the State of California. 1.12. "Closing" means the consummation of the Merger (as defined herein) on the Closing Date (as defined herein) at the offices of Manatt, Phelps & Phillips, 11355 West Olympic Boulevard, Los Angeles, California, or at such other place as the parties may agree upon. 1.13. "Closing Date" means a Business Day to be designated by the Parties. 1.14. "Closing Price of CU Stock" means the closing price of CU Stock as reported on the NASDAQ and reprinted in the Western Edition of the Wall Street Journal. 1.15. "Code" means the Internal Revenue Code of 1986, as amended. 1.16. "Conversion Ratio" has the meaning set forth in Section 2.1(c). 2 10 1.17. "Corporate Bank Merger" means the proposed merger of Corporate Bank, a California banking corporation, with and into CU Bank. 1.18. "Covered Loan" has the meaning set forth in Section 4.24. 1.19. "CU Bank Stock" means the common stock, $5.00 par value, of CU Bank. 1.20. "CU Options" means options to purchase CU Stock pursuant to the CU Stock Option Plan. 1.21. "CU Schedules" has the meaning set forth in Section 7.3(k). 1.22. "CU Scheduled Contracts" has the meaning set forth in Section 5.16. 1.23. "CU Shareholders' Meeting" means the meeting of CU's shareholders referred to in Section 7.7 hereof. 1.24. "CU Stock" means the common stock, no par value, of CU. 1.25. "CU Stock Option Plan" means, collectively, the (i) the 1983 Employee Stock Option Plan, (ii) 1985 Employee Stock Option Plan, (iii) 1987 Special Stock Option Plan, (iv) 1993 Employee Stock Option Plan, (v) Non Employee Director Stock Option Plan, and (vi) 1995 Restricted Stock Plan. 1.26. "CU Supplied Information" has the meaning set forth in Section 5.26. 1.27. "CU Warrant" means the warrant issued to CU pursuant to the CU Warrant Agreement. 1.28. "CU Warrant Agreement" means the Warrant Agreement entered into between CU and Home and attached hereto as Exhibit C, pursuant to which the CU Warrant is issued. 1.29. "Dissenting Shares" means any shares of CU Stock or Home Stock (as defined herein) that are (i) issued and outstanding immediately prior to the Effective Time of the Merger and (ii) "dissenting shares" as that term is defined in Section 1301 (b) of the California Corporations Code. 1.30. "Effective Time" means the date and time of the filing of the Agreement of Merger with the California Secretary. 1.31. "Environmental Law" means any federal, state, provincial or local statute, law, ordinance, rule, regulation, order, consent, decree, judicial or administrative decision or directive of the United States or other jurisdiction whether now existing or as hereinafter promulgated, issued or enacted relating to: (A) pollution or protection of the environment, including natural resources; (B) exposure of persons, including employees, to Hazardous Substances or other products, materials or chemicals; (C) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of chemical or other substances from industrial or commercial activities; or (D) regulation of the manufacture, use or introduction into commerce of substances, including, without limitation, their manufacture, formulation, packaging, labeling, distribution transportation, handling, storage and disposal. For the purposes of this definition the term "Environmental Law" shall include, without limiting the foregoing, the following statutes, as amended from time to time: (1) the Clean Air Act, as amended, 3 11 42 U.S.C. Section 7401 et seq.; (2) the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.; (3) the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et seq., (4) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (including the Superfund Amendments and Reauthorization Act of 1986), 42 U.S.C. Section 2601 et seq; (5) the Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq.; (6) The Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651; (7) the Emergency Planning and Community Right-To-Know Act of 1986, 42 U.S.C. Section 1101 et seq.; (8) the Mine Safety and Health Act of 1977, as amended, 30 U.S.C. Section 801 et seq.; (9) the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; and (10) all comparable state and local laws, laws of other jurisdictions or orders and regulations including, but not limited to, the Carpenter-Presley-Tanner Hazardous Substance Account Act, Cal. Health & Safety Code Section 25300 et seq. 1.32. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.33. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1.34. "Exchange Agent" means the financial institution appointed by CU with the consent of Home, to effect the exchange contemplated by Article II hereof. 1.35. "FDIC" means the Federal Deposit Insurance Corporation. 1.36. "FDIC Filings of Home" means all reports, registration statements, proxy statements or other filings made by Home or Home Bank with the FDIC during the time period from January 1, 1992 through the date of this Agreement. 1.37. "Financial Statements of CU" means (i) the audited consolidated financial statements and notes thereto of CU and the related opinions thereon included in CU's Annual Reports on Form 10-K for the years ended December 31, 1992, 1993 and 1994, (ii) the unaudited consolidated interim financial statements and notes thereto of CU included in CU's Quarterly Report on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1995. 1.38. "Financial Statements of Home" means (i) the audited consolidated financial statements and notes thereto of Home and the related opinions thereon included in Home's Annual Reports on Form 10-K for the years ended December 31, 1992, 1993 and 1994 and (ii) the unaudited consolidated interim financial statements and notes thereto of Home included in Home's Quarterly Reports on Form 1O-Q for the quarters ended March 31, June 30 and September 30, 1995. 1.39. "FRB" means the Board of Governors of the Federal Reserve System. 1.40. "FRB Filings of CU" means all reports, registration statements, proxy statements or other filings made by CU or CU Bank with the FRB during the time period from January 1, 1992 through the date of this Agreement. 1.41. "FRB Filings of Home" means all reports, registration statements, proxy statements or other filings made by Home or Home Bank with the FRB during the time period from January 1, 1992 through the date of this Agreement. 4 12 1.42. "Hazardous Substances" means (i) substances that are defined or listed in, or otherwise classified pursuant to, or the use or disposal of which are regulated by, any Environmental Law as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity;" (ii) oil, petroleum or petroleum derived from substances and drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources; (iii) any flammable substances or explosives, any radioactive materials, any hazardous wastes or substances, any toxic wastes or substances or any other materials or pollutants which pose a hazard to any property or to Persons on or about such property; and (iv) asbestos in any form or electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. 1.43. "Home Bank Stock" means the common stock, $0.40 par value per share, of Home Bank. 1.44. "Home Employee Plans" has the meaning set forth in Section 4.20. 1.45. "Home Options" means options to purchase Home Stock pursuant to the Home Stock Option Plan. 1.46. "Home Real Property" has the meaning set forth in Section 4.9. 1.47. "Home Scheduled Contracts" has the meaning set forth in Section 4.16. 1.48. "Home Schedules" has the meaning set forth in Section 6.3(k). 1.49. "Home Shareholders' Meeting" means the meeting of Home's shareholders referred to in Section 6.7 hereof. 1.50. "Home Stock" means the common stock, no par value, of Home. 1.51. "Home Stock Option Plan" means the Home Interstate Bancorp Stock Option Plan, which plan expired on March 12, 1995. 1.52. "Home Supplied Information" has the meaning set forth in Section 4.26. 1.53. "Home Warrant" means the warrant issued to Home pursuant to the Home Warrant Agreement. 1.54. "Home Warrant Agreement" means the Warrant Agreement entered between Home and CU and attached hereto as Exhibit D, pursuant to which the Home Warrant is issued. 1.55. "Immediate Family" means a person's spouse, parents, in-laws, children and siblings. 1.56. "IRS" means the Internal Revenue Service. 1.57. "Montgomery" means Montgomery Securities. 5 13 1.58. "NASDAQ" means the National Association of Securities Dealers Automated Quotation System. 1.59. "New Stock Option Plan" means the CU Stock Option Plan to be established in connection with the Merger. 1.60. "Non-Performing Loans" means loans or investments held by Home Bank or CU Bank which are (i) more than ninety (90) days past due with respect to any scheduled payment of principal or interest, (ii) classified as "loss," "doubtful," "substandard," "other assets especially mentioned" or "special mention," or (iii) on non-accrual status in accordance with Home Bank's or CU Bank's, as the case may be, loan review procedures. 1.61. "OCC" means the Office of the Comptroller of the Currency. 1.62. "OCC Filings of CU" means all reports, registration statements, proxy statements or other filings made by CU or CU Bank with the OCC during the time period from January 1, 1992 through the date of this Agreement. 1.63. "Operating Loss" has the meaning set forth in Section 4.23. 1.64. "Other Real Estate Owned" means any real property owned or acquired by foreclosure or otherwise, in the ordinary course of collecting a debt previously contracted for in good faith. 1.65. "Party" means either Home, Home Bank, CU or CU Bank and "Parties" shall mean Home, Home Bank, CU and CU Bank. 1.66. "Person" means any individual, corporation, association, partnership, joint venture, other entity, government or governmental department or agency. 1.67. "Phase I Reports" has the meaning set forth in Sesction 6.12. 1.68. "Phase II Assessments" has the meaning set forth in Section 6.12. 1.69. "Proposed Retention Agreements" means the Retention Agreements to be entered into between Home Bank and certain executive officers of Home Bank, pursuant to which certain key employees of Home Bank shall receive certain payments as a result of the transactions contemplated hereby. 1.70. "Proxy Statement" means the Joint Proxy Statement and Prospectus that is used to solicit proxies for the Home Shareholders' Meeting and CU Shareholders' Meeting and to offer and sell the shares of CU Stock to be issued in connection with the Merger. 1.71. "Related Group of Persons" means Affiliates, members of an Immediate Family or Persons the obligations of whom would be attributed to another Person pursuant to the regulations promulgated by the SEC (as defined herein). 1.72. "SEC" means the Securities and Exchange Commission. 6 14 1.73. "SEC Filings of CU" means all reports, registration statements, proxy statements or other filings made by CU with the SEC during the time period from January 1, 1992 through the date of this Agreement. 1.74. "SEC Filings of Home" means all reports, registration statements, proxy statements or other filings made by Home with the SEC during the time period from January 1, 1992 through the date of this Agreement. 1.75. "Secured Loan" has the meaning set forth in Section 4.24. 1.76. "Securities Act" means the Securities Act of 1933, as amended. 1.77. "S-4" means the registration statement on Form S-4 to be filed with the SEC relating to the registration under the Securities Act of the CU Stock to be issued in connection with the Merger. 1.78. "Superintendent" means the Superintendent of Banks of the State of California. 1.79. "Surviving Company" means the corporation surviving the Merger. 1.80. "Transferred Employees" has the meaning set forth in Section 12.1. 1.81. "Understanding" means any contract, agreement, understanding, commitment or offer, whether written or oral, which may become a binding obligation if accepted by another Person. ARTICLE II THE MERGER AND RELATED MATTERS 2.1. The Merger. The Merger shall become effective upon the filing of the Agreement of Merger with the California Secretary in accordance with the provisions of the California Corporations Code. At the Effective Time, the following transactions will be deemed to have occurred simultaneously: (a) Home shall be merged with and into CU, and the separate corporate existence of Home shall cease. (b) Subject to Section 2.4(a), each share of CU Stock issued and outstanding immediately prior to the Effective Time shall remain an issued and outstanding share of common stock of the Surviving Company and shall not be converted or otherwise affected by the Merger. (c) Subject to Sections 2.2 and 2.4(b), each share of Home Stock issued and outstanding immediately prior to the Effective Time shall, on and after the Effective Time, be automatically canceled and cease to be an issued and outstanding share of Home Stock and shall be converted into 1.409 shares of CU Stock (the "Conversion Ratio"). 7 15 2.2. Fractional Shares. No fractional shares of CU Stock shall be issued in the Merger. In lieu thereof, each holder of Home Stock who would otherwise be entitled to receive a fractional share shall receive an amount in cash equal to the product (calculated to the nearest thousandth) obtained by multiplying (a) the Average Price of CU Stock times (b) the fraction of the share of CU Stock to which such holder would otherwise be entitled. No such holder shall be entitled to dividends or other rights in respect of any such fraction. 2.3. Exchange Procedures. (a) On or before the Effective Time, CU will deliver to the Exchange Agent certificates representing a sufficient number of shares of CU Stock issuable in the Merger and funds representing a sufficient amount of cash payable in lieu of fractional shares in the Merger. (b) Upon surrender for cancellation to the Exchange Agent of one or more certificates for shares of Home Stock ("Old Certificates"), accompanied by a duly executed letter of transmittal in proper form, the Exchange Agent shall, promptly after the Effective Time, deliver to each holder of such surrendered Old Certificates new certificates representing the appropriate number of shares of CU Stock ("New Certificates"), together with checks for payment of cash in lieu of fractional interests to be issued in respect of the Old Certificates. (c) Until Old Certificates have been surrendered and exchanged as herein provided, each outstanding Old Certificate shall represent, on and after the Effective Time, the right to receive the shares of CU Stock and/or the cash into which the number of shares of Home Stock shown thereon have been converted, as provided herein. No dividends or other distributions that are declared on CU Stock will be paid to Persons otherwise entitled to receive the same until the Old Certificates have been surrendered in exchange for New Certificates in the manner herein provided, but upon such surrender, such dividends or other distributions, from and after the Effective Time, will be paid to such Persons in accordance with the terms of such CU Stock. In no event shall the Persons entitled to receive such dividends or other distributions be entitled to receive interest on such dividends or other distributions. (d) No transfer taxes shall be payable by any shareholder in respect of the issuance of New Certificates, except that if any New Certificate is to be issued in a name other than that in which the Old Certificate surrendered shall have been registered, it shall be a condition of such issuance that the Person requesting such issuance shall properly endorse the certificate or certificates and shall pay to CU any transfer taxes payable by reason thereof, or of any prior transfer of such surrendered certificate, or establish to the satisfaction of CU that such taxes have been paid or are not payable. (e) Any CU Stock or cash delivered to the Exchange Agent (together with any interest or profits earned thereon) and not issued pursuant to this Section 2.3 at the end of six months from the Effective Time shall be returned to CU. (f) Notwithstanding anything to the contrary set forth in Sections 2.3(c) and 2.3(d) hereof, if any holder of Home Stock shall be unable to surrender his Old Certificates because such certificates have been lost or destroyed, such holder may deliver in lieu thereof an indemnity bond in form and substance reasonably satisfactory to CU. 8 16 (g) The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of CU Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares of CU Stock for the account of the Persons entitled thereto. 2.4. Dissenting Shares. (a) Notwithstanding anything to the contrary contained in this Agreement, Dissenting Shares of CU Stock which have not effectively withdrawn or lost their rights under Section 1309 shall remain issued and outstanding shares of common stock of Surviving Company after the Effective Time, subject to the right to receive such consideration as shall be determined pursuant to Chapter 13 of the California Corporations Code. (b) Notwithstanding anything to the contrary contained in this Agreement, Dissenting Shares of Home Stock which have not effectively withdrawn or lost their rights under Section 1309 shall not be converted pursuant to Section 2.1 (c), but shall be entitled to receive such consideration as shall be determined pursuant to Chapter 13 of the California Corporations Code. 2.5. Effect of Merger. By virtue the Merger and at the Effective Time, all of the rights, privileges, powers and franchises and all property and assets of every kind and description of Home and CU shall be vested in and be held and enjoyed by the Surviving Company, without further act or deed, and all the estates and interests of every kind of Home and CU, including all debts due to either of them, shall be as effectively the property of the Surviving Company as they were of Home and CU, and the title to any real estate vested by deed or otherwise in either Home or CU shall not revert or be in any way impaired by reason of the Merger; and all rights of creditors and liens upon any property of Home and CU shall be preserved unimpaired and all debts, liabilities and duties of Home and CU shall be debts, liabilities and duties of the Surviving Company and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it, and none of such debts, liabilities or duties shall be expanded, increased, broadened or enlarged by reason of the Merger. 2.6. Name of Surviving Company. The name of the Surviving Company shall be mutually agreed upon by the Parties. 2.7. Articles of Incorporation and Bylaws of Surviving Company. Subject to any changes in the Articles of Incorporation resulting from the Parties' agreement as to the name of the Surviving Company as provided in Section 2.6, the Articles of Incorporation and Bylaws of CU as in effect immediately prior to the Effective Time shall continue to be the Articles of Incorporation and Bylaws of the Surviving Company. 2.8. Directors and Officers of Surviving Company. (a) At the Effective Time, the Board of Directors of the Surviving Company will consist of the five directors designated by the Board of Directors of Home and the five directors designated by the Board of Directors of CU. (b) At the Effective Time, Stephen Carpenter will become the Chairman and Chief Executive Officer, James Staes will become Vice Chairman and David Rainer will become President and Chief Operating Officer of the Surviving Company. 9 17 2.9. Options. (a) Subject to Section 2.9(b), (c) and (d), each Home Option issued and outstanding immediately prior to the Effective Time shall, on and after the Effective Time, be assumed by and be deemed to be options granted by the Surviving Company pursuant to the New Stock Option Plan to purchase that number of shares of CU Stock equal to the Conversion Ratio times the number of shares of Home Stock subject to the option; provided, however, that no option shall be deemed granted by the Surviving Company to acquire a fractional share of CU Stock. (b) Assumption of such options shall be contingent upon the Closing and upon the execution prior to the Closing by the particular optionee, CU and Home of a new option agreement providing for the assumption and conversion of the Home Options. Assumption by CU of the Home Options will be pursuant to the terms of the New Stock Option Plan providing for the assumption of such options, which plan shall be contingent upon approval of the CU shareholders. (c) To the extent that the assumption of a Home Option by the Surviving Company would result in the issuance of an option to purchase a fractional share of CU Stock, such fractional share option shall be canceled, and the aggregate exercise price of the option to purchase shares of CU Stock shall be reduced by the proportionate amount of the aggregate exercise price attributable to the fractional share. (d) The assumption by the Surviving Company of Home Options pursuant to the New Stock Option Plan shall be subject to the following limitations: (i) The excess of the aggregate fair market value of the shares of CU Stock subject to an option immediately after the assumption over the aggregate option exercise price of such shares of CU Stock shall not be greater than the excess of the aggregate fair market value of the shares subject to the Home Option immediately before the assumption over the aggregate option exercise price of such shares of Home Stock. (ii) For any option, on a share by share comparison, the ratio of the option exercise price to the fair market value of the CU Stock subject to the option immediately after the assumption shall not be more favorable to the optionee than the ratio of the Home Option exercise price to the fair market value on the Home Stock subject to the option immediately before the assumption. (iii) The optionee shall not receive additional benefits under the Surviving Company option which he did not have under the Home Option. (e) Each CU Option issued and outstanding immediately prior to the Effective Time shall not be affected by the Merger. 2.10. Warrant. Concurrent with the execution of this Agreement, CU and Home have executed each of the Home Warrant Agreement and the CU Warrant Agreement, pursuant to which agreements CU has issued to Home the Home Warrant and Home has issued to CU the CU Warrant, granting the holder of each such warrant the right to purchase up to 19.9% of the issued and outstanding shares of capital stock of 10 18 the other party, on a fully diluted basis (as more specifically set forth in the Home Warrant Agreement and CU Warrant Agreement), on the terms, and subject to the conditions set forth in such agreements. ARTICLE III THE CLOSING 3.1. Closing Date. The Closing shall take place on the Closing Date. 3.2. Execution of Merger Agreements. As soon as practicable after execution of this Agreement, the Agreement of Merger shall be executed by Home and CU. On the Closing Date, the Agreement of Merger, together with all requisite certificates, shall be duly filed with the California Secretary as required by applicable laws and regulations. 3.3. Documents to be Delivered. At the Closing, the parties hereto shall deliver, or cause to be delivered, such documents or certificates as may be necessary, in the reasonable opinion of counsel for any of the parties, to effectuate the transactions contemplated by this Agreement. From and after the Effective Time, each of the parties hereto hereby covenants and agrees, without the necessity of any further consideration whatsoever, to execute, acknowledge and deliver any and all other documents and instruments and take any and all such other action as may be reasonably necessary or desirable to effectuate the transactions set forth herein or contemplated hereby, and the officers and directors of the parties hereto shall execute and deliver, or cause to be executed and delivered, all such documents as may reasonably be required to effectuate such transactions. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HOME AND HOME BANK Home and Home Bank represent and warrant to CU as follows: 4.1. Incorporation, Standing and Power. Home has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California and is registered as a bank holding company under the BHC Act. Home Bank has been duly incorporated and is validly existing as a state chartered Bank under the laws of the State of California and is a member of the Federal Reserve System, and its deposits are insured by the FDIC in the manner and to the extent provided by law. Home and Home Bank have all requisite corporate power and authority to own, lease and operate their respective properties and assets and to carry on their respective businesses as presently conducted. Neither the scope of the business of Home or Home Bank nor the location of any of their respective properties requires that Home or Home Bank be licensed to do business in any jurisdiction other than the State of California where the failure to be so licensed would, individually or in the aggregate, have a materially adverse effect on the financial condition, results of operation or business of Home on a consolidated basis. 11 19 4.2. Capitalization. (a) As of the date of this Agreement, the authorized capital stock of Home consists of 20,000,000 shares of Home Stock, of which 4,187,954 shares are outstanding, and 3,000,000 shares of serial preferred stock, none of which is outstanding. All of the outstanding shares of Home Stock are duly authorized, validly issued, fully paid and nonassessable. As of the date of this Agreement, except for Home Options covering 168,134 shares of Home Stock granted pursuant to the Home Stock Option Plan, and 1,082,224 shares covered by the CU Warrant, there were no outstanding options, warrants or other rights in or with respect to the unissued shares of Home Stock or Home serial preferred stock nor any securities convertible into such stock, and Home is not obligated to issue any additional shares of Home Stock or preferred stock or any additional options, warrants or other rights in or with respect to the unissued shares of such stock or any other securities convertible into such stock. Schedule 4.2 sets forth the name of each holder of a Home Option, the number of shares of Home Stock covered by each such Home Option, the exercise price per share and the expiration date of each such Home Option. (b) As of the date of this Agreement, the authorized capital stock of Home Bank consists of 4,000,000 shares of Home Bank Stock, of which1,938,746 shares are outstanding and all of which are owned of record by Home. All the outstanding shares of Home Bank Stock are duly authorized, validly issued, fully paid and nonassessable (except for assessments that may be made by order of the Superintendent pursuant to the Section 662 of the California Finance Code). There are no outstanding options, warrants or other rights in or with respect to the unissued shares of Home Bank Stock or any other securities convertible into such stock, and Home Bank is not obligated to issue any additional shares of its common stock or any options, warrants or other rights in or with respect to the unissued shares of its common stock or any other securities convertible into such stock. 4.3. Subsidiaries. Except for Home Bank, a wholly owned subsidiary of Home, Home does not own, directly or indirectly (except as pledgee pursuant to loans or upon acquisition in satisfaction of debt previously contracted), the outstanding stock or other voting interest in any corporation, partnership, joint venture or other entity. 4.4. Financial Statements. Home has previously furnished to CU a copy of the Financial Statements of Home. The Financial Statements of Home: (a) present fairly the consolidated financial condition of Home as of the respective dates indicated and its consolidated results of operations and changes in financial position/cash flow, as applicable, for the respective periods then ended, subject, in the case of the unaudited consolidated interim financial statements, to normal recurring adjustments; (b) have been prepared in accordance with generally accepted accounting principles consistently applied (except as otherwise indicated therein); (c) set forth as of the respective dates indicated adequate reserves for all foreseeable loan losses and other contingencies; and (d) are based on the books and records of Home and Home Bank. 4.5. SEC/Regulatory Filings. Since January 1, 1990, Home and Home Bank have filed all reports, registrations and statements that were required to be filed with the (i) FDIC; (ii) the FRB; (iii) the SEC; and (iv) any other applicable federal, state or local governmental or regulatory authority. Home has previously furnished to CU a copy of the SEC Filings, FDIC Filings and FRB Filings of Home. As of their respective dates, the SEC Filings, FDIC Filings and FRB Filings of Home complied in all material respects 12 20 with the requirements of their respective forms and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.6. Authority of Home and Home Bank. The execution and delivery by Home and Home Bank of this Agreement, by Home of the Agreement of Merger and by Home Bank of the Bank Merger Agreement and, subject to the requisite approval of the shareholders of Home and the sole shareholder of Home Bank, the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of Home and Home Bank, and this Agreement is, and the Agreement of Merger and Bank Merger Agreement will be upon execution by the respective parties thereto, a valid and binding obligation of Home or Home Bank or both of them, as the case may be, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles and by Section 8(b)(6)(D) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b) (6) (D). Except as set forth in Schedule 4.6, neither the (i) execution and delivery by Home and Home Bank of this Agreement, by Home of the Agreement of Merger or by Home Bank of the Bank Merger Agreement; (ii) the consummation of the Merger or Bank Merger or the transactions contemplated herein or therein; nor (iii) compliance by Home and Home Bank with any of the provisions hereof or thereof, will: (a) conflict with or result in a breach of any provision of their respective Articles of Incorporation, as amended, or Bylaws, as amended; (b) constitute a breach of or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which Home or Home Bank is a party, or by which Home or Home Bank or any of their respective properties or assets is bound, if in any such circumstances, such event could have consequences materially adverse to Home on a consolidated basis; or (c) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Home or Home Bank or any of their respective properties or assets, if such violation could have consequences materially adverse to Home on a consolidated basis. Except as set forth in the Home Schedules, no consent of, approval of, notice to or filing with any governmental authority having jurisdiction over any aspect of the business or assets of Home or Home Bank, and no consent of, approval of or notice to any other Person, is required in connection with the execution and delivery by Home and Home Bank of this Agreement, by Home of the Agreement of Merger, by Home and Home Bank of the Bank Merger Agreement, or the consummation by Home and Home Bank of the Merger or Bank Merger or the transactions contemplated hereby or thereby, except (i) the approval of this Agreement and the transactions contemplated hereby by the shareholders of Home and the sole shareholder of Home Bank; (ii) such approvals as may be required by the FRB and the OCC; (iii) the filing of the Agreement of Merger with the California Secretary; (iv) the filing of the Bank Merger Agreement with the OCC; and (v) the filing with and the approval by the SEC of the S-4 and Proxy Statement. 4.7. Insurance. Home and Home Bank have policies of insurance and bonds with respect to their respective assets and businesses against such casualties and contingencies and in such amounts, types and forms as are appropriate for their respective businesses, operations, properties and assets. All such insurance policies and bonds are in full force and effect. To the knowledge of Home and Home Bank and except as set forth on Schedule 4.7, no insurer under any such policy or bond has canceled or indicated an intention to cancel or not to renew any such policy or bond or generally disclaimed liability thereunder. To the knowledge of Home and Home Bank and except as set forth on Schedule 4.7, neither Home nor Home Bank is in default under any such policy or bond and all material claims thereunder have been filed in a timely 13 21 fashion. Set forth on Schedule 4.7 is a list of all policies of insurance carried and owned by Home or Home Bank, showing the name of the insurance company, the nature of the coverage, the policy limit, the annual premiums and the expiration dates. Home has delivered to CU a copy of each such policy of insurance. 4.8. Title to Assets. Home and Home Bank have good and marketable title to all their respective material properties and assets, other than real property, owned or stated to be owned by Home or Home Bank, free and clear of all mortgages, liens, encumbrances, pledges or charges of any kind or nature except: (a) as set forth in the Financial Statements of Home; (b) for liens or encumbrances for current taxes not yet due; (c) for liens or encumbrances incurred in the ordinary course of business; (d) for liens that are not substantial in character, amount or extent or that do not materially detract from the value, or interfere with present use, of the property subject thereto or affected thereby, or otherwise materially impair the conduct of business of Home on a consolidated basis; or (e) as set forth on Schedule 4.8. 4.9. Real Estate. Schedule 4.9 sets forth a list of real property, including leaseholds, owned or leased by Home or Home Bank (the "Home Real Property"). Home or Home Bank has good and marketable title to the Home Real Property, and valid leasehold interests in the leaseholds, described on Schedule 4.9, free and clear of all mortgages, covenants, conditions, restrictions, easements, liens, security interests, charges, claims, assessments and encumbrances, except (a) for rights of lessors, co-lessees or sublessees in such matters that are reflected in the lease; (b) for current taxes not yet due and payable; (c) for liens and encumbrances of public record; (d) for such imperfections of title, liens and encumbrances, if any, as do not materially detract from the value of or materially interfere with the present use of such property; and (e) as described on Schedule 4.9. 4.10. Litigation. Except as set forth in the SEC Filings of Home or Schedule 4.10, there is no private or governmental suit, claim, action or proceeding pending, nor to Home's or Home Bank's knowledge, threatened against Home or Home Bank or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of Home or Home Bank that has had or may have a material adverse effect upon the business, financial condition or results of operations of Home on a consolidated basis or the transactions contemplated hereby or which may involve a payment by Home in excess of $50,000 of applicable insurance coverage. Also, except as disclosed in the SEC Filings of Home or on Schedule 4.10, there are no material judgments, decrees, stipulations or orders against Home or Home Bank enjoining either of them or any of their respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. Home has previously provided to CU summary reports of Home's and Home Bank's attorneys relating to all pending litigation to which Home or Home Bank is a party and which names Home or Home Bank as a defendant or cross- defendant and a true, correct and complete list of all pending litigation in which Home or Home Bank is a named party. 4.11. Taxes. (a) Home and/or Home Bank have filed all federal and foreign income tax returns, all state and local franchise and income tax, real and personal property tax, sales and use tax, premium tax, excise tax and other tax returns of every character required to be filed by it and have paid all taxes, together with any interest and penalties owing in connection therewith, shown on such returns to be due in respect of the periods covered by such returns, other than taxes which are being contested in good faith and for which adequate reserves have been established. Home and/or Home 14 22 Bank have filed all required payroll tax returns, have fulfilled all tax withholding obligations and have paid over to the appropriate governmental authorities the proper amounts with respect to the foregoing. The tax and audit positions taken by Home and/or Home Bank in connection with the tax returns described in the preceding sentence were reasonable and asserted in good faith. Adequate provision has been made in the books and records of Home and/or Home Bank and, to the extent required by generally accepted accounting procedures, reflected in the Financial Statements of Home, for all tax liabilities, including interest or penalties, whether or not due and payable and whether or not disputed, with respect to any and all federal, foreign, state, local and other taxes for the periods covered by such financial statements and for all prior periods. Schedule 4.11 sets forth the date or dates through which the IRS has examined the federal tax returns of Home and/or Home Bank and the date or dates through which any foreign, state, local or other taxing authority has examined any other tax returns of Home and/or Home Bank. Schedule 4.11 also contains a complete list of each year for which any federal, state, local or foreign tax authority has obtained or has requested an extension of the statute of limitations from Home and/or Home Bank and lists each tax case of Home and/or Home Bank currently pending in audit, at the administrative appeals level or in litigation. Schedule 4.11 further lists the date and issuing authority of each statutory notice of deficiency, notice of proposed assessment and revenue agent's report issued to Home and/or Home Bank within the last twelve (12) months. Except as set forth in Schedule 4.11, neither the IRS nor any foreign, state, local or other taxing authority has, during the past three years, examined or is in the process of examining any federal, foreign, state, local or other tax returns of Home. To the knowledge of Home, neither the IRS nor any foreign, state, local or other taxing authority is now asserting or threatening to assert any deficiency or claim for additional taxes (or interest thereon or penalties in connection therewith) except as set forth on Schedule 4.11. (b) Except as set forth on Schedule 4.11(b), neither Home nor Home Bank is a party to any safe harbor lease within the meaning of Section 168(f)(8) of the Code, as in effect prior to amendment by the Tax Equity and Fiscal Responsibility Act of 1982. Neither Home nor Home Bank is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Neither Home nor Home Bank is a "consenting corporation" under Section 341(f) of the Code. Neither Home nor Home Bank has agreed, nor is it required to make, any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. 4.12. Compliance with Laws and Regulations. To Home's and Home Bank's knowledge, neither of them is in default under or in breach of any provision of their respective Articles of Incorporation, as amended, or Bylaws, as amended, or law, ordinance, rule or regulation promulgated by any governmental agency having authority over either of them, where such default or breach would have a material adverse effect on the business, financial condition or results of operations of Home on a consolidated basis. No investigation or review by any governmental entity or regulatory authority with respect to Home or Home Bank is pending or, to the knowledge of Home or Home Bank, threatened, nor has any such governmental entity or regulatory authority indicated to Home or any Affiliate of Home any intention to conduct the same, other than those the outcome of which would not have a material adverse affect on the business, financial condition or results of operations of Home on a consolidated basis. 4.13. Performance of Obligations. Home and Home Bank have performed in all material respects all of the obligations required to be performed by them to date, and to the best of their knowledge, are not in default under or in breach of any term or provision of any covenant, contract, lease, indenture or any other 15 23 covenant to which either of them is a party, is subject or is otherwise bound, and no event has occurred that, with the giving of notice or the passage of time or both, would constitute such default or breach, where such default or breach would have a material adverse effect on the business, financial condition or results of operations of Home on a consolidated basis. Except for loans and leases made by Home Bank in the ordinary course of business, to Home's or Home Bank's knowledge, no party with whom Home or Home Bank has an agreement that is of material importance to the business of Home on a consolidated basis is in default thereunder. 4.14. Employees. There are no controversies pending or threatened between Home or Home Bank and any of their respective employees that are likely to have a material adverse effect on the business, financial condition or results of operation of Home on a consolidated basis. Neither Home nor Home Bank is a party to any collective bargaining agreement with respect to any of their respective employees or any labor organization to which their respective employees or any of them belong. Except as previously disclosed in writing to CU, there are no Understandings with respect to the employment of any officer or employee of Home or Home Bank which are not terminable by Home or Home Bank without liability on not more than thirty (30) days' notice. Except as disclosed in the Home Financial Statements or as previously disclosed in writing to CU, all material sums due for employee compensation have been paid or accrued and all employer contributions for employee benefits, including deferred compensation obligations, and any benefits under any Home Employee Plan have been duly and adequately paid or provided for in accordance with plan documents. Except for the Proposed Retention Agreements and as set forth on Schedule 4.14, as of the date hereof, no director, officer or employee of Home or Home Bank is entitled to receive any payment or any amount under any existing Home Employee Plan, Understanding, severance plan or other benefit plan as a result of the consummation of any transaction contemplated by this Agreement, the Agreement of Merger or the Bank Merger. 4.15. Brokers and Finders. Except for any agreements among Home, CU and Montgomery, and any fees payable thereunder, neither Home nor Home Bank is a party to or obligated under any agreement with any broker or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for herein or therein will result in any liability to any broker or finder. 4.16. Material Contracts. Except as set forth on Schedule 4.16 hereto (all items listed or required to be listed on Schedule 4.16 being referred to herein as "Home Scheduled Contracts"), neither Home nor Home Bank is a party or otherwise subject to: (a) any employment, deferred compensation, bonus or consulting contract that requires payment by Home or Home Bank of $50,000 or more per annum; (b) any advertising, brokerage, licensing, dealership, representative or agency relationship or contract not terminable by Home on 30 days' or less notice and which requires payment by Home or Home Bank of $10,000 or more per annum; (c) any contract or agreement that restricts Home (or would restrict any Affiliate of Home after the Effective Time) from competing in any line of business with any Person or using or employing the services of any Person; 16 24 (d) any lease of real or personal property providing for annual lease payments by or to Home or Home Bank in excess of $100,000 per annum other than (i) financing leases entered into in the ordinary course of business in which Home or Home Bank is lessor and (ii) leases of real property presently used by Home Bank as banking offices; (e) any mortgage, pledge, conditional sales contract, security agreement, option, or any other similar agreement with respect to any interest of Home or Home Bank (other than as mortgagor or pledgor in the ordinary course of their banking business or as mortgagee, secured party or deed of trust beneficiary in the ordinary course of their business) in personal property having a value of $100,000 or more; (f) any agreement to acquire equipment or any commitment to make capital expenditures of $100,000 or more; (g) other than agreements entered into in the ordinary course of business, including sales of Other Real Estate Owned, any agreement for the sale of any property or assets in which Home or Home Bank has an ownership interest or for the grant of any preferential right to purchase any such property or asset; (h) any agreement for the borrowing of any money (other than liabilities or interbank borrowings made in the ordinary course of their banking business and reflected in the Financial Statements of Home); (i) any restrictive covenant contained in any deed to or lease of real property owned or leased by Home or Home Bank (as lessee) that materially restricts the use, transferability or value of such property; (j) any guarantee or indemnification which involves the sum of $100,000 or more, other than letters of credit or loan commitments issued in the normal course of business; (k) any supply, maintenance or landscape contracts not terminable by Home or Home Bank without penalty on 30 days' or less notice and which provides for payments in excess of $25,000 per annum; (l) any agreement which would be terminable other than by Home or Home Bank as a result of the consummation of the transactions contemplated by this Agreement; (m) any contract of participation with any other bank in any loan entered into by Home or Home Bank subsequent to December 31, 1994 in excess of $100,000 or any sales of assets of Home or Home Bank with recourse of any kind to Home or Home Bank except the sale of mortgage loans, servicing rights, repurchase or reverse repurchase agreements, securities or other financial transactions in the ordinary course of business; (n) any other Understanding of any other kind not terminable on 30 days' or less notice which involves future payments or receipts or performances of services or delivery of items requiring payment of $25,000 or more to or by Home or Home Bank other than payments made 17 25 under or pursuant to loan agreements, participation agreements and other agreements for the extension of credit in the ordinary course of their business; or (o) any Understanding that is otherwise material to the business, financial condition, results of operations or prospects of Home or Home Bank. Home has delivered to CU copies of all Home Scheduled Contracts, including all amendments and supplements thereto. 4.17. Absence of Material Change. Since December 31, 1994, the businesses of Home and Home Bank have been conducted, only in the ordinary course, in the same manner as theretofore conducted and there has not occurred any event that has had or may reasonably be expected to have a material adverse effect on the business, financial condition or results of operation of Home on a consolidated basis. 4.18. Licenses and Permits. Home and Home Bank have all material licenses and permits that are necessary for the conduct of their respective businesses, and such licenses are in full force and effect, except for any failure to be in full force and effect that would not, individually or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of Home on a consolidated basis. The properties and operations of Home and Home Bank are and have been maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. 4.19. No Material Liabilities; Environmental. (a) Schedule 4.19 sets forth all material liabilities of Home and Home Bank, including liabilities for Hazardous Substances or under any Environmental Law, contingent or otherwise, that are not reflected or reserved against in the Home Financial Statements, except for liabilities incurred or accrued since December 31, 1994 in the ordinary course of business, none of which has had or could reasonably be expected to have a material adverse effect on the business, financial condition, results of operations or prospects of Home on a consolidated basis. Except as set forth in Schedule 4.19, neither Home nor Home Bank knows of any basis for the asserting against it of any liability, obligation or claim that could reasonably be expected to have a material adverse effect on the business, financial condition, or results of operations of Home on a consolidated basis. (b) Except as set forth on Schedule 4.19(b) or the Phase I Reports or Phase II Assessments, to the actual knowledge of the executive officers of Home and Home Bank, (i) there has not been any generation, use, handling, transportation, treatment, storage, release, or disposal of any Hazardous Substance in connection with the conduct of business of Home or Home Bank that has resulted or is likely to result in any liability under any Environmental Law in excess of $1,000,000; (ii) there has never been a use of the Home Real Property that has resulted, or is likely to result in any liability under any Environmental Law in excess of $1,000,000; (iii) no underground storage tanks or surface impoundments are on or in the Home Real Property; and (iv) no Hazardous Substances are contained on, under or migrating from or located on any of the Home Real Property. 