UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR
15(d)
|
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the
Quarterly Period Ended September 30, 2008
OR
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR
15(d)
|
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the
Transition Period from _____ to _____
Commission
File Number 1-33199
|
IMPERIAL
CAPITAL BANCORP, INC.
|
|
|
(Exact Name
of Registrant as Specified in its Charter)
|
|
Delaware
|
|
95-4596322
|
(State or
Other Jurisdiction of Incorporation or
Organization)
|
|
(IRS
Employer Identification No.)
|
|
|
|
888
Prospect St., Suite 110, La Jolla, California
|
|
92037
|
(Address of
Principal Executive Offices)
|
|
(Zip
Code)
|
(858)
551-0511
|
(Registrant’s
Telephone Number, Including Area
Code)
|
Indicate
by check mark whether the registrant (1) 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
R
No
£
.
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of “larger accelerated filer,” “accelerated filer” and
“small reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
£
Accelerated
Filer
R
Non-Accelerated
Filer
£
(Do not
check if a smaller reporting company) Smaller reporting
company
£
|
Indicate
by check mark whether the Registrant is a shell company
(as
defined in Rule 12b-2 of the Exchange Act). Yes
£
No
R
.
|
Number
of shares of common stock of the registrant: 5,428,760 outstanding as of
November 4, 2008.
|
FORM
10-Q
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008
TABLE
OF CONTENTS
|
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3
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4
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|
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5
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6
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13
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29
|
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30
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|
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31
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31
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34
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34
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35
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35
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35
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|
|
36
|
Forward
Looking Statements
“Safe
Harbor” statement under the Private Securities Litigation Reform Act of 1995:
This Form 10-Q contains forward-looking statements that are subject to risks and
uncertainties, including, but not limited to, changes in economic conditions in
our market areas, changes in policies by regulatory agencies and other
governmental initiatives affecting the financial services industry, the impact
of our competitors’ loan and other products, loan demand risks, the quality or
composition of our loan or investment portfolios, increased costs from pursuing
the national expansion of our lending platform and operational challenges
inherent in implementing this expansion strategy, fluctuations in interest
rates, and changes in the relative differences between short- and long-term
interest rates, conditions in the commercial and residential real estate
markets, levels of non-performing assets and other loans of concern, and
operating results, capital and credit market conditions, the economic impact of
any terrorist actions and other risks detailed from time to time in our filings
with the Securities and Exchange Commission. We caution readers not to place
undue reliance on any forward-looking statements. We do not undertake and
specifically disclaim any obligation to revise any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements. These risks could cause our actual results
for 2008 and beyond to differ materially from those expressed in any
forward-looking statements by, or on behalf of, us, and could negatively affect
the Company’s operating and stock price performance.
As used
throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
Imperial Capital Bancorp, Inc. and its consolidated subsidiaries.
PART
I – FINANCIAL INFORMATION
IMPERIAL
CAPITAL BANCORP, INC. AND
SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
|
|
|
2008
|
|
|
December
31,
|
|
|
|
(unaudited)
|
|
|
2007
|
|
|
|
(in
thousands, except share data)
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
67,757
|
|
|
$
|
8,944
|
|
Investment
