UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
8/3/99
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended June 30, 1999
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
California 95-2575576
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9920 South La Cienega Boulevard
Inglewood, California 90301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 417-5600
Commission file number: 0-7722
Securities registered pursuant to Section 12(g) of the Act:
Common Stock: Number of Shares of Common Stock outstanding as of June 30, 1999:
41,751,869 shares.
Debt Securities: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due
1999. As of June 30, 1999, $1,106,000 in principal amount of
such Notes and $999,000 in principal amount of such Debentures
were outstanding. Imperial Bank Subordinated Capital Notes Due
2009. As of June 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 June 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.
IMPERIAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED JUNE 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 six months ended June 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 June 30, 1999, increased approximately 20
percent to $19.8 million, or $0.46 a share, from $16.6 million, or $0.37 a
share, for the year-earlier period. The annualized return on average assets
increased to 1.43 percent for the three months ended June 30, 1999, from 1.36
percent for the year-earlier period. Net income for the second quarter includes
a $5.1 million after-tax gain on the sale of the business portfolio of Imperial
Trust Company ("trust business") and a $978,000 after-tax gain, net of related
transaction expenses, on the sale of 3.7 million shares of Imperial Credit
Industries, Inc. (NASDAQ-ICII) ("ICII") common stock. As a result of the sale,
the Company's ownership of ICII common stock decreased to 5.3 million shares, or
approximately 15.9 percent of the total outstanding shares. The Company no
longer applies the equity method of accounting for its investment in ICII due to
the reduction in its ownership percentage.
Net income for the six months ended June 30, 1999, increased approximately 14
percent to $34.0 million, or $0.79 a share, from $29.9 million, or $0.67 a
share, for the year-earlier period. The annualized return on average assets
decreased to 1.25 percent for the six months ended June 30, 1999, from 1.30
percent for the year-earlier period. The recent increase in the Company's prime
lending rate to 8.00 percent is expected to favorably impact net income for the
second half of 1999.
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
Normalized net income was $14.1 million, or $0.33 a share, for the three months
ended June 30, 1999, compared with $14.4 million, or $0.32 a share, for the
year-earlier period. For the six months ended June 30, 1999, normalized net
income increased to $27.0 million, or $0.62 a share, from $26.1 million, or
$0.58 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/losses of ICII, the gain on the sale of the trust business and the net
gain on the sale of ICII common stock. The normalizing adjustments reduced net
income by $5.7 million and $7.0 million for the three and six months ended June
30, 1999, respectively. Normalized earnings for 1998 excludes equity in the
earnings of ICII. The normalizing adjustments reduced net income by $2.2 million
and $3.9 million for the three and six months ended June 30, 1998, respectively.
Net income growth continues to be driven by the Company's core commercial
banking business.
The following table provides the calculation of normalized net income for the
periods indicated:
1
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 19,811 $ 16,567 $ 34,035 $ 29,942
After-tax adjustments: (1)
Equity in net loss (income) of ICII 345 (2,211) (954) (3,882)
Net gain on sale of ICII common stock (978) - (978) -
Net gain on sale of trust business (5,109) - (5,109) -
- -------------------------------------------------------------------------------------------------------------------------------
Normalized net income $ 14,069 $ 14,356 $ 26,994 $ 26,060
- -------------------------------------------------------------------------------------------------------------------------------
Normalized diluted earnings per share $ 0.33 $ 0.32 $ 0.62 $ 0.58
Normalized return on average assets (2) (3) 1.02% 1.20% 1.00% 1.15%
Normalized return on average equity (3) 14.14% 15.21% 13.84% 14.25%
- -------------------------------------------------------------------------------------------------------------------------------
(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 1.02 percent for the three months ended June 30, 1999, from 1.20
percent for the year-earlier period. The annualized return on average assets,
based on normalized net income, decreased to 1.00 percent for the six months
ended June 30, 1999, from 1.15 percent for the year-earlier period. Although
average earning assets grew by approximately 14 percent and 18 percent for the
three and six months ended June 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, decreased
to 14.14 percent for the three months ended June 30, 1999, from 15.21 percent
for the year-earlier period. The annualized return on average equity, based on
normalized net income, decreased to 13.84 percent for the six months ended June
30, 1999, from 14.25 percent for the year-earlier period.
Net interest income increased to $65.5 million for the three months ended June
30, 1999, from $65.4 million for the three months ended June 30, 1998. Net
interest income increased to $128.3 million for the six months ended June 30,
1999, from $126.2 million for the year-earlier period. The increase in net
interest income for the three and six months ended June 30, 1999, was primarily
due to loan growth. The increase in net interest income due to loan growth was
partially offset by a lower net interest margin for each period, resulting from
a decrease in the yield on loans, compared with the year-earlier periods.
Average loan balances increased approximately $685.9 million, or 21 percent, and
$759.4 million, or 24 percent, for the three and six months ended June 30, 1999,
respectively, compared with the year-earlier periods.
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
Interest income $ 92,217 $ 90,474 $ 179,650 $ 174,732
Interest expense 26,724 25,077 51,329 48,510
- ---------------------------------------------------------------------------------------------------------
Net interest income $ 65,493 $ 65,397 $ 128,321 $ 126,222
- ---------------------------------------------------------------------------------------------------------
Net interest margin 5.21% 5.95% 5.23% 6.09%
- ---------------------------------------------------------------------------------------------------------
The net interest margin decreased to 5.21 percent and 5.23 percent for the three
and six months ended June 30, 1999, respectively, from 5.95 percent and 6.09
percent for the year-earlier periods. The decline in net interest margin for the
2
three and six months ended June 30, 1999, compared with the comparable periods
of 1998 is 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 7.75 percent for the first six months of 1999 compared with 8.50
percent for the first six months of 1998. The Company anticipates that the July
1, 1999, increase in its prime lending rate to 8.00 percent from 7.75 percent
will have a positive impact on its net interest margin. It is anticipated that
the net interest margin could increase approximately 10 basis points for the
second half 1999. The Company's overall cost of funds decreased to 4.13 percent
and 4.09 percent for the three and six months ended June 30, 1999, respectively,
from 4.64 percent and 4.67 percent for the year-earlier periods.
Loan loss provisions totaled $10.0 million and $14.8 million for the three and
six months ended June 30, 1999, respectively, compared with $14.1 million and
$20.0 million for the comparable periods of 1998, respectively. Net charge-offs
were $3.6 million, or 0.37 percent of average loans on an annualized basis, for
the second quarter of 1999 compared with $11.8 million, or 1.47 percent of
average loans on an annualized basis, for the year-earlier quarter. Net charge-
offs include $3.1 million and $7.0 million on one loan to a company in the
healthcare industry for the three months ended June 30, 1999 and 1998,
respectively. Net charge-offs were $7.3 million, or 0.38 percent of average
loans on an annualized basis, for the six months ended June 30, 1999, compared
with $13.1 million, or 0.85 percent of average loans on an annualized basis, for
the year-earlier period. The ratio of the allowance for loan losses to period-
end outstanding loans increased to 1.95 percent at June 30, 1999, from 1.82
percent at December 31, 1998, and 1.80 percent at June 30, 1998.
Noninterest income increased to $36.6 million for the three months ended June
30, 1999, from $35.2 million for the year-earlier period. Normalized
noninterest income for the second quarter of 1999, which excludes equity in the
loss of ICII, an $8.8 million gain on the sale of the trust business and a $5.4
million gain on the sale of ICII stock, decreased to $23.0 million from $31.4
million, excluding equity in the earnings of ICII, for the year-earlier period.
Normalized noninterest income includes gains on the exercise and sale of equity
warrants totaling $3.4 million and $16.6 million, for the three months ended
June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999,
noninterest income increased to $58.6 million from $53.1 million for the year-
earlier period. Normalized noninterest income decreased to $42.7 million for
the first six months of 1999 from $46.4 million for the year-earlier period. On
a year-to-date basis, gains on the exercise and sale of equity warrants totaled
$7.4 million for 1999, compared with $17.0 million for 1998. The Company expects
to continue to exercise equity warrants during the second half of 1999,
dependent on market conditions.
Noninterest expense decreased to $58.4 million for the three months ended June
30, 1999, from $59.1 million for the year-earlier period. Normalized
noninterest expense, which excludes $3.7 million of consulting expense related
to the sale of ICII stock, decreased approximately 7 percent to $54.7 million
for the three months ended June 30, 1999, from $59.1 million for the year-
earlier period. The decrease in normalized noninterest expense for the three
months ended June 30, 1999, compared with the year-earlier period, is primarily
due to reductions in salaries and benefits expense and customer services
expense. The decrease in salaries and benefits expense is largely due to lower
commissions associated with the sale of equity warrants, which totaled $937,000
for the quarter ended June 30, 1999, compared with $5.0 million for the year-
earlier quarter. The decrease in customer services expense is due to lower rates
on deposit balances generated by the Financial Services Division. For the six
months ended June 30, 1999, normalized noninterest expense increased to $111.2
million from $109.2 million for the year-earlier period. A decrease in salaries
and benefits expense, due to lower commission expense, was offset by increases
in occupancy expense, data processing expense, business development expense and
other noninterest expense. The increase in occupancy and equipment expense and
business development expense is the result of growth in the Company's lending
and deposit businesses and support operations. The average number of full-time
equivalent staff increased to 1,271 for the six months ended June 30, 1999, from
1,086 for the same period of 1998. The increase in data processing expense is
primarily due to higher volumes in merchant card processing.
