-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VPXvraWI8kI8s7PVAyInm4UwFmOs1GVMZx/xP+uyHEJ1GSy7rVORVCccTLoLij7L R7UOdcapPwvibfmrGi+DHw== 0000944209-98-001457.txt : 19980814 0000944209-98-001457.hdr.sgml : 19980814 ACCESSION NUMBER: 0000944209-98-001457 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL BANCORP CENTRAL INDEX KEY: 0000049899 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 952575576 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08196 FILM NUMBER: 98684560 BUSINESS ADDRESS: STREET 1: 9920 S LA CIENEGA BLVD CITY: INGLEWOOD STATE: CA ZIP: 90301 BUSINESS PHONE: 3104175600 MAIL ADDRESS: STREET 2: PO BOX 92991 CITY: LOS ANGELES STATE: CA ZIP: 90009 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1998 IMPERIAL BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 95-2575576 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 9920 SOUTH LA CIENEGA BOULEVARD INGLEWOOD, CALIFORNIA 90301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 417-5600 Commission file number: 0-7722 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK: Number of Shares of Common Stock outstanding as of June 30, 1998: 39,756,670 shares. DEBT SECURITIES: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due 1999. As of June 30, 1998, $2,195,000 in principal amount of such Notes and $1,038,000 in principal amount of such Debentures were outstanding. CAPITAL SECURITIES: 9.98% Series B Capital Securities of Imperial Capital Trust I Due 2026. As of June 30, 1998, $73,343,000 in net principal amount was outstanding. The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. IMPERIAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology including "may", "will", "intend", "should", "expect", "anticipate", "estimate" or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth in documents filed with the Securities and Exchange Commission. FINANCIAL REVIEW The following discussion presents information about the results of operations, financial condition, liquidity, and capital resources of Imperial Bancorp ("the Company") for the three months and six months ended June 30, 1998. This information should be read in conjunction with the Company's 1997 consolidated financial statements and notes thereto, and the accompanying quarterly unaudited consolidated financial statements and notes thereto. PERFORMANCE SUMMARY Net income for the second quarter of 1998 increased to $16.6 million, or $0.40 per diluted share, from $11.0 million, or $0.27 per diluted share, for the second quarter of 1997. The annualized return on average total assets increased to 1.36% for the quarter ended June 30, 1998, from 1.25% for the same period of 1997. The annualized return on average shareholders' equity increased to 17.55% for the second quarter of 1998 compared with 14.34% for the second quarter of 1997. Net income for the second quarter of 1998 includes gains net of commission expense totaling $6.7 million after-tax from the exercise and sale of equity warrants, and an incremental loan loss provision of $4.1 million after- tax relating to a charge-off on one commercial loan. Net income for the six months ended June 30, 1998, increased to $29.9 million, or $0.72 per diluted share, from $18.9 million, or $0.47 per diluted share, for the first six months of 1997. The annualized return on average total assets increased to 1.30% for the first half of 1998, compared with 1.13% for the first half of 1997. The annualized return on average shareholders' equity increased to 16.37% for the first half of 1998, compared with 12.75% for the same period of 1997. Net income for the first half of 1998 and 1997 includes after-tax gains, net of commission expense, from the exercise and sale of equity warrants totaling $7.0 million and $1.0 million, respectively. Earnings per share calculations for the prior periods have been adjusted to reflect a three-for-two stock split effected on February 6, 1998. Net income increased 51% and 58%, respectively, for the second quarter and first six months of 1998 compared with the comparable periods of 1997. The increase in year-to-date net income is largely attributable to growth in loans and to increases in gains on the exercise and sale of equity warrants and fee-based income. Average loan balances for the current quarter and year-to-date increased approximately 40% compared with the comparable periods of 1997. Loan growth is expected to continue for the balance of 1998 but at a more moderate pace. Net interest income increased to $65.1 million for the three months ended June 30, 1998, compared with $47.8 million for the same period of 1997. Net interest income for the six months ended June 30, 1998, increased to $125.7 million from $88.0 million for the first half of 1997. The Company's net interest margin decreased to 5.93% for the second quarter of 1998 compared with 6.12% for the second quarter of 1997, however, on a year-to-date basis, the net interest margin increased to 6.07% for 1998 from 5.98% for the same period of 1997. The decrease in the net interest margin for the second quarter of 1998 is largely due to a decrease in loan yields. The Company's cost of funds for the second quarter of of 1998 decreased slightly from the same period of 1997. The provision for loan losses for the quarter and six months ended June 30, 1998, totaled $14.1 million and $20.0 million, respectively. The provision for loan losses for the comparable periods of the prior year totaled $4.4 million and $7.7 million, respectively. The increases in the provision for loan losses for the quarter and year-to-date compared to the prior year reflect loan growth and net charge-offs recorded in the second quarter of 1998. Charge-offs for the second 1 quarter of 1998 include $7.0 million related to one commercial loan. The Company's loan portfolio increased by $429.1 million, or 15%, since December 31, 1997. The ratio of the allowance for loan losses to period end outstanding loans was 1.80% at June 30, 1998, 1.83% at December 31, 1997, and 1.81% at June 30, 1997. Noninterest income for the three months ended June 30, 1998, increased to $35.5 million from $16.0 million for the three months ended June 30, 1997. Noninterest income for the second quarter of 1998 includes gains totaling $16.6 million from the exercise and sale of equity warrants. Excluding gains on equity warrants, noninterest income increased 25% to $18.9 million for the second quarter of 1998 from $15.2 million for the second quarter of 1997. Noninterest income for the first half of 1998 increased to $36.6 million, excluding $17.0 million in gains on equity warrants, from $26.7 million for the first half of 1997, excluding $2.5 million in gains on equity warrants and $2.8 million recognized on the appreciation of Imperial Credit Industries, Inc. ("ICII") (NASDAQ-NMS-ICII) stock donated to not-for-profit organizations in the first quarter of 1997. The increase in noninterest income for the quarter and year-to-date compared with the prior year is primarily due to growth in fee- based service income including: merchant card processing fees, international income, fees derived from the sale of nonproprietory mutual funds, factoring fees, trust fees and service charges on deposits. Noninterest expense increased to $59.1 million for the three months ended June 30, 1998, from $40.8 million for the three months ended June 30, 1997. Noninterest expense totaled $109.2 million for the six months ended June 30, 1998, compared with $80.5 million for the six months ended June 30, 1997. The increase in noninterest expense for the current quarter and year-to-date compared with the prior year occurred primarily in salary and benefits expense and customer services expense. The increase in salary and benefits expense is primarily the result of expansion in the Company's core lending and deposit businesses and related support operations, and the addition of new offices. Benefits expense includes $5.0 million of commissions associated with the exercise and sale of equity warrants. The increase in customer services expense can be attributed to the growth in deposit balances generated by the Financial Services Group. Total assets at June 30, 1998, were $6.2 billion, an increase of 32% from total assets of $4.7 billion reported at December 31, 1997, and a 50% increase over total assets of $4.1 billion reported at June 30, 1997. Total loans at June 30, 1998, were $3.2 billion, a 15% increase from $2.8 billion reported at December 31, 1997, and a 37% increase over $2.4 billion reported at June 30, 1997. The growth in the loan portfolio occurred primarily in commercial loans. Total deposits at June 30, 1998, were $5.5 billion, an increase of 33% over total deposits of $4.2 billion at December 31, 1997, and a 56% increase over total deposits of $3.5 billion at June 30, 1997. Noninterest-bearing demand deposits increased to $3.6 billion at June 30, 1998, from $2.4 billion at December 31, 1997, and $1.9 billion at June 30, 1997. Noninterest-bearing demand deposits represented 64% of total deposits at June 30, 1998, compared with 57% at December 31, 1997 and 53% at June 30, 1997. Nonaccrual loans totaled $25.9 million at June 30, 1998, compared with $10.6 million at December 31, 1997, and $7.9 million at June 30, 1997. Restructured loans totaled $23.7 million at June 30, 1998, $24.0 million at December 31, 1997, and $24.1 million at June 30, 1997. All restructured loans were performing in accordance with their modified terms at June 30, 1998. The balance of real estate owned and other assets net of allowance ("OREO") was $3.3 million at June 30, 1998, $3.3 million at December 31, 1997, and $3.0 million at June 30, 1997. Imperial Bancorp is classified as "Well Capitalized" with leverage, Tier I and total capital ratios at June 30, 1998, of 9.32%, 10.25% and 11.57%, respectively, compared to 8.61%, 9.67% and 11.06%, respectively, at June 30, 1997. SPIN OFF On February 27, 1998, the Company received from the Internal Revenue Service a ruling favorable to the Company's proposed spin off, in a tax free distribution to shareholders, of a portion of the Company's specialty lending and finance businesses (the Lewis Horwitz Organization, the small business lending division, Imperial Trust Company and the Company's investment in Imperial Credit Industries, Inc.) into a newly formed corporation, Imperial Financial Group, Inc. ("IFG"). On June 18, 1998, the Company announced that the Board of Directors set a record date of September 17, 1998, for the spin off of IFG with the distribution to occur on October 1, 1998. Shareholders as of the record date will receive one share of IFG for each two shares of Imperial Bancorp owned. The spin off, which is in the form of a dividend to the Company's shareholders as of the record date, is subject to certain remaining conditions including the finalization of financing and other necessary regulatory approvals which the Company expects to receive. 2 Prior to distributing the common stock of IFG to the Company's shareholders, the Company will contribute to IFG the following: (i) the assets and liabilities relating to The Lewis Horwitz Organization, a division of Imperial Bank ("the Bank") that specializes in motion picture and television financing, (ii) all of the common stock of Imperial Trust Company, a California licensed trust company that offers a wide range of trust and investment management services, (iii) all of the common stock of a newly formed industrial loan company, Crown American Bank, that holds the assets and liabilities of the Bank's Small Business Administration ("SBA") lending business that provides loans to small businesses, a portion of which are guaranteed as to repayment by the U.S. Government, and (iv) the common stock owned by the Bank (representing approximately 23% of all outstanding common stock as of June 30, 1998) in ICII. Total assets of the entities comprising IFG approximated $245.6 million at June 30, 1998. Revenues of IFG, including interest income and noninterest income would have approximated $23.6 million for the six months ended June 30, 1998. The contribution agreement, as currently contemplated, calls for the Company to contribute to IFG the following: net assets approximating the Company's net investment in ICII, the Company's investment in Crown American Bank and Imperial Trust Company, and approximately $11.8 million in cash (totaling $75.4 million at June 30, 1998). The Company's pro forma leverage, Tier 1, and total capital ratios at June 30, 1998, reflecting the spin off of IFG were 8.20%, 9.06% and 10.31%, respectively. EARNINGS PERFORMANCE Net Interest Income: The Company's operating results depend primarily on net interest income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income increased to $65.1 million for the three months ended June 30, 1998, from $47.8 million for the same period of the prior year. The increase in net interest income was primarily due to the growth in loans. Growth in the average balances of securities available for sale and Fed funds sold also contributed to the increase in net interest income. Total average earning assets increased to $4.4 billion for the three months ended June 30, 1998, compared with $3.1 billion for the three months ended June 30, 1997.