securities available-for-sale, at fair value
|
|
|
97,126
|
|
|
|
117,924
|
|
Investment
securities held-to-maturity, at amortized cost
|
|
|
957,891
|
|
|
|
159,023
|
|
Stock
in Federal Home Loan Bank
|
|
|
62,894
|
|
|
|
53,497
|
|
Loans,
net (net of allowance for loan losses of $51,817 and $47,783
as
of September 30, 2008 and December 31, 2007, respectively)
|
|
|
2,825,519
|
|
|
|
3,125,072
|
|
Interest
receivable
|
|
|
21,699
|
|
|
|
20,841
|
|
Other
real estate and other assets owned, net
|
|
|
27,207
|
|
|
|
19,396
|
|
Premises
and equipment, net
|
|
|
8,035
|
|
|
|
8,550
|
|
Deferred
income taxes
|
|
|
14,187
|
|
|
|
12,148
|
|
Other
assets
|
|
|
23,143
|
|
|
|
25,824
|
|
Total
assets
|
|
$
|
4,105,458
|
|
|
$
|
3,551,219
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
$
|
2,571,813
|
|
|
$
|
2,181,858
|
|
Federal
Home Loan Bank advances and other borrowings
|
|
|
1,183,903
|
|
|
|
1,021,235
|
|
Accounts
payable and other liabilities
|
|
|
37,630
|
|
|
|
33,959
|
|
Junior
subordinated debentures
|
|
|
86,600
|
|
|
|
86,600
|
|
Total
liabilities
|
|
|
3,879,946
|
|
|
|
3,323,652
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, 5,000,000 shares authorized, none issued
|
|
|
—
|
|
|
|
—
|
|
Contributed
capital - common stock, $.01 par value; 20,000,000 shares authorized,
9,146,256 and 9,142,256 issued as of September 30, 2008 and December 31,
2007, respectively
|
|
|
85,283
|
|
|
|
85,009
|
|
Retained
earnings
|
|
|
258,659
|
|
|
|
255,947
|
|
Accumulated
other comprehensive (loss) income, net
|
|
|
(2,792
|
)
|
|
|
267
|
|
|
|
|
341,150
|
|
|
|
341,223
|
|
Less
treasury stock, at cost 4,126,068 and 3,995,634 shares as of
September
30, 2008 and December 31, 2007, respectively
|
|
|
(115,638
|
)
|
|
|
(113,656
|
)
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
225,512
|
|
|
|
227,567
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
4,105,458
|
|
|
$
|
3,551,219
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
IMPERIAL
CAPITAL BANCORP, INC. AND
SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF INCOME
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands, except per share data)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
46,686
|
|
|
$
|
58,450
|
|
|
$
|
151,442
|
|
|
$
|
175,677
|
|
Cash
and investment securities
|
|
|
22,723
|
|
|
|
4,249
|
|
|
|
40,418
|
|
|
|
13,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
|
69,409
|
|
|
|
62,699
|
|
|
|
191,860
|
|
|
|
189,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
24,984
|
|
|
|
28,479
|
|
|
|
74,369
|
|
|
|
82,552
|
|
Federal
Home Loan Bank advances and other borrowings
|
|
|
13,775
|
|
|
|
11,440
|
|
|
|
38,187
|
|
|
|
33,710
|
|
Junior
subordinated debentures
|
|
|
1,753
|
|
|
|
2,102
|
|
|
|
5,556
|
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
40,512
|
|
|
|
42,021
|
|
|
|
118,112
|
|
|
|
122,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
|
|
28,897
|
|
|
|
20,678
|
|
|
|
73,748
|
|
|
|
66,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
10,125
|
|
|
|
5,266
|
|
|
|
20,625
|
|
|
|
6,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
|
18,772
|
|
|
|
15,412
|
|
|
|
53,123
|
|
|
|
59,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Late
and collection fees
|
|
|
225
|
|
|
|
309
|
|
|
|
640
|
|
|
|
848
|
|
(Loss)
gain on sale of loans, net
|
|
|
(3
|
)
|
|
|
22
|
|
|
|
(482
|
)
|
|
|
22
|
|
Other
|
|
|
(4,644
|
)
|
|
|
618
|
|
|
|
(5,461
|
)
|
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest (loss) income
|
|
|
(4,422
|
)
|
|
|
949
|
|
|
|
(5,303
|
)
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
5,988
|
|
|
|
5,967
|
|
|
|
18,547
|
|
|
|
17,205
|
|
Occupancy
and equipment
|
|
|
1,885
|
|
|
|
1,987
|
|
|
|
5,741
|
|
|
|
5,928
|
|
Other
|
|
|
4,973
|
|
|
|
5,301
|
|
|
|
14,738
|
|
|
|
14,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
general and administrative
|
|
|
12,846
|
|
|
|
13,255
|
|
|
|
39,026
|
|
|
|
37,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate and other assets owned expense, net
|
|
|
436
|
|
|
|
268
|
|
|
|
1,123
|
|
|
|
626
|
|
Provision
for losses on real estate and other assets owned
|
|
|
185
|
|
|
|
—
|
|
|
|
1,290
|
|
|
|
—
|
|
Loss
(gain) on sale of real estate and other assets owned, net
|
|
|
—
|
|
|
|
(69
|
)
|
|
|
463
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
real estate and other assets owned expense, net
|
|
|
621
|
|
|
|
199
|
|
|
|
2,876
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
|
13,467
|
|
|
|
13,454
|
|
|
|
41,902
|
|
|
|
