<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, 1999
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-2575576
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
9920 South La Cienega Boulevard
Inglewood, California 90301
(Address of principal executive offices) (Zip Code)
</TABLE>
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 November 1,
1999: 41,542,395 shares.
Debt Securities: Imperial Bank Subordinated Capital Notes Due 2009. As of
September 30, 1999, $100,000,000 in principal amount of such
Notes was outstanding.
Capital Securities: 9.98 percent Series B Capital Securities of Imperial Capital
Trust I Due 2026. As of September 30, 1999, $75,000,000 in
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 AND NINE MONTHS ENDED SEPTEMBER 30, 1999
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") as of and for the three and nine months ended September 30, 1999.
This information should be read in conjunction with the Company's 1998
consolidated financial statements and notes thereto, and the accompanying
quarterly unaudited consolidated financial statements and notes thereto.
PERFORMANCE SUMMARY
Net income for the three months ended September 30, 1999, increased to $14.9
million, or $0.35 a share, from a loss of $3.1 million, or $0.07 a share, for
the year-earlier period. The annualized return on average assets increased to
1.03 percent for the three months ended September 30, 1999, from an annualized
loss on average assets of 0.24 percent for the year-earlier period. Net income
for third quarter 1999 includes a $1.8 million after-tax loss on the sale of 5.3
million shares of Imperial Credit Industries, Inc. (NASDAQ-ICII) ("ICII") common
stock. As a result of this sale, the Company no longer owns shares of ICII
common stock. Results for the year-earlier quarter include a $15.4 million
after-tax loss representing the Company's share of losses incurred by ICII and a
$2.8 million after-tax restructuring charge related to the canceled spin-off of
Imperial Financial Group ("IFG").
Net income for the nine months ended September 30, 1999, increased to $48.9
million, or $1.14 a share, from $26.8 million, or $0.60 a share, for the year-
earlier period. The annualized return on average assets increased to 1.18
percent for the nine months ended September 30, 1999, from 0.75 percent for the
year-earlier period. Year-to-date net income for 1999 includes $953,000 after-
tax representing the Company's equity in ICII's first quarter 1999 earnings, an
after-tax loss of $840,000, net of related transaction expenses included in
noninterest expense, on the sale of 8.9 million shares of ICII common stock and
an after-tax gain of $5.1 million on the sale of the Company's trust business.
Net income for the first nine months of 1998 includes an $11.5 million after-tax
loss representing the Company's share of ICII's losses and the $2.8 million
after-tax IFG restructuring charge.
Earnings per share calculations for the 1998 reporting periods have been
adjusted to reflect an 8 percent stock dividend paid on March 5, 1999.
Normalized net income increased over 10 percent, to $16.7 million, or $0.39 a
share, for the three months ended September 30, 1999, from $15.1 million or
$0.34 a share, for the year-earlier period. For the nine months ended September
30, 1999, normalized net income increased 6 percent to $43.7 million, or $1.02 a
share, from $41.2 million, or $0.92 a share, for the year-earlier period. For
purposes of these comparisons, normalized net income for the 1999 reporting
periods excludes equity in the earnings of ICII, the net losses on the sale of
ICII common stock and the gain on the sale of the trust business. The
normalizing adjustments increased net income by $1.8 million for the three
months ended September 30, 1999, and reduced net income by $5.2 million for the
nine months ended September 30, 1999.
Normalized earnings for 1998 excludes equity in the losses of ICII and the IFG
restructuring charge. The normalizing adjustments increased net income by $18.2
million and $14.3 million for the three- and nine-month periods ended September
30, 1998, respectively. Net income growth continues to be driven by the
Company's core commercial
1
<PAGE>
banking and residential tract construction businesses.
The following table provides the calculation of normalized net income for the
periods indicated:
<TABLE>
<CAPTION>
=========================================================================================================================
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 14,852 $ (3,099) $ 48,886 $ 26,843
After-tax adjustments: (1)
Equity in net loss (income) of ICII - 15,369 (953) 11,487
Net loss on sale of ICII common stock 1,817 - 840 -
Net gain on sale of trust business - - (5,110) -
Restructuring charges - 2,828 2,828
- -------------------------------------------------------------------------------------------------------------------------
Normalized net income $ 16,669 $ 15,098 $ 43,663 $ 41,158
=========================================================================================================================
Normalized diluted earnings per share $ 0.39 $ 0.34 $ 1.02 $ 0.92
Normalized return on average assets (2) (3) 1.16% 1.20% 1.06% 1.17%
Normalized return on average equity (3) 15.96% 15.12% 14.58% 14.56%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjustment increases (decreases) reported income.
(2) Average assets excludes the Company's investment in ICII.
(3) Annualized.
- --------------------------------------------------------------------------------
The annualized return on average assets, based on normalized net income,
decreased to 1.16 percent for the three months ended September 30, 1999, from
1.20 percent for the year-earlier period. The annualized return on average
assets, based on normalized net income, decreased to 1.06 percent for the nine
months ended September 30, 1999, from 1.17 percent for the year-earlier period.
Although average earning assets grew by approximately 13 percent and 16 percent
for the three and nine months ended September 30, 1999, respectively, compared
with the year-earlier periods, the annualized return on average assets was
adversely impacted by a decline in the net interest margin compared with the
prior year. The annualized return on average equity, based on normalized net
income, increased to 15.96 percent for the three months ended September 30,
1999, from 15.12 percent for the year-earlier period. The annualized return on
average equity, based on normalized net income, increased to 14.58 percent for
the nine months ended September 30, 1999, from 14.56 percent for the
year-earlier period.
Net interest income increased to $68.4 million for the three months ended
September 30, 1999, from $65.0 million for the same period last year. Net
interest income increased to $196.7 million for the nine months ended September
30, 1999, from $191.2 million for the year-earlier period. The increase in net
interest income for the three and nine months ended September 30, 1999, is
primarily due to loan growth. The increase in net interest income for the 1999
reporting periods was partially offset by decreases in the yield on loans,
compared with the year-earlier periods. Average loan balances increased
approximately $562.5 million, or approximately 16 percent, and $691.0 million,
or approximately 21 percent, for the three and nine months ended September 30,
1999, respectively, compared with the year-earlier periods.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 99,147 $ 92,186 $ 278,796 $ 266,918
Interest expense 30,723 27,166 82,052 75,677
- ------------------------------------------------------------------------------------------------------------------------
Net interest income $ 68,424 $ 65,020 $ 196,744 $ 191,241
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.24% 5.62% 5.24% 5.92%
========================================================================================================================
</TABLE>
2
<PAGE>
The net interest margin decreased to 5.24 percent for the three and nine months
ended September 30, 1999, from 5.62 percent and 5.92 percent for the
year-earlier periods. The decline in net interest margin for the three and nine
months ended September 30, 1999, compared with the comparable periods of 1998,
is primarily due to a decrease in the yield on commercial loans. A majority of
the Company's commercial loans are tied to the prime rate. The prime rate
averaged 7.87 percent for the nine months ended September 30, 1999, compared
with 8.50 percent for the same period of 1998. Although the yield on commercial
loans and net interest margin deceased compared with the prior year, both
percentages increased compared with the three months ended June 30, 1999. The
improved yield on commercial loans and net interest margin reflect the positive
impact of the recent increases in the prime rate to 8.25 percent at September
30, 1999, from 7.75 percent at June 30, 1999. The Company continues to benefit
from a sizeable base of noninterest-bearing demand deposits. The overall cost of
funds decreased to 4.26 percent and 4.15 percent for the three and nine months
ended September 30, 1999, respectively, from 4.65 percent and 4.66 percent for
the year-earlier periods.
Loan loss provisions totaled $6.0 million and $20.8 million for the three and
nine months ended September 30, 1999, respectively, compared with $5.6 million
and $25.6 million for the comparable periods of 1998. Net charge-offs were $3.4
million, or 0.34 percent of average loans on an annualized basis, for the third
quarter of 1999 compared with $2.2 million, or 0.25 percent of average loans on
an annualized basis, for the year-earlier quarter. Net charge-offs decreased to
$10.7 million, or 0.37 percent of average loans on an annualized basis, for the
nine months ended September 30, 1999, from $15.3 million, or 0.63 percent of
average loans on an annualized basis, for the year-earlier period. Net
charge-offs for 1998 include $7.0 million on one loan to a company in the
healthcare industry. The ratio of the allowance for loan losses to period-end
outstanding loans increased to 1.88 percent at September 30, 1999, from 1.82
percent at December 31, 1998, and 1.79 percent at September 30, 1998.
Noninterest income increased to $16.8 million for the three months ended
September 30, 1999, from a loss of $10.6 million for the year-earlier period.
Normalized noninterest income for third quarter 1999, which excludes a $3.1
million loss on the sale of ICII stock, increased 25 percent to $19.9 million
from $15.9 million, excluding equity in the net loss of ICII, for the
year-earlier period. Normalized noninterest income includes gains on the
exercise of warrants and related sale of equity securities totaling $2.2 million
and $1.8 million, for the three months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999, noninterest income
increased to $75.4 million from $42.5 million for the year-earlier period.
Normalized noninterest income, which excludes equity in the earnings of ICII, a
$2.3 million gain on the sale of ICII stock and a $8.8 million gain on the sale
of the trust business, increased slightly to $62.6 million for the first nine
months of 1999 from $62.3 million for the year-earlier period, excluding equity
in the net loss of ICII. On a year-to-date basis, gains on the exercise of
warrants and related sale of equity securities totaled $9.6 million for 1999,
compared with $18.8 million for 1998. Gains on the exercise of warrants and
related sale of equity securities for the prior period include $16.1 million on
a single transaction recorded by one of the Company's nonbank subsidiaries. The
Company expects to continue to recognize gains on the exercise of warrants and
related sale of equity securities dependent on market conditions.
Noninterest expense decreased to $54.6 million for the three months ended
September 30, 1999, from $55.8 million for the year-earlier period. Normalized
noninterest expense, increased to $54.6 million for the three months ended
September 30, 1999, from $50.9 million for the year-earlier period. There were
no normalizing adjustments to noninterest expense for third quarter 1999.
Normalized noninterest expense for third quarter 1998 excludes a $4.9 million
restructuring charge for the canceled spin-off of IFG. The increase in
normalized noninterest expense for the three months ended September 30, 1999,
compared with the year-earlier period, reflects increases in salaries, furniture
and equipment expense, business development expense and other expense related to
the Company's growth. These increases in noninterest expense were partially
offset by a decrease in customer services expense related to deposits generated
by the Financial Services Division.
Noninterest expense increased to $169.4 million for the nine months ended
September 30, 1999, from $164.9 million for the year-earlier period. Normalized
noninterest expense, which excludes $3.7 million of consulting expense related
to the sale of ICII stock, increased to $165.7 million for the first nine months
of 1999 from $160.1 million for the same period of the prior year, excluding the
IFG restructuring charge. Increases in salaries, furniture and equipment
expense, data processing, professional fees, business development and other
expense were partially offset by a decrease in
3
<PAGE>
customer services expense. The increase in salaries can be attributed to an
increase in the average number of full-time equivalent staff to 1,254 for the
nine months ended September 30, 1999, from 1,108 for the same period of 1998.
The increase in data processing expense is primarily due to higher volumes in
merchant card processing.
Total assets increased to $6.5 billion at September 30, 1999, from $6.2 billion
at December 31, 1998, and $6.3 billion at September 30, 1998. Total loans grew
to $3.6 billion at September 30, 1999, an increase of approximately 6 percent
from $3.4 billion at December 31, 1998, and September 30, 1998. The growth in
the loan portfolio at September 30, 1999, occurred in commercial loans and
residential tract construction loans, which increased $124.3 million, or
approximately 4 percent, and $181.9 million, or approximately 79 percent, over
September 30, 1998, respectively. Loans held for sale increased to $111.4
million at September 30, 1999, from $18.3 million at December 31, 1998, and
$14.0 million at September 30, 1998. The increase in loans held for sale
reflects a reclassification of loan balances held by the Lewis Horwitz
Organization ("LHO"). Imperial Bank finalized an agreement to sell the assets of
LHO subsequent to quarter end. The LHO balances were previously included in
commercial loans.