================================================================================================================ Three Months Ended Six Months Ended June 30, June 30, (In Thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Interest income $90,146 $68,495 $174,216 $127,228 Interest expense 25,077 20,656 48,510 39,228 - ---------------------------------------------------------------------------------------------------------------- Net interest Income $65,069 $47,839 $125,706 $ 88,000 - ---------------------------------------------------------------------------------------------------------------- Net interest margin 5.93% 6.12% 6.07% 5.98% ================================================================================================================
The Company's net interest margin decreased to 5.93% for the second quarter of 1998 from 6.12% for the second quarter of 1997. The decrease in the net interest margin for the current quarter is largely due to a decline in the yield on commercial loans. While the overall pricing of loan products remained fairly stable, the Company did experience a reduction in yield on selected loan products, and the yield on commercial loans was negatively impacted during the second quarter by an increase in nonaccrual loans. The net interest margin was favorably impacted by a modest reduction in the Company's cost of funds due in large part to the growth in noninterest-bearing deposits. On a year-to-date basis, the net interest margin increased to 6.07% for the first half of 1998 compared with 5.98% for the first half of 1997. The increase in the year-to- date net interest margin is due to growth in loans and other earning assets. Additional information concerning interest-earning assets and interest-bearing liabilities and the yields and rates thereon for the three months and six months ended June 30, 1998, is provided in Table 1-Average Balances, Yields and Rates Paid on page 21 of this Form 10-Q. In conformity with banking industry practice, payments for accounting, courier and other deposit-related services provided to the Company's Financial Services Group depositors are recorded as noninterest expense. If these deposits were treated as interest-bearing and the payments reclassified as interest expense, the Company's reported net interest income and noninterest expense would have been reduced by $6.9 million and $12.8 million, respectively, for the three 3 months and six months ended June 30, 1998, and by $4.3 million and $7.9 million, respectively, for the three months and six months ended June 30, 1997. The net interest margin for the three months ended June 30, 1998 and 1997, would have been 5.30% and 5.57%, respectively. The net interest margin for the six months ended June 30, 1998 and 1997, would have been 5.45% and 5.44%, respectively Noninterest Income: Noninterest income increased to $35.5 million for the three months ended June 30, 1998, from $16.0 million for the second quarter of 1997. For the first six months of 1998, noninterest income increased to $53.6 million from $32.1 million for the prior year. The table below provides the major components of noninterest income for the periods indicated:
============================================================================================================================= Three months ended Six months ended June 30, June 30, (In Thousands) 1998 1997 1998 1997 ============================================================================================================================= Service charges on deposit accounts $ 1,686 $ 1,314 $ 3,118 $ 2,717 Trust fees 2,094 1,740 4,185 3,717 Gain on origination and sale of loans 1,452 1,505 2,536 2,019 Equity in net income of Imperial Credit Industries, Inc. 3,815 3,544 6,699 5,005 Other service charges and fees 3,870 2,675 6,785 4,953 Merchant and credit card fees 1,631 798 3,106 1,497 International income and fees 3,469 2,631 6,409 4,750 Gain on securities available for sale 8 123 12 356 Gain on trading instruments 163 478 371 1,096 Gain on exercise and sale of equity warrants 16,617 809 17,040 2,543 Appreciation of donated Imperial Credit Industries, Inc. common stock - - - 2,816 Other income 696 342 3,343 619 - ----------------------------------------------------------------------------------------------------------------------------- Total $35,501 $15,959 $53,604 $32,088 =============================================================================================================================
Noninterest income for the second quarter of 1998 includes gains totaling $16.6 million from the exercise and sale of equity warrants. Excluding gains on equity warrants, noninterest income increased 24.7% to $18.9 million for the second quarter of 1998 from $15.2 million for the second quarter of 1997. Noninterest income for the first half of 1998 increased to $36.6 million, excluding $17.0 million in gains on equity warrants, from $26.7 million for the first half of 1997, excluding gains on equity warrants and $2.8 million recognized on the appreciation of ICII stock donated to not-for-profit organizations in the first quarter of 1997. The Company continues to experience growth in fee-based service income including: merchant card processing fees, international income, fees derived from the sale of nonproprietory mutual funds, factoring fees, trust fees and service charges on deposits. The increases in fee income were related to higher volumes in the respective operations. The Company's equity in the earnings of ICII increased slightly for the second quarter of 1998 to $3.8 million from $3.5 million for the prior year. For the first six months of 1998, equity in the earnings of ICII increased to $6.7 million from $5.0 million for the prior year. In the first quarter of 1997, ICII recorded an extraordinary loss due to the early retirement of debt which resulted in an after-tax loss of approximately $4.0 million. The Company's pretax share of this loss was $1.0 million. The increases in fee income and in the equity in ICII's net income were offset in part by decreases in gains on trading instruments and gains on the sale of securities available for sale. Noninterest Expense: Noninterest expense totaled $59.1 million for the three months ended June 30, 1998, compared with $40.8 million for the three months ended June 30, 1997. Noninterest expense for the first half of 1998 totaled $109.2 million compared with $80.5 million for the first half of 1997. The table below provides detail of noninterest expense by category for the periods indicated: 4
=================================================================================================================== Three months ended Six months ended June 30, June 30, (In Thousands) 1998 1997 1998 1997 =================================================================================================================== Salary and employee benefits $33,189 $21,839 $ 61,900 $41,510 Net occupancy expense 2,646 2,309 4,969 4,521 Furniture and equipment 2,583 1,607 4,800 2,988 Data processing 2,455 1,884 4,655 3,759 Customer services 6,878 4,273 12,784 7,879 Professional and legal fees 2,799 2,468 5,098 4,296 Business development 1,597 1,753 2,724 2,650 Charitable donations 164 51 307 3,727 Other expense 6,763 4,609 11,920 9,177 - ------------------------------------------------------------------------------------------------------------------- Total $59,074 $40,793 $109,157 $80,507 ===================================================================================================================
The increase in noninterest expense for the current quarter and year-to-date compared with the prior year occurred primarily in salary and benefits expense, customer services expense and other noninterest expense. The increase in salary and benefits expense is primarily the result of the Company's growth. The number of full-time equivalent staff increased 28% to 1,146 at June 30, 1998, compared with 898 at June 30, 1997. The increase in staff reflects additions to lending and deposit personnel at existing offices, the opening of two loan production offices and Imperial Bank Arizona, and additions to operations staff to support the Company's growth. Benefits expense for the second quarter of 1998 includes $5.0 million of commissions associated with the exercise and sale of equity warrants. Excluding commissions related to warrants, salaries and benefits expense increased 31% for the second quarter of 1998 compared to the second quarter of 1997. The Company's expansion has also led to increases in occupancy, furniture and equipment expenses. Customer services expense increased to $6.9 million for the second quarter of 1998 from $4.3 million for the prior year. For the first half of 1998, customer services expense totaled $12.8 million compared with $7.9 million for the same period of 1997. The Company pays certain accounting and courier expenses on behalf of its Financial Services Group depositors. The increase in customer services expense is directly related to the growth in Financial Services Group demand deposits. The average balance of these demand deposits increased approximately $633.1 million for the six months ended June 30, 1998, compared with the comparable period of 1997. Other noninterest expense for the second quarter of 1998 totaling $6.8 million includes $660,000 of amortization related to the Company's investment in low income housing tax credits. The Company's gross investment in low income housing tax credits increased to $8.1 million at June 30, 1998, from $2.6 million at December 31, 1997. Other noninterest expense for the current quarter and year-to-date also reflects increases in travel, supplies and telephone expenses related to the Company's growth. The increases in noninterest expense discussed above were partially offset by a reduction in contributions expense. Contributions expense for the first half of 1997 included a $3.7 million donation of ICII stock to not-for-profit organizations. Income Taxes: The Company recorded income tax expense of $10.8 million and $7.5 million, respectively, for the quarters ended June 30, 1998 and 1997. Income tax expense was $20.2 million and $12.7 million, respectively, for the six months ended June 30, 1998 and 1997. The Company's effective tax rate was 40.3% for the six month period ended June 30, 1998, and 40.0% for the six month period ended June 30, 1997. 5 LOANS The following table provides a summary of loans by category for the periods indicated:
