<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2575576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9920 SOUTH LA CIENEGA BOULEVARD
INGLEWOOD, CALIFORNIA 90301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 417-5600
Commission file number: 0-7722
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK: Number of Shares of Common Stock outstanding as of September
30, 1998: 38,116,423 shares.
DEBT SECURITIES: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due
1999. As of September 30, 1998, $1,106,000 in principal
amount of such Notes and $999,000 in principal amount of
such Debentures were outstanding.
CAPITAL SECURITIES: 9.98 percent Series B Capital Securities of Imperial
Capital Trust I Due 2026. As of September 30, 1998,
$73,358,000 in net principal amount was outstanding.
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
<PAGE>
IMPERIAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Except for the historical information contained herein, the following discussion
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of forward-
looking terminology including "may", "will", "intend", "should", "expect",
"anticipate", "estimate" or "continue" or the negatives thereof or other
comparable terminology. The Company's actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
factors, including those set forth in documents filed with the Securities and
Exchange Commission.
FINANCIAL REVIEW
The following discussion presents information about the results of operations,
financial condition, liquidity, and capital resources of Imperial Bancorp ("the
Company") for the third quarter and nine months ended September 30, 1998. This
information should be read in conjunction with the Company's 1997 consolidated
financial statements and notes thereto, and the accompanying quarterly unaudited
consolidated financial statements and notes thereto.
PERFORMANCE SUMMARY
The Company reported a net loss of $3.1 million, or $0.08 per share, for the
three months ended September 30, 1998. This compares with net income of $14.9
million, or $0.36 per diluted share, for the same period of 1997. Financial
results for the three months ended September 30, 1998, were significantly
impacted by the after-tax losses, totaling $109.4 million, reported by Imperial
Credit Industries, Inc. ("ICII") (NASDAQ:ICII). At September 30, 1998, the
Company held 8.9 million shares of ICII or approximately 24.3 percent of total
outstanding common shares. The Company's share of ICII's losses on an after-tax
basis was $15.4 million, or $0.40 per share, for the three months ended
September 30, 1998. The net loss for the third quarter of 1998 also includes
$2.8 million after-tax, or $0.07 per share, of restructuring charges related to
the canceled spin-off of Imperial Financial Group ("IFG").
For the third quarter of 1998, the annualized loss on average total assets was
0.24 percent compared with an annualized return on average assets of 1.56
percent for the year earlier quarter. The annualized loss on average
shareholders' equity was 3.10 percent for the quarter ended September 30, 1998,
compared with an annualized return on average shareholders' equity of 18.37
percent for the same period of 1997.
Net income for the nine months ended September 30, 1998, decreased to $26.8
million, or $0.65 per diluted share, from $33.8 million, or $0.83 per diluted
share, for the first nine months of 1997. In addition to the Company's share of
ICII's losses and the restructuring charges recorded in the third quarter, net
income for the first nine months of 1998 included after-tax gains, net of
commission expense, from the exercise and sale of equity warrants totaling $7.7
million. Net income for the comparable period of 1997 included $1.4 million of
after-tax gains, net of commission expense, from the exercise and sale of equity
warrants.
The annualized return on average total assets was 0.75 percent for the first
nine months of 1998, compared with 1.29 percent for the same period of 1997.
The annualized return on average shareholders' equity decreased to 9.49 percent
for the first nine months of 1998, from 14.73 percent for the first nine months
of 1997.
Excluding equity in the net losses of ICII and the restructuring charges,
normalized net income from continuing operations increased 24 percent for the
third quarter of 1998, to $15.1 million, or $0.38 per diluted share, from $12.2
million, or $0.30 per diluted share, for the year earlier quarter. For the nine
months ended September 30, 1998, normalized net income from continuing
operations increased 48 percent to $41.2 million, or $1.00 per diluted share,
from $27.7 million, or $0.68 per diluted share, for the year earlier period.
For purposes of these comparisons, net income for the 1997 reporting periods
excludes equity in the net income of ICII, gains on the sale of ICII stock,
appreciation on donated ICII stock, expense associated with the settlement of a
consulting agreement and charitable contribution expense associated with the
donation of ICII shares to a nonprofit institution. The increase in net income
for the third quarter and nine months ended September 30, 1998, compared with
the comparable periods of 1997 is due to the growth in loans, higher gains on
the exercise and sale of equity warrants and increased fee-based income.
1
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The following table provides the calculation of normalized net income from
continuing operations for the periods indicated:
<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Loss) income from continuing operations $(3,099) $14,183 $26,843 $33,307
After-tax adjustments: (1)
Equity in net loss (income) of ICII 15,369 (1,945) 11,487 (4,846)
Gain on sale of ICII common stock - (1,408) - (1,408)
Appreciation of donated ICII common stock - - - (2,816)
Restructuring charges 2,828 - 2,828 -
Consulting expense - 1,394 - 1,394
Charitable contribution expense - - - 2,105
-----------------------------------------------------------
Normalized income from continuing operations $15,098 $12,224 $41,158 $27,736
===========================================================
Normalized diluted earnings per share
from continuing operations $ 0.38 $ 0.30 $ 1.00 $ 0.68
Normalized return on average assets (2) 1.20% 1.31% 1.17% 1.08%
Normalized return on average equity 15.12% 15.10% 14.56% 12.09%
- -----------------------------------------------------------------------------------------------------------------------
(1) Adjustment increases (decreases) reported (loss) income.
(2) The balance of average assets excludes the Company's investment in ICII.
</TABLE>
The annualized return on average assets, based on normalized net income from
continuing operations, decreased to 1.20 percent for the third quarter of 1998
from 1.31 percent for the year earlier quarter. A 35 percent increase in
average assets for the third quarter of 1998 compared with the third quarter of
1997 contributed to the decrease. For the nine months ended September 30, 1998,
the annualized return on average assets, based on normalized net income from
continuing operations, increased to 1.17 percent from 1.08 percent for the same
period of 1997.
The annualized return on average equity, based on normalized net income from
continuing operations, rose to 15.12 percent for the three months ended
September 30, 1998, from 15.10 percent for the same period of 1997--and, for the
first nine months of 1998, increased to 14.56 percent from 12.09 percent for the
same period of 1997.
Earnings per share calculations for the 1997 reporting periods have been
adjusted to reflect a three-for-two stock split effective February 6, 1998.
Net interest income increased 20 percent for the three months ended September
30, 1998, to $64.5 million from $53.8 million for the three months ended
September 30, 1997. The increase in net interest income is primarily due to
growth in the loan portfolio. Average loan balances increased approximately
$972.4 million during the third quarter of 1998 compared with the same quarter
of 1997. For the nine months ended September 30, 1998, net interest income
increased 34 percent to $190.2 million from $141.8 million for the comparable
period of 1997. Loan growth also contributed to increased loan fee income in
1998.
Net interest margin decreased to 5.58 percent and 5.89 percent from 6.35 percent
and 6.11 percent for the three- and nine- month periods ended September 30,
1998, respectively, compared with the year earlier periods. The decrease for
both periods is primarily due to a lower yield on commercial loans. The
Company's funding costs have increased only slightly from the prior year.
2
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<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $91,627 $74,372 $265,843 $201,601
Interest expense 27,167 20,528 75,677 59,756
NET INTEREST INCOME $64,460 $53,844 $190,166 $141,845
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.58% 6.35% 5.89% 6.11%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Loan loss provisions for the quarter and nine months ended September 30, 1998,
totaled $5.6 million and $25.6 million, respectively, compared with $7.1 million
and $14.8 million, respectively, for the comparable periods of 1997. The
increase in the loan loss provision for the first nine months of 1998, compared
with the prior year, reflects loan growth and an increase in net charge-offs.
Net charge-offs for 1998 include a charge-off of $7.0 million recorded during
the second quarter on one commercial loan. The Company's loan portfolio
increased by $886.2 million, or 35 percent, to $3.4 billion at September 30,
1998, from $2.5 billion at September 30, 1997. The ratio of the allowance for
loan losses to period end outstanding loans was 1.80 percent at September 30,
1998, 1.83 percent at December 31, 1997, and 1.86 percent at September 30, 1997.
The loss reported in noninterest income for the three months ended September 30,
1998, was $10.1 million compared with noninterest income of $19.0 million for
the year earlier quarter. For the nine months ended September 30, 1998,
noninterest income decreased to $43.5 million from $51.1 million for the
comparable period of 1997. Increases in various noninterest income categories
including other service charges and fees, merchant card processing fees,
international fees and gains on the exercise and sale of equity warrants for the
third quarter and nine months ended September 30, 1998, compared with the same
periods of 1997, were more than offset by the Company's equity in the net losses
of ICII of $26.5 million and $19.8 million, respectively.
Excluding the equity in net the losses of ICII, noninterest income for the three
months ended September 30, 1998, increased 24 percent to $16.5 million, from
$13.3 million, excluding $3.4 million equity in the net income of ICII and a
$2.4 million gain on the sale of ICII stock, for the comparable period of 1997.
For the first nine months of 1998, noninterest income rose 69 percent to $63.4
million, excluding $19.8 million equity in the net losses of ICII, from $37.5
million, excluding $8.4 million equity in the net income of ICII, the gain on
the sale of ICII stock and $2.8 million of appreciation on donated ICII stock
for the nine months ended September 30, 1997. Noninterest income for the first
nine months of 1998 includes gains on the exercise and sale of equity warrants
totaling $18.8 million compared with $3.6 million for the same period of 1997.