Total deposit balances remained stable for the periods reported totaling $5.7
billion at September 30, 1999, $5.6 billion at December 31, 1998, and $5.7
billion at September 30, 1998. Noninterest-bearing demand deposits comprised 51
percent of total deposits at September 30, 1999, a decrease from 59 percent of
total deposits at December 31, 1998, and 60 percent at September 30, 1998. Two
factors led to the decrease in noninterest-bearing demand deposits as a
percentage of total deposits at September 30, 1999: decreases in the balance of
noninterest-bearing deposits of approximately 12 percent and 15 percent compared
with December 31, 1998, and September 30, 1998, respectively, and an increase in
time certificates of deposits as a percentage of total deposits. The decrease in
noninterest-bearing deposits occurred in commercial business accounts.
Shareholders' equity increased to $414.5 million at September 30, 1999, from
$381.8 million at December 31, 1998, and $370.6 million at September 30, 1998.
Nonaccrual loans totaled $43.0 million, or 1.18 percent of total loans, at
September 30, 1999, compared with $30.6 million, or 0.89 percent of total loans,
at December 31, 1998, and $34.5 million, or 1.01 percent of total loans, at
September 30, 1998. Nonaccrual loans at September 30, 1999, include $10.9
million belonging to Lewis Horwitz Organization that was sold subsequent to
quarter end. Restructured loans decreased to $4.6 million at September 30, 1999,
from $9.8 million at December 31, 1998, and $27.6 million at September 30, 1998.
The percentage of nonaccrual and restructured loans to total loans increased to
1.31 percent at September 30, 1999, from 1.17 percent at December 31, 1998, and
decreased from 1.81 percent at September 30, 1998. The decrease in restructured
loans from September 30, 1998, is due in large part to the payoff of a $14.3
million commercial loan. All restructured loans were performing in accordance
with their modified terms at September 30, 1999. The balance of real estate and
other assets owned net of allowance ("OREO") decreased to $1.2 million at
September 30, 1999, from $2.3 million at December 31, 1998, and $2.7 million at
September 30, 1998.
As of the most recent regulatory examination, Imperial Bancorp was classified as
well capitalized. As of September 30, 1999, the Company's leverage, Tier 1 and
total capital ratios were 8.50 percent, 9.54 percent and 12.76 percent,
respectively.
Stock Repurchase Program
The Company repurchased and retired 511,700 shares of its common stock at a cost
of $9.3 million during the nine months ended September 30, 1999. The Company
originally announced its stock repurchase program in January 1997 and increased
the total shares authorized for repurchase to 2,862,000 in September 1998. The
Company has repurchased and retired 2,401,052 shares of the total authorized
under the program.
Sale of Imperial Credit Industries, Inc. Common Stock
On May 17, 1999, Imperial Bank (the "Bank") sold 3.7 million shares of ICII
common stock to ICII for $8.00 a share. On July 27, 1999, the Bank sold the
remaining 5.3 million shares it owned of Imperial Credit Industries, Inc. common
stock to an institutional investor for $6.00 a share. The Bank recorded a pretax
loss on the two sales totaling $1.4 million including related transaction
expenses.
4
<PAGE>
Sale of Lewis Horwitz Organization
In October 1999, the Bank finalized an agreement to sell the assets of the Lewis
Horwitz Organization, a division of the Bank, to Imperial Credit Industries,
Inc. ICII will purchase the assets at net book value over an 15-month period
ending in December 2000.
Regional Office Opened in Kirkland, Washington
The Company's loan production office previously located in Bellevue, Washington
relocated to Kirkland and expanded to a full-service regional banking office
effective October 20, 1999. The Company now operates 15 regional banking
offices; 12 located throughout California; and out-of-state locations in
Phoenix, Arizona; Denver, Colorado; and Kirkland, Washington.
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 $68.4 million for the three months
ended September 30, 1999, from $65.0 million for the year-earlier period. The
increase in net interest income is due to growth in average earning assets,
which increased approximately 13 percent to $5.2 billion for the quarter ended
September 30, 1999, from $4.6 billion for the year-earlier period. Average loan
balances grew approximately 16 percent to $4.0 billion for the three months
ended September 30, 1999, from $3.5 billion for the year-earlier period. Loans
comprised approximately 78 percent of average earnings assets for the current
quarter compared with approximately 75 percent for the third quarter of 1998.
The average balance of trading instruments increased to $55.5 million for the
three months ended September 30, 1999, from $32.0 million for the year-earlier
period. The growth in trading instruments occurred primarily in Small Business
Administration ("SBA") loan certificates. The increases in average loans and
trading instruments were partially offset by a decrease in the average balance
of Federal funds sold and securities purchased under resale agreements to $302.1
million for the three months ended September 30, 1999, from $343.6 million for
the year-earlier period. Although there was a decline in the overall yield on
earning assets to 7.59 percent for third quarter 1999 from 7.97 percent for the
year-earlier quarter, the Company experienced an increase in net interest income
due to growth in earning asset balances.
5
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
Three months ended September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars 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) $ 4,025,351 $ 83,134 (3) 8.19% $ 3,462,873 $ 76,328 (3) 8.74%
Trading instruments 55,484 748 5.35% 31,977 454 5.63%
Securities available for sale (4) 735,380 9,719 5.24% 735,910 10,160 5.50%
Securities held to maturity 3,807 70 7.29% 3,954 71 7.12%
Federal funds sold and securities
purchased under resale agreements 302,103 3,944 5.18% 343,609 4,832 5.58%
Loans held for sale 60,274 1,532 10.08% 13,411 341 10.09%
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 5,182,399 $ 99,147 7.59% $ 4,591,734 $ 92,186 7.97%
==================================================================================================================
Allowance for loan losses (70,099) (59,402)
Cash 377,042 346,411
Other assets 215,132 211,793
------------ ------------
Total assets $ 5,704,474 $ 5,090,536
============ ============
Interest-bearing liabilities:
Savings $ 23,719 $ 106 1.77% $ 28,823 $ 184 2.53%
Money market 1,191,852 8,600 2.86% 978,872 8,260 3.35%
Time-under $100,000 161,461 2,098 5.16% 217,076 3,104 5.67%
Time-$100,000 and over 1,228,538 15,304 4.94% 917,613 12,442 5.38%
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 2,605,570 $ 26,108 3.98% $ 2,142,384 $ 23,990 4.44%
- ------------------------------------------------------------------------------------------------------------------
Short-term borrowings 74,688 955 5.07% 99,804 1,473 5.86%
Long-term borrowings 105,568 2,100 7.89% 2,832 53 7.42%
Capital securities 73,406 1,560 8.43% 73,349 1,650 8.92%
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,859,232 $ 30,723 4.26% $ 2,318,369 $ 27,166 4.65%
==================================================================================================================
Demand deposits 2,311,767 2,295,653
Other liabilities 119,030 80,357
Shareholders' equity 414,445 396,157
Total liabilities and
------------ ------------
shareholders' equity $ 5,704,474 $ 5,090,536
============ ============
Net interest income/Net interest
margin $ 68,424 5.24% $ 65,020 5.62%
========= ======= ========== =======
</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 $6.2 million and $5.6
million for the three months ended September 30, 1999 and 1998,
respectively.
(4) Average balance includes unrealized gains and losses while yield is based
on amortized cost.
6
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
Nine months ended September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars 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) $ 3,914,946 $ 235,287 (3) 8.04% $ 3,223,928 $ 220,195 (3) 9.13%
Trading instruments 63,624 2,617 5.50% 25,637 1,046 5.45%
Securities available for sale (4) 673,382 25,740 5.11% 679,392 29,058 5.72%
Securities held to maturity 3,841 214 7.45% 3,989 211 7.07%
Federal funds sold and securities
purchased under resale agreements 334,605 12,369 4.94% 377,864 15,675 5.55%
Loans held for sale 33,716 2,569 10.19% 9,531 733 10.28%
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 5,024,114 $ 278,796 7.42% $ 4,320,341 $ 266,918 8.26%
==================================================================================================================
Allowance for loan losses (67,185) (56,205)
Cash 368,586 331,730
Other assets 234,174 201,496
------------- -------------
Total assets $ 5,559,689 $ 4,797,362
============= =============
Interest-bearing liabilities:
Savings $ 29,153 $ 399 1.83% $ 26,799 $ 508 2.53%
Money market 1,119,576 23,771 2.84% 935,092 23,617 3.38%
Time-under $100,000 160,192 6,175 5.15% 185,455 7,947 5.73%
Time-$100,000 and over 1,103,305 39,930 4.84% 836,848 33,965 5.43%
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 2,412,226 $ 70,275 3.90% $ 1,984,194 $ 66,037 4.45%
- ------------------------------------------------------------------------------------------------------------------
Short-term borrowings 85,211 3,114 4.89% 108,354 4,562 5.63%
Long-term borrowings 70,280 4,099 7.80% 3,389 184 7.26%
Capital securities 73,393 4,564 8.31% 73,335 4,894 8.92%
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,641,110 $ 82,052 4.15% $ 2,169,272 $ 75,677 4.66%
==================================================================================================================
Demand deposits 2,411,452 2,175,839
Other liabilities 106,704 74,203
Shareholders' equity 400,423 378,048
Total liabilities and
------------- -------------
shareholders' equity $ 5,559,689 $ 4,797,362
============= =============
Net interest income/Net interest
margin $ 196,744 5.24% $ 191,241 5.92%
============ ======= ============ =======
</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 $16.5 million and $18.5
million for the nine months ended September 30, 1999 and 1998,
respectively.
(4) Average balance includes unrealized gains and losses while yield is based
on amortized cost.
7
<PAGE>
Net interest income increased to $196.7 million for the nine months ended
September 30, 1999, from $191.2 million for the year-earlier period. The
increase in net interest income is primarily due to loan growth. Average loan
balances increased approximately 21 percent to $3.9 billion for the nine months
ended September 30, 1999, from $3.2 billion for the year-earlier period. Loans
comprised approximately 78 percent of average earnings assets for the nine
months ended September 30, 1999, compared with approximately 75 percent for the
comparable period of 1998. Although there was a decline in the overall yield on
earning assets to 7.42 percent for the nine months ended September 30, 1999,
from 8.26 percent compared with the year-earlier period, the Company experienced
an increase in net interest income due to growth in earning asset balances.
The Company's net interest margin decreased to 5.24 percent for the three and
nine months ended September 30, 1999, respectively, from 5.62 percent and 5.92
percent for the year-earlier periods. The decrease in the net interest margin
for the current quarter and year-to-date is largely due to a decline in the
yield on commercial loans. The average yield on loans decreased to 8.19 percent
and 8.04 percent for the three and nine months ended September 30, 1999,
respectively, from 8.74 percent and 9.13 for the year-earlier periods. The
Company's loans are generally tied to a rate index, with the majority tied to
the prime rate. Some loans, including entertainment loans and purchased loan
participations, are tied to the London Interbank Offered Rate ("LIBOR"). The
prime rate averaged 7.87 percent for the first nine months of 1999 compared with
an average of 8.50 percent for the same period of 1998. On a year-to-date basis,
the yield on commercial loans was negatively impacted, although to a lesser
extent, by the increase in nonaccrual loan balances compared with the prior
year. Interest income was reduced by approximately $503,800 due to interest
reversals on nonaccrual loans for the nine months ended September 30, 1999.
Average demand deposits were $2.3 billion for the three months ended September
30, 1999 and 1998. Average demand deposits represented approximately 47 percent
of total average deposits for the third quarter of 1999 compared with
approximately 52 percent of total average deposits for the year-earlier quarter.