================================================================================================================================= (In Thousands) June 30, 1998 December 31, 1997 June 30, 1997 - --------------------------------------------------------------------------------------------------------------------------------- Balance Percent Balance Percent Balance Percent Commercial $2,808,458 87.28% $2,350,438 84.29% $1,885,317 80.02% Loan Secured by real estate: - Real estate term loans 196,352 6.10 232,954 8.35 321,460 13.64 Interim construction loans 183,203 5.69 174,767 6.27 123,975 5.26 Consumer loans 29,676 0.93 30,449 1.09 25,511 1.08 - --------------------------------------------------------------------------------------------------------------------------------- Gross Loans 3,217,689 100.00% 2,788,608 100.00% 2,356,263 100.00% Less Allowance for loan losses (58,007) (51,143) (42,567) - --------------------------------------------------------------------------------------------------------------------------------- Total loans $3,159,682 $2,737,465 $2,313,696 =================================================================================================================================
The Company continued to experience strong loan demand in its core California markets during the second quarter of 1998 and the relative distribution by industry type remained consistent with year end 1997. The out-of-state loan production offices opened in 1996 and 1997 also contributed to the Company's loan growth. Management expects loan growth to continue through 1998 and into 1999 although at a more moderate pace. ASSET QUALITY Nonaccrual Loans, Restructured Loans and Real Estate Owned: Nonaccrual loans, which includes loans 90 days or more past due, totaled $25.9 million at June 30, 1998, compared with $10.6 million at December 31, 1997, and $7.9 million at June 30, 1997. Nonaccrual loans as a percentage of total loans outstanding were 0.81% at June 30, 1998, 0.38% at December 31, 1997, and 0.34% at June 30, 1997. Loans totaling $21.4 million were placed on nonaccrual status during the three months ended June 30, 1998. The increase in nonaccrual loans was partially offset by gross charge-offs totaling $3.9 million, payoffs totaling $2.3 million, loans brought current totaling $592,000 and loans transferred to OREO totaling $915,000. The increase in nonaccrual loans during the second quarter of 1998 comprises $19.8 million of commercial loans, including one $5.9 million loan, and two real estate loans totaling $1.6 million. For the six months ended June 30, 1998, nonaccrual loans increased by $28.8 million. The increase in the balance of nonaccrual loans was partially offset by gross charge-offs totaling $5.4 million, payoffs totaling $3.5 million, loans brought current totaling $3.7 million and loans transferred to OREO totaling $915,000. At June 30, 1998, the Company had loans totaling $1.1 million that were past due 90 days or more and still accruing interest. The majority of these loans were government-guaranteed Small Business Administration ("SBA") loans. When a loan reaches nonaccrual status, any interest accrued but uncollected is reversed and charged against current income. Restructured loans, loans that have had their original terms modified, totaled $23.7 million, $24.0 million and $24.1 million at June 30, 1998, December 31, 1997, and June 30, 1997, respectively. The net decrease in restructured loans since December 31, 1997, reflects payments received totaling $1.1 million offset in part by the addition of one commercial loan. Real estate and other assets owned ("OREO") include properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the collateral, less the estimated costs of disposal, and the loan balance at the time of transfer to OREO is reflected in the allowance for loan losses as a charge-off. Any subsequent declines in the fair value of the property after the date of transfer are recorded through a provision for writedowns on OREO. OREO net of valuation allowances totaled $3.3 million, $3.3 million and $3.0 million at June 30, 1998, December 31, 1997, and June 30, 1997, respectively. For the six months ended June 30, 1998, four properties were added to OREO and six properties were sold. A net loss of $67,000 was recognized on the sales. The following table provides information on nonaccrual loans, restructured loans and real estate and other assets owned as indicated: 6
=================================================================================================================================== June 30, March 31, Dec. 31, Sept. 30, June 30, (In Thousands) 1998 1998 1997 1997 1997 =================================================================================================================================== Nonaccrual loans: Commercial $25,039 $ 9,802 $ 8,675 $ 6,250 $ 5,782 Real estate 831 2,353 1,903 2,685 2,136 Consumer 49 99 - 301 - - ----------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $25,919 $12,254 $10,578 $ 9,236 $ 7,918 =================================================================================================================================== Restructured loans $23,652 $23,129 $23,970 $25,549 $24,144 =================================================================================================================================== Real estate and other assets owned: Real estate and other assets owned, gross $ 4,343 $ 4,073 $ 4,373 $ 3,547 $ 3,817 Less valuation allowance (1,089) (1,089) (1,089) (1,089) (833) - ----------------------------------------------------------------------------------------------------------------------------------- Real estate and other assets owned, net $ 3,254 $ 2,984 $ 3,284 $ 2,458 $ 2,984 - ----------------------------------------------------------------------------------------------------------------------------------- Total $52,825 $38,367 $37,832 $37,243 $35,046 ===================================================================================================================================
All loans on nonaccrual status are considered to be impaired; however, not all impaired loans are on nonaccrual status. Impaired loans on accrual status must meet the following criteria: all payments must be current and the loan underwriting must support the debt service requirements. Factors that contribute to a performing loan being classified as impaired include: a below market interest rate, delinquent taxes and debts to other lenders that cannot be serviced out of existing cash flow. The following table contains information for loans deemed impaired:
=========================================================================================================== Net Carrying Specific Net (In Thousands) Value Allowance Balance - ----------------------------------------------------------------------------------------------------------- June 30, 1998 Loans with specific allowances $61,302 $(12,692) $48,610 Loans without specific allowances 15,187 - 15,187 - ----------------------------------------------------------------------------------------------------------- Total $76,489 $(12,692) $63,797 =========================================================================================================== December 31, 1997 Loans with specific allowances $85,612 $(11,881) $73,731 Loans without specific allowances 7,374 - 7,374 - ----------------------------------------------------------------------------------------------------------- Total $92,986 $(11,881) $81,105 =========================================================================================================== Impaired loans were classified as follows: =========================================================================================================== June 30, December 31, (In Thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Current $50,570 $79,109 Past due - 3,299 Nonaccrual 25,919 10,578 - ----------------------------------------------------------------------------------------------------------- Total $76,489 $92,986 ===========================================================================================================
Loans classified as impaired totaled $76.5 million at June 30, 1998, compared to $93.0 million at December 31, 1997. During the first half of 1998, $44.8 million of loans were newly classified as impaired. The increase in impaired loans was offset by the receipt of payments on impaired loans totaling $49.4 million, charge-offs totaling $6.6 million, loans removed from impaired status totaling $4.3 million and loans transferred to OREO of $915,000. The Company's average recorded investment in impaired loans for the six months ended June 30, 1998, was $83.4 million. Interest income totaling approximately $4.0 million was collected on impaired loans during the six months ended June 30, 1998. 7 Allowance and Provision for Loan Losses: The allowance for loan losses is maintained at a level considered appropriate by management and is based on an ongoing assessment of the risks inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net charge-offs during the period. The Company's determination of the level of the allowance for loan losses, and correspondingly, the provision for loan losses is based upon various judgments and assumptions, including general economic conditions (especially in California), loan growth, loan portfolio composition and concentrations, prior loan loss experience, collateral value, identification of problem and potential problem loans and other relevant data to identify the risks in the loan portfolio. While management believes that the allowance for loan losses is adequate at June 30, 1998, future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. At June 30, 1998, the allowance for loan losses equaled $58.0 million, or 1.80% of total loans, compared with $51.1 million, or 1.83% of total loans, at December 31, 1997, and $42.6 million, or 1.81% of total loans, at June 30, 1997. The following table summarizes changes in the allowance for loan losses.