Noninterest expense for the third quarter of 1998, increased to $55.8 million,
from $41.9 million for the third quarter of 1997. Noninterest expense for the
third quarter of 1998 includes $4.9 million of restructuring charges related to
the canceled IFG spin-off. Noninterest expense for the nine months ended
September 30, 1998, increased to $164.9 million, from $122.4 million for the
comparable period of 1997. The increase in noninterest expense for the three-
and nine- month periods ended September 30, 1998, compared with the same periods
of 1997 occurred primarily in salaries and benefits expense, occupancy and
equipment expense and customer services expense. The increase in salaries and
benefits expense and occupancy and equipment expense is the result of growth in
the Company's lending and deposit businesses, support operations and the
addition of new offices. Benefits expense for the nine months ended September
30, 1998, includes commissions totaling $5.5 million associated with the
exercise and sale of equity warrants compared with $1.1 million for the same
period of the prior year. The increase in customer services expense is directly
related to the growth in deposit balances generated by the Financial Services
Group.
Total assets at September 30, 1998, were $6.3 billion, a 34 percent increase
from $4.7 billion reported at December 31, 1997, and a 40 percent increase from
$4.5 billion reported at September 30, 1997. Total loans rose to $3.4 billion
at September 30, 1998, from $2.8 billion at December 31, 1997, and $2.5 billion
at September 30, 1997. The increase in total loans was driven by a $860.6
million, or 41 percent, increase in commercial loan balances from September 30,
1997. Reflecting strong growth in short-term deposits generated by the Financial
Services Group, the balance of
3
<PAGE>
Federal funds sold increased to $1.5 billion at September 30, 1998, from $680.7
million at September 30, 1997. Excluding Federal funds sold, total assets
increased 25 percent to $4.8 billion at September 30, 1998, compared with total
assets of $3.8 billion at September 30, 1997.
Total deposits increased to $5.7 billion at September 30, 1998, a 36 percent
increase over $4.2 billion at December 31, 1997 and a 44 percent increase from
$3.9 billion reported at September 30, 1997. Noninterest-bearing demand
deposits comprised 60 percent of total deposits at September 30, 1998, compared
with 57 percent at December 31, 1997 and September 30, 1997. Shareholders'
equity increased to $370.6 million at September 30, 1998, from $352.0 million at
December 31, 1997, and $328.0 million at September 30, 1997.
Nonaccrual loans totaled $34.5 million, or 1.01 percent of total loans, at
September 30, 1998, compared with $10.6 million, or 0.38 percent of total loans,
at December 31, 1997, and $9.2 million, or 0.37 percent of total loans, at
September 30, 1997. The increase in nonaccrual loans at September 30, 1998,
compared with December 31, 1997, includes one $6.9 million loan to a physicians
management company; the remaining increase is primarily due to loans made to
companies in the entertainment industry. Restructured loans totaled $27.6
million at September 30, 1998, $24.0 million at December 31, 1997, and $25.5
million at September 30, 1997. A $14.2 million restructured loan paid off after
the September 1998 quarter end. All restructured loans were performing in
accordance with their modified terms at September 30, 1998. The balance of real
estate and other assets owned net of allowance ("OREO") decreased to $2.7
million at September 30, 1998, from $3.3 million at December 31, 1997, and
increased slightly from $2.5 million at September 30, 1997.
Imperial Bancorp is classified as "Well Capitalized" with leverage, Tier I and
total capital ratios at September 30, 1998, of 8.59 percent, 9.44 percent and
10.73 percent, respectively, compared with 10.63 percent, 11.38 percent and
12.72 percent, respectively, at September 30, 1997.
STOCK REPURCHASE PROGRAM
On September 24, 1998, the Company announced that the Board of Directors had
authorized the Company to repurchase 1,000,000 shares of its common stock in
addition to the existing repurchase plan announced in January 1997 under which
1,650,000 shares, as adjusted for stock dividends and splits, were authorized to
be repurchased. At September 30, 1998, the Company had repurchased 1,541,400
shares of the total 2,650,000 shares authorized for repurchase.
SPIN-OFF
In September 1998, the Company canceled plans to spin-off its wholly owned
subsidiary, Imperial Financial Group ("IFG"), as a separate publicly traded
company. The decision to cancel the spin-off was due to volatility in the
financial markets which contributed to a significant decline in the market value
of Imperial Credit Industries, Inc. ("ICII") common stock. The proposed
transaction involved the spin-off, in a tax free distribution to shareholders,
of a portion of the Company's specialty lending and finance businesses (the
Lewis Horwitz organization, the small business lending division, Imperial Trust
Company and the Company's 24 percent ownership interest in ICII) into IFG. The
distribution had been set to occur on October 1, 1998. The Company is
evaluating alternatives related to its investment in ICII common stock.
EARNINGS PERFORMANCE
Net Interest Income:
The Company's operating results depend primarily on net interest income. Net
interest income is the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities. Net interest margin
is net interest income expressed as a percentage of average interest-earning
assets. Net interest income increased to $64.5 million for the three months
ended September 30, 1998, from $53.8 million for the same period of the prior
year. The increase in net interest income is primarily due to the growth in
loans. Growth in the average balances of securities available for sale and
Federal funds sold also contributed to the increase in net interest income.
Total average earning
4
<PAGE>
assets increased 36 percent to $4.6 billion for the three months ended September
30, 1998, compared with $3.4 billion for the three months ended September 30,
1997.
<TABLE>
<CAPTION>
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THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
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Interest Interest
Average Income/ Average Average Income/ Average
(IN THOUSANDS) Balance Expense Rate (1) Balance Expense Rate (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans-net of unearned income
and deferred loan fees (2) $3,450,649 $75,769 (3) 8.71% $2,478,248 $61,157 (3) 9.79%
Trading account securities 31,977 454 5.63% 27,140 452 6.61%
Securities available for sale 738,554 10,160 5.46% 639,218 9,563 5.94%
Securities held to maturity 3,954 71 7.12% 4,108 73 7.05%
Federal funds sold and securities
purchased under resale agreements 343,609 4,832 5.58% 206,774 2,914 5.59%
Loans held for sale 13,411 341 10.09% 6,573 213 12.86%
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TOTAL INTEREST-EARNING ASSETS $4,582,154 $91,627 7.93% $3,362,061 $74,372 8.78%
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Allowance for loan losses (59,402) (43,108)
Cash 346,411 263,607
Other assets 222,894 190,188
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TOTAL ASSETS $5,092,057 $3,772,748
========== ==========
INTEREST-BEARING LIABILITIES:
Savings $ 28,823 $ 184 2.53% $ 21,740 $ 137 2.50%
Money market 978,872 8,260 3.35% 876,194 7,424 3.36%
Time-under $100,000 217,076 3,104 5.67% 125,930 1,789 5.64%
Time-$100,000 and over 917,613 12,442 5.38% 625,735 8,551 5.42%
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Total interest-bearing deposits $2,142,384 $23,990 4.44% $1,649,599 $17,901 4.31%
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Short-term borrowings 99,804 1,483 5.90% 66,957 921 5.46%
Long-term borrowings 75,858 1,694 8.86% 76,922 1,706 8.80%
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TOTAL INTEREST-BEARING LIABILITIES $2,318,046 $27,167 4.65% $1,793,478 $20,528 4.54%
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Demand deposits 2,295,653 1,580,507
Other liabilities 82,201 77,628
Shareholders' equity 396,157 321,135
---------- ---------
$5,092,057 $3,772,748
========== ==========
NET INTEREST INCOME/NET INTEREST MARGIN $64,460 5.58% $53,844 6.35%
------- ---- ------- ----
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</TABLE>
(1) The yields are not presented on a tax equivalent basis as the effects are
not material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $5.6 million and $5.4
million, for the three months ended September 30, 1998 and 1997,
respectively.
5
<PAGE>
The Company's net interest margin decreased to 5.58 percent for the third
quarter of 1998 from 6.35 percent for the third quarter of 1997.
<TABLE>
<CAPTION>
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NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
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Interest Interest
Average Income/ Average Average Income/ Average
(IN THOUSANDS) Balance Expense Rate (1) Balance Expense Rate (1)
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<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans-net of unearned income
and deferred loan fees (2) $3,214,497 $219,120 (3) 9.11% $2,290,275 $165,821 (3) 9.68%
Trading account securities 25,637 1,046 5.45% 27,494 1,334 6.49%
Securities available for sale 682,066 29,058 5.70% 536,062 23,864 5.95%
Securities held to maturity 3,989 211 7.07% 4,153 219 7.05%
Federal funds sold and securities 377,864 15,675 5.55% 236,769 9,806 5.54%
purchased under resale agreements 9,531 733 10.28% 6,739 557 11.05%
Loans held for sale
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TOTAL INTEREST-EARNING ASSETS $4,313,584 $265,843 8.24% $3,101,492 $201,601 8.69%
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Allowance for loan losses (56,205) (39,875)
Cash 331,730 264,592
Other assets 209,566 175,858
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TOTAL ASSETS $4,798,675 $3,502,067
========== ==========
INTEREST-BEARING LIABILITIES:
Savings $ 26,799 $ 508 2.53% $ 20,230 $ 378 2.50%
Money market 935,092 23,617 3.38% 718,315 17,281 3.22%
Time-under $100,000 185,455 7,947 5.73% 156,492 6,707 5.73%
Time-$100,000 and over 836,848 33,965 5.43% 713,573 29,055 5.44%
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Total interest-bearing deposits $1,984,194 $ 66,037 4.45% $1,608,610 $ 53,421 4.44%
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Short-term borrowings 108,354 4,589 5.66% 81,273 3,239 5.33%
Long-term borrowings 76,330 5,051 8.85% 47,393 3,096 8.73%
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TOTAL INTEREST-BEARING LIABILITIES $2,168,878 $ 75,677 4.67% $1,737,276 $ 59,756 4.60%
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Demand deposits 2,175,839 1,386,977
Other liabilities 75,910 71,202
Shareholders' equity 378,048 306,612
---------- ----------
$4,798,675 $3,502,067
========== ==========
NET INTEREST INCOME/NET INTEREST MARGIN $190,166 5.89% $141,845 6.11%
------- ---- -------- ----
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</TABLE>
(1) The yields are not presented on a tax equivalent basis as the effects are
not material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $18.5 million and $12.7
million, for the nine months ended September 30, 1998 and 1997,
respectively.