The net interest margin was positively impacted by a decrease in the overall
cost of funds to 4.26 percent for the three months ended September 30, 1999,
from 4.65 percent for the year-earlier period. This decrease is largely due to a
reduction in the cost of deposits. On a year-to-date basis, the overall cost of
funds decreased to 4.15 percent for 1999 from 4.66 percent for the comparable
period of 1998.
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 three and nine months ended
September 30, 1999 and 1998. 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.
Nonaccrual 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.
8
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
Three months ended September 30, 1999 over 1998
(Dollars in thousands) Volume Rate Rate/Volume Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $ 12,398 $ (4,811) $ (781) $ 6,806
Trading instruments 334 (23) (17) 294
Securities available for sale (7) (478) 44 (441)
Securities held to maturity (3) 2 - (1)
Federal funds sold and securities
purchased under resale agreements (584) (346) 42 (888)
Loans held for sale 1,191 (0) (0) 1,191
- ----------------------------------------------------------------------------------------------------------------
Total interest income $ 13,329 $ (5,656) $ (712) $ 6,961
================================================================================================================
Savings $ (33) $ (55) $ 10 $ (78)
Money market 1,797 (1,197) (260) 340
Time-under $100,000 (796) (283) 73 (1,006)
Time-$100,000 and over 4,216 (1,011) (343) 2,862
- ----------------------------------------------------------------------------------------------------------------
Total deposits $ 5,184 $ (2,546) $ (520) $ 2,118
================================================================================================================
Short-term borrowings (370) (197) 49 (518)
Long-term borrowings 1,923 3 121 2,047
Capital securities 1 (91) 0 (90)
- ----------------------------------------------------------------------------------------------------------------
Total interest expense $ 6,738 $ (2,831) $ (350) $ 3,557
================================================================================================================
Change in net interest income $ 6,591 $ (2,825) $ (362) $ 3,404
================================================================================================================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
Nine months ended September 30, 1999 over 1998
(Dollars in thousands) Volume Rate Rate/Volume Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $ 47,197 $ (26,438) $ (5,667) $ 15,092
Trading instruments 1,549 9 13 1,571
Securities available for sale (257) (3,088) 27 (3,318)
Securities held to maturity (8) 11 - 3
Federal funds sold and securities
purchased under resale agreements (1,794) (1,707) 195 (3,306)
Loans held for sale 1,860 (7) (17) 1,836
- ----------------------------------------------------------------------------------------------------------------
Total interest income $ 48,547 $ (31,220) $ (5,449) $ 11,878
================================================================================================================
Savings $ 45 $ (142) $ (12) $ (109)
Money market 4,659 (3,763) (742) 154
Time-under $100,000 (1,083) (798) 109 (1,772)
Time-$100,000 and over 10,814 (3,678) (1,171) 5,965
- ----------------------------------------------------------------------------------------------------------------
Total deposits $ 14,435 $ (8,381) $ (1,816) $ 4,238
================================================================================================================
Short-term borrowings (975) (602) 129 (1,448)
Long-term borrowings 3,631 14 270 3,915
Capital securities 5 (335) 0 (330)
- ----------------------------------------------------------------------------------------------------------------
Total interest expense $ 17,096 $ (9,304) $ (1,417) $ 6,375
================================================================================================================
Change in net interest income $ 31,451 $ (21,916) $ (4,032) $ 5,503
================================================================================================================
</TABLE>
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's real estate
services customers 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 $4.5 million and $17.1 million for the three and nine months
ended September 30, 1999, respectively, and by $7.5 million and $20.3 million
for the three and nine months ended September 30, 1998, respectively. The net
interest margin would have decreased to 4.89 and 4.78 percent for the three and
nine months ended September 30, 1999, respectively, and 4.97 percent and 5.29
percent for the comparable periods of 1998, respectively.
Noninterest Income:
Noninterest income increased to $16.8 million for the three months ended
September 30, 1999, from a loss of $10.6 million for the year-earlier period.
Normalized noninterest income for third quarter 1999, which excludes a $3.1
million loss on the sale of ICII stock, increased 25 percent to $19.9 million
from $15.9 million, excluding equity in the losses of ICII, for the year-earlier
period. For the nine months ended September 30, 1999, noninterest income
increased to $75.4 million from $42.5 million for the year-earlier period.
Normalized noninterest income increased slightly to $62.6 million for the first
nine months of 1999 from $62.3 million for the year-earlier period.
10
<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,
(Dollars in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,857 $ 1,614 $ 5,636 $ 4,731
Trust fees 4 2,138 3,382 6,323
Gain on origination and sale of loans 1,132 837 2,853 3,373
Equity in net (loss) income of Imperial Credit Industries, Inc. - (26,520) 1,644 (19,821)
(Loss) gain on the sale of Imperial Credit Industries, Inc. stock (3,136) - 2,255 -
Other service charges and fees 5,374 3,889 14,856 10,158
Merchant and credit card fees 3,231 2,121 7,972 5,227
International income and fees 2,680 2,358 8,611 8,767
(Loss) gain on securities available for sale (112) 111 (58) 123
Gain on trading instruments 982 519 1,365 891
Gain on exercise of warrants and related sale of equity securities 2,173 1,750 9,555 18,790
Gain on sale of the trust business - - 8,817 -
Gain on sale of software license - - 2,461 -
Other income 2,586 557 6,012 3,901
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 16,771 $ (10,626) $ 75,361 $ 42,463
- ----------------------------------------------------------------------------------------------------------------------------
Normalized noninterest income:
Excludes equity in the (losses) earnings of ICII, (loss) gain on the
sale of ICII stock and gain on the sale of the trust business $ 19,907 $ 15,894 $ 62,645 $ 62,284
Normalized noninterest income less gains on the
exercise and sale of equity warrants $ 17,734 $ 14,144 $ 53,090 $ 43,494
============================================================================================================================
</TABLE>
Normalized noninterest income includes gains on the exercise of warrants and
related sale of equity securities totaling $2.2 million and $1.8 million, for
the three months ended September 30, 1999 and 1998, respectively. Excluding
gains on equity warrants, normalized noninterest income increased approximately
25 percent to $17.7 million for the three months ended September 30, 1999, from
$14.1 million for the year-earlier period. On a year-to-date basis, gains on the
exercise of warrants and related sale of equity securities totaled $9.6 million
for 1999, compared with $18.8 million for 1998. Gains on the exercise of
warrants and related sale of equity securities for the prior year include $16.1
million on a single transaction recorded by one of the Company's nonbank
subsidiaries. The Company expects to continue to recognize gains on the exercise
of warrants and related sale of equity securities dependent on market
conditions. Excluding gains on equity warrants, normalized noninterest income
increased approximately 22 percent to $53.1 million for the nine months ended
September 30, 1999, from $43.5 million for the year-earlier period
The growth in noninterest income for the three and nine months ended September
30, 1999, compared with the prior year, occurred primarily in service charges on
deposits, other service charges and fees and other income. The increase in other
service charges and fees is attributed to higher fees on the sale of
nonproprietary mutual funds, and to increases in loan servicing and item
processing fees. The increase in other income is due to higher fee income
generated by the Company's nonbank subsidiaries that specialize in payment
processing and bankruptcy account processing. For third quarter 1999, other
income includes $1.5 million related to the sale of an investment by a nonbank
subsidiary and $377,000 of death benefit proceeds from a life insurance policy.
Noninterest income for the nine months ended September 30, 1999, includes $2.5
million related to a gain on the sale of a software license that was recognized
by one of the Company's nonbank subsidiaries. The reduction in trust fee income
for the three and nine months ended September 30, 1999, compared with the
year-earlier periods, is due to the sale of the Company's trust business in May
1999.
11
<PAGE>
Noninterest Expense:
Noninterest expense decreased to $54.6 million for the three months ended
September 30, 1999, from $55.8 million for the year-earlier period. Normalized
noninterest expense, increased approximately 7 percent to $54.6 million for the
three months ended September 30, 1999, from $50.9 million for the year-earlier
period. There were no normalizing adjustments to noninterest expense for third
quarter 1999. Normalized noninterest expense for third quarter 1998 excludes a
$4.9 million restructuring charge for the canceled spin-off of IFG. Noninterest
expense increased to $169.4 million for the nine months ended September 30,
1999, from $164.9 million for the year-earlier period. Normalized noninterest
expense increased approximately 4 percent to $165.7 million for the first nine
months of 1999 from $160.1 million for the same period of the prior year. For
the nine months ended September 30, 1999, normalized noninterest expense
excludes $3.7 million of consulting expense related to the sale of ICII common
stock. Normalized noninterest expense for the year-earlier period excludes the
IFG restructuring charge.
The following table provides detail of noninterest expense by category for the
periods indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salary and employee benefits $ 30,250 $ 26,533 $ 90,492 $ 88,434
Net occupancy expense 2,656 2,747 7,944 7,715
Furniture and equipment 3,066 2,388 8,783 7,189
Data processing 2,778 2,684 8,179 7,339
Customer services 4,519 7,501 17,099 20,285
Professional and legal fees 2,604 2,603 11,185 7,701
Business development 1,563 1,185 5,116 3,909
Other expense 7,121 10,134 20,639 22,360
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 54,557 $ 55,775 $ 169,437 $ 164,932
- ---------------------------------------------------------------------------------------------------------------------------
Normalized noninterest expense:
Excludes consulting expense related to the sale
of ICII stock and IFG restructuring charges $ 54,557 $ 50,895 $ 165,733 $ 160,052
Normalized noninterest expense excluding commissions
on the exercise of warrants and sale of equity securities $ 53,905 $ 50,373 $ 162,958 $ 154,544
===========================================================================================================================
</TABLE>
The increases in normalized noninterest expense for the three and nine months
ended September 30, 1999, compared with the year-earlier periods, reflects
increases in salaries, furniture and equipment expense, business development
expense and other expense largely due to the Company's growth. Salaries expense
includes commissions associated with the sale of equity securities obtained
through the exercise of warrants totaling $652,000 and $2.8 million for the
three and nine months ended September 30, 1999, respectively, compared with
$522,000 and $5.5 million for the year-earlier periods. Excluding commissions
associated with the sale of equity securities, normalized noninterest expense
increased to $53.9 million for the three months ended September 30, 1999, from
$50.4 million for the year-earlier period. For the nine months ended September
30, 1999, normalized noninterest expense, excluding commissions on the sale of
equity securities, increased to $163.0 million from $154.5 million for the
year-earlier period.
The increases in salaries expense, excluding commissions on the sale of equity
securities, furniture and equipment expense and business development expense are
due to growth in the Company's lending and deposit business and support
operations. The average number of full-time equivalent staff increased to 1,254
for the nine months ended September 30, 1999, from 1,108 for the same period of
1998. Other expense increased to $7.1 million for the three months ended
September 30, 1999, from $5.3 million, excluding the $4.9 million IFG
restructuring charge, for the year-earlier period. The growth in other expense
includes increases in OREO expense ($1.2 million), OREO expense for the
12
<PAGE>
prior year was net of gains on the sale of OREO of $1.1 million,
telecommunications ($529,300), miscellaneous ($334,800), goodwill amortization
($137,800) and expense related to the Company's investment in qualified low
income housing tax credits ($145,900). These increases were partially offset by
a reduction in noninterest expense resulting from the sale of the trust
portfolio ($525,500). For the nine months ended September 30, 1999, other
expense increased to $20.6 million from $17.5 million, excluding the $4.9
million IFG restructuring charge, for the year-earlier period. The growth in
other expense includes increases in OREO expense ($1.3 million), expenses
associated with the Company's factoring business ($469,500), miscellaneous
expense ($452,800), goodwill amortization ($447,200), membership dues
($429,000), insurance ($344,700), expense associated with the writedown of
certain investments to fair value ($331,900), telecommunications ($316,200) and
excise taxes ($242,300). These increases were partially offset by reductions in
noninterest expense related to the sale of the trust portfolio ($894,100) and a
reduction in lawsuit settlement expense ($375,000). The remaining net increase
in other expense occurred in a number of smaller categories.