38,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
883
|
|
|
|
2,907
|
|
|
|
5,918
|
|
|
|
24,340
|
|
Provision
for income taxes
|
|
|
350
|
|
|
|
1,193
|
|
|
|
2,338
|
|
|
|
9,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
533
|
|
|
$
|
1,714
|
|
|
$
|
3,580
|
|
|
$
|
14,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.10
|
|
|
$
|
0.31
|
|
|
$
|
0.66
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.10
|
|
|
$
|
0.31
|
|
|
$
|
0.66
|
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share of common stock
|
|
$
|
—
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.48
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
IMPERIAL
CAPITAL BANCORP, INC. AND
SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
3,580
|
|
|
$
|
14,489
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of premises and equipment
|
|
|
2,144
|
|
|
|
1,823
|
|
(Accretion)
amortization of discounts and premiums on loans and investment
securities
|
|
|
(6,056
|
)
|
|
|
3,986
|
|
Accretion
of deferred loan origination fees, net of costs
|
|
|
(1,236
|
)
|
|
|
(1,967
|
)
|
Provision
for loan losses
|
|
|
20,625
|
|
|
|
6,516
|
|
Provision
for losses on other real estate owned
|
|
|
1,290
|
|
|
|
—
|
|
Impairment
of investment securities available-for-sale
|
|
|
4,590
|
|
|
|
—
|
|
Other,
net
|
|
|
(1,565
|
)
|
|
|
71
|
|
Increase
in interest receivable
|
|
|
(858
|
)
|
|
|
(450
|
)
|
Decrease
(increase) in other assets
|
|
|
2,681
|
|
|
|
(1,286
|
)
|
Increase
(decrease) in accounts payable and other liabilities
|
|
|
3,671
|
|
|
|
(3,804
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
28,866
|
|
|
|
19,378
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of investment securities available-for-sale
|
|
|
(10,198
|
)
|
|
|
(77,195
|
)
|
Proceeds
from maturity and calls of investment securities
available-for-sale
|
|
|
22,241
|
|
|
|
62,006
|
|
Purchases
of investment securities held-to-maturity
|
|
|
(861,633
|
)
|
|
|
—
|
|
Proceeds
from the maturity and redemption of investment securities
held-to-maturity
|
|
|
70,626
|
|
|
|
28,441
|
|
Purchase
of stock in Federal Home Loan Bank
|
|
|
(6,764
|
)
|
|
|
—
|
|
Purchase
of loans
|
|
|
(5,892
|
)
|
|
|
(47,343
|
)
|
Proceeds
from sale of loans
|
|
|
53,645
|
|
|
|
—
|
|
Other
decreases (increases) in loans, net
|
|
|
213,529
|
|
|
|
(136,474
|
)
|
Proceeds
from sale of other real estate owned
|
|
|
6,135
|
|
|
|
—
|
|
Cash
paid for capital expenditures
|
|
|
(1,809
|
)
|
|
|
(2,555
|
)
|
Proceeds
from sale of equipment
|
|
|
183
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(519,937
|
)
|
|
|
(173,120
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
and excess tax benefits from exercise of employee stock
options
|
|
|
71
|
|
|
|
2,488
|
|
Cash
paid to acquire treasury stock
|
|
|
(1,982
|
)
|
|
|
(9,018
|
)
|
Cash
paid for dividends
|
|
|
(828
|
)
|
|
|
(2,513
|
)
|
Increase
in deposit accounts
|
|
|
389,955
|
|
|
|
124,992
|
|
(Repayments)
proceeds from short-term borrowings, net
|
|
|
(100,000
|
)
|
|
|
46,502
|
|
Proceeds
from long-term borrowings
|
|
|
470,000
|
|
|
|
142,000
|
|
Repayments
of long-term borrowings
|
|
|
(207,332
|
)
|
|
|
(169,055
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
549,884
|
|
|
|
135,396
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
58,813
|
|
|
|
(18,346
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
8,944
|
|
|
|
30,448
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period
|
|
$
|
67,757
|
|
|
$
|
12,102
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
112,301
|
|
|
$
|
124,536
|
|
Cash
paid during the period for income taxes
|
|
$
|
1,001
|
|
|
$
|
11,702
|
|
Non-Cash
Investing and Financing Transactions:
|
|
|
|
|
|
|
|
|
Loans
transferred to other real estate owned
|
|
$
|
15,699
|
|
|
$
|
14,330
|
|
Cash
dividends declared but not yet paid
|
|
$
|
—
|
|
|
$
|
829
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1 – BASIS OF PRESENTATION
The
unaudited consolidated financial statements of Imperial Capital Bancorp, Inc.
and subsidiaries (the “Company”) included herein reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present fairly
the results of operations and financial position of the Company, as of the dates
and for the interim periods indicated. The unaudited consolidated
financial statements include the accounts of Imperial Capital Bancorp, Inc. and
its wholly-owned subsidiaries, Imperial Capital Bank (the “Bank”) and Imperial
Capital Real Estate Investment Trust (“Imperial Capital REIT”).