4.20. Employee Benefit Plans. (a) Schedule 4.20 sets forth and describes all employee benefit plans and any collective bargaining agreements or labor contracts in which Home or Home Bank participates, or by which 18 26 they are bound, including, without limitation; (i) any profit sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer consulting, retirement, welfare or incentive plan or agreement whether legally binding or not; (ii) any plan providing for "fringe benefits" to its employees, including but not limited to vacation, sick leave, medical, hospitalization, life insurance and other insurance plans, and related benefits; (iii) any written employment agreement and any other employment agreement not terminable at will; or (iv) any other "employee benefit plan" (within the meaning of Section 3(3) of ERISA) (collectively, the "Home Employee Plans"). Except as set forth in Schedule 4.20, (i) there are no negotiations, demands or proposals that are pending or threatened that concern matters now covered, or that would be covered, by any employment agreements or employee benefit plans other than amendments to plans qualified under Section 401 of the Code that are required by the Tax Reform Act of 1986 and later legislation; (ii) Home is in compliance with the material reporting and disclosure requirements of Part 1 of Subtitle IB of ERISA and the corresponding provisions of the Code to the extent applicable to all such employee benefit plans; (iii) Home has performed all of its obligations under all such employee benefit plans and employment agreements required to be performed heretofore; and (iv) there are no actions, suits or claims (other than routine claims for benefits) pending or, to the best knowledge of Home and Home Bank, threatened against any such employee benefit plans and employment agreements or the assets of such plans, and to the best knowledge of Home, no facts exist which could give rise to any actions, suits or claims (other than routine claims for benefits) against such plans or the assets of such plans. (b) The "employee pension benefit plans" (within the meaning of Section 3(2) of ERISA) described on Schedule 4.20 have been duly authorized by the Board of Directors of Home. Except as set forth in Schedule 4.20, each such plan and associated trust intended to be qualified under Section 401(a) and to be exempt from tax under Section 501(a) of the Code, respectively, has either received a favorable determination letter from the IRS, has applied for such a determination letter or will apply for such a determination letter before the expiration of the remedial amendment period set forth in Section 401(b) of the Code, as the IRS may extend such period, and to the best knowledge of Home and Home Bank, no event has occurred that will or could give rise to disqualification of any such plan which is intended to be qualified under Section 401(a) of the Code or loss of the exemption from tax of any such trust which is intended to be exempt from tax under Section 501(a) of the Code. No event has occurred that will or could subject any such plans to tax under Section 511 of the Code. None of such plans has engaged in a merger or consolidation with any other plan or transferred assets or liabilities from any other plan. No prohibited transaction (within the meaning of Section 409 or 502(i) of ERISA or Section 4975 of the Code) or party-in-interest transaction (within the meaning of Section 406 of ERISA) has occurred with respect to any of such plans which could subject Home or Home Bank to an excise tax or penalty. To the best knowledge of Home and Home Bank, no employee of Home or Home Bank has engaged in any transactions which could subject Home or Home Bank to indemnify such person against liability. All costs of plans have been provided for on the basis of consistent methods in accordance with sound actuarial assumptions and practices. No employee benefit plan has incurred any "accumulated funding deficiency" (as defined in Section 302(2) of ERISA), whether or not waived, taking into account contributions made within the period described in Section 412(c)(10) of the Code; nor are there any unfunded amounts under any employee benefit plan which is required to be funded under Part 3 of Subtitle IB of ERISA and Section 412 of the Code); nor has Home or Home Bank failed to make any contributions or pay any amount due and owing as required by law or the terms of any employee benefit plan or employment agreement. Subject to amendments that are required by the 19 27 Tax Reform Act of 1986 and later legislation, since the last valuation date for each employee pension benefit plan, there has been no amendment or change to such plan that would increase the amount of benefits thereunder. (c) Neither Home nor Home Bank sponsors or participates in, or has sponsored or participated in, any employee benefit pension plan to which Section 4021 of ERISA applies that would create a liability under Title IV of ERISA. (d) Neither Home nor Home Bank sponsors or participates in, or has sponsored or participated in, any employee benefit pension plan that is a "multi-employer plan" (within the meaning of Section 3(37) of ERISA) that would subject such Person to any liability with respect to any such plan. (e) All group health plans of Home or Home Bank (including any plans of Affiliates of Home that must be taken into account under Section 162(i) or (k) of the Code as in effect immediately prior to the Technical and Miscellaneous Revenue Act of 1988 and Section 4980B of the Code) have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code to the extent such requirements are applicable. (f) There have been no acts or omissions by Home or Home Bank that have given rise to or may give rise to fines, penalties, taxes, or related charges under Sections 502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code which could be imposed on Home or Home Bank. (g) Except as described in Section 4.20(j), neither Home or Home Bank maintains any employee benefit plan or employment agreement pursuant to which any benefit plan or other payment will be required to be made by Home or Home Bank or pursuant to which any other benefit will accrue or vest in any director, officer or employee of Home or Home Bank, in either case as a result of the consummation of the transactions contemplated by the Agreement. (h) No "reportable event," as defined in ERISA, has occurred with respect to any of the employee benefit plans. (i) All amendments required to bring each of the employee benefit plans into conformity with all of the provisions of ERISA and the Code and all other applicable laws, rules and regulations have been made, or will be made before the expiration of the remedial amendment period set forth under Section 401(b) of the Code, as such period may be extended by the IRS. (j) Schedule 4.20 sets forth the name of each director, officer, employee, agent or representative of Home or Home Bank and every other person entitled to receive any benefit or any payment of any amount under any existing employment agreement, severance plan or other benefit plan or Understanding as a result of the consummation of any transaction contemplated in this Agreement, and with respect to each such person, the nature of such benefit or the amount of such payment, the event triggering the benefit or payment, and the date of, and parties to, such employment agreement, severance or other benefit plan or Understanding. Home has furnished CU with true and correct copies of all documents with respect to the plans and agreements referred to in Schedule 4.20 delivered as of the date of the Agreement, including all amendments and supplements thereto, and all related summary plan descriptions. For each of the employee pension 20 28 benefit plans of Home and Home Bank referred to in Schedule 4.20 delivered as of the date of the Agreement, Home has furnished CU with true and correct copies of (i) a copy of the Form 5500 which was filed in each of the three most recent plan years, including without limitation, all schedules thereto and all financial statements with attached opinions of independent accountants to the extent required; (ii) the most recent determination letter from the IRS; (iii) the statement of assets and liabilities as of the most recent valuation date; and (iv) the statement of changes in fund balance and in financial position or the statement of changes in net assets available for benefits under each of said plans for the most recently ended plan year. The documents referred to in subdivisions (iii) and (iv) fairly present the financial condition of each of said plans as of and at such dates and the results of operations of each of said plans, all in accordance with generally accepted accounting principles or on the cash method of accounting applied on a consistent basis. 4.21. Corporate Records. The minute books of Home and Home Bank accurately reflect all material actions taken to this date by the respective shareholders, boards of directors and committees of Home and Home Bank and contain true and complete copies of the Articles of Incorporation, Bylaws and other charter documents, and all amendments thereto. 4.22. Offices and ATMs. Schedule 4.22 sets forth the headquarters of Home and Home Bank (identified as such) and each of the offices and automated teller machines ("ATMs") maintained and operated by Home Bank (including, without limitation, representative and loan production offices and operations centers) and the location thereof. Except as set forth on Schedule 4.22, neither Home nor Home Bank maintains any other office or ATM nor conducts business at any other location. Neither Home nor Home Bank has applied for or received permission to open any additional branch or operate at any other location. 4.23. Operating Losses. Schedule 4.23 sets forth a list of any Operating Loss (as herein defined) which has occurred at Home Bank during the period after September 30, 1995. To the knowledge of Home or Home Bank, no action has been taken or omitted to be taken by any employee of Home or Home Bank that has resulted in the incurrence by Home Bank of an Operating Loss or that might reasonably be expected to result in the incurrence of any individual Operating Loss after September 30, 1995, which, net of any insurance proceeds payable in respect thereof, would exceed $25,000. For purposes of this Agreement "Operating Loss" means any loss resulting from cash shortages, lost or misposted items, disputed clerical and accounting errors, forged checks, payment of checks over stop payment orders, merchant credit card processing, counterfeit money, wire transfers made in error, theft, robberies, defalcations, check kiting, fraudulent use of credit cards or electronic teller machines or other similar acts or occurrences. 4.24. Loan Portfolio. All loans or other extensions of credit, and guaranties, security agreements or other agreements supporting any loans or extensions of credit, and investments of Home or Home Bank are, in all material respects, legal, enforceable and authorized under applicable federal and state laws and regulations, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles. Except as previously disclosed in writing to CU, no loans or investments held by Home Bank are, as of September 30, 1995 (i) more than ninety (90) days past due with respect to any scheduled payment of principal or interest; (ii) classified as "loss," "doubtful," "substandard," "special mention," or "criticized" by any federal or state banking regulators; or (iii) on a non-accrual status in accordance with Home Bank's loan review procedures. None of such investments are subject to any restrictions, contractual, statutory or other, that would materially impair the ability of the entity holding such investment to dispose freely of any such investment at any time, except restrictions on the public distribution or transfer of any such investments under the Securities Act and 21 29 the regulations thereunder or state securities laws and pledges or security interests given in connection with government deposits. Except as previously disclosed in writing to CU, Home Bank has no loans, leases or other extensions of credit outstanding, or commitments to make any loans, leases or other extensions of credit to any Affiliates of Home Bank which are not on substantially the same terms (including interest rates, repayment terms and collateral) as would be available for comparable transactions with persons of similar creditworthiness who are not Affiliates of Home Bank. For each outstanding loan or extension of credit or commitment to make a loan or extension of credit where the original principal amount is in excess of $50,000 and which by its terms is either secured by collateral ("Secured Loan") or supported by a guaranty or similar obligation ("Covered Loan"), in the case of each Secured Loan, to the best knowledge of Home Bank, the security interest has been perfected and, in the case of each Covered Loan, the guaranty or similar obligation has been executed and delivered to Home Bank and is still in full force and effect. 4.25. Power of Attorney. Neither Home nor Home Bank has granted any Person a power of attorney or similar authorization that is presently in effect or outstanding. 4.26. Disclosure Documents and Applications. None of the information supplied or to be supplied by or on behalf of Home or Home Bank ("Home Supplied Information") for inclusion in the documents to be filed with the SEC, FRB, the FDIC, or any other governmental entity in connection with the transactions contemplated in this Agreement will, at the respective times such documents are filed or become effective, contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.27. Accuracy and Currentness of Information Furnished. The representations and warranties made by Home or Home Bank hereby or in the schedules hereto contain no statements of fact which are untrue or misleading, or omit to state any material fact which is necessary under the circumstances to prevent the statements contained herein or in such schedules from being misleading. 4.28. Loan Servicing Portfolio. Except as set forth on Schedule 4.28, Home Bank services no loans owned in whole or in part by other parties. 4.29. Certain Interests. Schedule 4.29 sets forth a description of each instance in which an executive officer or director of Home or Home Bank (a) has any material interest in any property, real or personal, tangible or intangible, used by or in connection with the business of Home or Home Bank; (b) is indebted to Home or Home Bank except for normal business expense advances; or (c) is a creditor (other than as a deposit holder of Home Bank) of Home or Home Bank except for amounts due under normal salary and related benefits or reimbursement of ordinary business expenses. Except as set forth in Schedule 4.29, all such arrangements are arm's length transactions pursuant to normal commercial terms and conditions. 4.30. Investment Securities. Except as set forth on Schedule 4.30, all investment securities held by Home or Home Bank are legal investments under applicable law and regulations. 22 30 ARTICLE V REPRESENTATIONS AND WARRANTIES OF CU AND CU BANK CU and CU Bank represent and warrant to Home and Home Bank as follows: 5.1. Incorporation, Standing and Power. CU has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California and is registered as a bank holding company under the BHC Act. CU Bank has been duly incorporated and is validly existing as a national banking association under the laws of the United States, and is authorized by the OCC to conduct a general banking business; CU Bank's deposits are insured by the FDIC in the manner and to the extent provided by law. CU and CU Bank have all requisite corporate power and authority to own, lease and operate their respective properties and assets and to carry on their respective businesses as presently conducted. Neither the scope of the business of CU or CU Bank nor the location of any of their respective properties requires that CU or CU Bank be licensed to do business in any jurisdiction other than the State of California where the failure to be so licensed would, individually or in the aggregate, have a materially adverse effect on the financial condition, results of operation or business of CU on a consolidated basis. 5.2. Capitalization. (a) As of the date of this Agreement, the authorized capital stock of CU consists of 24,000,000 shares of CU Stock, of which 4,621,450 shares are outstanding, and 10,000,000 shares of serial preferred stock, none of which are outstanding. All of the outstanding shares of CU Stock are duly authorized, validly issued, fully paid and nonassessable. As of the date of this Agreement, except for employee stock options covering 729,240 shares of CU Stock granted pursuant to the CU Stock Option Plan, outstanding warrants covering 7,500 shares of CU Stock and 1,492,390 shares covered by the Home Warrant, there were no outstanding options, warrants or other rights in or with respect to the unissued shares of CU Stock or CU serial preferred stock nor any securities convertible into such stock. Except with respect to the approximately 648,871 shares of CU Stock to be issued in connection with the Corporate Bank Merger, CU is not obligated to issue any additional shares of CU Stock or preferred stock or any additional options, warrants or other rights in or with respect to the unissued shares of such stock or any other securities convertible into such stock. Schedule 5.2 sets forth the name of each holder of a CU Option, the number of shares of CU Stock covered by each such CU Option, the exercise price per share and the expiration date of each CU Option. (b) As of the date of this Agreement, the authorized capital stock of CU Bank consists of 540,000 shares of CU Bank Stock, of which 472,973 shares are outstanding and all of which are owned of record by CU. All the outstanding shares of CU Bank Stock are duly authorized, validly issued, fully paid and nonassessable (except as provided for in 12 U.S.C. Section55). There are no outstanding options, warrants or other rights in or with respect to the unissued shares of CU Bank Stock or any other securities convertible into such stock, and CU Bank is not obligated to issue any additional shares of its common stock or any options, warrants or other rights in or with respect to the unissued shares of its common stock or any other securities convertible into such stock. 5.3. Subsidiaries. Except for CU Bank, a wholly owned subsidiary of CU, CU does not own, directly or indirectly (except as pledgee pursuant to loans or upon acquisition in satisfaction of debt 23 31 previously contracted), the outstanding stock or other voting interest in any corporation, partnership, joint venture or other entity. 5.4. Financial Statements. CU has previously furnished to Home a copy of the Financial Statements of CU. The Financial Statements of CU: (a) present fairly the consolidated financial condition of CU as of the respective dates indicated and its consolidated results of operations and changes in financial position/cash flow, as applicable, for the respective periods then ended, subject, in the case of the unaudited consolidated interim financial statements, to normal recurring adjustments; (b) have been prepared in accordance with generally accepted accounting principles consistently applied (except as otherwise indicated therein); (c) set forth as of the respective dates indicated adequate reserves for all foreseeable loan losses and other contingencies; and (d) are based on the books and records of CU and CU Bank. 5.5. SEC/Regulatory Filings. Since January 1, 1990, CU and CU Bank have filed all reports, registrations, and statements that were required to be filed with the (i) OCC; (ii) the FRB; (iii) the SEC; and (iv) any other applicable federal, state or local or governmental or regulatory authority. CU has previously furnished to Home a copy of the SEC Filings of CU, OCC Filings of CU, and the FRB Filings of CU. As of their respective dates, the SEC Filings of CU, the OCC Filings of CU and the FRB Filings of CU complied in all material respects with the requirements of their respective forms and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.6. Authority of CU and CU Bank. The execution and delivery by CU and CU Bank of this Agreement, by CU of the Agreement of Merger and by CU Bank of the Bank Merger Agreement and, subject to the requisite approval of the shareholders of CU and the sole shareholder of CU Bank, the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of CU and CU Bank, and this Agreement is, and the Agreement of Merger and Bank Merger Agreement will be upon execution by the respective parties thereto, a valid and binding obligation of CU or CU Bank or both of them, as the case may be, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles and by Section 8(b)(6)(D) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b) (6) (D). Except as set forth in Schedule 5.6, neither the (i) execution and delivery by CU and CU Bank of this Agreement, by CU of the Agreement of Merger or by CU Bank of the Bank Merger Agreement; (ii) the consummation of the Merger or Bank Merger or the transactions contemplated herein or therein; nor (iii) compliance by CU and CU Bank with any of the provisions hereof or thereof, will: (a) conflict with or result in a breach of any provision of their respective Articles of Incorporation or Association, as amended, as the case may be, or Bylaws, as amended; (b) constitute a breach of or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which CU or CU Bank is a party, or by which CU or CU Bank or any of their respective properties or assets is bound, if in any such circumstances, such event could have consequences materially adverse to CU on a consolidated basis; or (c) violate any order, writ, injunction, decree, statute, rule or regulation applicable to CU or CU Bank or any of their respective properties or assets, if such violation could have consequences materially adverse to CU on a consolidated basis. Except as set forth in the CU Schedules, no consent of, approval of, notice to or filing with any governmental authority having jurisdiction over any aspect of the business or assets of CU or CU Bank, and no consent of, approval of or notice to any other Person, is required in connection with the 24 32 execution and delivery by CU and CU Bank of this Agreement, by CU of the Agreement of Merger, by CU Bank of the Bank Merger Agreement, or the consummation by CU and CU Bank of the Merger or Bank Merger or the transactions contemplated hereby or thereby, except (i) the approval of this Agreement and the transactions contemplated hereby by the shareholders of CU and the sole shareholder of CU Bank; (ii) such approvals as may be required by the FRB and the OCC; (iii) the filing of the Agreement of Merger with the California Secretary; (iv) the filing of the Bank Merger Agreement with the OCC; and (v) the filing with and the approval by the SEC of the S-4 and the Proxy Statement. 5.7. Insurance. CU and CU Bank have policies of insurance and bonds with respect to their respective assets and businesses against such casualties and contingencies and in such amounts, types and forms as are appropriate for their respective businesses, operations, properties and assets. All such insurance policies and bonds are in full force and effect. To the knowledge of CU and CU Bank and except as set forth on Schedule 5.7, no insurer under any such policy or bond has canceled or indicated an intention to cancel or not to renew any such policy or bond or generally disclaimed liability thereunder. To the knowledge of CU and CU Bank and except as set forth on Schedule 5.7, neither CU nor CU Bank is in default under any such policy or bond and all material claims thereunder have been filed in a timely fashion. Set forth on Schedule 5.7 is a list of all policies of insurance carried and owned by CU or CU Bank, showing the name of the insurance company, the nature of the coverage, the policy limit, the annual premiums and the expiration dates. CU has delivered to Home a copy of each such policy of insurance. 5.8. Title to Assets. CU and CU Bank have good and marketable title to all their respective material properties and assets, other than real property, owned or stated to be owned by CU or CU Bank, free and clear of all mortgages, liens, encumbrances, pledges or charges of any kind or nature except: (a) as set forth in the Financial Statements of CU; (b) for liens or encumbrances for current taxes not yet due; (c) for liens or encumbrances incurred in the ordinary course of business; (d) for liens that are not substantial in character, amount or extent or that do not materially detract from the value, or interfere with present use, of the property subject thereto or affected thereby, or otherwise materially impair the conduct of business of CU on a consolidated basis; or (e) as set forth on Schedule 5.8. 5.9. Real Estate. Schedule 5.9 sets forth a list of real property, including leaseholds, owned or leased by CU or CU Bank (the "CU Real Property"). CU or CU Bank has good and marketable title to the CU Real Property, and valid leasehold interests in the leaseholds, described on Schedule 5.9, free and clear of all mortgages, covenants, conditions, restrictions, easements, liens, security interests, charges, claims, assessments and encumbrances, except (a) for rights of lessors, co-lessees or sublessees in such matters that are reflected in the lease; (b) for current taxes not yet due and payable; (c) for liens and encumbrances of public record; (d) for such imperfections of title, liens and encumbrances, if any, as do not materially detract from the value of or materially interfere with the present use of such property; and (e) as described on Schedule 5.9. 5.10. Litigation. Except as set forth in the SEC Filings of CU or Schedule 5.10, there is no private or governmental suit, claim, action or proceeding pending, nor to CU's or CU Bank's knowledge, threatened against CU or CU Bank or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of CU or CU Bank that has had or may have a material adverse effect upon the business, financial condition or results of operations of CU on a consolidated basis or the transactions contemplated hereby or which may involve a payment by CU in excess of $50,000 of applicable insurance coverage. Also, except as disclosed in the SEC Filings of CU or on Schedule 5.10, there are no material judgments, decrees, stipulations or orders against CU or CU 25 33 Bank enjoining either of them or any of their respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. CU has previously provided to Home summary reports of CU's and CU Bank's attorneys relating to all pending litigation to which CU or CU Bank is a party and which names CU or CU Bank as a defendant or cross-defendant and a true, correct and complete list of all pending litigation in which CU or CU Bank is a named party. 5.11. Taxes. (a) CU and/or CU Bank have filed all federal and foreign income tax returns, all state and local franchise and income tax, real and personal property tax, sales and use tax, premium tax, excise tax and other tax returns of every character required to be filed by it and have paid all taxes, together with any interest and penalties owing in connection therewith, shown on such returns to be due in respect of the periods covered by such returns, other than taxes which are being contested in good faith and for which adequate reserves have been established. CU and/or CU Bank have filed all required payroll tax returns, have fulfilled all tax withholding obligations and have paid over to the appropriate governmental authorities the proper amounts with respect to the foregoing. The tax and audit positions taken by CU and/or CU Bank in connection with the tax returns described in the preceding sentence were reasonable and asserted in good faith. Adequate provision has been made in the books and records of CU and/or CU Bank and, to the extent required by generally accepted accounting procedures, reflected in the Financial Statements of CU, for all tax liabilities, including interest or penalties, whether or not due and payable and whether or not disputed, with respect to any and all federal, foreign, state, local and other taxes for the periods covered by such financial statements and for all prior periods. Schedule 5.11 sets forth the date or dates through which the IRS has examined the federal tax returns of CU and/or CU Bank and the date or dates through which any foreign, state, local or other taxing authority has examined any other tax returns of CU and/or CU Bank. Schedule 5.11 also contains a complete list of each year for which any federal, state, local or foreign tax authority has obtained or has requested an extension of the statute of limitations from CU and/or CU Bank and lists each tax case of CU and/or CU Bank currently pending in audit, at the administrative appeals level or in litigation. Schedule 5.11 further lists the date and issuing authority of each statutory notice of deficiency, notice of proposed assessment and revenue agent's report issued to CU and/or CU Bank within the last twelve (12) months. Except as set forth in Schedule 5.11, neither the IRS nor any foreign, state, local or other taxing authority has, during the past three years, examined or is in the process of examining any federal, foreign, state, local or other tax returns of CU. To the knowledge of CU, neither the IRS nor any foreign, state, local or other taxing authority is now asserting or threatening to assert any deficiency or claim for additional taxes (or interest thereon or penalties in connection therewith) except as set forth on Schedule 5.11. (b) Neither CU nor CU Bank is a party to any safe harbor lease within the meaning of Section 168(f)(8) of the Code, as in effect prior to amendment by the Tax Equity and Fiscal Responsibility Act of 1982. Neither CU nor CU Bank is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(i)(A)(ii) of the Code. Neither CU nor CU Bank is a "consenting corporation" under Section 341(f) of the Code. Neither CU nor CU Bank has agreed, nor is it required to make, any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. 26 34 5.12. Compliance with Laws and Regulations. To CU's and CU Bank's knowledge, neither of them is in default under or in breach of any provision of their respective Articles of Incorporation or Association, as amended, as the case may be, or Bylaws, as amended, or law, ordinance, rule or regulation promulgated by any governmental agency having authority over either of them, where such default or breach would have a material adverse effect on the business, financial condition or results of operations of CU on a consolidated basis. No investigation or review by any governmental entity or regulatory authority with respect to CU or CU Bank is pending or, to the knowledge of CU or CU Bank, threatened, nor has any such governmental entity or regulatory authority indicated to CU or any Affiliate of CU an intention to conduct the same, other than those the outcome of which would not have a material adverse affect on the business, financial condition or results of operation of CU on a consolidated basis. 5.13. Performance of Obligations. CU and CU Bank have performed in all material respects all of the obligations required to be performed by them to date, and to the best of their knowledge, are not in default under or in breach of any term or provision of any covenant, contract, lease, indenture or any other covenant to which either of them is a party, is subject or is otherwise bound, and no event has occurred that, with the giving of notice or the passage of time or both, would constitute such default or breach, where such default or breach would have a material adverse effect on the business, financial condition or results of operations of CU on a consolidated basis. Except for loans and leases made by CU Bank in the ordinary course of business, to CU's or CU Bank's knowledge, no party with whom CU or CU Bank has an agreement that is of material importance to the business of CU on a consolidated basis is in default thereunder. 5.14. Employees. There are no controversies pending or threatened between CU or CU Bank and any of their respective employees that are likely to have a material adverse effect on the business, financial condition or results of operation of CU on a consolidated basis. Neither CU nor CU Bank is a party to any collective bargaining agreement with respect to any of their respective employees or any labor organization to which their respective employees or any of them belong. Except as previously disclosed in writing to Home, there are no understandings with respect to the employment of any officer or employee of CU or CU Bank which are not terminable by CU or CU Bank without liability on not more than thirty (30) days notice. Except as disclosed in the CU Financial Statements or as previously disclosed in writing to CU, all material sums due for employee compensation have been paid or accrued and all employer contributions for employee benefits, including deferred compensation obligations, and any benefits under any CU Employee Plan have been duly and adequately paid or provided for in accordance with plan documents. Except as set forth on Schedule 5.14, as of the date hereof, no director, officer or employee of CU or CU Bank is entitled to receive any payment or any amount under any existing CU Employee Plan, Understanding, agreement, severance plan or other benefit plan as a result of the consummation of any transaction contemplated by this Agreement, the Agreement of Merger or the Bank Merger. 5.15. Brokers and Finders. Except for any agreements among CU, Home and Montgomery, and any fees payable thereunder, neither CU nor CU Bank is a party to or obligated under any agreement with any broker or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for herein or therein will result in any liability to any broker or finder. 5.16. Material Contracts. Except as set forth on Schedule 5.16 hereto (all items listed or required to be listed on Schedule 5.16 being referred to herein as "CU Scheduled Contracts"), neither CU nor CU Bank is a party or otherwise subject to: 27 35 (a) any employment, deferred compensation, bonus or consulting contract that requires payment by CU or CU Bank of $50,000 or more per annum; (b) any advertising, brokerage, licensing, dealership, representative or agency relationship or contract not terminable by CU on 30 days' or less notice and which requires payment by CU or CU Bank of $10,000 or more per annum; (c) any contract or agreement that restricts CU (or would restrict any Affiliate of CU after the Effective Time) from competing in any line of business with any Person or using or employing the services of any Person; (d) any lease of real or personal property providing for annual lease payments by or to CU or CU Bank in excess of $100,000 per annum other than (i) financing leases entered into in the ordinary course of business in which CU or CU Bank is lessor and (ii) leases of real property presently used by CU Bank as banking offices; (e) any mortgage, pledge, conditional sales contract, security agreement, option, or any other similar agreement with respect to any interest of CU or CU Bank (other than as mortgagor or pledgor in the ordinary course of their banking business or as mortgagee, secured party or deed of trust beneficiary in the ordinary course of their business) in personal property having a value of $100,000 or more; (f) any agreement to acquire equipment or any commitment to make capital expenditures of $100,000 or more; (g) other than agreements entered into in the ordinary course of business, including sales of Other Real Estate Owned, any agreement for the sale of any property or assets in which CU or CU Bank has an ownership interest or for the grant of any preferential right to purchase any such property or asset; (h) except for any subordinated debt that may be assumed by CU Bank in connection with the Corporate Bank Merger, any agreement for the borrowing of any money (other than liabilities or interbank borrowings made in the ordinary course of their banking business and reflected in the Financial Statements of CU); (i) any restrictive covenant contained in any deed to or lease of real property owned or leased by CU or CU Bank (as lessee) that materially restricts the use, transferability or value of such property; (j) any guarantee or indemnification which involves the sum of $100,000 or more, other than letters of credit or loan commitments issued in the normal course of business; (k) any supply, maintenance or landscape contracts not terminable by CU or CU Bank without penalty on 30 days or less notice and which provides for payments in excess of $25,000 per annum; 28 36 (l) any agreement which would be terminable other than by CU or CU Bank as a result of the consummation of the transactions contemplated by this Agreement; (m) any contract of participation with any other bank in any loan entered into by CU or CU Bank subsequent to December 31, 1994 in excess of $100,000 or any sales of assets of CU or CU Bank with recourse of any kind to CU or CU Bank except the sale of mortgage loans, servicing rights, repurchase or reverse repurchase agreements, securities or other financial transactions in the ordinary course of business; (n) any other Understanding of any other kind not terminable on 30 days' or less notice which involves future payments or receipts or performances of services or delivery of items requiring payment of $25,000 or more to or by CU or CU Bank other than payments made under or pursuant to loan agreements, participation agreements and other agreements for the extension of credit in the ordinary course of their business; or (o) any Understanding that is otherwise material to the business, financial condition, results of operations or prospects of CU or CU Bank. CU has delivered to Home copies of all Scheduled Contracts, including all amendments and supplements thereto. 5.17. Absence of Material Change. Since December 31, 1994, the businesses of CU and CU Bank have been conducted, only in the ordinary course, in the same manner as theretofore conducted and there has not occurred any event that has had or may reasonably be expected to have a material adverse effect in the business, financial condition or results of operation of CU on a consolidated basis. 5.18. Licenses and Permits. CU and CU Bank have all material licenses and permits that are necessary for the conduct of their respective businesses, and such licenses are in full force and effect, except for any failure to be in full force and effect that would not, individually or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of CU on a consolidated basis. The properties and operations of CU and CU Bank are and have been maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. 5.19. No Material Liabilities; Environmental. (a) Schedule 5.19 sets forth all material liabilities of CU and CU Bank, including liabilities for Hazardous Substances or under any Environmental Law, contingent or otherwise, that are not reflected or reserved against in the CU Financial Statements, except for liabilities incurred or accrued since December 31, 1994 in the ordinary course of business, none of which has had or could reasonably be expected to have had a material adverse effect on the business, financial condition, results of operations or prospects of CU on a consolidated basis. Except as set forth in Schedule 5.19, neither CU nor CU Bank knows of any basis for the asserting against it of any liability, obligation or claim that could reasonably be expected to have a material adverse effect on the business, financial condition, or results of operations of CU on a consolidated basis. (b) Except as set forth on Schedule 5.19(b), to the actual knowledge of the executive officers of CU and CU Bank, (i) there has not been any generation, use, handling, transportation, 29 37 treatment, storage, release, or disposal of any Hazardous Substance in connection with the conduct of business of CU or CU Bank that has resulted or is likely to result in any liability under any Environmental Law in excess of $1,000,000; (ii) there has never been a use of the CU Real Property that has resulted, or is likely to result in any liability under any Environmental Law in excess of $1,000,000; (iii) no underground storage tanks or surface impoundments are on or in the CU Real Property; and (iv) no Hazardous Substances are contained or located on any of the CU Real Property. 5.20. Employee Benefit Plans. (a) Schedule 5.20 sets forth and describes all employee benefit plans and any collective bargaining agreements or labor contracts in which CU or CU Bank participates, or by which they are bound, including, without limitation, (i) any profit sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer consulting, retirement, welfare or incentive plan or agreement whether legally binding or not; (ii) any plan providing for "fringe benefits" to its employees, including but not limited to vacation, sick leave, medical, hospitalization, life insurance and other insurance plans, and related benefits; (iii) any written employment agreement and any other employment agreement not terminable at will; or (iv) any other "employee benefit plan" (within the meaning of Section 3(3) of ERISA) (collectively, the "CU Employee Plans"). Except as set forth in Schedule 5.20, (i) there are no negotiations, demands or proposals that are pending or threatened that concern matters now covered, or that would be covered, by any employment agreements or employee benefit plans other than amendments to plans qualified under Section 401 of the Code that are required by the Tax Reform Act of 1986 and later legislation; (ii) CU is in compliance with the material reporting and disclosure requirements of Part 1 of Subtitle IB of ERISA and the corresponding provisions of the Code to the extent applicable to all such employee benefit plans; (iii) CU has performed all of its obligations under all such employee benefit plans and employment agreements required to be performed heretofore; and (iv) there are no actions, suits or claims (other than routine claims for benefits) pending or, to the best knowledge of CU and CU Bank, threatened against any such employee benefit plans and employment agreements or the assets of such plans, and to the best knowledge of CU, no facts exist which could give rise to any actions, suits or claims (other than routine claims for benefits) against such plans or the assets of such plans. (b) The "employee pension benefit plans" (within the meaning of Section 3(2) of ERISA) described on Schedule 5.20 have been duly authorized by the Board of Directors of CU. Except as set forth in Schedule 5.20, each such plan and associated trust intended to be qualified under Section 401(a) and to be exempt from tax under Section 501(a) of the Code, respectively, has either received a favorable determination letter from the IRS, has applied for such a determination letter or will apply for such a determination letter before the expiration of the remedial amendment period set forth in Section 401(b) of the Code, as the IRS may extend such period, and to the best knowledge of CU and CU Bank, no event has occurred that will or could give rise to disqualification of any such plan which is intended to be qualified under Section 401(a) of the Code or loss of the exemption from tax of any such trust which is intended to be exempt from tax under Section 501(a) of the Code. No event has occurred that will or could subject any such plans to tax under Section 511 of the Code. None of such plans has engaged in a merger or consolidation with any other plan or transferred assets or liabilities from any other plan. No prohibited transaction (within the meaning of Section 409 or 502(i) of ERISA or Section 4975 of the Code) or party-in-interest transaction (within the meaning of Section 406 of ERISA) has occurred with respect to any of such 30 38 plans which could subject CU of CU Bank to an excise tax or penalty. To the best knowledge of CU and CU Bank, no employee of CU or CU Bank has engaged in any transactions which could subject CU or CU Bank to indemnify such person against liability. All costs of plans have been provided for on the basis of consistent methods in accordance with sound actuarial assumptions and practices. No employee benefit plan has incurred any "accumulated funding deficiency" (as defined in Section 302(2) of ERISA), whether or not waived, taking into account contributions made within the period described in Section 412(c)(10) of the Code; nor are there any unfunded amounts under any employee benefit plan which is required to be funded under Part 3 of Subtitle IB of ERISA and Section 412 of the Code); nor has CU or CU Bank failed to make any contributions or pay any amount due and owing as required by law or the terms of any employee benefit plan or employment agreement. Subject to amendments that are required by the Tax Reform Act of 1986 and later legislation, since the last valuation date for each employee pension benefit plan, there has been no amendment or change to such plan that would increase the amount of benefits thereunder. (c) Neither CU nor CU Bank sponsors or participates in, or has sponsored or participated in, any employee benefit pension plan to which Section 4021 of ERISA applies that would create a liability under Title IV of ERISA. (d) Neither CU nor CU Bank sponsors or participates in, or has sponsored or participated in, any employee benefit pension plan that is a "multi-employer plan" (within the meaning of Section 3(37) of ERISA) that would subject such Person to any liability with respect to any such plan. (e) All group health plans of CU or CU Bank (including any plans of Affiliates of CU that must be taken into account under Section 162(i) or (k) of the Code as in effect immediately prior to the Technical and Miscellaneous Revenue Act of 1988 and Section 4980B of the Code) have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code to the extent such requirements are applicable. (f) There have been no acts or omissions by CU or CU Bank that have given rise to or may give rise to fines, penalties, taxes, or related charges under Sections 502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code which could be imposed on CU or CU Bank. (g) Except as described in Section 5.20(j), neither CU or CU Bank maintains any employee benefit plan or employment agreement pursuant to which any benefit plan or other payment will be required to be made by CU or CU Bank or pursuant to which any other benefit will accrue or vest in any director, officer or employee of CU or CU Bank, in either case as a result of the consummation of the transactions contemplated by the Agreement. (h) No "reportable event," as defined in ERISA, has occurred with respect to any of the employee benefit plans. (i) All amendments required to bring each of the employee benefit plans into conformity with all of the provisions of ERISA and the Code and all other applicable laws, rules and regulations have been made, or will be made before the expiration of the remedial amendment period set forth under Section 401(b) of the Code, as such period may be extended by the IRS. 31 39 (j) Schedule 5.20 sets forth the name of each director, officer, employee, agent or representative of CU or CU Bank and every other person entitled to receive any benefit or any payment of any amount under any existing employment agreement, severance plan or other benefit plan or Understanding as a result of the consummation of any transaction contemplated in this Agreement, and with respect to each such person, the nature of such benefit or the amount of such payment, the event triggering the benefit or payment, and the date of, and parties to, such employment agreement, severance or other benefit plan or Understanding. CU has furnished Home with true and correct copies of all documents with respect to the plans and agreements referred to in Schedule 5.20 delivered as of the date of the Agreement, including all amendments and supplements thereto, and all related summary plan descriptions. For each of the employee pension benefit plans of CU and CU Bank referred to in Schedule 5.20 delivered as of the date of the Agreement, CU has furnished Home with true and correct copies of (i) a copy of the Form 5500 which was filed in each of the three most recent plan years, including without limitation, all schedules thereto and all financial statements with attached opinions of independent accountants to the extent required; (ii) the most recent determination letter from the IRS; (iii) the statement of assets and liabilities as of the most recent valuation date; and (iv) the statement of changes in fund balance and in financial position or the statement of changes in net assets available for benefits under each of said plans for the most recently ended plan year. The documents referred to in subdivisions (iii) and (iv) fairly present the financial condition of each of said plans as of and at such dates and the results of operations of each of said plans, all in accordance with generally accepted accounting principles or on the cash method of accounting applied on a consistent basis. 5.21. Corporate Records. The minute books of CU and CU Bank accurately reflect all material actions taken to this date by the respective shareholders, boards of directors and committees of CU and CU Bank and contain true and complete copies of the Articles of Incorporation or Association, Bylaws and other charter documents, and all amendments thereto. 5.22. Offices and ATMs. Schedule 5.22 sets forth the headquarters of CU and CU Bank (identified as such) and each of the offices and automated teller machines ("ATMs") maintained and operated by CU Bank (including, without limitation, representative and loan production offices and operations centers) and the location thereof. Except as set forth on Schedule 5.22, neither CU nor CU Bank maintains any other office or ATM nor conducts business at any other location. Neither CU nor CU Bank has applied for or received permission to open any additional branch nor operate at any other location. 5.23. Operating Losses. Schedule 5.23 sets forth a list of any Operating Loss (as herein defined) which has occurred at CU Bank during the period after September 30, 1995. To the knowledge of CU or CU Bank, no action has been taken or omitted to be taken by any employee of CU Bank that has resulted in the incurrence by CU Bank of an Operating Loss or that might reasonably be expected to result in the incurrence of any individual Operating Loss after September 30, 1995, which, net of any insurance proceeds payable in respect thereof, would exceed $25,000. For purposes of this Agreement "Operating Loss" means any loss resulting from cash shortages, lost or misposted items, disputed clerical and accounting errors, forged checks, payment of checks over stop payment orders, merchant credit card processing, counterfeit money, wire transfers made in error, theft, robberies, defalcations, check kiting, fraudulent use of credit cards or electronic teller machines or other similar acts or occurrences. 