Total assets were $6.6 billion at June 30, 1999, an increase of approximately 7
percent from $6.2 billion at December 31, 1998, and $6.2 billion at June 30,
1998. Total loans grew to $3.6 billion at June 30, 1999, an increase of
approximately 5 percent from $3.4 billion at December 31, 1998, and an increase
of approximately 12 percent from $3.2 billion at June 30, 1998. The growth in
the loan portfolio at June 30, 1999, occurred in commercial and interim
construction loans, which increased $249.8 million, or approximately 9 percent,
and $193.9 million, or approximately
3
106 percent, over June 30, 1998, respectively. Total deposits increased to $5.7
billion at June 30, 1999, from $5.6 billion at December 31, 1998, and $5.5
billion at June 30, 1998. Noninterest-bearing demand deposits comprised 58
percent of total deposits at June 30, 1999, a decrease from 59 percent of total
deposits at December 31, 1998, and 64 percent at June 30, 1998. Shareholders'
equity increased to $406.6 million at June 30, 1999, from $381.8 million at
December 31, 1998, and $389.4 million at June 30, 1998.
Nonaccrual loans totaled $49.6 million, or 1.38 percent of total loans, at June
30, 1999, compared with $30.6 million, or 0.89 percent of total loans, at
December 31, 1998, and $25.9 million, or 0.80 percent of total loans, at June
30, 1998. Restructured loans decreased to $5.7 million at June 30, 1999, from
$9.8 million at December 31, 1998, and $23.7 million at June 30, 1998. The
percentage of nonaccrual and restructured loans to total loans increased to 1.53
percent at June 30, 1999, from 1.17 percent at December 31, 1998, and decreased
from 1.54 percent at June 30, 1998. The increase in nonaccrual loans at June
30, 1999, compared with December 31, 1998, includes a $10.0 million commercial
real estate loan that was repaid in full in July. The decrease in restructured
loans from June 30, 1998, is largely due to the payoff of a $14.3 million loan
on a retail shopping center during the fourth quarter of 1998. All restructured
loans were performing in accordance with their modified terms at June 30, 1999.
The balance of real estate and other assets owned net of allowance ("OREO")
decreased to $1.7 million at June 30, 1999, from $2.3 million at December 31,
1998, and $3.3 million at June 30, 1998.
Imperial Bancorp is classified as well capitalized with leverage, Tier 1 and
total capital ratios of 8.50 percent, 9.64 percent and 12.96 percent,
respectively, at June 30, 1999.
Subordinated Debt Issue
On April 7, 1999, Imperial Bank completed a $100 million offering of 8.5 percent
Subordinated Capital Notes due 2009. The Notes qualify as Tier 2 capital under
FDIC guidelines.
Sale of Trust Business
On April 23, 1999, the Company announced the sale of the business portfolio of
Imperial Trust Company ("ITC") to Union Bank of California, N.A. ("UBOC"). The
Company recorded a pretax gain of $8.8 million on the sale, which closed on May
14, 1999. An additional gain of up to $3.5 million may be recorded in the
second quarter of 2000, based on business retention as measured by trust fee
revenues of the trust business for UBOC. ITC was not considered to be a
significant operating segment.
Sale of Imperial Credit Industries, Inc. Common Stock
On May 17, 1999, the company sold 3.7 million shares of ICII common stock to
ICII for $8.00 a share. The Company recorded a pretax gain of $1.7 million on
the sale, net of $3.7 million of related transaction expenses. As a result of
the sale, the Company's ownership of ICII common stock decreased to 5.3 million
shares, or approximately 15.9 percent of the total outstanding shares as of June
30, 1999. Due to the reduction in its ownership percentage, the Company
discontinued the equity method of accounting for its investment in ICII. On
July 27, 1999, the Company announced the sale of the remaining 5.3 million ICII
shares it owned for $6.00 a share. The sale will result in a pretax loss of
approximately $2.8 million that will be reported in the third quarter.
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 $65.5 million for the three months
ended June 30, 1999, from $65.4 million for the year-earlier period. The
increase in net interest income is due to growth in average earning assets,
which increased approximately 14 percent to $5.0 billion for the quarter ended
June 30, 1999, from $4.4 billion for the year-earlier period. Average loan
balances grew approximately 21 percent to $3.9 billion for the three months
ended June 30, 1999, from $3.2 billion for the year-earlier period. Loans
comprised approximately 77 percent of average earnings assets for the current
quarter compared with approximately 73 percent for the second quarter of 1998.
The average balance of trading instruments increased to $68.8 million for the
three months ended June 30, 1999, from $18.7 million for the year-earlier
period. The growth in trading
4
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 $362.6 million for the three
months ended June 30, 1999, from $489.3 million for the year-earlier period.
The balance of Federal funds sold and securities purchased under resale
agreements tends to correspond with demand deposit balances maintained by the
Company's customers in the real estate services industry. Although there was a
decline in the overall yield on earning assets to 7.34 percent for the second
quarter of 1999 from 8.23 percent compared with the year-earlier quarter, the
Company experienced an increase in net interest income due to growth in earning
asset balances.
5
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
- -------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $ 3,901,754 $ 77,568 (3) 7.97% $ 3,215,901 $ 73,637 (3) 9.18%
Trading instruments 68,840 980 5.71% 18,729 242 5.18%
Securities available for sale 679,306 8,627 5.06% 671,693 9,555 5.74%
Securities held to maturity 3,844 71 7.41% 3,992 70 7.03%
Federal funds sold and securities
purchased under resale agreements 362,627 4,370 4.83% 489,254 6,722 5.51%
Loans held for sale 21,798 601 11.06% 9,846 248 10.10%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 5,038,169 $ 92,217 7.34% $ 4,409,415 $ 90,474 8.24%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (67,757) (57,032)
Cash 369,577 337,698
Other assets 224,103 196,449
------------ ------------
Total assets $ 5,564,092 $ 4,886,530
============ ============
Interest-bearing liabilities:
Savings $ 27,229 $ 142 2.09% $ 26,190 $ 165 2.53%
Money market 1,098,435 7,716 2.82% 940,796 7,873 3.36%
Time-under $100,000 162,397 2,342 5.78% 185,037 2,610 5.66%
Time-$100,000 and over 1,058,209 12,200 4.62% 813,122 11,041 5.45%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 2,346,270 $ 22,400 3.83% $ 1,965,145 $ 21,689 4.43%
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 75,313 894 4.76% 123,538 1,714 5.56%
Long-term borrowings 101,155 1,954 7.75% 3,699 67 7.27%
Capital securities 73,393 1,476 8.07% 73,335 1,607 8.79%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,596,131 $ 26,724 4.13% $ 2,165,717 $ 25,077 4.64%
- -------------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,474,673 2,265,377
Other liabilities 94,160 76,839
Shareholders' equity 399,128 378,597
Total liabilities and
-------------- --------------
shareholders' equity $ 5,564,092 $ 4,886,530
============== ==============
Net interest income/Net interest margin $ 65,493 5.21% $ 65,397 5.95%
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------------
(1) The yields are not presented on a tax equivalent basis as the effects are
not material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $5.4 million and $6.8
million for the three months ended June 30, 1999 and 1998, respectively.
6
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Six months ended June 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
- -----------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $ 3,859,024 $ 152,155 (3) 7.95% $ 3,099,621 $ 143,868 (3)9.36%
Trading instruments 67,762 1,869 5.56% 22,414 592 5.33%
Securities available for sale 645,488 16,021 5.01% 653,923 18,897 5.83%
Securities held to maturity 3,859 143 7.47% 4,006 140 7.05%
Federal funds sold and securities
purchased under resale agreements 351,125 8,425 4.84% 395,275 10,843 5.53%
Loans held for sale 20,206 1,037 10.35% 7,558 392 10.46%
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Total interest-earning assets $ 4,947,464 $ 179,650 7.32% $ 4,182,797 $ 174,732 8.42%
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (65,704) (54,580)
Cash 363,697 324,269
Other assets 231,913 196,007
----------- -----------
Total assets $ 5,477,370 $ 4,648,493
=========== ===========
Interest-bearing liabilities:
Savings $ 31,915 $ 294 1.86% $ 25,770 $ 325 2.54%
Money market 1,082,839 15,171 2.83% 912,839 15,357 3.39%
Time-under $100,000 159,535 4,111 5.20% 185,938 4,843 5.25%
Time-$100,000 and over 1,039,662 24,592 4.77% 779,242 21,521 5.57%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 2,313,951 $ 44,168 3.85% $ 1,903,789 $ 42,046 4.45%
- ------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 90,561 2,158 4.81% 112,700 3,089 5.53%
Long-term borrowings 52,344 1,998 7.70% 3,672 131 7.19%
Capital securities 73,386 3,005 8.26% 73,327 3,244 8.92%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,530,242 $ 51,329 4.09% $ 2,093,488 $ 48,510 4.67%
- ------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,462,328 2,115,086
Other liabilities 91,504 71,076
Shareholders' equity 393,296 368,843
Total liabilities and
----------- -----------
shareholders' equity $ 5,477,370 $ 4,648,493
=========== ===========
Net interest income/Net interest margin $ 128,321 5.23% $ 126,222 6.09%
========= ==== ========= ====
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(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 $10.3 million and $12.9
million for the six months ended June 30, 1999 and 1998, respectively.