All
intercompany transactions and balances have been eliminated. Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. Certain amounts in prior periods
have been reclassified to conform to the presentation in the current
periods. The results of operations for the three and nine months
ended September 30, 2008 are not necessarily indicative of the results of
operations for the remainder of the year.
These
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2007.
NOTE
2 – ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, which requires the
recognition of the expense related to the fair value of stock-based compensation
awards within the consolidated statement of income. Stock-based
compensation expense for the three and nine months ended September 30, 2008 and
2007 includes compensation expense for stock-based compensation awards for which
the requisite service was performed during the period.
Total
stock-based compensation expense included in our consolidated statements of
income for the three and nine months ended September 30, 2008 was approximately
$74,000 ($64,000, net of tax, or $0.01 per diluted share) and $241,000
($210,000, net of tax, or $0.04 per diluted share), respectively. For
the three and nine months ended September 30, 2007, these amounts were $68,000
($41,000, net of tax, or $0.01 per diluted share) and $126,000 ($76,000, net of
tax, or $0.01 per diluted share), respectively. Unrecognized
stock-based compensation expense related to stock options was approximately
$501,000 and $879,000, respectively, at September 30, 2008 and
2007. The weighted-average period over which the unrecognized expense
was expected to be recognized was 1.7 years and 2.7 years at September 30, 2008
and 2007, respectively.
The fair
value of each option grant is estimated on the date of grant using a
Black-Scholes option pricing model. No options were granted during
the nine months ended September 30, 2008. The weighted-average
assumptions for option grants during the nine months ended September 30, 2007
were:
|
|
Weighted-Average
Assumptions for Option Grants 2007
|
|
|
|
Dividend
Yield
|
|
1.87%
|
Expected
Volatility
|
|
24.31%
|
Risk-Free
Interest Rates
|
|
4.67%
|
Expected
Lives
|
|
Five
Years
|
Weighted-Average
Fair Value
|
|
$9.12
|
NOTE
3 – EARNINGS PER SHARE
Basic
Earnings Per Share (“Basic EPS”) is computed by dividing net income by the
weighted-average number of common shares outstanding for the
period. Diluted Earnings Per Share (“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 in the
issuance of common stock which shared in the Company’s
earnings. Stock options outstanding as of September 30, 2008 and 2007
were 535,649 and 574,400, respectively. For the three and nine months
ended September 30, 2008, 535,649 and 506,949, respectively, of these options
outstanding were excluded from the diluted EPS computation as their effect was
anti-dilutive, compared to 294,250 and 95,500, respectively, for the same
periods last year.
The
following is a reconciliation of the calculation of Basic EPS and Diluted
EPS:
|
|
Net
Income
|
|
|
Weighted-
Average
Shares
Outstanding
|
|
|
Per
Share
Amount
|
|
|
|
(in
thousands, except per share data)
|
|
For
the Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
533
|
|
|
|
5,429
|
|
|
$
|
0.10
|
|
Effect
of dilutive stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.00
|
)
|
Diluted
EPS
|
|
$
|
533
|
|
|
|
5,429
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
1,714
|
|
|
|
5,453
|
|
|
$
|
0.31
|
|
Effect
of dilutive stock options
|
|
|
—
|
|
|
|
75
|
|
|
|
(0.00
|
)
|
Diluted
EPS
|
|
$
|
1,714
|
|
|
|
5,528
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
3,580
|
|
|
|
5,428
|
|
|
$
|
0.66
|
|
Effect
of dilutive stock options
|
|
|
—
|
|
|
|
8
|
|
|
|
(0.00
|
)
|
Diluted
EPS
|
|
$
|
3,580
|
|
|
|
5,436
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
14,489
|
|
|
|
5,490
|
|
|
$
|
2.64
|
|
Effect
of dilutive stock options
|
|
|
—
|
|
|
|
117
|
|
|
|
(0.06
|
)
|
Diluted
EPS
|
|
$
|
14,489
|
|
|
|
5,607
|
|
|
$
|
2.58
|
|
NOTE
4 – COMPREHENSIVE INCOME
Comprehensive
(loss) income, which encompasses net income, the net change in unrealized gains
(losses) on investment securities available-for-sale and the reclassification of
net (gains) losses included in earnings, is presented below:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
533
|
|
|
$
|
1,714
|
|
|
$
|
3,580
|
|
|
$
|
14,489
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized gains (losses) on investment securities
available-for-sale, net of tax benefit (expense) of $642 and $(575) for
the three months ended September 30, 2008 and 2007, respectively, and
$1,999 and $(262) for the nine months ended September 30, 2008 and 2007,
respectively.
