<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 March 31, 1998
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2575576
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 March 31,
1998: 39,492,497 shares.
DEBT SECURITIES: Floating Rate Noes Due 1999 and Fixed Rate Debentures Due
1999. As of March 31, 1998, $2,196,000 in principal amount
of such Notes and $1,038,000 in principal amount of such
Debentures were outstanding.
CAPITAL SECURITIES: 9.98% Series B Capital Securities of Imperial Capital Trust
I Due 2026. As of March 31, 1998, $73,328,000 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
THREE MONTHS ENDED MARCH 31, 1998
Except for the historical information contained herein, the following discussion
includes forward-looking information that involves risks and uncertainties.
Actual results may differ materially from those expressed or implied by such
forward-looking statements.
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 three months ended March 31, 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
Net income for the first quarter of 1998 increased to $13.4 million, or $0.32
per diluted share, from $8.0 million, or $0.20 per diluted share, for the first
quarter of 1997. The annualized return on average total assets increased to
1.21% for the three months ended March 31, 1998, from 0.99% for the same period
of the prior year. Return on average shareholder's equity increased to 14.89%
for the first quarter of 1998 compared to 10.90% for the first quarter of 1997.
Earnings per share calculations for the prior year have been adjusted for a
three-for-two stock split effected on February 6, 1998.
Net income for the first quarter of 1998 increased 68% over the first quarter of
1997. The increase in earnings was largely attributable to the growth in loans
partially offset by increases in noninterest expense. Average loan balances
increased 40% in the first quarter of 1998 over the first quarter of 1997. Given
current economic conditions, loan growth is expected to remain strong. Loan
growth and increasing net interest margin contributed substantially to the 51%
increase in net interest income for the first quarter of 1998 over the
comparable period of 1997. The Company's net interest margin increased to 6.14%
for the first quarter of 1998 from 5.74% for the first quarter of 1997.
The provision for loan losses for the first quarter of 1998 was $5.8 million
compared to $3.3 million for the first quarter of 1997. The increase in the
provision is due to the ongoing analysis of risk within the loan portfolio due
to new loan products and expansion into new geographic areas along with the
increase in the size of the portfolio. The Company's loan portfolio has
increased $252.1 million since December 31, 1997. The ratio of the allowance for
loan losses to outstanding loans was 1.83% at March 31, 1998 and December 31,
1997, and 1.79% at March 31, 1997, respectively.
Noninterest income for the quarter ended March 31, 1998, totaled $18.1 million,
an increase of 12% over the $16.1 million reported for the first quarter of
1997. Excluding the appreciation of Imperial Credit Industries, Inc. ("ICII")
(NASDAQ-NMS-ICII) stock donated to not-for-profit organizations recognized in
the first quarter of 1997, noninterest income for the quarter ended March 31,
1998, increased 36% over the same period of the prior year. The increase in
noninterest income for the quarter ended March 31, 1998 versus the first quarter
of 1997 is primarily due to the increase in the equity in net income of ICII
along with higher fee-based income including merchant and credit card fees,
service charges and international income and fees. Partially offsetting these
increases were lower gains due to decreased warrant exercise and sale activity.
Noninterest expense increased to $50.1 million for the quarter ended March 31,
1998, from $39.7 million for the first quarter of 1997. The increase in
noninterest expense occurred primarily in salary and benefits and customer
services expense. The increase in salary and benefits expense is due to an
increase in the number of full time equivalent staff to support the Company's
growth in conjunction with higher benefit plan costs. The increase in customer
services expense can be attributed to the growth in deposit balances generated
by the Financial Services Group, which focuses on the real estate services
industry. These increases were partially offset by the decline in charitable
donation expense.
Total assets at March 31, 1998, were $5.7 billion, an increase of 21% from total
assets of $4.7 billion reported at December 31, 1997, and a 54% increase over
total assets of $3.7 billion reported at March 31, 1997. Total loans at
1
<PAGE>
March 31, 1998, were $3.0 billion, a 7% increase from $2.8 billion reported at
December 31, 1997, and a 36% increase over $2.2 billion reported at March 31,
1997. The growth in the loan portfolio occurred primarily in commercial loans.
Total deposits at March 31, 1998 were $5.1 billion, an increase of 21% over
total deposits of $4.2 billion at December 31, 1997, and a 55% increase over
total deposits of $3.3 billion at March 31, 1997. Noninterest-bearing demand
deposits increased to $3.1 billion at March 31, 1998, from $2.4 billion at
December 31, 1997, and $1.6 billion at March 31, 1997. Noninterest-bearing
demand deposits represented 61% of total deposits at March 31, 1998, compared to
57% at December 31, 1997.
Credit quality remained strong. Net charge-offs for the first quarter of 1998
were $1.3 million, compared to $0.7 million, for the comparable period of 1997.
Nonaccrual loans totaled $12.3 million at March 31, 1998, from $10.6 million at
December 31, 1997, and $17.0 million reported at March 31, 1997. Restructured
loans decreased to $22.6 million at March 31, 1998, compared to $24.0 million at
December 31, 1997, and $25.4 million at March 31, 1997. All restructured loans
were performing in accordance with their modified terms at March 31, 1998. The
balance of real estate owned and other assets, net, ("OREO") was $3.0 million at
March 31, 1998, $3.3 million at December 31, 1997, and $2.2 million at March 31,
1997.
Imperial Bancorp is classified as "Well Capitalized" with leverage, Tier I and
total capital ratios at March 31, 1998, of 9.85%, 10.56% and 11.89%,
respectively, compared to 9.32%, 10.26% and 11.66%, respectively, at March 31,
1997.
SPIN-OFF
On February 27, 1998, the Company received from the Internal Revenue Service a
private letter ruling favorable to the Company's proposed spin off, in a tax-
free distribution to shareholders, of a portion of its specialty lending and
finance business into a newly formed corporation , Imperial Financial Group,
Inc. ("IFG"). The spin off is conditioned upon, among other things, receipt of
other required regulatory approvals and obtaining necessary financing.