7
Net interest income increased to $128.3 million for the six months ended June
30, 1999, from $126.2 million for the year-earlier period. The increase in net
interest income is primarily due to growth in loans. Average loan balances
increased approximately 24 percent to $3.9 billion for the six months ended June
30, 1999, from $3.1 billion for the year-earlier period. Loans comprised
approximately 78 percent of average earnings assets for the six months ended
June 30, 1999, compared with approximately 74 percent for the comparable period
of 1998. Although there was a decline in the overall yield on earning assets to
7.32 percent for the six months ended June 30, 1999, from 8.42 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 5.21 percent and 5.23 percent for
the three and six months ended June 30, 1999, respectively, from 5.95 percent
and 6.09 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 7.97
percent and 7.95 percent for the three and six months ended June 30, 1999,
respectively, from 9.18 percent and 9.36 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 7.75 percent for the first six months of 1999 compared with
an average of 8.50 percent for the same period of 1998. The yield on commercial
loans was also 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 $271,300 and $712,200 due to interest reversals on
nonaccrual loans for the three and six months ended June 30, 1999, respectively.
Average demand deposits increased to $2.5 billion for the three months ended
June 30, 1999, from $2.3 billion for the year-earlier period. Average demand
deposits represented approximately 51 percent of total average deposits for the
second quarter of 1999 compared with approximately 54 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 4.13 percent for the
three months ended June 30, 1999, from 4.64 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 4.09 percent for 1999 from
4.67 percent for the same 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 six months ended June 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
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Three months ended June 30, 1999 over 1998
(Dollars in thousands) Volume Rate Rate/Volume Total
- ----------------------------------------------------------------------------------------------------------------------------------
Loans $15,705 $ (9,704) $(2,070) $ 3,931
Trading instruments 647 25 66 738
Securities available for sale 110 (1,136) 99 (928)
Securities held to maturity (3) 4 - 1
Federal funds sold and securities
purchased under resale agreements (1,740) (826) 214 (2,352)
Loans held for sale 302 23 28 353
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income $15,021 $(11,614) $(1,663) $ 1,743
- ----------------------------------------------------------------------------------------------------------------------------------
Savings $ 7 $ (29) $ (1) $ (23)
Money market 1,319 (1,264) (212) (157)
Time-under $100,000 (320) 59 (7) (268)
Time-$100,000 and over 3,328 (1,667) (502) 1,159
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Total deposits $ 4,334 $ (2,901) $ (722) $ 711
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (669) (248) 97 (820)
Long-term borrowings 1,765 4 118 1,887
Capital securities 1 (132) 0 (131)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 5,431 $ (3,277) $ (507) $ 1,647
- ----------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 9,590 $ (8,337) $(1,156) $ 96
- ----------------------------------------------------------------------------------------------------------------------------------
9
- -------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999 over 1998
(Dollars in thousands) Volume Rate Rate/Volume Total
- -------------------------------------------------------------------------------------------------------------------------------
Loans $35,247 $(21,655) $(5,305) $ 8,287
Trading instruments 1,198 26 53 1,277
Securities available for sale (244) (2,666) 34 (2,876)
Securities held to maturity (5) 8 - 3
Federal funds sold and
securities purchased
under resale agreements (1,211) (1,359) 152 (2,418)
Loans held for sale 656 (4) (7) 645
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income $35,641 $(25,650) $(5,073) $ 4,918
- -------------------------------------------------------------------------------------------------------------------------------
Savings $ 77 $ (87) $ (21) $ (31)
Money market 2,860 (2,568) (478) (186)
Time-under $100,000 (687) (52) 7 (732)
Time-$100,000 and over 7,192 (3,089) (1,032) 3,071
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 9,442 $ (5,796) $(1,524) $ 2,122
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (607) (403) 79 (931)
Long-term borrowings 1,737 9 121 1,867
Capital securities 3 (242) 0 (239)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense $10,575 $ (6,432) $(1,324) $ 2,819
- -------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $25,066 $(19,218) $(3,749) $ 2,099
- -------------------------------------------------------------------------------------------------------------------------------
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 $6.2 million and $12.6 million for the three and six months
ended June 30, 1999, respectively, and by $6.9 million and $12.8 million for the
three and six months ended June 30, 1998, respectively. The net interest margin
would have decreased to 4.72 percent for the three and six months ended June 30,
1999, respectively, and 5.32 percent and 5.47 percent for the comparable periods
of 1998, respectively.
Noninterest Income:
Noninterest income increased to $36.6 million for the three months ended June
30, 1999, from $35.2 million for the year-earlier period. Normalized noninterest
income for the second quarter of 1999, which excludes equity in the loss of
ICII, an $8.8 million gain on the sale of the trust business and a $5.4 million
gain on the sale of ICII stock, decreased to $23.0 million from $31.4 million,
excluding equity in the earnings of ICII, for the year-earlier period. For the
six months ended June 30, 1999, noninterest income increased to $58.6 million
from $53.1 million for the year-earlier period. Normalized noninterest income
for the first six months of 1999 decreased to $42.7 million from $46.4 million
for the year-earlier period.
The following table provides the components of noninterest income for the
periods indicated:
10
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 1,936 $ 1,686 $ 3,779 $ 3,118
Trust fees 2,195 2,094 4,410 4,185
Gain on origination and sale of loans 500 1,452 1,721 2,536
Equity in net (loss) income of Imperial Credit
Industries, Inc. (596) 3,815 1,644 6,699
Gain on the sale of Imperial Credit Industries, Inc.
stock 5,391 - 5,391 -
Other service charges and fees 5,034 3,542 9,483 6,268
Merchant and credit card fees 2,506 1,631 4,741 3,106
International income and fees 3,130 3,469 5,931 6,409
Gain on securities available for sale 54 8 54 12
Gain on trading instruments 365 163 384 371
Gain on exercise and sale of equity warrants 3,430 16,617 7,382 17,040
Gain on sale of the trust business 8,817 - 8,817 -
Gain on sale of software license 2,461 - 2,461 -
Other income 1,379 696 2,393 3,344
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 36,602 $ 35,173 $ 58,591 $ 53,088
- -----------------------------------------------------------------------------------------------------------------------------------
Normalized noninterest income:
Excludes equity in the (losses) earnings of ICII, gain
on the sale of ICII stock and gain on the sale of the
trust business $ 22,990 $ 31,358 $ 42,739 $ 46,389
Normalized noninterest income less gains on the
exercise and sale of equity warrants $ 19,560 $ 14,741 $ 35,357 $ 29,349
- -----------------------------------------------------------------------------------------------------------------------------------
Normalized noninterest income includes gains on the exercise and sale of equity
warrants totaling $3.4 million and $16.6 million for the three months ended June
30, 1999 and 1998, respectively. Gains on equity warrants were larger than
normal in the second quarter of 1998 due to one large transaction recorded by
one of the Company's nonbank subsidiaries. Excluding gains on equity warrants,
noninterest income increased approximately 33 percent to $19.6 million for the
three months ended June 30, 1999, from $14.7 million for the year-earlier
period. For the six months ended June 30, 1999, gains on the exercise and sale
of equity warrants totaled $7.4 million, compared with $17.0 million for the
first six months of 1998. Excluding gains on equity warrants, noninterest
income increased approximately 20 percent to $35.4 million for the six months
ended June 30, 1999, from $29.3 million for the year-earlier period. The growth
in noninterest income for the three and six months ended June 30, 1999, compared
with the prior year occurred primarily in merchant card processing fees, due to
higher volumes, fees derived from the sale of nonproprietary mutual funds and
deposit service charges. Noninterest income for the three months ended June 30,
1999, also includes $2.5 million related to a previously deferred gain
recognized by one of the Company's nonbank subsidiaries on the sale of a
software license.