6
<PAGE>
For the nine months ended September 30, 1998, the net interest margin decreased
to 5.89 percent from 6.11 percent for the comparable period of 1997.
The decrease in the net interest margin for the third quarter and nine months
ended September 30, 1998, compared with the year earlier periods is largely due
to a decline in the yield on commercial loans. While the overall pricing of
loan products remained fairly stable, the Company did experience a reduction in
yield on selected loan products, and the yield on commercial loans was
negatively impacted by the increase in nonaccrual loans. Interest income for
the three and nine months ended September 30, 1998, was reduced by approximately
$200,000 and $840,000, respectively, due to interest reversals on nonaccrual
loans. An increase in Federal funds sold as a percentage of total average
earning assets also contributed to a reduction in the net interest margin for
1998 compared with 1997. The level of Federal funds sold tends to correspond
with demand deposit balances maintained by customers in the real estate services
industry. The Company's cost of funds for the third quarter and nine months
ended September 30, 1998, increased modestly from the same periods of 1997.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Changes in the Company's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following tables set forth information regarding changes in
interest income and interest expense for the third quarter and nine months ended
September 30, 1998 and 1997. The total change is segmented into the change
attributable to variations in volume (changes in volume multiplied by old rate)
and the change attributable to variations in interest rates (changes in rates
multiplied by old volume). The change in interest due to both rate and volume
(changes in rate multiplied by changes in volume) is classified as rate/volume.
Non-accrual loans are included in average loans for these computations. The
tables are not presented on a tax equivalent basis as the effects are not
material.
7
<PAGE>
<TABLE>
<CAPTION>
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THREE MONTHS ENDED SEPTEMBER 30, 1998 OVER 1997
(IN THOUSANDS) VOLUME RATE RATE/VOLUME TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $23,997 $(6,740) $(2,645) $14,612
Trading instruments 81 (67) (12) 2
Securities available for sale 1,487 (770) (120) 597
Securities held to maturity (3) 1 - (2)
Federal funds sold and securities
purchased under resale agreements 1,928 (6) (4) 1,918
Loans held for sale 222 (46) (48) 128
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income $27,712 $(7,628) $(2,829) $17,255
- -----------------------------------------------------------------------------------------------------------------------------------
Savings $ 44 $ 2 $ 1 $ 47
Money market 870 (30) (4) 836
Time-under $100,000 1,295 12 8 1,315
Time-$100,000 and over 3,989 (67) (31) 3,891
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 6,198 $ (83) $ (26) $ 6,089
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Short-term borrowings 452 74 36 562
Long-term borrowings (24) 12 (0) (12)
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Total interest expense $ 6,626 $ 3 $ 10 $ 6,639
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Change in net interest income $21,086 $(7,631) $(2,839) $10,616
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</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
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NINE MONTHS ENDED SEPTEMBER 30, 1998 OVER 1997
(IN THOUSANDS) VOLUME RATE RATE/VOLUME TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $66,916 $ (9,702) $(3,915) $53,299
Trading account securities (90) (212) 14 (288)
Securities available for sale 6,499 (1,026) (279) 5,194
Securities held to maturity (8) - (0) (8)
Federal funds sold and securities
purchased under resale agreements 5,844 16 9 5,869
Loans held for sale 231 (39) (16) 176
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Total interest income $79,392 $(10,963) $(4,187) $64,242
- -----------------------------------------------------------------------------------------------------------------------------------
Savings $ 123 $ 5 $ 2 $ 130
Money market 5,215 861 260 6,336
Time-under $100,000 1,241 (1) (0) 1,240
Time-$100,000 and over 5,019 (93) (16) 4,910
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $11,598 $ 772 $ 246 $12,616
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Short-term borrowings 1,079 203 68 1,350
Long-term borrowings 1,890 40 25 1,955
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Total interest expense $14,567 $ 1,015 $ 339 $15,921
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $64,825 $(11,978) $(4,526) $48,321
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</TABLE>
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's real estate
services depositors are recorded as noninterest expense. If these deposits were
treated as interest-bearing and the payments reclassified as interest expense,
the Company's reported net interest income and noninterest expense would have
been reduced by $7.5 million and $20.3 million, respectively, for the three and
nine months ended September 30, 1998, and by $5.3 million and $13.2 million,
respectively, for the comparable periods of 1997. The net interest margin for
the three and nine months ended September 30, 1998, would have been 4.93 percent
and 5.27 percent, respectively. The net interest margin for the three and nine
months ended September 30, 1997, would have been 5.73 percent and 5.55 percent,
respectively.
Noninterest Income:
The loss reported in noninterest income for the three months ended September 30,
1998, was $10.1 million compared with noninterest income of $19.0 million for
the year earlier quarter. For the nine months ended September 30, 1998,
noninterest income decreased to $43.5 million from $51.1 million for the
comparable period of 1997.
Excluding equity in the net losses of ICII, noninterest income for the three
months ended September 30, 1998, totaled $16.5 million, compared with $13.3
million, excluding $3.4 million equity in the net income of ICII and a $2.4
million gain on the sale of ICII stock, for the comparable period of 1997. For
the first nine months of 1998, noninterest income rose 69 percent to $63.4
million, excluding $19.8 million equity in the net losses of ICII, from $37.5
million, excluding $8.4 million equity in the net income of ICII, the gain on
the sale of ICII stock and $2.8 million of appreciation on donated ICII stock,
for the nine months ended September 30, 1997.
9
<PAGE>
The following table provides the components of noninterest income for the
periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,614 $1,313 $ 4,731 $4,030
Trust fees 2,138 2,125 6,323 5,842
Gain on origination and sale of loans 837 961 3,373 2,979
Equity in net (loss) income of Imperial Credit
Industries, Inc. (26,520) 3,356 (19,821) 8,362
Gain on sale of Imperial Credit Industries, Inc. common stock - 2,429 - 2,429
Other service charges and fees 4,448 2,686 11,233 7,639
Merchant and credit card fees 2,121 956 5,227 2,453
International income and fees 2,358 2,443 8,767 7,193
Gain on securities available for sale 111 2 123 359
Gain on trading instruments 519 1,139 891 3,387
Gain on exercise and sale of equity warrants 1,750 1,084 18,790 3,627
Appreciation of donated Imperial Credit Industries, Inc.
common stock - - - 2,816
Other income 558 552 3,901 18
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $(10,066) $19,046 $43,538 $51,134
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest income excluding equity in net (loss) income
of ICII, gain on sale of ICII stock and appreciation of
donated ICII stock $ 16,454 $13,261 $63,359 $37,527
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest income for the first nine months of 1998 included gains on the
exercise and sale of equity warrants totaling $18.8 million, which includes a
$16.1 million gain on the exercise and sale of warrants held in one company,
compared with $3.6 million for the same period of 1997. The remaining increase
in noninterest income is due to growth in fee-based service income including:
merchant card processing fees, international fees, fees derived from the sale of
nonproprietory mutual funds, factoring fees, trust fees and service charges on
deposits. The increases in fee income are related to higher volumes in the
respective operations.
Noninterest Expense:
Noninterest expense for the third quarter of 1998, increased to $55.8 million,
from $41.9 million for the third quarter of 1997. Noninterest expense for the
third quarter of 1998 includes $4.9 million of restructuring charges related to
the canceled IFG spin-off. Noninterest expense for the nine months ended
September 30, 1998, increased to $164.9 million, from $122.4 million for the
comparable period of 1997.
Excluding the restructuring charges, noninterest expense increased by 29 percent
to $50.9 million for the three months ended September 30, 1998, from $39.5
million for the same period of 1997, excluding $2.4 million of consulting
expense related to the settlement of a consulting agreement. Noninterest
expense for the nine months ended September 30, 1998, increased 38 percent to
$160.1 million, excluding restructuring charges, from $116.4 million, excluding
the consulting settlement and $3.6 million of charitable contribution expense,
for the comparable period of 1997.
10
<PAGE>
The table below provides detail of noninterest expense by category for the
periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salary and employee benefits $26,533 $20,018 $ 88,434 $ 61,528
Net occupancy expense 2,747 2,267 7,715 6,788
Furniture and equipment 2,388 1,674 7,189 4,662
Data processing 2,684 1,867 7,339 5,626
Customer services 7,501 5,305 20,285 13,184
Professional and legal fees 2,603 2,643 7,701 6,939
Business development 1,185 1,205 3,909 3,856
Restructuring charges 4,880 - 4,880 -
Charitable donations 100 37 407 3,764
Other expense 5,154 6,870 17,074 16,046
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $55,775 $41,886 $164,933 $122,393
- -------------------------------------------------------------------------------------------------------------------------
Noninterest expense excluding $4.9 million of restructuring
charges, $ 2.4 million of consulting expense related to the
settlement of a consulting agreement and $3.6 million of
charitable contribution expense associated with the
donation of ICII stock $50,895 $39,480 $160,053 $116,355
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Excluding the items noted above, the increase in noninterest expense for the
three- and nine-month periods ended September 30, 1998, compared with 1997
occurred primarily in salaries and benefits expense, occupancy and equipment
expense and customer services expense. The increase in salaries and benefits
expense and occupancy and equipment expense is the result of growth in the
Company's lending and deposit businesses, support operations and to the addition
of new offices. The number of full-time equivalent staff increased 25 percent to
1,168 at September 30, 1998, from 934 at September 30, 1997. Benefits expense
for the nine months ended September 30, 1998, includes commissions totaling $5.5
million associated with the exercise and sale of equity warrants compared with
$1.1 million for the same period of the prior year. The increase in customer
services expense is directly related to the growth in deposit balances generated
by the Financial Services Group which supports the real estate services
industry.