Prior to distributing the common stock of IFG to the Company's shareholders, the
Company will contribute to IFG the following: (i) the assets and liabilities
relating to The Lewis Horwitz Organization, a division of Imperial Bank ("the
Bank") that specializes in motion picture and television financing, (ii) all of
the common stock of Imperial Trust Company, a California licensed trust company
that offers a wide range of trust and investment management services, (iii) all
of the common stock of a newly formed thrift and loan company, Crown American
Bank, that will hold the assets and liabilities of the Bank's Small Business
Administration ("SBA") lending group, a division of the Bank that provides loans
to small business, a portion of which are guaranteed as to repayment by the U.S.
Government, and (iv) the common stock owned by the Bank (representing
approximately 23% of all outstanding common stock as of March 31, 1998) in ICII.
It is anticipated that shareholders would receive one share of IFG common stock
for every two shares of Imperial Bancorp stock owned on the record date. The
Company anticipates that the spin off will occur at the end of the second
quarter of 1998.
Total assets of the entities comprising IFG approximated $228.9 million at March
31, 1998. Revenues of IFG, including interest income and noninterest income
would have approximated $11.1 million for the three months ended March 31, 1998.
The contribution agreement calls for the Company to contribute to IFG net assets
approximating the Company's net investment in ICII plus $15 million ($61.3
million at March 31, 1998).
The Company's pro forma Tier 1, total and leverage capital ratios at March 31,
1998, reflecting the spin off of IFG were 9.62%, 10.87% and 8.93%, respectively.
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 $60.6 million for the three months
ended March 31, 1998, from $40.2 million for the same period of the prior year.
The increase in net interest income was driven by the growth in loans and the
overall yield on earning assets which increased to 8.51% for the current quarter
from 8.39% for the first quarter of 1997.
2
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Three Months Ended
March 31,
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest income $84,071 $58,733
Interest expense 23,434 18,572
- --------------------------------------------------------------------------------
Net interest Income $60,637 $40,161
- --------------------------------------------------------------------------------
Net interest margin 6.14% 5.74%
================================================================================
</TABLE>
The Company's net interest margin increased to 6.14% for the first quarter of
1998 from 5.74% for the first quarter of 1997. While loan rates remained
relatively stable during the quarter, the net interest margin was favorably
impacted by strong growth in loan fees. An $876.4 million increase in the
average balance of noninterest-bearing deposits for the first quarter of 1998
compared to the prior year also contributed to the improved net interest margin.
Additional information concerning interest-earning assets and interest-bearing
liabilities and the yields and rates thereon for the three months ended March
31, 1998, is provided in Table 1-Average Balances, Yields and Rates Paid on page
19 of this Form 10-Q.
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's Financial Services
Group 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 $5.9 million and $3.6 million, respectively, for the three
months ended March 31, 1998 and 1997. The net interest margin for the three
months ended March 31, 1998 and 1997, would have been 5.54% and 5.22%,
respectively.
Noninterest Income:
Noninterest income increased to $18.1 million for the three months ended March
31, 1998, from $16.1 million for the first quarter of 1997. The table below
provides the major components of noninterest income for the periods indicated.
<TABLE>
<CAPTION>
================================================================================
Three Months Ended
March 31,
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Service charges on deposit accounts $ 1,432 $ 1,403
Trust fees 2,091 1,977
Gain on origination and sale of loans 1,084 514
Equity in net income of Imperial Credit
Industries, Inc. 2,884 1,461
Other service charges and fees 2,915 2,278
Merchant and credit card fees 1,475 700
International income and fees 2,940 2,412
Gain on securities available for sale 4 234
Gain on trading instruments 208 324
Gain on exercise and sale of stock warrants 423 1,734
Appreciation of donated Imperial Credit
Industries, Inc. common stock -- 2,816
Other income 2,647 276
- --------------------------------------------------------------------------------
Total $18,103 $16,129
================================================================================
</TABLE>
Excluding the appreciation of ICII stock donated to not-for-profit organizations
in the first quarter of 1997, noninterest income for the quarter ended March
31, 1998, increased 36% over the same period of the prior year.
Equity in the net earnings of ICII for the first quarter of 1998 increased $1.4
million from the same period of 1997. In the first quarter of 1997, ICII
recorded an extraordinary loss due to the early retirement of debt which
resulted in an after-tax
3
<PAGE>
charge of approximately $4.0 million. The Company's pretax equity share of this
extraordinary loss in the first quarter of 1997 was $1.0 million.
The Company continues to be positively impacted by growth in other fee income
businesses. Merchant and credit card fees increased by $0.8 million, other
service charges and fees, primarily related to item processing agreements with
other institutions, increased by $0.6 million, fees from the origination and
sale of SBA loans increased by $0.6 million and international income and fees,
relating to trade finance and foreign exchange activity, increased by $0.5
million. These increases were related to larger volumes in their respective
operations.
Although loan fundings have increased over the first quarter of 1997, activity
related to the exercise and sale of stock warrants has declined resulting in a
decrease in gains recognized of $1.3 million. These stock warrants are received
in conjunction with loans funded primarily in the Bank's Emerging Growth
Industries Group.
Noninterest Expense:
Noninterest expense totaled $50.1 million for the quarter ended March 31, 1998,
compared to $39.7 million for the prior year. The table below provides detail of
noninterest expense by category for the periods indicated:
<TABLE>
<CAPTION>
================================================================================
Three months ended
March 31,
(In Thousands) 1998 1997
================================================================================
<S> <C> <C>
Salary and employee benefits $28,711 $19,671
Net occupancy expense 2,323 2,212
Furniture and equipment 2,218 1,381
Data processing 2,200 1,875
Customer services 5,906 3,606
Professional and legal fees 2,299 1,828
Business development 1,126 897
Charitable donations 143 3,676
Other expense 5,157 4,568
- --------------------------------------------------------------------------------
Total $50,083 $39,714
================================================================================
</TABLE>
Noninterest expense increased 26% for the three months ended March 31, 1998,
compared to the same period of the prior year. Noninterest expense for the first
quarter of 1997 included a $3.7 million contribution expense resulting from the
donation of ICII stock to not-for-profit organizations. Excluding the donation
expense, noninterest expense for the first quarter of 1998 increased 39% over
the prior year. The increase in noninterest expense for the first quarter of
1998 compared to 1997 occurred primarily in salary and benefits expense. The
increase in salary and benefits expense can be attributed to the Company's
growth including the opening of a new loan production office in Bellevue,
Washington, during the second quarter of 1997 and Imperial Bank Arizona which
was established in August 1997. The number of full time equivalent staff has
increased to 1,090 compared to 901 at March 31, 1997. Another factor impacting
salary and employee benefits expense was an increase in incentive compensation
tied to the Company's performance.