==================================================================================================================================== Six months ended June 30, (In Thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of year $ 51,143 $ 36,051 ==================================================================================================================================== Loans charged off: Commercial (13,791) (2,394) Real estate (329) (1,115) Consumer (47) (2) - ------------------------------------------------------------------------------------------------------------------------------------ Total loans charged off $(14,167) $ (3,511) ==================================================================================================================================== Recoveries of loans previously charged off: Commercial 911 545 Real estate 153 1,696 Consumer 1 13 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans recoveries $ 1,065 $ 2,254 ==================================================================================================================================== Net loans charged off (13,102) (1,257) Provision for loan losses 19,966 7,773 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $ 58,007 $ 42,567 ==================================================================================================================================== Loans outstanding, end of period $3,217,689 $2,356,263 ==================================================================================================================================== Average loans outstanding $3,094,609 $2,194,731 ==================================================================================================================================== Ratio of net charge-offs to average loans /(1)/ 0.85% 0.12% Ratio of allowance for loan losses to average loans 1.87 1.94 Ratio of allowance for loan losses to loans outstanding at June 30 1.80 1.81 Ratio of allowance for loan losses to nonaccrual loans 224 538 Ratio of provision for loan losses to net charge-offs 152 618 ==================================================================================================================================== /(1)/ Annualized
The provision for loan losses for the six months ended June 30, 1998 and 1997, totaled $20.0 million and $7.8 million, respectively. The increase in the provision for loan losses compared with the prior year reflects loan growth and net charge-offs recorded in the second quarter of 1998. Charge-offs for the second quarter of 1998 include $7.0 million related to one commercial loan. The average balance of the Company's loan portfolio increased by $899.9 million, or 41%, for the six months ended June 30, 1998, compared with the comparable period of the prior year. As a percentage of average loans outstanding, annualized net charge-offs were 0.85% for the first half of 1998 compared with 0.12% for the first half of 1997. 8 Securities: Securities available for sale increased to $755.8 million at June 30, 1998, from $669.3 million at December 31, 1997. Federal funds sold and securities purchased under resale agreements increased to $1.5 billion at June 30, 1998, from $765.0 million at December 31, 1997. The increase in these balances is a function of the growth in deposits. Noninterest-bearing demand deposits increased to $3.6 billion at June 30, 1998, from $2.4 billion at December 31, 1997. The growth in demand balances occurred primarily in real estate services deposits which increased to $2.5 billion at June 30, 1998, from $1.4 billion at December 31, 1997. The remaining increase in demand balances is due to growth in commercial deposits. Other Borrowings: Short-term borrowings increased to $136.0 million at June 30, 1998, from $55.9 million at December 31, 1997. Increases of $95.1 million in borrowed funds backed by Treasury, Tax and Loan ("T,T&L") deposits and $8.9 million in commercial paper were offset in part by a $23.9 million decrease in Federal funds purchased and reverse repurchase balances. ASSET/LIABILITY MANAGEMENT Liquidity: Liquidity management involves the Company's ability to meet the cash flow requirements of its lending and deposit businesses. For the Company, as with most commercial banking institutions, this involves an ongoing process of managing the cash inflows and outflows associated with a commercial deposit base. The Company's ability to acquire new deposits at pricing levels consistent with management's targets is largely based upon its financial condition and capital base. The Company's liquid assets consist of cash and cash equivalents and investment securities, excluding those pledged as collateral. The majority of the Company's securities portfolio is held as available for sale. Available for sale securities can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. It is the Company's policy to maintain a minimum liquidity ratio (liquid assets to deposits) of 20% and to limit gross loans to no more than 80% of deposits. At June 30, 1998, the Company's liquidity ratio was 40% and the loan to deposit ratio was 58%. The overall liquidity position of the Company has been enhanced by a sizable base of demand deposits resulting from the Company's longstanding relationships with the real estate services industry which have provided a relatively stable and low cost funding base. Total demand deposits averaged $2.3 billion for the quarter ended June 30, 1998, compared with $1.4 billion for the same period of 1997. For the six months ended June 30, 1998, approximately 37% of average total deposits were from the real estate services industry compared to 28% of average total deposits for the same period of 1997. The Company's average demand deposits and average shareholders' equity funded approximately 53% and 47%, respectively, of average total assets for the six months ended June 30, 1998 and 1997. These funding sources are augmented by payments of principal and interest on loans, the routine liquidation of securities from the trading and available for sale portfolios, Federal funds sold and securities purchased under resale agreements. For the six months ended June 30, 1998, the Company experienced a net cash outflow from its investing activities of approximately $1.3 billion. The net outflow related to investing activities can be attributed to growth in the Company's loan portfolio, an outflow of $415.4 million, and a $753.0 million increase in Federal funds sold. The outflow in investing activities was offset by the $1.5 billion net cash provided by the Company's financing activities. Net cash inflows from financing activities for the six months ended June 30, 1998, included net increases in deposits totaling $1.4 billion, and $80.1 million provided by an increase in short-term borrowings. Interest Rate Sensitivity Management: The primary objective of the asset liability management process is to manage the Company's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. In order to manage its interest rate sensitivity, the Company has adopted policies which attempt to limit the change in pretax net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as 9 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 position, on any particular segment of the balance sheet, and overall profitability. Cumulative interest sensitivity gap represents the difference between interest- earning assets and interest-bearing liabilities maturing or repricing, whichever is earlier, at a given point in time. At June 30, 1998, the Company maintained a positive one year gap of approximately $2.5 billion; meaning its interest rate sensitive assets exceeded its interest rate sensitive liabilities. This positive cumulative gap position indicates that the Company is asset sensitive and positioned for increased net interest income during a period of rising interest rates but also exposed to an adverse impact on net interest income in a falling rate environment. At June 30, 1997, the Company maintained a positive one year gap of approximately $742.0 million. The Company's net interest margin is sensitive to sudden changes in interest rates. In addition, the Company's interest-earning assets, primarily its loans, are tied to the prime rate, an index which tends to react more slowly to changes in market rates than other money market indices such as LIBOR (London Interbank Offered Rate). The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's Prime based assets and LIBOR correlated liabilities. The Company has developed strategies to protect both net interest income and net interest margin from significant movements in interest rates. These strategies involve purchasing interest rate floors and caps with strike prices that generally adjust quarterly and are approximately 125 basis points below or above (depending on the instrument) current market rates at the time the floors and caps were purchased. At June 30, 1998, the Company owned exchange traded floors totaling $4.8 billion that expire as follows: $1.0 billion per quarter for the third and fourth quarters of 1998, $1.3 billion in the first quarter of 1999 and $1.5 billion in the second quarter of 1999. The floors provide the Company protection in the event that the three-month LIBOR rate drops below their respective strike prices. The floors have an average strike price of 4.88%. The unrealized gain on the floors approximated $241,000 at June 30, 1998. The unamortized premium relating to the floors was $311,000 at June 30, 1998. In March 1998, the Company purchased an over the counter interest rate cap with a notional value outstanding of $1.0 billion at June 30, 1998. The cap provides protection in the event that the three-month LIBOR increases above the 8.33% strike price of the cap and expires during the first quarter of 2001. The unrealized gain on this cap at June 30, 1998, approximated $43,000. The unamortized premium paid for the cap approximated $444,000 at June 30, 1998. In the first quarter of 1997, the Company sold $27.0 million of ten-year certificates of deposit with a fixed rate of 7.15%. These long-term certificates of deposit are callable by the Company after one year and semi- annually after that. In order to minimize the interest rate risk of paying out a fixed rate for ten years, the Company executed an interest rate swap transaction with a notional value of $27.0 million in the first quarter of 1997. The interest rate swap requires the Company to pay a rate of three-month LIBOR less 10 basis points, quarterly for ten years. Simultaneously, the Company will receive quarterly interest payments at a fixed rate of 7.15% for ten years. The unrealized gain on this swap at June 30, 1998, approximated $573,000. In April 1997, the Company issued $75.0 million of 9.98% capital securities (the "Capital Securities") and entered into three fixed for floating interest rate swaps with a total notional value of $75.0 million in order to convert the Capital Securities to a floating rate. The swaps require the Company to pay three-month LIBOR and receive a fixed rate of 7.18% on $25.0 million, 7.186% on $25.0 million and 7.187% on the remaining $25.0 million. The maturity and fixed payment due dates on the swaps coincide with the call date and payment dates of the Capital Securities. The unrealized gain on the swaps approximated $6.9 million at June 30, 1998. In June 