Customer services expense increased to $7.5 million for the third quarter of
1998 from $5.3 million for the third quarter of 1997. For the first nine
months, customer services expense totaled $20.3 million for 1998 compared with
$13.2 million for the same period of 1997. The Company pays certain accounting
and courier expenses on behalf of its depositors in the real estate services
industry. The increase in customer services expense is directly related to the
growth in these demand deposit balances. The average balance of these demand
deposits increased approximately $615.5 million for the nine months ended
September 30, 1998, compared with the comparable period of 1997.
Other noninterest expense for the three months ended September 30, 1998,
totaling $5.2 million includes $835,900 of charges related to the Company's
investment in qualified low income housing tax credits. The Company's gross
investment in low income housing tax credits increased to $8.6 million at
September 30, 1998, from $2.6 million at December 31, 1997. Other noninterest
expense for the current quarter and year-to-date also reflects increases in
travel, supplies and telephone expenses related to the Company's growth.
Income Taxes:
The Company recorded income tax (benefit) expense of ($3.9) million and $9.8
million, for the quarters ended September 30, 1998 and 1997, respectively.
Income tax expense was $16.4 million and $22.5 million, for the nine months
ended September 30, 1998 and 1997, respectively. The Company's effective tax
rate was 37.9 percent for the
11
<PAGE>
nine-month period ended September 30, 1998, and 40.3 percent for the nine-month
period ended September 30, 1997. Tax expense for 1998 includes estimated tax
credits totaling $1.4 million related to the Company's investments in qualified
low income housing projects.
LOANS
The following table provides a summary of loans by category for the periods
indicated :
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997 SEPTEMBER 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
<S> <C> <C> <C> <C> <C> <C>
Commercial $2,954,343 86.59% $2,350,438 84.29% $2,093,711 82.90%
Loan Secured by real estate: -
Real estate term loans 191,583 5.61 232,954 8.35 256,130 10.14
Interim construction loans 229,539 6.73 174,767 6.27 151,914 6.01
Consumer loans 36,361 1.07 30,449 1.09 23,874 0.95
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Loans 3,411,826 100.00% 2,788,608 100.00% 2,525,629 100.00%
Less Allowance for loan losses (61,415) (51,143) (46,871)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $3,350,411 $2,737,465 $2,478,758
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company continued to experience strong loan demand in its core California
markets during the third quarter of 1998. The balance of loans outstanding
increased by $623.2 million, or 22 percent, at September 30, 1998, compared with
December 31, 1997, and by $886.2 million, or 35 percent, compared with September
30, 1997. The commercial loan portfolio is well diversified across industry
lines. Major industries served include manufacturing, entertainment, high tech,
wholesale trade, health care and real estate services. The relative distribution
of the portfolio by industry type at September 30, 1998, remained consistent
with year-end 1997. The increase in construction loans was driven by loans to
established builders of entry-level housing. Management expects loan growth to
continue at a more moderate pace for the remainder of 1998 and 1999.
ASSET QUALITY
Nonaccrual Loans, Restructured Loans and Real Estate Owned:
Nonaccrual loans, which includes loans 90 days or more past due, totaled $34.5
million, or 1.01 percent of total loans, at September 30, 1998, compared with
$10.6 million, or 0.38 percent of total loans, at December 31, 1997, and $9.2
million, or 0.37 percent of total loans, at September 30, 1997. The increase in
nonaccrual loans at September 30, 1998, compared with December 31, 1997,
includes one $6.9 million loan to a physicians management company; the remaining
increase is primarily due to loans made to companies in the entertainment
industry. Recent events in the Asian and European financial markets have
adversely impacted the market for independent films. Loans totaling $18.1
million were placed on nonaccrual status during the quarter ended September 30,
1998. The increase in nonaccrual loans was partially offset by gross charge-
offs totaling $2.3 million, payoffs totaling $3.9 million, loans brought current
totaling $2.7 and loans transferred to OREO totaling $601,500.
For the nine months ended September 30, 1998, loans totaling $46.9 million were
placed on nonaccrual status. The increase in nonaccrual loans was partially
offset by gross charge-offs totaling $7.6 million, payoffs totaling $7.4
million, loans brought current totaling $6.4 million and loans transferred to
OREO totaling $1.5 million. At September 30, 1998, the Company had loans
totaling $506,000 that were past due 90 days or more and still accruing
interest. The majority of these loans were government-guaranteed Small Business
Administration ("SBA") loans which have interest guaranteed for 120 days. When
a loan reaches nonaccrual status, any interest accrued but uncollected is
reversed and charged against current income. Interest income for the three and
nine months ended September 30, 1998, was reduced by approximately $200,000 and
$840,000, respectively, due to interest reversals on nonaccrual loans.
Restructured loans, loans that have had their original terms modified, totaled
$27.6 million, $24.0 million and $25.5 million at September 30, 1998, December
31, 1997, and September 30, 1997, respectively. The net increase in
12
<PAGE>
restructured loans since December 31, 1997, reflects the addition of a small
number of commercial loans offset by payments received totaling $1.4 million. A
$14.2 million restructured loan paid off after the September 1998 quarter end.
Real estate and other assets owned ("OREO") include properties acquired through
foreclosure or through full or partial satisfaction of loans. The difference
between the fair value of the collateral, less the estimated costs of disposal,
and the loan balance at the time of transfer to OREO is reflected in the
allowance for loan losses as a charge-off. Any subsequent declines in the fair
value of the property after the date of transfer are recorded through a
provision for writedowns on OREO. OREO, net of valuation allowances, totaled
$2.7 million, $3.3 million and $2.5 million at September 30, 1998, December 31,
1997, and September 30, 1997, respectively. For the nine months ended September
30, 1998, five properties, totaling $1.5 million, were added to OREO and six
properties, totaling $1.9 million, were sold. The remaining change in the
balance of OREO is due to payments received. A net gain of $1.1 million was
recognized on the sales.
The following table provides information on nonaccrual loans, restructured loans
and real estate and other assets owned as indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
(IN THOUSANDS) 1998 1998 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial $33,720 $25,039 $9,802 $8,675 $6,250
Real estate 788 831 2,353 1,903 2,685
Consumer - 49 99 - 301
- ---------------------------------------------------------------------------------------------------------------
TOTAL NONACCRUAL LOANS $34,508 $25,919 $12,254 $10,578 $ 9,236
- ---------------------------------------------------------------------------------------------------------------
RESTRUCTURED LOANS $27,591 $23,652 $23,129 $23,970 $25,549
- ---------------------------------------------------------------------------------------------------------------
Real estate and other assets owned:
Real estate and other assets owned, gross $ 2,700 $ 4,343 $ 4,073 $ 4,373 $ 3,547
Less valuation allowance - (1,089) (1,089) (1,089) (1,089)
- ---------------------------------------------------------------------------------------------------------------
REAL ESTATE AND OTHER ASSETS OWNED, NET $ 2,700 $ 3,254 $ 2,984 $ 3,284 $ 2,458
- ---------------------------------------------------------------------------------------------------------------
TOTAL $64,799 $52,825 $38,367 $37,832 $37,243
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
All loans on nonaccrual status are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status must
meet the following criteria: all payments must be current and the loan
underwriting must support the debt service requirements. Factors that contribute
to a performing loan being classified as impaired include: a below market
interest rate, delinquent taxes and debts to other lenders that cannot be
serviced out of existing cash flow.
The following table contains information for loans deemed impaired:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NET
CARRYING SPECIFIC NET
(IN THOUSANDS) VALUE ALLOWANCE BALANCE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1998
Loans with specific allowances $67,553 $(14,751) $52,802
Loans without specific allowances 13,759 - 13,759
- ------------------------------------------------------------------------------------------------------------
TOTAL $81,312 $(14,751) $66,561
- ------------------------------------------------------------------------------------------------------------
December 31, 1997
Loans with specific allowances $85,612 $(11,881) $73,731
Loans without specific allowances 7,374 - 7,374
- ------------------------------------------------------------------------------------------------------------
TOTAL $92,986 $(11,881) $81,105
- ------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $46,804 $79,109
Past due - 3,299
Nonaccrual 34,508 10,578
- ---------------------------------------------------------------------------------------------------------
TOTAL $81,312 $92,986
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Loans classified as impaired totaled $81.3 million at September 30, 1998,
compared with $93.0 million at December 31, 1997. During the first nine months
of 1998, $70.9 million of loans were newly classified as impaired. The
additions to impaired loans were more than offset by the receipt of payments on
impaired loans totaling $52.8 million, charge-offs totaling $9.6 million, loans
removed from impaired status totaling $19.3 million and loans transferred to
OREO of $915,000. The Company's average recorded investment in impaired loans
for the nine months ended September 30, 1998, was $85.7 million. Interest
income totaling approximately $6.6 million was collected on impaired loans
during the nine months ended September 30, 1998.
Allowance and Provision for Loan Losses:
The allowance for loan losses is maintained at a level considered appropriate by
management and is based on an ongoing assessment of the risks inherent in the
loan portfolio. The allowance for loan losses is increased by the provision for
loan losses which is charged against current period operating results, and is
decreased by the amount of net charge-offs during the period. The Company's
determination of the level of the allowance for loan losses, and
correspondingly, the provision for loan losses is based upon various judgments
and assumptions, including general economic conditions (especially in
California), loan growth, loan portfolio composition and concentrations, prior
loan loss experience, collateral value, identification of problem and potential
problem loans and other relevant data to identify the risks in the loan
portfolio. While management believes that the allowance for loan losses is
adequate at September 30, 1998, future additions to the allowance will be
subject to continuing evaluation of inherent risk in the loan portfolio.