Noninterest Expense:
Noninterest expense decreased to $58.4 million for the three months ended June
30, 1999, from $59.1 million for the year-earlier period. Normalized
noninterest expense, which excludes $3.7 million of consulting expense related
to the sale of ICII stock, decreased approximately 7 percent to $54.7 million
for the quarter ended June 30, 1999, from $59.1 million for the year-earlier
period. For the six months ended June 30, 1999, noninterest expense increased by
approximately 5 percent to $114.9 million from $109.2 million for the same
period of 1998. Normalized noninterest expense increased approximately 2
percent to $111.2 million for the first six months of 1999, from $109.2 million
for the year-earlier period.
The following table provides detail of noninterest expense by category for the
periods indicated:
11
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits $29,527 $33,189 $ 60,243 $ 61,900
Net occupancy expense 2,592 2,646 5,287 4,969
Furniture and equipment 2,814 2,583 5,718 4,800
Data processing 2,875 2,455 5,401 4,655
Customer services 6,228 6,878 12,579 12,784
Professional and legal fees 5,738 2,799 8,581 5,098
Business development 2,169 1,597 3,554 2,724
Other expense 6,482 6,927 13,517 12,227
- ----------------------------------------------------------------------------------------------------------------------------
Total $58,425 $59,074 $114,880 $109,157
- ----------------------------------------------------------------------------------------------------------------------------
Normalized noninterest expense:
Excludes $3.7 million of consulting expense
related to the sale of ICII stock $54,721 $59,074 $111,176 $109,157
Normalized noninterest expense less commissions
on sales of equity warrants $53,784 $54,096 $109,053 $104,171
- ----------------------------------------------------------------------------------------------------------------------------
The decrease in normalized noninterest expense for the three months ended June
30, 1999, compared with the year-earlier period, is primarily due to reductions
in salaries and benefits expense and customer services expense. The decrease in
salaries and benefits expense is largely due to lower commissions associated
with the sale of equity warrants, which totaled $937,000 for the three months
ended June 30, 1999, compared with $5.0 million for the year-earlier period.
Excluding commissions associated with the sale of equity warrants, normalized
noninterest expense decreased to $53.8 million for the three months ended June
30, 1999, from $54.1 million for the same period of 1998. For the first six
months of 1999, normalized noninterest expense, excluding commissions associated
with the sale of equity warrants, increased to $109.1 million from $104.2
million for the year-earlier period. For the six months ended June 30, 1999, the
decrease in salaries and benefits expense, due to lower commissions associated
with the sale of equity warrants, was offset by increases in occupancy expense,
data processing expense, business development expense and other noninterest
expense. The increase in occupancy and equipment expense and business
development expense is the result of growth in the Company's lending and deposit
businesses and support operations. The average number of full-time equivalent
staff increased to 1,271 for the six months ended June 30, 1999, from 1,086 for
the same period of 1998. Excluding the impact of warrant commissions, the level
of salaries expense and staff is expected to stabilize for the remainder of
1999. The increase in data processing expense is primarily due to higher volumes
in merchant and credit card processing and, to a lesser extent, to expenses
associated with the Company's Year 2000 Program.
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 $1.5
billion for the six months ended June 30, 1999, from $1.3 billion for the
comparable period of 1998. The decrease in customer services expense is due to
lower rates on these deposit balances.
Other noninterest expense increased to $13.5 million for the six months ended
June 30, 1999, from $12.2 million for the year-earlier period. The increase is
due to expenses associated with the Company's factoring business ($627,400),
goodwill amortization ($309,400), dues and memberships ($300,800), expense
associated with the writedown of certain equity investments to fair value
($260,300), expenses related to the Company's Community Redevelopment activities
($229,800), insurance expense ($220,700) and courier expense ($126,900). These
increases were offset in part by reductions in noninterest expense related to
the deferral of loan origination costs by the SBA division ($238,500), the
reimbursement of operating expenses incurred to service the trust portfolio
pending conversion to the purchaser's
12
system ($541,300) and a decrease in lawsuit settlement expense ($450,000). The
remaining net increase in noninterest expense occurred in a number of smaller
categories.
Income Taxes:
The Company recorded income tax expense of $13.8 million and $10.8 million,
representing an effective tax rate of 41.1 percent and 39.5 percent, for the
three months ended June 30, 1999 and 1998, respectively. Income tax expense was
$23.2 million and $20.2 million, representing an effective tax rate of 40.5
percent and 40.3 percent, for the six months ended June 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 for the first
six months of 1999 includes estimated tax credits totaling $840,000 related to
the Company's investment in low-income housing projects.
LOANS
The following table provides a summary of loans by category for the periods
indicated:
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) June 30, 1999 December 31, 1998 June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent
Commercial $ 3,066,214 85.05% $ 3,010,555 87.32% $ 2,816,434 87.31%
Loan secured by real estate:
Real estate term loans 124,308 3.45 142,866 4.14 196,352 6.09
Interim construction loans 377,067 10.46 258,763 7.51 183,203 5.68
Consumer loans 37,545 1.04 35,354 1.03 29,676 0.92
- -------------------------------------------------------------------------------------------------------------------
Gross loans 3,605,134 100.00% 3,447,538 100.00% 3,225,665 100.00%
Less allowance for loan losses (70,200) (62,649) (58,007)
- -------------------------------------------------------------------------------------------------------------------
Total loans $ 3,534,934 $ 3,384,889 $ 3,167,658
- -------------------------------------------------------------------------------------------------------------------
The Company continued to experience increased loan demand although the rate of
growth has moderated from that experienced in 1998. Total loans increased by
$157.6 million, or approximately 5 percent, to $3.6 billion at June 30, 1999,
from $3.4 billion at December 31, 1998, and by $379.5 million, or approximately
12 percent, from June 30, 1998. The commercial loan portfolio remains broadly
diversified among many industries including manufacturing, entertainment, real
estate services, high technology, healthcare, retail trade and professional
services. The Company has experienced strong growth in interim construction
loans which increased by $118.3 million, or approximately 46 percent, from
December 31, 1998, and by $193.9 million, or approximately 106 percent, from
June 30, 1998. The increase in interim construction loans compared with December
31, 1998, and June 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.
ASSET QUALITY
Nonaccrual Loans, Restructured Loans and Real Estate Owned:
Nonaccrual loans, which include loans 90 days or more past due, totaled $49.6
million, or 1.38 percent of total loans, at June 30, 1999, compared with $30.6
million, or 0.89 percent of total loans, at December 31, 1998, and $25.9
million, or 0.80 percent of total loans, at June 30, 1998. The increase in
nonaccrual loans at June 30, 1999, compared with December 31, 1998, includes a
$10.0 commercial real estate loan that was repaid in full in July. The remaining
increase from December 31, 1998, reflects commercial loans distributed
proportionally throughout the portfolio. Loans totaling $37.2 million were
placed on nonaccrual status during the six months ended June 30, 1999. This
increase in nonaccrual loans for the first six months of 1999 was partially
offset by gross charge-offs totaling $7.9 million, receipt of payments totaling
$5.3 million, loans brought current totaling $4.7 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.
Interest income was reduced by approximately $271,300 and $712,200 for the three
and six months ended June 30, 1999, respectively, due to interest reversals on
nonaccrual loans.
13
Restructured loans, loans that have had their original terms modified, totaled
$5.7 million, $9.8 million and $23.7 million at June 30, 1999, December 31,
1998, and June 30, 1998, respectively. The decrease in restructured loans since
December 31, 1998, is due to payments received totaling $1.8 million, loans
removed from restructured status of $1.0 million and a $1.3 million loan that
was moved to nonaccrual status. The decrease in restructured loans from June 30,
1998, is largely due to the payoff of a $14.3 million loan on a retail shopping
center during the fourth quarter of 1998.
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
$1.7 million, $2.3 million and $3.3 million at June 30, 1999, December 31, 1998,
and June 30, 1998, respectively. For the six months ended June 30, 1999, four
properties with a total book value of $591,500 were sold, one property with a
book value of $132,000 was added to OREO and payments totaling $108,500 were
applied to OREO. A net gain of $128,900 was recognized on the sales.