1998, the Company entered into two fixed for floating interest rate swaps with a total notional value of $5.0 million. The swaps require the Company to pay three-month LIBOR and receive a fixed rate of 5.95%. The swaps 10 mature in June 1999. Concurrently, the Company entered into interest rate swaps with its subsidiary, Crown American Bank. The notional amount, maturity and payment due dates on the swaps coincide with the original swaps, however, the payment terms require the Company to pay a fixed rate of 5.95% and receive three-month LIBOR. The purpose of the swaps is to convert a similar amount of one-year fixed rate time certificates of deposit acquired on behalf of Crown American Bank as part of a $35.0 million time deposit acquisition program to a floating rate. There was no unrealized gain on the swaps at June 30, 1998. CAPITAL SECURITIES On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of the Company, issued in a private placement transaction $75.0 million of 9.98% Capital Securities which represent undivided preferred beneficial interests in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust (the "Common Securities"), together with the Capital Securities, (the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 9.98% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") issued by the 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, 1998. The Company used $30.0 million of the net proceeds from the sale of the Junior Subordinated Debentures to make an additional investment in the Bank during 1997. An additional $37.2 million investment was made in the Bank in January 1998. The remainder of the proceeds will be used for general corporate purposes or may be used for additional capital contributions to the Bank or to pursue investment opportunities. The Capital Securities qualify as Tier I capital under the capital guidelines of the Federal Reserve. The net principal balance of the Capital Securities was $73.3 million at June 30, 1998. CAPITAL Until 1997, the primary source of new capital for the Company, has been retained earnings from operations, with the exception of its long-term debt offering in 1979, and the exercise of employee stock options. On April 23, 1997, Imperial Capital Trust, a wholly-owned subsidiary of the Company, issued in a private placement transaction $75.0 million of 9.98% capital securities. See - "Capital Securities." At June 30, 1998, shareholders' equity totaled $389.4 million, an 11% increase over the $352.0 million reported at December 31, 1997. In the first six months of 1998, the Company recorded an additional $2.4 million of shareholders' equity from the exercise of employee stock options. The Company receives a tax deduction upon the exercise of nonqualified stock options for the difference between the option price and the market value of the shares issued. The tax benefit associated with shares exercised, which is recorded as a component of shareholders' equity, approximated $4.6 million in for the first six months of 1998. Management is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company and its bank subsidiaries are financially sound. The Company and its bank subsidiaries are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. The risk-based capital guidelines assign risk weightings to assets both on and off-balance sheet and place increased emphasis on common equity. Federal law requires each Federal banking agency to take prompt corrective action to resolve problems of insured depository institutions including, but not limited to, those that fall below one or more prescribed capital ratios. According to the regulations, institutions whose Tier I and total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be "well capitalized". Tier I capital basically consists of common shareholders' equity and noncumulative perpetual preferred stock and minority interest of consolidated subsidiaries minus intangible assets. Based on the guidelines, the Company's Tier I and total capital ratios at June 30, 1998, were 10.25% and 11.57%, respectively, compared to 9.67% and 11.06%, respectively, at June 30, 1997. The Capital Securities discussed above qualify as Tier I capital and therefore contributed to the increase in the Company's capital ratios compared with the prior year. 11 CAPITAL RATIOS FOR IMPERIAL BANCORP AND IMPERIAL BANK/(1)/
=============================================================================================================================== June 30, 1998 - ------------------------------------------------------------------------------------------------------------------------------- To be Well Capitalized For Capital Adequacy Under Prompt Corrective (In Thousands) Actual Purposes Action Provisions - ------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio Total capital (to risk-weighted assets): Company $ 514,394 11.57% $355,533 8.00% $444,417 10.00% Bank 473,230 10.83% 349,523 8.00% 436,904 10.00% Tier I Capital (to risk-weighted assets): Company $ 455,578 10.25% $177,767 4.00% $266,650 6.00% Bank 418,581 9.58% 174,762 4.00% 262,142 6.00% Leverage (to average assets): Company $ 455,578 9.32% $146,600 3.00% $244,333 5.00% Bank 418,581 8.74% 143,607 3.00% 239,344 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 the Bank were $4,444 million and $4,369 million, respectively, at June 30, 1998. Average assets for the Company and the Bank were $4,887 million and $4,787 million, respectively, at June 30, 1998. In addition to the risk-weighted ratios, all banks are required to maintain leverage ratios, to be determined on an individual basis, but not below a minimum of 3%. The ratio is defined as Tier I capital to average total assets for the most recent quarter. The Company's leverage ratio was 9.32% at June 30, 1998, compared to 8.61% at June 30, 1997, well in excess of minimum regulatory requirements. In anticipation of the spin off of IFG, Imperial Bancorp contributed $67.2 million of the proceeds from the Capital Securities to the Bank as additional capital to ensure that the Bank's risk-based capital ratios continue to meet the well capitalized criteria. The Company will evaluate the capital needs of the Bank following the spin off to determine whether additional capital is required. The Company's pro forma leverage, Tier 1, and total capital ratios at June 30, 1998, reflecting the spin off of IFG were 8.20%, 9.06% and 10.31%, respectively. YEAR 2000 To fulfill the Company's business responsibility and ensure compliance with regulatory requirements, the Company has established a year 2000 readiness program with the objective of having the Company year 2000 compliant by mid- 1999. The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computers that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Company's year 2000 readiness program is managed by an enterprise-wide Program Office ("Office") under the guidance of the Company's Management Committee. The Office is staffed with representatives from each of the Company's primary business units. Within some business units, the Office representative is supported by a business unit year 2000 project team. The Company has conducted a comprehensive review of its computer systems. All systems have been evaluated and classified as critical, important or ordinary. All hardware has been tested, with those requiring upgrades or replacement identified. All vendor readiness efforts are being monitored. The Office presently believes that, with updates and upgrades to existing software and/or minimal conversions to new software, the year 2000 will not pose significant operational problems for the Company's computer systems. Based on its identification and analysis of necessary year 2000 updates and enhancements, the Company anticipates that it will incur costs of approximately $5 million related to the year 2000 project. 12 NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 130 - REPORTING COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general- purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company adopted the applicable provisions of SFAS No. 130 effective January 1, 1998. Total comprehensive income is disclosed in a footnote to the interim financial statements for each period presented. See Note 5 on page 20 of this Form 10-Q. SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends SFAS Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 requires that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliation's of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise's general-purpose financial statements. It requires that all public business enterprises report information about the revenues derived from the enterprise's products or services (or groups of similar products and services), about the countries in which the enterprise earns revenues and holds assets, and about major customers regardless of whether that information is used in making operating decisions. However, SFAS No. 131 does not require an enterprise to report information that is not prepared for internal use if reporting it would be impracticable. SFAS No. 131 also requires that a public business enterprise report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. This statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The Company adopted the applicable provisions of SFAS No. 131 effective January 1, 1998. Segment disclosures will be presented in the financial statements for the year ended December 31, 1998. 13 SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires recognition of all derivatives as either assets or liabilities in the statement of financial condition and the measurement of those instruments at fair value. Recognition of changes in fair value will be recognized into income or as a component of other comprehensive income depending upon the type of the derivative and its related hedge, if any. SFAS No. 133 is effective for the Company beginning January 1, 2000. 14 CONSOLIDATED BALANCE SHEET