At September 30, 1998, the allowance for loan losses equaled $61.4 million, or
1.80 percent of total loans, compared with $51.1 million, or 1.83 percent of
total loans, at December 31, 1997, and $46.9 million, or 1.86 percent of total
loans, at September 30, 1997. The following table summarizes changes in the
allowance for loan losses:
14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, BEGINNING OF YEAR $ 51,143 $ 36,051
- --------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial (16,344) (5,468)
Real estate (329) (1,115)
Consumer (58) (4)
- --------------------------------------------------------------------------------------------------------------
TOTAL LOANS CHARGED OFF $ (16,731) $ (6,587)
- --------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 1,268 960
Real estate 154 1,588
Consumer 5 17
- --------------------------------------------------------------------------------------------------------------
TOTAL LOANS RECOVERIES $ 1,427 $ 2,565
- --------------------------------------------------------------------------------------------------------------
Net loans charged off (15,304) (4,022)
Provision for loan losses 25,576 14,842
- --------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 61,415 $ 46,871
- --------------------------------------------------------------------------------------------------------------
LOANS OUTSTANDING, END OF PERIOD $3,411,826 $2,525,629
- --------------------------------------------------------------------------------------------------------------
AVERAGE LOANS OUTSTANDING $3,214,497 $2,290,275
- --------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans /(1)/ 0.64% 0.23%
Ratio of allowance for loan losses to loans outstanding at Sept. 30 1.80% 1.86%
Ratio of allowance for loan losses to nonaccrual loans 177.97% 507.48%
Ratio of provision for loan losses to net charge-offs 167.12% 369.02%
- --------------------------------------------------------------------------------------------------------------
/(1)/ Annualized
</TABLE>
The provision for loan losses for the nine months ended September 30, 1998 and
1997, totaled $25.6 million and $14.8 million, respectively. The increase in
the provision for loan losses for 1998 compared with the prior year reflects
loan growth and an increase in net charge-offs. Net charge-offs increased to
$15.3 million for the nine months ended September 30, 1998, from $4.0 million
for the same period of 1997. Over half of the increase is due to a $7.0 million
charge-off recorded on one commercial loan during the second quarter of 1998.
The average balance of the Company's loan portfolio increased by $924.2 million,
or 40 percent, for the nine months ended September 30, 1998, compared with the
comparable period of 1997. As a percentage of average loans outstanding,
annualized net charge-offs were 0.64 percent for the first nine months of 1998
compared with 0.23 percent for the same period of 1997.
Securities:
Securities available for sale decreased to $602.6 million at September 30, 1998,
from $669.3 million at December 31, 1997. The decrease was largely due to
maturities of U.S. Treasury securities. Federal funds sold and securities
purchased under resale agreements increased to $l.5 billion at September 30,
1998, from $765.0 million at December 31, 1997. The increase in these balances
is a function of the growth in demand deposits. Noninterest-bearing demand
deposits increased to $3.4 billion at September 30, 1998, from $2.4 billion at
December 31, 1997. The growth in demand balances occurred primarily in deposits
of real estate services companies which increased to $2.3 billion at September
30, 1998, from $1.4 billion at December 31, 1997.
15
<PAGE>
A summary of securities held to maturity as of September 30, 1998, and December
31, 1997, is provided below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1998
Industrial development bonds $3,933 $ - $ - $3,933
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $3,933 $ - $ - $3,933
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1997
Industrial development bonds $4,026 $ - $ - $4,026
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $4,026 $ - $ - $4,026
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the amortized cost and estimated fair value of securities available
for sale as of September 30, 1998, and December 31, 1997, is provided below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1998
U.S. Treasury and federal agencies $579,846 $2,703 $ (542) $582,007
Mutual funds 8,829 - - 8,829
Other securities 14,264 - (2,548) 11,716
- --------------------------------------------------------------------------------------------------------------------
TOTAL $602,939 $2,703 $(3,090) $602,552
- --------------------------------------------------------------------------------------------------------------------
December 31, 1997
U.S. Treasury and federal agencies $612,903 $2,378 $ (74) $615,207
Mutual funds 37,532 - - 37,532
Other securities 15,928 599 - 16,527
- --------------------------------------------------------------------------------------------------------------------
TOTAL $666,363 $2,977 $ (74) $669,266
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains and losses realized on the sale of securities available for sale
during the nine months ended September 30, 1998, were $127,600 and $4,800,
respectively. These amounts were $428,300 and $69,600, respectively, for the
nine months ended September 30, 1997.
Deferred Tax Asset
The Company's net deferred tax asset increased to $21.6 million at September 30,
1998, from $355,000 at December 31, 1997. The increase is largely due to a
$19.8 million reduction in deferred tax liabilities resulting from the Company's
equity in the net losses of ICII. The deferred tax asset is reported net
of deferred tax liabilities. Management believes that it is more likely than not
the Company will realize the benefits of these deductible differences.
Other Assets
The balance of other assets increased to $85.1 million at September 30, 1998,
from $64.3 million at December 31, 1997. The growth in other assets compared
with year-end 1997 reflects the following: a $5.2 million increase in the net
investment in qualified low income housing projects, a $4.5 million increase in
the receivable for payments due on SBA investment securities, a $3.5 million
receivable on the books of Altair Corporation, a software company that was
acquired in September 1998, and a $2.7 million increase in the cash surrender
value of life insurance funding deferred compensation plans.
16
<PAGE>
Time Certificates of Deposit
Time certificate of deposit balances increased 55 percent to $1.3 billion at
September 30, 1998, from $833.3 million at December 31, 1997. Approximately
$186.6 million of the increase is due to higher deposits by state and local
government agencies. The remaining growth occurred in commercial accounts.
Other Borrowings:
Short-term borrowings increased to $121.0 million at September 30, 1998, from
$55.9 million at December 31, 1997. Increases of $84.4 million in borrowed funds
backed by Treasury, Tax and Loan ("T,T&L") deposits and $8.7 million in
commercial paper at September 30, 1998, compared with the balances at December
31, 1997, were offset in part by a $28.0 million decrease in Federal funds
purchased and reverse repurchase balances over the same period.
ASSET/LIABILITY MANAGEMENT
Liquidity:
Liquidity management involves the Company's ability to meet the cash flow
requirements of its lending and deposit businesses. For the Company, as with
most commercial banking institutions, this involves an ongoing process of
managing the cash inflows and outflows associated with a commercial deposit
base. The Company's ability to acquire new deposits at pricing levels consistent
with management's targets is largely based upon its financial condition and
capital base.
The Company's liquid assets consist of cash, Federal funds sold, securities
purchased under resale agreements and investment securities, excluding those
pledged as collateral. The majority of the Company's securities portfolio is
held as available for sale. Available for sale securities can be sold in
response to liquidity needs or used as collateral under reverse repurchase
agreements. It is the Company's policy to maintain a minimum liquidity ratio
(liquid assets to deposits) of 20 percent and to limit gross loans to no more
than 80 percent of deposits. At September 30, 1998, the Company's liquidity
ratio was 39 percent and the loan to deposit ratio was 60 percent.
The overall liquidity position of the Company has been enhanced by a sizable
base of demand deposits resulting from the Company's longstanding relationships
with the real estate services industry which have provided a relatively stable
and low cost funding base. Total demand deposits averaged $2.3 billion for the
quarter ended September 30, 1998, compared with $1.6 billion for the same period
of 1997. For the nine months ended September 30, 1998, approximately 37 percent
of average total deposits were from the real estate services industry compared
with 30 percent of average total deposits for the same period of 1997. The
Company's average demand deposits and average shareholders' equity funded
approximately 53 percent and 48 percent, of average total assets for the nine
months ended September 30, 1998 and 1997, respectively.
These funding sources are augmented by payments of principal and interest on
loans, the routine liquidation of securities from the trading and available for
sale portfolios, Federal funds sold and securities purchased under resale
agreements. For the nine months ended September 30, 1998, the Company
experienced a net cash outflow from its investing activities of approximately
$1.3 billion. The net outflow related to investing activities can be attributed
to growth in the Company's loan portfolio, an outflow of $613.0 million, and a
$764.0 million increase in Federal funds sold. The outflow in investing
activities was offset by the $1.5 billion net cash provided by the Company's
financing activities. Net cash inflows from financing activities for the nine
months ended September 30, 1998, included net increases in deposits totaling
$1.5 billion and $65.1 million provided by an increase in short-term borrowings.
These increases from financing activities were partially offset by an outflow of
$21.9 million for the repurchase of common stock.
Interest Rate Sensitivity Management:
The primary objective of the asset liability management process is to manage the
Company's exposure to interest rate fluctuations while maintaining adequate
levels of liquidity and capital. In order to manage its interest rate
sensitivity, the Company has adopted policies that attempt to limit the change
in pretax net interest income assuming various interest rate
17
<PAGE>
scenarios. This is accomplished by adjusting the repricing characteristics of
the Company's assets and liabilities as interest rates change. The Company's
Asset Liability Committee ("ALCO") chooses strategies in conformance with its
policies to achieve an appropriate trade off between interest rate sensitivity
and the volatility of pretax net interest income and net interest margin.
Each month, the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on net interest income and
the net interest margin by simulating various interest rate scenarios over
future time periods. Through the use of these simulations, the Company can
approximate the impact these projected rate changes may have on its entire on-
and off-balance sheet positions, on any particular segment of the balance sheet,
and overall profitability.
Cumulative interest sensitivity gap represents the difference between interest-
earning assets and interest-bearing liabilities maturing or repricing, whichever
is earlier, at a given point in time. At September 30, 1998, the Company
maintained a positive one year gap of approximately $2.5 billion; meaning its
interest rate sensitive assets exceeded its interest rate sensitive liabilities.