The increases in normalized noninterest expense for the current year periods
were partially offset by lower customer services expense. Customer services
expense decreased to $4.5 million and $17.1 million for the three and nine
months ended September 30, 1999, respectively, from $7.5 million and $20.3
million for the year-earlier periods. Customer services expense includes
accounting and courier expenses that the Company pays on behalf of its
depositors in the real estate services industry. Customer services expense is a
function of the volume of these deposits and interest rates. The average balance
of these demand deposits increased to $1.4 billion for the nine months ended
September 30, 1999, from $1.3 billion for the comparable period of 1998. The
market interest rate used to determine the customer services credit available on
the deposit balances decreased approximately 50 basis points from the prior
year.
Income Taxes:
The Company recorded income tax expense of $9.8 million and an income tax
benefit of $3.9 million for the three months ended September 30, 1999 and 1998,
respectively. Income tax expense was $33.0 million and $16.4 million,
representing an effective tax rate of 40.3 percent and 37.9 percent, for the
nine months ended September 30, 1999 and 1998, respectively. The change in
income tax expense for the periods reported is primarily due to changes in net
income before taxes. Tax expense includes estimated tax credits totaling $1.1
million and $1.4 million for the nine months ended September 30, 1999 and 1998,
respectively, related to the Company's investment in qualified low-income
housing projects.
LOANS
The following table provides a summary of loans by category for the periods
indicated:
<TABLE>
<CAPTION>
==============================================================================================================================
(Dollars in thousands) September 30, 1999 December 31, 1998 September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 3,091,962 84.75% $ 3,010,555 87.32% $ 2,967,707 86.65%
Loan secured by real estate:
Real estate term loans 109,367 3.00 142,866 4.14 191,583 5.59
Residential tract construction loans 411,473 11.28 258,763 7.51 229,539 6.70
Consumer loans 35,435 0.97 35,354 1.03 36,361 1.06
- ------------------------------------------------------------------------------------------------------------------------------
Gross loans 3,648,237 100.00% 3,447,538 100.00% 3,425,190 100.00%
Less allowance for loan losses (68,769) (62,649) (61,415)
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $ 3,579,468 $ 3,384,889 $ 3,363,775
==============================================================================================================================
</TABLE>
Total loans grew to $3.6 billion at September 30, 1999, an increase of
approximately 6 percent from $3.4 billion at December 31, 1998 and September 30,
1998. The growth in the loan portfolio at September 30, 1999, occurred in
commercial loans and residential tract construction loans. Commercial loans
increased $81.4 million, or approximately 3 percent, over December 31, 1998, and
by $124.3 million, or approximately 4 percent, over September 30, 1998. The
commercial loan portfolio remains broadly diversified among many industries
including manufacturing, entertainment,
13
<PAGE>
real estate services, high technology, venture capital backed emerging growth
companies, retail trade and professional services. The Company has experienced
strong growth in residential tract construction loans which increased by $152.7
million, or approximately 59 percent, from December 31, 1998, and by $181.9
million, or approximately 79 percent, from September 30, 1998. The increase in
residential tract construction loans compared with December 31, 1998, and
September 30, 1998, occurred primarily in the moderately priced segment of the
residential housing market. Loan growth is expected to be moderate for the
remainder of 1999 and early 2000.
Loans held for sale increased to $111.4 million at September 30, 1999, from
$18.3 million at December 31, 1998, and $14.0 million at September 30, 1998. The
increase in loans held for sale reflects a reclassification of loan balances
held by the Lewis Horwitz Organization ("LHO"). The Bank finalized an agreement
to sell the assets of LHO to ICII subsequent to quarter end. The LHO balances
were previously included in commercial loans.
ASSET QUALITY
Nonaccrual Loans, Restructured Loans and Real Estate Owned:
Nonaccrual loans, which include loans 90 days or more past due, totaled $43.0
million, or 1.18 percent of total loans, at September 30, 1999, compared with
$30.6 million, or 0.89 percent of total loans, at December 31, 1998, and $34.5
million, or 1.01 percent of total loans, at September 30, 1998. Nonaccrual loans
at September 30, 1999, include $10.9 million belonging to the Lewis Horwitz
Organization which was sold subsequent to quarter end. The increase in
nonaccrual loans at September 30, 1999, compared with December 31, 1998,
reflects commercial loans distributed throughout the portfolio. Loans totaling
$54.5 million were placed on nonaccrual status during the nine months ended
September 30, 1999. This increase in nonaccrual loans for the first nine months
of 1999 was partially offset by gross charge-offs totaling $9.5 million, receipt
of payments totaling $26.2 million, loans brought current totaling $6.1 million
and loans transferred to OREO totaling $283,800. When a loan reaches nonaccrual
status, any interest accrued but uncollected is reversed and charged against
interest income. For the three months ended September 30, 1999, interest income
was increased by approximately $208,400 due to recoveries on nonaccrual loans
that paid off. Interest income was reduced by approximately $503,800 due to
interest reversals on nonaccrual loans for the nine months ended September 30,
1999.
Restructured loans, loans that have had their original terms modified, totaled
$4.6 million, $9.8 million and $27.6 million at September 30, 1999, December 31,
1998, and September 30, 1998, respectively. The decrease in restructured loans
since December 31, 1998, is due to payments received totaling $2.1 million,
loans removed from restructured status of $1.1 million and a $2.0 million loan
that was moved to nonaccrual status. The decrease in restructured loans from
September 30, 1998, is largely due to the payoff of a $14.3 million commercial
loan.
Real estate and other assets owned includes 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
$1.2 million, $2.3 million and $2.7 million at September 30, 1999, December 31,
1998, and September 30, 1998, respectively. For the nine months ended September
30, 1999, seven properties with a total book value of $1.0 million were sold,
one property with a book value of $132,000 was added to OREO, payments totaling
$159,300 were applied to OREO and the balance of other assets was written down
by $34,100. A net loss of $119,200 was recognized on the sales of OREO.
The following table provides information on nonaccrual loans, restructured loans
and real estate and other assets owned for the periods indicated:
14
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
(Dollars in thousands) 1999 1999 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial $ 31,630 $ 39,032 $ 31,348 $ 29,853 $ 33,720
Real estate 496 10,576 11,604 692 788
Consumer - - - 70 -
Loans held for sale at fair market value 10,909 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 43,035 $ 49,608 $ 42,952 $ 30,615 $ 34,508
===========================================================================================================================
Restructured loans 4,640 $ 5,704 $ 7,287 $ 9,770 $ 27,591
===========================================================================================================================
Real estate and other assets owned:
Real estate and other assets owned, gross $ 1,237 $ 1,741 $ 2,023 $ 2,309 $ 2,700
Less valuation allowance - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net $ 1,237 $ 1,741 $ 2,023 $ 2,309 $ 2,700
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 48,912 $ 57,053 $ 52,262 $ 42,694 $ 64,799
===========================================================================================================================
</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: substantial doubt of
the ability of the borrower to make all principal and interest payments under
the original terms of the loan, 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
(Dollars in thousands) Value Allowance Balance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1999
Loans with specific allowances $ 54,872 $ (17,857) $ 37,015
Loans without specific allowances 3,826 - 3,826
- -----------------------------------------------------------------------------------------------------------------------
Total $ 58,698 $ (17,857) $ 40,841
=======================================================================================================================
December 31, 1998
Loans with specific allowances $ 56,746 $ (12,775) $ 43,971
Loans without specific allowances 4,847 - 4,847
- -----------------------------------------------------------------------------------------------------------------------
Total $ 61,593 $ (12,775) $ 48,818
=======================================================================================================================
</TABLE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
=======================================================================================================================
September 30, December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ 14,197 $ 27,414
Past due 1,466 3,564
Nonaccrual 43,035 30,615
- -----------------------------------------------------------------------------------------------------------------------
Total $ 58,698 $ 61,593
=======================================================================================================================
</TABLE>
Loans classified as impaired totaled $58.7 million at September 30, 1999,
compared with $61.6 million at December 31, 1998. During the first nine months
of 1999, $45.3 million of loans were newly classified as impaired. The additions
to impaired loans were partially offset by charge-offs totaling $10.1 million,
the receipt of payments on impaired loans totaling $30.5 million, loans removed
from impaired status totaling $7.3 million and loans transferred to OREO of
15
<PAGE>
$283,800. The Company's average recorded investment in impaired loans for the
nine months ended September 30, 1999, was $69.7 million. Interest income
totaling approximately $1.7 million and $6.6 million was collected on impaired
loans during the nine months ended September 30, 1999 and 1998, respectively.
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 in California and
out-of-state markets served, 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 was adequate at September 30, 1999, future additions to the
allowance will be subject to continuing evaluation of inherent risk and probable
loan losses in the loan portfolio.
At September 30, 1999, the allowance for loan losses equaled $68.8 million, or
1.88 percent of total loans, compared with $62.6 million, or 1.82 percent of
total loans, at December 31, 1998, and $61.4 million, or 1.79 percent of total
loans, at September 30, 1998. The allowance for loan losses represented 160
percent of nonaccrual loans at September 30, 1999, compared with 205 percent of
nonaccrual loans at December 31, 1998, and 178 percent of nonaccrual loans at
September 30, 1998. The following table summarizes changes in the allowance for
loan losses:
<TABLE>
<CAPTION>
=======================================================================================================================
Nine months ended September 30, (Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ 62,649 $ 51,143
=======================================================================================================================
Loans charged off:
Commercial (12,420) (16,344)
Real estate (295) (329)
Consumer (69) (58)
- -----------------------------------------------------------------------------------------------------------------------
Total charge-offs $ (12,784) $ (16,731)
=======================================================================================================================
Recoveries of loans previously charged off:
Commercial 2,011 1,268
Real estate 67 154
Consumer 6 5
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries $ 2,084 $ 1,427
=======================================================================================================================
Net loans charged off (10,700) (15,304)
Provision for loan losses 20,820 25,576
Portfolio transfer (4,000) -
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 68,769 $ 61,415
=======================================================================================================================
Loans outstanding, end of period $ 3,648,237 $ 3,425,190
=======================================================================================================================
Average loans outstanding $ 3,914,946 $ 3,223,928
=======================================================================================================================
Ratio of net charge-offs to average loans (annualized) 0.37% 0.63%
Ratio of allowance for loan losses to loans outstanding at Sept 30 1.88% 1.79%
Ratio of allowance for loan losses to nonaccrual loans 159.80% 177.97%
Ratio of provision for loan losses to net charge-offs 194.58% 167.12%
=======================================================================================================================
</TABLE>
The provision for loan losses, totaled $20.8 million and $25.6 million, for the
nine months ended September 30, 1999 and 1998, respectively. Net charge-offs
decreased to $10.7 million, or 0.37 percent of average loans on an annualized
basis, for the first nine months of 1999 compared with $15.3 million, or 0.63
percent of average loans on an annualized basis, for the year-earlier period.
Net charge-offs for the nine months September 30, 1999 and 1998, include $4.5
million and $7.0 million, respectively, on one commercial loan to a company in
the healthcare industry.
16
<PAGE>
Securities:
Securities available for sale increased to $751.1 million at September 30, 1999,
from $694.8 million at December 31, 1998. Increases in U.S. Treasury and federal
agency securities and other securities were partially offset by a decrease in
mutual funds. U.S. Treasury and federal agency securities increased $74.7
million to $638.0 million at September 30, 1999, from $563.4 million at December
31, 1998. Other securities, largely comprised of SBA certificates, increased to
$24.1 million at September 30, 1999, from $18.9 million at December 31, 1998.