==================================================================================================================================== Imperial Bancorp and Subsidiaries June 30, December 31, (In Thousands, Except Share Data) 1998 1997 ==================================================================================================================================== ASSETS Cash and due from banks $ 531,807 $ 316,600 Trading instruments 28,536 35,782 Securities available for sale 755,830 669,266 Securities held to maturity (market value of $3,980 and $4,026 for 1998 and 1997, respectively) 3,980 4,026 Federal funds sold and securities purchased under resale agreements 1,518,000 765,000 Loans held for sale (market value of $9,068 and $4,120 for 1998 and 1997, respectively) 8,441 3,763 Loans: Loans, net of unearned income and deferred loan fees 3,217,689 2,788,608 Less allowance for loan losses (58,0007) (51,143) - ------------------------------------------------------------------------------------------------------------------------------------ Total net loans $3,159,682 $2,737,465 ==================================================================================================================================== Premises and equipment, net 26,277 23,091 Accrued interest receivable 25,128 22,212 Real estate and other assets owned, net 3,254 3,284 Current income taxes receivable 2,896 6,086 Deferred tax asset 5,216 355 Investment in Imperial Credit Industries, Inc. 81,700 75,001 Other assets 71,945 64,348 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $6,222,692 $4,726,279 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $3,564,484 $2,378,830 Savings 24,932 23,375 Money market 956,467 939,086 Time - under $100,000 200,743 128,543 Time - $100,000 and over 800,309 704,764 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits $5,546,935 $4,174,598 ==================================================================================================================================== Accrued interest payable 6,079 5,205 Short-term borrowings 135,974 55,915 Long-term borrowings: Floating rate notes and fixed rate debentures 3,234 3,257 Capital securities of subsidiary trust: Company-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of the Company, net 73,343 73,314 Other liabilities 67,727 61,966 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities $5,833,292 $4,374,255 ==================================================================================================================================== Shareholders' equity: Common Stock - no par, 50,000,000 shares authorized; 39,756,670 shares at June 30, 1998 and 39,236,034 shares at December 31, 1997, issued and outstanding 243,204 236,186 Unrealized gain on securities available for sale, net of tax 2,098 1,682 Retained earnings 144,098 114,156 - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity $ 389,400 $ 352,024 ==================================================================================================================================== Total liabilities and shareholders' equity $6,222,692 $4,726,279 ====================================================================================================================================
See accompanying notes to consolidated financial statements. 15 CONSOLIDATED STATEMENT OF INCOME
============================================================================================================================== Three months ended Six months ended Imperial Bancorp and Subsidiaries June 30, June 30, (In Thousands, Except Per Share Data) 1998 1997 1998 1997 ============================================================================================================================== Interest income: Loans $73,309 $55,494 $143,352 $104,663 Trading instruments 242 263 592 881 Securities available for sale 9,555 7,793 18,897 14,301 Securities held to maturity 70 73 140 146 Federal funds sold and securities purchased under resale agreements 6,722 4,651 10,843 6,893 Loans held for sale 248 221 392 344 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income $90,146 $68,495 $174,216 $127,228 ============================================================================================================================== Interest expense: Deposits 21,689 18,165 42,046 35,520 Short-term borrowings 1,724 1,180 3,107 2,318 Long-term borrowings 1,664 1,311 3,357 1,390 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense $25,077 $20,656 $ 48,510 $ 39,228 ============================================================================================================================== Net interest income 65,069 47,839 125,706 88,000 Provision for loan losses 14,127 4,427 19,966 7,717 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses $50,942 $43,412 $105,740 $ 80,283 ============================================================================================================================== Noninterest income: Service charges on deposit accounts 1,686 1,314 3,118 2,717 Trust fees 2,094 1,740 4,185 3,717 Gain on origination and sale of loans 1,452 1,505 2,536 2,019 Equity in net income of Imperial Credit Industries, Inc. 3,815 3,544 6,699 5,005 Other service charges and fees 3,870 2,675 6,785 4,953 Merchant and credit card fees 1,631 798 3,106 1,497 International income and fees 3,469 2,361 6,409 4,750 Gain on securities available for sale 8 123 12 356 Gain on trading instruments 163 748 371 1,096 Gain on exercise and sale of equity warrants 16,617 809 17,040 2,543 Appreciation of donated Imperial Credit Industries, Inc. common stock - - - 2,816 Other income 696 342 3,343 619 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income $35,501 $15,959 $ 53,604 $ 32,088 ============================================================================================================================== Noninterest expense: Salary and employee benefits 33,189 21,839 61,900 41,510 Net occupancy expense 2,646 2,309 4,969 4,521 Furniture and equipment 2,583 1,607 4,800 2,988 Data processing 2,455 1,884 4,655 3,759 Customer services 6,878 4,273 12,784 7,879 Professional and legal fees 2,799 2,468 5,098 4,296 Business development 1,597 1,753 2,724 2,650 Charitable donations 164 51 307 3,727 Other expense 6,763 4,609 11,920 9,177 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest expense $59,074 $40,793 $109,157 $ 80,507 ============================================================================================================================== Income from continuing operations before income taxes 27,369 18,578 50,187 31,864 Income tax provision 10,802 7,487 20,245 12,741 - ------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations $16,567 $11,091 $ 29,942 $ 19,123 ============================================================================================================================== Loss from operations of discontinued operations, net of tax - 132 - 210 - ------------------------------------------------------------------------------------------------------------------------------ Net income $16,567 $10,959 $ 29,942 $ 18,913 ============================================================================================================================== Basic earnings per share from continuing operations $0.42 $0.29 $0.76 $0.50 Diluted earnings per share from continuing operations $0.40 $0.27 $0.72 $0.47 Basic earnings per share $0.42 $0.28 $0.76 $0.49 Diluted earnings per share $0.40 $0.27 $0.72 $0.47 ==============================================================================================================================
See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENT OF CASH FLOWS
======================================================================================================= Imperial Bancorp and Subsidiaries (Unaudited) Six months ended June 30, (In Thousands) 1998 1997 ======================================================================================================= Cash flows from operating activities: Net income $ 29,942 $ 18,913 Adjustments for noncash charges (credits): Depreciation and amortization (12,765) (3,828) Accretion of purchase loan discount - (37) Provision for loan losses 19,966 7,717 Provision for other real estate owned - 64 Equity in net income of Imperial Credit Industries, Inc. (6,699) (5,005) Gain on exercise and sale of stock warrants (17,040) (2,543) (Gain) loss on sale of real estate and other assets owned 67 (364) Loss on sale of premises and equipment 17 9 (Benefit) provision for deferred taxes (572) - Gain on securities available for sale (12) (356) Net change in trading instruments 7,246 36,285 Net change in loans held for sale (4,678) (1,554) Net change in accrued interest receivable (2,916) (5,942) Net change in accrued interest payable 874 1,236 Net change in income taxes receivable 3,190 4,206 Net change in other liabilities 5,789 10,576 Net change in other assets (11,814) (13,822) - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 10,595 $ 45,555 ======================================================================================================= Cash flows from investing activities: Proceeds from securities held to maturity 46 48 Proceeds from sale of securities available for sale 2,102,556 2,159,857 Proceeds from maturities of securities available for sale 418,465 285,981 Purchase of securities available for sale (2,603,135) (2,682,050) Proceeds from exercise and sale of equity warrants 5,940 2,543 Net change in Federal funds sold and securities purchased under resale agreements (753,000) (178,000) Net change in loans (415,443) (288,612) Capital expenditures (6,543) (4,492) Proceeds from sale of real estate and other assets owned 884 508 Proceeds from sale of premises and equipment 12 133 - ------------------------------------------------------------------------------------------------------- Net cash used in investing activities $(1,250,218) $ (704,084) ======================================================================================================= Cash flows from financing activities: Net change in demand deposits, savings, and money market accounts 1,204,592 616,883 Net change in time deposits 167,745 (18,535) Net change in short-term borrowings 80,059 77,451 Retirement of long-term borrowings (23) (19) Net change in capital securities of subsidiary 29 73,284 Proceeds from exercise of employee stock options 2,428 676 Other - (18) - ------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 1,454,830 $ 749,722 - ------------------------------------------------------------------------------------------------------- Net change in cash and due from banks $ 215,207 $ 91,193 - ------------------------------------------------------------------------------------------------------- Cash and due from banks, beginning of year $ 316,600 $ 325,014 - ------------------------------------------------------------------------------------------------------- Cash and due from banks, end of period $ 531,807 $ 416,207 =======================================================================================================
See accompanying notes to consolidated financial statements. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPERIAL BANCORP AND SUBSIDIARIES NOTE (1) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations, and changes in cash flows in conformity with generally accepted accounting principles. However, these interim financial statements reflect all normal recurring adjustments, which are, in the opinion of the management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments were of a normal recurring nature. The Consolidated Balance Sheet, Consolidated Statement of Income and Consolidated Statement of Cash Flows are presented in the same format as that used in the Company's most recently filed Report on Form 10-K. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. NOTE (2) IMPERIAL CREDIT INDUSTRIES, INC. At June 30, 1998, the Company owned 8.9 million shares, or approximately 23% of the common stock of ICII. The Company does not exercise significant control over the operations of ICII and, as such, the results of operations are accounted for in the Company's financial statements as an equity investment. The equity investment in ICII is carried at cost adjusted for changes in ICII's shareholder equity including undistributed income. Transactions between ICII and the Company occur during the normal course of business. All transactions are carried out at substantially the same terms as those prevailing at the same time for comparable transactions with others. NOTE (3) STATEMENT OF CASH FLOWS The following information supplements the statement of cash flows.