|
|
|
(963
|
)
|
|
|
862
|
|
|
|
(2,999
|
)
|
|
|
393
|
|
Reclassification
for net losses (gains) included in earnings, net of tax (benefit) expense
of $(85) and $40 for the three and nine months ended September 30, 2008,
respectively.
|
|
|
127
|
|
|
|
—
|
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(Loss) Income
|
|
$
|
(303
|
)
|
|
$
|
2,576
|
|
|
$
|
521
|
|
|
$
|
14,882
|
|
NOTE
5 – IMPAIRED LOANS RECEIVABLE
As of
September 30, 2008 and December 31, 2007, the recorded investment in impaired
loans was $184.3 million and $47.0 million, respectively. The average
recorded investment in impaired loans was $149.0 million and $108.3 million,
respectively, for the three and nine months ended September 30, 2008, and $46.4
million and $42.1 million, respectively, for the same periods last year.
Interest income recognized on impaired loans totaled $140,000 and
$500,000 respectively, for the three and nine months ended September 30,
2008, as compared to $212,000 and $618,000, respectively, for the same periods
last year.
NOTE
6 – FAIR VALUE
The
Company adopted the provisions of SFAS No. 157 as of January 1, 2008, for
financial instruments. Although the adoption of SFAS No. 157 did not
materially impact its financial condition or results of operations, the Company
is now required to provide additional disclosures as part of its financial
statements. In accordance with FASB Staff Position No. 157-2,
"Effective Date of FASB Statement No. 157," the Company has delayed the
application of SFAS No. 157 for non-financial assets and non-financial
liabilities, until January 1, 2009.
SFAS No.
157 establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined
as observable inputs such as quoted prices in active markets; Level 2, defined
as inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
Investment
securities available-for-sale are reported at fair value utilizing Level 1
inputs with respect to valuing equity securities with quoted prices on an active
market, Level 2 inputs for investment and debt securities, and Level 3 inputs
related to the valuation of the Company’s residual interest in securitized
loans. The valuation for investment and debt securities utilizing
Level 2 inputs were primarily determined by an independent pricing service using
matrix pricing, which is a mathematical technique widely used in the industry to
value securities without relying exclusively on quoted market prices for the
specific securities, but rather by relying on the securities’ relationship to
other benchmark quoted securities.
The
Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at September 30, 2008, were as
follows:
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
at September 30, 2008
|
|
|
Quoted Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Balance
at
September
30,
2008
|
|
|
(dollars
in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities—available-for-sale
|
|
$
|
140
|
|
|
$
|
96,232
|
|
|
$
|
754
|
|
|
$
|
97,126
|
|
Changes
in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring
Basis
|
|
Balance
at
December
31,
2007
|
|
Total Realized
and Unrealized
Gains
Included
in
Income
|
|
Total
Realized and
Unrealized
Gains
|
|
Purchases,
Sales, Other
Settlements and
Issuances,
net
|
|
Net Transfers
In and/or Out
of
Level 3
|
|
Balance
at
September
30, 2008
|
|
Net Revaluation
of
Retained
Interests
|
|
|
|
|
|
(dollars
in thousands)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities—available-for-sale
|
$
|
1,318
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(564)
|
|
$
|
—
|
|
$
|
754
|
The
Company’s assets measured at fair value on a non-recurring basis subject to the
disclosure requirements of SFAS No. 157 at September 30, 2008, were as
follows:
Assets
and Liabilities Measured at Fair Value on a Non-Recurring Basis at
September
30, 2008
|
|
|
Quoted Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Balance
at
September
30,
2008
|
|
(dollars
in thousands)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
$
|
—
|
|
$
|
—
|
|
$
|
159,134
|
|
$
|
159,134
|
Impaired
loans, which are measured for impairment using the fair value of the collateral,
for collateral dependent loans, had a carrying amount $184.3 million, with a
valuation allowance of $25.2 million.
Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test. Certain non-financial assets measured
at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial
long-lived assets measured at fair value for impairment
assessment. As stated above, SFAS No. 157 will be applicable to these
fair value measurements beginning January 1, 2009.
NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 was effective for the Company on January 1, 2008. The
adoption of SFAS No. 157 did not have a material impact on the Company’s
financial condition or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 was effective for us on
January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on
the Company’s financial condition or results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB Statement No.
51.” SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51,
“Consolidated Financial Statements,” to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS No. 160 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS No. 160 is
effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company’s financial condition or results of
operations.
In March
2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No.133." SFAS
No. 161 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to amend and expand the disclosure requirements of SFAS No. 133 to
provide greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under SFAS No. 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. To meet those
objectives, SFAS No. 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company's financial condition or results of
operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS
No. 162 did not have a significant impact on the Company’s financial condition
or results of operation.
NOTE
8 – BUSINESS SEGMENT INFORMATION
SFAS No.
131, “Disclosures About Segments of an Enterprise and Related Information”
(“SFAS No. 131”), requires disclosure of segment information in a manner
consistent with the “management approach”. The management approach is
based on the way the chief operating decision-maker organizes segments within a
company for making operating decisions and assessing performance.
The main
factors used to identify operating segments are the specific product and
business lines of the various operating segments of the Company. Operating
segments are organized separately by product and service offered. We have
identified one operating segment that meets the criteria of being a reportable
segment in accordance with the provisions of SFAS No. 131. This reportable
segment is the origination and purchase of loans, which by its legal form, is
identified as operations of the Bank and Imperial Capital REIT. This segment
derives the majority of its revenue by originating and purchasing loans. Other
operating segments of the Company that did not meet the criteria of being a
reportable segment in accordance with SFAS No. 131 have been aggregated and
reported as “All Other”. Substantially all of the transactions from the
Company’s operating segments occur in the United States.
Transactions
between the reportable segment of the Company and its other operating segments
are made at terms which approximate arm’s-length transactions and in accordance
with accounting principles generally accepted in the United States. There is no
significant difference between the measurement of the reportable segments
profits and losses disclosed below and the measurement of profits and losses in
the Company’s consolidated statements of income. Accounting allocations are made
in the same manner for all operating segments.
|
|
Lending
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
All Other
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
For
the three months ended September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
65,406
|
|
|
$
|
(419
|
)
|
|
$
|
64,987
|
|
Total
interest income
|
|
|
69,357
|
|
|
|
52
|
|
|
|
69,409
|
|
Total
interest expense
|
|
|
38,759
|
|
|
|
1,753
|
|
|
|
40,512
|
|
Net
income (loss)
|
|
|
2,369
|
|
|
|
(1,836
|
)
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
63,404
|
|
|
$
|
244
|
|
|
$
|
63,648
|
|
Total
interest income
|
|
|
62,636
|
|
|
|
63
|
|
|
|
62,699
|
|
Total
interest expense
|
|
|
39,919
|
|
|
|
2,102
|
|
|
|
42,021
|
|
Net
income (loss)
|
|
|
3,349
|
|
|
|
(1,635
|
)
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
187,409
|
|
|
$
|
(852
|
)
|
|
$
|
186,557
|
|
Total
interest income
|
|
|
191,697
|
|
|
|
163
|
|
|
|
191,860
|
|
Total
interest expense
|
|
|
112,556
|
|
|
|
5,556
|
|
|
|
118,112
|
|
Net
income (loss)
|
|
|
9,122
|
|
|
|
(5,542
|
)
|
|
|
3,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
190,362
|
|
|
$
|
1,160
|
|
|
$
|
191,522
|
|
Total
interest income
|
|
|
188,242
|
|
|
|
772
|
|
|
|
189,014
|
|
Total
interest expense
|
|
|
116,262
|
|
|
|
6,268
|
|
|
|
122,530
|
|
Net
income (loss)
|
|
|
19,396
|
|
|
|
(4,907
|
)
|
|
|
14,489
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion and analysis is intended to identify the major factors that
affected our financial condition and results of operations as of and for the
three and nine months ended September 30, 2008.
Application
of Critical Accounting Policies and Accounting Estimates
The
accounting and reporting policies followed by us conform, in all material
respects, to accounting principles generally accepted in the United States
(“GAAP”) and to general practices within the financial services
industry. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While we
base our estimates on historical experience, current information and other
factors deemed to be relevant, actual results could differ from those
estimates.
We
consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain and (ii) different estimates that management
reasonably could have used for the accounting estimate in the current period, or
changes in the accounting estimate that are reasonably likely to occur from
period to period, could have a material impact on our financial
statements. Accounting polices related to the allowance for loan
losses are considered to be critical, as these policies involve considerable
subjective judgment and estimation by management. We also consider
our accounting polices related to other real estate and other assets owned to be
critical due to the potential significance of these activities and the estimates
involved.