The following table provides information on nonaccrual loans, restructured loans
and real estate and other assets owned for the periods indicated:
- ---------------------------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
(Dollars in thousands) 1999 1999 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $39,032 $31,348 $29,853 $ 33,720 $25,039
Real estate 10,576 11,604 692 788 831
Consumer - - 70 - 49
- --------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $49,608 $42,952 $30,615 $ 34,508 $25,919
- --------------------------------------------------------------------------------------------------------------------
Restructured loans $ 5,704 $ 7,287 $ 9,770 $ 27,591 $23,652
- --------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned:
Real estate and other assets owned, gross $ 1,741 $ 2,023 $ 2,309 $ 2,700 $ 4,343
Less valuation allowance - - - - (1,089)
- --------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net $ 1,741 $ 2,023 $ 2,309 $ 2,700 $ 3,254
- --------------------------------------------------------------------------------------------------------------------
Total $57,053 $52,262 $42,694 $ 64,799 $52,825
- --------------------------------------------------------------------------------------------------------------------
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:
14
- --------------------------------------------------------------------------------------------------------------------
Net
Carrying Specific Net
(Dollars in thousands) Value Allowance Balance
- --------------------------------------------------------------------------------------------------------------------
June 30, 1999
Loans with specific allowances $69,977 $(14,454) $55,523
Loans without specific allowances 3,686 - 3,686
- --------------------------------------------------------------------------------------------------------------------
Total $73,663 $(14,454) $59,209
- --------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------
Impaired loans were classified as follows:
- --------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Current $ 22,750 $27,414
Past due 1,305 3,564
Nonaccrual 49,608 30,615
- --------------------------------------------------------------------------------------------------------------------
Total $ 73,663 $61,593
- --------------------------------------------------------------------------------------------------------------------
Loans classified as impaired totaled $73.7 million at June 30, 1999, compared
with $61.6 million at December 31, 1998. During the first six months of 1999,
$34.9 million of loans were newly classified as impaired. The additions to
impaired loans were partially offset by charge-offs totaling $8.4 million, the
receipt of payments on impaired loans totaling $8.3 million, loans removed from
impaired status totaling $5.8 million and loans transferred to OREO of $283,800.
The Company's average recorded investment in impaired loans for the six months
ended June 30, 1999, was $64.1 million. Interest income totaling approximately
$1.3 million and $4.0 million was collected on impaired loans during the six
months ended June 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 June 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 June 30, 1999, the allowance for loan losses equaled $70.2 million, or 1.95
percent of total loans, compared with $62.6 million, or 1.82 percent of total
loans, at December 31, 1998, and $58.0 million, or 1.80 percent of total loans,
at June 30, 1998. The allowance for loan losses represented 142 percent of
nonaccrual loans at June 30, 1999, compared with 205 percent of nonaccrual loans
at December 31, 1998, and 224 percent of nonaccrual loans at June 30, 1998. The
following table summarizes changes in the allowance for loan losses:
15
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, (Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 62,649 $ 51,143
- ----------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial (8,159) (13,791)
Real estate (195) (329)
Consumer (9) (47)
- ----------------------------------------------------------------------------------------------------------------------------
Total charge-offs $ (8,363) $ (14,167)
- ----------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 1,022 911
Real estate 67 153
Consumer 5 1
- ----------------------------------------------------------------------------------------------------------------------------
Total recoveries $ 1,094 $ 1,065
- ----------------------------------------------------------------------------------------------------------------------------
Net loans charged off (7,269) (13,102)
Provision for loan losses 14,820 19,966
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 70,200 $ 58,007
----------------------------------------------------------------------------------------------------------------------------
Loans outstanding, end of period $3,605,134 $3,225,665
- ----------------------------------------------------------------------------------------------------------------------------
Average loans outstanding $3,859,024 $3,099,621
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans /(1)/ 0.38% 0.85%
Ratio of allowance for loan losses to loans outstanding at June 30 1.95% 1.80%
Ratio of allowance for loan losses to nonaccrual loans 142% 224%
Ratio of provision for loan losses to net charge-offs 204% 152%
- ----------------------------------------------------------------------------------------------------------------------------
/(1)/ Annualized
The provision for loan losses for the six months ended June 30, 1999 and 1998,
totaled $14.8 million and $20.0 million, respectively. Net charge-offs
decreased to $7.3 million, or 0.38 percent of average loans on an annualized
basis, for the first six months of 1999 compared with $13.1 million, or 0.85
percent of average loans on an annualized basis, for the year-earlier period.
Net charge-offs for the six months ended June 30, 1999 and 1998, include $4.5
million and $7.0 million, respectively, on a commercial loan to a company in the
healthcare industry. As of June 30, 1999, this loan was fully charged off.
Securities:
Securities available for sale increased to $761.5 million at June 30, 1999, from
$694.8 million at December 31, 1998. The change in securities available for
sale reflects an $83.3 million increase in U.S. Treasury and federal agency
securities to $646.7 million at June 30, 1999. In addition, other securities
increased by $34.9 million to $53.7 million at June 30, 1999. The increase in
other securities is largely due to the reclassification of the Company's
remaining investment in ICII common stock to the securities available for sale
category following the sale of 3.7 million shares in May 1999. The Company
discontinued the equity method of accounting for its investment in ICII after it
sold the ICII shares. These increases were partially offset by a $51.5 million
reduction in mutual funds to $61.1 million at June 30, 1999. Federal funds sold
and securities purchased under resale agreements increased to $1.5 billion at
June 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 increased by $36.4 million from year end to $3.3 billion at June 30,
1999.
16
A summary of securities held to maturity as of June 30, 1999, and December 31,
1998, is provided below:
- ------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
June 30, 1999
Industrial development bonds $ 3,831 $ - $ - $ 3,831
- ------------------------------------------------------------------------------------------------------------
Total $ 3,831 $ - $ - $ 3,831
- ------------------------------------------------------------------------------------------------------------
December 31, 1998
Industrial development bonds $ 3,898 $ - $ - $ 3,898
- ------------------------------------------------------------------------------------------------------------
Total $ 3,898 $ - $ - $ 3,898
- ------------------------------------------------------------------------------------------------------------
A summary of the amortized cost and estimated fair value of securities available
for sale as of June 30, 1999, and December 31, 1998, is provided below:
- ------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
June 30, 1999
U.S. Treasury and federal agencies $ 647,193 $ 59 $ (583) $ 646,669
Mutual funds 61,108 - - 61,108
Other securities 56,546 2,945 (5,750) 53,741
- ------------------------------------------------------------------------------------------------------------
Total $ 764,847 $ 3,004 $ (6,333) $ 761,518
- ------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------
Gross gains totaling $53,500 were realized on the sale of securities available
for sale during the six months ended June 30, 1999. Gross gains and losses
realized on the sale of securities available for sale during the six months
ended June 30, 1998, were $16,500 and $4,900, respectively.
Deferred Tax Asset
The Company reported a net deferred tax asset of $32.4 million at June 30, 1999,
compared with $21.8 million at December 31, 1998. The deferred tax asset is
reported net of deferred tax liabilities. 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 $110.5 million at June 30, 1999, from
$91.1 million at December 31, 1998. The increase in other assets at June 30,
1999, compared with year-end 1998 reflects the following: a $4.0 million
increase in
17
prepaid insurance due to the purchase of additional life insurance to fund the
Company's deferred compensation plan, a $4.1 million increase in foreign
exchange settlement accounts, a $2.5 million increase in miscellaneous assets
primarily due to the increase in the cash surrender value of life insurance
funding the deferred compensation plan, $1.5 million of asset balances related
to the leasing business and $1.3 million of unamortized debt issuance costs
related to the Bank's Subordinated Capital Notes issued in April 1999. These
increases were offset in part by a $1.8 million decrease in accounts receivable.
The remaining change in other assets occurred in a number of smaller categories.
Short-term Borrowings:
Short-term borrowings increased to $170.7 million at June 30, 1999, from $60.6
million at December 31, 1998. The increase is primarily due to a $69.4 million
increase in borrowed funds backed by Treasury, Tax and Loan deposits ("T,T&L")
and a $48.9 million increase in Federal funds purchased and reverse repurchase
balances. These increases were partially offset by a $8.2 million reduction in
commercial paper outstanding.
Long-term Borrowings
The net principal balance of notes and debentures increased to $101.5 million at
June 30, 1998, 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. Other borrowed funds increased to $5.5
million at June 30, 1999, from $290,000 at December 31, 1998, due to 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 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 June 30, 1999, the Company's liquidity ratio
was 41 percent and the loan to deposit ratio was 63 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 $2.5 billion for the
three months ended June 30, 1999, compared with $2.3 billion for the year-
earlier period. For the six months ended June 30, 1999, approximately 36 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 52 percent and 53 percent, of average total assets for the six
months ended June 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 six months ended June 30, 1999, the Company experienced a
net cash outflow from its investing activities of approximately $235.2 million.
The net outflow related to investing activities is largely due to a $85.0
million increase in Federal funds sold and securities purchased under resale
agreements and a $154.6 million increase in loans. Net cash provided by
financing activities totaled approximately $365.7 million for the six months
ended June 30, 1999. Net cash
18
provided by financing activities for the six months ended June 30, 1999,
includes a $158.8 million increase in deposits and a $214.8 million increase in
borrowed funds. These increases were offset in part by a $5.2 million repurchase
of common stock for the Company's ESOP plan and a $3.1 million repurchase of
common stock under the Company's Stock Repurchase Program.
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 June 30, 1999, the Company maintained a
positive one-year gap of approximately $3.2 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 June 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 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
June 30, 1999:
19
- ------------------------------------------------------------------------------------------------------------------------------
Weighted
Notional Average
At June 30, 1999 (Dollars in thousands) Amount Rate Terms
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate caps and collars purchased
Over the counter $1,000,000 n/a Expires March 2001.