====================================================================================== June 30, (In Thousands) 1998 1997 - -------------------------------------------------------------------------------------- Interest paid $47,636 $37,992 Taxes refunded - 424 Taxes paid 17,614 8,791 Significant noncash transactions: Loans transferred to OREO 915 1,482 Net change in unrealized gain on securities, net of taxes 416 824 Donation of Imperial Credit Industries, Inc. common stock - 3,362 ======================================================================================
NOTE (4) PRO FORMA FINANCIAL INFORMATION OF IMPERIAL BANCORP The pro forma impact of the spin off of IFG on selected income statement items is reflected as if the spin off had occurred at the beginning of the period presented. Selected balance sheet items are reflected as if the spin off had occurred at the end of the period presented. 18
=============================================================================== For the six months ended June 30, 1998 (In Thousands, Except Share Data) Actual Pro Forma =============================================================================== Pro Forma Earnings Summary: Interest income $ 174,216 $ 165,330 Interest expense 48,510 48,297 - -------------------------------------------------------------------------------- Net interest income 125,706 117,033 Provision for loan losses 19,966 19,270 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 105,740 97,763 Noninterest income 46,905 38,843 Equity in net income of ICII 6,699 - Other noninterest expense 109,157 97,326 - -------------------------------------------------------------------------------- Income from continuing operations before income taxes 50,187 39,280 Income tax provision 20,245 15,647 - -------------------------------------------------------------------------------- Income from continuing operations $ 29,942 $ 23,633 ================================================================================ Pro forma earnings per share: Basic earnings per share from continuing operations $ 0.76 $ 0.60 Diluted earnings per share from continuing operations $ 0.72 $ 0.57 Weighted average number of shares: Basic 39,535,396 39,535,396 Diluted 41,389,169 41,389,369 ================================================================================ =============================================================================== At June 30, 1998 (In Thousands) Actual Pro Forma ================================================================================ Pro forma balance sheet summary: Cash $ 531,807 $ 523,859 Investments 2,314,787 2,300,339 Loans, net 3,159,682 3,025,406 Investment in ICII 81,700 - Other assets 134,716 218,246 - -------------------------------------------------------------------------------- Total assets $ 6,222,692 $ 6,067,850 ================================================================================ Deposits $ 5,546,935 $ 5,509,455 Short-term borrowings 135,974 135,974 Long-term borrowings 76,577 76,577 Other liabilities 73,806 31,802 - -------------------------------------------------------------------------------- Total liabilities $ 5,833,292 $ 5,753,808 - -------------------------------------------------------------------------------- Total shareholders' equity 389,400 314,042 - -------------------------------------------------------------------------------- Total liabilities & shareholders' equity $ 6,222,692 $ 6,067,850 ================================================================================
19 NOTE (5) COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general- purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company adopted the applicable provisions of SFAS No. 130 effective January 1, 1998. The following table provides a summary of total comprehensive income for the six months ended June 30, 1998 and 1997:
==================================================================================================================================== Three months ended Six months ended Consolidated Statement of Comprehensive Income June 30, June 30, (In Thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 16,567 $ 10,959 $29,942 $18,913 Other comprehensive income, net of tax Unrealized gains on securities: Unrealized holding gains (269) 596 416 824 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 16,298 $ 11,555 $30,358 $19,737 ====================================================================================================================================
20 TABLE 1 - AVERAGE BALANCES, YIELDS AND RATES PAID (1)
===================================================================================================================== Three months ended June 30, 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (In Thousands) Balance Expense Rate % Balance Expense Rate % - --------------------------------------------------------------------------------------------------------------------- Earning assets: Loans -net of unearned income and deferred loan fees (2) $3,209,633 $73,309 (3) 9.16% $2,258,437 $55,494 (3) 9.86% Trading account securities 18,729 242 5.18% 16,422 263 6.42% Securities available for sale 671,693 9,555 5.71% 514,046 7,793 6.08% Securities held to maturity 3,992 70 7.03% 4,163 73 7.03% Federal funds sold and securities purchased under resale agreement 489,254 6,722 5.51% 335,566 4,651 5.56% Loans held for sale 9,846 248 10.10% 8,769 221 10.11% - --------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $4,403,147 $90,146 8.21% $3,137,403 $68,495 8.76% ===================================================================================================================== Allowance for loan losses (57,032) (39,404) Cash 337,698 257,053 Other assets 204,028 174,239 ---------- ---------- Total assets $4,887,841 $3,529,291 ========== ========== Interest-bearing liabilities: Savings $ 26,190 $ 165 2.53% $ 21,292 $ 133 2.51% Money market 940,796 7,873 3.36% 680,841 5,402 3.18% Time-under $100,000 185,037 2,610 5.66% 169,356 2,454 5.81% Time-$100,000 and over 813,122 11,041 5.45% 746,400 10,176 5.47% - --------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits $1,965,145 $21,689 4.43% $1,617,889 $18,165 4.50% - --------------------------------------------------------------------------------------------------------------------- Short-term borrowings 123,538 1,724 5.60% 88,564 1,180 5.34% Long-term borrowings 76,568 1,664 8.72% 60,008 1,311 8.76% - --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $2,165,251 $25,077 4.65% $1,766,461 $20,656 4.69% ===================================================================================================================== Demand deposits 2,265,377 1,383,614 Other liabilities 78,616 72,616 Shareholders' equity 378,597 306,600 ---------- ---------- $4,887,841 $3,529,291 ========== ========== Net interest income/Net interest margin $65,069 5.93% $47,839 6.12% ======= ===== ======= ===== (1) The yields are not presented on a tax equivalent basis as the effects are not material. (2) Average loan balance includes nonaccrual loans. (3) Includes net loan fee income and amortization of $6.8 million and $4.3 million, respectively, for the three months ended June 30, 1998 and 1997. =====================================================================================================================
21 TABLE 1 - AVERAGE BALANCES, YIELDS AND RATES PAID (1) (Continued)
==================================================================================================================================== Six months ended June 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Interest Average Income/ Average Average Income/ Average (In Thousands) Balance Expense Rate % Balance Expense Rate % - ------------------------------------------------------------------------------------------------------------------------------------ Earning assets: Loans -net of unearned income and deferred loan fees (2) $3,094,609 $143,352 (3) 9.34% $2,194,731 $104,663 (3) 9.62% Trading account securities 22,414 592 5.33% 27,674 881 6.42% Securities available for sale 653,923 18,897 5.83% 483,629 14,301 5.96% Securities held to maturity 4,006 140 7.05% 4,176 146 7.05% Federal funds sold and securities purchased under resale agreements 395,275 10,843 5.53% 252,015 6,893 5.52% Loans held for sale 7,558 392 10.46% 6,824 344 10.17% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $4,177,785 $174,216 8.41% $2,969,049 $127,228 8.64% =================================================================================================================================== Allowance for loan losses (54,580) (38,232) Cash 324,269 265,092 Other assets 202,226 168,916 ---------- ---------- Total assets $4,649,700 $3,364,825 ========== ========== Interest-bearing liabilities: Savings $ 25,770 $ 325 2.54% $ 19,462 $ 241 2.50% Money market 912,839 15,357 3.39% 638,067 9,857 3.12% Time-under $100,000 185,938 4,843 5.25% 172,026 4,918 5.77% Time-$100,000 and over 779,242 21,521 5.57% 758,221 20,504 5.45% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposit $1,903,789 $ 42,046 4.45% $1,587,776 $35,520 4.51% - ----------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 112,700 3,107 5.56% 88,550 2,318 5.28% Long-term borrowings 76,569 3,357 8.84% 32,383 1,390 8.66% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $2,093,058 $ 48,510 4.67% $1,708,709 $39,228 4.63% =================================================================================================================================== Demand deposits 2,115,086 1,288,609 Other liabilities 72,713 68,277 Shareholders' equity 368,843 299,230 ---------- ---------- $4,649,700 $3,364,825 ========== ========== Net interest income/Net interest margin $125,706 6.07% $ 88,000 5.98% ======== ===== ========= ===== (1) The yields are not presented on a tax equivalent basis as the effects are not material. (2) Average loan balance includes nonaccrual lonas. (3) Includes net loan fee income and amortization of $12.9 million and $7.3 million, respectively, for the six months ended June 30, 1998 and 1997. ===================================================================================================================================
22 TABLE 2 - ANALYSIS OF CHANGES IN NET INTEREST INCOME Changes in the Company's net interest income are a function of both changes in interest rates and changes in the average balance of interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the years indicated. The total change is segmented into the change attributable to variations in volume (changes in average balances multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old balances). The change in interest income and interest expense attributable to both rate and volume (changes in rate multiplied by changes in volume) is classified as rate/volume. Nonaccrual loans are included in average loans used to compute this table. The table is not presented on a tax equivalent basis as the effects are not material.