Customer services expense increased to $5.9 million for the first quarter of
1998 from $3.6 million for the prior year. The Company pays certain accounting
and courier expenses on behalf of its Financial Services Group depositors. The
increase in customer services expense is directly related to the growth in
Financial Services Group demand deposits. The average balance of these demand
deposits increased approximately $577.9 million for the three months ended March
31, 1998, compared to the comparable period for 1997.
Furniture and equipment expense increased $0.8 million over the first quarter of
1997. To accommodate the increase in staff levels, capital purchases have
increased resulting in higher depreciation expense.
4
<PAGE>
Income Taxes:
The Company recorded income tax expense of $9.4 million and $5.3 million,
respectively, for the quarters ended March 31, 1998 and 1997. The Company's
effective tax rates approximated 42.05% for 1998 and 1997.
LOANS
The following table provides a summary of loans by category for the periods
indicated :
<TABLE>
<CAPTION>
===================================================================================================================
(In Thousands) March 31, 1998 December 31, 1997 March 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent
<S> <C> <C> <C> <C> <C> <C>
Commercial $2,590,478 85.19% $2,350,438 84.29% $1,670,810 77.59%
Loan Secured by real estate:
Real estate term loans 218,929 7.20% 232,954 8.35 359,613 16.70
Interim construction loans 201,956 6.64 174,767 6.27 99,999 4.64
Consumer loans 29,334 0.97 30,449 1.09 23,070 1.07
- -------------------------------------------------------------------------------------------------------------------
Gross Loans 3,040,697 100.00% 2,788,608 100.00% 2,153,492 100.00%
Less Allowance for loan losses (55,635) (51,143) (38,642)
- -------------------------------------------------------------------------------------------------------------------
Total loans $2,985,062 $2,737,465 $2,114,850
===================================================================================================================
</TABLE>
The Company continued to experience strong loan demand in its core California
markets during the first quarter of 1998 and the relative distribution by
industry type remained consistent with year end 1997. The out-of-state loan
production offices opened in 1996 and 1997 also contributed to the Company's
loan growth. Management anticipates continued strong loan demand throughout
1998.
ASSET QUALITY
Nonaccrual Loans, Restructured Loans and Real Estate Owned:
Nonaccrual loans, which includes loans 90 days or more past due, totaled $12.3
million at March 31, 1998, compared to $10.6 million at December 31, 1997, and
$17.0 million at March 31, 1997. Nonaccrual loans as a percentage of total loans
outstanding were 0.4% at March 31, 1998, and December 31, 1997, and 0.8% at
March 31, 1997, respectively. Loans totaling approximately $7.3 million were
placed on nonaccrual status during the three months ended March 31, 1998. The
increase in the balance of nonaccrual loans during the first quarter of 1998 was
partially offset by gross charge-offs of approximately $1.4 million, payoffs
totaling approximately $1.1 million and loans brought current of approximately
$3.1 million. Consistent with prior reporting periods, there were no loans past
due 90 days or more that ware still accruing interest. When a loan reaches
nonaccrual status, any interest accrued but uncollected is reversed and charged
against current income.
Restructured loans, loans that have had their original terms modified, totaled
$23.1 million, $24.0 million and $25.4 million at March 31, 1998, December 31,
1997, and March 31, 1997, respectively. The decrease in restructured loans
during the first quarter of 1998 is primarily due to a $0.7 million pay down on
one loan.
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 $3.0
million, $3.3 million and $2.2 million at March 31, 1998, December 31, 1997, and
March 31, 1997, respectively. For the three months ended March 31, 1998, there
were no additions to real estate and other assets owned. Disposals of real
estate owned for the same period totaled $206,000. The valuation allowance
remained unchanged from December 31, 1997.
Information regarding nonaccrual loans, restructured loans and real estate and
other assets owned is presented as follows:
5
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
March 31, Dec. 31, Sept. 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial $ 9,802 $ 8,675 $ 6,250 $ 5,782 $ 8,515
Real estate 2,353 1,903 2,685 2,136 8,479
Consumer 99 -- 301 -- --
- ----------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $12,254 $10,578 $ 9,236 $ 7,918 $16,994
================================================================================================================
Restructured loans $23,129 $23,970 $25,549 $24,144 $25,395
================================================================================================================
Real estate and other assets owned:
Real estate and other assets owned, gross 4,073 4,373 3,547 3,817 2,973
Less valuation allowance (1,089) (1,089) (1,089) (833) (769)
- ----------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net $ 2,984 $ 3,284 $ 2,458 $ 2,984 $ 2,204
- ----------------------------------------------------------------------------------------------------------------
Total $38,367 $37,832 $37,243 $35,046 $44,593
================================================================================================================
</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>
March 31, 1998
Loans with specific allowances $89,301 $(14,180) $75,121
Loans without specific allowances 6,477 -- 6,477
- -------------------------------------------------------------------------------------
Total $95,778 $(14,180) $81,598
=====================================================================================
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>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
=====================================================================================
March 31, December 31,
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Current $83,524 $79,109
Pass due -- 3,299
Nonaccrual 12,254 10,578
- -------------------------------------------------------------------------------------
Total $95,778 $92,986
=====================================================================================
</TABLE>
Loans classified as impaired totaled $95.8 million at March 31, 1998, compared
to $93.0 million at December 31, 1997. During the first quarter of 1998, $20.3
million of loans were newly classified as impaired. The increase in the balance
of impaired loans during the first quarter of 1998 was partially offset by gross
charge-offs of approximately $1.6 million, payoffs totaling approximately $13.8
million and loans brought current of $2.2 million. The Company's average
recorded investment in impaired loans for the three months ended March 31, 1998,
was $94.0 million. Interest income totaling approximately $2.0 million was
collected on impaired loans during the three months ended March 31, 1998.