The balance of mutual funds decreased to $89.0 million at September 30, 1999,
from $112.6 million at December 31, 1998. Federal funds sold and securities
purchased under resale agreements decreased to $1.3 billion at September 30
1999, from $1.4 billion at December 31, 1998. The Company generally invests
short-term liquidity in mutual funds and Federal funds sold and securities
purchased under resale agreements. The fluctuation in these balances is largely
a function of changes in the level of demand deposits. Demand deposits decreased
by $394.9 million from year-end to $2.9 billion at September 30, 1999.
A summary of securities held to maturity as of September 30, 1999, and December
31, 1998, is provided below:
<TABLE>
<CAPTION>
=======================================================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1999
Industrial development bonds $ 3,793 $ - $ - $ 3,793
- -----------------------------------------------------------------------------------------------------------------------
Total $ 3,793 $ - $ - $ 3,793
=======================================================================================================================
December 31, 1998
Industrial development bonds $ 3,898 $ - $ - $ 3,898
- -----------------------------------------------------------------------------------------------------------------------
Total $ 3,898 $ - $ - $ 3,898
=======================================================================================================================
</TABLE>
A summary of the amortized cost and estimated fair value of securities available
for sale as of September 30, 1999, and December 31, 1998, is provided below:
<TABLE>
<CAPTION>
=======================================================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1999
U.S. Treasury and federal agencies $ 641,923 $ - $ (3,885) $ 638,038
Mutual funds 88,987 - - 88,987
Other securities 27,519 1,123 (4,557) 24,085
- -----------------------------------------------------------------------------------------------------------------------
Total $ 758,429 $ 1,123 $ (8,442) $ 751,110
=======================================================================================================================
December 31, 1998
U.S. Treasury and federal agencies $ 560,332 $ 3,024 $ (1) $ 563,355
Mutual funds 112,579 - - 112,579
Other securities 22,792 - (3,912) 18,880
- -----------------------------------------------------------------------------------------------------------------------
Total $ 695,703 $ 3,024 $ (3,913) $ 694,814
=======================================================================================================================
</TABLE>
Gross gains totaling $53,500 and gross losses totaling $3.2 million were
realized on the sale of securities available for sale during the nine months
ended September 30, 1999, respectively. Gross losses on the sale of securities
include a $3.1 million loss on the sale of 5.3 million shares of ICII common
stock in July 1999. The Company's investment in ICII common stock was
reclassified to securities available for sale following an initial sale of 3.7
million shares in May 1999. 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.
17
<PAGE>
Deferred Tax Asset
The Company reported a net deferred tax asset of $49.3 million at September 30,
1999, compared with $21.8 million at December 31, 1998. The deferred tax asset
is reported net of deferred tax liabilities. The increase in the net deferred
tax asset at September 30, 1999, is primarily due to the reversal of the
deferred tax liability associated with the Bank's investment in of ICII common
stock. The deferred tax liability related to the ICII common stock became a
current tax liability when the stock was sold. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management believes that it is more likely than not the
Company will realize the benefits of these deductible differences. The amount of
the deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
Other Assets
The balance of other assets increased to $118.0 million at September 30, 1999,
from $91.1 million at December 31, 1998. The growth in other assets at September
30, 1999, compared with year-end 1998 reflects the following: a $7.9 million
increase in the cash surrender value of life insurance policies funding the
Company's deferred compensation plan, a $7.7 million increase in the balance of
operating leases associated with the Company's leasing business, a $4.6 million
increase in accounts receivable representing principal and interest payments due
on SBA investment securities, a $3.0 million increase in foreign exchange
settlement accounts, a $1.4 million increase in prepaid insurance due to the
purchase of additional life insurance to fund the Company's deferred
compensation plan and a $1.2 million increase in unamortized debt issuance costs
related to the Bank's Subordinated Capital Notes issued in April 1999. The
remaining change in other assets occurred in a number of smaller categories.
Short-term Borrowings:
Short-term borrowings increased to $101.6 million at September 30, 1999, from
$60.6 million at December 31, 1998. The increase is primarily due to a $76.7
million increase in borrowed funds backed by Treasury, Tax and Loan deposits
("T, T&L"). The increase in T, T&L was partially offset by a $18.0 million
reduction in commercial paper and a $17.7 million decrease in the balance of
reverse repurchase agreements.
Long-term Borrowings
The net principal balance of notes and debentures increased to $99.4 million at
September 30, 1999, from $2.1 million at December 31, 1998. The increase is due
to the issuance of $100.0 million of 8.5 percent, 10-year subordinated capital
notes by Imperial Bank in April 1999. The $2.1 million balance of floating rate
notes and debentures outstanding at December 31, 1998, paid off in August 1999.
Other borrowed funds increased to $4.8 million at September 30, 1999, from
$290,000 at December 31, 1998. The primary component of other borrowed funds is
a borrowing to fund the purchase of common stock by the Company's Employee Stock
Ownership Plan ("ESOP").
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
18
<PAGE>
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 pledged as
collateral under 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, 1999, the
Company's liquidity ratio was 36 percent and the loan to deposit ratio was 64
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
three months ended September 30, 1999, and $2.3 billion for the year-earlier
period. For the nine months ended September 30, 1999, approximately 34 percent
of average total deposits were from the real estate services industry compared
with 37 percent of average total deposits for the year-earlier period. The
Company's average demand deposits and average shareholders' equity funded
approximately 51 percent and 53 percent, of average total assets for the nine
months ended September 30, 1999 and 1998, 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, 1999, the Company
experienced a net cash outflow from its investing activities of approximately
$124.3 million. The net outflow related to investing activities is largely due
to a $287.5 million increase in loans partially offset by a $156.8 million
decrease in Federal funds sold and securities purchased under resale agreements.
Net cash provided by financing activities totaled approximately $214.7 million
for the nine months ended September 30, 1999. Net cash provided by financing
activities for the nine months ended September 30, 1999, includes an $87.1
million net increase in deposits and a net increase of $141.7 million in
borrowed funds. These increases were offset in part by a $9.2 million repurchase
of common stock under the Company's Stock Repurchase Program and a $6.0 million
repurchase of common stock for the Company's ESOP plan.
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 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 on 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, 1999, the
Company maintained a positive one-year gap of approximately $2.2 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, 1998, the Company
maintained a positive one-year gap of approximately $2.5 billion.
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 generally tied to the prime rate, an index which tends to react more slowly
to
19
<PAGE>
changes in market rates than other money market indices such as LIBOR. 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, caps and swaps. The following tables
provide information concerning the Company's derivative financial instruments at
September 30, 1999:
<TABLE>
<CAPTION>
=============================================================================================================================
Weighted
Notional Average
At September 30, 1999 (Dollars in thousands) Amount Rate Terms
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate caps and collars purchased
Over the counter $1,000,000 n/a Expires March 2001.
Over the counter 15,085 n/a Expires $1.5 million October 1999, $6.6
million March 2000 and $7 million
July 2003. Contracts hedge specific
lending transactions.
Interest rate floors purchased
Exchange traded $6,250,000 n/a Expires $2 billion December 1999, $2 billion
March 2000, $2 billion June 2000, $250
million September 2000. The floors have an
average strike price of 4.27 percent.
Interest rate swaps Loans and leases:
Pay-fixed rate $ 39,486 6.22% Matures $25 million September 2003,
Receive-3 month LIBOR 39,486 5.43% $4.7 million March 2004, $7.3 million July
2004 and $2.5 million September 2006.
Deposits:
Pay 3 month LIBOR less 10-15 basis points $ 110,000 5.27% $35 million matures June 2009, $40 million
Receive-fixed rate 110,000 7.20% matures July 2009, $15 million matures
August 2009 and $20 million matures
September 2009. The swaps are callable by
the counterparty six months after
effective date and semi-annually
thereafter.
Subordinated Capital Notes:
Pay 3-month LIBOR $ 100,000 5.35% Matures April 2009.
Receive-fixed rate 100,000 6.06%
Capital securities:
Pay 3-month LIBOR $ 75,000 5.13% Matures second quarter 2007.
Receive-fixed rate 75,000 7.18%
=============================================================================================================================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
Notional Unrealized Unamortized
At September 30, 1999 (Dollars in thousands) Amount Gain (loss) Premium
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate caps and collars purchased
Over the counter $ 1,000,000 $ 142 $ 217
Over the counter 15,085 22 -
Interest rate floors purchased
Exchange traded (1) $ 6,250,000 $ 191 $ 342
Interest rate swaps
Loans and leases $ 39,486 $ (70) $ -
Deposits 110,000 (3,950) -
Subordinated Capital Notes 100,000 (2,267) 698
Capital securities 75,000 2,113 -
- ------------------------------------------------------------------------------------------------------------------------
(1) In October 1998, following a decline in the LIBOR rate, the Company sold exchange-traded floors with a notional
amount totaling $4.5 billion in order to reset the strike price on the floors from 4.75 percent to approximately
4.00 percent. The $3.3 million gain on the sale of the floors was amortized over the term of the original floors
and was fully amortized as of September 30, 1999.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 exists for the sole purpose of issuing the Capital
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, 1999.
The Company used $67.2 million of the net proceeds from the sale of the Junior
Subordinated Debentures to make additional investments in Imperial Bank. The
remainder of the proceeds was used to implement the Company's Stock Repurchase
Program. 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, 1999.
CAPITAL
At September 30, 1999, shareholders' equity totaled $414.5 million compared with
$381.8 million at December 31, 1998. For the first nine months of 1999,
shareholders' equity was reduced by $9.2 million due to common stock repurchases
under the Company's Stock Repurchase Program and by $6.0 million due to the
purchase of common stock for the Company's ESOP plan. Shareholders' equity
increased by $1.1 million during the period due to exercises of employee stock
options.
The tax benefit associated with nonqualified options exercised, which is
recorded as a component of shareholders' equity, approximated $300,000 for the
first nine months of 1999.
21
<PAGE>
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 promulgated by the federal banking
regulators. 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, 1999, were 9.54
percent and 12.76 percent, respectively, compared with 9.44 percent and 10.73
percent, respectively, at September 30, 1998.
Capital Ratios for Imperial Bancorp and Imperial Bank /(1)/
<TABLE>
<CAPTION>
=========================================================================================================================
September 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
(Dollars 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 $ 645,998 12.76% $ 405,039 8.00% $ 506,299 10.00%
Bank 583,367 11.68% 399,723 8.00% 499,653 10.00%
Tier I Capital (to risk-weighted assets):
Company $ 483,248 9.54% $ 202,519 4.00% $ 303,779 6.00%
Bank 421,440 8.43% 199,861 4.00% 299,792 6.00%
Leverage (to average assets):
Company $ 483,248 8.50% $ 170,524 3.00% $ 284,207 5.00%
Bank 421,440 7.54% 167,755 3.00% 279,592 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 Imperial Bank were $5,063.0 million and
$4,996.5 million, respectively, at September 30, 1999. Average assets for the
Company and the Bank were $5,684.1 million and $5,591.8 million, at September
30, 1999, respectively.
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 8.50
percent at September 30, 1999, compared with 8.59 percent at September 30, 1998,
well in excess of minimum regulatory requirements.
YEAR 2000
To fulfill the Company's business responsibility and ensure compliance with
regulatory requirements, the Company has established a Year 2000 Readiness
Program ("Y2K") with the objective of having the Company Year 2000 compliant
prior to year-end. 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 year 2000. The Company's Y2K Readiness
Program is managed by an enterprise-wide Program Office ("Office") under the
guidance of the Company's Management Committee. The Office
22
<PAGE>
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 adopted the approach set forth by the Federal Financial
Institutions Examination Council ("FFIEC"). This approach is based on five
crucial phases: awareness, assessment, remediation, validation, and
implementation. The Company's approach considers the FFIEC guidelines a minimum
set of prudent business practices needed to become Y2K ready.
Awareness:
The Company has completed extensive internal and external communication related
to the Y2K issue. The communication has been in the form of customer statement
enclosures, Web site disclosures, monthly and quarterly reports to the Company's
Management Committee, internal mailings, and periodic meetings.