=============================================================================== Three months ended June 30, 1998 over 1997 (In Thousands) Volume Rate Rate/Volume Total - ------------------------------------------------------------------------------- Loans $23,435 $(3,921) $(1,701) $17,813 Trading instruments 36 (51) (5) (20) Securities available for sale 2,397 (482) (153) 1,762 Securities held to maturity (3) - - (3) Federal Funds sold and securities purchased under resale agreements 2,136 (41) (24) 2,071 Loans held for sale 28 - - 28 - ------------------------------------------------------------------------------- Total interest income $28,029 $(4,495) $(1,883) $21,651 =============================================================================== Savings (41) 1 72 32 Money market 2,068 296 106 2,470 Time-under $100,000 228 (65) (6) 157 Time-$100,000 and over 912 (41) (6) 865 - ------------------------------------------------------------------------------- Total deposits $ 3,167 $ 191 $ 166 $ 3,524 - ------------------------------------------------------------------------------- Short-term borrowings 467 56 21 544 Long-term borrowings 363 (7) (3) 353 - ------------------------------------------------------------------------------- Total interest expense $ 3,997 $ 240 $ 184 $ 4,421 =============================================================================== Change in net interest income $24,032 $(4,735) $(2,067) $17,230 ===============================================================================
23 TABLE 2 - ANALYSIS OF CHANGES IN NET INTEREST INCOME (CONTINUED)
================================================================================ Six months ended June 30, 1998 over 1997 (In Thousands) Volume Rate Rate/Volume Total - -------------------------------------------------------------------------------- Loans $21,634 $(1,511) $18,565 $38,688 Trading account securities (85) (76) (127) (288) Securities available for sale 2,539 (164) 2,221 4,596 Securities held to maturity (3) - (3) (6) Federal Funds sold and securities purchased under resale agreements 1,975 10 1,964 3,949 Loans held for sale 20 5 24 49 - ------------------------------------------------------------------------------- Total interest income $26,080 $(1,736) $22,644 $46,988 =============================================================================== Savings (41) 2 123 84 Money market 2,139 442 2,918 5,499 Time-under $100,000 201 (220) (55) (74) Time-$100,000 and over 287 220 510 1,017 - ------------------------------------------------------------------------------- Total deposits $ 2,586 $ 444 $ 3,496 $ 6,526 - ------------------------------------------------------------------------------- Short-term borrowings 319 62 408 789 Long-term borrowings 956 15 996 1,967 - ------------------------------------------------------------------------------- Total interest expense $ 3,861 $ 521 $ 4,900 $ 9,282 =============================================================================== Change in net interest income $22,219 $(2,257) $17,744 $37,706 ===============================================================================
TABLE 3 - SECURITIES (a) Securities Held to Maturity A summary of securities held to maturity as of June 30, 1998, and December 31, 1997, is provided below:
================================================================================ Gross Gross Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------- June 30, 1998 Industrial development bonds $3,980 $ - $ - $3,980 - -------------------------------------------------------------------------------- Total $3,980 $ - $ - $3,980 ================================================================================ December 31, 1997 Industrial development bonds $4,026 $ - $ - $4,026 - -------------------------------------------------------------------------------- Total $4,026 $ - $ - $4,026 ================================================================================
24 TABLE 3 - SECURITIES (CONTINUED) (b) Securities Available for Sale A summary of the amortized cost and estimated fair value of securities available for sale as of June 30, 1998, and December 31, 1997, is provided as follows:
======================================================================================================================== Gross Gross Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------ June 30, 1998 U.S. Treasury and federal agencies $662,348 $ 3,577 $ - $665,925 Mutual funds 76,127 - - 76,127 Other securities 13,735 43 - 13,778 - ------------------------------------------------------------------------------------------------------------------------ Total $752,210 $ 3,620 $ - $755,830 ======================================================================================================================== December 31, 1997 U.S. Treasury and federal agencies $612,903 $ 2,378 $ (74) $615,207 Mutual funds 37,532 - - 37,532 Other securities 15,928 599 - 16,527 - ------------------------------------------------------------------------------------------------------------------------ Total $666,363 $ 2,977 $ (74) $669,266 ========================================================================================================================
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. For the same period of 1997, these amounts were $419,000 and $63,000, respectively. TABLE 4 - FINANCIAL RATIOS
==================================================================================================================================== Three months ended Six months ended June 30, June 30, 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Net income as a percentage of:/(1)/ Average shareholders' equity 17.55% 14.34% 16.37% 12.75% Average total assets 1.36% 1.25% 1.30% 1.13% Average earning assets 1.51% 1.40% 1.45% 1.28% Average shareholders' equity as a percentage of: Average assets 7.75% 8.69% 7.93% 8.89% Average loans 11.80% 13.58% 11.92% 13.63% Average deposits 8.95% 10.21% 9.18% 10.40% Shareholders' equity at period end as a percentage of: Total assets at period end - - 6.26% 7.52% Total loans at period end - - 12.10% 13.21% Total deposits at period end - - 7.02% 8.77% ==================================================================================================================================== /(1)/ Annualized
25 EXHIBITS PART I COMPUTATION OF EARNINGS PER SHARE Imperial Bancorp ("the Company") has outstanding certain employee stock options, which options have been determined to be common stock equivalents for purposes of computing earnings per share. The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") for the fiscal year ended December 31, 1997, and for all prior periods presented. SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings.
==================================================================================================================================== 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ For the three months ended June 30, Per-share Per-share (In Thousands, Except Share Data) Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Basic EPS Income available to shareholders: Income from continuing operations $16,567 39,712,590 $0.42 $11,091 38,760,933 $0.29 Loss from discontinued operation, net of tax - - 132 0.01 ------- ----- ------- ----- Net income $16,567 $0.42 $10,959 $0.28 Effect of dilutive securities Incremental shares from outstanding common stock options 1,745,943 1,700,289 ---------- ---------- Diluted EPS Income available to shareholders: Income from continuing operations $16,567 41,458,533 $0.40 $11,091 40,461,222 $0.27 Income from continuing operations Loss from discontinued operation, net of tax - - 132 - ------- ----- ------- ----- Net income $16,567 $0.40 $10,959 $0.27 ====================================================================================================================================
26 COMPUTATION OF EARNINGS PER SHARE (CONTINUED)
==================================================================================================================================== 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ For the three months ended June 30, Per-share Per-share (In Thousands, Except Share Data) Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Basic EPS Income available to shareholders: Income from continuing operations $29,942 39,535,396 $0.76 $19,123 38,572,050 $0.50 Loss from discontinued operation, net of tax - - 210 0.01 ------- ----- -------- ----- Net income $29,942 $0.76 $18,913 $0.49 Effect of dilutive securities Incremental shares from outstanding common stock options 1,853,773 1,810,989 ---------- ---------- Diluted EPS Income available to shareholders: Income from continuing operations $29,942 41,389,169 $0.72 $19,123 40,383,039 $0.47 Income from continuing operations Loss from discontinued operation, net of tax - - 210 - ------- ----- ------- ----- Net income $29,942 $0.72 $18,913 $0.47 ====================================================================================================================================
The weighted average number of shares used to compute earnings per share was retroactively adjusted to reflect a three-for-two stock split effected in the first quarter of 1998. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Due to the nature of the businesses, the Company and its subsidiaries are subject to numerous legal actions, threatened or filed, arising in the normal course of business. Certain of the actions currently pending seek punitive damages, in addition to other relief the Company is of the opinion that the eventual outcome of all currently pending legal proceedings will not be materially adverse to the Company, nor has the resolution of any proceeding since the Company's last filing with the Commission materially adversely affected the registrant or any subsidiary thereof. ITEM 2. CHANGES IN SECURITIES No events have transpired which would make response to this item appropriate. ITEM 3. DEFAULTS UPON SENIOR SECURITIES No events have transpired which would make response to this item appropriate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No events have transpired which would make response to this item appropriate. ITEM 5. OTHER INFORMATION No events have transpired which would make response to this item appropriate. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Index Exhibit Number Description -------------- ----------- 27 Financial Data Schedule 27.1 Restated Financial Data Schedules for June 30, 1997 and September 30, 1997 All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted. (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the period, and no events have occurred which would require one to be filed. 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 13, 1998 By: /s/ Christine M. McCarthy ---------------------------- Christine M. McCarthy Executive Vice President and Chief Financial Officer 28 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 531,807 0 1,518,000 28,536 755,830 3,980 3,980 3,217,689 58,007 6,222,692 5,546,935 135,974 73,806 76,577 0 0 243,204 146,196 6,222,692 143,352 19,037 11,827 174,216 42,046 48,510 125,706 19,966 12 109,157 50,187 29,942 0 0 29,942 0.76 0.72 6.07 25,919 0 23,652 0 51,143 14,167 1,065 58,007 58,007 0 0
EX-27.1 3 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JUN-30-1997 SEP-30-1997 416,207 434,403 0 0 535,000 680,700 28,602 63,825 664,252 673,413 4,145 4,085 4,145 4,085 2,356,263 2,525,629 42,567 46,871 4,135,836 4,517,186 3,548,625 3,936,494 122,348 110,503 75,946 65,596 77,720 76,556 0 0 0 0 231,275 232,618 79,922 95,419 4,135,836 4,517,186 104,663 165,821 14,447 24,083 8,118 11,697 127,228 201,601 35,520 53,421 39,228 59,756 88,000 141,845 7,717 14,785 356 359 80,507 122,393 31,864 55,801 19,123 33,307 (210) 479 0 0 18,913 33,786 0.50 0.86 0.47 0.82 5.98 6.11 7,918 9,236 0 0 24,144 25,549 0 0 36,051 36,051 3,511 6,587 2,254 2,565 42,567 46,871 42,567 46,871 0 0 0 0 Restatement of earnings per share data for the six months ended June 30, 1997, and nine months ended September 30, 1997, to reflect the adoption of SFAS No. 128, "Earnings Per Share." Earnings per share data is for continuing operations.
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