6
<PAGE>
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 March 31, 1998, future additions to the allowance will be subject to
continuing evaluation of inherent risk in the loan portfolio.
At March 31, 1998, the allowance for loan losses equaled $55.6 million, or 1.83%
of total loans, as compared to $51.1 million, or 1.83% of total loans, at
December 31, 1997, and $38.6 million, or 1.79% of total loans, at March 31,
1997. The following table summarizes changes in the allowance for loan losses.
<TABLE>
<CAPTION>
================================================================================
Three months ended March 31, (In Thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 51,143 $ 36,051
================================================================================
Loans charged off:
Commercial (1,545) (835)
Real estate (169) (70)
Consumer (24) (2)
- --------------------------------------------------------------------------------
Total loans charged off $ (1,738) $ (907)
================================================================================
Recoveries of loans previously charged off:
Commercial 390 170
Real estate - -
Consumer 1 5
- --------------------------------------------------------------------------------
Total loans recoveries $ 391 $ 175
================================================================================
Net loans charged off (1,347) (732)
Provision for loan losses including
discontinued operations 5,839 3,323
- --------------------------------------------------------------------------------
Balance, end of period $ 55,635 $ 38,642
================================================================================
Loans outstanding, end of period $3,040,697 $2,153,492
================================================================================
Average loans outstanding $2,973,463 $2,130,316
================================================================================
Ratio of net charge-offs to average loans/(1)/ 0.18% 0.14%
Ratio of allowance for loan losses to average loans 1.87 1.81
Ratio of allowance for loan losses to loans
outstanding at March 31 1.83 1.79
Ratio of allowance for loan losses to nonaccrual
loans 454 227
Ratio of provision for loan losses to net
charge-offs 433 454
================================================================================
</TABLE>
/(1)/ Annualized
The provision for loan losses totaled $5.8 million for the quarter ended March
31, 1998, as compared to $3.3 million for the same period of 1997. The increase
in the provision for loan losses was due to the change in risk within the loan
portfolio due to new loan products and expansion into new geographic areas. Net
charge-offs totaled $1.3 million for the three months ended March 31, 1998, as
compared to $0.7 million in the same period of 1997. As a percentage of average
loans outstanding, annualized net charge-offs were 0.18% for the three months
ended March 31, 1998, and 0.14% for the corresponding period a year ago.
Securities:
Securities available for sale increased to $680.5 million at March 31, 1998,
from $669.3 million at December 31, 1997. Federal funds sold and securities
purchased under resale agreements increased to $l.1 billion at March 31, 1998,
from $765.0 million at December 31, 1997. The increase in these balances is a
function of the growth in deposits. Noninterest-bearing demand deposits
increased to $3.1 billion at March 31, 1998, from $2.4 billion at December 31,
1997. The
7
<PAGE>
growth in demand balances occurred primarily in real estate services deposits
which increased $787.9 million from December 31, 1997. The remaining increase in
demand balances is due to growth in commercial deposits.
Other Borrowings:
Short-term borrowings increased to $125.0 million at March 31, 1998, from $55.9
million at December 31, 1997. The increase is due to a $39.4 million increase in
Federal funds purchased and reverse repurchase balances, and to a $32.9 million
increase in borrowed funds backed by Treasury, Tax and Loan ("T,T&L") balances.
The increases in Federal funds purchased, reverse repurchase balances, and T,T&L
were offset in part by a $3.2 million decrease in commercial paper.
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 and cash equivalents 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% and to limit gross
loans to no more than 80% of deposits. At March 31, 1998, the Company's
liquidity ratio was 39% and the loan to deposit ratio was 60%.
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 $2.0 billion for the
quarter ended March 31, 1998, compared to $1.0 billion for the same period of
1997. For the quarter ended March 31, 1998, approximately 35% of average total
deposits were from the real estate services industry compared to 26% of average
total deposits for the same period of 1997. The Company's average demand
deposits and average shareholders' equity funded approximately 53% and 46%,
respectively, of average total assets for the quarters ended March 31, 1998 and
1997.
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 three months ended March 31, 1998, the Company experienced a
net cash outflow from its investing activities of approximately $618.3 million.
The net outflow related to investing activities can be attributed to growth in
the Company's loan portfolio, an outflow of $247.4 million, and a $361.0 million
increase in Federal funds sold. The outflow in investing activities was offset
by the $962.4 million net cash provided by the Company's financing activities.
Net cash inflows from financing activities for the three months ended March 31,
1998, included net increases in deposits totaling $891.8 million, and $69.1
million provided by an increase in short-term borrowings.
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 which attempt to limit the change
in pretax net interest income assuming various interest rate 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
8
<PAGE>
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 position, 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 March 31, 1998, the Company maintained
a positive one year gap of approximately $2.4 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 March 31, 1997, the Company maintained a positive one year
gap of approximately $828 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 range from 125-200 basis points below or above
(depending on the instrument) current market rates at the time the floors and
caps were purchased. At March 31, 1998, the Company owned exchange traded floors
totaling $4.2 billion that expire at the rate of approximately $1.0 billion per
quarter through the first 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 4.7%. The
unrealized gain on the floors approximated $206,000 at March 31, 1998. The
unamortized premium relating to the floors was $265,000 at March 31, 1998.
In March 1998, the Company purchased an over the counter interest rate cap with
a notional value outstanding of $1.0 billion at March 31, 1998. The cap
provides protection in the event that the three-month LIBOR increases above the
8.33% strike price of the cap and expires during the first quarter of 2001.