5.24. Loan Portfolio. All loans or other extensions of credit, and guaranties, security agreements or other agreements supporting any loans or extensions of credit, and investments of CU or CU Bank are, 32 40 in all material respects, legal, enforceable and authorized under applicable federal and state laws and regulations, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles. Except as previously disclosed in writing to Home, no loans or investments held by CU Bank are, as of September 30, 1995 (i) more than ninety (90) days past due with respect to any scheduled payment of principal or interest; (ii) classified as "loss," "doubtful," "substandard," "special mention," or "criticized" by any federal or state banking regulators; or (iii) on a non-accrual status in accordance with CU Bank's loan review procedures. None of such investments are subject to any restrictions, contractual, statutory or other, that would materially impair the ability of the entity holding such investment to dispose freely of any such investment at any time, except restrictions on the public distribution or transfer of any such investments under the Securities Act and the regulations thereunder or state securities laws and pledges or security interests given in connection with government deposits. Except as previously disclosed in writing to Home, CU Bank has no loans, leases or other extensions of credit outstanding, or commitments to make any loans, leases or other extensions of credit to any Affiliates of CU Bank which are not on substantially the same terms (including interest rates, repayment terms and collateral) as would be available for comparable transactions with persons of similar creditworthiness who are not Affiliates of CU Bank. In the case of each Secured Loan, to the best knowledge of CU Bank, the security interest has been perfected and, in the case of each Covered Loan, the guaranty or similar obligation has been executed and delivered to CU Bank and is still in full force and effect. 5.25. Power of Attorney. Neither CU nor CU Bank has granted any Person a power of attorney or similar authorization that is presently in effect or outstanding. 5.26. Disclosure Documents and Applications. None of the information supplied or to be supplied by or on behalf of CU or CU Bank ("CU Supplied Information") for inclusion in the documents to be filed with the SEC, FRB, the OCC, or any other governmental entity in connection with the transactions contemplated in this Agreement will, at the respective times such documents are filed or become effective, contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.27. Accuracy and Currentness of Information Furnished. The representations and warranties made by CU or CU Bank hereby or in the schedules hereto contain no statements of fact which are untrue or misleading, or omit to state any material fact which is necessary under the circumstances to prevent the statements contained herein or in such schedules from being misleading. 5.28. Loan Servicing Portfolio. Except as set forth on Schedule 5.28, CU Bank services no loans owned in whole or in part by other parties. 5.29. Certain Interests. Schedule 5.29 sets forth a description of each instance in which an executive officer or director of CU or CU Bank (a) has any material interest in any property, real or personal, tangible or intangible, used by or in connection with the business of CU or CU Bank; (b) is indebted to CU or CU Bank except for normal business expense advances; or (c) is a creditor (other than as a deposit holder of CU Bank) of CU or CU Bank except for amounts due under normal salary and related benefits or reimbursement of ordinary business expenses. Except as set forth in Schedule 5.29, all such arrangements are arm's length transactions pursuant to normal commercial terms and conditions. 33 41 5.30. Investment Securities. Except as set forth on Schedule 5.30, all investment securities held by CU or CU Bank are legal investments under applicable law and regulations. ARTICLE VI COVENANTS OF HOME AND HOME BANK PENDING EFFECTIVE TIME OF THE MERGERS Home and Home Bank covenant and agree with CU and CU Bank as follows: 6.1. Limitation on Home's and Home Bank's Conduct Prior to Effective Time. Between the date hereof and the Effective Time, except as contemplated by this Agreement, Home and Home Bank agree to conduct their respective businesses only in the normal and customary manner and in accordance with sound banking practices, and Home and Home Bank shall not, without the prior written consent of CU (which consent shall not be unreasonably withheld and which consent (except with respect to subparagraph (h) of this Section 6.1) shall be deemed granted if within five (5) business days of CU's receipt of written notice of a request for prior written consent, written notice of objection is not received by Home): (a) issue any Home Stock (except pursuant to the exercise of Home Options outstanding as of the date hereof), Home preferred stock, Home Bank Stock, Home Bank preferred stock, any other securities (including long term debt) of Home or Home Bank or any rights, options or securities to acquire any Home Stock, Home preferred stock, Home Bank Stock, Home Bank preferred stock or any other securities (including long term debt) of Home or Home Bank; (b) except in accordance with Home's customary and past practice of paying dividends in an amount equal to $.085 per quarter, declare, set aside or pay any dividend or make any other distribution upon, or purchase or redeem any shares of, Home Stock; (c) except as may be required to effect the transactions contemplated herein, amend its respective Articles of Incorporation or its Bylaws; (d) grant any general or uniform increase in the rate of pay of employees or employee benefits; (e) grant any material increase in salary, incentive compensation or employee benefits or pay any bonus to any Person except for payments in the ordinary course of business consistent with past practices or pursuant to the Proposed Retention Agreements or any pre-existing contract, arrangement or bonus plan; (f) make any capital expenditure in excess of $100,000, except for ordinary repairs, renewals and replacements; (g) compromise or otherwise settle or adjust any assertion or claim of a deficiency in taxes (or interest thereon or penalties in connection therewith), extend the statute of limitations with 34 42 any tax authority or file any pleading in court in any tax litigation or any appeal from an asserted deficiency; (h) grant or commit to grant any new extension of credit or amend the terms of any such credit outstanding on the date hereof to any executive officer, director or holder of ten percent (10%) or more of the outstanding Home Stock, or to any corporation, partnership, trust or other entity controlled by any such person, except consistent with practices and policies in existence as of the date of this Agreement; (i) close or open any offices at which business is conducted; (j) adopt or amend any Home Employee Plan or other benefit plan or arrangement of any such type except for such amendments as are required by law or do not materially increase the costs or benefits of such plan or arrangement, except for the Proposed Retention Agreements; (k) change any of Home's or Home Bank's policies and practices with respect to liquidity management and cash flow planning, lending, personnel practices, accounting or any other material aspect of Home's business or operations on a consolidated basis, except such changes as may be required in the opinion of Home's or Home Bank's management to respond to economic or market conditions or as may be required by the rules of the American Institute of Certified Public Accountants or Financial Accounting Standards Board or by applicable governmental authorities; (l) grant any Person a power of attorney or similar authority; (m) make any material investment by purchase of stock or securities, contributions to capital, property transfers or otherwise in any other Person, except for investments made in the ordinary course of business consistent with past practice; (n) amend, modify or terminate, except in accordance with its terms, any Home Scheduled Contract or enter into any agreement or contract that would be a Home Scheduled Contract under Section 4.16; (o) create or incur or suffer to exist any mortgage, lien, pledge, security interest, charge, encumbrance or restraint of any kind against or in respect of any property or right of Home and/or Home Bank; (p) sell, lease or otherwise dispose of any of its assets which are material, individually or in the aggregate, to Home or Home Bank, except in the ordinary course of business consistent with past practice; (q) make any extraordinary payment to any Person, other than with respect to the Proposed Retention Agreements; or (r) except as required by law, take or cause to be taken any action which would prevent the transactions contemplated hereby from qualifying as tax free reorganizations under Section 368 of the Code. 35 43 6.2. No Solicitation, etc. (a) Home and Home Bank shall not, and shall cause each of their respective officers, directors, employees, agents, legal and financial advisors and Affiliates not to, directly or indirectly, solicit, initiate or, except as contemplated by Section 6.2(b) hereof, encourage, entertain or enter into any agreement or agreement in principle, or announce any intention to do any of the foregoing, with respect to any Alternative Transaction, other than the Alternative Transaction contemplated by this Agreement. (b) Home or Home Bank shall not, and shall cause each of its officers, directors, employees, agents, legal and financial advisors and Affiliates not to, directly or indirectly, participate in any negotiations or discussions regarding, or furnish any information with respect to, or otherwise cooperate in any way in connection with, or assist or participate in, facilitate or encourage, any effort or attempt to effect, any Alternative Transaction with or involving any Person other than CU or CU Bank, unless Home or Home Bank shall have received an unsolicited written offer from a Person other than CU or CU Bank to effect an Alternative Transaction and the Board of Directors of Home determines, based on an opinion of counsel, that in the exercise of the fiduciary obligations of the Board of Directors such information should be provided to or such discussions or negotiations undertaken with the Person submitting such unsolicited written offer. (c) Home will promptly communicate to CU the terms of any proposal which it may receive in respect of any Alternative Transaction and will keep CU informed as to the status of any actions, including negotiations or discussions, taken pursuant to subsection (b) of this Section 6.2. 6.3. Affirmative Conduct of Home and Home Bank Prior to Effective Time. Between the date hereof and the Effective Time, Home and Home Bank shall: (a) use and devote their respective best efforts consistent with this Agreement to maintain and preserve intact their respective present business organizations and to maintain and preserve their respective relationships and goodwill with account holders, borrowers, employees and others having business relationships with Home or Home Bank; (b) use their respective best efforts to keep in full force and effect all of the existing material permits and licenses of Home or Home Bank; (c) use their respective best efforts to maintain insurance coverage at least equal to that now in effect on all properties for which they are responsible and on their respective business operations; (d) perform their respective material contractual obligations and not become in material default on any thereof; (e) duly and timely file all reports and returns required to be filed with any federal, state or local governmental authority, unless any extensions have been duly granted by such authority; (f) duly observe and conform to all lawful requirements applicable to their respective businesses that are material to the business of Home on a consolidated basis; 36 44 (g) maintain their respective assets and properties in good condition and repair, normal wear and tear excepted; (h) promptly advise CU in writing of any event or any other transaction within Home's or Home Bank's knowledge whereby any Person or Related Group of Persons acquires, directly or indirectly, record or beneficial ownership or control (as defined in Rule 13d-3 promulgated by the SEC under the Exchange Act) of five percent (5%) or more of the outstanding Home Stock prior to the record date fixed for the Home Shareholders' Meeting or any adjourned meeting thereof to approve this Agreement and the transactions contemplated herein; (i) promptly notify CU regarding receipt from any tax authority of any notification of the commencement of an audit, any request to extend the statute of limitations, any statutory notice of deficiency, any revenue agent's report, any notice of proposed assessment, or any other similar notification of potential adjustments to the tax liabilities of Home and/or Home Bank, or any actual or threatened collection enforcement activity by any tax authority with respect to tax liabilities of Home and/or Home Bank; (j) furnish to CU, as soon as practicable, and in any event within fifteen days after it is prepared, (i) a copy of any report submitted to the board of directors of Home or Home Bank, provided, however, that Home need not furnish to CU communications of Home's legal counsel regarding Home's rights and obligations under this Agreement or books, records and documents covered by the attorney-client privilege, or which are attorneys' work product, (ii) copies of all reports, filings, certificates, correspondence and other documents filed with or received from the SEC, FRB, FDIC, Superintendent or any other governmental or regulatory entity, and (iii) monthly unaudited consolidated balance sheets and consolidated statements of operations of Home; (k) not later than the 25th day of each calendar month, amend or supplement the Schedules prepared and delivered pursuant to Article IV (the "Home Schedules") to ensure that the information set forth in such Home Schedules accurately reflects the then-current status of Home and Home Bank. Home shall further amend or supplement the Home Schedules as of the Closing Date if necessary to reflect any additional information that needs to be included in the Home Schedules; (l) use their respective best efforts to obtain any third party consent with respect to any contract, agreement, lease, license, amendment, permit or release that is material to the business of Home on a consolidated basis or that is contemplated or required in connection with this Agreement, the Merger or Bank Merger; (m) promptly notify CU of the filing of any material litigation, or the filing of any governmental or regulatory action, including any investigation or notice of investigation, or similar proceeding or notice of any claim against Home or Home Bank or any of their assets; and (n) prepare and timely file all tax returns and amendments thereto required to be filed by them on or before the Closing Date. CU shall have a reasonable opportunity to review all such returns and amendments thereto on a pre-filing basis. Home and Home Bank shall discharge all taxes, assessments and governmental charges in the nature of taxes upon or against it or any of its 37 45 properties or assets, and all tax liabilities at any time existing, before the same shall become delinquent and before penalties accrue thereon, except to the extent and as long as: (i) the same are being contested in good faith and by appropriate proceedings pursued diligently and in such manner not to cause any material adverse effect upon the condition (financial or otherwise) or operations of Home or Home Bank; and (ii) Home and Home Bank shall have set aside on their books appropriate reserves in the amount of the demanded principal imposition together with interest and penalties relating thereto, if any. 6.4. Access to Information. Home and Home Bank will afford CU and its representatives, counsel, accountants, agents and employees access during normal business hours to all of their respective businesses, operations, properties, books, files and records and will do everything reasonably necessary to enable CU and its representatives, counsel, accountants, agents and employees to make a complete examination of the financial statements, businesses, assets and properties of Home and Home Bank and the condition thereof and to update such examination at such intervals as CU shall deem appropriate. Such examination shall be conducted in cooperation with the officers of Home and Home Bank and in such a manner as to minimize any disruption of, or interference with, the normal business operations of Home and Home Bank. Upon the request of CU, Home will request that Arthur Andersen provide reasonable access to auditors' work papers with respect to the businesses and properties of Home and Home Bank, including tax accrual work papers prepared for Home and/or Home Bank during the preceding sixty (60) months, other than (a) books, records and documents covered by the attorney-client privilege, or that are attorneys' work product, and (b) books, records and documents that Home or Home Bank is legally obligated to keep confidential. No examination or review conducted under this section shall constitute a waiver or relinquishment on the part of CU of the right to rely upon the representations and warranties made by Home and Home Bank herein; provided, that CU shall disclose in writing to Home any fact or circumstance it may discover which CU believes renders any representation or warranty made by Home or Home Bank hereunder incorrect in any respect. CU covenants and agrees that it and its representatives, counsel, accountants, agents and employees will hold in strict confidence all documents and information concerning Home and Home Bank so obtained (except to the extent that such documents or information are a matter of public record or require disclosure in the Proxy Statement or any of the public information of any applications required to be filed with any governmental or regulatory agency to obtain the approvals and consents required to effect the transactions contemplated hereby), and if the transactions contemplated herein are not consummated, such confidence shall be maintained and all such documents shall be returned to Home and Home Bank. 6.5. Filings. Home and Home Bank agree that through the Effective Time, each of their respective reports, registrations, statements and other filings required to be filed with any applicable governmental or regulatory authority will comply in all material respects with all the applicable statutes, rules and regulations enforced or promulgated by the governmental or regulatory body with which it will be filed and none will contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any such report, registration, statement or other filing that is intended to present the financial position of the entity or entities to which it relates will fairly present the financial position of such entities or entity and will be prepared in accordance with generally accepted accounting principles consistently applied during the periods involved. 6.6. Notices; Reports. Home and Home Bank will promptly notify CU of any event of which Home or Home Bank obtains knowledge which has had or may reasonably be expected to have a materially adverse effect on the financial condition, operations, business or prospects of Home on a consolidated basis 38 46 or in the event that Home or Home Bank determines that either is unable to fulfill any of the conditions to the performance of CU's obligations hereunder, as set forth in Articles IX or XI herein, and Home and Home Bank will furnish CU (i) as soon as available, and in any event within thirty (30) days after it is prepared, any report by Home or Home Bank for submission to the Board of Directors of Home or Home Bank, (ii) as soon as available, all proxy statements, information statements, financial statements, reports, letters and communications sent by Home to its shareholders or other security holders, and all reports filed by Home or Home Bank with the SEC, FRB or FDIC, and (iii) such other existing reports as CU may reasonably request relating to Home or Home Bank. 6.7. Home Shareholders' Meeting. Promptly after the execution of this Agreement, Home will take all action necessary in accordance with applicable law and its Articles of Incorporation and Bylaws to convene a meeting of its shareholders to consider and vote upon this Agreement and the transactions contemplated hereby. The Board of Directors of Home shall, subject to its fiduciary duties, recommend that its shareholders approve this Agreement and the transactions contemplated hereby, and the Board of Directors of Home shall, subject to its fiduciary duties, use its best efforts to obtain the affirmative vote of the holders of the largest possible percentage of the outstanding Home Stock to approve this Agreement and the transactions contemplated hereby. 6.8. Bank Merger. Home and Home Bank shall (i) take all necessary corporate and other action, to effect the Bank Merger; (ii) execute, deliver and, where appropriate, file any and all documents necessary or desirable to effect the Bank Merger; and (iii) take and cause Home Bank to take any other action to permit the consummation of any transactions contemplated in connection with the Bank Merger. Neither Home nor Home Bank shall take any action that would prevent the performance of the Bank Merger. 6.9. Filings; Applications. Home and Home Bank will cooperate with CU in the preparation of the Proxy Statement and S-4 and the statements or applications to be filed to obtain the necessary regulatory approvals to consummate the transactions contemplated by this Agreement. Home and Home Bank covenant and agree that all information furnished by Home or Home Bank for inclusion in the Proxy Statement and S-4 and in all applications or statements filed with the appropriate regulatory authorities for approval of, or consent to, the Merger and the Bank Merger will comply in all material respects with the provisions of applicable law, and will not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 6.10. Certain Loans and Other Extensions of Credit. Home Bank will promptly inform CU of the amounts and categories of any loans, leases or other extensions of credit that have been classified by any bank regulatory authority or by any unit of Home or Home Bank as "Criticized," "Specially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification ("Classified Credits"). Home Bank will furnish CU, as soon as practicable, and in any event within 15 days after the end of each calendar month, schedules, including the following: (a) Classified Credits (including with respect to each credit its classification category and the originating unit); (b) nonaccrual credits (including the originating unit); (c) accrual exception credits that are delinquent 90 or more days and have not been placed on nonaccrual status (including its originating unit); (d) credits delinquent as to payment of principal or interest (including its originating unit), including an aging into 30-89 and 90+ day categories; (e) participating loans and leases, stating, with respect to each, whether it is purchased or sold and the originating unit; (f) loans or leases (including any commitments) by Home or Home Bank to any Home or Home Bank director, officer at or above the senior vice president level, or shareholder holding ten percent (10%) or more of the capital stock 39 47 of Home, including with respect to each such loan or lease the identity and, to the knowledge of Home, the relation of the borrower to Home or Home Bank, and the outstanding and undrawn amounts; (g) letters of credit (including the originating unit); (h) loans or leases wholly or partially charged off during the previous month (including with respect to each loan or lease, the originating amount, the write-off amount and its originating unit); and (i) other real estate or assets acquired in satisfaction of debt. 6.11. Termination of Home Stock Option Plan. Home will take all steps necessary to cause the Home Stock Option Plan to be terminated as of or prior to the Effective Time, and will cause any options outstanding thereunder to be either exercised (accompanied with the payment provided for in such exercised option) on or before the Effective Time, or for those options not so exercised, to obtain at the earliest practicable date and prior to the Effective Time a revised stock option contract with each holder of such unexercised options, incorporating such terms as may be necessary in order to make such option contracts consistent with the New Stock Option Plan. 6.12. Environmental Audit. Home shall deliver to CU a Phase I Environmental Assessment Report with respect to the property listed on Schedule 4.9 (the "Phase I Reports"), in a form reasonably satisfactory to CU. The Parties agree to share equally any and all costs incurred in obtaining the Phase 1 Reports requested after the date hereof in connection with this Section 6.12. Based on the Parties' review of the Phase I Reports, the Parties shall determine, in good faith based on a reasonable assessment of the results of the Phase I Reports, whether to obtain Phase II Site Assessments ("Phase II Assessments") for any Home Real Property. The Parties shall mutually agree on the environmental consultant to prepare any such Phase II Assessment and shall share equally any and all costs incurred in obtaining such Phase II Assessments. If the amount of remediation expenses related to the Home Real Property, as set forth in the Phase II Assessments, is estimated to exceed $1,000,000, then Home shall have an additional ninety (90) days from the date of receipt of such Phase II Assessments within which to cure the excessive remediation costs and to reduce the estimated costs of remediation to an amount below $1,000,000. 6.13. D&O Coverage. Home shall obtain (i) coverage for a period of 36 months following the Effective Time for the directors and officers of Home and Home Bank under a directors' and officers' liability insurance policy which is no less protective in terms of coverage or limitations then now possessed by Home covering acts or omissions occurring prior to the Effective Time and (ii) coverage for a period of at least 36 months following the Effective Time under a bankers' blanket bond which is no less protective in terms of coverage or limitations then now possessed by Home which covers losses incurred prior to the Effective Time and actions related to this Agreement. ARTICLE VII COVENANTS OF CU AND CU BANK PENDING EFFECTIVE TIME OF THE MERGERS CU and CU Bank covenant and agree with Home and Home Bank as follows: 7.1. Limitation on CU's and CU Bank's Conduct Prior to Effective Time. Between the date hereof and the Effective Time, except as contemplated by this Agreement, CU and CU Bank agree to conduct their respective businesses only in the normal and customary manner and in accordance with sound banking 40 48 practices, and CU and CU Bank shall not, without prior written consent of Home (which consent shall not be unreasonably withheld and which consent (except with respect to subparagraph (h) of this Section 7.1) shall be deemed granted if within five (5) business days of Home's receipt of written notice of a request for prior written consent, written notice of objection is not received by CU): (a) except in connection with the Corporate Bank Merger, issue any CU Stock (except pursuant to the exercise of CU Options outstanding as of the date hereof), CU preferred stock, CU Bank Stock, CU Bank preferred stock, any other securities (including long term debt) of CU or CU Bank or any rights, options or securities to acquire any CU Stock, CU preferred stock, CU Bank Stock, CU Bank preferred stock or any other securities (including long term debt) of CU or CU Bank; (b) except in accordance with CU's customary and past practice of paying dividends in an amount equal to $.02 per quarter, declare, set aside or pay any dividend or make any other distribution upon, or purchase or redeem any shares of, CU Stock; (c) except as may be required to effect the transactions contemplated herein, amend its Articles of Incorporation or Association, as the case may be, or its Bylaws; provided, however, that CU Bank shall be permitted to amend and restate its Articles of Association in the form previously submitted to Home's counsel; (d) grant any general or uniform increase in the rate of pay of employees or employee benefits; (e) grant any material increase in salary, incentive compensation or employee benefits or pay any bonus to any Person except for payments in the ordinary course of business consistent with past practices or pursuant to any pre-existing contract, arrangement or bonus plan; (f) make any capital expenditure in excess of $100,000, except for ordinary repairs, renewals and replacements; (g) compromise or otherwise settle or adjust any assertion or claim of a deficiency in taxes (or interest thereon or penalties in connection therewith), extend the statute of limitations with any tax authority or file any pleading in court in any tax litigation or any appeal from an asserted deficiency; (h) grant or commit to grant any new extension of credit or amend the terms of any such credit outstanding on the date hereof to any executive officer, director or holder of ten percent (10%) or more of the outstanding CU Stock, or to any corporation, partnership, trust or other entity controlled by any such person, except consistent with practices and policies in existence as of the date of this Agreement; (i) close or open any offices at which business is conducted except in connection with Corporate Bank Merger; 41 49 (j) adopt or amend any CU Employee Plan or other benefit plan or arrangement of any such type except for such amendments as are required by law or do not materially increase the costs or benefits of such plan or arrangement; (k) change any of CU's or CU Bank's policies and practices with respect to liquidity management and cash flow planning, lending, personnel practices, accounting or any other material aspect of CU's business or operations on a consolidated basis, except such changes as may be required in the opinion of CU's or CU Bank's management to respond to economic or market conditions or as may be required by the rules of the American Institute of Certified Public Accountants or Financial Accounting Standards Board or by applicable governmental authorities; (l) grant any Person a power of attorney or similar authority; (m) make any material investment by purchase of stock or securities, contributions to capital, property transfers or otherwise in any other Person, except for investments made in the ordinary course of business consistent with past practice; (n) amend, modify or terminate, except in accordance with its terms, any CU Scheduled Contract or enter into any agreement or contract that would be a CU Scheduled Contract under Section 5.16; (o) create or incur or suffer to exist any mortgage, lien, pledge, security interest, charge, encumbrance or restraint of any kind against or in respect of any property or right of CU and/or CU Bank; (p) sell, lease or otherwise dispose of any of its assets which are material, individually or in the aggregate, to CU or CU Bank, except in the ordinary course of business consistent with past practice; (q) make any extraordinary payment to any Person; or (r) except as required by law, take or cause to be taken any action which would prevent the transactions contemplated hereby form qualifying as tax free reorganizations under Section 368 of the Code. 7.2. No Solicitation, etc. (a) CU and CU Bank shall not, and shall cause each of their respective officers, directors, employees, agents, legal and financial advisors and Affiliates not to, directly or indirectly, solicit, initiate or, except as contemplated by Section 7.2(b) hereof, encourage, entertain or enter into any agreement or agreement in principle, or announce any intention to do any of the foregoing, with respect to any Alternative Transaction, other than the Alternative Transaction contemplated by this Agreement. (b) CU or CU Bank shall not, and shall cause each of its officers, directors, employees, agents, legal and financial advisors and Affiliates not to, directly or indirectly, participate in any negotiations or discussions regarding, or furnish any information with respect to, or otherwise 42 50 cooperate in any way in connection with, or assist or participate in, facilitate or encourage, any effort or attempt to effect any Alternative Transaction with or involving any Person other than Home or Home Bank, unless CU or CU Bank shall have received an unsolicited written offer from a Person other than Home or Home Bank to effect an Alternative Transaction and the Board of Directors of CU determines, based on an opinion of counsel, that in the exercise of the fiduciary obligations of the Board of Directors such information should be provided to or such discussions or negotiations undertaken with the Person submitting such unsolicited written offer. (c) CU will promptly communicate to Home the terms of any proposal which it may receive in respect of any Alternative Transaction and will keep Home informed as to the status of any actions, including negotiations or discussions, taken pursuant to subsection (b) of this Section 7.2. 7.3. Affirmative Conduct of CU and CU Bank Prior to Effective Time. Between the date hereof and the Effective Time, CU and CU Bank shall: (a) use and devote their respective best efforts consistent with this Agreement to maintain and preserve intact their respective present business organizations and to maintain and preserve their respective relationships and goodwill with account holders, borrowers, employees and others having business relationships with CU or CU Bank; (b) use their respective best efforts to keep in full force and effect all of the existing material permits and licenses of CU or CU Bank; (c) use their respective best efforts to maintain insurance coverage at least equal to that now in effect on all properties for which they are responsible and on their respective business operations; (d) perform their respective material contractual obligations and not become in material default on any thereof; (e) duly and timely file all reports and returns required to be filed with any federal, state or local governmental authority, unless any extensions have been duly granted by such authority; (f) duly observe and conform to all lawful requirements applicable to their respective businesses that are material to the business of CU on a consolidated basis; (g) maintain their respective assets and properties in good condition and repair, normal wear and tear excepted; (h) promptly advise Home in writing of any event or any other transaction within CU's or CU Bank's knowledge whereby any Person or Related Group of Persons acquires, directly or indirectly, record or beneficial ownership or control (as defined in Rule 13d-3 promulgated by the SEC under the Exchange Act) of five percent (5%) or more of the outstanding CU Stock prior to the record date fixed for the CU Shareholders' Meeting or any adjourned meeting thereof to approve this Agreement and the transactions contemplated herein; 43 51 (i) promptly notify Home regarding receipt from any tax authority of any notification of the commencement of an audit, any request to extend the statute of limitations, any statutory notice of deficiency, any revenue agent's report, any notice of proposed assessment, or any other similar notification of potential adjustments to the tax liabilities of CU and/or CU Bank, or any actual or threatened collection enforcement activity by any tax authority with respect to tax liabilities of CU and/or CU Bank; (j) furnish to Home, as soon as practicable, and in any event within fifteen days after it is prepared (i) a copy of any report submitted to the board of directors of CU or CU Bank, provided, however, that CU need not furnish to Home communications of CU's legal counsel regarding CU's rights and obligations under this Agreement or books, records and documents covered by the attorney-client privilege, or which are attorneys' work product, (ii) copies of all reports, filings, certificates, correspondence and other documents filed with or received from the SEC, FRB, FDIC, OCC or any other governmental or regulatory entity, and (iii) monthly unaudited consolidated balance sheets and consolidated statements of operations of CU; (k) not later than the 25th day of each calendar month, amend or supplement the Schedules prepared and delivered pursuant to Article IV (the "CU Schedules") to ensure that the information set forth in such CU Schedules accurately reflects the then-current status of CU and CU Bank; provided, however, that any such amendment or supplement required solely as a result of the Corporate Bank Merger shall be due not later than the 60th day after the consummation of the Corporate Bank Merger. CU shall further amend or supplement the CU Schedules as of the Closing Date if necessary to reflect any additional information that needs to be included in the CU Schedules; (l) use their respective best efforts to obtain any third party consent with respect to any contract, agreement, lease, license, amendment, permit or release that is material to the business of CU on a consolidated basis or that is contemplated or required in connection with the Merger or Bank Merger; (m) promptly notify Home of the filing of any material litigation, or the filing of any governmental or regulatory action, including any investigation or notice of investigation, or similar proceeding, or notice of any claim against CU or CU Bank or any of their assets; and (n) prepare and timely file all tax returns and amendments thereto required to be filed by them on or before the Closing Date. Home shall have a reasonable opportunity to review all such returns and amendments thereto on a pre-filing basis. CU and CU Bank shall discharge all taxes, assessments and governmental charges in the nature of taxes upon or against it or any of its properties or assets, and all tax liabilities at any time existing, before the same shall become delinquent and before penalties accrue thereon, except to the extent and as long as: (i) the same are being contested in good faith and by appropriate proceedings pursued diligently and in such manner not to cause any material adverse effect upon the condition (financial or otherwise) or operations of CU or CU Bank; and (ii) CU and CU Bank shall have set aside on their books appropriate reserves in the amount of the demanded principal imposition together with interest and penalties relating thereto, if any. 44 52 7.4. Access to Information. CU and CU Bank will afford Home and its representatives, counsel, accountants, agents and employees access during normal business hours to all of their respective businesses, operations, properties, books, files and records and will do everything reasonably necessary to enable Home and its representatives, counsel, accountants, agents and employees to make a complete examination of the financial statements, businesses, assets and properties of CU and CU Bank and the condition thereof and to update such examination at such intervals as Home shall deem appropriate. Upon the consummation of the Corporate Bank Merger, CU and CU Bank will afford Home and its representatives everything reasonably necessary to evaluate and make a complete examination of the Corporate Bank Merger. Such examination shall be conducted in cooperation with the officers of CU and CU Bank and in such a manner as to minimize any disruption of, or interference with, the normal business operations of CU and CU Bank. Upon the request of Home, CU will request that Arthur Andersen provide reasonable access to auditors' work papers with respect to the businesses and properties of CU and CU Bank, including tax accrual work papers prepared for CU and/or CU Bank during the preceding sixty (60) months, other than (a) books, records and documents covered by the attorney-client privilege, or that are attorneys' work product, and (b) books, records and documents that CU or CU Bank is legally obligated to keep confidential. No examination or review conducted under this section shall constitute a waiver or relinquishment on the part of Home of the right to rely upon the representations and warranties made by CU and CU Bank herein; provided, that Home shall disclose in writing to CU any fact or circumstance it may discover which Home believes renders any representation or warranty made by CU or CU Bank hereunder incorrect in any respect. Home covenants and agrees that it and its representatives, counsel, accountants, agents and employees will hold in strict confidence all documents and information concerning CU and CU Bank so obtained (except to the extent that such documents or information are a matter of public record or require disclosure in the Proxy Statement or any of the public information of any applications required to be filed with any governmental or regulatory agency to obtain the approvals and consents required to effect the transactions contemplated hereby), and if the transactions contemplated herein are not consummated, such confidence shall be maintained and all such documents shall be returned to CU and CU Bank. 7.5. Filings. CU and CU Bank agree that through the Effective Time, each of their respective reports, registrations, statements and other filings required to be filed with any applicable governmental or regulatory authority will comply in all material respects with all the applicable statutes, rules and regulations enforced or promulgated by the governmental or regulatory body with which it will be filed and none will contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any such report, registration, statement or other filing that is intended to present the financial position of the entity or entities to which it relates will fairly present the financial position of such entities or entity and will be prepared in accordance with generally accepted accounting principles consistently applied during the periods involved. 7.6. Notices; Reports. CU and CU Bank will promptly notify Home of any event of which CU or CU Bank obtains knowledge which has had or may reasonably be expected to have a materially adverse effect on the financial condition, operations, business or prospects of CU on a consolidated basis or in the event that CU or CU Bank determines that either is unable to fulfill any of the conditions to the performance of Home's obligations hereunder, as set forth in Articles IX or XI herein, and CU and CU Bank will furnish Home (i) as soon as available, and in any event within thirty (30) days after it is prepared, any report by CU or CU Bank for submission to the Board of Directors of CU or CU Bank, (ii) as soon as available, all proxy statements, information statements, financial statements, reports, letters and communications sent by CU to 45 53 its shareholders or other security holders, and all reports filed by CU or CU Bank with the SEC, FRB or FDIC, and (iii) such other existing reports as Home may reasonably request relating to CU or CU Bank. 7.7. CU Shareholders' Meeting. Promptly after the execution of this Agreement, CU will take all action necessary in accordance with applicable law and its Articles of Incorporation and Bylaws to convene a meeting of its shareholders to consider and vote upon this Agreement and the transactions contemplated hereby. The Board of Directors of CU shall, subject to its fiduciary duties, recommend that its shareholders approve this Agreement and the transactions contemplated hereby, and the Board of Directors of CU shall, subject to its fiduciary duties, use its best efforts to obtain the affirmative vote of the holders of the largest possible percentage of the outstanding CU Stock to approve this Agreement and the transactions contemplated hereby. 7.8. Bank Merger. CU and CU Bank shall (i) take all necessary corporate and other action to effect the Bank Merger; (ii) execute, deliver and, where appropriate, file any and all documents necessary or desirable to permit the Bank Merger; and (iii) take and cause CU Bank to take any other action to permit the consummation of the Bank Merger. Neither CU nor CU Bank shall take any action that would prevent performance of the Bank Merger. 7.9. Filings; Applications. CU and CU Bank will prepare promptly and file the Proxy Statement, the S-4 and any statements or applications necessary to obtain the regulatory approvals required to consummate the transactions contemplated by this Agreement. CU and CU Bank covenant and agree that all information included by CU or CU Bank in the Proxy Statement and S-4 and in all applications or statements filed with the appropriate regulatory authorities for approval of, or consent to, the Merger and the Bank Merger, and other transactions contemplated by this Agreement, will comply in all material respects with the provisions of applicable law, and will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 7.10. Certain Loans and Other Extensions of Credit. CU Bank will promptly inform Home of the amounts and categories of any loans, leases or other extensions of credit that have been classified by any bank regulatory authority or by any unit of CU or CU Bank as "Criticized," "Specially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification ("Classified Credits"). CU Bank will furnish Home, as soon as practicable, and in any event within 15 days after the end of each calendar month, schedules including the following: (a) Classified Credits (including with respect to each credit its classification category and the originating unit); (b) nonaccrual credits (including the originating unit); (c) accrual exception credits that are delinquent 90 or more days and have not been placed on nonaccrual status (including its originating unit); (d) credits delinquent as to payment of principal or interest (including its originating unit), including an aging into 30-89, and 90+ day categories; (e) participating loans and leases, stating, with respect to each, whether it is purchased or sold and the originating unit; (f) loans or leases (including any commitments) by CU or CU Bank to any CU or CU Bank director, officer at or above the senior vice president level, or shareholder holding ten percent (10%) or more of the capital stock of CU, including with respect to each such loan or lease the identity and, to the knowledge of CU, the relation of the borrower to CU or CU Bank, and the outstanding and undrawn amounts; (g) letters of credit (including the originating unit); (h) loans or leases wholly or partially charged off during the previous month (including with respect to each loan or lease, the originating amount, the write-off amount and its originating unit); and (i) other real estate or assets acquired in satisfaction of debt. 46 54 7.11. CU Stock Option Plan. CU will take all steps necessary to adopt the New Stock Option Plan and take any other actions necessary or appropriate as of or prior to the Effective Time, in order to effect the transactions contemplated by Section 2.9. CU shall recommend that its shareholders approve the New Stock Option Plan and the Board of Directors of CU shall, subject to its fiduciary duties, use its best efforts to obtain the affirmative vote of the outstanding CU Stock to approve such New Stock Option Plan. 7.12. Dividends. Subject to applicable law and regulations and the good faith determination of the Surviving Company Board of Directors, it is the intention of CU that the Surviving Company shall pay quarterly dividends to its shareholders for each of the eight quarters following the Effective Time in an amount per share which is no less than $.06 per share. 7.13. Articles of Incorporation. CU will take all steps necessary to amend its Articles of Incorporation, including without limitation obtaining shareholder approval at the CU Shareholders' meeting, to effect any name change of the Surviving Company agreed upon by the Parties in accordance with Section 2.6. ARTICLE VIII GENERAL COVENANTS The parties hereto hereby mutually covenant and agree with each other as follows: 8.1. Best Efforts. Subject to the terms and conditions of this Agreement, each party will use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the transactions contemplated by this Agreement as promptly as practical. 8.2. Public Announcements. CU and Home will consult with each other before any Party hereto issues any press release or makes any public statement with respect to this Agreement or the transactions contemplated hereby, and except as may be required by applicable law or any listing agreement, neither CU nor Home will issue any such press release or make any such public statement prior to such consultation. 8.3. S-4 and the Proxy Statement. Home and CU shall use their respective best efforts to have the S-4 declared effective under the Securities Act as promptly as practicable. CU shall take any action required to be taken under any applicable state securities laws in connection with the issuance of CU Stock in the Merger, and Home shall furnish all information concerning Home as may be reasonably requested in connection with any such action. Each Party shall immediately notify the other Party in writing in the event that such Party becomes aware that the S-4 or Proxy Statement at any time contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or that the S-4 or the Proxy Statement otherwise is required to be amended or supplemented, which notice shall specify, in reasonable detail, the circumstances thereof. 