Assessment:
The Company has conducted a comprehensive review of its information technology
("IT") and non-IT computer systems. All systems have been evaluated and
classified as critical, important or ordinary. Systems requiring upgrades or
replacement have been identified.
The Company utilizes the services of third-party service providers and software
vendors for substantially all of its data processing functions. As such, the
Company has focused on monitoring the Y2K compliance progress of its primary
vendors and providers. The Company has identified its significant customers,
i.e., fund providers, fund takers, and counterparties. The initial evaluation
and assignment of risk for the Company's fund takers, fund providers, and
counterparties has been completed. Follow-up was performed for some customers
and completed by September 30, 1999.
Contingency plans have been designed to mitigate the risks associated with (1)
the failure to successfully complete renovation, validation, or implementation
of its Y2K readiness plan (Remediation Contingency Plan), and (2) the failure of
systems at critical dates (Business Resumption Contingency Planning) ("BRCP").
These contingency plans have been presented to and approved by the Company's
Board of Directors. The Remediation Contingency Plans and Business Resumption
Contingency Plans were completed as of June 30, 1999.
Remediation/Validation/Implementation:
The Company employs a small programming staff, but does not customize
application code that affects the books of record or customer accounting. The
Company's vendors and service providers are committed to delivering Y2K ready
capabilities.
At September 30, 1999, validation testing was 100 percent complete for all
production systems. Systems that required remediation were placed into
production after testing was completed and authorization obtained from the
business unit.
Non-IT systems, such as security systems, vault alarms and elevators, have been
identified and the Company is satisfied regarding Y2K readiness. Most of the
Company's facilities are leased; therefore, the Company's efforts to determine
the status of Y2K readiness and contingency plans is focused on the vendors and
property managers. This evaluation and resolution was completed in July 1999.
Costs:
Through September 30, 1999, the Company had incurred operating expenses totaling
$2.6 million on the Y2K project, slightly above the $2.5 million budgeted. Y2K
capital expenditures total approximately $2.5 million through September 30,
1999, including invoices that are in the process of being paid. At present, the
Company expects to complete the project with capital expenditures equal to the
estimated budget of $2.5 million.
The Office presently believes that with updates and upgrades to existing
software and minimal conversions to new software, the Company's computer systems
will be Y2K ready. However, the potential impact of the Y2K issue on the
23
<PAGE>
financial services industry could be significant due to the interdependent
nature of banking transactions. Despite its efforts towards achieving Y2K
readiness, the Company could be adversely impacted if the entities with which it
transacts business do not address this issue successfully.
NEW ACCOUNTING PRONOUNCEMENTS
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"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. It specifies necessary conditions to be met to
designate a derivative as a hedge. Implementation of SFAS No. 133 has been
postponed to fiscal periods beginning after June 15, 2000, and will be effective
for the Company on January 1, 2001. Early implementation is permitted under this
statement. The Company does not believe that the adoption of SFAS No. 133 will
have a material impact on its operations and financial position.
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
===========================================================================================================================
Imperial Bancorp and Subsidiaries September 30, December 31,
(Dollars in thousands) 1999 1998
===========================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 437,968 $ 355,317
Trading instruments 49,193 52,971
Securities available for sale, at fair value 751,110 694,814
Securities held to maturity (fair value of $3,793 and $3,898 for 1999 and 1998, respectively) 3,793 3,898
Federal funds sold and securities purchased under resale agreements 1,289,167 1,446,000
Loans held for sale (fair value of $112,162 and $19,416 for 1999 and 1998, respectively) 111,430 18,287
Loans:
Loans, net of unearned income and deferred loan fees 3,648,237 3,447,538
Less allowance for loan losses (68,769) (62,649)
- ---------------------------------------------------------------------------------------------------------------------------
Total net loans $ 3,579,468 $ 3,384,889
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 33,891 30,938
Accrued interest receivable 33,088 25,505
Real estate and other assets owned, net 1,237 2,309
Deferred tax asset 49,267 21,809
Investment in Imperial Credit Industries, Inc. - 56,796
Other assets 117,970 91,070
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 6,457,582 $ 6,184,603
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 2,903,164 $ 3,298,070
Savings 22,905 25,135
Money market 1,220,213 1,086,959
Time - under $100 157,789 171,224
Time - $100 and over 1,352,707 988,259
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $ 5,656,778 $ 5,569,647
- ---------------------------------------------------------------------------------------------------------------------------
Accrued interest payable 9,320 5,428
Income taxes payable 4,326 1,504
Short-term borrowings 101,604 60,601
Long-term borrowings:
Notes and debentures 99,394 2,105
Other borrowed funds 4,780 290
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 73,415 73,372
Other liabilities 93,466 89,834
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 6,043,083 $ 5,802,781
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock - no par, 50,000,000 shares authorized; 41,517,828 shares at
September 30, 1999, and 41,863,935 shares at
December 31, 1998, issued and outstanding 269,103 224,433
Unearned employee stock ownership plan shares; 214,352 shares (4,428) -
Accumulated other comprehensive loss, net of tax (4,242) (515)
Retained earnings 154,066 157,904
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 414,499 $ 381,822
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 6,457,582 $ 6,184,603
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
============================================================================================================================
Imperial Bancorp and Subsidiaries Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands, except per share data) 1999 1998 1999 1998
============================================================================================================================
<S> <C> <C> <C> <C>
Interest income:
Loans $ 83,134 $ 76,328 $ 235,287 $ 220,195
Trading instruments 748 454 2,617 1,046
Securities available for sale 9,719 10,160 25,740 29,058
Securities held to maturity 70 71 214 211
Federal funds sold and securities purchased under resale 3,944 4,832 12,369 15,675
Loans held for sale 1,532 341 2,569 733
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income $ 99,147 $ 92,186 $ 278,796 $ 266,918
============================================================================================================================
Interest expense:
Deposits 26,108 23,990 70,275 66,037
Short-term borrowings 955 1,473 3,114 4,562
Long-term borrowings 3,660 1,703 8,663 5,078
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 30,723 $ 27,166 $ 82,052 $ 75,677
============================================================================================================================
Net interest income 68,424 65,020 196,744 191,241
Provision for loan losses 6,000 5,610 20,820 25,576
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses $ 62,424 $ 59,410 $ 175,924 $ 165,665
============================================================================================================================
Noninterest income:
Service charges on deposit accounts 1,857 1,614 5,636 4,731
Trust fees 4 2,138 3,382 6,323
Gain on origination and sale of loans 1,132 837 2,853 3,373
Equity in net (loss) income of Imperial Credit Industries,
Inc. - (26,520) 1,644 (19,821)
(Loss) gain on sale of Imperial Credit Industries, Inc.
stock (3,136) - 2,255 -
Other service charges and fees 5,374 3,889 14,856 10,158
Merchant and credit card fees 3,231 2,121 7,972 5,227
International income and fees 2,680 2,358 8,611 8,767
(Loss) gain on securities available for sale (112) 111 (58) 123
Gain on trading instruments 982 519 1,365 891
Gain on exercise of warrants and related sale of equity 2,173 1,750 9,555 18,790
securities - - 8,817 -
Gain on sale of the trust business
Other income 2,586 557 8,473 3,901
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income (loss) $ 16,771 $ (10,626) $ 75,361 $ 42,463
============================================================================================================================
Noninterest expense:
Salary and employee benefits 30,250 26,533 90,492 88,434
Net occupancy expense 2,656 2,747 7,944 7,715
Furniture and equipment 3,066 2,388 8,783 7,189
Data processing 2,778 2,684 8,179 7,339
Customer services 4,519 7,501 17,099 20,285
Professional and legal fees 2,604 2,603 11,185 7,701
Business development 1,563 1,185 5,116 3,909
Other expense 7,121 10,134 20,639 22,360
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 54,557 $ 55,775 $ 169,437 $ 164,932
============================================================================================================================
Income (loss) before income taxes 24,638 (6,991) 81,848 43,196
Income tax provision (benefit) 9,786 (3,892) 32,962 16,353
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 14,852 $ (3,099) $ 48,886 $ 26,843
============================================================================================================================
Basic earnings per share $ 0.36 $ (0.07) $ 1.17 $ 0.63
Diluted earnings per share $ 0.35 $ (0.07) $ 1.14 $ 0.60
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Earnings per share for the 1998 reporting periods have been adjusted to reflect
an 8 percent stock dividend paid on March 5, 1999.
26
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
==================================================================================================================
Imperial Bancorp and Subsidiaries Nine months ended
September 30,
(Dollars in thousands) 1999 1998
==================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $ 48,886 $ 26,843
Adjustments for noncash charges (credits):
Depreciation and amortization (7,742) (11,441)
Provision for loan losses 20,820 25,576
Equity in (net income) loss of Imperial Credit Industries, Inc. (1,644) 19,821
Gain on sale of Imperial Credit Industries, Inc. stock (2,255) -
Gain on exercise and sale of stock warrants (9,555) (18,790)
Gain on sale of the trust business (8,817) -
Gain on sale of software license (2,461) -
Loss (gain) on sale of real estate and other assets owned 113 (1,099)
(Gain) loss on sale of premises and equipment (23) 9
Benefit for deferred taxes (24,489) (11,045)
Loss (Gain) on securities available for sale 58 (123)
Net change in trading instruments 3,778 (22,674)
Net change in loans held for sale (3,979) (10,243)
Net change in accrued interest receivable/payable (3,691) (2,643)
Net change in income taxes receivable/payable 2,822 17,889
Net change in other assets/liabilities (19,536) (22,617)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (7,715) $ (10,537)
==================================================================================================================
Cash flows from investing activities:
Proceeds from securities held to maturity 105 93
Proceeds from maturities of securities available for sale 1,431,765 709,159
Proceeds from sale of securities available for sale 1,524,297 3,289,196
Proceeds from sale of Imperial Credit Industries, Inc. stock 61,010 -
Purchase of securities available for sale (3,019,932) (3,929,265)
Proceeds from exercise and sale of equity warrants 9,555 7,690
Proceeds from sale of the trust business 8,817 -
Net change in Federal funds sold and securities
purchased under resale agreements 156,833 (764,000)
Net change in loans (287,459) (613,027)
Premises and equipment expenditures (10,492) (9,847)
Proceeds from sale of real estate and other assets owned 138 3,206
Proceeds from sale of premises and equipment 1,057 15
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (124,306) $(1,306,780)
==================================================================================================================
Cash flows from financing activities:
Net change in demand deposits, savings, and
money market accounts (263,882) 1,035,805
Net change in time deposits 351,013 454,247
Net change in short-term borrowings 41,003 65,132
Net proceeds from issuance of subordinated capital notes 98,364 -
Net proceeds from ESOP loan 5,985 -
Net change in long-term borrowings (3,615) (1,152)
Repurchase of common stock for ESOP (5,985) 2,855
Repurchase of common stock (9,248) (21,864)
Proceeds from exercise of employee stock options 1,056 -
Other (19) 376
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 214,672 $ 1,535,399
- ------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks $ 82,651 $ 218,082
- ------------------------------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year $ 355,317 $ 316,600
- ------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of period $ 437,968 $ 534,682
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
Imperial Bancorp and Subsidiaries Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 14,852 $ (3,099) $ 48,886 $ 26,843
Other comprehensive (loss) income, net of tax:
Reclassification adjustments, net of tax of ($1,684), - (2,322) 16 (1,909)
$12 and ($1,385)
Unrealized (loss) gain on securities available for sale,
net of tax effect of ($1,677), $1, ($2,716) and $2 (2,312) 1 (3,743) 3
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 12,540 $ (5,420) $ 45,159 $ 24,937
========================================================================================================================
</TABLE>
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, changes in cash flows and comprehensive income
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 and majority-owned subsidiaries.
NOTE (2) IMPERIAL CREDIT INDUSTRIES, INC.