The unrealized gain on this cap at March 31, 1998 approximated $382,000. The
unamortized premium paid for the cap approximated $490,000 at March 31, 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%. These long-term
certificates of deposit are 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 requires the Company to pay a rate of three-month LIBOR
less 10 basis points, quarterly for ten years. Simultaneously, the Company will
receive quarterly interest payments at a fixed rate of 7.15% for ten years. The
unrealized gain on this swap at March 31, 1998, approximated $108,000.
In April 1997, the Company issued $75.0 million of 9.98% 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 7.18% on $25.0 million, 7.186% 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 $5.6 million at March
31, 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% 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% junior subordinated
deferrable interest debentures (the "Junior Subordinated Debentures") issued by
the
9
<PAGE>
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 March 31, 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 remainder of the proceeds will be used for general corporate purposes
or may be used for additional capital contributions to the Bank or to pursue
investment opportunities. 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 $73.3 million at March 31, 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% capital securities. See - "Capital
Securities." At March 31, 1998, shareholders' equity totaled $370.0 million, a
5% increase over the $352.0 million reported at December 31, 1997. In the first
quarter of 1998, the Company recorded an additional $1.5 million of
shareholders' equity from the exercise of employee stock options. The Company
receives a tax deduction for the difference between the option price and the
market value of shares issued. The tax benefit associated with shares exercised
which is recorded as a component of shareholders' equity, approximated $2.0
million in the first quarter of 1998.
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% and 10%, 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 March 31, 1998, were 10.56% and
11.89%, respectively, compared to 10.26% and 11.66%, respectively, at March 31,
1997. The Capital Securities discussed above qualify as Tier I capital and
therefore contributed to the increase in the Company's capital ratios over the
first quarter of 1997.
10
<PAGE>
CAPITAL RATIOS FOR IMPERIAL BANCORP AND IMPERIAL BANK/(1)/
<TABLE>
<CAPTION>
======================================================================================================================
March 31, 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 $488,433 11.89% $328,596 8.00% $410,745 10.00%
Bank 450,849 11.13% 323,945 8.00% 404,931 10.00%
Tier 1 Capital (to risk-weighted assets):
Company $433,803 10.56% $164,298 4.00% $246,447 6.00%
Bank 400,175 9.88% 161,972 4.00% 242,959 6.00%
Leverage (to average assets)
Company 433,803 9.85% $132,169 3.00% $220,281 5.00%
Bank 400,175 9.25% 129,749 3.00% 216,248 5.00%
======================================================================================================================
</TABLE>
/(1)/Includes common shareholder's 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 $4,107 million and $4,049
million, respectively, at March 31, 1998. Average assets for the Company and the
Bank were $4,406 million and $4,325 million, respectively, at March 31, 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%. The ratio is defined as Tier I capital to average total assets
for the most recent quarter. The Company's leverage ratio was 9.85% at March 31,
1998, compared to 9.32% at March 31, 1997, well in excess of minimum regulatory
requirements.
In conjunction with the 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. The Company will evaluate the capital needs of the
Bank following the spin off to determine whether additional capital is required.
The Company's pro forma Tier 1, total and leverage capital ratios at March 31,
1998, reflecting the spin off of IFG were 9.62%, 10.87% and 8.93%, respectively.
YEAR 2000
To fulfill the Company's business responsibility and ensure compliance with
regulatory requirements, the Company has established a year 2000 project team
("the Team"). The Team has conducted a comprehensive review of the Company's
computer systems to identify the systems that could be affected by the year 2000
issue and is developing an implementation plan to ensure that date-sensitive
data continues to be processed correctly. Incorporated into the Team's mission
statement is to have the Company year 2000 compliant in the main by year-end
1998. 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 Team presently believes that, with
updates 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 the Team's identification and analysis of necessary year 2000
updates and enhancements, the Company does not anticipate incurring significant
incremental costs related to the year 2000 project.
11
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130 - Reporting Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 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 5 on page 17 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 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.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
=============================================================================================================================
(Unaudited)
Imperial Bancorp and Subsidiaries March 31, December 31,
(In Thousands, Except Share Data) 1998 1997
=============================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 690,403 $ 316,600
Trading instruments 17,027 35,782
Securities available for sale 680,484 669,266
Securities held to maturity (market value of $4,007 and $4,026 for 1998 and 1997, respectively 4,007 4,026
Federal funds sold and securities purchased under resale agreements 1,126,000 765,000
Loans held for sale (market value of $4,012 and $4,120 for 1998 and 1997, respectively) 3,732 3,763
Loans:
Loans, net of unearned income and deferred loan fees 3,040,697 2,788,608
Less allowance for loan losses (55,635) (51,143)
- -----------------------------------------------------------------------------------------------------------------------------
Total net loans $ 2,985,062 $ 2,737,465
=============================================================================================================================
Premises and equipment, net 23,876 23,091
Accrued interest receivable 23,654 22,212
Real estate and other assets owned, net 2,984 3,284
Current income taxes receivable - 6,086
Deferred tax asset 2,790 355
Investment in Imperial Credit Industries, Inc. 77,884 75,001
Other assets 72,793 64,348
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,710,696 $ 4,726,279
=============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 3,112,697 $ 2,378,830
Savings 26,969 23,375
Money market 923,410 939,086
Time - under $100,000 166,619 128,543
Time - $100,000 and over 836,719 704,764
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 5,066,414 $ 4,174,598
=============================================================================================================================
Accrued interest payable 7,805 5,205
Short-term borrowings 124,993 55,915
Long-term borrowings:
Floating rate notes and fixed rate debentures 3,234 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 73,328 73,314
Current income taxes payable 4,219 -
Other liabilites 61,131 61,966
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 5,341,124 $ 4,374,255
=============================================================================================================================
Shareholder's equity:
Common Stock - no par, 50,000,000 shares authorized; 39,492,497
shares at March 31, 1998 and 39,236,034 shares at