This positive cumulative gap position indicates that the Company is asset
sensitive and positioned for increased net interest income during a period of
rising interest rates but also exposed to an adverse impact on net interest
income in a falling rate environment. At September 30, 1997, the Company
maintained a positive one year gap of approximately $447.0 million.
The Company's net interest margin is sensitive to sudden changes in interest
rates. In addition, the Company's interest-earning assets, primarily its loans,
are tied to the prime rate, an index which tends to react more slowly to changes
in market rates than other money market indices such as LIBOR (London Interbank
Offered Rate). The rates paid for the Company's interest-bearing liabilities,
however, do correlate with LIBOR. This mismatch creates a spread relationship
risk between the Company's Prime based assets and LIBOR correlated liabilities.
The Company has developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates. These strategies
involve purchasing interest rate floors and caps with strike prices that
generally adjust quarterly and are priced approximately 100-250 basis points
below or above (depending on the instrument) current market rates at the time
the floors and caps were purchased. At September 30, 1998, the Company owned
exchange traded floors totaling $4.5 billion that expire as follows: $1.0
billion in the fourth quarter of 1998, $1.3 billion in the first quarter of
1999, $1.8 billion in the second quarter of 1999 and $500.0 million in the third
quarter of 1999. The floors provide the Company protection in the event that the
three-month LIBOR rate drops below their respective strike prices. The floors
have an average strike price of approximately 4.8 percent. The unrealized gain
on the floors approximated $3.2 million at September 30, 1998. The unamortized
premium relating to the floors was $318,700 at September 30, 1998.
In March 1998, the Company purchased an over-the-counter interest rate cap with
a notional value outstanding of $1.0 billion at September 30, 1998. The cap
provides protection in the event that the three-month LIBOR increases above the
8.33 percent strike price of the cap and expires during the first quarter of
2001. The unrealized gain on this cap at September 30, 1998, approximated
$6,500. The unamortized premium paid for the cap approximated $398,600 at
September 30, 1998.
In the first quarter of 1997, the Company sold $27.0 million of ten-year
certificates of deposit with a fixed rate of 7.15 percent. These long-term
certificates of deposit were callable by the Company after one year and semi-
annually after that. In order to minimize the interest rate risk of paying out a
fixed rate for ten years, the Company executed an interest rate swap transaction
with a notional value of $27.0 million in the first quarter of 1997. The
interest rate swap required the Company to pay a rate of three-month LIBOR less
10 basis points, quarterly for ten years. Simultaneously, the Company received
quarterly interest payments at a fixed rate of 7.15 percent for ten years. On
July 28, 1998, the swap was called by the counterparty and the Company paid off
the certificates of deposit.
In April 1997, the Company issued $75.0 million of 9.98 percent capital
securities (the "Capital Securities") and entered into three fixed for floating
interest rate swaps with a total notional value of $75.0 million in order to
convert the Capital Securities to a floating rate. The swaps require the Company
to pay three-month LIBOR and receive a fixed rate of
18
<PAGE>
7.18 percent on $25.0 million, 7.186 percent on $25.0 million and 7.187% on the
remaining $25.0 million. The maturity and fixed payment due dates on the swaps
coincide with the call date and payment dates of the Capital Securities. The
unrealized gain on the swaps approximated $8.3 million at September 30, 1998.
In June 1998, the Company entered into two fixed for floating interest rate
swaps with a total notional value of $5.0 million. The swaps require the Company
to pay three-month LIBOR and receive a fixed rate of 5.95 percent. The swaps
mature in June 1999. Concurrently, the Company entered into interest rate swaps
with its subsidiary, Crown American Bank. The notional amount, maturity and
payment due dates on the swaps coincide with the original swaps, however, the
payment terms require the Company to pay a fixed rate of 5.95 percent and
receive three-month LIBOR. The purpose of the swaps is to convert to a floating
rate a similar amount of one-year fixed rate time certificates of deposit
acquired on behalf of Crown American Bank as part of a $35.0 million time
deposit acquisition program. The unrealized gain on the swaps approximated
$18,000 at September 30, 1998.
From time to time, the Company purchases over-the-counter option contracts or
enters into interest rate swap contracts that are matched against specific
lending transactions. The term and notional amount of the contracts are
consistent with the underlying customer transaction. The contracts generally
require the Company to pay a fixed rate and receive a floating rate. At
September 30, 1998, the Company had matched purchased options totaling $24.5
million and matched swap contracts of $4.0 million. There were unrealized losses
on the options and swaps of approximately $35,600 and $201,900, respectively, at
September 30, 1998.
CAPITAL SECURITIES
On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business
trust and wholly-owned subsidiary of the Company, issued in a private placement
transaction $75.0 million of 9.98 percent Capital Securities which represent
undivided preferred beneficial interests in the assets of the Trust. The Company
is the owner of all the beneficial interests represented by the common
securities of the Trust (the "Common Securities"), together with the Capital
Securities, (the "Trust Securities"). The Trust exists for the sole purpose of
issuing the Trust Securities and investing the proceeds thereof in 9.98 percent
junior subordinated deferrable interest debentures (the "Junior Subordinated
Debentures") issued by the Company and engaging in certain other limited
activities. The Junior Subordinated Debentures held by the Trust will mature on
December 31, 2026.
The Indenture for the Capital Securities includes provisions that restrict the
payment of dividends under certain conditions and changes in ownership of the
Trust. The Indenture also includes provisions relating to the payment of
expenses associated with the issuance of the Capital Securities. The Company was
in compliance with the provisions of the Indenture at September 30, 1998.
The Company used $30.0 million of the net proceeds from the sale of the Junior
Subordinated Debentures to make an additional investment in the Bank during
1997. An additional $37.2 million investment was made in the Bank in January
1998. The Capital Securities qualify as Tier I capital under the capital
guidelines of the Federal Reserve. The net principal balance of the Capital
Securities was $73.4 million at September 30, 1998.
CAPITAL
Until 1997, the primary source of new capital for the Company, has been retained
earnings from operations, with the exception of its long-term debt offering in
1979, and the exercise of employee stock options. On April 23, 1997, Imperial
Capital Trust, a wholly-owned subsidiary of the Company, issued in a private
placement transaction $75.0 million of 9.98 percent capital securities. See -
"Capital Securities." At September 30, 1998, shareholders' equity totaled $370.6
million, a 5 percent increase over the $352.0 million reported at December 31,
1997. For the first nine months of 1998, shareholders' equity was reduced by
$21.9 million due to the repurchase of common stock under the Company's stock
repurchase program. Shareholders' equity increased by $2.9 million during the
same period due to exercises of employee stock options. The Company receives a
tax deduction upon the exercise of nonqualified stock options for the difference
between the option price and the market value of the shares issued. The tax
benefit associated with shares exercised, which is recorded as a component of
shareholders' equity, approximated $8.7 million for the first nine months of
1998. In September 1998, the Company recorded approximately $4.0 million of
additional capital due to the issuance of common stock in conjunction with the
acquisition of Altair Corporation ("Altair"). Altair is a software company
19
<PAGE>
located in Houston, Texas that markets software programs to financial
institutions.
Management is committed to maintaining capital at a level sufficient to assure
shareholders, customers and regulators that the Company and its bank
subsidiaries are financially sound. The Company and its bank subsidiaries are
subject to risk-based capital regulations adopted by the federal banking
regulators in January 1990. These guidelines are used to evaluate capital
adequacy and are based on an institution's asset risk profile and off-balance
sheet exposures. The risk-based capital guidelines assign risk weightings to
assets both on and off-balance sheet and place increased emphasis on common
equity. Federal law requires each Federal banking agency to take prompt
corrective action to resolve problems of insured depository institutions
including, but not limited to, those that fall below one or more prescribed
capital ratios.
According to the regulations, institutions whose Tier I and total capital ratios
meet or exceed 6 percent and 10 percent, respectively, are deemed to be "well
capitalized". Tier I capital basically consists of common shareholders' equity
and noncumulative perpetual preferred stock and minority interest of
consolidated subsidiaries minus intangible assets. Based on the guidelines, the
Company's Tier I and total capital ratios at September 30, 1998, were 9.44
percent and 10.73 percent, respectively, compared with 11.38 percent and 12.72
percent, respectively, at September 30, 1997. The Capital Securities discussed
above qualify as Tier I capital and therefore contributed to the increase in the
Company's capital ratios compared with the prior year.
CAPITAL RATIOS FOR IMPERIAL BANCORP AND IMPERIAL BANK/(1)/
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
(IN THOUSANDS) ACTUAL PURPOSES ACTION PROVISIONS
- -----------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Company $497,191 10.73% $370,612 8.00% $463,265 10.00%
Bank 469,848 10.32% 364,245 8.00% 455,307 10.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
Company $437,135 9.44% $185,306 4.00% $277,959 6.00%
Bank 412,886 9.07% 182,123 4.00% 273,184 6.00%
LEVERAGE (TO AVERAGE ASSETS):
Company $437,135 8.59% $152,726 3.00% $254,543 5.00%
Bank 412,886 8.27% 149,851 3.00% 249,752 5.00%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes common shareholders' equity (excluding unrealized gains on
securities available for sale) less goodwill and other disallowed
intangibles.
Risk-weighted assets for the Company and the Bank were $4,632.7 million and
$4,553.1 million, respectively, at September 30, 1998. Average assets for the
Company and the Bank were $5,090.9 million and $4,995.0 million, respectively,
at September 30, 1998.
In addition to the risk-weighted ratios, all banks are required to maintain
leverage ratios, to be determined on an individual basis, but not below a
minimum of 3 percent. The ratio is defined as Tier I capital to average total
assets for the most recent quarter. The Company's leverage ratio was 8.59
percent at September 30, 1998, compared to 10.63 percent at September 30, 1997,
well in excess of minimum regulatory requirements.