On May 17, 1999, Imperial Bank (the "Bank") sold 3.7 million shares of ICII
common stock to ICII for $8.00 a share. As a result of the sale, the Bank's
ownership of ICII common stock decreased to 5.3 million shares, or approximately
15.9 percent of the total outstanding shares. Due to the reduction in its
ownership percentage, the Bank discontinued the equity method of accounting for
its investment in ICII as of the date of the sale. On July 27, 1999, the Bank
sold the remaining 5.3 million shares it owned of ICII common stock for $6.00 a
share. The Bank recorded a pretax loss on the two sales totaling $1.4 million
including related transaction expenses.
NOTE (3) STATEMENT OF CASH FLOWS
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30, (Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 79,554 $ 73,371
Taxes paid 53,530 26,699
Significant noncash transactions:
Transfer of LHO loans to loans held for sale 93,164 -
Reclassification of investment in ICII stock to securities available for
sale 34,370 -
Loans transferred to OREO 132 915
Net change in accumulated other comprehensive income, net of tax 3,727 1,906
Purchase of ROC Technologies Inc. (formerly Altair Corp). - 3,954
==================================================================================================================
</TABLE>
28
<PAGE>
NOTE (4) EARNINGS PER SHARE
The Company reports earnings per share ("EPS") in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128").
Basic EPS excludes dilution and is computed by dividing net income 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. Unearned
ESOP shares are not considered to be outstanding shares for purposes of
determining the number of weighted average shares for the EPS calculation.
Reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation is presented in the
following tables for the three and nine months ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
========================================================================================================================
For the three months ended September 30, 1999 1998
------------------------------ ------------------------------
Per Per
Share Share
(Dollars in thousands, except per share data) Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss) $14,852 41,475,110 $ 0.36 $(3,099) 43,076,193 $(0.07)
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,335,693 -
---------- ----------
Diluted EPS
Net income (loss) $14,852 42,810,803 $ 0.35 $(3,099) 43,076,193 $(0.07)
=========================================================================================================================
<CAPTION>
========================================================================================================================
For the nine months ended September 30, 1999 1998
------------------------------ ------------------------------
Per Per
Share Share
(Dollars in thousands, except per share data) Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $48,886 41,712,649 $ 1.17 $26,843 42,824,216 $ 0.63
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,412,413 1,817,122
---------- ----------
Diluted EPS
Net income $48,886 43,125,062 $ 1.14 $26,843 44,641,338 $ 0.60
=========================================================================================================================
</TABLE>
The weighted average number of shares used for calculating EPS for the 1998
reporting periods have been adjusted to reflect an 8 percent stock dividend paid
on March 5, 1999.
29
<PAGE>
NOTE (5) OPERATING SEGMENT RESULTS
The Company has identified seven principal operating segments for purposes of
management reporting. Information related to the Company's remaining businesses
and centralized functions has been aggregated and is included in either "Other
Segments" or "Unallocated" as appropriate. The Company's management reporting is
structured to support management's strategic focus on mid-sized companies,
high-growth and niche markets, and new enterprises that exhibit solid growth
potential.
The following tables present the operating results and other key financial
measures for the individual operating segments for the three and nine months
ended September 30, 1999 and 1998. Operating segment results are based on the
Company's internal management reporting process, which reflects assignments and
allocations of capital, certain operating and administrative costs and the loan
loss provision. Any future changes in the Company's management structure or
reporting methodologies may result in changes in the measurement of operating
segment results. In that case, results for prior periods would be restated for
comparability.
30
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
For the three months ended Entertainment and
September 30, 1999 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 24,919 $ 11,111 $ 10,123 $ 8,012 $ 4,179
Provision for loan losses 2,311 1,598 702 450 2,730
Noninterest income 4,274 2,360 406 526 475
Noninterest expense 15,558 6,713 1,839 3,600 574
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 11,324 5,160 7,988 4,488 1,350
Taxes 4,761 2,170 3,359 1,887 568
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,563 $ 2,990 $ 4,629 $ 2,601 $ 782
- -----------------------------------------------------------------------------------------------------------------------------
Average net loans $ 1,430,427 $ 502,432 $ 528,462 $ 464,778 $ 444,829
Average assets 1,441,497 505,570 535,935 466,753 448,032
Average deposits 1,332,369 839,072 14,493 87,162 -
=============================================================================================================================
<CAPTION>
=============================================================================================================================
For the three months ended
September 30, 1999 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 10,734 $ - $ 3,869 $ (4,523) $ 68,424
Provision for loan losses 89 - 210 (2,090) 6,000
Noninterest income 518 (3,136) 10,951 397 16,771
Noninterest expense 9,871 11,280 5,122 54,557
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 1,292 (3,136) 3,330 (7,158) 24,638
Taxes 543 (1,319) 1,400 (3,583) 9,786
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 749 $ (1,817) $ 1,930 $ (3,575) $ 14,852
- ----------------------------------------------------------------------------------------------------------------------------
Average net loans $ 568,272 $ - $ 160,340 $ (84,014) $4,015,526
Average assets 573,566 9,713 1,219,776 503,632 5,704,474
Average deposits 1,845,483 - 762,332 36,426 4,917,337
=============================================================================================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
For the three months ended Entertainment and
September 30, 1998 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 22,946 $ 9,743 $ 7,226 $ 7,491 $ 3,819
Provision for loan losses 140 1,311 - 572 -
Noninterest income 3,921 1,673 271 764 428
Noninterest expense 14,186 6,496 1,589 2,635 500
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 12,541 3,609 5,908 5,048 3,747
Taxes 5,274 1,517 2,484 2,122 1,575
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7,267 $ 2,092 $ 3,424 $ 2,926 $ 2,172
- -----------------------------------------------------------------------------------------------------------------------------
Average net loans $ 1,254,623 $ 520,988 $ 420,138 $ 404,036 $ 437,692
Average assets 1,282,014 524,546 428,492 406,722 440,489
Average deposits 1,240,886 495,245 11,532 78,651 -
=============================================================================================================================
<CAPTION>
=============================================================================================================================
For the three months ended
September 30, 1998 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 15,140 $ - $ 1,879 $ (3,224) $ 65,020
Provision for loan losses 165 - 225 3,197 5,610
Noninterest income 21 (26,520) 8,720 96 (10,626)
Noninterest expense 12,130 - 10,763 7,476 55,775
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 2,866 (26,520) (389) (13,801) (6,991)
Taxes 1,205 (11,150) (164) (6,755) (3,892)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,661 $ (15,370) $ (225) $ (7,046) $ (3,099)
- -----------------------------------------------------------------------------------------------------------------------------
Average net loans $ 337,022 $ - $ 88,673 $ (46,290) $3,416,882
Average assets 337,274 81,439 1,174,149 415,411 5,090,536
Average deposits 1,842,934 - 731,465 37,324 4,438,037
=============================================================================================================================
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
For the nine months ended Entertainment and
September 30, 1999 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 68,852 $ 31,397 $ 25,425 $ 21,794 $ 12,198
Provision for loan losses 7,214 3,703 893 813 2,758
Noninterest income 11,272 10,993 899 1,873 1,366
Noninterest expense 46,025 20,866 4,551 9,373 2,074
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 26,885 17,821 20,880 13,481 8,732
Taxes 11,304 7,493 8,779 5,668 3,671
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 15,581 $ 10,328 $ 12,101 $ 7,813 $ 5,061
- ------------------------------------------------------------------------------------------------------------------
Average net loans $1,378,870 $ 528,497 $ 489,155 $ 451,510 $ 450,978
Average assets 1,388,866 531,879 496,243 453,869 454,169
Average deposits 1,263,494 700,315 15,156 86,545 -
==================================================================================================================
<CAPTION>
==================================================================================================================
For the nine months ended
September 30, 1999 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 38,661 $ - $ 10,059 $ (11,642) $ 196,744
Provision for loan losses 149 - 593 4,697 20,820
Noninterest income 3,928 3,899 40,094 1,037 75,361
Noninterest expense 33,488 3,704 33,666 15,690 169,437
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 8,952 195 15,894 (30,992) 81,848
Taxes 3,765 82 6,683 (14,483) 32,962
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,187 $ 113 $ 9,211 $ (16,509) $ 48,886
- ------------------------------------------------------------------------------------------------------------------
Average net loans $ 524,134 $ - $ 129,222 $ (70,889) $3,881,477
Average assets 530,770 37,599 1,187,995 478,299 5,559,689
Average deposits 1,996,775 - 725,429 35,964 4,823,678
==================================================================================================================
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
For the nine months ended Entertainment and
September 30, 1998 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 67,052 $ 28,069 $ 21,233 $ 22,526 $ 10,689
Provision for loan losses 9,220 4,512 126 512 -
Noninterest income 11,007 3,285 838 1,925 1,419
Noninterest expense 44,315 17,555 4,898 8,003 1,412
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 24,524 9,287 17,047 15,936 10,696
Taxes 10,311 3,905 7,167 6,701 4,498
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 14,213 $ 5,382 $ 9,880 $ 9,235 $ 6,198
- -----------------------------------------------------------------------------------------------------------------
Average net loans $1,214,468 $ 476,727 $ 425,866 $ 375,993 $ 400,823
Average assets 1,246,892 480,099 434,442 378,748 403,280
Average deposits 1,189,505 482,113 12,170 80,021 -
=================================================================================================================
<CAPTION>
=================================================================================================================
For the nine months ended
September 30, 1998 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 45,000 $ - $ 5,860 $ (9,188) $ 191,241
Provision for loan losses 527 - 886 9,793 25,576
Noninterest income 237 (19,821) 40,328 3,245 42,463
Noninterest expense 33,655 - 36,078 19,017 164,932
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 11,055 (19,821) 9,224 (34,753) 43,195
Taxes 4,648 (8,334) 3,878 (16,422) 16,352
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,407 $ (11,487) $ 5,346 $ (18,331) $ 26,843
- -----------------------------------------------------------------------------------------------------------------
Average net loans $ 255,385 $ - $ 77,145 $ (49,153) $ 3,177,254
Average assets 255,657 78,009 1,128,908 391,327 4,797,362
Average deposits 1,696,031 - 668,165 32,028 4,160,033
=================================================================================================================
</TABLE>
34
<PAGE>
Detail of amounts included in unallocated is provided below:
<TABLE>
<CAPTION>
==============================================================================================================
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income:
Internal funding $ (3,585) $ (2,936) $ (9,574) $ (7,893)
Deferred loan fees (1,324) (1,402) (4,101) (3,932)
Reclass of late fees and factoring interest 302 914 1,704 1,971
Other 84 200 329 666
- ---------------------------------------------------------------------------------------------------------------
$ (4,523) $ (3,224) $ (11,642) $ (9,188)
==============================================================================================================
Loan loss provision:
Unallocated allowance $ (2,090) $ 3,197 $ 4,738 $ 9,618
Mortgage loans - - (41) 173
Other - - - 2
- --------------------------------------------------------------------------------------------------------------
$ (2,090) $ 3,197 $ 4,697 $ 9,793
==============================================================================================================
Noninterest income:
Item processing revenue $ 1,035 $ 993 $ 3,129 $ 2,911
Reclass of late fees and factoring interest (302) (914) (1,704) (1,971)
Intercompany eliminations (584) - (584) -
Other 248 17 196 2,305
- --------------------------------------------------------------------------------------------------------------
$ 397 $ 96 $ 1,037 $ 3,245
==============================================================================================================
Noninterest expense:
Unallocated administration and operations $ 6,445 $ 8,878 $ 18,939 $ 22,659
Deferred loan costs (1,383) (1,453) (3,866) (3,867)
Other 60 51 617 224
- --------------------------------------------------------------------------------------------------------------
$ 5,122 $ 7,476 $ 15,690 $ 19,016
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Balance Sheet:
Unallocated average assets include the Company's cash and due from
accounts with correspondent banks and the Federal Reserve, the unallocated
portion of the allowance for loan losses, the balance of deferred fees and
deferred taxes. Unallocated deposit balances include official checks and
Treasury, Tax and Loan accounts.