Over the counter 10,914 n/a Expires $6.6 million first quarter 2000,
$914,000 July 1999 and $3.4 million
October 1999. Contracts hedge specific
lending transactions.
Interest rate floors purchased
Exchange traded $8,000,000 n/a Expires $1.75 billion September 1999,
$2.0 billion December 1999, $2.0 billion
March 2000, $2.0 billion June 2000 and
$250 million September 2000. The floors
have an average strike price of 4.23 percent.
Interest rate swaps
Loans and leases:
Pay-fixed rate $ 26,002 5.83% Matures $17.0 million September 2003,
Receive-3 month LIBOR 26,002 5.11% $5.0 million March 2004 and $4.0 million
July 2004.
Deposits:
Pay 3 month LIBOR less 11 basis points $ 35,000 5.18% Matures June 2009, callable by the Company
Receive-fixed rate 35,000 7.04% June 2000 and semi-annually thereafter.
Subordinated Capital Notes:
Pay 3-month LIBOR $ 100,000 5.00% Matures April 2009.
Receive 100,000 6.06%
Capital securities:
Pay 3-month LIBOR $ 75,000 5.07% Matures second quarter 2007.
Receive fixed rate 75,000 7.18%
- ------------------------------------------------------------------------------------------------------------------------------
20
- ------------------------------------------------------------------------------------------------------------------------------
Notional Unrealized Unamortized
At June 30, 1999 (Dollars in thousands) Amount Gain (loss) Premium
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate caps and collars purchased
Over the counter $1,000,000 $ 256 $263
Over the counter 10,914 (9) -
Interest rate floors purchased
Exchange traded (1) $8,000,000 $ 273 $856
Interest rate swaps
Loans and leases $ 26,002 $ 57 $ -
Deposits 35,000 (538) -
Subordinated Capital Notes 100,000 (3,891) 716
Capital securities 75,000 3,284 -
- -------------------------------------------------------------------------------------------------------------------------------
(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 gain on the sale of the
floors is being amortized over the term of the original floors and will
be fully amortized by the end of the third quarter of 1999. The balance
of the deferred gain on the floors was $151,300 at June 30, 1999.
- ------------------------------------------------------------------------------
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 June 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
plan. 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 June 30, 1999.
CAPITAL
At June 30, 1999, shareholders' equity totaled $406.6 million compared with
$381.8 million at December 31, 1998. For the first six months of 1999,
shareholders' equity was reduced by $5.2 million due to the purchase of common
stock for the Company's ESOP plan and by $3.1 million due to common stock
repurchases under the Company's Stock Repurchase Program. Shareholders' equity
increased by $450,000 during the period due to exercises of employee stock
options.
21
The tax benefit associated with nonqualified options exercised, which is
recorded as a component of shareholders' equity, approximated $145,000 for the
first six months of 1999.
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 June 30, 1999, were 9.64 percent
and 12.96 percent, respectively, compared with 10.25 percent and 11.57 percent,
respectively, at June 30, 1998.
Capital Ratios for Imperial Bancorp and Imperial Bank /(1)/
- -----------------------------------------------------------------------------------------------------------------------------
June 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
Total capital (to risk-weighted assets):
Company $ 636,385 12.96% $392,954 8.00% $491,192 10.00%
Bank 566,914 11.71% 387,355 8.00% 484,194 10.00%
Tier I Capital (to risk-weighted assets):
Company $ 473,393 9.64% $196,477 4.00% $294,715 6.00%
Bank 406,894 8.40% 193,678 4.00% 290,516 6.00%
Leverage (to average assets):
Company $ 473,393 8.50% $166,989 3.00% $278,314 5.00%
Bank 406,894 7.45% 163,766 3.00% 272,943 5.00%
- ------------------------------------------------------------------------------------------------------------------------------
/(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 ("the Bank") were
$4,911.9 million and $4,841.9 million, respectively, at June 30, 1999. Average
assets for the Company and the Bank were $5,566.3 million and $5,458.9 million,
respectively, at June 30, 1999.
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 June 30, 1999, compared with 9.32 percent at June 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
22
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 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:
As of the end of June 1999, 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 March 31, 1999.
The Company is making progress on the overall Y2K contingency effort.
Contingency plans are being 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").
The Company has completed the Remediation Contingency Plans and the Business
Resumption Contingency Plans as of June 30, 1999. This milestone date adheres
to the FFIEC statement requiring the four phases of the BRCP effort be
substantially complete.
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 June 30, 1999, system testing was approximately 99 percent complete for
critical systems, 98 percent complete for important systems, and 98 percent
complete for ordinary systems. Testing of critical systems was completed in
July 1999. Testing of important and ordinary systems is scheduled for
completion by the end of August 1999. Systems requiring remediation are placed
into production after testing has been completed and authorization from the
business unit has been obtained.
Non-IT systems, such as security systems, vault alarms and elevators, have been
identified and the Company is in the process of evaluating 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 June 30, 1999, the Company had incurred $2.4 million of the total $2.5
million of operating expenses budgeted for the Y2K project. It is currently
anticipated that total expense for the project will be within $100,000 of the
estimated budget. Y2K capital expenditures total $1.4 million through June 30,
1999. At present, the Company expects to complete the project with capital
expenditures at or slightly under the estimated budget of $1.9 million.
23
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
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 years beginning after June 15, 2000. 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
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries June 30, December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 486,568 $ 355,317
Trading instruments 53,596 52,971
Securities available for sale, at fair value 761,518 694,814
Securities held to maturity (fair value of $3,831 and $3,898 for 1999 and 1998, respectively) 3,831 3,898
Federal funds sold and securities purchased under resale agreements 1,531,000 1,446,000
Loans held for sale (fair value of $19,462 and $19,416 for 1999 and 1998, respectively) 18,562 18,287
Loans:
Loans, net of unearned income and deferred loan fees 3,605,134 3,447,538
Less allowance for loan losses (70,200) (62,649)
- -----------------------------------------------------------------------------------------------------------------------------------
Total net loans $3,534,934 $3,384,889
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 33,267 30,938
Accrued interest receivable 27,302 25,505
Real estate and other assets owned, net 1,741 2,309
Deferred tax asset 32,448 21,809
Investment in Imperial Credit Industries, Inc. - 56,796
Other assets 110,520 91,070
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $6,595,287 $6,184,603
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $3,334,442 $3,298,070
Savings 24,122 25,135
Money market 1,112,081 1,086,959
Time - under $100,000 154,822 171,224
Time - $100,000 and over 1,103,022 988,259
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $5,728,489 $5,569,647
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued interest payable 7,927 5,428
Income taxes payable 19,568 1,504
Short-term borrowings 170,731 60,601
Long-term borrowings:
Notes and debentures 101,484 2,105
Other borrowed funds 5,546 290
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 73,401 73,372
Other liabilities 81,578 89,834
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities $6,188,724 $5,802,781
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock - no par, 50,000,000 shares authorized; 41,751,869
shares at June 30, 1999, and 41,863,935 shares at
December 31, 1998, issued and outstanding 274,513 224,433
Unearned employee stock ownership plan shares; 252,528 shares (5,235) -
Accumulated other comprehensive loss, net of tax (1,930) (515)
Retained earnings 139,215 157,904
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 406,563 $ 381,822
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $6,595,287 $6,184,603
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
25
CONSOLIDATED STATEMENT OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries Three months ended Six months ended
June 30, June 30,
(Dollars in thousands, except per share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $77,568 $73,637 $152,155 $143,868
Trading instruments 980 242 1,869 592
Securities available for sale 8,627 9,555 16,021 18,897
Securities held to maturity 71 70 143 140
Federal funds sold and securities purchased under resale 4,370 6,722 8,425 10,843
Loans held for sale 601 248 1,037 392
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income $92,217 $90,474 $179,650 $174,732
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 22,400 21,689 44,168 42,046