In anticipation of the previously planned spin off of IFG, Imperial Bancorp
contributed $67.2 million of the proceeds from the Capital Securities to the
Bank as additional capital to ensure that the Bank's risk-based capital ratios
continue to meet the well capitalized criteria.
20
<PAGE>
YEAR 2000
To fulfill the Company's business responsibility and ensure compliance with
regulatory requirements, the Company has established a Year 2000 readiness
program with the objective of having the Company Year 2000 compliant by mid-
1999. The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computers that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. The Company's Year 2000 readiness
program is managed by an enterprise-wide Program Office ("Office") under the
guidance of the Company's Management Committee. The Office is staffed with
representatives from each of the Company's primary business units. Within some
business units, the Office representative is supported by a business unit Year
2000 project team.
The Company has conducted a comprehensive review of its computer systems. All
systems have been evaluated and classified as critical, important or ordinary.
Systems requiring upgrades or replacement have been identified. System testing
is approximately one-third complete with all testing scheduled for completion by
March 1999. The Company's primary vendor applications for loans and deposits
were converted to Year 2000 compliant code in October 1998. All vendor readiness
efforts are being monitored by the Office and evaluations of significant
customers, including the assignment of risk ratings, are in process with
anticipated completion by the end of November 1998. Contingency planning for
critical systems has been completed. Business continuation plans are in
development.
The Office presently believes that, with updates and upgrades to existing
software and minimal conversions to new software, the Year 2000 will not pose
significant operational problems for the Company's computer systems. Based on
its identification and analysis of necessary Year 2000 updates and enhancements,
the Company anticipates that it will incur operating expenses of approximately
$2.5 million and capital expenditures of approximately $1.9 million related to
the Year 2000 project. The Company has incurred operating expenses of $1.0
million and capital expenditures of $1.0 million as of September 30, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130 - REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 does not require
a specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company adopted the
applicable provisions of SFAS No. 130 effective January 1, 1998. Total
comprehensive income is disclosed in a footnote to the interim financial
statements for each period presented. See Note 4 on page 26 of this Form 10-Q.
SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 supersedes SFAS Statement No.
14, "Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends SFAS
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the
21
<PAGE>
special disclosure requirements for previously unconsolidated subsidiaries.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS No. 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliation's of total segment revenues, total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. The Company adopted the applicable provisions of SFAS No. 131
effective January 1, 1998. Segment disclosures will be presented in the
financial statements for the year ended December 31, 1998.
SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires recognition of all derivatives as either assets or liabilities in the
statement of financial condition and the measurement of those instruments at
fair value. Recognition of changes in fair value will be recognized into income
or as a component of other comprehensive income depending upon the type of the
derivative and its related hedge, if any. SFAS No. 133 is effective for the
Company beginning January 1, 2000.
22
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
===============================================================================================================================
IMPERIAL BANCORP AND SUBSIDIARIES SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997
===============================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 534,682 $ 316,600
Trading instruments 58,456 35,782
Securities available for sale 602,552 669,266
Securities held to maturity (market value of $3,933 and $4,026 for 1998 and 1997, respectively) 3,933 4,026
Federal funds sold and securities purchased under resale agreements 1,529,000 765,000
Loans held for sale (market value of $14,883 and $4,120 for 1998 and 1997, respectively) 14,006 3,763
Loans:
Loans, net of unearned income and deferred loan fees 3,411,826 2,788,608
Less allowance for loan losses (61,415) (51,143)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NET LOANS $3,350,411 $2,737,465
===============================================================================================================================
Premises and equipment, net 28,264 23,091
Accrued interest receivable 27,161 22,212
Real estate and other assets owned, net 2,700 3,284
Current income taxes receivable 5,352 6,086
Deferred tax asset 21,634 355
Investment in Imperial Credit Industries, Inc. 55,180 75,001
Other assets 85,052 64,348
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,318,383 $4,726,279
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $3,395,710 $2,378,830
Savings 28,255 23,375
Money market 953,131 939,086
Time - under $100,000 227,303 128,543
Time - $100,000 and over 1,060,251 704,764
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $5,664,650 $4,174,598
===============================================================================================================================
Accrued interest payable 7,511 5,205
Short-term borrowings 121,047 55,915
Long-term borrowings:
Floating rate notes and fixed rate debentures 2,105 3,257
Capital securities of subsidiary trust:
Company-obligated mandatorily redeemable capital securities of
subsidiary trust holding solely junior subordinated deferrable
interest debentures of the Company, net 73,358 73,314
Other liabilities 79,093 61,966
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $5,947,764 $4,374,255
===============================================================================================================================
Shareholders' equity:
Common Stock - no par, 50,000,000 shares authorized; 38,116,423
shares at September 30, 1998, and 39,236,034 shares at
December 31, 1997, issued and outstanding 229,844 236,186
Unrealized (loss) gain on securities available for sale, net of tax (224) 1,682
Retained earnings 140,999 114,156
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 370,619 $ 352,024
===============================================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,318,383 $4,726,279
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
=================================================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
IMPERIAL BANCORP AND SUBSIDIARIES SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
=================================================================================================================================
<S> <C> <C> <C> <C>
Interest income:
Loans $75,769 $61,157 $219,120 $165,821
Trading instruments 454 452 1,046 1,334
Securities available for sale 10,160 9,563 29,058 23,864
Securities held to maturity 71 73 211 219
Federal funds sold and securities purchased under resale agreements 4,832 2,914 15,675 9,806
Loans held for sale 341 213 733 557
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 91,627 $74,372 $265,843 $201,601
=================================================================================================================================
Interest expense:
Deposits 23,990 17,901 66,037 53,421
Short-term borrowings 1,483 921 4,589 3,239
Long-term borrowings 1,694 1,706 5,051 3,096
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 27,167 $20,528 $ 75,677 $ 59,756
=================================================================================================================================
Net interest income 64,460 53,844 190,166 141,845
Provision for loan losses 5,610 7,068 25,576 14,785
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $ 58,850 $46,776 $164,590 $127,060
=================================================================================================================================
Noninterest income:
Service charges on deposit accounts 1,614 1,313 4,731 4,030
Trust fees 2,138 2,125 6,323 5,842
Gain on origination and sale of loans 837 961 3,373 2,979
Equity in net (loss) income of Imperial Credit Industries, Inc. (26,520) 3,356 (19,821) 8,362
Gain on sale of Imperial Credit Industries, Inc, common stock - 2,429 - 2,429
Other service charges and fees 4,448 2,686 11,233 7,639
Merchant and credit card fees 2,121 956 5,227 2,453
International income and fees 2,358 2,443 8,767 7,193
Gain on securities available for sale 111 2 123 359
Gain on trading instruments 519 1,139 891 3,387
Gain on exercise and sale of equity warrants 1,750 1,084 18,790 3,627
Appreciation of donated Imperial Credit Industries, Inc. common stock - - - 2,816
Other income 558 552 3,901 18
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $(10,066) $19,046 $ 43,538 $ 51,134
=================================================================================================================================
Noninterest expense:
Salary and employee benefits 26,533 20,018 88,434 61,528
Net occupancy expense 2,747 2,267 7,715 6,788
Furniture and equipment 2,388 1,674 7,189 4,662
Data processing 2,684 1,867 7,339 5,626
Customer services 7,501 5,305 20,285 13,184
Professional and legal fees 2,603 2,643 7,701 6,939
Business development 1,185 1,205 3,909 3,856
Restructuring charges 4,880 - 4,880 -
Charitable donations 100 37 407 3,764
Other expense 5,154 6,870 17,074 16,046
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $55,775 $41,886 $164,933 $122,393
=================================================================================================================================
(Loss) income from continuing operations before income taxes (6,991) 23,936 43,195 55,801
Income tax (benefit) provision (3,892) 9,753 16,352 22,494
- ---------------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS $(3,099) $14,183 $ 26,843 $ 33,307
=================================================================================================================================
Income from operations of discontinued operations, net of tax - 690 - 479
- ---------------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $(3,099) $14,873 $ 26,843 $ 33,786
=================================================================================================================================
Basic (loss) earnings per share from continuing operations $ (0.08) $ 0.36 $ 0.68 $ 0.86
Diluted (loss) earnings per share from continuing operations $ (0.08) $ 0.35 $ 0.65 $ 0.82
Basic (loss) earnings per share $ (0.08) $ 0.38 $ 0.68 $ 0.87
Diluted (loss) earnings per share $ (0.08) $ 0.36 $ 0.65 $ 0.83
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
==========================================================================================================================
IMPERIAL BANCORP AND SUBSIDIARIES (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997
==========================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,843 $ 33,786
Adjustments for noncash charges (credits):
Depreciation and amortization (11,441) (8,011)
Accretion of purchase loan discount - (37)
Provision for loan losses 25,576 14,842
Provision for other real estate owned - 320
Equity in net loss (income) of Imperial Credit Industries, Inc. 19,821 (8,362)
Gain on sale of Imperial Credit Industries, Inc, common stock - (2,429)
Gain on exercise and sale of stock warrants (18,790) (3,627)
Gain on sale of real estate and other assets owned (1,099) (348)
Loss on sale of premises and equipment 9 9
Benefit for deferred taxes (11,045) -
Gain on securities available for sale (123) (359)
Net change in trading instruments (22,674) (739)
Net change in loans held for sale (10,243) 676
Net change in accrued interest receivable (4,949) (8,673)
Net change in accrued interest payable 2,306 (55)
Net change in income taxes receivable 734 7,309
Net change in other liabilities 17,155 (25)
Net change in other assets (22,617) (18,651)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (10,537) $ 5,626
==========================================================================================================================
Cash flows from investing activities:
Proceeds from securities held to maturity 93 108
Proceeds from sale of securities available for sale 3,289,196 2,023,003
Proceeds from maturities of securities available for sale 709,159 412,163
Purchase of securities available for sale (3,929,265) (2,679,458)
Proceeds from sale of Imperial Credit Industries, Inc. common stock - 3,519
Proceeds from exercise and sale of equity warrants 7,690 3,769
Net change in Federal funds sold and securities purchased under resale agreements (764,000) (323,700)
Net change in loans (613,027) (455,675)
Capital expenditures (9,847) (7,033)
Proceeds from sale of real estate and other assets owned 3,206 1,483
Proceeds from sale of premises and equipment 15 343
- --------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(1,306,780) $(1,021,478)
==========================================================================================================================
Cash flows from financing activities:
Net change in demand deposits, savings, and money market accounts 1,035,805 1,128,473
Net change in time deposits 454,247 (142,255)
Net change in short-term borrowings 65,132 65,605
Retirement of long-term borrowings (1,152) (1,198)
Net change in capital securities of subsidiary - 73,299
Proceeds from exercise of employee stock options 2,855 1,334
Purchase of common stock (21,864) -
Other 376 (17)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,535,399 $ 1,125,241
- --------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND DUE FROM BANKS $ 218,082 $ 109,389
- --------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, BEGINNING OF YEAR $ 316,600 $ 325,014
- --------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 534,682 $ 434,403
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
NOTE (1) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all footnotes as would be necessary for a fair presentation of financial
position, results of operations, and changes in cash flows in conformity with
generally accepted accounting principles. However, these interim financial
statements reflect all normal recurring adjustments, which are, in the opinion
of the management, necessary for a fair presentation of the results for the
interim periods presented. All such adjustments were of a normal recurring
nature. The Consolidated Balance Sheet, Consolidated Statement of Operations and
Consolidated Statement of Cash Flows are presented in the same format as that
used in the Company's most recently filed Report on Form 10-K. The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries.