8.4. Merger of Home Bank and CU Bank. The parties agree to use their reasonable efforts between the date of this Agreement and the Closing to take all actions necessary or desirable, including the filing of any regulatory applications, so that the Bank Merger will occur substantially concurrently with, or 47 55 as soon as practicable after, the Effective Time. A copy of the Bank Merger Agreement is attached hereto as Exhibit B. The original of such Bank Merger Agreement shall be executed and delivered as soon as practicable after the execution and delivery of this Agreement. ARTICLE IX CONDITIONS PRECEDENT TO THE MERGERS The obligations of each of the Parties hereto to consummate the transactions contemplated herein are subject to the satisfaction, on or before the Closing Date, of the following conditions: 9.1. Shareholder Approval. The transactions contemplated hereby shall have received all requisite approvals of the shareholders of CU, CU Bank, Home and Home Bank. 9.2. No Judgments or Orders. No judgment, decree, injunction, order or proceeding shall be outstanding or threatened by any governmental entity which prohibits or restricts the effectuation of, or threatens to invalidate or set aside, the Merger or the Bank Merger substantially in the form contemplated by this Agreement, unless counsel to the party against whom such action or proceeding was instituted or threatened renders to the other parties hereto a favorable opinion that such judgment, decree, injunction, order or proceeding is without merit. 9.3. Regulatory Approvals. To the extent required by applicable law or regulation, all approvals or consents of any governmental authority, including, without limitation, those of the FRB and the OCC shall have been obtained or granted for the Merger and Bank Merger and the transactions contemplated hereby, and the applicable waiting period under all laws shall have expired. All other statutory or regulatory requirements for the valid completion of the transactions contemplated hereby shall have been satisfied. 9.4. Tax Opinion. CU and Home shall have received an opinion from Manatt, Phelps & Phillips or Arthur Andersen that the Merger and the Bank Merger will not result in the recognition of gain or loss for federal income tax purposes to CU, CU Bank, Home or Home Bank, nor will the issuance of the CU Stock result in the recognition of gain or loss by the holders of Home Stock who receive such stock in connection with the Merger. 9.5. Pooling of Interests Accounting Treatment. Arthur Andersen shall have confirmed in writing to CU and Home that the Merger and Bank Merger will qualify for pooling of interests accounting treatment. 9.6. S-4 and Proxy Statement. The S-4 shall have become effective under the Securities Act and shall not be subject to any stop order or proceeding seeking a stop order and copies of the Proxy Statement shall have been mailed to every shareholder of record of CU and Home on the record date not less than 20 days prior to the date of the shareholders' meetings called to act upon the Merger. 9.7. Dissenters. The sum of (i) the shares of Home Stock that will not be converted into CU Stock due to the exercise of dissenters' rights granted under the California Corporations Code and (ii) the shares of CU Stock that become Dissenting Shares shall not exceed 10% of the aggregate number of issued and outstanding shares of Home Stock and CU Stock. 48 56 ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF HOME AND HOME BANK All of the obligations of Home and Home Bank to effect the transactions contemplated hereby shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by Home and Home Bank: 10.1. Legal Opinion. Home and Home Bank shall have received the opinion of Anita Wolman, general counsel of CU and CU Bank, dated as of the Closing Date, in substantially the form of Exhibit E hereto. 10.2. Representations and Warranties; Performance of Covenants. All covenants, terms and conditions of this Agreement to be complied with and performed by CU and CU Bank at or before the Closing Date shall have been complied with and performed in all material respects; the representations and warranties of CU and CU Bank contained in Article V hereof shall have been true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. It is understood and acknowledged that the representations being made on and as of the Closing Date shall be made with respect to the CU Schedules as updated in accordance with Section 7.3(k). 10.3. Authorization of Mergers; Option Plan. (a) All actions necessary to authorize the execution, delivery and performance of this Agreement, the Agreement of Merger and the Bank Merger Agreement by CU and CU Bank, as the case may be, and the consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken by the Board of Directors and shareholders of CU and CU Bank, as the case may be, as required by applicable law, and CU and CU Bank shall have full power and right to merge pursuant to the Agreement of Merger and Bank Merger Agreement, respectively. (b) The shareholders of CU shall have voted in favor of the adoption of the New Stock Option Plan. 10.4. Absence of Certain Changes. Between the date of this Agreement and the Effective Time, there shall not have occurred any event that has had or could reasonably be expected to have a material adverse effect on the business, financial condition, results of operations or prospects of CU on a consolidated basis, whether or not such event, change or effect is reflected in the CU Schedules as amended or supplemented after the date of this Agreement. 10.5. Officers' Certificate. There shall have been delivered to Home and Home Bank on the Closing Date a certificate executed by the Chief Executive Officer and the Chief Financial Officer of CU certifying , to the best of their knowledge, compliance with all of the provisions of Sections 10.2, 10.3 and 10.4. 10.6. Fairness Opinion. Home shall have received a letter from Piper Jaffray Inc., dated as of a date within five (5) days of the mailing of the Proxy Statement and S-4 to the shareholders of Home, to the 49 57 effect that the transactions contemplated by this Agreement are fair from a financial point of view to the shareholders of Home. 10.7. Shareholder's Voting Agreements. Concurrently with the execution of this Agreement, the CU directors shall have executed and delivered to Home an agreement substantially in the form of Exhibit F. 10.8. Home Warrant Agreement. Concurrently with the execution of this Agreement, CU shall have executed and delivered to Home the Home Warrant and the Home Warrant Agreement. 10.9. Appointment of Directors. All necessary action shall have been taken to have the five persons designated by Home elected or appointed to serve, from and after the Effective Time, as directors of Surviving Company. 10.10. Validity of Transactions. The validity of all transactions herein contemplated, as well as the form and substance of all opinions, certificates, instruments of transfer and other documents to be delivered to Home or Home Bank hereunder, shall be subject to the approval, to be reasonably exercised, of Manatt, Phelps & Phillips, special counsel for Home and Home Bank. 10.11. Third Party Consents. CU and CU Bank shall have obtained all consents of other parties to their respective material mortgages, notes, leases, franchises, agreements, licenses and permits as may be necessary to permit the Merger and the Bank Merger and the transactions contemplated herein to be consummated without a material default, acceleration, breach or loss of rights or benefits thereunder. 10.12. NASDAQ Listing. The shares of CU Stock issuable pursuant to this Agreement shall have been duly authorized for listing, subject to notice of issuance, on the NASDAQ, National Market System or any other national exchange on which the shares of CU Stock may be listed. 10.13. CU Board. All necessary action shall have been taken to have the five persons designated by CU elected or appointed to serve, from and after the Effective Time, as directors of the Surviving Company and CU shall have delivered to Home the written resignations of those directors of CU who will not be serving on the Surviving Company's Board of Directors. 10.14. Non-Performing Loans. CU Bank's Non-Performing Loans shall not exceed 75% of (i) the shareholders' equity of CU Bank plus (ii) the loan loss reserves of CU Bank. ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATIONS OF CU AND CU BANK All of the obligations of CU and CU Bank to effect the transactions contemplated hereby shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by CU and CU Bank: 50 58 11.1. Legal Opinion. CU and CU Bank shall have received the opinion of Manatt, Phelps & Phillips., special counsel to Home and Home Bank, dated as of the Closing Date, in substantially the form of Exhibit G hereto. 11.2. Representations and Warranties; Performance of Covenants. All the covenants, terms and conditions of this Agreement to be complied with and performed by Home or Home Bank at or before the Closing Date shall have been complied with and performed in all material respects; the representations and warranties of Home and Home Bank contained in Article IV hereof shall have been true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date. It is understood and acknowledged that the representations being made on and as of the Closing Date shall be made with respect to the Home Schedules as updated in accordance with Section 7.3(j). 11.3. Authorization of Mergers. All actions necessary to authorize the execution, delivery and performance of this Agreement, the Agreement of Merger and the Bank Merger Agreement by Home and Home Bank, as the case may be, and the consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken by the Boards of Directors and shareholders of Home and Home Bank, as the case may be, as required by applicable law, and Home and Home Bank shall have full power and right to merge pursuant to the Agreement of Merger and Bank Merger Agreement, respectively. 11.4. Regulatory Approvals and Related Conditions. Any governmental and regulatory approvals and consents which are referred to in this Agreement and are required to consummate the Merger and the Bank Merger shall have been granted without the imposition of conditions that are or would have become applicable to CU or the Surviving Bank and that CU reasonably and in good faith concludes would materially adversely affect the consolidated financial condition or operations of CU or otherwise would be materially burdensome to CU on a consolidated basis and all applicable waiting periods shall have expired. 11.5. Third Party Consents. Home and Home Bank shall have obtained all consents of other parties to their respective material mortgages, notes, leases, franchises, agreements, licenses and permits as may be necessary to permit the Merger and Bank Merger and the transactions contemplated herein to be consummated without a material default, acceleration, breach or loss of rights or benefits thereunder. 11.6. Absence of Certain Changes. Between the date of this Agreement and the Effective Time, there shall not have occurred any event that has had or could reasonably be expected to have a material adverse effect on the business, financial condition, results of operations or prospects of Home on a consolidated basis, whether or not such event, change or effect is reflected in the Home Schedules as amended or supplemented after the date of this Agreement. 11.7. Officers' Certificate. There shall have been delivered to CU on the Closing Date a certificate executed by the President and the Chief Financial Officer of each of Home and Home Bank certifying, to the best of their knowledge, compliance with all of the provisions of Sections 11.2, 11.3, 11.5 and 11.6. 11.8. Fairness Opinion. CU shall have received a letter from Van Kasper & Company dated as of a date within five (5) days of the mailing of the Proxy Statement to the shareholders of CU, to the effect that the transactions contemplated by this Agreement are fair from a financial point of view to the shareholders of CU. 51 59 11.9. Validity of Transactions. The validity of all transactions herein contemplated, as well as the form and substance of all opinions, certificates, instruments of transfer and other documents to be delivered to CU hereunder, shall be subject to the approval, to be reasonably exercised, of Anita Wolman, general counsel of CU. 11.10. Blue Sky Matters. The issuance of the CU Stock in the Merger shall have been qualified or registered with the appropriate governmental entity under state securities or Blue Sky laws, and such qualifications or registrations are in effect on the Closing Date. 11.11. Insurance Coverage. Home shall have obtained (i) coverage for a period of 36 months following the Effective Time for the directors and officers of Home and Home Bank under a directors' and officers' liability insurance policy covering acts or omissions occurring prior to the Effective Time and (ii) coverage for a period of at least 36 months following the Effective Time under a bankers' blanket bond which is no less protective in terms of coverage or limitations than possessed by Home prior to the Effective Time which covers losses incurred prior to the Effective Time and actions related to this Agreement. 11.12. Shareholder's Voting Agreements. Concurrently with the execution of this Agreement, the Home directors shall have executed and delivered to CU an agreement substantially in the form of Exhibit H. 11.13. CU Warrant Agreement. Concurrently with the execution of this Agreement, Home shall have executed and delivered to CU the CU Warrant and the CU Warrant Agreement. 11.14. Affiliate Agreements. Those persons listed on Annex I hereto shall have executed and delivered to CU an agreement in substantially the form of Exhibit I. 11.15. Non-Performing Loans. Home Bank's Non-Performing Loans shall not exceed 75% of (i) the shareholders' equity of Home Bank as of the month end prior to the Effective Time plus (ii) the loan loss reserves of Home Bank. 11.16. Absence of Excess Remediation. Subject to Home's right to cure pursuant to Section 6.12 hereto, the Home Real Property, based on a reasonable analysis of the Phase II Assessments, shall not require remediation expenses in excess of $1,000,000. ARTICLE XII EMPLOYEE BENEFITS 12.1. Employee Benefits. At and as of the Effective Time the former officers and employees of Home and Home Bank who become officers and employees of the Surviving Bank ("Transferred Employees") shall, in that capacity, be entitled to participate in all employee benefits and benefit programs of the Surviving Bank in accordance with the terms of such employee benefit programs. Surviving Bank shall recognize such Transferred Employees' service with Home and Home Bank for purposes of eligibility and vesting under all such benefit programs. Surviving Bank shall also cover under its health plans, without the application of any pre-existing limitation or exclusion, all Transferred Employees and their covered dependents who are covered under similar Home or Home Bank health plans as of the Closing Date and who 52 60 change coverage to Surviving Bank's health plans at the time such Transferred Employees are first provided the option to enroll in Surviving Bank's health plans. ARTICLE XIII TERMINATION 13.1. Termination. This Agreement may be terminated at any time prior to the Effective Time of the Merger upon the occurrence of any of the following: (a) By mutual agreement of the parties, in writing; (b) By Home or CU immediately upon the failure of the shareholders of Home or CU to approve this Agreement and the transactions contemplated hereby; (c) By Home immediately upon expiration of twenty (20) days from delivery of written notice by Home to CU of CU's breach of or failure to satisfy any covenant or agreement contained herein resulting in a material impairment of the benefit reasonably expected to be derived by Home from the performance or satisfaction of such covenant or agreement (provided that such breach has not been waived by Home and Home Bank or cured by CU prior to expiration of such twenty (20) day period); (d) By CU immediately upon expiration of twenty (20) days from delivery of written notice by CU to Home of Home's or Home Bank's breach of or failure to satisfy any covenant or agreement contained herein resulting in a material impairment of the benefit reasonably expected to be derived by CU and CU Bank from the performance or satisfaction of such covenant or agreement (provided that such breach has not been waived by CU or cured by Home or Home Bank, as the case may be, prior to expiration of such twenty (20) day period); (e) By Home or CU upon the expiration of thirty (30) days after any governmental or regulatory authority denies or refuses to grant any approval, consent or authorization required to be obtained in order to consummate the transactions contemplated by this Agreement unless, within said thirty (30) day period after such denial or refusal, all parties hereto agree to submit the application to the regulatory authority that has denied; or refused to grant the approval, consent or qualification requested; or (f) By Home, if any conditions set forth in Article X shall not have been met, by CU if any conditions set forth in Article XI shall not have been met, or by Home or CU, if any conditions set forth in Article IX shall not have been met by September 30, 1996, or such earlier time as it becomes apparent that such conditions cannot be met. 13.2. Termination Date. This Agreement shall be terminated if the Closing Date shall not have occurred by September 30, 1996, unless extended in writing by the parties. 53 61 13.3. Effect of Termination. No termination of this Agreement under this Article XIII for any reason or in any manner shall release, or be construed as so releasing, CU or CU Bank or Home or Home Bank from their respective obligations under the CU Warrant Agreement or Home Warrant Agreement, the last sentence of Section 6.4, Section 7.4 or under Section 14.1 hereof, or any party hereto from any liability or damage to any other party hereto arising out of in connection with or otherwise relating to, directly or indirectly, said party's material breach, default or failure in performance of any of its covenants, agreements, duties or obligations arising hereunder. ARTICLE XIV MISCELLANEOUS 14.1. Expenses. Each party hereto shall pay its own costs and expenses, including but not limited to those of its attorneys and accountants, in connection with this Agreement, the Agreement of Merger, the Bank Merger and the transactions covered and contemplated hereby and thereby. Notwithstanding the foregoing, CU and Home shall share equally the cost of printing the Proxy Statement and S-4. 14.2. Notices. Any notice, request, instruction or other document to be given hereunder by any party hereto to another shall be in writing and delivered personally or by facsimile transmission or sent by registered or certified mail, postage prepaid, with return receipt requested, addressed as follows: To CU or CU Bank: 16030 Ventura Boulevard Encino, California 91436-4487 Attention: Stephen G. Carpenter Facsimile Number: (818) 907-5024 With a copy to: Anita Wolman, Esq. 16030 Ventura Boulevard Encino, California 91436-4487 To Home or Home Bank: Home Bancorp 2633 Cherry Avenue Signal Hill, California 90806 Attention: Jim Staes Facsimile Number: (310) 426-4526 With copies to: Manatt, Phelps & Phillips 11355 West Olympic Boulevard Los Angeles, California 90064 Attention: Barbara S. Polsky, Esq. Facsimile Number: (310) 312-4224 Any such notice, request, instruction or other document shall be deemed received on the date delivered personally or sent by facsimile transmission, or on the third business day after it was sent by registered or certified mail, postage prepaid. Any of the persons shown above may change its address for purposes of this section by giving notice in accordance herewith. 54 62 14.3. Successors and Assigns. All terms and conditions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective transferees, successors and assigns; provided, however, that this Agreement and all rights, privileges, duties and obligations of the parties hereto may not be assigned or delegated by any party hereto without the prior written consent of the other parties hereto. 14.4. Counterparts. This Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one original document. 14.5. Effect of Representations and Warranties. The representations and warranties contained in this Agreement or the Schedules shall terminate immediately after the Effective Time. 14.6. Third Parties. Each party hereto intends that this Agreement shall not benefit or create any right or cause of action to any person other than parties hereto. 14.7. Lists; Exhibits; Integration. Each Schedule, exhibit and letter delivered pursuant to this Agreement shall be in writing and shall constitute a part of the Agreement, although Schedules and letters need not be attached to each copy of this Agreement. This Agreement, together with such Schedules, exhibits and letters, constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith. 14.8. Knowledge. In all representations and warranties concerning the knowledge of Home, Home Bank, CU or CU Bank, wherever included herein, the only knowledge imputed to Home, Home Bank, CU or CU Bank shall be the knowledge of their respective officers at the level of senior vice-president and above. 14.9. Governing Law. This Agreement is made and entered into in the State of California, except to the extent that the provisions of federal law are mandatorily applicable, and the laws of the State of California shall govern the validity and interpretation hereof and the performance of the parties hereto of their respective duties and obligations hereunder. 14.10. Schedules. The Schedules are an integral part of this Agreement, and each Schedule shall be applicable as if set forth in full in the text hereof. In the event there is any absolute unconditional representation contained in this Agreement, said representation shall be modified by any contrary information set forth in any Schedule. In the event there is any representation contained in this Agreement that is modified by a Schedule, said representation shall also be modified by any other applicable information contained in any other Schedule. 14.11. Captions. The captions contained in this Agreement are for convenience of reference only and do not form a part of this Agreement and shall not affect the interpretation hereof. 14.12. Severability. If any portion of this Agreement shall be deemed by a court of competent jurisdiction to be unenforceable, the remaining portions shall be valid and enforceable only if, after excluding the portion deemed to be unenforceable, the remaining terms hereof shall provide for the consummation of the transactions contemplated herein in substantially the same manner as originally set forth at the date this Agreement was executed. 55 63 14.13. Waiver and Modification. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision or condition of this Agreement. Except as otherwise required by law, this Agreement, the Agreement of Merger and Bank Merger Agreement, when executed and delivered, may be modified or amended by action of the Boards of Directors of CU, CU Bank, Home or Home Bank without action by their respective shareholders. This Agreement may be modified or amended only by an instrument of equal formality signed by the parties or their duly authorized agents. 14.14. Attorney's Fees. In the event any of the parties to this Agreement brings an action or suit against any other party by reason of any breach of any covenant, agreement, representation, warranty or other provision hereof, or any breach of any duty or obligation created hereunder by such other party, the prevailing party, as determined by the court or other body having jurisdiction, shall be entitled to have and recover of and from the losing party, as determined by the court or other body having jurisdiction, all reasonable costs and expenses incurred or sustained by such prevailing party in connection with such suit or action, including, without limitation, legal fees and court costs (whether or not taxable as such). 56 64 14.15. JURY WAIVER. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY MATTER ARISING OUT OF THIS AGREEMENT OR RELATED TO THIS AGREEMENT OR IN CONNECTION WITH ANY TRANSACTION OR MATTER CONTEMPLATED IN THIS AGREEMENT. IN WITNESS WHEREOF, the parties to this Agreement have duly executed this Agreement as of the day and year first above written. CU BANCORP By:_______________________________ Name: Title: CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION By:_______________________________ Name: Title: HOME INTERSTATE BANCORP By:_______________________________ Name: Title: HOME BANK By:_______________________________ Name: Title: 57 65 EXHIBIT A AGREEMENT OF MERGER THIS AGREEMENT OF MERGER (the "Merger Agreement") is made and entered into as of this _____ day of ___________, 1996, by and between CU Bancorp, a California corporation ("CU") and Home Interstate Bancorp, a California corporation ("Home"), with reference to the following facts: RECITALS 1. CU is a California corporation duly organized, validly existing and in good standing under the laws of the State of California, with authorized capital of 24,000,000 shares of no par value common stock ("CU Stock") of which, on the date hereof, there are [4,467,318] shares issued and outstanding and 10,000,000 shares of serial preferred stock, none of which is outstanding.. 2. Home is a corporation duly organized, validly existing and in good standing under the laws of the State of California with authorized capital of 20,000,000 shares of common stock, no par value ("Home Stock") of which, on the date hereof, there are [4,187,954] shares issued and outstanding. 3. The respective Boards of Directors of CU and Home deem it desirable and in the best interests of their respective corporations and stockholders that Home be merged (the "Merger") with and into CU as provided in this Merger Agreement pursuant to the laws of the State of California and that CU be the surviving company (the "Surviving Company"). 4. In connection with the Merger, CU and Home, and their respective wholly-owned banking subsidiaries, entered into an Agreement and Plan of Reorganization, dated as of January 10, 1996 (the "Reorganization Agreement"). NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein set forth and for the purpose of prescribing the terms and conditions of such Merger, the parties hereto agree as follows: ARTICLE I THE MERGER Upon consummation of the Merger at the Effective Time (as defined in Article IX hereof), Home shall be merged with and into CU which shall thereupon be the Surviving Company, and the separate corporate existence of Home shall cease. ARTICLE II NAME The name of the Surviving Company shall be "_____________". A-1 66 ARTICLE III ARTICLES OF INCORPORATION The Articles of Incorporation of CU as in effect immediately prior to the Effective Time shall, at and after the Effective Time, continue to be the Articles of Incorporation of the Surviving Company. ARTICLE IV BYLAWS The Bylaws of CU as in effect immediately prior to the Effective Time shall, at and after the Effective Time, continue to be the Bylaws of the Surviving Company. ARTICLE V DIRECTORS The following persons shall, at and after the Effective Time, serve as the Directors of the Surviving Company until its next annual meeting of shareholders or until such time as their successors have been elected and qualified: [insert names of directors] ARTICLE VI RIGHTS AND DUTIES OF SURVIVING COMPANY At and after the Effective Time, all rights, privileges, powers and franchises and all property and assets of every kind and description of CU and Home shall be vested in and be held and enjoyed by the Surviving Company, without further act or deed, and all the estates and interests of every kind of CU and Home, including all debts due to either of them, shall be as effectively the property of the Surviving Company as they were of CU and Home, and the title to any real estate vested by deed or otherwise in either CU or Home shall not revert or be in any way impaired by reason of the Merger; and all rights of creditors and liens upon any property of CU and Home shall be preserved unimpaired and all debts, liabilities and duties of CU and Home shall be debts, liabilities and duties of the Surviving Company and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. ARTICLE VII CONVERSION OF SHARES In and by virtue of the Merger and at the Effective Time, pursuant to this Merger Agreement, the shares of CU Stock and Home Stock outstanding at the Effective Time shall be converted as follows: (a) Effect on the Home Stock. Each share of Home Stock issued and outstanding immediately prior to the Effective Time shall, on and after the Effective Time, be automatically canceled and cease to be an issued and outstanding share of Home Stock and shall be converted into the right to receive 1.409 shares of CU Stock. No fractional shares of CU Stock shall be issued in the Merger. CU A-2 67 will pay or cause to be paid cash in lieu of fractional shares of CU Stock which would otherwise be issuable as provided above. (b) Effect on CU Stock. Each share of CU Stock issued and outstanding immediately prior to the Effective Time shall, on and after the Effective Time, remain outstanding and shall for all purposes be deemed to represent, one share of common stock of the Surviving Company. ARTICLE VIII FURTHER ACTION The parties hereto shall execute and deliver, or cause to be executed and delivered, all such deeds and other instruments, and will take or cause to be taken all further or other action as they may deem necessary or desirable, in order to vest in and confirm to the Surviving Company title to and possession of all of CU's and Home's property, rights, privileges, powers and franchises hereunder, and otherwise to carry out the intent and purposes of this Merger Agreement. ARTICLE IX EFFECTIVE TIME The Merger will become effective upon the filing, in accordance with Section 1103 of the California Corporations Code, of a copy of this Merger Agreement and all other requisite accompanying certificates in the office of the California Secretary of State (the "Secretary"). The date and time of such filing with the Secretary is referred to herein as to the "Effective Time." ARTICLE X SUCCESSORS AND ASSIGNS This Merger Agreement shall be binding upon and enforceable by the parties hereto and their respective successors, assigns and transferees, but this Merger Agreement may not be assigned by either party without the written consent of the other. ARTICLE XI GOVERNING LAW This Merger Agreement has been executed in the State of California, and the laws of the State of California shall govern the validity and interpretation hereof and the performance by the parties hereto. A-3 68 ARTICLE XII TERMINATION This Merger Agreement may, by the mutual consent and action of the Boards of Directors of CU and Home, be abandoned at any time before or after approval thereof by the shareholders of CU and Home, but not later than the filing of this Merger Agreement with the Secretary pursuant to Section 1103 of the California Corporations Code. IN WITNESS WHEREOF, CU and Home, pursuant to the approval and authority duly given by resolution of their respective Board of Directors, have caused this Merger Agreement to be signed by their respective Presidents and Secretaries on the day and year first above written. CU BANCORP By:_________________________ President ____________________________ Secretary HOME INTERSTATE BANCORP By:__________________________ President _____________________________ Secretary A-4 69 EXHIBIT A WARRANT No. 1 January 10, 1996 1,082,224 Shares HOME INTERSTATE BANCORP This is to certify that, for value received and subject to the terms and conditions provided for in a Warrant Purchase Agreement dated as of January 10, 1996 (the "Agreement") by and between Home Interstate Bancorp, a California corporation ("Home"), and CU Bancorp, a California corporation ("CU"), pursuant to which CU and its assigns are entitled to purchase from Home, on the terms and conditions set forth therein, 1,082,224 fully paid and nonassessable shares of common stock of Home ("Common Stock"), subject to adjustment as provided in the Agreement. Terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This Warrant may be exercised by the holder (except any holder which shall not be permitted by the Bank Holding Company Act of 1956, as amended ("BHC Act"), or other applicable law to own, or shall not have obtained all regulatory approvals required by such Act or other applicable law as a precondition to its ownership of, the shares of Common Stock covered hereby) as to the whole or any part of the shares of Common Stock covered hereby at any time when such exercise shall be permitted under the terms of this Warrant, by surrender of this Warrant at the principal office of Home or at the office of any transfer agent for the Warrant and upon payment to Home of the Warrant Price for shares so purchased by wire transfer to a bank account designated by Home. Thereupon, this Warrant shall be deemed to have been exercised and the person exercising the same to have become a holder of record of shares of Common Stock (or of the other securities or property to which it is entitled upon such exercise) purchased hereunder for all purposes, and certificates for shares so purchased shall be delivered to the purchaser. If this Warrant shall be exercised in respect of a part of the shares of Common Stock covered hereby, the holder shall be entitled to receive a new Warrant covering the number of shares in respect of which this Warrant shall not have been exercised, but otherwise identical hereto. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at such office or agency of Home, for new Warrants of this tenor representing in the aggregate the right to A-1 70 subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase not less than 1,000 shares of Common Stock (except to the extent necessary to round out the balance of the number of shares purchasable hereunder). Home covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). Home further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, Home will at all times have authorized, and reserved, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant, and will at its expense expeditiously upon each such reservation of shares use its best efforts to procure the listing thereof (subject to issuance or notice of issuance) on all stock exchanges on which the shares of Common Stock are then listed, or if Home Shares are not then listed on a stock exchange on NASDAQ National Market System. The rights of the holder of this Warrant shall be subject to the following further terms and conditions: Section 1.1 Home shall at all times reserve and keep available, free from preemptive rights, out of its authorized and unissued Common Stock or shares of Common Stock held in treasury, for the purpose of effecting the exercise of this Warrant, the full number of shares of Common Stock then issuable upon the exercise of this and all other outstanding Warrant, computed on the assumption that the adjustments required by Section 1.11 hereof have become effective, in the event such is not then the case. Section 1.2 Home will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock upon exercise of this Warrant. Home shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of the Warrant or Warrants to be exercised, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to Home the amount of any such tax, or has established, to the satisfaction of Home, that such tax has been paid. Section 1.3 This Warrant shall not entitle the holder of any rights of a shareholder of Home, either at law or in equity, or to any notice of meetings of shareholders or of any other proceedings of Home. Section 1.4 Subject to Section 1.5 and the terms and conditions set forth in the Agreement, this Warrant and all rights hereunder are transferable (in whole or in part), on the books of Home by the registered holder thereof in person or by duly authorized attorney, upon surrender A-2 71 of this Warrant, properly endorsed, to Home (or if Home shall have notified the registered holder hereof of the appointment of an independent transfer agent for Warrants, then to such transfer agent). As used herein the term "this Warrant" shall mean and include any Warrant or Warrants hereafter issued in consequence of transfers of this Warrant in whole or in part. Section 1.5 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO THIS WARRANT WHICH IS EFFECTIVE UNDER THE SECURITIES ACT, OR (ii) AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THIS WARRANT IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF HOME INTERSTATE BANCORP. Section 1.6 The holder of this Warrant, by the acceptance hereof, agrees that prior to the exercise of any Warrants, at a time when said Warrants have not been registered under the Securities Act or any similar Federal statute, it will, if it has not requested or is then not entitled to such registration pursuant to the provisions of Article III of the Agreement, deliver to Home a written representation that it is acquiring the shares of Common Stock issuable upon the exercise of such Warrants for its own account for investment, and not with a view to, or for sale in connection with, any distribution thereof, and not with any present intention of distributing or selling the same. Section 1.7 (a) This Warrant shall terminate and be of no further force or effect as provided in Article VII of the Agreement. (b) Notwithstanding any other provision contained herein, this Warrant and the rights conferred hereby shall terminate, and the full consideration paid by CU for this Warrant shall be immediately due and payable to CU, if Home or CU receives written notice from the Federal Reserve Board to the effect that the execution and delivery of the Agreement or the issuance of the Warrants is not consistent with Section 3 of the BHC Act. Section 1.8 This Warrant shall be governed by and construed in accordance with the laws of the State of California. Section 1.9 This Warrant incorporates by reference all of the terms and conditions of the Agreement. HOME INTERSTATE BANCORP By: --------------------------------- A-3 72 A-4 73 EXHIBIT A WARRANT No. January 10, 1996 1,492,390 Shares CU BANCORP This is to certify that, for value received and subject to the terms and conditions provided for in a Warrant Purchase Agreement dated as of January 10, 1996 (the "Agreement") by and between Home Interstate Bancorp, a California corporation ("Home"), and CU Bancorp, a California corporation ("CU"), pursuant to which Home and its assigns are entitled to purchase from CU, on the terms and conditions set forth therein, 1,492,390 fully paid and nonassessable shares of common stock of CU ("Common Stock"), subject to adjustment as provided in the Agreement. Terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This Warrant may be exercised by the holder (except any holder which shall not be permitted by the Bank Holding Company Act of 1956, as amended ("BHC Act"), or other applicable law to own, or shall not have obtained all regulatory approvals required by such Act or other applicable law as a precondition to its ownership of, the shares of Common Stock covered hereby) as to the whole or any part of the shares of Common Stock covered hereby at any time when such exercise shall be permitted under the terms of this Warrant, by surrender of this Warrant at the principal office of CU or at the office of any transfer agent for the Warrant and upon payment to CU of the Warrant Price for shares so purchased by wire transfer to a bank account designated by CU. Thereupon, this Warrant shall be deemed to have been exercised and the person exercising the same to have become a holder of record of shares of Common Stock (or of the other securities or property to which it is entitled upon such exercise) purchased hereunder for all purposes, and certificates for shares so purchased shall be delivered to the purchaser. If this Warrant shall be exercised in respect of a part of the shares of Common Stock covered hereby, the holder shall be entitled to receive a new Warrant covering the number of shares in respect of which this Warrant shall not have been exercised, but otherwise identical hereto. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at such office or agency of CU, for new Warrants of this tenor representing in the aggregate the right to A-1 74 subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase not less than 1,000 shares of Common Stock (except to the extent necessary to round out the balance of the number of shares purchasable hereunder). CU covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). CU further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, CU will at all times have authorized, and reserved, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant, and will at its expense expeditiously upon each such reservation of shares use its best efforts to procure the listing thereof (subject to issuance or notice of issuance) on all stock exchanges on which the shares of Common Stock are then listed, or if CU Shares are not then listed on a stock exchange on NASDAQ National Market System. The rights of the holder of this Warrant shall be subject to the following further terms and conditions: Section 1.1 CU shall at all times reserve and keep available, free from preemptive rights, out of its authorized and unissued Common Stock or shares of Common Stock held in treasury, for the purpose of effecting the exercise of this Warrant, the full number of shares of Common Stock then issuable upon the exercise of this and all other outstanding Warrant, computed on the assumption that the adjustments required by Section 1.11 hereof have become effective, in the event such is not then the case. Section 1.2 CU will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock upon exercise of this Warrant. CU shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of the Warrant or Warrants to be exercised, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to CU the amount of any such tax, or has established, to the satisfaction of CU, that such tax has been paid. Section 1.3 This Warrant shall not entitle the holder of any rights of a shareholder of CU, either at law or in equity, or to any notice of meetings of shareholders or of any other proceedings of CU. Section 1.4 Subject to Section 1.5 and the terms and conditions set forth in the Agreement, this Warrant and all rights hereunder are transferable (in whole or in part), on the books of CU by the registered holder thereof in person or by duly authorized attorney, upon surrender of this Warrant, properly endorsed, to CU (or if CU shall have notified the registered holder hereof of A-2 75 the appointment of an independent transfer agent for Warrants, then to such transfer agent). As used herein the term "this Warrant" shall mean and include any Warrant or Warrants hereafter issued in consequence of transfers of this Warrant in whole or in part. Section 1.5 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO THIS WARRANT WHICH IS EFFECTIVE UNDER THE SECURITIES ACT, OR (ii) AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THIS WARRANT IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF CU BANCORP. Section 1.6 The holder of this Warrant, by the acceptance hereof, agrees that prior to the exercise of any Warrants, at a time when said Warrants have not been registered under the Securities Act or any similar Federal statute, it will, if it has not requested or is then not entitled to such registration pursuant to the provisions of Article III of the Agreement, deliver to CU a written representation that it is acquiring the shares of Common Stock issuable upon the exercise of such Warrants for its own account for investment, and not with a view to, or for sale in connection with, any distribution thereof, and not with any present intention of distributing or selling the same. Section 1.7 (a) This Warrant shall terminate and be of no further force or effect as provided in Article VII of the Agreement. (b) Notwithstanding any other provision contained herein, this Warrant and the rights conferred hereby shall terminate, and the full consideration paid by Home for this Warrant shall be immediately due and payable to Home, if CU or Home receives written notice from the Federal Reserve Board to the effect that the execution and delivery of the Agreement or the issuance of the Warrants is not consistent with Section 3 of the BHC Act. Section 1.8 This Warrant shall be governed by and construed in accordance with the laws of the State of California. Section 1.9 This Warrant incorporates by reference all of the terms and conditions of the Agreement. CU BANCORP By: --------------------------------- A-3 76 EXHIBIT B AGREEMENT OF MERGER THIS AGREEMENT OF MERGER (the "Bank Merger Agreement") is made and entered into as of this _____ day of ___________, 1996, by and between California United Bank, National Association, a national banking association ("CU Bank") and Home Bank, a California corporation ("Home Bank"), with reference to the following facts: RECITALS 1. CU Bank is a national banking association duly organized, validly existing and in good standing under the laws of the United States, with authorized capital of 540,000 shares of $5.00 par value common stock ("CU Bank Stock") of which, on the date hereof, there are [472,973] shares issued and outstanding. CU Bank has surplus of $____ and undivided profits, including capital reserves, of $______ as of _____________. CU Bank is the wholly owned subsidiary of CU Bancorp, a California corporation. 2. Home Bank is a corporation duly organized, validly existing and in good standing under the laws of the State of California with authorized capital of [ ] shares of common stock, [ ] par value ("Home Stock") of which, on the date hereof, there are [ ] shares issued and outstanding. Home Bank has surplus of $______ and undivided profits, including capital reserves, of $_____ as of _______. Home Bank is the wholly owned subsidiary of Home Interstate Bancorp, a California corporation. 3. The respective Boards of Directors of CU Bank and Home Bank, each acting pursuant to a resolution of its board of directors, adopted by the vote of a majority of its directors, pursuant to the authority given by and in accordance with the provisions of 12 U.S.C. Section 215a, deem it desirable and in the best interests of their respective corporations and shareholders that Home Bank be merged (the "Bank Merger") with and into CU Bank as provided in this Bank Merger Agreement pursuant to the laws of the United States of America and that CU Bank be the surviving bank (the "Surviving Bank"). 