Short-term borrowings 894 1,714 2,158 3,089
Long-term borrowings 3,430 1,674 5,003 3,375
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense $26,724 $25,077 $ 51,329 $ 48,510
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 65,493 65,397 128,321 126,222
Provision for loan losses 10,026 14,127 14,820 19,966
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses $55,467 $51,270 $113,501 $106,256
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 1,936 1,686 3,779 3,118
Trust fees 2,195 2,094 4,410 4,185
Gain on origination and sale of loans 500 1,452 1,721 2,536
Equity in net (loss) income of Imperial Credit Industries, Inc. (596) 3,815 1,644 6,699
Gain on sale of Imperial Credit Industries, Inc. stock 5,391 - 5,391 -
Other service charges and fees 5,034 3,542 9,483 6,268
Merchant and credit card fees 2,506 1,631 4,741 3,106
International income and fees 3,130 3,469 5,931 6,409
Gain on securities available for sale 54 8 54 12
Gain on trading instruments 365 163 384 371
Gain on exercise and sale of equity warrants 3,430 16,617 7,382 17,040
Gain on sale of the trust business 8,817 - 8,817 -
Gain on sale of software license 2,461 - 2,461 -
Other income 1,379 696 2,393 3,344
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $36,602 $35,173 $ 58,591 $ 53,088
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salary and employee benefits 29,527 33,189 60,243 61,900
Net occupancy expense 2,592 2,646 5,287 4,969
Furniture and equipment 2,814 2,583 5,718 4,800
Data processing 2,875 2,455 5,401 4,655
Customer services 6,228 6,878 12,579 12,784
Professional and legal fees 5,738 2,799 8,581 5,098
Business development 2,169 1,597 3,554 2,724
Other expense 6,482 6,927 13,517 12,227
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $58,425 $59,074 $114,880 $109,157
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,644 27,369 57,212 50,187
Income tax provision 13,833 10,802 23,177 20,245
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $19,811 $16,567 $ 34,035 $ 29,942
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.47 $ 0.39 $ 0.81 $ 0.70
Diluted earnings per share $ 0.46 $ 0.37 $ 0.79 $ 0.67
- -----------------------------------------------------------------------------------------------------------------------------------
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
CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries Six months ended
June 30,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 34,035 $ 29,942
Adjustments for noncash charges (credits):
Depreciation and amortization (4,325) (12,765)
Provision for loan losses 14,820 19,966
Equity in net income of Imperial Credit Industries, Inc. (1,644) (6,699)
Gain on sale of Imperial Credit Industries, Inc. stock (5,391) -
Gain on exercise and sale of stock warrants (7,382) (17,040)
Gain on sale of the trust business (8,817) -
Gain on sale of software license (2,461) -
(Gain) loss on sale of real estate and other assets owned (129) 67
(Gain) loss on sale of premises and equipment (23) 17
Benefit for deferred taxes (9,467) (572)
Gain on securities available for sale (54) (12)
Net change in trading instruments (625) 7,246
Net change in loans held for sale (275) (4,678)
Net change in accrued interest receivable/payable 702 (2,042)
Net change in income taxes receivable/payable 18,064 3,190
Net change in other assets/liabilities (26,278) (6,025)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 750 $ 10,595
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from securities held to maturity 67 46
Proceeds from maturities of securities available for sale 1,265,116 418,465
Proceeds from sale of securities available for sale 593,825 2,102,556
Proceeds from sale of Imperial Credit Industries, Inc. stock 29,460 -
Purchase of securities available for sale (1,894,064) (2,603,135)
Proceeds from exercise and sale of equity warrants 7,382 5,940
Proceeds from sale of the trust business 8,817 -
Net change in Federal funds sold and securities
purchased under resale agreements (85,000) (753,000)
Net change in loans (154,553) (415,443)
Premises and equipment expenditures (7,204) (6,543)
Proceeds from sale of real estate and other assets owned 829 884
Proceeds from sale of premises and equipment 138 12
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (235,187) $(1,250,218)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits, savings, and
money market accounts 60,481 1,204,592
Net change in time deposits 98,361 167,745
Net change in short-term borrowings 110,130 80,059
Net proceeds from issuance of subordinated capital notes 98,364 -
Net proceeds from ESOP loan 5,985 -
Net change in long-term borrowings 286 (23)
Repurchase of common stock for ESOP (5,235) 29
Repurchase of common stock (3,116) -
Proceeds from exercise of employee stock options 450 2,428
Other (18) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 365,688 $ 1,454,830
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks $ 131,251 $ 215,207
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year $ 355,317 $ 316,600
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of period $ 486,568 $ 531,807
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
27
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
$
Net income $ 19,811 $ 16,567 34,035 $ 29,942
Other comprehensive income, net of tax:
Reclassification adjustments, net of tax of $12 and $1 16 3 16 3
Unrealized gain (loss) on securities available for sale,
net of tax effect of $570, ($197), ($1,038) and $300 $ 786 (272) $ (1,431) $ 413
- -------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 20,613 $ 16,298 $ 32,620 $ 30,358
===============================================================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
NOTE (1) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all footnotes as would be necessary for a fair presentation of financial
position, results of operations, and changes in cash flows in conformity with
generally accepted accounting principles. However, these interim financial
statements reflect all normal recurring adjustments, which are, in the opinion
of the management, necessary for a fair presentation of the results for the
interim periods presented. All such adjustments were of a normal recurring
nature. The Consolidated Balance Sheet, Consolidated Statement of Income and
Consolidated Statement of Cash Flows are presented in the same format as that
used in the Company's most recently filed Report on Form 10-K. A Consolidated
Statement of Comprehensive Income has been added to the Company's interim
financial statements. 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, the company sold 3.7 million shares of ICII common stock to
ICII for $8.00 a share. As a result of the sale, the Company'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 Company discontinued the equity method of accounting for its investment in
ICII as of the date of the sale. At June 30, 1999, the Company's investment in
ICII common stock was classified as securities available for sale in the
Consolidated Balance Sheet. On July 27, 1999, the Company announced the sale of
the remaining 5.3 million ICII shares it owned for $6.00 a share. The sale will
result in a pretax loss of approximately $2.8 million that will be reported in
the third quarter.
NOTE (3) STATEMENT OF CASH FLOWS
The following information supplements the statement of cash flows:
- -----------------------------------------------------------------------------------------------------------------------------------
For the six months ended June 30, (Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Interest paid $ 48,830 $ 47,636
Taxes paid 13,492 17,614
Significant noncash transactions:
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 1,431 413
- -----------------------------------------------------------------------------------------------------------------------------------
28
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 income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings. 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 six months ended June 30,
1999:
- ----------------------------------------------------------------------------------------------------------------------------------
For the three months ended June 30, 1999 1998
------------------------------------ ----------------------------------
Per Per
Share Share
(Dollars in thousands, except per share data) Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to shareholders:
Net income $19,811 41,777,281 $ 0.47 $ 16,567 42,889,597 $0.39
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,378,991 1,885,619
------------ -------------
Diluted EPS
Income available to shareholders:
Net income $19,811 43,156,272 $ 0.46 $ 16,567 44,775,216 $0.37
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
For the six months ended June 30, 1999 1998
------------------------------------ ----------------------------------
Per Per
Share Share
(Dollars in thousands, except per share data) Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to shareholders:
Net income $34,035 41,831,418 $ 0.81 $ 29,942 42,698,227 $0.70
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,450,773 2,002,075
------------ -----------
Diluted EPS
Income available to shareholders:
Net income $34,035 43,282,191 $ 0.79 $ 29,942 44,700,302 $0.67
- ----------------------------------------------------------------------------------------------------------------------------------
29
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.
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 six months
ended June 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.