December 31, 1997, issued and outstanding 239,674 236,186
Unrealized gain on securities available for sale, net of tax 2,367 1,682
Retained earnings 127,531 114,156
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 369,572 $ 352,024
=============================================================================================================================
Total liabilities and shareholders' equity $ 5,710,696 $ 4,726,279
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
========================================================================================================================
(Unaudited)
Imperial Bancorp and Subsidiaries
Three months ended March 31,
(In Thousands, Except Per Share Data) 1998 1997
========================================================================================================================
<S> <C> <C>
Interest income:
Loans $70,043 $49,170
Trading instruments 350 618
Securities available for sale 9,343 6,508
Securities held to maturity 70 73
Federal funds sold and securities purchased under resale agreements 4,121 2,241
Loans held for sale 144 123
- ------------------------------------------------------------------------------------------------------------------------
Total interest income $84,071 $58,733
========================================================================================================================
Interest expense:
Deposits 20,357 17,355
Short-term borrowings 1,383 1,138
Long-term borrowings 1,694 79
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense $23,434 $18,572
========================================================================================================================
Net interest income 60,637 40,161
Provision for loan losses 5,839 3,290
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses $54,798 $36,871
========================================================================================================================
Noninterest income:
Service charges on deposit accounts 1,432 1,403
Trust fees 2,091 1,977
Gain on origination and sale of loans 1,084 514
Equity in net income of Imperial Credit Industries, Inc. 2,884 1,461
Other service charges and fees 2,915 2,278
Merchant and credit card fees 1,475 700
International income and fees 2,940 2,412
Gain on securities available for sale 4 234
Gain on trading instruments 208 324
Gain on exercise and sale of stock warrants 423 1,734
Appreciation of donated Imperial Credit Industries, Inc. common stock - 2,816
Other income 2,647 276
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income $18,103 $16,129
========================================================================================================================
Noninterest expense:
Salary and employee benefits 28,711 19,671
Net occupancy expense 2,323 2,212
Furniture and equipment 2,218 1,381
Data processing 2,200 1,875
Customer services 5,906 3,606
Professional and legal fees 2,299 1,828
Business development 1,126 897
Charitable donations 143 3,676
Other expense 5,157 4,568
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $50,083 $39,714
========================================================================================================================
Income from continuing operations before income taxes 22,818 13,286
Income tax provision 9,443 5,254
- ------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $13,375 $ 8,032
========================================================================================================================
Income (loss) from operations of discontinued operations, net of tax - (79)
- ------------------------------------------------------------------------------------------------------------------------
Net income $13,375 $ 7,953
========================================================================================================================
Basic earnings per share from continuing operations $0.34 $0.21
Diluted earnings per share from continuing operations $0.32 $0.20
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
============================================================================================================================
Imperial Bancorp and Subsidiaries (Unaudited)
Three months ended March 31, (In Thousands) 1998 1997
============================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,375 $ 7,953
Adjustments for noncash charges (credits):
Depreciation and amortization (6,169) (1,202)
Accretion of purchase loan discount - (22)
Provision for loan losses 5,839 3,323
Equity in net income of Imperial Credit Industries, Inc. (2,884) (1,461)
Gain on exercise and sale of stock warrants (423) (1,734)
(Gain) loss on sale of real estate and other assets owned 2 (5)
Loss on sale of premises and equipment - 10
(Benefit) provision for deferred taxes (936) 312
Gain on securities available for sale (4) (234)
Net change in trading instruments 18,755 36,158
Net change in loans held for sale 31 (607)
Net change in accrued interest receivable (1,442) (1,225)
Net change in accrued interest payable 2,600 1,250
Net change in income taxes receivable 6,086 4,934
Net change in other liabilities 3,383 (1,350)
Net change in other assets (8,504) (11,416)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 29,709 $ 34,684
============================================================================================================================
Cash flows from investing activities:
Proceeds from securities held to maturity 19 14
Proceeds from sale of securities available for sale 795,548 1,100,608
Proceeds from maturities of securities available for sale 261,623 133,876
Purchase of securities available for sale (1,065,390) (1,305,032)
Proceeds from exercise and sale of stock warrants 325 1,734
Net change in federal funds sold and securities
purchased under resale agreements (361,000) (258,000)
Net change in loans (247,359) (88,375)
Capital expenditures (2,348) (2,287)
Proceed from sale of real estate and other assets owned 300 192
Proceed from sale of premises and equipment - 24
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (618,282) $ (417,246)
============================================================================================================================
Cash flows from financing activities:
Net change in demand deposits, savings, and
money market accounts 721,785 201,950
Net change in time deposits 170,031 123,002
Net change in short-term borrowings 69,078 23,726
Retirement of long-term borrowings - (5)
Proceed from exercise of employee stock options 1,491 467
Other (9) (18)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 962,376 $ 349,122
- ----------------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks $ 373,803 $ (33,440)
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year $ 316,600 $ 325,014
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of period $ 690,403 $ 291,574
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<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 Income 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 March 31, 1998, the Company owned 8.9 million shares, or approximately 23% 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 shareholder
equity including undistributed income. 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>
==========================================================================================================================
March 31, (In Thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 20,834 $ 17,322
Taxes refunded - 424
Taxes paid 72 375
Loans transferred to other real estate owned - 265
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE (4) PRO FORMA FINANCIAL INFORMATION OF IMPERIAL BANCORP (UNAUDITED)
The pro forma impact of the spin off of IFG on selected income statement items
is reflected as if the spin off had occurred at the beginning of the period
presented. Selected balance sheet items are reflected as if the spin off had
occurred at the end of the period presented.