4. In connection with the Merger, CU Bank, CU Bancorp, a California corporation ("CU"), Home Bank and Home Interstate Bancorp, a California corporation ("Home"), entered into an Agreement and Plan of Reorganization, dated as of January 10, 1996 (the "Reorganization Agreement"). NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein set forth and for the purpose of prescribing the terms and conditions of such Bank Merger, the parties hereto agree as follows: B-1 77 ARTICLE I THE BANK MERGER Upon consummation of the Bank Merger at the Effective Time of the Bank Merger (as defined in Article XI hereof), Home Bank shall be merged with and into CU Bank which shall thereupon be the Surviving Bank, and the separate corporate existence of Home Bank shall cease. ARTICLE II SHAREHOLDER APPROVAL This Agreement shall be ratified and approved by the written consent of the shareholders of each of Home Bank and CU Bank owning at least two-thirds of the outstanding capital stock. ARTICLE III NAME The name of the Surviving Bank shall be "___________." ARTICLE IV ARTICLES OF ASSOCIATION The Articles of Association of CU Bank as in effect immediately prior to the Effective Time of the Bank Merger shall, at and after the Effective Time of the Bank Merger, continue to be the Articles of Association of the Surviving Bank. ARTICLE V BYLAWS The Bylaws of CU Bank as in effect immediately prior to the Effective Time of the Bank Merger shall, at and after the Effective Time of the Bank Merger, continue to be the Bylaws of the Surviving Bank. ARTICLE VI DIRECTORS The following persons shall, at and after the Effective Time of the Bank Merger, serve as the Directors of the Surviving Bank until its next annual meeting of shareholders or until such time as their successors have been elected and qualified: [insert names of directors] ARTICLE VII RIGHTS AND DUTIES OF SURVIVING BANK At and after the Effective Time of the Bank Merger, all rights, privileges, powers and franchises and all property and assets of every kind and description of CU Bank and Home Bank shall be vested in and be held and enjoyed by the Surviving Bank, without further act or deed, and all the estates B-2 78 and interests of every kind of CU Bank and Home Bank, including all debts due to either of them, shall be as effectively the property of the Surviving Company as they were of CU Bank and Home Bank, and the title to any real estate vested by deed or otherwise in either CU Bank or Home Bank shall not revert or be in any way impaired by reason of the Bank Merger; and all rights of creditors and liens upon any property of CU Bank and Home Bank shall be preserved unimpaired and all debts, liabilities and duties of CU Bank and Home Bank shall be debts, liabilities and duties of the Surviving Bank and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. ARTICLE VIII CONVERSION OF SHARES In and by virtue of the Bank Merger and at the Effective Time of the Bank Merger, pursuant to this Bank Merger Agreement, the shares of CU Bank Stock and Home Bank Stock outstanding at the Effective Time of the Bank Merger shall be converted as follows: (a) Effect on the Home Bank Stock. Each share of Home Bank Stock issued and outstanding immediately prior to the Effective Time of the Bank Merger, except for shares as to which dissenters' rights are perfected pursuant to 12 U.S.C. 215a(b) ("Perfected Dissenting Shares") shall, on and after the Effective Time of the Bank Merger, be automatically canceled and cease to be an issued and outstanding share of Home Bank Stock. (b) Effect on CU Bank Stock. Each share of CU Bank Stock issued and outstanding immediately prior to the Effective Time of the Bank Merger, except for Perfected Dissenting Shares, shall, on and after the Effective Time of the Bank Merger, remain outstanding and shall for all purposes be deemed to represent, one share of common stock of the Surviving Bank. ARTICLE IX CAPITAL STRUCTURE OF SURVIVING BANK The amount of capital stock of the Surviving Bank shall be $_____, divided into ____ shares of common stock, each of $___ par value, and at the time the Bank Merger shall become effective the Surviving Bank shall have a surplus of $____ and undivided profits of $______, including capital reserves, which when combined with the Surviving Bank's capital and surplus will be equal to the combined capital structures of Home Bank and CU Bank as stated in the preamble of this Agreement, adjusted, however, for normal earnings and expenses between ______ and the Effective Time of the Bank Merger. ARTICLE X FURTHER ACTION The parties hereto shall execute and deliver, or cause to be executed and delivered, all such deeds and other instruments, and will take or cause to be taken all further or other action as they may deem necessary or desirable, in order to vest in and confirm to the Surviving Bank title to and possession of all of CU Bank's and Home Bank's property, rights, privileges, powers and franchises hereunder, and otherwise to carry out the intent and purposes of this Agreement. B-3 79 CU Bank and Home Bank agree that solely for the purpose of completing the merger of Home Bank with and into CU Bank or obtaining any necessary regulatory approval therefor or approving, signing, ratifying or confirming any related Bank Merger Agreement or conferring any necessary or appropriate corporate authority related thereto or taking any other corporate act or satisfying any other corporate requirement necessary therefor, the board of directors of the Surviving Bank, as it will be constituted upon the effectiveness of the Bank Merger, may act as such in advance of such effectiveness, and CU, the shareholder of the Surviving Bank upon such effectiveness, may act as such in advance of such effectiveness. ARTICLE XI EFFECTIVE TIME OF THE BANK MERGER The Bank Merger will become effective in accordance with 12 U.S.C. 215a at the time specified in the approval to be issued by the Comptroller of the Currency. The date and time of such approval specified by the Comptroller is referred to herein as to the "Effective Time of the Bank Merger." ARTICLE XII SUCCESSORS AND ASSIGNS This Bank Merger Agreement shall be binding upon and enforceable by the parties hereto and their respective successors, assigns and transferees, but this Bank Merger Agreement may not be assigned by either party without the written consent of the other. ARTICLE XIII TERMINATION This Bank Merger Agreement may, by the mutual consent and action of the Boards of Directors of CU Bank and Home Bank, be abandoned at any time before or after approval thereof by the shareholders of CU Bank and Home Bank, but not later than the Effective Time of the Bank Merger. This Agreement shall automatically be terminated and of no further force and effect if, prior to the Effective Time of the Bank Merger, the Reorganization Agreement is terminated in accordance with the terms thereof. ARTICLE XIV SATISFACTION OF CONDITION AND OBLIGATIONS (a) The obligations of CU Bank to proceed with the Closing are subject to the satisfaction at or prior to the Closing of all of the conditions to the obligations of CU Bank and CU under the Reorganization Agreement, any one or more of which, to the extent it is or they are waivable, may be waived, in whole or in part, by CU Bank. (b) The obligations of Home Bank to proceed with the Closing are subject to the satisfaction at or prior to the Closing of all of the conditions to the obligations of Home and Home Bank under the Reorganization Agreement, any one or more of which, to the extent it is or they are waivable, may be waived, in whole or in party, by Home Bank. B-4 80 IN WITNESS WHEREOF, CU Bank and Home Bank, pursuant to the approval and authority duly given by resolution of their respective Board of Directors, have caused this Bank Merger Agreement to be signed by their respective Presidents and Secretaries on the day and year first above written. CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION By: ------------------------- President ---------------------------- Secretary DIRECTORS OF CALIFORNIA UNITED BANK, N.A. - ---------------------------- - ---------------------------- - ---------------------------- - ---------------------------- - ---------------------------- - ---------------------------- B-5 81 HOME BANK By: -------------------------- President ----------------------------- Secretary DIRECTORS OF HOME BANK - ---------------------------- - ---------------------------- - ---------------------------- - ---------------------------- - ---------------------------- - ---------------------------- B-6 82 EXHIBIT C WARRANT PURCHASE AGREEMENT This WARRANT PURCHASE AGREEMENT (the "Agreement"), dated as of January 10, 1996, between CU Bancorp, a California corporation ("CU"), and Home Interstate Bancorp, a California corporation ("Home") is made with reference to the following: RECITALS A. CU, California United Bank, National Association, a wholly owned subsidiary of CU ("CU Bank"), Home and Home Bank, a wholly owned subsidiary of Home ("Home Bank"), have entered into an Agreement and Plan of Reorganization (the "Merger Agreement") whereby Home and Home Bank would be merged with and into CU and CU Bank, respectively (collectively, the "Merger"). B. As partial consideration to Home for entering into the Merger Agreement, CU has agreed to issue to Home a warrant entitling the holder thereof to purchase up to 19.9% (or 1,492,390) of the outstanding common stock of CU ("Common Stock"), assuming the exercise of all Warrants (as hereafter defined), and all other options, warrants or other securities convertible into Common Stock, subject to such restrictions and conditions as may be imposed by bank regulatory authorities having jurisdiction over Home and CU, respectively. C. Concurrent with the execution of this Agreement, Home and CU shall enter into a separate warrant agreement, with substantially identical terms and conditions as are set forth in this Agreement, pursuant to which Home shall issue to CU a warrant entitling the holder thereof, upon the occurrence of certain events as set forth in such agreement, to purchase up to 19.9% (on a fully diluted basis) of the outstanding common stock of Home. D. Terms used herein and not otherwise defined shall have the meanings ascribed to them in Article VI hereof. In consideration of these premises and of the representations, covenants and agreements hereinafter set forth, CU and Home hereby agree as follows: ARTICLE I ISSUANCE AND SALE OF WARRANT Section 1.1 Issuance and Sale of the Warrant. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties hereinafter set forth, and in consideration for the execution and delivery of the Merger Agreement, CU hereby issues to Home one or more warrants (such warrants, together with any warrants issued pursuant to Section 1.4, the C-1 83 "Warrants") entitling the holder thereof to purchase in the aggregate 1,492,390 duly authorized and newly issued shares of Common Stock, subject to adjustment as provided below. The Warrants being issued at the time of the execution of this Agreement will be evidenced by a single certificate in the form of Exhibit A hereto. All Warrants issued pursuant to Section 1.4 will be evidenced by one or, at Home's request, more certificates in the form of Exhibit A hereto, dated the date of their issuance, exercisable at the adjusted exercise price at the time in effect for the Warrants issued pursuant to this Section 1.1. Section 1.2 Warrant Price. The initial exercise price at which shares of Common Stock may be acquired pursuant to exercise of the Warrants shall be $9.834 per share (the "Warrant Price"), subject to adjustment as provided in Section 1.4. Section 1.3 Exercise of Warrants. (a) The Warrants may be exercised in whole or in part only after the occurrence of an Acquisition Event. (b) As used herein, an "Acquisition Event" means any of the following events: (i) any person (other than Home or an Affiliate of Home) shall have commenced (as such term is defined in Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), or shall have filed a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to, a tender offer or exchange offer to purchase any shares of Common Stock such that, upon consummation of such offer, such person would own or control 10% or more of the then outstanding Common Stock; (ii) CU or CU Bank, without having received Home's prior written consent or except as permitted by the Merger Agreement, shall have authorized, recommended, proposed or publicly announced an intention to authorize, recommend or propose, or entered into, an agreement with any person (other than Home or any Affiliate of Home to (A) effect a merger, consolidation or similar transaction involving CU or CU Bank, (B) sell, lease or otherwise dispose of assets of CU or CU Bank representing 10% or more of the consolidated assets of CU or CU Bank, or (C) issue, sell or otherwise dispose of (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 10% or more of the voting power of CU or CU Bank (any of the foregoing an "Acquisition Transaction"); (iii) any person (other than Home or Home Bank or CU or CU Bank in a fiduciary capacity) shall have acquired beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act) or the right to acquire beneficial ownership of, or any "group" (as such term is defined in the Exchange Act) shall have been C-2 84 formed which beneficially owns or has the right to acquire beneficial ownership of, 10% or more of the then outstanding Common Stock; or (iv) the holders of Common Stock shall not have approved the Merger Agreement at the meeting of such stockholders held for the purpose of voting on the Merger Agreement, such meeting shall not have been held or shall have been canceled prior to termination of the Merger Agreement or CU's Board of Directors shall have withdrawn or modified in a manner adverse to Home the recommendation of CU's Board of Directors with respect to the Merger Agreement, in each case after any person (other than Home) shall have (A) publicly announced a proposal, or publicly disclosed an intention to make a proposal, to engage in an Acquisition Transaction or (B) filed an application (or given a notice), whether in draft or final form, under the BHC Act or the Change in Bank Control Act for approval to engage in an Acquisition Transaction. As used in this Agreement, "person" shall have the meaning specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act. (c) In the event Home is entitled to and wishes to exercise the Warrants, it shall send to CU a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three Business Days nor later than 60 Business Days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to or approval of the Federal Reserve Board or any other regulatory agency is required in connection with such purchase, Home shall promptly file the required notice or application for approval, shall promptly notify CU of such filing, and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. (d) At the closing referred to in subsection (c), Home shall pay to CU the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Warrants in immediately available funds by wire transfer to a bank account designated by CU, provided that failure or refusal of CU to designate such a bank account shall not preclude Home from exercising the Warrants. (e) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (d), CU shall deliver to Home a certificate or certificates representing the number of shares of Common stock purchased by Home. (f) Upon the giving by Home to CU of the written notice of exercise of the Warrants provided for under subsection (c) and the tender of the applicable purchase price in C-3 85 immediately available funds, Home shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of CU shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to Home. CU shall pay all expenses, and any and all federal, state and local taxes or other charges that may be payable in connection with the preparation, issue and delivery of stock certificates hereunder in the name of Home. Section 1.4 Additional Warrants; Adjustments to Warrant Price and Number of Shares. The number of shares to which the Warrants may be exercised and the Warrant Price shall be subject to adjustment as provided below: (a) Additional Warrants. If CU shall, on one or more occasions after the date hereof, issue additional shares of Common Stock, and if, as a result of any such issuance the shares of Common Stock issued or issuable upon the exercise of Warrants issued pursuant to Section 1.1 hereof shall represent less than 19.9% of the outstanding Common Stock, assuming the exercise of all Warrants and all other options, warrants or other securities convertible into Common Stock, CU shall issue to Home, promptly upon Home's demand, without further consideration, Warrants to purchase a number of authorized but unissued shares of Common Stock which, when added to the shares issued or issuable upon the exercise of such previously issued Warrants, would represent 19.9% as the case may be of the outstanding Common Stock. (b) Adjustment for Stock Splits and Combinations. If CU at any time or from time to time after the date of this Agreement effects a subdivision of the Common Stock, the Warrant Price then in effect immediately before that subdivision shall be proportionately decreased, and conversely, if CU at any time or from time to time after the date of this Agreement combines the outstanding shares of Common Stock, the Warrant Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subsection (b) shall become effective at the close of business on the date the subdivision or combination becomes effective. (c) Adjustment for Certain Dividends and Distributions. In the event CU at any time or from time to time after the date of this Agreement makes, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Warrant Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the Warrant Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Warrant Price shall be C-4 86 recomputed accordingly as of the close of business on such record date and thereafter the Warrant Price shall be adjusted pursuant to this subsection (c) as of the time of actual payment of such dividends or distributions. (d) Adjustments for Other Dividends and Distributions. In the event CU at any time or from time to time after the date of this Agreement makes, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities of CU other than shares of Common Stock, then in each such event provision shall be made so that the holders of Warrants shall receive upon exercise thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of CU which they would have received had their Warrants been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of exercise of the Warrants, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 1.4. (e) Adjustment for Reclassification, Exchange and Substitution. If the Common Stock issuable upon the exercise of the Warrants is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 1.4), then and in any such event each holder of Warrants shall have the right thereafter to receive upon exercise of the Warrants the kind and amount of stock and other securities and property receivable upon such reorganization, reclassification or other change by holders of the number of shares of Common Stock into which such Warrants might have been exercised immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided in this Section 1.4. (f) Reorganization, Mergers, Consolidations and Sales of Assets. If at any time or from time to time there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 1.4), or a merger or consolidation of CU with or into another corporation, or the sale of all or substantially all of CU's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Warrants shall thereafter be entitled to receive upon exercise of the Warrants the number of shares of stock or other securities or property of CU, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon exercise of the Warrants would have been entitled in such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 1.4 and the other terms and conditions with respect to the rights of the holders of the Warrants after the reorganization, merger, consolidation or sale to the end that the provisions of this Agreement, including this Section 1.4 (including adjustment of the Warrant Price then in effect and number of shares purchasable upon exercise of the Warrants) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. C-5 87 (g) Sale of Shares Below Warrant Price. (i) If at any time or from time to time after the date of this Agreement, CU issues or sells, or is deemed by the express provisions of this subsection (g) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in subsection (c) above and other than upon a subdivision or combination of shares of Common Stock as provided in subsection (b) above, for an Effective Price (as hereinafter defined) less than the Warrant Price (or, if an adjusted Warrant Price shall be in effect by reason of a previous adjustment, then less than such adjusted Warrant Price) then and in each such case the then existing Warrant Price shall be reduced, as of the opening of business on the date of such issuance or sale, to a price determined by multiplying that Warrant Price by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock Deemed Outstanding at the close of business on the day next preceding the date of such issue or sale plus (B) the number of shares of Common Stock which the aggregate consideration received (or by express provision hereof deemed to have been received) by CU for the total number of Additional Shares of Common Stock so issued would purchase at such Warrant Price, and (ii) the denominator of which shall be the number of shares of Common Stock Deemed Outstanding at the close of business on the date of such issuance after giving effect to such issuance of Additional Shares of Common Stock. For purposes of this paragraph (i), "Common Stock Deemed Outstanding" at any given time shall mean the sum of (1) the number of shares of Common Stock actually outstanding at that time, (2) the number of Additional Shares of Common Stock then deemed to have been issued under paragraphs (iii) or (iv) of this subsection (g) and (3) the number of shares of Common Stock then issuable upon exercise of stock options to the extent not already deemed to have been issued under paragraphs (iii) or (iv) of this subsection (g). (ii) For the purpose of making any adjustment required under this subsection (g), the consideration received by CU for any issuance or sale of securities shall (i) to the extent it consists of cash be computed at the net amount of cash received by CU after deduction of any expenses payable by CU and any underwriting or similar commissions, compensation or concessions paid or allowed by CU in connection with such issue or sale, (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board and (iii) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of CU for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iii) For the purpose of the adjustment required under this subsection (g), if at any time or from time to time after the date of this Agreement CU issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being hereinafter referred to as "Convertible Securities"), then in each case CU shall be deemed to have issued at the time of the C-6 88 issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by CU for the issuance of such rights or options or Convertible Securities plus, in the case of such options or rights, the amounts of consideration, if any, payable to CU upon the exercise of such options or rights and, in the case of Convertible Securities, the amounts of consideration, if any, payable to CU upon conversion (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities). No further adjustment of the Warrant Price, adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire or be canceled without having been exercised, the Warrant Price adjusted upon the issuance of such options, rights or Convertible Securities shall be readjusted to the Warrant Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by CU upon such exercise, plus the consideration, if any, actually received by CU for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by CU (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities. (iv) For the purpose of the adjustment required under this subsection (g), if at any time or from time to time after the date of this Agreement CU issues or sells any rights or options for the purchase of Convertible Securities, then in each such case CU shall be deemed to have issued at the time of the issuance of such rights or options the maximum number of Additional Shares of Common Stock issuable upon conversion of the total amount of Convertible Securities covered by such rights or options and to have received as consideration for the issuance of such Additional Shares of Common Stock an amount equal to the amount of consideration, if any, received by CU for the issuance of such rights or options, plus the minimum amounts of consideration, if any, payable to CU upon the exercise of such rights or options and plus the minimum amount of consideration, if any, payable to CU (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion of such Convertible Securities. No further adjustment of the Warrant Price, adjusted upon the issuance of such rights or options, shall be made as a result of the actual issuance of the Convertible Securities upon the exercise of such rights or options or upon the actual issuance of Additional Shares of Common Stock upon the conversion of such Convertible Securities. The provisions of paragraph (iii) above for the readjustment of the Warrant Price upon the expiration of rights or options or the rights of conversion of Convertible Securities shall apply in like manner to the rights, options and Convertible Securities referred to in this paragraph (iv). C-7 89 (v) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by CU after the date of this Agreement whether or not subsequently reacquired or retired by CU, other than (i) shares of Common Stock issued upon exercise of the Warrants and (ii) shares issued by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clause or shares of Common Stock resulting from any subdivision or combination of shares of Common Stock so excluded, or shares issued by way of dividend or other distribution on, or resulting from any subdivision or combination of, shares of Common stock excluded from the definition of "Additional Shares of Common Stock" by the foregoing provision. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by CU under this subsection (g), into the aggregate consideration received or deemed to have been received by CU for such issue under this subsection (i). ARTICLE II REPURCHASE OF WARRANTS AND LIMITATIONS ON SALE Section 2.1 Repurchase of Warrants. (a) Prior to the occurrence of an Acquisition Event, CU shall have no right to repurchase the Warrants and Home shall have no right to require CU to repurchase the Warrants. (b) At any time after the occurrence of an Acquisition Event, CU shall have the right to purchase (or to cause a person designated by CU to purchase), and Home shall have the right to require that CU repurchase (or, if CU shall so elect, cause a person designated by CU to purchase), (i) all (but not fewer than all) the Warrants at the time beneficially owned by Home and its Affiliates at the Warrant Call Price in effect for such Warrants on the date of closing (as provided below) and (ii) all (but not fewer than all) of the shares of Common Stock purchased by Home and its Affiliates pursuant to this Agreement with respect to which Home has beneficial ownership at a price equal to the aggregate market value for such shares as of the date of closing (as provided below). Any purchase pursuant hereto shall take place on a Business Day specified in a notice given by CU to Home or by Home to CU, as the case may be (but in no event prior to the 30th day following the date of any such notice to Home or later than the 30th day following the date of any such notice to CU). (c) The closing of any repurchase of Warrants pursuant to this Section 2.1 shall take place at 10:00 a.m. Los Angeles Time, on the date set forth in the applicable notice given by CU or Home, as the case may be, at the office of Home at the address set forth in Section 8.1. The amount payable to Home and its Affiliates upon any repurchase of Warrants shall be paid in lawful money of the United States by a federal funds check or a wire transfer of immediately available funds to an account designated by Home. Upon receipt of such payment, Home shall C-8 90 deliver or cause to be delivered to CU the certificates representing all the Warrants being repurchased free and clear of any liens, security interests, charges or encumbrances. Section 2.2 Certain Determinations of Market Value. The calculation of the Market Value, as required herein, shall be calculated in accordance with this Section 2.2. In the event that Market Value is to be determined pursuant to the terms hereof and there is not an established trading market for shares of Common Stock, or more than 50% of the outstanding shares of Common Stock are held beneficially or of record by persons, each of whom owns (individually or together with members of any group of which such persons are members) 5% or more of the outstanding shares of Common Stock, then Home may elect to have an investment banking firm mutually agreeable to CU and Home determine (i) whether, in the opinion of such investment banking firm, as a result of the absence of an established trading market or the concentration of stock holdings, Market Value (determined in accordance with the provisions of the definition of Market Value in Article VI) does not accurately reflect the fair market value of a block of 1,000 shares of Common Stock on the date as of which Market Value is to be determined, and (ii) if such investment banking firm determines that Market Value (as so determined) does not accurately reflect such fair market value, such investment banking firm shall make determination of the fair market value of a share of Common Stock on the date as of which Market Value is to be determined, based on whatever factors it deems relevant, as soon as possible and shall promptly give written notice to Home and CU of its determination. The fees of such investment banking firm in connection with such determination shall be paid by Home. Such determination shall be final and binding on the parties hereto and the fair market value so determined shall, if higher than the Market Value that would otherwise apply, be the Market Value of a share of Common Stock. In the event such determination is not transmitted to Home and CU prior to the scheduled closing date with respect to any repurchase of Warrants or Common Stock, the scheduled closing of such transaction shall not be postponed, and CU shall make such payments on the closing date as are required based on the Market Value of a share of Common Stock determined as if Home had not made an election under this Section 2.4. Within three Business Days after such investment banking firm's determination is made and conveyed to Home and CU in writing, CU shall make a payment to Home, or Home shall make a payment to CU, as the case may be, equal to the difference between the amount paid on the closing date and the amount that would have been so payable had such amount been determined on the basis of such investment banking firm's determination of the Market Value of a share of Common Stock. Section 2.3 Limit on Proceeds. Home agrees, as long as CU shall not have defaulted in its obligations to repurchase Warrants pursuant to Section 2.1, to pay over to CU any amount by which the profits received by Home and its Affiliates upon the sale or transfer of Warrants (net of all selling expenses, underwriting discounts, and commissions and other expenses incurred by Home in connection with such exercise and sale) shall exceed $5,000,000. C-9 91 ARTICLE III RESTRICTIONS ON TRANSFERABILITY OF STOCK; COMPLIANCE WITH SECURITIES ACT OF 1933 Section 3.1 Restrictions on Transferability. The Warrants acquired by Home or any Affiliate of Home pursuant to this Agreement and the Common Stock issuable upon exercise of such Warrants and any shares of capital stock received or issued in respect thereof, including, without limitation, securities issued upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event (such Warrants and all such shares of Common Stock and securities being collectively called the "Restricted Stock") shall not be hypothecated, nor shall any claim or liability exist, nor shall any agreement, written or oral, be entered into by Home or any Affiliate of Home which would cause any claim or liability to exist with respect to the Restricted Stock, and the Restricted Stock shall not be transferred except upon the conditions, to the extent applicable, specified in this Article III. Home will cause any proposed transferee of Restricted Stock held by Home or any other Affiliate of Home to agree to take ownership of such Restricted Stock subject to the provisions, to the extent applicable, of this Article III; provided, however, that the provisions of this Article shall cease to apply to any Restricted Stock which shall have been sold in a registered public offering in accordance with the provisions of this Article III. Home represents that it is purchasing the Restricted Stock for its own account and not with a view to or for sale in connection with any distribution of such Restricted Stock. Section 3.2 Restrictive Legend; Notice of Proposed Transfers. (a) Each certificate representing Restricted Stock shall (unless otherwise permitted by the provisions of paragraph (b) of this Section) be stamped or otherwise imprinted with a legend in substantially the following form: THESE SHARES/WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES/WARRANTS MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SAID ACT OR (ii) AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THESE SHARES/ WARRANTS IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF CU BANCORP. (b) Each holder of a certificate representing Restricted Stock by acceptance thereof agrees to comply in all respects with the provisions of this Section 3.2(b). Prior to any proposed transfer of any Restricted Stock other than pursuant to a registration under the Securities Act, the holder thereof shall give written notice to CU of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer C-10 92 of the Restricted Stock to be transferred and shall be accompanied by an unqualified written opinion of counsel reasonably satisfactory to CU to the effect that such proposed transfer may be effected without registration under the Securities Act. Subject to Section 3.11 hereof, upon delivery to CU of such notice and such opinion of counsel, the holder of such Restricted Stock shall be entitled to transfer such Restricted Stock in accordance with the terms of such notice delivered by the holder to CU. Each certificate evidencing Restricted Stock transferred as above provided shall bear the appropriate restrictive legend set forth in paragraph (a) above, except that such certificate shall not bear such restrictive legend if the opinion of counsel referred to above shall be to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act. Section 3.3 No Transfers Prior to Acquisition Event. Notwithstanding anything to the contrary set forth in this Agreement or the Restricted Stock, neither Home nor any Affiliate of Home shall sell, transfer or otherwise dispose of all or any portion of the Warrants owned by it, other than to an Affiliate of Home, except after the occurrence of an Acquisition Event; provided, however, that following an Acquisition Event, if CU or Home shall give notice of its election to exercise its rights under Section 2.1, then such right of Home and its Affiliates to sell, transfer or otherwise dispose of the Restricted Stock shall no longer be exercised unless CU shall have defaulted in its obligation to repurchase such Restricted Stock on the date specified in any notice. Section 3.4 Limitations on Transferees and Manner of Transfer. (a) In the event that Home and its Affiliates become entitled pursuant to the provisions of Section 3.3 to sell, transfer or otherwise dispose of Restricted Stock, such Restricted Stock may be sold or transferred (subject to Section 3.11 hereof) only (i) to a third party (or a third party and its Affiliates) in a transaction which complies with the provisions of paragraph (b) of this Section or (ii) to one or more underwriters or dealers in connection with a broad public distribution complying with the provisions of paragraph (c) of this Section of the shares of Common Stock issuable pursuant to the exercise of the transferred Warrants (such shares being hereinafter referred to as the "Underlying Shares"). The provisions of this Section shall only apply to sales, transfers or dispositions by Home and its Affiliates, and shall not apply to sales, transfers or dispositions by transferees of Home or its Affiliates (except that any sale or disposition by dealers or underwriters shall be conducted in accordance with the applicable provisions of this Section and further except that all resales shall be made in accordance with the Securities Act). (b) Home and its Affiliates shall be entitled, subject to the other applicable provisions of this Article III (including Section 3.11) and Section 2.1, to sell or transfer Restricted Stock in one or more transactions exempt from the registration requirements of Section 5 of the Securities Act; provided, however, that the aggregate number of shares of Restricted Stock sold or transferred to any single purchaser and persons known to Home to be Affiliates of or persons acting in concert with such purchaser in any such transaction shall be limited to that amount of Restricted Stock which, when taken together with the Restricted Stock theretofore sold or transferred to such purchaser and such Affiliates and persons, would not, upon the exercise in full of the Warrants so C-11 93 transferred, permit the acquisition of more than 2% of the then outstanding shares of Common Stock, determined as of the date of such sale or transfer. For purposes of the immediately preceding sentence, it shall be assumed that all Warrants, if any, that already have been sold or transferred by Home and its Affiliates are still outstanding and have not been exercised in whole or in part to purchase shares of Common Stock. (c) Warrants owned by Home and its Affiliates, unless sold to CU or an Affiliate of CU or in compliance with paragraph (b) of this Section, may only be sold or transferred to one or more underwriters or dealers in accordance with the provisions of this paragraph. Home and its Affiliates may, subject to the terms and conditions set forth in this paragraph (c), sell or transfer Warrants in whole or in part to one or more underwriters or dealers who agree in writing with Home, prior to the effective time of any such sale or transfer, to exercise such Warrants and offer and sell the Underlying Shares either (i) to the public in a public offering registered under the Securities Act (or any successor federal securities laws) pursuant to a distribution in which no single purchaser and its Affiliates will, to the knowledge of such underwriters or dealers, acquire Underlying Shares representing more than 2% of the then outstanding shares of Common Stock or (ii) in other transactions complying with the requirements of paragraph (b) above. Notwithstanding any other provision of this Agreement to the contrary, the exercise of any Warrants transferred to underwriters or dealers in accordance with this Section and the acquisition by such underwriters or dealers of shares of Common Stock pursuant to such exercise may be made simultaneously on the date of the closing of the sale or transfer by Home or its Affiliates of the relevant Warrants to such underwriters or dealers, provided CU is given written notice of the date of such closing at least five Business Days prior thereto. At any such closing, against payment of the exercise price for shares of Common Stock to be acquired pursuant to the exercise of Warrants, CU will deliver or cause to be delivered certificates representing the Underlying Shares to such underwriters or dealers, in such names and denominations as it or they shall designate not fewer than two Business Days prior to such closing. Section 3.5 "Demand" Registration. From and after such date as Home and its Affiliates become entitled pursuant to Section 3.4 to sell or transfer any Restricted Stock, CU shall, if requested by Home, as expeditiously as possible, use its best efforts to effect the registration of the Restricted Stock (which CU has been requested to register on a form in general use under the Securities Act (or any successor federal securities law) selected by CU, in order to permit the sale or other disposition of such Restricted Stock in accordance with the intended method of sale or other disposition set forth in the request (subject to the provisions of Section 3.4(c)). The right to require registration of the Restricted Stock under this Section 3.5 may only be exercised once unless Home is advised in writing by its investment banking firm (a copy of which advice shall be supplied to CU) that, in the opinion of such firm, an additional or two additional registrations are appropriate to maximize the benefits to Home of the proposed distribution of Restricted Stock, in which event Home may exercise once or twice more, as applicable, its rights under this Section 3.5. Upon the issuance of a stop order or injunction, CU may withdraw any such registration statement and abandon the proposed offering which Home shall have demanded, in which case Home's right shall be reinstated. C-12 94 Section 3.6 "Piggyback" Registration. From and after such date as Home and its Affiliates become entitled pursuant to Section 3.4 to sell or transfer any Restricted Stock, if at any time CU proposes to register any of its securities under the Securities Act (or any successor federal securities law), whether or not for sale for its own account (except with respect to registration statements filed with respect to the issuance of securities under employee benefit plans), it will give written notice to Home of its intention to do so. Upon the written request of Home, given within 15 calendar days after receipt of CU's notice, CU will use its best efforts to cause to be included in the shares to be covered by the registration statement proposed to be filed by CU, in accordance with the request of Home, the Restricted Stock to be sold by dealers or underwriters in accordance with the provisions of Section 3.4; provided, however, that CU need not include such Restricted Stock in such registration statement if CU is advised in writing by its investment banking firm (a copy of which advise shall be supplied to Home) that the inclusion of such securities shall, in the opinion of such firm, materially interfere with the orderly sale and distribution of the CU securities being sold by it. CU may, in its sole discretion and without the consent of Home, withdraw any such registration statement and abandon the proposed offering in which Home shall have requested to participate pursuant to this Section. Section 3.7 Registration Procedures and Expenses. (a) If and whenever CU is required by the provisions of this Article III to use its best efforts to effect the registration of any of the Restricted Stock under the Securities Act (or any successor federal securities law), Home and its Affiliates (including the underwriters in the case of a registration of Underlying Shares) (individually referred to as a "selling holder" or "holder" and collectively referred to as "selling holders" or "holders") will furnish in writing such information as is reasonably requested by CU for inclusion in the registration statement relating to such offering and such other information and documentation as CU shall reasonably request, and CU will, as expeditiously as possible: (i) prepare and file with the SEC or any other federal agency at the time administering the Securities Act (or a successor federal securities law) a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for such period as may be necessary to permit the successful marketing of such securities, but not exceeding 90 days; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act; (iii) furnish to each selling holder of Restricted Stock being registered such number of copies of a prospectus and preliminary prospectus in conformity with the requirements of the Securities Act (or any successor federal securities law), and such other C-13 95 documents as such seller may reasonably request in order to facilitate the public sale or other disposition of the Restricted Stock being registered owned by such seller; (iv) furnish, at the request of any holder or holders of securities being registered pursuant to this Article III, on the date that such securities are delivered to the underwriters for sale pursuant to such registration or if such securities are not being sold through underwriters, on the date the registration statement with respect to such securities becomes effective (A) an opinion dated such date of independent counsel representing CU for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, stating that such registration statement has become effective under the Securities Act (or such successor law) and that (a) to the best of the knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act (or such successor federal securities law); (b) the registration statement, the related prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Securities Act (or such successor law) and the applicable rules and regulations of the SEC thereunder, except that such counsel need express no opinion as to financial information or information provided by selling holders contained therein; (c) such counsel (subject to such customary limitation on the scope of their investigation as shall be set forth in such opinion) has no reason to believe that either the registration statement or the prospectus, or any amendment or supplement thereto, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading except that such counsel need express no opinion as to financial information or information provided by selling holders contained therein; (d) the descriptions in the registration statement and in the prospectus, or any amendment or supplement thereto, of all legal and governmental matters and all contracts and other legal documents or instruments are accurate and fairly present the information required to be shown; and (e) such counsel does not know of any legal or governmental proceedings, pending or contemplated, required to be described in the registration statement or prospectus, or any amendment or supplement thereto, or to be filed as exhibits to the registration statement which are not described and filed as required; and (B) a letter dated such date, from the independent certified public accountants of CU, addressed to the underwriters, if any, and to the holder or holders by or on behalf of whom a request is made, stating that they are independent certified public accountants within the meaning of the Securities Act (or such successor law) and that in the opinion of such accountants the financial statements and other financial data of CU included in the registration statement or the prospectus, or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act (or such successor law). Such letter from the independent certified public accountants shall additionally cover such other financial matters (including information as to the period ending not more than five business days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as the holder of Restricted Stock being registered may reasonably request; (v) use its best efforts to register or qualify the Restricted Stock covered by such registration statement under such other securities or blue sky laws of such C-14 96 jurisdictions as each such selling holder of such Restricted Stock shall reasonably request and do any and all other acts and things which may be necessary or reasonably desirable to enable such seller to consummate the public sale or other disposition in such jurisdictions as may be requested by such seller; provided, however, that CU shall have no obligation to qualify to do business in any jurisdiction or to file a general consent to service of process in any jurisdiction; (vi) notify each selling holder of Restricted Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act (or any successor Federal securities law), of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (vii) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (viii) provide a transfer agent and registrar for all Restricted Stock covered by such registration statement not later than the effective date of such registration statement; (ix) use its best efforts to list all Common Stock covered by such registration statement on each securities exchange, if any, on which any of the Common Stock is then listed (unless such Common Stock is already so listed) if such listing is then permitted under the rules of such exchange or with the NASDAQ, National Market System; and (x) undertake to take such further actions as may be reasonably requested by the underwriters. (b) If any registration statement pursuant to Section 3.5 or 3.6 shall have been declared effective and, in the judgment of CU, (A) any event shall occur or state of facts exist (other than as described in clause (B)) which requires a notice to the selling holders of Restricted Stock pursuant to clause (vi) of paragraph (a) of this Section 3.7 or (B) the offering at the time of Restricted Stock pursuant to such registration statement would adversely affect, or would be improper in view of, a public offering, financing, reorganization, recapitalization, merger, consolidation, acquisition, or other similar transaction, or negotiations, discussions or pending proposals with respect thereto, immediately upon receipt of notice to such effect from CU, Home shall cease to offer or sell any Restricted Stock registered thereunder and cease to deliver or use the prospectus in use thereunder. In the case of any matter described in clause (A), CU shall, as promptly as practicable, furnish to each selling holder a reasonable number of copies of a supple- C-15 97 ment to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchaser of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. In the case of any matter described in clause (B), CU shall promptly notify Home at such times as, in CU's judgment, such offering may be recommended (which shall be no later than 90 days following such suspension); provided that Home may, in its sole discretion, discontinue such offering with respect to the Restricted Stock covered thereby, in which event Home shall be entitled to "demand" registration rights hereunder to the full extent as if such offering had not been requested. All expenses incurred by CU in complying with Sections 3.5 and 3.6 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disburse ments of counsel for CU and blue sky fees and expenses are herein called "Registration Expenses," except for all underwriting discounts and selling commissions applicable to the sales, all fees and disbursements of counsel for any selling holder or holders (including counsel designated by any seller for a "due diligence" investigation of CU) and the expense of any special audits incident to or required by such registration, all of which are herein called "Selling Expenses." CU shall pay all Registration Expenses and the selling holder or holders of Restricted Stock being registered shall pay all Selling Expenses. Section 3.8 Indemnification. In the event of a registration of any of the Restricted Stock under the Securities Act (or any successor Federal securities law) pursuant to this Article III, CU will indemnify and hold harmless each underwriter of such Restricted Stock, Home and its Affiliates as the transferors of the Restricted Stock or any portion thereof to underwriters, and each other person, if any, who controls such seller, assignor or underwriter within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter, assignor or controlling person may become subject under the Securities Act (or such successor law) or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock shall have been registered under the Securities Act (or such successor law), any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse such seller, transferor and underwriter and each such controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that CU will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, said preliminary prospectus or said prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished to CU through an instrument executed by such seller, transferor or underwriter specifically for use in the preparation thereof; and provided further that if any losses, claims, damages or liabilities arise out of or are based C-16 98 upon an untrue statement, alleged untrue statement, omission or alleged omission contained in any preliminary prospectus which did not appear in the final prospectus, CU shall not have any such liability with respect thereto to such seller, transferor or underwriter or any person who controls such seller, transferor or underwriter within the meaning of Section 15 of the Securities Act if such seller, transferor or underwriter or any person on their behalf delivered a copy of the preliminary prospectus to the person alleging such losses, claims, damages or liabilities and failed to deliver a copy of the final prospectus, as amended or supplemented if it has been amended or supplemented, to such person at or prior to the written confirmation of the sale to such person. In the event of any registration of any Restricted Stock under the Securities Act (or a successor Federal securities law) pursuant to this Article III, each seller of such Restricted Stock (other than any underwriter or dealer purchasing Underlying Shares), and Home and its Affiliates, as transferors of Restricted Stock, severally and not jointly, will indemnify and hold harmless CU, each person, if any who controls CU within the meaning of Section 15 of the Securities Act, each officer of CU who signs the registration statement and each director of CU against any and all such losses, claims, damages, or liabilities arising out of or based upon any untrue statement or alleged untrue statement in or omission or alleged omission from any such registration statement, prospectus, amendment or supplement, if the untrue statement or omission or alleged untrue statement or omission in respect of which such loss, claim, damage or liability is asserted was made in reliance upon and in conformity with information furnished in writing to CU by or on behalf of such seller or transferor specifically for use in connection with the preparation of such registration statement, preliminary prospectus, prospectus, amendment or supplement; provided, however, that, if any losses, claims, damages or liabilities arise out of or are based upon an untrue statement, alleged untrue statement, omission or alleged omission contained in any preliminary prospectus which did not appear in the final prospectus, such seller or transferor shall not have any such liability with respect thereto to CU, any person who controls CU within the meaning of Section 15 of the Securities Act, any officer of CU who signed the registration statement of any director of CU if CU or any person on their behalf delivered a copy of the preliminary prospectus to the person alleging such losses, claims, damages or liabilities and failed to deliver a copy of the final prospectus, as amended or supplemented if it has been amended or supplemented, to such person at or prior to the written confirmation of the sale to such person; and provided further that the liability of any such seller or transferor so to indemnify shall be limited to an amount equal to the amount received by such seller upon the sale of such Restricted Stock pursuant to such registration statement, or by such transferor from the seller, as the case may be. Payments in respect of indemnifications required by this Section 3.8 shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. Any party which proposes to assert the right to be indemnified under this Section 3.8 will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party under this Section 3.8, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served, but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability which C-17 99 it may have to any indemnified party otherwise than under this Section 3.8. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and after notice from such indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its own counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party, when and as incurred, unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying party shall not in fact have employed counsel to assume the defense of such action. An indemnifying party shall not be liable for employed counsel to assume the defense of such action. An indemnifying party shall not be liable for any settlement of any action or claim effected without its consent. In no event shall an indemnifying party be required to pay for more than one counsel for an indemnified party, exclusive of local counsel. Section 3.9 Obligations of CU with Respect to Underwritten Offering. In the event that Restricted Stock shall be sold pursuant to a registration statement in an underwritten offering pursuant to Section 3.5, CU agrees to enter into an underwriting agreement containing customary representations and warranties with respect to the business and operations of an issuer of the securities being registered and customary covenants and agreements to be performed by such issuer, including, without limiting the generality of the foregoing, customary provisions with respect to indemnification by CU of the underwriters of such offering. CU shall have the right to approve the managing underwriters for such offering (which in no event shall include an affiliate of Home); provided, however, that such approval shall not be unreasonably withheld. Section 3.10 Rule 144 Requirements. CU shall undertake to make publicly available and available to the holders of Restricted Stock, pursuant to Rule 144 of the SEC under the Securities Act, such information as shall be necessary, and to take such further action as any such holder may reasonably request, to enable the holders of Restricted Stock to make sales of Restricted Stock pursuant to the Rule. CU shall furnish to any holder of Restricted Stock upon request (after the preceding sentences shall have become applicable), a written statement executed by CU as to the steps it has taken to comply with the current public information requirements of Rule 144. Section 3.11 Rights of First Refusal. (a) In the event Home or its Affiliates intend, at any time after the occurrence of an Acquisition Event to sell, transfer or dispose of any Restricted Stock (other than C-18 100 to an Affiliate of Home in a transaction not intended to circumvent the transfer restrictions contained in this Agreement) other than (i) pursuant to a sale or transfer of Warrants to one or more underwriters or dealers in accordance with Section 3.4(c) (in which case Section 3.11(b) shall govern) or (ii) at any time after CU has failed for any reason to repurchase such Restricted Stock pursuant to Article II hereof on the closing date scheduled for such repurchase, then: (i) Home shall notify CU in writing of its or its Affiliate's intention to sell, transfer or dispose of such Restricted Stock specifying the number of shares or amount of Warrants, as the case may be, proposed to be disposed of, the identity or identities of the prospective purchaser or purchasers thereof, the proposed purchase price therefor and the material terms of any agreement relating thereto (the "Sale Notice"); and (ii) CU shall have the right, by written notice of its exercise of its right of first refusal given to Home within 15 calendar days after CU's receipt of such notice of intention from Home, to purchase (or to cause a Person designated by CU to purchase) all, but not less than all of, the Restricted Stock specified in such notice of intention for cash at the gross price set forth therein (including broker's commissions and other transaction costs of Home or its Affiliate to be paid or absorbed by the prospective purchaser) if the terms set forth in such notice of intention provide for a cash sale. If the purchase price specified in such notice of intention include any property other than cash, the purchase price at which CU shall be entitled to purchase shall be (x) the amount of cash included in the purchase price specified in such notice of intention plus (y) property, to the extent feasible, substantially similar to the property described in such notice of intention and in any case of equivalent value to such property (as agreed to by CU and Home, or as determined by a nationally recognized investment banking firm selected by Home and CU). If CU shall have exercised its right of first refusal under this paragraph (a) (including the designation of another purchaser as referred to in the next subparagraph), the closing of the purchase of the Restricted Stock as to which such right CU shall have been exercised shall take place as promptly as practicable, but in no event more than 10 Business Days after CU gives notice of such exercise, and if such closing does not occur within such 10 days, such right of first refusal provided for herein (including any assignment thereof) shall be null and void and of no further force and effect with respect to such Restricted Stock and this Section 3.11 shall no longer apply to any sale or dispo sition or proposed sale or disposition of such Restricted Stock; provided that if prior notification to or approval of the Federal Reserve Board or any other regulatory authority is required in connection with such purchase, CU shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which, as the case may be, (i) any required notification period has expired or been terminated, or (ii) such approval has been obtained and, in either event, any requisite waiting period shall have passed. If CU elects not to exercise, or fails to exercise or cause to be exercised, its right of first refusal provided in this paragraph (a) within the time specified for such exercise or if the Federal Reserve Board or any other regulatory authority disapproves of CU's proposed purchase, Home and C-19 101 its Affiliates shall be free thereafter for a period of 90 days to consummate the sale, transfer or other disposition with any purchaser or purchasers of the Restricted Stock who shall have been specified in the sale notice at the price (or at any price in excess of such price) and on substantially the terms specified therein. The right of first refusal provided for in this paragraph (a) may only be exercised with respect to the initial sale, transfer or other disposition of the Restricted Stock by Home or an Affiliate (whether in blocks or as a whole) to a person that is not an Affiliate of Home and not to subsequent sales, transfers or other dispositions by purchasers of Restricted Stock. (b) If Home or its Affiliates at any time propose to transfer any Warrants to any underwriters or dealers pursuant to the provisions of Section 3.4, other than at any time after CU has failed for any reason to repurchase such Warrants pursuant to Article II hereof on the closing date scheduled for such repurchase, then Home shall first notify CU in writing of such intention, specifying the Warrants which it proposes to sell or transfer and the name or names of the proposed dealers or of the proposed managing underwriters in the underwriting syndicate to which the sale or transfer is proposed to be made. CU shall have the right, exercisable by written notice given to Home 15 calendar days after CU's receipt of notice from Home pursuant to the immediately preceding sentence, to repurchase, or to cause a third party designated by CU to purchase, all, but not fewer than all, the Warrants proposed to be sold or transferred on the terms and conditions hereinafter set forth. Any notice given by CU of exercise of its repurchase rights under this paragraph (b) shall specify a place in Los Angeles and a Business Day not earlier than 10 days and not later than 15 days after the date of such notice for the closing of the repurchase of the Warrants being repurchased. The purchase price payable to CU or its designee for the repurchase of Warrants pursuant to this paragraph (b) shall be a cash price equal to the product of (x) the number of Underlying Shares covered by the relevant Warrants (calculated as of the date of the closing of the repurchase) and (y) the Share Price on such date. At the closing of a sale of Warrants pursuant to the foregoing provisions, CU or its designee will make payment to Home of the aggregate price for the Warrants to be repurchased in one of the manners set forth in Section 2.1(c). At such closing, Home shall deliver to CU or its designee the certificates representing the Warrants to be repurchased and CU shall deliver to Home replacement certificates representing the Warrants (if any) which are not to be repurchased but were covered by the certificate or certificates surrendered by Home. Any election by CU pursuant to this paragraph to exercise its repurchase rights in respect of Warrants shall be irrevocable. In the event CU fails timely to exercise its repurchase rights in respect of Warrants within the period specified above during which it must do so or notifies Home in writing prior to the expiration of such period that it does not intend to exercise such rights or its designee fails to repurchase Warrants on the date set for the closing of such a purchase, Home and its Affiliates shall be free thereafter to consummate the sale and transfer of the Warrants specified in this notice to CU under this paragraph to any underwriters or dealers who agree to exercise the Warrants and sell the Underlying Shares in accordance with the provisions of Section 3.4(c), and this Section 3.11 shall no longer apply to such sale or transfer of such Warrants. C-20 102 (c) Home shall have the right to withdraw any notice given by it pursuant to this Section 3.11 at any time before CU shall have given notice of its intention to exercise its right of first refusal hereunder (including by designation of another purchaser). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CU CU represents and warrants to Home that: Section 4.1 Authorization of Agreement; No Conflicts. (a) The execution and delivery of this Agreement by CU and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of CU. This Agreement has been duly executed and delivered by CU and constitutes a valid and binding obligation of CU, enforceable in accordance with its terms. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with, or result in any violation of or default or loss of a material benefit under any provision of the articles of incorporation, articles or association or bylaws of CU or CU Bank or, except for the necessity of obtaining Requisite Regulatory Approvals, any material mortgage, indenture, lease agreement or other material instrument or any permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to CU or CU Bank or their respective properties, other than any such conflict, violation, default or loss which will not have a material adverse effect on CU or CU Bank. No material consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required in connection with the execution and delivery of this Agreement by CU and CU Bank or the consummation by CU of the transactions contemplated hereby except for any approvals required to be obtained pursuant to the BHC Act or the Policy State ment of the Board of Governors of the Federal Reserve System on Nonvoting Equity Investments by Bank Holding Companies, 12 C.F.R. Section 225.143 (the "FRB Guidelines"), or any other applicable laws, for the execution and delivery of this Agreement and the issuance of the Warrants by CU. Section 4.2 Authorized Stock CU has taken all necessary corporate and other action to authorize and reserve and, subject to obtaining the governmental and other approvals and consents referred to herein, to permit it to issue, and, at all times from the date hereof until the obligation to deliver Common Stock upon the exercise of the Warrants terminates, will have reserved for issuance, upon exercise of the Warrants, shares of Common Stock necessary for Home to exercise the Warrants, and CU will take all necessary corporate action to authorize and reserve for issuance all additional shares of Common Stock or other securities which may be issued pursuant to this Agreement. The shares of Common Stock to be issued upon due exercise of the Warrants, including all additional shares of Common Stock or other securities which may be issuable pursuant to this C-21 103 Agreement, upon issuance pursuant hereto, shall be duly and validly issued, fully paid and nonassessable, and shall be delivered free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever, including any preemptive rights of any stockholder of CU. ARTICLE V REPRESENTATIONS AND WARRANTIES OF HOME Home represents and warrants to CU that: Section 5.1 Due Execution of Agreement; No Conflicts. (a) This Agreement has been duly executed and delivered by Home and constitutes a valid and binding obligation of Home, enforceable in accordance with its terms. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with, or result in any violation of or default or loss of a material benefit under, any provision of the certificate of incorporation or By-laws of Home or, except for the necessity of obtaining Requisite Regulatory Approvals, any material mortgage, indenture, lease, agreement or other material instrument, or any permit, concession, grant, franchise, license, judgment, order decree, statute, law, ordinance, rule or regulation applicable to Home or its respective properties, other than any such conflict, violation, default or loss which (i) will not have a material adverse effect on Home and its Subsidiaries taken as a whole. No material consent, approval, order or authorization of, or registration, declaration or filing with, any Govern mental Entity is required in connection with the execution and delivery of this Agreement by Home or the consummation by Home of the transactions contemplated hereby, except for (a) filings required in order to obtain Requisite Regulatory Approvals, and (b) any approvals required to be obtained pursuant to the BHC Act, or the FRB Guidelines or any other applicable law for the execution and delivery of this Agreement by CU, Home and the issuance of the Warrants. ARTICLE VI DEFINITIONS Except as otherwise provided herein, the capitalized terms set forth below (in their singular and plural forms as applicable) shall have the meanings set forth below. "Affiliate" or "affiliate" shall mean, with respect to any corporation, any person that, directly or indirectly, controls or is controlled by or is under common control with such corporation. "BHC Act" means the Bank Holding Company Act of 1956, as amended. C-22 104 "Business Day" shall mean any day, other than a Saturday, Sunday or legal holiday in the State of California, on which banks are open for substantially all their banking business in Los Angeles. "Change in Bank Control Act" means the Change in Bank Control Act of 1978, as amended. "Covered Shares" shall mean on any date, with respect to any Warrants, the maximum number of shares of Common Stock that would be purchasable upon the exercise on such date of such Warrants, assuming that such Warrants may be exercised on such date to purchase the maximum number of shares of Common Stock purchasable pursuant to the terms thereof (including the limitations contained in the second paragraph of the certificate evidencing each such Warrant) without regard to any provision therein (other than such limitations) or in this Agreement or in any law limiting the right of any holder of such Warrants to acquire shares otherwise purchasable thereunder. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "Governmental Entity" shall mean any court, administrative agency or commission or other governmental authority or instrumentality. "Market Value" shall mean, on any date, the average of the closing sale prices of a share of Common Stock on the principal securities exchange on which the Common Stock is traded, or, if the Common Stock is not at the time listed on any national securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), on the 10 trading days immediately preceding such date, (or such fewer number of trading days immediately preceding such date for which shares of Common Stock have been listed for trading on such exchange or quoted on NASDAQ); provided, however, that if Home seeks a determination of the fair market value of a share of Common Stock pursuant to the provisions of Section 2.2, Market Value shall, if required pursuant to the terms of such Section, mean the fair market value of a share of Common Stock on such date determined pursuant to such Section. "Person" or "person" shall mean an individual, corporation, partnership, joint venture, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Regulatory Authority" shall mean any United States federal or state government or governmental authority the approval of which is legally required for consummation of the Merger. "Requisite Regulatory Approvals" shall mean all material permits, approvals and consents required to be obtained, and all waiting periods required to expire, prior to the consummation of the issuance of the Covered Shares under applicable federal laws of the United States or applicable laws of any state having jurisdiction over Home or CU. C-23 105 "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Share Price" shall mean, with respect to any Warrants, the amount by which, on the date of the Acquisition Event triggering the exercisability of the Warrants (i) the Warrant Price on such date is less than (ii) the greatest of: (i) the Market Value of a share of Common Stock on such date; and (ii) the highest price paid on or prior to such date for a share of Common Stock (including in any merger or consolidation) by a purchaser or group of purchasers acting in concert of 50% or more of the outstanding shares of Common Stock, or, in the case of a purchaser of 50% or more of the consolidated assets of CU (as shown on the books of CU), the Market Value of a share of Common Stock on the date of consummation of such asset acquisition. "Subsidiary" shall mean, with respect to any corporation (the "parent"), any other corporation, association or other business entity of which more than 50% of the shares of the Voting Stock are owned or controlled, directly or indirectly, by the parent or by one or more Subsidiaries of the parent, or by the parent and one or more of its Subsidiaries. "Voting Stock" shall mean the stock entitling the holders thereof to vote in the election of the directors or trustees of the corporation, association, or other business entity in question, except that it shall not include any stock so entitling the holders thereof to vote only upon the happening of a contingency, whether or not such contingency has occurred. "Warrant Call Price" shall mean, when used with respect to any Warrant, the product of (i) the number of Covered Shares on such date and (ii) the Share Price on such date; provided that the Warrant Call Price with respect to any Warrant shall in no event exceed (x) the quotient obtained by dividing $5,000,000 by the number of Covered Shares subject to all the outstanding Warrants multiplied by (y) the number of Covered Shares subject to such Warrant. ARTICLE VII TERMINATION Section 7.1 Termination. Subject to Section 7.2, this Agreement may be terminated in the following circumstances: C-24 106 (a) at the effective time of the Merger, as set forth in the Merger Agreement; (b) at the termination of the Merger Agreement prior to the occurrence of an Acquisition Event; or (c) two years after the occurrence of an Acquisition Event. Section 7.2 Effect of Termination. In the event of termination of this Agreement pursuant to Section 7.1(c), the rights of the parties hereto shall forthwith become void; provided that, if the Agreement shall terminate pursuant to Section 7.1(c) and any party has filed an application to purchase securities with any regulatory authority, the Agreement shall not terminate as provided in Section 7.1(c), but shall remain in full force and effect until the day which is 30 Business Days (plus any applicable waiting periods) after the receipt or denial of regulatory approval or consent, at which time the Agreement shall then terminate. Section 7.3 Indemnification for Breach. Each party to this Agreement agrees to indemnify and hold harmless the other party against any loss, claim, damage or liability arising out of or based upon a Default of this Agreement by such defaulting party in accordance with the procedures set forth in the last paragraph of Section 3.8 of this Agreement. ARTICLE VIII GENERAL PROVISIONS Section 8.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or any such other address for a party as shall be specified by like notice): (a) If to CU at: 16030 Ventura Boulevard Encino, CA 91436 Attn: Stephen G. Carpenter Fax: (818) 907-5024 with a copy to: Anita Wolman, Esq. 16030 Ventura Boulevard Encino, CA 91436 Fax: (818) 907-5024 C-25 107 (b) If to Home at: 2633 Cherry Avenue Signal Hill, CA 90806 Attn: James Staes Phone: (310) 988-9600 Fax: (310) 426-4526 with a copy to: Manatt, Phelps & Phillips 11355 West Olympic Boulevard Los Angeles, California 90064 Attn: Barbara S. Polsky, Esq. Fax: (310) 312-4224 Section 8.2 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 8.3 Amendment. This Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors or the duly authorized committees thereof. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. The parties hereto agree to make such amendments as may be necessary to respond to the request of any Regulatory Authority with respect to this Agreement. Section 8.4 Waiver. Any term or provision of this Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof. Section 8.5 Miscellaneous. This Agreement (including the documents and instruments referred to herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) except as contemplated in this Agreement, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder; and (c) except as contemplated in this Agreement, shall not be assigned by operation of law or otherwise. CU and Home agree that, except as required by law, it shall not issue any press release with respect to the transactions contemplated by this Agreement without consulting with each other party hereto. C-26 108 Section 8.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, CU and Home have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first above written. CU BANCORP By: --------------------------------- HOME INTERSTATE BANCORP By: --------------------------------- C-27 109 EXHIBIT D WARRANT PURCHASE AGREEMENT This WARRANT PURCHASE AGREEMENT (the "Agreement"), dated as of January 10, 1996, between CU Bancorp, a California corporation ("CU"), and Home Interstate Bancorp, a California corporation ("Home") is made with reference to the following: RECITALS A. CU, California United Bank, National Association, a wholly owned subsidiary of CU ("CU Bank"), Home and Home Bank, a wholly owned subsidiary of Home ("Home Bank"), have entered into an Agreement and Plan of Reorganization (the "Merger Agreement") whereby Home and Home Bank would be merged with and into CU and CU Bank, respectively (collectively, the "Merger"). B. As partial consideration to CU for entering into the Merger Agreement, Home has agreed to issue to CU a warrant entitling the holder thereof to purchase up to 19.9% (or 1,082,224 shares) of the outstanding common stock of Home ("Common Stock"), assuming the exercise of all Warrants (as hereafter defined), and all other options, warrants or other securities convertible into Common Stock, subject to such restrictions and conditions as may be imposed by bank regulatory authorities having jurisdiction over CU and Home, respectively. C. Concurrent with the execution of this Agreement, CU and Home shall enter into a separate warrant agreement, with substantially identical terms and conditions as are set forth in this Agreement, pursuant to which CU shall issue to Home a warrant entitling the holder thereof, upon the occurrence of certain events as set forth in such agreement, to purchase up to 19.9% (on a fully diluted basis) of the outstanding common stock of CU. D. Terms used herein and not otherwise defined shall have the meanings ascribed to them in Article VI hereof. In consideration of these premises and of the representations, covenants and agreements hereinafter set forth, Home and CU hereby agree as follows: ARTICLE I ISSUANCE AND SALE OF WARRANT Section 1.1 Issuance and Sale of the Warrant. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties hereinafter set forth, and in consideration for the execution and delivery of the Merger Agreement, Home hereby issues to CU one or more warrants (such warrants, together with any warrants issued pursuant to Section 1.4, the D-1 110 "Warrants") entitling the holder thereof to purchase in the aggregate 1,082,224 duly authorized and newly issued shares of Common Stock, subject to adjustment as provided below. The Warrants being issued at the time of the execution of this Agreement will be evidenced by a single certificate in the form of Exhibit A hereto. All Warrants issued pursuant to Section 1.4 will be evidenced by one or, at CU's request, more certificates in the form of Exhibit A hereto, dated the date of their issuance, exercisable at the adjusted exercise price at the time in effect for the Warrants issued pursuant to this Section 1.1. Section 1.2 Warrant Price. The initial exercise price at which shares of Common Stock may be acquired pursuant to exercise of the Warrants shall be $12.050 per share (the "Warrant Price"), subject to adjustment as provided in Section 1.4. Section 1.3 Exercise of Warrants. (a) The Warrants may be exercised in whole or in part only after the occurrence of an Acquisition Event. (b) As used herein, an "Acquisition Event" means any of the following events: (i) any person (other than CU or an Affiliate of CU) shall have commenced (as such term is defined in Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), or shall have filed a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to, a tender offer or exchange offer to purchase any shares of Common Stock such that, upon consummation of such offer, such person would own or control 10% or more of the then outstanding Common Stock; (ii) Home or Home Bank, without having received CU's prior written consent or except as permitted by the Merger Agreement, shall have authorized, recommended, proposed or publicly announced an intention to authorize, recommend or propose, or entered into, an agreement with any person (other than CU or any Affiliate of CU to (A) effect a merger, consolidation or similar transaction involving Home or Home Bank, (B) sell, lease or otherwise dispose of assets of Home or Home Bank representing 10% or more of the consolidated assets of Home or Home Bank, or (C) issue, sell or otherwise dispose of (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 10% or more of the voting power of Home or Home Bank (any of the foregoing an "Acquisition Transaction"); (iii) any person (other than Home or Home Bank or CU or CU Bank in a fiduciary capacity) shall have acquired beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act) or the right to acquire beneficial ownership of, or any "group" (as such term is defined in the Exchange Act) shall have been D-2 111 formed which beneficially owns or has the right to acquire beneficial ownership of, 10% or more of the then outstanding Common Stock; or (iv) the holders of Common Stock shall not have approved the Merger Agreement at the meeting of such stockholders held for the purpose of voting on the Merger Agreement, such meeting shall not have been held or shall have been canceled prior to termination of the Merger Agreement or Home's Board of Directors shall have withdrawn or modified in a manner adverse to CU the recommendation of Home's Board of Directors with respect to the Merger Agreement, in each case after any person (other than CU) shall have (A) publicly announced a proposal, or publicly disclosed an intention to make a proposal, to engage in an Acquisition Transaction or (B) filed an application (or given a notice), whether in draft or final form, under the BHC Act or the Change in Bank Control Act for approval to engage in an Acquisition Transaction. As used in this Agreement, "person" shall have the meaning specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act. (c) In the event CU is entitled to and wishes to exercise the Warrants, it shall send to Home a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three Business Days nor later than 60 Business Days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to or approval of the Federal Reserve Board or any other regulatory agency is required in connection with such purchase, CU shall promptly file the required notice or application for approval, shall promptly notify Home of such filing, and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. (d) At the closing referred to in subsection (c), CU shall pay to Home the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Warrants in immediately available funds by wire transfer to a bank account designated by Home, provided that failure or refusal of Home to designate such a bank account shall not preclude CU from exercising the Warrants. (e) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (d), Home shall deliver to CU a certificate or certificates representing the number of shares of Common stock purchased by CU. (f) Upon the giving by CU to Home of the written notice of exercise of the Warrants provided for under subsection (c) and the tender of the applicable purchase price in D-3 112 immediately available funds, CU shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Home shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to CU. Home shall pay all expenses, and any and all federal, state and local taxes or other charges that may be payable in connection with the preparation, issue and delivery of stock certificates hereunder in the name of CU. Section 1.4 Additional Warrants; Adjustments to Warrant Price and Number of Shares. The number of shares to which the Warrants may be exercised and the Warrant Price shall be subject to adjustment as provided below: (a) Additional Warrants. If Home shall, on one or more occasions after the date hereof, issue additional shares of Common Stock, and if, as a result of any such issuance the shares of Common Stock issued or issuable upon the exercise of Warrants issued pursuant to Section 1.1 hereof shall represent less than 19.9% of the outstanding Common Stock, assuming the exercise of all Warrants and all other options, warrants or other securities convertible into Common Stock, Home shall issue to CU, promptly upon CU's demand, without further consideration, Warrants to purchase a number of authorized but unissued shares of Common Stock which, when added to the shares issued or issuable upon the exercise of such previously issued Warrants, would represent 19.9% as the case may be of the outstanding Common Stock. (b) Adjustment for Stock Splits and Combinations. If Home at any time or from time to time after the date of this Agreement effects a subdivision of the Common Stock, the Warrant Price then in effect immediately before that subdivision shall be proportionately decreased, and conversely, if Home at any time or from time to time after the date of this Agreement combines the outstanding shares of Common Stock, the Warrant Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subsection (b) shall become effective at the close of business on the date the subdivision or combination becomes effective. (c) Adjustment for Certain Dividends and Distributions. In the event Home at any time or from time to time after the date of this Agreement makes, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Warrant Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the Warrant Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Warrant Price shall be D-4 113 recomputed accordingly as of the close of business on such record date and thereafter the Warrant Price shall be adjusted pursuant to this subsection (c) as of the time of actual payment of such dividends or distributions. (d) Adjustments for Other Dividends and Distributions. In the event Home at any time or from time to time after the date of this Agreement makes, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities of Home other than shares of Common Stock, then in each such event provision shall be made so that the holders of Warrants shall receive upon exercise thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of Home which they would have received had their Warrants been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of exercise of the Warrants, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 1.4. (e) Adjustment for Reclassification, Exchange and Substitution. If the Common Stock issuable upon the exercise of the Warrants is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 1.4), then and in any such event each holder of Warrants shall have the right thereafter to receive upon exercise of the Warrants the kind and amount of stock and other securities and property receivable upon such reorganization, reclassification or other change by holders of the number of shares of Common Stock into which such Warrants might have been exercised immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided in this Section 1.4. (f) Reorganization, Mergers, Consolidations and Sales of Assets. If at any time or from time to time there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 1.4), or a merger or consolidation of Home with or into another corporation, or the sale of all or substantially all of Home's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Warrants shall thereafter be entitled to receive upon exercise of the Warrants the number of shares of stock or other securities or property of Home, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon exercise of the Warrants would have been entitled in such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 1.4 and the other terms and conditions with respect to the rights of the holders of the Warrants after the reorganization, merger, consolidation or sale to the end that the provisions of this Agreement, including this Section 1.4 (including adjustment of the Warrant Price then in effect and number of shares purchasable upon exercise of the Warrants) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. D-5 114 (g) Sale of Shares Below Warrant Price. (i) If at any time or from time to time after the date of this Agreement, Home issues or sells, or is deemed by the express provisions of this subsection (g) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in subsection (c) above and other than upon a subdivision or combination of shares of Common Stock as provided in subsection (b) above, for an Effective Price (as hereinafter defined) less than the Warrant Price (or, if an adjusted Warrant Price shall be in effect by reason of a previous adjustment, then less than such adjusted Warrant Price) then and in each such case the then existing Warrant Price shall be reduced, as of the opening of business on the date of such issuance or sale, to a price determined by multiplying that Warrant Price by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock Deemed Outstanding at the close of business on the day next preceding the date of such issue or sale plus (B) the number of shares of Common Stock which the aggregate consideration received (or by express provision hereof deemed to have been received) by Home for the total number of Additional Shares of Common Stock so issued would purchase at such Warrant Price, and (ii) the denominator of which shall be the number of shares of Common Stock Deemed Outstanding at the close of business on the date of such issuance after giving effect to such issuance of Additional Shares of Common Stock. For purposes of this paragraph (i), "Common Stock Deemed Outstanding" at any given time shall mean the sum of (1) the number of shares of Common Stock actually outstanding at that time, (2) the number of Additional Shares of Common Stock then deemed to have been issued under paragraphs (iii) or (iv) of this subsection (g) and (3) the number of shares of Common Stock then issuable upon exercise of stock options to the extent not already deemed to have been issued under paragraphs (iii) or (iv) of this subsection (g). (ii) For the purpose of making any adjustment required under this subsection (g), the consideration received by Home for any issuance or sale of securities shall (i) to the extent it consists of cash be computed at the net amount of cash received by Home after deduction of any expenses payable by Home and any underwriting or similar commissions, compensation or concessions paid or allowed by Home in connection with such issue or sale, (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board and (iii) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of Home for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iii) For the purpose of the adjustment required under this subsection (g), if at any time or from time to time after the date of this Agreement Home issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being hereinafter referred to as "Convertible Securities"), then in each case Home shall be deemed to have issued at the time of the D-6 115 issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by Home for the issuance of such rights or options or Convertible Securities plus, in the case of such options or rights, the amounts of consideration, if any, payable to Home upon the exercise of such options or rights and, in the case of Convertible Securities, the amounts of consideration, if any, payable to Home upon conversion (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities). No further adjustment of the Warrant Price, adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire or be canceled without having been exercised, the Warrant Price adjusted upon the issuance of such options, rights or Convertible Securities shall be readjusted to the Warrant Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by Home upon such exercise, plus the consideration, if any, actually received by Home for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by Home (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities. (iv) For the purpose of the adjustment required under this subsection (g), if at any time or from time to time after the date of this Agreement Home issues or sells any rights or options for the purchase of Convertible Securities, then in each such case Home shall be deemed to have issued at the time of the issuance of such rights or options the maximum number of Additional Shares of Common Stock issuable upon conversion of the total amount of Convertible Securities covered by such rights or options and to have received as consideration for the issuance of such Additional Shares of Common Stock an amount equal to the amount of consideration, if any, received by Home for the issuance of such rights or options, plus the minimum amounts of consideration, if any, payable to Home upon the exercise of such rights or options and plus the minimum amount of consideration, if any, payable to Home (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion of such Convertible Securities. No further adjustment of the Warrant Price, adjusted upon the issuance of such rights or options, shall be made as a result of the actual issuance of the Convertible Securities upon the exercise of such rights or options or upon the actual issuance of Additional Shares of Common Stock upon the conversion of such Convertible Securities. The provisions of paragraph (iii) above for the readjustment of the Warrant Price upon the expiration of rights or options or the rights of conversion of Convertible Securities shall apply in like manner to the rights, options and Convertible Securities referred to in this paragraph (iv). D-7 116 (v) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by Home after the date of this Agreement whether or not subsequently reacquired or retired by Home, other than (i) shares of Common Stock issued upon exercise of the Warrants and (ii) shares issued by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clause or shares of Common Stock resulting from any subdivision or combination of shares of Common Stock so excluded, or shares issued by way of dividend or other distribution on, or resulting from any subdivision or combination of, shares of Common stock excluded from the definition of "Additional Shares of Common Stock" by the foregoing provision. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by Home under this subsection (g), into the aggregate consideration received or deemed to have been received by Home for such issue under this subsection (i). ARTICLE II REPURCHASE OF WARRANTS AND LIMITATIONS ON SALE Section 2.1 Repurchase of Warrants. (a) Prior to the occurrence of an Acquisition Event, Home shall have no right to repurchase the Warrants and CU shall have no right to require Home to repurchase the Warrants. (b) At any time after the occurrence of an Acquisition Event, Home shall have the right to purchase (or to cause a person designated by Home to purchase), and CU shall have the right to require that Home repurchase (or, if Home shall so elect, cause a person designated by Home to purchase), (i) all (but not fewer than all) the Warrants at the time beneficially owned by CU and its Affiliates at the Warrant Call Price in effect for such Warrants on the date of closing (as provided below) and (ii) all (but not fewer than all) of the shares of Common Stock purchased by CU and its Affiliates pursuant to this Agreement with respect to which CU has beneficial ownership at a price equal to the aggregate Market Value for such shares as of the date of closing (as provided below). Any purchase pursuant hereto shall take place on a Business Day specified in a notice given by Home to CU or by CU to Home, as the case may be (but in no event prior to the 30th day following the date of any such notice to CU or later than the 30th day following the date of any such notice to Home). (c) The closing of any repurchase of Warrants pursuant to this Section 2.1 shall take place at 10:00 a.m. Los Angeles Time, on the date set forth in the applicable notice given by Home or CU, as the case may be, at the office of CU at the address set forth in Section 8.1. The amount payable to CU and its Affiliates upon any repurchase of Warrants shall be paid in lawful money of the United States by a federal funds check or a wire transfer of immediately available funds to an account designated by CU. Upon receipt of such payment, CU shall deliver or cause to D-8 117 be delivered to Home the certificates representing all the Warrants being repurchased free and clear of any liens, security interests, charges or encumbrances. Section 2.2 Certain Determinations of Market Value. The calculation of the Market Value, as required herein, shall be calculated in accordance with this section 2.2 In the event that Market Value is to be determined pursuant to the terms hereof and there is not an established trading market for shares of Common Stock, or more than 50% of the outstanding shares of Common Stock are held beneficially or of record by persons, each of whom owns (individually or together with members of any group of which such persons are members) 5% or more of the outstanding shares of Common Stock, then CU may elect to have an investment banking firm mutually agreeable to Home and CU determine (i) whether, in the opinion of such investment banking firm, as a result of the absence of an established trading market or the concentration of stock holdings, Market Value (determined in accordance with the provisions of the definition of Market Value in Article VI) does not accurately reflect the fair market value of a block of 1,000 shares of Common Stock on the date as of which Market Value is to be determined, and (ii) if such investment banking firm determines that Market Value (as so determined) does not accurately reflect such fair market value, such investment banking firm shall make determination of the fair market value of a share of Common Stock on the date as of which Market Value is to be determined, based on whatever factors it deems relevant, as soon as possible and shall promptly give written notice to CU and Home of its determination. The fees of such investment banking firm in connection with such determination shall be paid by CU. Such determination shall be final and binding on the parties hereto and the fair market value so determined shall, if higher than the Market Value that would otherwise apply, be the Market Value of a share of Common Stock. In the event such determination is not transmitted to CU and Home prior to the scheduled closing date with respect to any repurchase of Warrants or Common Stock, the scheduled closing of such transaction shall not be postponed, and Home shall make such payments on the closing date as are required based on the Market Value of a share of Common Stock determined as if CU had not made an election under this Section 2.4. Within three Business Days after such investment banking firm's determination is made and conveyed to CU and Home in writing, Home shall make a payment to CU, or CU shall make a payment to Home, as the case may be, equal to the difference between the amount paid on the closing date and the amount that would have been so payable had such amount been determined on the basis of such investment banking firm's determination of the Market Value of a share of Common Stock. Section 2.3 Limit on Proceeds. CU agrees, as long as Home shall not have defaulted in its obligations to repurchase Warrants pursuant to Section 2.1, to pay over to Home any amount by which the profits received by CU and its Affiliates upon the sale or transfer of Warrants (net of all selling expenses, underwriting discounts, and commissions and other expenses incurred by CU in connection with such exercise and sale) shall exceed $5,000,000. D-9 118 ARTICLE III RESTRICTIONS ON TRANSFERABILITY OF STOCK; COMPLIANCE WITH SECURITIES ACT OF 1933 Section 3.1 Restrictions on Transferability. The Warrants acquired by CU or any Affiliate of CU pursuant to this Agreement and the Common Stock issuable upon exercise of such Warrants and any shares of capital stock received or issued in respect thereof, including, without limitation, securities issued upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event (such Warrants and all such shares of Common Stock and securities being collectively called the "Restricted Stock") shall not be hypothecated, nor shall any claim or liability exist, nor shall any agreement, written or oral, be entered into by CU or any Affiliate of CU which would cause any claim or liability to exist with respect to the Restricted Stock, and the Restricted Stock shall not be transferred except upon the conditions, to the extent applicable, specified in this Article III. CU will cause any proposed transferee of Restricted Stock held by CU or any other Affiliate of CU to agree to take ownership of such Restricted Stock subject to the provisions, to the extent applicable, of this Article III; provided, however, that the provisions of this Article shall cease to apply to any Restricted Stock which shall have been sold in a registered public offering in accordance with the provisions of this Article III. CU represents that it is purchasing the Restricted Stock for its own account and not with a view to or for sale in connection with any distribution of such Restricted Stock. Section 3.2 Restrictive Legend; Notice of Proposed Transfers. (a) Each certificate representing Restricted Stock shall (unless otherwise permitted by the provisions of paragraph (b) of this Section) be stamped or otherwise imprinted with a legend in substantially the following form: THESE SHARES/WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES/WARRANTS MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SAID ACT OR (ii) AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THESE SHARES/ WARRANTS IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE AGREEMENT DATED AS OF JANUARY 10, 1996, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF HOME INTERSTATE BANCORP. (b) Each holder of a certificate representing Restricted Stock by acceptance thereof agrees to comply in all respects with the provisions of this Section 3.2(b). Prior to any proposed transfer of any Restricted Stock other than pursuant to a registration under the Securities Act, the holder thereof shall give written notice to Home of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer of the Restricted Stock to be transferred and shall be accompanied by an unqualified written D-10 119 opinion of counsel reasonably satisfactory to Home to the effect that such proposed transfer may be effected without registration under the Securities Act. Subject to Section 3.11 hereof, upon delivery to Home of such notice and such opinion of counsel, the holder of such Restricted Stock shall be entitled to transfer such Restricted Stock in accordance with the terms of such notice delivered by the holder to Home. Each certificate evidencing Restricted Stock transferred as above provided shall bear the appropriate restrictive legend set forth in paragraph (a) above, except that such certificate shall not bear such restrictive legend if the opinion of counsel referred to above shall be to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act. Section 3.3 No Transfers Prior to Acquisition Event. Notwithstanding anything to the contrary set forth in this Agreement or the Restricted Stock, neither CU nor any Affiliate of CU shall sell, transfer or otherwise dispose of all or any portion of the Warrants owned by it, other than to an Affiliate of CU, except after the occurrence of an Acquisition Event; provided, however, that following an Acquisition Event, if Home or CU shall give notice of its election to exercise its rights under Section 2.1, then such right of CU and its Affiliates to sell, transfer or otherwise dispose of the Restricted Stock shall no longer be exercised unless Home shall have defaulted in its obligation to repurchase such Restricted Stock on the date specified in any notice. Section 3.4 Limitations on Transferees and Manner of Transfer. (a) In the event that CU and its Affiliates become entitled pursuant to the provisions of Section 3.3 to sell, transfer or otherwise dispose of Restricted Stock, such Restricted Stock may be sold or transferred (subject to Section 3.11 hereof) only (i) to a third party (or a third party and its Affiliates) in a transaction which complies with the provisions of paragraph (b) of this Section or (ii) to one or more underwriters or dealers in connection with a broad public distribution complying with the provisions of paragraph (c) of this Section of the shares of Common Stock issuable pursuant to the exercise of the transferred Warrants (such shares being hereinafter referred to as the "Underlying Shares"). The provisions of this Section shall only apply to sales, transfers or dispositions by CU and its Affiliates, and shall not apply to sales, transfers or dispositions by transferees of CU or its Affiliates (except that any sale or disposition by dealers or underwriters shall be conducted in accordance with the applicable provisions of this Section and further except that all resales shall be made in accordance with the Securities Act). (b) CU and its Affiliates shall be entitled, subject to the other applicable provisions of this Article III (including Section 3.11) and Section 2.1, to sell or transfer Restricted Stock in one or more transactions exempt from the registration requirements of Section 5 of the Securities Act; provided, however, that the aggregate number of shares of Restricted Stock sold or transferred to any single purchaser and persons known to CU to be Affiliates of or persons acting in concert with such purchaser in any such transaction shall be limited to that amount of Restricted Stock which, when taken together with the Restricted Stock theretofore sold or transferred to such purchaser and such Affiliates and persons, would not, upon the exercise in full of the Warrants so transferred, permit the acquisition of more than 2% of the then outstanding shares of Common Stock, D-11 120 determined as of the date of such sale or transfer. For purposes of the immediately preceding sentence, it shall be assumed that all Warrants, if any, that already have been sold or transferred by CU and its Affiliates are still outstanding and have not been exercised in whole or in part to purchase shares of Common Stock. (c) Warrants owned by CU and its Affiliates, unless sold to Home or an Affiliate of Home or in compliance with paragraph (b) of this Section, may only be sold or transferred to one or more underwriters or dealers in accordance with the provisions of this paragraph. CU and its Affiliates may, subject to the terms and conditions set forth in this para graph (c), sell or transfer Warrants in whole or in part to one or more underwriters or dealers who agree in writing with CU, prior to the effective time of any such sale or transfer, to exercise such Warrants and offer and sell the Underlying Shares either (i) to the public in a public offering registered under the Securities Act (or any successor federal securities laws) pursuant to a distribution in which no single purchaser and its Affiliates will, to the knowledge of such underwriters or dealers, acquire Underlying Shares representing more than 2% of the then outstanding shares of Common Stock or (ii) in other transactions complying with the requirements of paragraph (b) above. Notwithstanding any other provision of this Agreement to the contrary, the exercise of any Warrants transferred to underwriters or dealers in accordance with this Section and the acquisition by such underwriters or dealers of shares of Common Stock pursuant to such exercise may be made simultaneously on the date of the closing of the sale or transfer by CU or its Affiliates of the relevant Warrants to such underwriters or dealers, provided Home is given written notice of the date of such closing at least five Business Days prior thereto. At any such closing, against payment of the exercise price for shares of Common Stock to be acquired pursuant to the exercise of Warrants, Home will deliver or cause to be delivered certificates representing the Underlying Shares to such underwriters or dealers, in such names and denominations as it or they shall designate not fewer than two Business Days prior to such closing. Section 3.5 "Demand" Registration. From and after such date as CU and its Affiliates become entitled pursuant to Section 3.4 to sell or transfer any Restricted Stock, Home shall, if requested by CU, as expeditiously as possible, use its best efforts to effect the registration of the Restricted Stock (which Home has been requested to register on a form in general use under the Securities Act (or any successor federal securities law) selected by Home, in order to permit the sale or other disposition of such Restricted Stock in accordance with the intended method of sale or other disposition set forth in the request (subject to the provisions of Section 3.4(c)). The right to require registration of the Restricted Stock under this Section 3.5 may only be exercised once unless CU is advised in writing by its investment banking firm (a copy of which advice shall be supplied to Home) that, in the opinion of such firm, an additional or two additional registrations are appropriate to maximize the benefits to CU of the proposed distribution of Restricted Stock, in which event CU may exercise once or twice more, as applicable, its rights under this Section 3.5. Upon the issuance of a stop order or injunction, Home may withdraw any such registration statement and abandon the proposed offering which CU shall have demanded, in which case CU's right shall be reinstated. D-12 121 Section 3.6 "Piggyback" Registration. From and after such date as CU and its Affiliates become entitled pursuant to Section 3.4 to sell or transfer any Restricted Stock, if at any time Home proposes to register any of its securities under the Securities Act (or any successor federal securities law), whether or not for sale for its own account (except with respect to registration statements filed with respect to the issuance of securities under employee benefit plans), it will give written notice to CU of its intention to do so. Upon the written request of CU, given within 15 calendar days after receipt of Home's notice, Home will use its best efforts to cause to be included in the shares to be covered by the registration statement proposed to be filed by Home, in accordance with the request of CU, the Restricted Stock to be sold by dealers or underwriters in accordance with the provisions of Section 3.4; provided, however, that Home need not include such Restricted Stock in such registration statement if Home is advised in writing by its investment banking firm (a copy of which advise shall be supplied to CU) that the inclusion of such securities shall, in the opinion of such firm, materially interfere with the orderly sale and distribution of the Home securities being sold by it. Home may, in its sole discretion and without the consent of CU, withdraw any such registration statement and abandon the proposed offering in which CU shall have requested to participate pursuant to this Section. Section 3.7 Registration Procedures and Expenses. (a) If and whenever Home is required by the provisions of this Article III to use its best efforts to effect the registration of any of the Restricted Stock under the Securities Act (or any successor federal securities law), CU and its Affiliates (including the underwriters in the case of a registration of Underlying Shares) (individually referred to as a "selling holder" or "holder" and collectively referred to as "selling holders" or "holders") will furnish in writing such information as is reasonably requested by Home for inclusion in the registration statement relating to such offering and such other information and documentation as Home shall reasonably request, and Home will, as expeditiously as possible: (i) prepare and file with the SEC or any other federal agency at the time administering the Securities Act (or a successor federal securities law) a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for such period as may be necessary to permit the successful marketing of such securities, but not exceeding 90 days; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act; (iii) furnish to each selling holder of Restricted Stock being registered such number of copies of a prospectus and preliminary prospectus in conformity with the requirements of the Securities Act (or any successor federal securities law), and such other D-13 122 documents as such seller may reasonably request in order to facilitate the public sale or other disposition of the Restricted Stock being registered owned by such seller; (iv) furnish, at the request of any holder or holders of securities being registered pursuant to this Article III, on the date that such securities are delivered to the underwriters for sale pursuant to such registration or if such securities are not being sold through underwriters, on the date the registration statement with respect to such securities becomes effective (A) an opinion dated such date of independent counsel representing Home for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, stating that such registration statement has become effective under the Securities Act (or such successor law) and that (a) to the best of the knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act (or such successor federal securities law); (b) the registration statement, the related prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Securities Act (or such successor law) and the applicable rules and regulations of the SEC thereunder, except that such counsel need express no opinion as to financial information or information provided by selling holders contained therein; (c) such counsel (subject to such customary limitation on the scope of their investigation as shall be set forth in such opinion) has no reason to believe that either the registration statement or the prospectus, or any amendment or supplement thereto, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading except that such counsel need express no opinion as to financial information or information provided by selling holders contained therein; (d) the descriptions in the registration statement and in the prospectus, or any amendment or supplement thereto, of all legal and governmental matters and all contracts and other legal documents or instruments are accurate and fairly present the information required to be shown; and (e) such counsel does not know of any legal or governmental proceedings, pending or contemplated, required to be described in the registration statement or prospectus, or any amendment or supplement thereto, or to be filed as exhibits to the registration statement which are not described and filed as required; and (B) a letter dated such date, from the independent certified public accountants of Home, addressed to the underwriters, if any, and to the holder or holders by or on behalf of whom a request is made, stating that they are independent certified public accountants within the meaning of the Securities Act (or such successor law) and that in the opinion of such accountants the financial statements and other financial data of Home included in the registration statement or the prospectus, or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act (or such successor law). Such letter from the independent certified public accountants shall additionally cover such other financial matters (including information as to the period ending not more than five business days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as the holder of Restricted Stock being registered may reasonably request; (v) use its best efforts to register or qualify the Restricted Stock covered by such registration statement under such other securities or blue sky laws of such D-14 123 jurisdictions as each such selling holder of such Restricted Stock shall reasonably request and do any and all other acts and things which may be necessary or reasonably desirable to enable such seller to consummate the public sale or other disposition in such jurisdictions as may be requested by such seller; provided, however, that Home shall have no obligation to qualify to do business in any jurisdiction or to file a general consent to service of process in any jurisdiction; (vi) notify each selling holder of Restricted Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act (or any successor Federal securities law), of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (vii) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (viii) provide a transfer agent and registrar for all Restricted Stock covered by such registration statement not later than the effective date of such registration statement; (ix) use its best efforts to list all Common Stock covered by such registration statement on each securities exchange, if any, on which any of the Common Stock is then listed (unless such Common Stock is already so listed) if such listing is then permitted under the rules of such exchange or with the NASDAQ, National Market System; and (x) undertake to take such further actions as may be reasonably requested by the underwriters. (b) If any registration statement pursuant to Section 3.5 or 3.6 shall have been declared effective and, in the judgment of Home, (A) any event shall occur or state of facts exist (other than as described in clause (B)) which requires a notice to the selling holders of Restricted Stock pursuant to clause (vi) of paragraph (a) of this Section 3.7 or (B) the offering at the time of Restricted Stock pursuant to such registration statement would adversely affect, or would be improper in view of, a public offering, financing, reorganization, recapitalization, merger, consolidation, acquisition, or other similar transaction, or negotiations, discussions or pending proposals with respect thereto, immediately upon receipt of notice to such effect from Home, CU shall cease to offer or sell any Restricted Stock registered thereunder and cease to deliver or use the prospectus in use thereunder. In the case of any matter described in clause (A), Home shall, as promptly as practicable, furnish to each selling holder a reasonable number of copies of a supple- D-15 124 ment to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchaser of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. In the case of any matter described in clause (B), Home shall promptly notify CU at such times as, in Home's judgment, such offering may be recommended (which shall be no later than 90 days following such suspension); provided that CU may, in its sole discretion, discontinue such offering with respect to the Restricted Stock covered thereby, in which event CU shall be entitled to "demand" registration rights hereunder to the full extent as if such offering had not been requested. All expenses incurred by Home in complying with Sections 3.5 and 3.6 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disburse ments of counsel for Home and blue sky fees and expenses are herein called "Registration Expenses," except for all underwriting discounts and selling commissions applicable to the sales, all fees and disbursements of counsel for any selling holder or holders (including counsel designated by any seller for a "due diligence" investigation of Home) and the expense of any special audits incident to or required by such registration, all of which are herein called "Selling Expenses." Home shall pay all Registration Expenses and the selling holder or holders of Restricted Stock being registered shall pay all Selling Expenses. Section 3.8 Indemnification. In the event of a registration of any of the Restricted Stock under the Securities Act (or any successor Federal securities law) pursuant to this Article III, Home will indemnify and hold harmless each underwriter of such Restricted Stock, CU and its Affiliates as the transferors of the Restricted Stock or any portion thereof to underwriters, and each other person, if any, who controls such seller, assignor or underwriter within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter, assignor or controlling person may become subject under the Securities Act (or such successor law) or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock shall have been registered under the Securities Act (or such successor law), any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse such seller, transferor and underwriter and each such controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Home will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, said preliminary prospectus or said prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished to Home through an instrument executed by such seller, transferor or underwriter specifically for use in the preparation thereof; and provided further that if any losses, claims, damages or liabilities arise out of or are based D-16 125 upon an untrue statement, alleged untrue statement, omission or alleged omission contained in any preliminary prospectus which did not appear in the final prospectus, Home shall not have any such liability with respect thereto to such seller, transferor or underwriter or any person who controls such seller, transferor or underwriter within the meaning of Section 15 of the Securities Act if such seller, transferor or underwriter or any person on their behalf delivered a copy of the preliminary prospectus to the person alleging such losses, claims, damages or liabilities and failed to deliver a copy of the final prospectus, as amended or supplemented if it has been amended or supplemented, to such person at or prior to the written confirmation of the sale to such person. In the event of any registration of any Restricted Stock under the Securities Act (or a successor Federal securities law) pursuant to this Article III, each seller of such Restricted Stock (other than any underwriter or dealer purchasing Underlying Shares), and CU and its Affiliates, as transferors of Restricted Stock, severally and not jointly, will indemnify and hold harmless Home, each person, if any who controls Home within the meaning of Section 15 of the Securities Act, each officer of Home who signs the registration statement and each director of Home against any and all such losses, claims, damages, or liabilities arising out of or based upon any untrue statement or alleged untrue statement in or omission or alleged omission from any such registration statement, prospectus, amendment or supplement, if the untrue statement or omission or alleged untrue statement or omission in respect of which such loss, claim, damage or liability is asserted was made in reliance upon and in conformity with information furnished in writing to Home by or on behalf of such seller or transferor specifically for use in connection with the preparation of such registration statement, preliminary prospectus, prospectus, amendment or supplement; provided, however, that, if any losses, claims, damages or liabilities arise out of or are based upon an untrue statement, alleged untrue statement, omission or alleged omission contained in any preliminary prospectus which did not appear in the final prospectus, such seller or transferor shall not have any such liability with respect thereto to Home, any person who controls Home within the meaning of Section 15 of the Securities Act, any officer of Home who signed the registration statement of any director of Home if Home or any person on their behalf delivered a copy of the preliminary prospectus to the person alleging such losses, claims, damages or liabilities and failed to deliver a copy of the final prospectus, as amended or supplemented if it has been amended or supplemented, to such person at or prior to the written confirmation of the sale to such person; and provided further that the liability of any such seller or transferor so to indemnify shall be limited to an amount equal to the amount received by such seller upon the sale of such Restricted Stock pursuant to such registration statement, or by such transferor from the seller, as the case may be. Payments in respect of indemnifications required by this Section 3.8 shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. Any party which proposes to assert the right to be indemnified under this Section 3.8 will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party under this Section 3.8, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served, but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability which D-17 126 it may have to any indemnified party otherwise than under this Section 3.8. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and after notice from such indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its own counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party, when and as incurred, unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying party shall not in fact have employed counsel to assume the defense of such action. An indemnifying party shall not be liable for employed counsel to assume the defense of such action. An indemnifying party shall not be liable for any settlement of any action or claim effected without its consent. In no event shall an indemnifying party be required to pay for more than one counsel for an indemnified party, exclusive of local counsel. Section 3.9 Obligations of Home with Respect to Underwritten Offering. In the event that Restricted Stock shall be sold pursuant to a registration statement in an underwritten offering pursuant to Section 3.5, Home agrees to enter into an underwriting agreement containing customary representations and warranties with respect to the business and operations of an issuer of the securities being registered and customary covenants and agreements to be performed by such issuer, including, without limiting the generality of the foregoing, customary provisions with respect to indemnification by Home of the underwriters of such offering. Home shall have the right to approve the managing underwriters for such offering (which in no event shall include an affiliate of CU); provided, however, that such approval shall not be unreasonably withheld. Section 3.10 Rule 144 Requirements. Home shall undertake to make publicly available and available to the holders of Restricted Stock, pursuant to Rule 144 of the SEC under the Securities Act, such information as shall be necessary, and to take such further action as any such holder may reasonably request, to enable the holders of Restricted Stock to make sales of Restricted Stock pursuant to the Rule. Home shall furnish to any holder of Restricted Stock upon request (after the preceding sentences shall have become applicable), a written statement executed by Home as to the steps it has taken to comply with the current public information requirements of Rule 144. Section 3.11 Rights of First Refusal. (a) In the event CU or its Affiliates intend, at any time after the occurrence of an Acquisition Event to sell, transfer or dispose of any Restricted Stock (other than to an Affiliate D-18 127 of CU in a transaction not intended to circumvent the transfer restrictions contained in this Agreement) other than (i) pursuant to a sale or transfer of Warrants to one or more underwriters or dealers in accordance with Section 3.4(c) (in which case Section 3.11(b) shall govern) or (ii) at any time after Home has failed for any reason to repurchase such Restricted Stock pursuant to Article II hereof on the closing date scheduled for such repurchase, then: (i) CU shall notify Home in writing of its or its Affiliate's intention to sell, transfer or dispose of such Restricted Stock specifying the number of shares or amount of Warrants, as the case may be, proposed to be disposed of, the identity or identities of the prospective purchaser or purchasers thereof, the proposed purchase price therefor and the material terms of any agreement relating thereto (the "Sale Notice"); and (ii) Home shall have the right, by written notice of its exercise of its right of first refusal given to CU within 15 calendar days after Home's receipt of such notice of intention from CU, to purchase (or to cause a Person designated by Home to purchase) all, but not less than all of, the Restricted Stock specified in such notice of intention for cash at the gross price set forth therein (including broker's commissions and other transaction costs of CU or its Affiliate to be paid or absorbed by the prospective purchaser) if the terms set forth in such notice of intention provide for a cash sale. If the purchase price specified in such notice of intention include any property other than cash, the purchase price at which Home shall be entitled to purchase shall be (x) the amount of cash included in the purchase price specified in such notice of intention plus (y) property, to the extent feasible, substantially similar to the property described in such notice of intention and in any case of equivalent value to such property (as agreed to by Home and CU, or as determined by a nationally recognized investment banking firm selected by CU and Home). If Home shall have exercised its right of first refusal under this paragraph (a) (including the designation of another purchaser as referred to in the next subparagraph), the closing of the purchase of the Restricted Stock as to which such right Home shall have been exercised shall take place as promptly as practicable, but in no event more than 10 Business Days after Home gives notice of such exercise, and if such closing does not occur within such 10 days, such right of first refusal provided for herein (including any assignment thereof) shall be null and void and of no further force and effect with respect to such Restricted Stock and this Section 3.11 shall no longer apply to any sale or disposition or proposed sale or disposition of such Restricted Stock; provided that if prior notification to or approval of the Federal Reserve Board or any other regulatory authority is required in connection with such purchase, Home shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which, as the case may be, (i) any required notification period has expired or been terminated, or (ii) such approval has been obtained and, in either event, any requisite waiting period shall have passed. If Home elects not to exercise, or fails to exercise or cause to be exercised, its right of first refusal provided in this paragraph (a) within the time specified for such exercise or if the Federal Reserve Board or any other regulatory authority disapproves of Home's proposed purchase, D-19 128 CU and its Affiliates shall be free thereafter for a period of 90 days to consummate the sale, transfer or other disposition with any purchaser or purchasers of the Restricted Stock who shall have been specified in the sale notice at the price (or at any price in excess of such price) and on substantially the terms specified therein. The right of first refusal provided for in this paragraph (a) may only be exercised with respect to the initial sale, transfer or other disposition of the Restricted Stock by CU or an Affiliate (whether in blocks or as a whole) to a person that is not an Affiliate of CU and not to subsequent sales, transfers or other dispositions by purchasers of Restricted Stock. (b) If CU or its Affiliates at any time propose to transfer any Warrants to any underwriters or dealers pursuant to the provisions of Section 3.4, other than at any time after Home has failed for any reason to repurchase such Warrants pursuant to Article II hereof on the closing date scheduled for such repurchase, then CU shall first notify Home in writing of such intention, specifying the Warrants which it proposes to sell or transfer and the name or names of the proposed dealers or of the proposed managing underwriters in the underwriting syndicate to which the sale or transfer is proposed to be made. Home shall have the right, exercisable by written notice given to CU 15 calendar days after Home's receipt of notice from CU pursuant to the immediately preceding sentence, to repurchase, or to cause a third party designated by Home to purchase, all, but not fewer than all, the Warrants proposed to be sold or transferred on the terms and conditions hereinafter set forth. Any notice given by Home of exercise of its repurchase rights under this paragraph (b) shall specify a place in Los Angeles and a Business Day not earlier than 10 days and not later than 15 days after the date of such notice for the closing of the repurchase of the Warrants being repurchased. The purchase price payable to Home or its designee for the repurchase of Warrants pursuant to this paragraph (b) shall be a cash price equal to the product of (x) the number of Underlying Shares covered by the relevant Warrants (calculated as of the date of the closing of the repurchase) and (y) the Share Price on such date. At the closing of a sale of Warrants pursuant to the foregoing provisions, Home or its designee will make payment to CU of the aggregate price for the Warrants to be repurchased in one of the manners set forth in Section 2.1(c). At such closing, CU shall deliver to Home or its designee the certificates representing the Warrants to be repurchased and Home shall deliver to CU replacement certificates representing the Warrants (if any) which are not to be repurchased but were covered by the certificate or certificates surrendered by CU. Any election by Home pursuant to this paragraph to exercise its repurchase rights in respect of Warrants shall be irrevocable. In the event Home fails timely to exercise its repurchase rights in respect of Warrants within the period specified above during which it must do so or notifies CU in writing prior to the expiration of such period that it does not intend to exercise such rights or its designee fails to repurchase Warrants on the date set for the closing of such a purchase, CU and its Affiliates shall be free thereafter to consummate the sale and transfer of the Warrants specified in this notice to Home under this paragraph to any underwriters or dealers who agree to exercise the Warrants and sell the Underlying Shares in accordance with the provisions of Section 3.4(c), and this Section 3.11 shall no longer apply to such sale or transfer of such Warrants. D-20 129 (c) CU shall have the right to withdraw any notice given by it pursuant to this Section 3.11 at any time before Home shall have given notice of its intention to exercise its right of first refusal hereunder (including by designation of another purchaser). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HOME Home represents and warrants to CU that: Section 4.1 Authorization of Agreement; No Conflicts. (a) The execution and delivery of this Agreement by Home and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Home. This Agreement has been duly executed and delivered by Home and constitutes a valid and binding obligation of Home, enforceable in accordance with its terms. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with, or result in any violation of or default or loss of a material benefit under any provision of the articles of incorporation, articles or association or bylaws of Home or Home Bank or, except for the necessity of obtaining Requisite Regulatory Approvals, any material mortgage, indenture, lease agreement or other material instrument or any permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Home or Home Bank or their respective properties, other than any such conflict, violation, default or loss which will not have a material adverse effect on Home or Home Bank. No material consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required in connection with the execution and delivery of this Agreement by Home and Home Bank or the consummation by Home of the transactions contemplated hereby except for any approvals required to be obtained pursuant to the BHC Act or the Policy Statement of the Board of Governors of the Federal Reserve System on Nonvoting Equity Investments by Bank Holding Companies, 12 C.F.R. Section 225.143 (the "FRB Guidelines"), or any other applicable laws, for the execution and delivery of this Agreement and the issuance of the Warrants by Home. Section 4.2 Authorized Stock Home has taken all necessary corporate and other action to authorize and reserve and, subject to obtaining the governmental and other approvals and consents referred to herein, to permit it to issue, and, at all times from the date hereof until the obligation to deliver Common Stock upon the exercise of the Warrants terminates, will have reserved for issuance, upon exercise of the Warrants, shares of Common Stock necessary for CU to exercise the Warrants, and Home will take all necessary corporate action to authorize and reserve for issuance all additional shares of Common Stock or other securities which may be issued pursuant to this Agreement. The shares of Common Stock to be issued upon due exercise of the Warrants, including all additional shares of Common Stock or other securities which may be issuable pursuant to this D-21 130 Agreement, upon issuance pursuant hereto, shall be duly and validly issued, fully paid and nonassessable, and shall be delivered free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever, including any preemptive rights of any stockholder of Home. ARTICLE V REPRESENTATIONS AND WARRANTIES OF CU CU represents and warrants to Home that: Section 5.1 Due Execution of Agreement; No Conflicts. (a) This Agreement has been duly executed and delivered by CU and constitutes a valid and binding obligation of CU, enforceable in accordance with its terms. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with, or result in any violation of or default or loss of a material benefit under, any provision of the certificate of incorporation or By-laws of CU or, except for the necessity of obtaining Requisite Regulatory Approvals, any material mortgage, indenture, lease, agreement or other material instrument, or any permit, concession, grant, franchise, license, judgment, order decree, statute, law, ordinance, rule or regulation applicable to CU or its respective properties, other than any such conflict, violation, default or loss which (i) will not have a material adverse effect on CU and its Subsidiaries taken as a whole. No material consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required in connection with the execution and delivery of this Agreement by CU or the consummation by CU of the transactions contemplated hereby, except for (a) filings required in order to obtain Requisite Regulatory Approvals, and (b) any approvals required to be obtained pursuant to the BHC Act, or the FRB Guidelines or any other applicable law for the execution and delivery of this Agreement by Home, CU and the issuance of the Warrants. ARTICLE VI DEFINITIONS Except as otherwise provided herein, the capitalized terms set forth below (in their singular and plural forms as applicable) shall have the meanings set forth below. "Affiliate" or "affiliate" shall mean, with respect to any corporation, any person that, directly or indirectly, controls or is controlled by or is under common control with such corporation. "BHC Act" means the Bank Holding Company Act of 1956, as amended. D-22 131 "Business Day" shall mean any day, other than a Saturday, Sunday or legal holiday in the State of California, on which banks are open for substantially all their banking business in Los Angeles. "Change in Bank Control Act" means the Change in Bank Control Act of 1978, as amended. "Covered Shares" shall mean on any date, with respect to any Warrants, the maximum number of shares of Common Stock that would be purchasable upon the exercise on such date of such Warrants, assuming that such Warrants may be exercised on such date to purchase the maximum number of shares of Common Stock purchasable pursuant to the terms thereof (including the limitations contained in the second paragraph of the certificate evidencing each such Warrant) without regard to any provision therein (other than such limitations) or in this Agreement or in any law limiting the right of any holder of such Warrants to acquire shares otherwise purchasable thereunder. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "Governmental Entity" shall mean any court, administrative agency or commission or other governmental authority or instrumentality. "Market Value" shall mean, on any date, the average of the closing sale prices of a share of Common Stock on the principal securities exchange on which the Common Stock is traded, or, if the Common Stock is not at the time listed on any national securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), on the 10 trading days immediately preceding such date, (or such fewer number of trading days immediately preceding such date for which shares of Common Stock have been listed for trading on such exchange or quoted on NASDAQ); provided, however, that if CU seeks a determination of the fair market value of a share of Common Stock pursuant to the provisions of Section 2.2, Market Value shall, if required pursuant to the terms of such Section, mean the fair market value of a share of Common Stock on such date determined pursuant to such Section. "Person" or "person" shall mean an individual, corporation, partnership, joint venture, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Regulatory Authority" shall mean any United States federal or state government or governmental authority the approval of which is legally required for consummation of the Merger. "Requisite Regulatory Approvals" shall mean all material permits, approvals and consents required to be obtained, and all waiting periods required to expire, prior to the consummation of the issuance of the Covered Shares under applicable federal laws of the United States or applicable laws of any state having jurisdiction over CU or Home. D-23 132 "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Share Price" shall mean, with respect to any Warrants, the amount by which, on the date of the Acquisition Event triggering the exercisability of the Warrants(i) the Warrant Price on such date is less than (ii) the greatest of: (i) the Market Value of a share of Common Stock on such date; and (ii) the highest price paid on or prior to such date for a share of Common Stock (including in any merger or consolidation) by a purchaser or group of purchasers acting in concert of 50% or more of the outstanding shares of Common Stock, or, in the case of a purchaser of 50% or more of the consolidated assets of Home (as shown on the books of Home), the Market Value of a share of Common Stock on the date of consummation of such asset acquisition. "Subsidiary" shall mean, with respect to any corporation (the "parent"), any other corporation, association or other business entity of which more than 50% of the shares of the Voting Stock are owned or controlled, directly or indirectly, by the parent or by one or more Subsidiaries of the parent, or by the parent and one or more of its Subsidiaries. "Voting Stock" shall mean the stock entitling the holders thereof to vote in the election of the directors or trustees of the corporation, association, or other business entity in question, except that it shall not include any stock so entitling the holders thereof to vote only upon the happening of a contingency, whether or not such contingency has occurred. "Warrant Call Price" shall mean, when used with respect to any Warrant, the product of (i) the number of Covered Shares on such date and (ii) the Share Price on such date; provided that the Warrant Call Price with respect to any Warrant shall in no event exceed (x) the quotient obtained by dividing $5,000,000 by the number of Covered Shares subject to all the outstanding Warrants multiplied by (y) the number of Covered Shares subject to such Warrant. ARTICLE VII TERMINATION Section 7.1 Termination. Subject to Section 7.2, this Agreement may be terminated in the following circumstances: D-24 133 (a) at the effective time of the Merger, as set forth in the Merger Agreement; (b) at the termination of the Merger Agreement prior to the occurrence of an Acquisition Event; or (c) two years after the occurrence of an Acquisition Event. Section 7.2 Effect of Termination. In the event of termination of this Agreement pursuant to Section 7.1(c), the rights of the parties hereto shall forthwith become void; provided that, if the Agreement shall terminate pursuant to Section 7.1(c) and any party has filed an application to purchase securities with any regulatory authority, the Agreement shall not terminate as provided in Section 7.1(c), but shall remain in full force and effect until the day which is 30 Business Days (plus any applicable waiting periods) after the receipt or denial of regulatory approval or consent, at which time the Agreement shall then terminate. Section 7.3 Indemnification for Breach. Each party to this Agreement agrees to indemnify and hold harmless the other party against any loss, claim, damage or liability arising out of or based upon a Default of this Agreement by such defaulting party in accordance with the procedures set forth in the last paragraph of Section 3.8 of this Agreement. ARTICLE VIII GENERAL PROVISIONS Section 8.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or any such other address for a party as shall be specified by like notice): (a) If to CU at: 16030 Ventura Boulevard Encino, CA 91436 Attn: Stephen G. Carpenter Fax: (818) 907-5024 with a copy to: Anita Wolman, Esq. 16030 Ventura Boulevard Encino, CA 91436 Fax: (818) 907-5024 D-25 134 (b) If to Home at: 2633 Cherry Avenue Signal Hill, CA 90806 Attn: James Staes Phone: (310) 988-9600 Fax: (310) 426-4526 with a copy to: Manatt, Phelps & Phillips 11355 West Olympic Boulevard Los Angeles, California 90064 Attn: Barbara S. Polsky, Esq. Fax: (310) 312-4224 Section 8.2 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 8.3 Amendment. This Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors or the duly authorized committees thereof. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. The parties hereto agree to make such amendments as may be necessary to respond to the request of any Regulatory Authority with respect to this Agreement. Section 8.4 Waiver. Any term or provision of this Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof. Section 8.5 Miscellaneous. This Agreement (including the documents and instruments referred to herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) except as contemplated in this Agreement, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder; and (c) except as contemplated in this Agreement, shall not be assigned by operation of law or otherwise. Home and CU agree that, except as required by law, it shall not issue any press release with respect to the transactions contemplated by this Agreement without consulting with each other party hereto. D-26 135 Section 8.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Home and CU have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first above written. CU BANCORP By: --------------------------------- HOME INTERSTATE BANCORP By: --------------------------------- D-27 136 EXHIBIT F CU SHAREHOLDER'S AGREEMENT This SHAREHOLDER'S AGREEMENT (this "Agreement"), dated as of January 10, 1996, is entered into by and among Home Bank, a California banking corporation ("Home Bank"), Home Interstate Bancorp, a California corporation ("Home"), and ___________________________ (the "Shareholder"). R E C I T A L S A. Home, Home Bank, CU Bancorp, a California corporation ("CU"), and California United Bank, National Association, a national banking association, entered into that certain Agreement and Plan of Reorganization dated as of January 10, 1996 (the "Reorganization Agreement"). B. The Shareholder is a beneficial shareholder of shares of common stock, no par value, of CU (the "CU Stock"). C. The Shareholder is a director of CU. D. As an inducement to Home and Home Bank to enter into the Reorganization Agreement, and in order to ensure pooling-of-interests accounting treatment for the Merger contemplated by the Reorganization Agreement, the Shareholder desires to enter into this Agreement. E. Unless otherwise provided in this Agreement, capitalized terms shall have the meanings ascribed to such terms in the Reorganization Agreement. NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties and covenants, agreements and conditions contained herein and in the Reorganization Agreement, and intending to be legally bound hereby, Home, Home Bank and Shareholder agree as follows: ARTICLE I SHAREHOLDER'S AGREEMENT 1.1 Agreement to Vote. Shareholder shall vote or cause to be voted at any meeting of shareholders of CU to approve the principal terms of the Reorganization Agreement, the Merger and the transactions contemplated thereby (the "Shareholders' Meeting"), all of the shares of CU Stock as to which F-1 137 Shareholder has sole or shared voting power (the "Shares") as of the record date established to determine shareholders who have the right to vote at any such Shareholders' Meeting (the "Record Date"). 1.2 Legend. The Shareholder agrees to stamp, print or type on the face of his certificates of CU Stock evidencing the Shares the following legend: "THE VOTING, SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER ENCUMBRANCE OR DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A SHAREHOLDER'S AGREEMENT DATED AS OF THE 10TH DAY OF JANUARY, 1996 BY AND AMONG HOME INTERSTATE BANCORP, HOME BANK AND (THE RECORD OWNER HEREOF), COPIES OF WHICH ARE ON FILE AT THE OFFICES OF HOME BANK" 1.3 Restrictions on Dispositions. The Shareholder agrees that, from and after the date of this Agreement and during the term of this Agreement, the Shareholder will not take any action that will alter or affect in any way the right to vote the Shares, except (i) with the prior written consent of Home or (ii) to change such right from that of a shared right of the Shareholder to vote the Shares to a sole right of the Shareholder to vote the Shares. 1.4 Shareholder Approval. The Shareholder, in his capacity as a director, shall (i) recommend shareholder approval of the Reorganization Agreement, the Agreement of Merger and the transactions contemplated thereby at the Shareholders' Meeting and (ii) advise the CU shareholders to reject any subsequent proposal or offer received by CU relating to any Alternative Transaction or purchase, sale, acquisition, merger or other form of business combination involving CU or any of its assets, equity securities or debt securities and to proceed with the transactions contemplated by the Reorganization Agreement; provided, however, that the Shareholder shall not be obligated to take any action specified in clause (ii) if the Board of Directors of CU is advised in writing by outside legal counsel (Loeb and Loeb, or such other counsel that is reasonably acceptable to Home and Home Bank) that, in the exercise of his fiduciary duties, a director of CU should not take such action. 