For
additional information regarding critical accounting policies, refer to
Note 1 – “Organization and Summary of Significant Accounting Policies” in
the Notes to Consolidated Financial Statements and the sections captioned
“Application of Critical Accounting Policies and Accounting Estimates” and
“Allowance for Loan Losses and Non-performing Assets” in Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Company’s Form 10-K for the year ended December 31, 2007. There have
been no significant changes in the Company's application of accounting policies
since December 31, 2007.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
Executive
Summary
Consolidated
net income and diluted EPS were $533,000 and $0.10, respectively, for the three
months ended September 30, 2008, compared to $1.7 million and $0.31 for the same
period last year. The decline in net income during the current period
was primarily caused by a $4.9 million increase in provision for loan losses
recorded and a $5.4 million decrease in non-interest income, partially offset by
an $8.2 million increase in net interest income before provision for loan
losses. The decrease in non-interest income was primarily caused by a
$4.6 million other than temporary impairment recorded during the current quarter
on our investment in Federal National Mortgage Association (“FNMA”) preferred
stock. See “—Non-Interest Income (Loss).”
Net
interest income before provision for loan losses increased 39.7% to $28.9
million for the quarter ended September 30, 2008, compared to $20.7 million for
the same period last year. The increase was primarily due to an
increase in interest earned on our investment securities held-to-maturity, as we
have significantly increased this portfolio, as well as a decline in our average
cost of funds, as deposits have repriced to current market interest
rates. Since September 17, 2007 through September 30, 2008, the
Federal Reserve Board has lowered the federal funds rate by a combined 325 basis
points. The increase in net interest income was partially offset by a
decline in the yield earned on our loan portfolio, as higher yielding loans have
paid-off and were replaced by loan production that was originated at lower
spreads over our cost of funds due to competitive pricing pressures, as well as
our adjustable rate loan portfolio repricing to lower current market interest
rates and a $173.6 million decline in the average balance of loans outstanding
during the period. During the quarters ended September 30, 2008 and
2007, the average balance of our investment securities held-to-maturity was
$955.4 million and $171.5 million, respectively. At September 30,
2008, our investment securities held-to-maturity totaled $957.9 million as
compared to $159.0 million at December 31, 2007. These increases were
primarily related to the purchase of approximately $861.6 million of AAA rated
corporate sponsored collateralized mortgage obligations (CMOs) during the
current year, which are secured by Alt A first lien residential mortgage loans,
predominantly all of which carry fixed interest rates. For further
discussion regarding these CMO acquisitions refer to management’s discussion
below regarding net interest income and margin for the three months ended
September 30, 2008 and 2007.
The
provision for loan losses was $10.1 million and $5.3 million, respectively, for
the quarters ended September 30, 2008 and 2007. The increase in the
provision for loan losses recorded during the current quarter was primarily due
to the increase in our non-performing loans. Non-performing loans as
of September 30, 2008 were $176.3 million, compared to $116.8 million and $38.0
million at June 30, 2008 and December 31, 2007, respectively. The
increase in non-performing loans during the year was primarily related to
non-performing construction and land loans, which increased from $8.8 million at
December 31, 2007 to $129.2 million at September 30, 2008. Our
construction and land loan portfolio at September 30, 2008 totaled $456.5
million, of which $294.6 million (representing 10.2% of our total loan
portfolio) were residential and condominium conversion construction and land
loans.
The
return on average assets was 0.05% for the three months ended September 30,
2008, compared to 0.19% for the same period last year. The return on
average shareholders’ equity was 0.94% for the three months ended September 30,
2008, compared to 2.97% for the same period last year.
Loan
originations were $102.5 million for the quarter ended September 30, 2008,
compared to $340.1 million for the same period last year. During the
current quarter, we originated $45.3 million of commercial real estate loans,
$22.0 million of small balance multi-family real estate loans, and $35.2 million
of entertainment finance loans. Loan originations for the same period
last year consisted of $215.1 million of commercial real estate loans, $90.2
million of small balance multi-family real estate loans, and $34.8 million of
entertainment finance loans. Loan originations during the current
period were impacted by a decline in customer demand as a result of uncertainty
regarding current real estate market conditions.