16
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
For the period ended
March 31, 1998
(In Thousands, Except Share Data) Actual Pro Forma
========================================================================================
<S> <C> <C>
Pro forma earnings summary:
Net interest income $ 60,637 $ 56,100
Provision for loan losses 5,839 5,627
- ----------------------------------------------------------------------------------------
Net interest income after provision for loan losses 54,798 50,473
Noninterest income 15,219 11,518
Equity in net income of ICII 2,884 --
Other noninterest expense 50,083 44,082
- ----------------------------------------------------------------------------------------
Income before income taxes from continuing operations 22,818 17,909
Income tax provision 9,443 7,377
Income from continuing operations $ 13,375 $ 10,532
- ----------------------------------------------------------------------------------------
Pro forma earnings per share:
Basic earnings per share from continuing operations $ 0.34 $ 0.27
Diluted earnings per share from continuing operations $ 0.32 $ 0.25
- ----------------------------------------------------------------------------------------
Weighted average number of shares:
Basic 39,358,201 39,358,201
Diluted 41,319,804 41,319,804
========================================================================================
<CAPTION>
========================================================================================
At March 31, 1998
(In Thousands) Actual Pro Forma
========================================================================================
<S> <C> <C>
Pro forma balance sheet summary:
Cash $ 690,403 $ 690,001
Investments 1,831,250 1,818,421
Loans, net 2,985,062 2,853,625
Investment in ICII 77,884 --
Other assets 126,097 248,215
- ----------------------------------------------------------------------------------------
Total assets $ 5,710,696 $ 5,610,262
========================================================================================
Deposits $ 5,066,414 $ 5,066,414
Short-term borrowings 124,993 124,993
Long-term borrowings 76,562 76,562
Other liabilities 73,155 33,978
- ----------------------------------------------------------------------------------------
Total liabilities $ 5,341,124 $ 5,301,947
- ----------------------------------------------------------------------------------------
Total shareholders' equity $ 369,572 $ 308,315
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,710,696 $ 5,610,262
========================================================================================
</TABLE>
NOTE (5) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS 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,
17
<PAGE>
1998. The following table provides a summary of total comprehensive income for
the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
========================================================================
Statement of Comprehensive Income
Three months ended March 31, (In Thousands) 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Net income $13,375 $7,953
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains 685 228
- ------------------------------------------------------------------------
Comprehensive income $14,060 $8,181
========================================================================
Basic comprehensive earnings per share $ 0.36 $ 0.21
Diluted comprehensive earnings per share $ 0.34 $ 0.20
========================================================================
</TABLE>
18
<PAGE>
TABLE 1 - AVERAGE BALANCES, YIELDS AND RATES PAID (1)
<TABLE>
<CAPTION>
==========================================================================================================================
Three months ended March 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate % Balance Expense Rate %
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans -net of unearned income
and deferred loan fees (2) $ 2,973,463 $ 70,043 (3) 9.42% $ 2,130,316 $ 49,170 (3) 9.23%
Trading account securities 26,140 350 5.36% 39,051 618 6.33%
Securities available for sale 641,085 9,343 5.83% 452,874 6,508 5.75%
Securities held to maturity 4,021 70 6.94% 4,189 73 6.97%
Fed funds sold and securities purchased 300,251 4,121 5.49% 167,536 2,241 5.35%
under resale agreements
Loans held for sale 5,245 144 11.00% 4,858 123 10.13%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 3,950,205 $ 84,071 8.51% $ 2,798,824 $ 58,733 8.39%
==========================================================================================================================
Allowance for loan losses (52,101) (37,048)
Cash 310,793 273,222
Other assets 200,680 163,533
--------------- ----------------
Total assets $ 4,409,577 $ 3,198,531
=============== ================
Interest-bearing liabilities:
Savings $ 25,346 $ 159 2.52% $ 17,612 $ 108 2.45%
Money market 778,893 7,483 3.84% 594,818 4,455 3.00%
Time-under $100,000 149,822 2,233 5.96% 174,725 2,464 5.64%
Time-over $100,000 782,012 10,482 5.36% 770,173 10,328 5.36%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 1,736,073 $ 20,357 4.69% $ 1,557,328 $ 17,355 4.46%
- --------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 101,743 1,383 5.44% 88,536 1,138 5.14%
Long-term borrowings 76,570 1,694 8.85% 4,452 79 7.10%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,914,386 $ 23,434 4.90% $ 1,650,316 $ 18,572 4.50%
==========================================================================================================================
Noninterest-bearing deposits 2,068,907 1,192,547
Other liabilities 66,973 63,889
Shareholders' equity 359,311 291,779
--------------- --------------
$ 4,409,577 $ 3,198,531
=============== ==============
Net interest income/Net interest margin $ 60,637 6.14% $ 40,161 5.74%
============================ ===================
</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 $6.1 million, $3.0 million,
for the three months ended March 31, 1998 and 1997, respectively.
19
<PAGE>
TABLE 2 - ANALYSIS OF CHANGES IN NET INTEREST INCOME
Changes in the Company's net interest income are a function of both changes in
interest rates and changes in the average balance of interest-earning assets and
interest-bearing liabilities. The following table sets forth information
regarding changes in interest income and interest expense for the years
indicated. The total change is segmented into the change attributable to
variations in volume (changes in average balances multiplied by old rate) and
the change attributable to variations in interest rates (changes in rates
multiplied by old balances). The change in interest income and interest expense
attributable to both rate and volume (changes in rate multiplied by changes in
volume) is classified as rate/volume. Nonaccrual loans are included in average
loans used to compute this table. The table is not presented on a tax equivalent
basis as the effects are not material.