- -----------------------------------------------------------------------------------------------------
For the three months ended Entertainment and
June 30, 1999 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------
Net interest income $ 22,342 $ 10,707 $ 8,251 $ 6,921 $ 4,057
Provision for loan losses 3,151 327 191 279 28
Noninterest income 3,862 3,704 266 923 405
Noninterest expense 15,304 7,018 1,036 2,767 749
- -----------------------------------------------------------------------------------------------------
Income before taxes 7,749 7,066 7,290 4,798 3,685
Taxes 3,258 2,971 3,064 2,017 1,550
- -----------------------------------------------------------------------------------------------------
Net income $ 4,491 $ 4,095 $ 4,226 $ 2,781 $ 2,135
- -----------------------------------------------------------------------------------------------------
Average net loans $ 1,372,239 $ 541,103 $ 498,129 $ 447,354 $ 449,848
Average assets 1,382,050 544,361 505,170 449,838 452,828
Average deposits 1,222,700 657,206 15,913 88,047 -
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
For the three months ended
June 30, 1999 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------
Net interest income $ 13,894 $ - $ 3,265 $ (3,944) $ 65,493
Provision for loan losses 26 - 221 5,803 10,026
Noninterest income 2,930 4,795 19,425 292 36,602
Noninterest expense 11,758 3,704 10,396 5,693 58,425
- -----------------------------------------------------------------------------------------------------
Income before taxes 5,040 1,091 12,073 (15,148) 33,644
Taxes 2,118 459 5,076 (6,680) 13,833
- -----------------------------------------------------------------------------------------------------
Net income $ 2,922 $ 632 $ 6,997 $ (8,468) $ 19,811
- -----------------------------------------------------------------------------------------------------
Average net loans $ 494,147 $ - $ 124,392 $ (93,215) $3,833,997
Average assets 501,364 46,727 $1,202,534 479,220 5,564,092
Average deposits 2,080,144 - 723,150 33,783 4,820,943
- -----------------------------------------------------------------------------------------------------
30
- ------------------------------------------------------------------------------------------------------
For the three months ended Entertainment and
June 30, 1998 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- ------------------------------------------------------------------------------------------------------
Net interest income $ 22,387 $ 9,346 $ 7,121 $ 7,723 $ 3,654
Provision for loan losses 9,105 2,137 (43) 232 -
Noninterest income 4,011 885 344 577 566
Noninterest expense 15,735 5,879 1,618 2,616 461
- ------------------------------------------------------------------------------------------------------
Income before taxes 1,558 2,215 5,890 5,452 3,759
Taxes 655 931 2,477 2,292 1,580
- ------------------------------------------------------------------------------------------------------
Net income $ 903 $ 1,284 $ 3,413 $ 3,160 $ 2,179
- ------------------------------------------------------------------------------------------------------
Average net loans $1,238,258 $468,512 $ 418,055 $ 372,882 $ 406,073
Average assets 1,275,262 472,004 426,487 375,573 408,607
Average deposits 1,200,031 498,290 14,237 79,102 -
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
For the three months ended
June 30, 1998 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- ------------------------------------------------------------------------------------------------------
Net interest income $ 16,146 $ - $ 1,854 $ (2,834) $ 65,397
Provision for loan losses 20 - 625 2,051 14,127
Noninterest income 139 3,815 24,461 375 35,173
Noninterest expense 11,322 - 15,425 6,018 59,074
- ------------------------------------------------------------------------------------------------------
Income before taxes 4,943 3,815 10,265 (10,528) 27,369
Taxes 2,078 1,604 4,316 (5,131) 10,802
- ------------------------------------------------------------------------------------------------------
Net income $ 2,865 $ 2,211 $ 5,949 $ (5,397) $ 16,567
- ------------------------------------------------------------------------------------------------------
Average net loans $ 249,842 $ - $ 62,308 $ (57,061) $3,158,869
Average assets 250,063 77,988 1,208,071 392,475 4,886,530
Average deposits 1,770,768 - 639,192 28,902 4,230,522
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
For the six months ended Entertainment and
June 30, 1999 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------
Net interest income $ 43,934 $ 20,286 $ 15,302 $ 13,782 $ 8,019
Provision for loan losses 4,903 2,105 190 362 28
Noninterest income 6,998 8,633 493 1,347 892
Noninterest expense 30,467 14,153 2,711 5,773 1,500
- -----------------------------------------------------------------------------------------------------
Income before taxes 15,562 12,661 12,894 8,994 7,383
Taxes 6,543 5,323 5,421 3,781 3,104
- ------------------------------------------------------------------------------------------------------
Net income $ 9,019 $ 7,338 $ 7,473 $ 5,213 $ 4,279
- -----------------------------------------------------------------------------------------------------
Average net loans $1,353,091 $541,530 $ 469,501 $ 444,876 $ 454,052
Average assets 1,362,500 545,034 476,398 447,428 457,238
Average deposits 1,229,056 630,936 15,487 86,237 -
- -----------------------------------------------------------------------------------------------------
31
- -----------------------------------------------------------------------------------------------------
For the six months ended
June 30, 1999 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------
Net interest income $ 27,929 $ - $ 6,190 $ (7,121) $ 128,321
Provision for loan losses 60 - 383 6,789 14,820
Noninterest income 3,409 7,035 29,147 637 58,591
Noninterest expense 23,618 3,704 22,261 10,693 114,880
- -----------------------------------------------------------------------------------------------------
Income before taxes 7,660 3,331 12,693 (23,966) 57,212
Taxes 3,221 1,401 5,337 (10,954) 23,177
- ------------------------------------------------------------------------------------------------------
Net income $ 4,439 $ 1,930 $ 7,356 $ (13,012) $ 34,035
- -----------------------------------------------------------------------------------------------------
Average net loans $ 502,064 $ - $ 113,663 $ (85,457) $3,793,320
Average assets 509,372 51,773 1,172,104 455,523 5,477,370
Average deposits 2,072,421 - 706,978 35,164 4,776,279
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
For the six months ended Entertainment and
June 30, 1998 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------
Net interest income $ 44,105 $ 18,326 $ 14,007 $ 15,036 $ 6,870
Provision for loan losses 9,080 3,201 126 (60) -
Noninterest income 7,086 1,612 566 1,161 992
Noninterest expense 30,130 11,059 3,309 5,367 911
- -----------------------------------------------------------------------------------------------------
Income before taxes 11,981 5,678 11,138 10,890 6,951
Taxes 5,038 2,388 4,683 4,579 2,922
- ------------------------------------------------------------------------------------------------------
Net income $ 6,943 $ 3,290 $ 6,455 $ 6,311 $ 4,029
- -----------------------------------------------------------------------------------------------------
Average net loans $1,194,391 $454,596 $ 428,730 $ 361,971 $ 382,388
Average assets 1,229,330 457,876 437,417 364,761 384,676
Average deposits 1,163,814 475,547 12,489 80,707 -
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
For the six months ended
June 30, 1998 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------
Net interest income $ 29,860 $ - $ 3,982 $ (5,964) $ 126,222
Provision for loan losses 362 - 661 6,596 19,966
Noninterest income 217 6,699 31,608 3,147 53,088
Noninterest expense 21,526 - 25,316 11,539 109,157
- -----------------------------------------------------------------------------------------------------
Income before taxes 8,189 6,699 9,613 (20,952) 50,187
Taxes 3,443 2,817 4,042 (9,667) 20,245
- ------------------------------------------------------------------------------------------------------
Net income $ 4,746 $ 3,882 $ 5,571 $ (11,285) $ 29,942
- -----------------------------------------------------------------------------------------------------
Average net loans $ 214,567 $ - $ 63,339 $ (54,941) $3,045,041
Average assets 214,848 76,264 1,106,287 377,034 4,648,493
Average deposits 1,622,579 - 636,515 27,224 4,018,875
- -----------------------------------------------------------------------------------------------------
32
Detail of amounts included in unallocated is provided below:
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Net interest income:
Internal funding $(3,349) $(1,744) $(5,983) $(4,956)
Deferred loan fees (1,295) (1,338) (2,777) (2,530)
Reclass of late fees and factoring interest 581 677 1,423 1,057
Other 119 (429) 216 465
- ------------------------------------------------------------------------------------------------------------------------
$(3,944) $(2,834) $(7,121) $(5,964)
- ------------------------------------------------------------------------------------------------------------------------
Loan loss provision:
Unallocated allowance $ 5,803 $ 1,801 $ 6,828 $ 6,421
Mortgage loans - 50 (41) 50
Other - 200 2 125
- ------------------------------------------------------------------------------------------------------------------------
$ 5,803 $ 2,051 $ 6,789 $ 6,596
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Item processing revenue $ 1,033 $ 972 $ 2,094 $ 1,919
Reclass of late fees and factoring (581) (677) (1,423) (1,057)
interest
Other (160) 80 (34) 2,285
- ------------------------------------------------------------------------------------------------------------------------
$ 292 $ 375 $ 637 $ 3,147
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Unallocated administration and $ 6,898 $ 7,622 $12,654 $13,841
operations
Deferred loan costs (1,297) (1,410) (2,483) (2,414)
Other 93 (193) 522 112
- ------------------------------------------------------------------------------------------------------------------------
$ 5,693 $ 6,018 $10,693 $11,539
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
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 and the balance of deferred fees. Unallocated deposit balances include
official checks and Treasury, Tax and Loan accounts.
- ------------------------------------------------------------------------------------------------------------------------
33
TABLE 1 - FINANCIAL RATIOS
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Net income as a percentage of: (1)
Average shareholders' equity 19.91% 17.55% 17.45% 16.37%
Average total assets 1.43% 1.36% 1.25% 1.30%
Average earning assets 1.58% 1.51% 1.39% 1.44%
Normalized income as a percentage of: (1)(2)
Average shareholders' equity 14.14% 15.21% 13.84% 14.25%
Average total assets (3) 1.02% 1.20% 1.00% 1.15%
Average earning assets 1.12% 1.31% 1.10% 1.26%
Average shareholders' equity as a
percentage of:
Average assets 7.17% 7.75% 7.18% 7.93%
Average loans 10.23% 11.77% 10.19% 11.90%
Average deposits 8.28% 8.95% 8.23% 9.18%
Shareholders' equity at period end as a
percentage of:
Total assets at period end - - 6.16% 6.26%
Total loans at period end - - 11.28% 12.07%
Total deposits at period end - - 7.10% 7.02%
- ----------------------------------------------------------------------------------------------------------------------------
(1) Annualized
(2) Normalized net income for 1999 reporting periods excludes equity in the
earnings/losses of ICII, the gain on the sale of the trust business and the
net gain on the sale of ICII common stock. Normalized net income for 1998
reporting periods excludes equity in the earnings of ICII.
(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.
34
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 Asset Purchase Agreement among
Union Bank of California,
N.A., Imperial Trust Company
and Imperial Bank
10.2 Transition Agreement Between
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: August 6, 1999 By: /s/ Christine M. McCarthy
-------------------------
Christine M. McCarthy
Executive Vice President and
Chief Financial Officer
35