1.5 Restrictions on Disposition of CU Stock After the Merger. Notwithstanding any other provisions of this Agreement to the contrary, none of the shares of CU Stock held by the undersigned at the Effective Time of the Merger will be sold, transferred or otherwise disposed of and the undersigned will not in any other way reduce the undersigned's risk of ownership or investment in any of the shares of CU Stock so held by the undersigned until financial results covering a period of at least thirty (30) days of combined operations of CU and Home following the Effective Time of the Merger have been published by CU (provided that the undersigned may make bona fide gifts or distributions without consideration so long as the recipients thereof agree not to sell, transfer or otherwise dispose of the CU Stock except as provided herein). F-2 138 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER The Shareholder represents and warrants to Home and Home Bank that the statements set forth below are true and correct as of the date of this Agreement, except those that are specifically as of a different date: 2.1 Ownership and Related Matters. (a) Schedule 2.1(a) hereto correctly sets forth the number of Shares beneficially owned by Shareholder and the nature of Shareholder's voting power with respect thereto. Within five Business Days after the Record Date, the Shareholder shall amend said Schedule 2.1(a) to correctly reflect the number of Shares and the nature of Shareholder's voting power with respect thereto as of the Record Date. (b) There are no proxies, voting trusts or other agreements or understandings to or by which the Shareholder or the Shareholder's spouse is a party or bound or that expressly requires that any of the Shares be voted in any specific manner other than as provided in this Agreement. 2.2 Authorization and Binding Agreement. The Shareholder has the legal right, power, capacity and authority to execute, deliver and perform this Agreement, and this Agreement is the valid and binding obligation of the Shareholder enforceable in accordance with its terms, except as the enforcement thereof may be limited by general principles of equity. 2.3 Non-contravention. The execution, delivery and performance of this Agreement by the Shareholder will not (a) conflict with or result in the breach of, or default or actual or potential loss of any benefit under, any provision of any agreement, instrument or obligation to which the Shareholder or the Shareholder's spouse is a party or by which any of Shareholder's properties or the Shareholder's spouse's properties are bound, or give any other party to any such agreement, instrument or obligation a right to terminate or modify any term thereof; (b) require the consent or approval of any third party; (c) result in the creation or imposition of any lien, mortgage or encumbrance on any of the Shares or any other assets of the Shareholder or the Shareholder's spouse; or (d) violate any law, rule or regulation to which the Shareholder or the Shareholder's spouse is subject. ARTICLE III GENERAL 3.1 Amendments. To the fullest extent permitted by law, this Agreement and any schedule or exhibit attached hereto may be amended by agreement in writing of the parties hereto at any time. 3.2 Integration. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof and (except for other documents to be executed pursuant to the Reorganization Agreement) supersedes all prior agreements and understandings of the parties in connection therewith. F-3 139 3.3 Specific Performance. The Shareholder, Home and Home Bank each expressly acknowledge that, in view of the uniqueness of the obligations of the Shareholder contemplated hereby, Home and Home Bank would not have an adequate remedy at law for money damages in the event that this Agreement has not been performed by the Shareholder in accordance with its terms, and therefore the Shareholder, Home and Home Bank agree that Home and Home Bank shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which it may be entitled at law or in equity. 3.4 Termination. This Agreement shall terminate automatically without further action at the earlier of the Effective Time of the Merger or the termination of the Reorganization Agreement in accordance with its terms. Upon such termination of this Agreement, the respective obligations of the parties hereto shall immediately become void and have no further force and effect. 3.5 No Assignment. Neither this Agreement nor any rights, duties or obligations hereunder shall be assignable by Home, Home Bank or the Shareholder, in whole or in part. Any attempted assignment in violation of this prohibition shall be null and void. Subject to the foregoing, all of the terms and provisions hereof shall be binding upon, and inure to the benefit of, the successors of the parties hereto. 3.6 Headings. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 3.7 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party hereto and delivered to each party hereto. 3.8 Notices. Any notice or communication required or permitted hereunder, shall be deemed to have been given if in writing and (a) delivered in person, (b) delivered by confirmed facsimile transmission (c) sent by overnight carrier, postage prepaid with return receipt requested or (d) mailed by certified or registered mail, postage prepaid with return receipt requested, addressed as follows: F-4 140 If to Home and Home Bank, addressed to: Home Interstate Bancorp 2633 Cherry Avenue Signal Hill, California 90806 Attention: James Staes Telecopier Number: (310) 426-4526 With a copy addressed to: Manatt, Phelps & Phillips 11355 West Olympic Blvd. Los Angeles, CA 90064 Attention: Barbara S. Polsky, Esq. Telecopier No: (310) 312-4224 If to Shareholder, addressed to: ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- With a copy addressed to: Anita Wolman, Esq. CU Bancorp 16030 Ventura Boulevard Encino, California 91436-4224 Telecopier No: (818) 907-5024 or at such other address and to the attention of such other person as a party may notice to the others in accordance with this Section 3.8. Any such notice or communication shall be deemed received on the date delivered personally or delivered by confirmed facsimile transmission, on the first Business Day after it was sent by overnight carrier, postage prepaid with return receipt requested or on the third Business Day after it was sent by certified or registered mail, postage prepaid with return receipt requested. 3.9 Governing Law. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California parties made and performed in such State. 3.10 Severability and the Like If any provision of this Agreement shall be held by a court of competent jurisdiction to be unreasonable as to duration, activity or subject, it shall be deemed to extend only over the maximum duration, range of activities or subjects as to which such provision shall be valid and enforceable under applicable law. If any provisions shall, for any reason, be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability F-5 141 shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 3.11 Waiver of Breach. Any failure or delay by Home and Home Bank in enforcing any provision of his Agreement shall not operate as a waiver thereof. The waiver by Home and Home Bank of a breach of any provision of this Agreement shall not operate as a waiver thereof. The waiver by Home and Home Bank of a breach of any provision of this Agreement by the Shareholder shall not operate or be construed as a waiver of any subsequent breach or violation thereof. All waivers shall be in writing and signed by the party to be bound. IN WITNESS WHEREOF, the parties to this Agreement have caused and duly executed this Agreement as of the day and year first above written. HOME INTERSTATE BANCORP By: --------------------------------- Title: ------------------------------ HOME BANK By: --------------------------------- Title: ------------------------------ SHAREHOLDER ------------------------------------ (Shareholder's Name) F-6 142 SPOUSAL CONSENT I am the spouse of __________________, the Shareholder in the above Agreement. I understand that I may consult independent legal counsel as to the effect of this Agreement and the consequences of my execution of this Agreement and, to the extent I felt it necessary, I have discussed it with legal counsel. I hereby confirm this Agreement and agree that it shall bind my interest in the Shares, if any. ------------------------------------ (Shareholder's Spouse's Name) F-7 143 EXHIBIT H HOME SHAREHOLDER'S AGREEMENT This SHAREHOLDER'S AGREEMENT (this "Agreement"), dated as of January 10, 1996, is entered into by and among California United Bank, National Association, a national banking association ("CU Bank"), CU Bancorp, a California corporation ("CU"), and ___________________________ (the "Shareholder"). R E C I T A L S A. CU Bank, CU, Home Interstate Bancorp, a California corporation ("Home"), and Home Bank, a California banking corporation ("Home Bank"), entered into that certain Agreement and Plan of Reorganization dated as of January 10, 1996 (the "Reorganization Agreement"). B. The Shareholder is a beneficial shareholder of shares of common stock, no par value, of Home (the "Home Stock"). C. The Shareholder is a director of Home. D. As an inducement to CU Bank and CU to enter into the Reorganization Agreement, and in order to ensure pooling-of-interests accounting treatment for the Merger contemplated by the Reorganization Agreement, the Shareholder desires to enter into this Agreement. E. Unless otherwise provided in this Agreement, capitalized terms shall have the meanings ascribed to such terms in the Reorganization Agreement. NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties and covenants, agreements and conditions contained herein and in the Reorganization Agreement, and intending to be legally bound hereby, CU Bank, CU and Shareholder agree as follows: ARTICLE I SHAREHOLDER'S AGREEMENT 1.1 Agreement to Vote. Shareholder shall vote or cause to be voted at any meeting of shareholders of Home to approve the principal terms of the Reorganization Agreement, the Merger and the transactions contemplated thereby (the "Shareholders' Meeting"), all of the shares H-1 144 of Home Stock as to which Shareholder has sole or shared voting power (the "Shares") as of the record date established to determine shareholders who have the right to vote at any such Shareholders' Meeting (the "Record Date"). 1.2 Legend. The Shareholder agrees to stamp, print or type on the face of his certificates of Home Stock evidencing the Shares the following legend: "THE VOTING, SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER ENCUMBRANCE OR DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A SHAREHOLDER'S AGREEMENT DATED AS OF THE 10TH DAY OF JANUARY, 1996 BY AND BETWEEN CU BANCORP, CALIFORNIA UNITED BANK, N.A. AND (THE RECORD OWNER HEREOF), COPIES OF WHICH ARE ON FILE AT THE OFFICES OF CU BANCORP." 1.3 Restrictions on Dispositions. The Shareholder agrees that, from and after the date of this Agreement and during the term of this Agreement, the Shareholder will not take any action that will alter or affect in any way the right to vote the Shares, except (i) with the prior written consent of CU or (ii) to change such right from that of a shared right of the Shareholder to vote the Shares to a sole right of the Shareholder to vote the Shares. 1.4 Shareholder Approval. The Shareholder shall, in his capacity as a director, (i) recommend shareholder approval of the Reorganization Agreement, the Agreement of Merger and the transactions contemplated thereby at the Home Shareholders' Meeting and (ii) advise the Home shareholders to reject any subsequent proposal or offer received by Home relating to any Alternative Transaction or purchase, sale, acquisition, merger or other form of business combination involving Home or any of its assets, equity securities or debt securities and to proceed with the transactions contemplated by the Reorganization Agreement; provided, however, that the Shareholder shall not be obligated to take any action specified in clause (ii) if the Board of Directors of Home is advised in writing by outside legal counsel (Manatt, Phelps & Phillips, or such other counsel that is reasonably acceptable to CU and CU Bank) that, in the exercise of his fiduciary duties, a director of Home should not take such action. 1.5 Restrictions on Disposition of CU Stock Received Pursuant to the Merger. Notwithstanding any other provisions of this Agreement to the contrary, none of the shares of CU Stock to be received by the undersigned pursuant to the Merger will be sold, transferred or otherwise disposed of and the undersigned will not in any other way reduce the undersigned's risk of ownership or investment in any of the shares of CU Stock so received by the undersigned until financial results covering a period of at least thirty (30) days of combined operations of CU and Home following the Effective Time of the Merger have been published by CU (provided that the H-2 145 undersigned may make bona fide gifts or distributions without consideration so long as the recipients thereof agree not to sell, transfer or otherwise dispose of the CU Stock except as provided herein). ARTICLE II REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER The Shareholder represents and warrants to CU and CU Bank that the statements set forth below are true and correct as of the date of this Agreement, except those that are specifically as of a different date: 2.1 Ownership and Related Matters. (a) Schedule 2.1(a) hereto correctly sets forth the number of Shares beneficially owned by Shareholder and the nature of Shareholder's voting power with respect thereto. Within five Business Days after the Record Date, the Shareholder shall amend said Schedule 2.1(a) to correctly reflect the number of Shares and the nature of Shareholder's voting power with respect thereto as of the Record Date. (b) There are no proxies, voting trusts or other agreements or understandings to or by which the Shareholder or the Shareholder's spouse is a party or bound or that expressly requires that any of the Shares be voted in any specific manner other than as provided in this Agreement. 2.2 Authorization and Binding Agreement. The Shareholder has the legal right, power, capacity and authority to execute, deliver and perform this Agreement, and this Agreement is the valid and binding obligation of the Shareholder enforceable in accordance with its terms, except as the enforcement thereof may be limited by general principles of equity. 2.3 Non-contravention. The execution, delivery and performance of this Agreement by the Shareholder will not (a) conflict with or result in the breach of, or default or actual or potential loss of any benefit under, any provision of any agreement, instrument or obligation to which the Shareholder or the Shareholder's spouse is a party or by which any of Shareholder's properties or the Shareholder's spouse's properties are bound, or give any other party to any such agreement, instrument or obligation a right to terminate or modify any term thereof; (b) require the consent or approval of any third party; (c) result in the creation or imposition of any lien, mortgage or encumbrance on any of the Shares or any other assets of the Shareholder or the Shareholder's spouse; or (d) violate any law, rule or regulation to which the Shareholder or the Shareholder's spouse is subject. H-3 146 ARTICLE III GENERAL 3.1 Amendments. To the fullest extent permitted by law, this Agreement and any schedule or exhibit attached hereto may be amended by agreement in writing of the parties hereto at any time. 3.2 Integration. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof and (except for other documents to be executed pursuant to the Reorganization Agreement) supersedes all prior agreements and understandings of the parties in connection therewith. 3.3 Specific Performance. The Shareholder, CU and CU Bank each expressly acknowledge that, in view of the uniqueness of the obligations of the Shareholder contemplated hereby, CU and CU Bank would not have an adequate remedy at law for money damages in the event that this Agreement has not been performed by the Shareholder in accordance with its terms, and therefore the Shareholder, CU and CU Bank agree that CU and CU Bank shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which it may be entitled at law or in equity. 3.4 Termination. This Agreement shall terminate automatically without further action at the earlier of the Effective Time of the Merger or the termination of the Reorganization Agreement in accordance with its terms. Upon such termination of this Agreement, the respective obligations of the parties hereto shall immediately become void and have no further force and effect. 3.5 No Assignment. Neither this Agreement nor any rights, duties or obligations hereunder shall be assignable by CU, CU Bank or the Shareholder, in whole or in part. Any attempted assignment in violation of this prohibition shall be null and void. Subject to the foregoing, all of the terms and provisions hereof shall be binding upon, and inure to the benefit of, the successors of the parties hereto. 3.6 Headings. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 3.7 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party hereto and delivered to each party hereto. 3.8 Notices. Any notice or communication required or permitted hereunder, shall be deemed to have been given if in writing and (a) delivered in person, (b) delivered by confirmed facsimile transmission (c) sent by overnight carrier, postage prepaid with return receipt requested H-4 147 or (d) mailed by certified or registered mail, postage prepaid with return receipt requested, addressed as follows: If to CU and CU Bank, addressed to: CU Bancorp 16030 Ventura Boulevard Encino, California 91436-4487 Attention: Stephen G. Carpenter With a copy addressed to: Anita Wolman, Esq. CU Bancorp 16030 Ventura Boulevard Encino, California 91436-4487 Telecopier No: (818) 907-5024 If to Shareholder, addressed to: ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- With a copy addressed to: Manatt, Phelps & Phillips 11355 West Olympic Blvd. Los Angeles, CA 90064 Attention: Barbara S. Polsky, Esq. Telecopier No: (310) 312-4224 or at such other address and to the attention of such other person as a party may notice to the others in accordance with this Section 3.8. Any such notice or communication shall be deemed received on the date delivered personally or delivered by confirmed facsimile transmission, on the first Business Day after it was sent by overnight carrier, postage prepaid with return receipt requested or on the third Business Day after it was sent by certified or registered mail, postage prepaid with return receipt requested. H-5 148 3.9 Governing Law. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California parties made and performed in such State. 3.10 Severability and the Like. If any provision of this Agreement shall be held by a court of competent jurisdiction to be unreasonable as to duration, activity or subject, it shall be deemed to extend only over the maximum duration, range of activities or subjects as to which such provision shall be valid and enforceable under applicable law. If any provisions shall, for any reason, be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 3.11 Waiver of Breach. Any failure or delay by CU and CU Bank in enforcing any provision of his Agreement shall not operate as a waiver thereof. The waiver by CU and CU Bank of a breach of any provision of this Agreement shall not operate as a waiver thereof. The waiver by CU and CU Bank of a breach of any provision of this Agreement by the Shareholder shall not operate or be construed as a waiver of any subsequent breach or violation thereof. All waivers shall be in writing and signed by the party to be bound. IN WITNESS WHEREOF, the parties to this Agreement have caused and duly executed this Agreement as of the day and year first above written. CU BANCORP By: -------------------------------- Title: ----------------------------- CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION By: -------------------------------- Title: ----------------------------- SHAREHOLDER ----------------------------------- (Shareholder's Name) H-6 149 SPOUSAL CONSENT I am the spouse of __________________, the Shareholder in the above Agreement. I understand that I may consult independent legal counsel as to the effect of this Agreement and the consequences of my execution of this Agreement and, to the extent I felt it necessary, I have discussed it with legal counsel. I hereby confirm this Agreement and agree that it shall bind my interest in the Shares, if any. ------------------------------------ (Shareholder's Spouse's Name) H-7 EX-2.(C) 4 AM. NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.(C) AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION By and Among HOME INTERSTATE BANCORP, HOME BANK, CU BANCORP AND CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION This Amendment No. 1 (the "Amendment") to the Agreement and Plan of Reorganization dated January 10, 1996 (the "Agreement") by and among Home Interstate Bancorp ("Home"), Home Bank ("Home Bank"), CU Bancorp ("CU") and California United Bank, National Association ("CU Bank") (collectively, the "Parties"), is entered into as of March __, 1996 by and among the Parties. Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Agreement. R E C I T A L S WHEREAS, the Agreement provides, among other things, that the Parties intend to cause the merger of Home Bank, a state bank, with and into CU Bank, a national Bank, at the Effective Time or as soon as practicable thereafter; WHEREAS, after discussions with various bank regulatory agencies and an assessment of the relative costs and benefits of a state bank versus a national bank, the Parties have decided to modify the original structure of the proposed merger between Home Bank and CU Bank, as set forth in the Agreement, to provide for the merger of CU Bank with and into Home Bank, with Home Bank surviving the merger (the "Surviving Bank"); and WHEREAS, the Surviving Bank, following the consummation of the merger between CU Bank and Home Bank, will operate as a state bank; WHEREAS, as a result of the revised structure of the proposed merger between CU Bank and Home Bank, certain terms and provisions of the Agreement require modification; A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing and other valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows: 1 2 1. Section 1.7 shall be amended to read in its entirety as follows: "'Bank Merger' means the merger of CU Bank with and into Home Bank, with Home Bank surviving the Merger." 2. As a result of the foregoing amendment, Sections 1.79, 1.80 and 1.81, as originally set forth in the Agreement, shall become Sections 1.80, 1.81 and 1.82, respectively. 3. Section 1.79 shall be amended to read in its entirety as follows: "1.79 'Surviving Bank' means Home Bank, following the consummation of the Bank Merger." 4. The last sentence of Section 4.6 shall be amended to read in its entirety as follows: "Except as set forth in the Home Schedules, no consent of, approval of, notice to or filing with any governmental authority having jurisdiction over any aspect of the business or assets of Home or Home Bank, and no consent of, approval of or notice to any other Person, is required in connection with the execution and delivery by Home and Home Bank of this Agreement, by Home of the Agreement of Merger, by Home and Home Bank of the Bank Merger Agreement, or the consummation by Home and Home Bank of the Merger or Bank Merger or the transactions contemplated hereby or thereby, except (i) the approval of this Agreement and the transactions contemplated hereby by the shareholders of Home and the sole shareholder of Home Bank; (ii) such approvals as may be required by the FRB and the Superintendent; (iii) the filing of the Agreement of Merger with the California Secretary; (iv) the filing of the Bank Merger Agreement with the Superintendent and the California Secretary; and (v) the filing with and approval by the SEC of the S-4 and the Proxy Statement. 5. Section 4.26 shall be amended to read in its entirety as follows: "4.26 Disclosure Documents and Applications. None of the information supplied or to be supplied by or on behalf of Home or Home Bank ("Home Supplied Information") for inclusion in the documents to be filed with the SEC, FRB, the Superintendent, or any governmental entity in connection with the transactions contemplated in this Agreement will, at the respective times such documents are filed or become effective, contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading." 2 3 6. The last sentence of Section 5.6 shall be amended to read in its entirety as follows: "Except as set forth in the CU Schedules, no consent of, approval of, notice to or filing with any governmental authority having jurisdiction over any aspect of the business or assets of CU or CU Bank, and no consent of, approval of or notice to any other Person, is required in connection with the execution and delivery by CU and CU Bank of this Agreement, by CU of the Agreement of Merger, by CU Bank of the Bank Merger Agreement, or the consummation by CU and CU Bank of the Merger or Bank Merger or the transactions contemplated hereby or thereby, except (i) the approval of this Agreement and the transactions contemplated hereby by the shareholders of CU and the sole shareholder of CU Bank; (ii) such approvals as may be required by the FRB and the Superintendent; (iii) the filing of the Agreement of Merger with the California Secretary; (iv) the filing of the Bank Merger Agreement with the Superintendent and the California Secretary; and (v) the filing with the approval by the SEC of the S-4 and the Proxy Statement." 7. Section 5.26 shall be amended to read in its entirety as follows: "5.26 Disclosure Documents and Applications. None of the information supplied or to be supplied by or on behalf of CU or CU Bank ("CU Supplied Information") for inclusion in the documents to be filed with the SEC, FRB, the Superintendent, or any other governmental entity in connection with the transactions contemplated in this Agreement will, at the respective times such documents are filed or become effective, contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading." 8. Section 6.3(j) shall be amended to read in its entirety as follows: "(j) furnish to CU, as soon as practicable, and in any event within thirty days after it is prepared, (i) a copy of any report submitted to the board of directors of Home or Home Bank, provided, however, that Home need not furnish to CU communications of Home's legal counsel regarding Home's rights and obligations under this Agreement or books, records and documents covered by the attorney-client privilege, or which are attorneys' work product, (ii) copies of all reports, filings, certificates, correspondence and other documents filed with or received from the SEC, FRB, FDIC, Superintendent or any other governmental or regulatory entity, (iii) monthly unaudited consolidation balance sheets and consolidated statements of operations of Home; (iv) all proxy statements, information statements, financial statements, reports, sent by Home to its shareholders or other security holders, and (v) such other existing reports as CU may reasonably request relating to Home or Home Bank." 9. Section 6.6 shall be amended to read in its entirety as follows: "6.6 Notices; Reports. Home and Home Bank will promptly notify CU of any event of which Home or Home Bank obtains knowledge which has had or may 3 4 reasonably be expected to have a materially adverse effect on the financial condition, operations, business or prospects of Home on a consolidated basis or in the event that Home or Home Bank determines that either is unable to fulfill any of the conditions to the performance of CU's obligations hereunder, as set forth in Articles IX or XI herein." 10. Section 7.3(j) shall be amended to read in its entirety as follows: "(j) furnish to Home, as soon as practicable, and in any event within thirty days after it is prepared (i) a copy of any report submitted to the board of directors of CU or CU Bank, provided, however, that CU need not furnish to Home communications of CU's legal counsel regarding CU's rights and obligations under this Agreement or books, records and documents covered by the attorney-client privilege, or which are attorney's work product, (ii) copies of all reports, filings, certificates, correspondence and other documents filed with or received from the SEC, FRB, FDIC, OCC or any other governmental or regulatory entity, (iii) monthly unaudited consolidated balance sheets and consolidated statements of operations of CU, (iv) as soon as available, all proxy statements, information statements, financial statements, reports, letters and communications sent by CU to its shareholders or other security holder, and (v) such other existing reports as Home may reasonably request relating to CU or CU Bank." 11. Section 7.6 shall be amended to read in it entirety as follows: "7.6 Notices; Reports. CU and CU Bank will promptly notify Home of any event of which CU or CU Bank obtains knowledge which has had or may reasonably be expected to have a materially adverse effect on the financial condition, operations, business or prospects of CU on a consolidated basis or in the event that CU or CU Bank determines that either is unable to fulfill any of the conditions to the performance of Home's obligations hereunder, as set forth in Articles IX or XI herein." 12. Section 9.3 shall be amended to read in its entirety as follows: "9.3 Regulatory Approvals." To the extent required by applicable law or regulation, all approvals or consents of any governmental authority, including, without limitation, those of the FRB and the Superintendent shall have been obtained or granted for the Merger and Bank Merger and the transactions contemplated hereby, and the applicable waiting period under all laws have expired. All other statutory or regulatory requirements for the valid completion of the transactions contemplated hereby shall have been satisfied." 13. Section 9.4 shall be amended to read in its entirety as follows: "9.4 Tax Opinion. CU and Home shall have received an opinion from Arthur Andersen that the Merger and the Bank Merger will not result in the recognition of gain or loss for federal income tax purposes to CU, CU Bank, Home or Home Bank, nor will the issuance of the CU Stock result in the recognition of gain or loss by the holders of Home Stock who receive such stock in connection with the Merger." 4 5 14. Section 10.5 shall be amended to read in its entirety as follows: "10.5 Officer's Certificate. There shall have been delivered to Home on the Closing Date a certificate executed by the President and the Chief Financial Officer of each of CU and CU Bank certifying, to the best of their knowledge, compliance with all of the provisions of Sections 10.2, 10.3, 10.4 and 10.11." 15. Section 10.14 shall be amended to read in its entirety as follows: "10.14 Non-Performing Loans. CU Bank's Non-Performing Loans shall not exceed 75% of (i) the shareholder's equity of CU Bank as of the month end prior to the Effective Time plus (ii) the loan loss reserves of CU Bank." 16. The last sentence of Section 11.2 shall be amended to read in its entirety as follows: "It is understood and acknowledged that the representations being made on and as of the Closing Date shall be made with respect to the Home Schedules as updated in accordance with Section 6.3(k)." 17. Section 12.1 shall be amended to read in its entirety as follows: "At and as of the Effective Time, the former officers and employees of Home and CU Bank who become officers and employees of the Surviving Company or Surviving Bank ("Transferred Employees") shall, in that capacity, be entitled to participate in all employee benefits and benefit programs of the Surviving Company or Surviving Bank, as the case may be, in accordance with the terms of such employee benefit programs. Surviving Company or Surviving Bank, as the case may be, shall recognize such Transferred Employees' service with Home and CU Bank for purposes of eligibility and vesting under all benefit programs. Surviving Company or Surviving Bank, as the case may be, shall also cover under its health plans, without the application of any pre-existing limitation or exclusion, all Transferred Employees and their covered dependents who are covered under similar Home or CU Bank health plans as of the Closing Date and who change coverage to Surviving Company's or Surviving Bank's health plans, as the case may be, at the time such Transferred Employees are first provided the option to enroll in Surviving Company's or Surviving Bank's health plans." 18. This Amendment may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party hereto and delivered to each party hereto. 5 6 IN WITNESS WHEREOF, the parties to this Amendment have duly executed this Amendment as of the day and year first above written. CU BANCORP By: ----------------------------------------- Name: Title: CALIFORNIA UNITED BANK, NATIONAL ASSOCIATION By: ----------------------------------------- Name: Title: HOME INTERSTATE BANCORP By: ----------------------------------------- Name: Title: HOME BANK By: ----------------------------------------- Name: Title: 6 EX-10.(A) 5 CU BANCORP 1995 RESTRICTED STOCK PLAN 1 EXHIBIT 10.(a) CU BANCORP 1995 RESTRICTED STOCK PLAN 1. PURPOSE This CU BANCORP 1995 RESTRICTED STOCK PLAN (the "Plan") is intended to promote the interests of CU Bancorp (the "Corporation") and its subsidiaries by providing a method whereby employees performing services for the Corporation and its subsidiaries may be offered incentives and rewards which will encourage them to view the Corporation from an ownership perspective, create shareholder value and continue in the employ or service of the Corporation or its subsidiaries. The Plan will become effective upon stockholder approval of the Plan. 2. ADMINISTRATION The Plan will be administered by a committee or committees (which term includes subcommittees) appointed by, and consisting of one or more members of, the Board of Directors of the Corporation (the "Board"). The Board may delegate the responsibility for administration of the Plan with respect to designated classes of eligible award recipients to different committees, subject to such limitations as the Board deems appropriate. The composition of any committee responsible for administration of the Plan with respect to persons who are subject to trading restrictions of Section 16(b) of the Securities Exchange Act of 1934 (the "1934 Act") with respect to securities of the Corporation shall comply with the applicable requirements of Rule 16b-3 of the Securities and Exchange Commission (or a successor provision). All of the members of the Committee shall be "disinterested persons" as provided in Rule 16b-3(c)(2)(i). Members of a committee will serve for such term as the Board may determine, subject to removal by the Board at any time. Any committee appointed by the Board shall have full authority to administer the Plan within the scope of its delegated responsibilities, including authority to interpret and construe any relevant provision of the Plan and to adopt such rules and regulations as it may deem necessary. Decisions of a committee made within the discretion delegated to it by the Board are final and binding on all persons who have an interest in the Plan. With respect to any matter, the term "Committee" refers to the committee that has been delegated authority with respect to such matter. Any action of the Committee shall be taken pursuant to a majority vote or by the unanimous written consent of its members. a. Specific Powers 1 2 The Committee shall have the power, subject to, and within the limitations of, the express provisions of the Plan: i. To determine any conditions or restrictions imposed on Restricted Stock acquired pursuant to the Plan (including, but not limited to, repurchase rights, forfeiture restrictions and restrictions on transferability). ii. Subject to section 6, to construe and interpret the Plan and the Restricted Stock granted under it, to construe and interpret any conditions or restrictions imposed on Restricted Stock acquired pursuant to the Plan, to define the terms used herein, and to establish, amend and revoke rules and regulations for its administration. The Committee, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Agreement in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. iii. Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Corporation. iv. The Committee shall comply with the provisions of Rule 16b-3 promulgated pursuant to the 1934 Act, as in effect from time to time, to the extent applicable to the Plan. b. Definitions Subject to the Committee's powers to interpret and modify the Plan and definitions thereunder, the following definitions shall apply: i. "Restricted Stock" or "Restricted Shares" is/are shares of Common Stock which have been awarded to a Participant subject to the restrictions set forth in Section 6a herein, so long as such restrictions are in effect. ii. Restricted Period means the period or periods designated by Section 6a or otherwise by the Committee or the Board of Directors of the Corporation, as the case may be, in respect of any award of shares of Common Stock, or any part or parts of such award with respect to any Participant. 2 3 3. ELIGIBILITY FOR AWARDS Awards may be granted under the Plan to those employees of the Corporation and its subsidiaries (including officers, whether or not they are directors) as the Committee from time to time selects. However, in no event may an award be made to any individual who is a director, but not an officer, of the Corporation. Except as expressly provided otherwise, subsidiary includes, for purposes of the Plan, any entity in which the Corporation has a directo or indirect significant ownership interest, and any entity which may become a direct or indirect parent of the Corporation. 4. STOCK SUBJECT TO THE PLAN a. Class. The stock which is the subject of awards granted under the Plan is the Corporation's authorized but unissued common stock ("Common Stock"). b. Aggregate Award Limit. The total number of shares made subject to awards issued under the Plan may not exceed 75,000 shares (subject to adjustment under Section 4(c) and (e)). c. Share Counting Rules. i. For purposes of this Section 4, the number of shares subject to an award is the maximum, gross number of shares which could be issued under the award. ii. The maximum number of shares that may be made subject to awards under the Plan shall be increased by the number of shares subject to the Restricted Period under the Plan if such award is terminated, cancelled or forfeited for any reason prior to lapse of the Restricted Period. d. Adjustments. In the event any change is made to the Common Stock subject to the Plan or subject to any outstanding award granted under the Plan 3 4 (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination of shares, exchange of shares, or other change in corporate or capital structure of the Corporation), then, unless such change results in a Terminating Event as defined hereinbelow, the Committee shall make appropriate adjustments to the maximum number of shares subject to the Plan, and shares previously granted. Any additional shares received by an individual with respect to shares of Restricted Stock will be subject to the same restrictions and shall be deposited with the corporation. FORM AND GRANT OF AWARDS An award must be in the form of shares of Restricted Stock meeting the specifications of Section 6, as the Committee may determine. The Committee may grant awards independently of other compensation or in lieu of compensation that would otherwise be paid, whether at the election of the grantee or otherwise. 5. RESTRICTED SHARES The terms, conditions and restrictions to which restricted shares and share rights are subject shall be evidenced by instruments in such form as the Committee may from time to time approve and may vary from grant to grant, but shall conform to the following: a. Provisions of Restricted Shares. A Restricted Share issued under the Plan shall consist of a share of Common Stock, the retention and transfer of which are subject to such terms, conditions and restrictions (including repurchase and/or forfeiture rights in favor of the Corporation) as the Committee shall determine. Subject to the authority of the Committee to determine restrictions, the restrictions on each share of Common Stock granted hereunder shall terminate as follows: Restrictions with regard to 25% of any award (shares granted at any one time) shall expire and terminate upon the second anniversary of the grant. Thereafter restrictions shall expire and terminate as to an additional 25% of such award on each anniversary of the grant thereof. b. Restrictions Applicable. During the Restricted Period the following restrictions shall apply: 4 5 i. If a Participant ceases to be an employee of the Corporation for any reason other than death, disability or retirement, all shares of Restricted Stock ( which are then still defined as Restricted Stock) theretofore awarded to him shall, upon such cessation of employment be forfeited and returned to the Corporation. ii. If a Participant ceases to be an employee of the Corporation by reason of retirement, death or disability, then any shares of Restricted Stock owned by such Participant shall become free and clear of the restrictions imposed by Section 6 and the Corporation will deliver to him (or his legal representative, beneficiary or heir) , shares of Common Stock. In the event that a Participant ceases to be an employee of the Corporation by reason of his election to retire before the normal retirement age as defined in the CU Bancorp and California United Bank 401K Plan, then the committee, in its discretion, shall determine whether all or any portion of the Restricted stock then owned by such Participant shall be forfeited or become free of such restrictions, and if so freed of such restrictions the Corporation will deliver pursuant to Section 6e , within 60 days of his retirement, any shares of Common Stock which have not been forfeited. c. Agreement. Each Participant awarded shares of Restricted Stock shall enter into an agreement with the Corporation in a form specified by the Committee, agreeing to the terms and conditions of the award and to such other matters as the Committee shall, in its sole discretion, determine. d. Certificates. Each certificate issued in respect of shares of Restricted Stock shall be registered in the name of the Participant, shall be deposited by him with the Corporation together with a stock power endorsed in blank and shall bear the following (or a similar legend): The transferability of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in Section 6 of the CU Bancorp 1995 Restricted Stock Plan, as it may be 5 6 amended from time to time, and an Agreement entered into between the registered owner and CU Bancorp. A copy of such Plan and Agreement is on file in the Office of the General Counsel of CU Bancorp at the principal office of the Corporation. e. Expiration of Restrictions. As and when the restrictions imposed by Section 6 expire, the Corporation shall deliver to the Participant (or his legal representative, beneficiary or heir) a certificate without the legend referred to in Section 6d above, representing the number of shares of Common Stock equal to the number of shares of Restricted Stock deposited with it by the Participant pursuant to Section 6d, as to which the restrictions have expired. When all restrictions have expired, the Agreement referred to in Section 6c shall be terminated. 6. ASSIGNABILITY No Restricted Shares granted under the Plan may be sold, assigned or transferred by the grantee other than by will or by the laws of descent and distribution during the Restricted Period applicable to such shares., except as hereinafter provided. Except for such restrictions, the Participant, as owner of such shares, shall have all the rights of a stockholder, including (but not limited to) the right to receive all dividends paid on such shares (subject the provisions of Section 6b ) and the right to vote such shares. 7. WITHHOLDING The Corporation's obligation to deliver shares upon the settlement of any award under the Plan is subject to the satisfaction of all applicable federal, state and local income and employment tax withholding obligations. The Committee may, in its discretion and subject to such rules as it may adopt, permit the optionee to satisfy withholding obligations, in whole or in part, by delivering shares of Common Stock already held by the optionee or by electing that a portion of the total value of the shares of Common Stock otherwise issuable under the award be paid in the form of cash in lieu of the issuance of Common Stock and that such cash payment be applied to the satisfaction of the withholding obligations. 8. ACCELERATION AND TERMINATION OF AWARDS Not less than thirty (30) days prior to the dissolution or liquidation of the Corporation (or its principal subsidiary), or a reorganization, merger, or consolidation of the Corporation (or its principal subsidiary) with one or more corporations as a result of which the Corporation (or its principal subsidiary) will not be the surviving or result- 6 7 ing corporation (or the ownership of 50% of the shares of the corporation or its principal subsidiary changes as a result of the transaction), or a sale of substantially all the assets of the Corporation to another person, or a reverse merger in which the Corporation is the surviving corporation but the shares of the Corporation's stock outstanding immediately preceding the merger are converted by virtue of the merger into other property or any other transaction in which more than 50% of the ownership of the Corporation is transferred (a "Terminating Event"), all restrictions on any Restricted Shares shall lapse and the Restricted Period shall immediately terminate. The Committee shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change in control of the Corporation, as defined by the Committee, (other than a Terminating Event) to provide for the termination of the Restricted Period as to any Restricted Shares and/or the settlement of any such award in cash upon or immediately before the effective time of such event. However, the grant of awards under the Plan will in no way affect the right of the Corporation to adjust, reclassify, reorganize, or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 9. REGISTRATION OF SHARES. Certificates shall bear appropriate legends indicating that the Restricted Shares have not been registered pursuant to the Securities Act of 1933, if applicable. The Corporation is under no obligation to register such shares or to comply with any exemption from such registration, including those portions of Rule 144 under the Act to be complied with by the issuer. 10. VALUATION OF COMMON STOCK For all valuation purposes under the Plan, the fair market value of a share of Common Stock will be its closing price, as quoted on the NASDAQ, on the day immediately prior to the date in question. If there is no quotation available for such day, then the closing price on the next preceding day for which there does exist such a quotation shall be used. If, however, the Committee determines that, as a result of circumstances existing on any date, the use of such price is not a reasonable method of determining fair market value on that date, the Committee may use such other method as, in its judgment, is reasonable. 11. EFFECTIVE DATE AND TERM OF PLAN a. Effective Date. 7 8 The Plan will become effective on the date it is approved by the holders of at least a majority of the Corporation's voting stock represented and voting at a duly held meeting at which a quorum is present or by written consent. If such shareholder approval is not obtained within 12 months of adoption by the Board, no awards may be granted hereunder. b. Term. No further grants may be made under the Plan after the third anniversary of the date of adoption of the Plan by the Board. 12. AMENDMENT OR DISCONTINUANCE a. Plan. The Board may amend, suspend or discontinue the Plan in whole or in part at any time; provided, however, that, such action may not adversely affect rights and obligations with respect to awards at the time outstanding under the Plan. The Board may not, without the approval of the Corporation's shareholders (i) materially increase the number of shares of Common Stock which may be issued under the Plan (unless necessary to effect the adjustments required under Section 4(e), (ii) materially modify the eligibility requirements for awards under the Plan or (iii) make any other change with respect to which the Board determines that shareholder approval is required by applicable law or regulatory standards. b. Awards. The Committee shall have full power and authority to modify or waive any or all of the terms, conditions or restrictions applicable to any outstanding award, to the extent not inconsistent with the Plan; provided, however, that no such modification or waiver may, without the consent of the holder, adversely affect the holder's rights thereunder. 13. NO OBLIGATION Nothing contained in the Plan (or in any award granted pursuant to the Plan) shall confer upon any person any right to continue in the employ of, or to provide services to, the Corporation or any affiliate or constitute any contract or agreement of employment or service or interfere in any way with the right of the Corporation or an 8 9 affiliate to reduce such person's compensation from the rate in existence at the time of the granting of an award or to terminate such person's employment or services at any time, with or without cause, but nothing contained herein or in any award shall affect any contractual rights of any person pursuant to a written employment, consulting or service agreement. 14. REGULATORY APPROVALS The implementation of the Plan, the granting of any award under the Plan, and the issuance of Common Stock are subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the awards granted under it or the Common Stock issued pursuant to it. 15. GOVERNING LAW To the extent not otherwise governed by federal law, the Plan and its implementation shall be governed by and construed in accordance with the laws of the State of California. 9 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21. Subsidiaries of the Registrant California United Bank, National Association (100% owned) EX-27 7 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1995 DEC-31-1995 28376 0 32500 0 6345 66735 73459 190626 6930 325309 284510 0 7793 0 0 0 27264 5841 325309 18693 5713 0 24406 8635 8870 15536 0 0 12554 5047 2894 0 0 2894 .60 .60 5.68 1024 0 2614 0 7427 1089 592 6930 6930 0 0
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