<TABLE>
<CAPTION>
====================================================================================
Three months ended March 31, 1998 over 1997
(In Thousands) Volume Rate Rate/Volume Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $19,458 $1,012 $ 400 $ 20,870
Trading account securities (205) (94) 33 (266)
Securities available for sale 2,705 92 38 2,835
Securities held to maturity (3) 0 0 (3)
Fed Funds sold and securities 1,775 58 46 1,879
purchased under resale agree
Loans held for sale 11 11 1 23
- ------------------------------------------------------------------------------------
Total interest income $23,741 $1,079 $ 518 $ 25,338
====================================================================================
Savings (41) 3 90 52
Money market 1,378 1,260 390 3,028
Time under-$100,000 (351) 140 (20) (231)
Time over-$100,000 159 (6) 0 153
- ------------------------------------------------------------------------------------
Total deposits $ 1,145 $1,397 $ 460 $ 3,002
- ------------------------------------------------------------------------------------
Short-term borrowings 170 66 10 246
Long-term borrowings 1,280 19 315 1,614
- ------------------------------------------------------------------------------------
Total interest expense $ 2,595 $1,482 $ 785 $ 4,862
====================================================================================
Change in net interest income $21,146 $ (403) $(267) $ 20,476
====================================================================================
</TABLE>
TABLE 3 - SECURITIES
(a) Securities Held to Maturity
A summary of securities held to maturity as of March 31, 1998, and December 31,
1997, is provided below:
20
<PAGE>
<TABLE>
<CAPTION>
=============================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------
March 31, 1998
<S> <C> <C> <C> <C>
Industrial development bonds $ 4,007 $ 4,007
- -----------------------------------------------------------------------------
Total $ 4,007 $ - $ - $ 4,007
=============================================================================
December 31, 1997
Industrial development bonds $ 4,026 $ - $ - $ 4,026
- -----------------------------------------------------------------------------
Total $ 4,026 $ - $ - $ 4,026
=============================================================================
</TABLE>
(b) Securities Available for Sale
A summary of the amortized cost and estimated fair value of securities available
for sale as of March 31, 1998, and December 31, 1997, is provided as follows:
<TABLE>
<CAPTION>
===================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------
March 31, 1998
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $ 571,167 $ 3,564 $ 574,731
Mutual funds 90,721 90,721
Other securities 14,513 520 15,032
- -----------------------------------------------------------------------------------
Total $ 676,400 $ 4,084 $ - $ 680,484
===================================================================================
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 three months ended March 31, 1998, were $8,300 and $4,300,
respectively. For the same period of 1997, these amounts were $295,000 and
$61,000, respectively.
21
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 - FINANCIAL RATIOS
================================================================================
Three months ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income as a percentage of:(1)
Average shareholders' equity 14.89% 10.90%
Average total assets 1.21% 0.99%
Average earning assets 1.35% 1.14%
Average shareholders' equity as a
percentage of:
Average assets 8.15% 9.12%
Average loans 12.08% 13.70%
Average deposits 20.70% 10.61%
Shareholders' equity at period end as a
percentage of:
Total assets at period end 6.47% 8.04%
Total loans at period end 12.15% 13.86%
Total deposits at period end 7.29% 9.11%
================================================================================
(1) Annualized
</TABLE>
22
<PAGE>
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.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") for the fiscal year ended December 31,
1997, and for all prior periods presented.
SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with
diluted EPS. 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.
<TABLE>
<CAPTION>
===================================================================================================================
1998 1997
- -------------------------------------------------------------------------------------------------------------------
For the three months ended March 31, Per-share Per-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 $13,375 39,358,201 $0.34 $7,953 38,383,167 $0.21
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,961,603 1,921,689
---------- ----------
Diluted EPS
Income available to shareholders $13,375 41,319,804 $0.32 $7,953 40,304,856 $0.20
===================================================================================================================
</TABLE>
The weighted average number of shares used to compute earnings per share was
retroactively adjusted to reflect a three-for-two stock split effected in the
first quarter of 1998.
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.
23
<PAGE>
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, and no events have occurred which would require one to be
filed.
24
<PAGE>
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: May 13, 1998 By: Christine M. McCarthy
---------------------
Christine M. McCarthy
Executive Vice President and
Chief Financial Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 291,574 690,403
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 615,000 1,126,000
<TRADING-ASSETS> 28,729 17,027
<INVESTMENTS-HELD-FOR-SALE> 497,269 680,484
<INVESTMENTS-CARRYING> 4,179 4,007
<INVESTMENTS-MARKET> 4,179 4,007
<LOANS> 2,153,492 3,040,697
<ALLOWANCE> (38,642) (55,635)
<TOTAL-ASSETS> 3,711,047 5,710,696
<DEPOSITS> 3,275,229 5,066,414
<SHORT-TERM> 68,623 124,993
<LIABILITIES-OTHER> 64,215 73,154
<LONG-TERM> 4,450 76,562
0 0
0 0
<COMMON> 230,163 239,674
<OTHER-SE> 68,367 129,898
<TOTAL-LIABILITIES-AND-EQUITY> 3,711,047 5,710,696
<INTEREST-LOAN> 49,170 70,043
<INTEREST-INVEST> 7,199 9,413
<INTEREST-OTHER> 2,364 4,615
<INTEREST-TOTAL> 58,733 84,071
<INTEREST-DEPOSIT> 17,355 20,357
<INTEREST-EXPENSE> 18,572 23,434
<INTEREST-INCOME-NET> 40,161 60,637
<LOAN-LOSSES> 3,290 5,839
<SECURITIES-GAINS> 234 4
<EXPENSE-OTHER> 39,714 50,083
<INCOME-PRETAX> 13,286 22,818
<INCOME-PRE-EXTRAORDINARY> 8,032 13,375
<EXTRAORDINARY> (79) 0
<CHANGES> 0 0
<NET-INCOME> 7,953 13,375
<EPS-PRIMARY> 0.21 0.34
<EPS-DILUTED> 0.20 0.32
<YIELD-ACTUAL> 5.74 6.14
<LOANS-NON> 16,994 12,254
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 25,395 22,565
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 36,051 51,143
<CHARGE-OFFS> 933 1,738
<RECOVERIES> 201 391
<ALLOWANCE-CLOSE> 38,642 55,635
<ALLOWANCE-DOMESTIC> 38,642 55,635
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0<F1> 0
<FN>
<F1>RESTATEMENT OF EARNINGS PER SHARE DATA FOR THE THREE MONTHS ENDED MARCH 31,
1997, TO REFLECT THE ADOPTION OF SFAS NO. 128, "EARNINGS PER SHARE."
</FN>
</TABLE>