NOTE (2) IMPERIAL CREDIT INDUSTRIES, INC.
At September 30, 1998, the Company owned 8.9 million shares, or approximately
24% of the common stock of ICII. The Company does not exercise significant
control over the operations of ICII and, as such, the results of operations are
accounted for in the Company's financial statements as an equity investment. The
equity investment in ICII is carried at cost adjusted for changes in ICII's
shareholders' equity including undistributed income, except when a decline in
value occurs that is deemed to be other than temporary, such decline is charged
to earnings. Transactions between ICII and the Company occur during the normal
course of business. All transactions are carried out at substantially the same
terms as those prevailing at the same time for comparable transactions with
others.
NOTE (3) STATEMENT OF CASH FLOWS
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, (IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $73,371 $59,811
Taxes refunded - 431
Taxes paid 26,699 15,955
Significant noncash transactions:
Loans transferred to OREO 1,517 864
Net change in unrealized gain on securities, net of taxes 1,905 -
Purchase of Altair 3,954 -
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE (4) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 does not require
a specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company adopted the
applicable provisions of SFAS No. 130 effective January 1,
26
<PAGE>
1998. The following table provides a summary of total comprehensive income for
the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
============================================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income $(3,099) $14,873 $26,843 $33,786
Other comprehensive (loss) income, net of tax
Holding (losses) gains arising during the period (2,322) 623 (1,909) 1,240
Reclassification adjustments for realized
gains recorded in the statement of
operations 1 1 3 208
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of
reclassification adjustments $(2,321) $ 624 $(1,906) $ 1,448
- ----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE (LOSS) INCOME $(5,420) $15,497 $24,937 $35,234
============================================================================================================================
</TABLE>
27
<PAGE>
TABLE 1 - FINANCIAL RATIOS
<TABLE>
<CAPTION>
======================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income as a percentage of:(1)
Average shareholders' equity -3.10% 18.37% 9.49% 14.73%
Average total assets -0.24% 1.56% 0.75% 1.29%
Average earning assets -0.27% 1.76% 0.83% 1.46%
Normalized income from continuing
operations as a percentage of: (1) (2)
Average shareholders' equity 15.12% 15.10% 14.56% 12.09%
Average total assets 1.18% 1.29% 1.15% 1.06%
Average earning assets 1.31% 1.44% 1.28% 1.20%
Average shareholders' equity as a
percentage of:
Average assets 7.78% 8.51% 7.88% 8.76%
Average loans 11.48% 12.96% 11.76% 13.39%
Average deposits 8.93% 9.94% 9.09% 10.24%
Shareholders' equity at period end as a
percentage of:
Total assets at period end - - 5.87% 7.26%
Total loans at period end - - 10.86% 12.99%
Total deposits at period end - - 6.54% 8.33%
======================================================================================================
</TABLE>
(1) Annualized
(2) Adjusted net income for the 1998 periods excludes equity in the losses of
ICII and restructuring charges. For the 1997 periods, adjusted net income
excludes equity in the income of ICII, gains on the sale of ICII stock,
appreciation on donated ICII stock, expense associated with the settlement
of a consulting agreement and charitable contributions expense associated
with the donation of ICII stock to a nonprofit institution.
EXHIBITS
PART I
COMPUTATION OF EARNINGS PER SHARE
Imperial Bancorp ("the Company") has outstanding certain employee stock options,
which options have been determined to be common stock equivalents for purposes
of computing earnings per share.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings.
28
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
1998 1997
----------------------------------- ---------------------------------
PER PER
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (LOSS) SHARE SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to shareholders:
(Loss) income from continuing operations $(3,099) 38,880,762 $(0.08) $14,183 38,892,401 $0.36
Income from discontinued operation,
net of tax - - 690 0.02
------- ------ ------- -----
Net (loss) income $(3,099) $(0.08) $14,873 $0.38
EFFECT OF DILUTIVE SECURITIES
Incremental shares from outstanding
common stock options - 1,941,607
---------- ----------
DILUTED EPS
Income available to shareholders:
(Loss) income from continuing operations $(3,099) 38,880,762 $(0.08) $14,183 40,834,008 $0.35
Income from discontinued operation,
net of tax - - 690 0.01
------- ------ ------- -----
Net (loss) income $(3,099) $(0.08) $14,873 $0.36
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================================================================
1998 1997
----------------------------------- ---------------------------------
PER PER
FOR THE NINE MONTHS ENDED SEPTEMBER 30, SHARE SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to shareholders:
Income from continuing operations $26,843 39,317,184 $0.68 $33,307 38,674,834 $0.86
Income from discontinued operation,
net of tax - - 479 0.01
------- ----- ------- -----
Net income $26,843 $0.68 $33,786 $0.87
EFFECT OF DILUTIVE SECURITIES
Incremental shares from outstanding
common stock options 1,682,521 1,858,528
---------- ----------
DILUTED EPS
Income available to shareholders:
Income from continuing operations $26,843 40,999,705 $0.65 $33,307 40,533,362 $0.82
Income from discontinued operation,
net of tax - - 479 0.01
------- ----- ------- -----
Net income $26,843 $0.65 $33,786 $0.83
================================================================================================================================
</TABLE>
The weighted average number of shares used to compute earnings per share was
retroactively adjusted to reflect a three-for-two stock split effective February
6, 1998.
29
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Due to the nature of the businesses, the Company and its subsidiaries
are subject to numerous legal actions, threatened or filed, arising in
the normal course of business. Certain of the actions currently
pending seek punitive damages, in addition to other relief. The
Company is of the opinion that the eventual outcome of all currently
pending legal proceedings will not be materially adverse to the
Company, nor has the resolution of any proceeding since the Company's
last filing with the Commission materially adversely affected the
registrant or any subsidiary thereof.
ITEM 2. CHANGES IN SECURITIES
No events have transpired which would make response to this item
appropriate.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No events have transpired which would make response to this item
appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No events have transpired which would make response to this item
appropriate.
ITEM 5. OTHER INFORMATION
No events have transpired which would make response to this item
appropriate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
All other material referenced in this report which is required to be filed as
an exhibit hereto has previously been submitted.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during
the period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
IMPERIAL BANCORP
Dated: November 12, 1998 By: Christine M. McCarthy
---------------------
Christine M. McCarthy
Executive Vice President and
Chief Financial Officer
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 534,682
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,529,000
<TRADING-ASSETS> 58,456
<INVESTMENTS-HELD-FOR-SALE> 602,552
<INVESTMENTS-CARRYING> 3,933
<INVESTMENTS-MARKET> 3,933
<LOANS> 3,411,826
<ALLOWANCE> 61,415
<TOTAL-ASSETS> 6,318,383
<DEPOSITS> 5,664,650
<SHORT-TERM> 121,047
<LIABILITIES-OTHER> 86,604
<LONG-TERM> 75,463
0
0
<COMMON> 229,844
<OTHER-SE> 140,775
<TOTAL-LIABILITIES-AND-EQUITY> 6,318,383
<INTEREST-LOAN> 219,120
<INTEREST-INVEST> 29,269
<INTEREST-OTHER> 17,454
<INTEREST-TOTAL> 265,843
<INTEREST-DEPOSIT> 66,037
<INTEREST-EXPENSE> 75,677
<INTEREST-INCOME-NET> 190,166
<LOAN-LOSSES> 25,576
<SECURITIES-GAINS> 123
<EXPENSE-OTHER> 164,933
<INCOME-PRETAX> 43,195
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,843
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 5.89
<LOANS-NON> 34,508
<LOANS-PAST> 0
<LOANS-TROUBLED> 27,591
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 51,143
<CHARGE-OFFS> 16,731
<RECOVERIES> 1,427
<ALLOWANCE-CLOSE> 61,415
<ALLOWANCE-DOMESTIC> 61,415
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