- -------------------------------------------------------------------------------
35
<PAGE>
TABLE 1 - FINANCIAL RATIOS
<TABLE>
<CAPTION>
=======================================================================================================================
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) as a percentage of: (1)
Average shareholders' equity 14.22% -3.10% 16.32% 9.49%
Average total assets 1.03% -0.24% 1.18% 0.75%
Average earning assets 1.14% -0.27% 1.30% 0.83%
Normalized income as a percentage of: (1)(2)
Average shareholders' equity 15.96% 15.12% 14.58% 14.56%
Average total assets (3) 1.16% 1.20% 1.06% 1.17%
Average earning assets 1.28% 1.30% 1.16% 1.27%
Average shareholders' equity as a percentage of:
Average assets 7.27% 7.78% 7.20% 7.88%
Average loans 10.30% 11.44% 10.23% 11.73%
Average deposits 8.43% 8.93% 8.30% 9.09%
Shareholders' equity at period end as a percentage of:
Total assets at period end - - 6.42% 5.87%
Total loans at period end - - 11.36% 10.82%
Total deposits at period end - - 7.33% 6.54%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized
(2) Normalized net income for 1999 reporting periods excludes equity in the
earnings of ICII, the gain on the sale of the trust business and the net
loss on the sale of ICII common stock. Normalized net income for 1998
reporting periods excludes equity in the losses of ICII and the IFG
restructuring charge.
(3) Average assets for calculating normalized return on assets excludes the
Company's investment in ICII.
- --------------------------------------------------------------------------------
EXHIBITS
PART I
None
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.
36
<PAGE>
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
-------------- -----------
10.1 First Amendment to Asset
Purchase Agreement among Union
Bank of California, N.A.,
Imperial
Trust Company and Imperial Bank
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) None
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 10, 1999 By:/s/ Christine M. McCarthy
-----------------------------
Christine M. McCarthy
Executive Vice President and
Chief Financial Officer
37
<PAGE>
Exhibit 10.1
APPROVED AND FILED
EFFECTIVE 5:00 P.M., MAY 14, 1999
JAN LYNN OWEN
Acting Commissioner of Financial Institutions
By /s/ Kenneth Sayre-Peterson
KENNETH SAYRE-PETERSON
Senior Counsel FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT (this "Amendment") is
---------
made as of May __, 1999, by and among UNION BANK OF CALIFORNIA, N.A., a
national banking association ("Purchaser"), IMPERIAL TRUST COMPANY, a
---------
California corporation ("Seller"), and IMPERIAL BANK, a California state
------
bank ("Imperial").
--------
RECITALS
--------
A. Purchaser, Seller and Imperial are parties to that certain Asset
Purchase Agreement dated as of April 23, 1999 (the "Agreement").
---------
B. Purchaser, Seller and Imperial desire to amend the Agreement as
set forth herein, and desire that, except as set forth in this Amendment, the
Agreement shall remain in full force and effect .
NOW THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise
-----------
defined herein shall have the meanings ascribed to them in the Agreement.
2. Amendment. The Agreement is hereby amended as follows:
---------
(a) Section 7.1(g) of the Agreement is amended by deleting
therefrom:
"that Section 4859 of the California Financial Code"
and replacing it with:
---------------------
"that Section 4859 or 4879.14 (including 4859.14(e)(2)), as
applicable, of the California Financial Code".
(b) Section 7.2(g) of the Agreement is amended by deleting
therefrom:
"that Section 4859 of the California Financial Code"
and replacing it with:
---------------------
"that Section 4859 or 4879.14 (including 4859.14(e)(2)), as
applicable, of the California Financial Code".
<PAGE>
(c) Section 9.4(a)(ii) of the Agreement is amended in its
entirety and replaced with the following:
"(ii) Purchaser shall be entitled to indemnification under this
Article 9 with respect to claims asserted by Purchaser against Seller
or Imperial after the Initial Indemnity Period only to the extent
provided in subparagraphs (iii), (iv) and (v) below."
(d) Section 9.4(a)(v) of the Agreement is amended in its
entirety and replaced with the following:
"(v) Neither Imperial nor Seller shall be obligated to indemnify
Purchaser under Section 9.2(a) for any Damages until the Damages
exceed, in the aggregate, $50,000, in which event Seller and Imperial
shall be obligated to indemnify Purchaser under Section 9.2(a) only
for Damages in excess of $50,000. Notwithstanding the foregoing, the
limitations set forth in this Section 9.4(a) shall not apply to
Imperial's or Seller's indemnification obligations pursuant to Section
9.2(a)(v)."
(e) The second sentence of Section 10.4 of the Agreement is
amended in its entirety and replaced with the following:
"Subject to the immediately preceding sentence, this Agreement is not
intended to benefit, and shall not run to the benefit of or be
enforceable by, any other person or entity other than the parties
hereto and their permitted successors and assigns."
(f) The Agreement is amended by deleting thereform Annex D and
-------
replacing it with Annex D attached to this Amendment.
-------
3. References. All references in the Agreement to "Agreement,"
----------
"herein," "hereof," "hereby or terms of like import referring to the Agreement
or any portion thereof are hereby amended to refer to the Agreement as amended
by this Amendment.
4. No Implied Amendments. Except as expressly provided herein,
---------------------
the Agreement is not being amended, supplemented, or otherwise modified, and the
Agreement shall continue in full force and effect in accordance with its terms.
5. Governing Law. This Amendment shall be governed by and
-------------
construed in accordance with the internal laws (and not the law of conflicts) of
the State of California.
[SIGNATURE PAGE TO FOLLOW]
-2-
<PAGE>
[FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
SIGNATURE PAGE]
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be executed on its behalf by a representative duly authorized, all as of the
date first above set forth.
UNION BANK OF CALIFORNIA, N.A.
By:_________________________________________
Name:____________________________________
Title:___________________________________
IMPERIAL TRUST COMPANY
By: /s/ Norman P. Creighton
-----------------------------------------
Name: Norman P. Creighton
------------------------------------
Title: Chairman
-----------------------------------
By: /s/ Richard M. Baker
-----------------------------------------
Name: Richard M. Baker
------------------------------------
Title: Secretary
-----------------------------------
IMPERIAL BANK
By: /s/ Norman P. Creighton
-----------------------------------------
Name: Norman P. Creighton
------------------------------------
Title: Vice Chairman and CEO
-----------------------------------
By: /s/ Richard M. Baker
-----------------------------------------
Name: Richard M. Baker
------------------------------------
Title: SVP, General Counsel and Secretary
----------------------------------
<PAGE>
[FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
SIGNATURE PAGE]
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be executed on its behalf by a representative duly authorized, all as of the
date first above set forth.
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Piet Westerbeek III
------------------------------
Name: Piet Westerbeek III
---------------------------
Title: Executive Vice President
--------------------------
IMPERIAL TRUST COMPANY
By:______________________________
Name:__________________________
Title:_________________________
By:______________________________
Name:__________________________
Title:_________________________
IMPERIAL BANK
By:______________________________
Name:__________________________
Title:_________________________
By:______________________________
Name:__________________________
Title:_________________________
<PAGE>
ANNEX D
-------
BILL OF SALE
------------
KNOW ALL MEN BY THESE PRESENTS that pursuant to the Asset Purchase
Agreement (the "Agreement") dated as of May ____, 1999 among Union Bank of
---------
California, N.A., a national banking association ("Purchaser"), Imperial Trust
---------
Company, a California corporation ("Seller"), and Imperial Bank, a California
------
state bank ("Imperial"), and for good and valuable consideration, receipt of
--------
which is hereby acknowledged, Seller does hereby sell, assign, convey, transfer
and deliver to Purchaser (and acknowledge the sale, assignment, conveyance,
transfer and delivery to Purchaser by operation of Section 4859 or 4879.14, as
applicable, of the California Financial Code), free and clear of all security
interests, liens, mortgages, pledges, claims, conditional sales contracts and
any other encumbrances of any nature whatsoever (other than liens on any other
encumbrances incurred in the Ordinary Course) and subject to the rights of
other Persons to the extent conferred by California Financial Code Section 4842
or other applicable law, all of Seller's right, title and interest in all
assets and properties used in connection with the conduct of the Trust
Business, including without limitation:
(i) Seller's business of acting as executor, administrator, guardian or
conservator of estates, assignee, receiver, depositary, custodian or trustee
under the appointment of any court, or by authority of any law of this or any
other state of the United States, as trustee for any purpose permitted by law,
and all agency and other fiduciary or representative capacities;
(ii) all of the trusteeships, executorships, administrations,
guardianships, conservatorships, custodianships, agencies and other fiduciary
and representative capacities held by Seller and any common, collective, or
commingled trust funds maintained by Seller on or prior to the Closing or to
which Seller may be named or appointed after the Closing, including but not
limited to trust documents where Seller is named successor trustee and wills on
deposit (the "Trusts");
------
(iii) all material contracts and agreements governing the Trusts;
(iv) all properties, assets, deposits, funds, investments, agreements,
bills, notes, securities, contracts and rights (including claims against third
parties) that are administered, utilized, held as collateral or held for the
benefit of others (whether or not constituting all or a portion of the corpus of
any trust) by Seller as agent, custodian, trustee or in any other capacity
pursuant to or in connection with Trusts;
<PAGE>
(v) all of the goodwill associated with the Assets; and
(vi) all of the accounting information, reports, books, records
statements and data regularly maintained on the electronic information systems
or electronic storage media separately specifying or accounting for each Trust,
including an electronic summary of the fees.
Capitalized terms not defined herein shall have the meanings ascribed
to such terms in the Agreement.
Each of Seller and Purchaser acknowledges that Purchaser only assumes
the Assumed Liabilities and does not assume and shall have no responsibility for
any other debt, liability or obligation relating to Seller whatsoever except
those explicitly assumed or undertaken pursuant to the Agreement.
IN WITNESS WHEREFORE, each party has caused this Bill of Sale to be
executed on its behalf by its duly authorized officers as of this ____ day of
May, 1999.
UNION BANK OF CALIFORNIA, N.A.
By:___________________________
Name:_______________________
Title:______________________
IMPERIAL TRUST COMPANY
By:___________________________
Name:_______________________
Title:______________________
By:___________________________
Name:_______________________
Title:______________________
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 437,968
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,289,167
<TRADING-ASSETS> 49,193
<INVESTMENTS-HELD-FOR-SALE> 751,110
<INVESTMENTS-CARRYING> 3,793
<INVESTMENTS-MARKET> 3,793
<LOANS> 3,648,237
<ALLOWANCE> (68,769)
<TOTAL-ASSETS> 6,457,582
<DEPOSITS> 5,656,778
<SHORT-TERM> 101,604
<LIABILITIES-OTHER> 107,092
<LONG-TERM> 104,174
0
0
<COMMON> 264,675
<OTHER-SE> 149,824
<TOTAL-LIABILITIES-AND-EQUITY> 6,457,582
<INTEREST-LOAN> 235,287
<INTEREST-INVEST> 28,571
<INTEREST-OTHER> 14,938
<INTEREST-TOTAL> 278,796
<INTEREST-DEPOSIT> 70,275
<INTEREST-EXPENSE> 82,052
<INTEREST-INCOME-NET> 196,744
<LOAN-LOSSES> 20,820
<SECURITIES-GAINS> (58)
<EXPENSE-OTHER> 169,437
<INCOME-PRETAX> 81,848
<INCOME-PRE-EXTRAORDINARY> 48,886
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,886
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 5.24
<LOANS-NON> 43,035
<LOANS-PAST> 1,466
<LOANS-TROUBLED> 4,640
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 62,649
<CHARGE-OFFS> 12,784
<RECOVERIES> 2,084
<ALLOWANCE-CLOSE> 68,769
<ALLOWANCE-DOMESTIC> 68,769
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