Net
Interest Income and Margin
The
following table presents for the three months ended September 30, 2008 and 2007,
our condensed average balance sheet information, together with interest income
and yields earned on average interest earning assets and interest expense and
rates paid on average interest bearing liabilities. Average balances
are computed using daily average balances. Nonaccrual loans are
included in loans receivable.
|
|
For
the Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
|
(dollars
in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
1,135,036
|
|
|
$
|
22,723
|
|
|
|
7.96
|
%
|
|
$
|
349,765
|
|
|
$
|
4,249
|
|
|
|
4.82
|
%
|
Loans
receivable
|
|
|
2,941,143
|
|
|
|
46,686
|
|
|
|
6.31
|
%
|
|
|
3,114,776
|
|
|
|
58,450
|
|
|
|
7.44
|
%
|
Total
interest earning assets
|
|
|
4,076,179
|
|
|
$
|
69,409
|
|
|
|
6.77
|
%
|
|
|
3,464,541
|
|
|
$
|
62,699
|
|
|
|
7.18
|
%
|
Non-interest
earning assets
|
|
|
82,437
|
|
|
|
|
|
|
|
|
|
|
|
75,030
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(53,841
|
)
|
|
|
|
|
|
|
|
|
|
|
(43,302
|
)
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,104,775
|
|
|
|
|
|
|
|
|
|
|
$
|
3,496,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$
|
37,606
|
|
|
$
|
286
|
|
|
|
3.03
|
%
|
|
$
|
25,627
|
|
|
$
|
251
|
|
|
|
3.89
|
%
|
Money
market and passbook
|
|
|
321,492
|
|
|
|
2,932
|
|
|
|
3.63
|
%
|
|
|
248,955
|
|
|
|
3,152
|
|
|
|
5.02
|
%
|
Time
certificates
|
|
|
2,125,627
|
|
|
|
21,766
|
|
|
|
4.07
|
%
|
|
|
1,879,726
|
|
|
|
25,076
|
|
|
|
5.29
|
%
|
Total interest bearing deposit
accounts
|
|
|
2,484,725
|
|
|
|
24,984
|
|
|
|
4.00
|
%
|
|
|
2,154,308
|
|
|
|
28,479
|
|
|
|
5.24
|
%
|
FHLB
advances and other borrowings
|
|
|
1,253,010
|
|
|
|
13,775
|
|
|
|
4.37
|
%
|
|
|
980,776
|
|
|
|
11,440
|
|
|
|
4.63
|
%
|
Junior
subordinated debentures
|
|
|
86,600
|
|
|
|
1,753
|
|
|
|
8.05
|
%
|
|
|
86,600
|
|
|
|
2,102
|
|
|
|
9.63
|
%
|
Total
interest bearing liabilities
|
|
|
3,824,335
|
|
|
$
|
40,512
|
|
|
|
4.21
|
%
|
|
|
3,221,684
|
|
|
$
|
42,021
|
|
|
|
5.17
|
%
|
Non-interest
bearing demand accounts
|
|
|
9,008
|
|
|
|
|
|
|
|
|
|
|
|
10,022
|
|
|
|
|
|
|
|
|
|
Other
non-interest bearing liabilities
|
|
|
45,320
|
|
|
|
|
|
|
|
|
|
|
|
35,392
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
226,112
|
|
|
|
|
|
|
|
|
|
|
|
229,171
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’
equity
|
|
$
|
4,104,775
|
|
|
|
|
|
|
|
|
|
|
$
|
3,496,269
|
|
|
|
|
|
|
|
|
|
Net
interest spread
(1)
|
|
|
|
|
|
|
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
2.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision
for
loan losses
|
|
|
|
|
|
$
|
28,897
|
|
|
|
|
|
|
|
|
|
|
$
|
20,678
|
|
|
|
|
|
Net
interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
2.82
|
%
|
|
|
|
|
|
|
|
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
(1)
|
Average
yield on interest earning assets minus average rate paid on interest
bearing liabilities.
|
(2)
|
Net
interest income divided by total average interest earning
assets.
|
The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in average interest earning asset and
interest bearing liability balances and changes in average interest
rates. The change in interest due to both volume and rate has been
allocated to change due to volume and rate in proportion to the relationship of
absolute dollar amounts of each.
|
|
For
the Three Months Ended
September
30, 2008 and 2007
|
|
|
|
Increase
(Decrease) Due to:
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest
and fees earned from:
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
4,155
|
|
|
$
|
14,319
|
|
|
$
|
18,474
|
|
Loans
|
|
|
(8,606
|
)
|
|
|
(3,158
|
)
|
|
|
(11,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(decrease) increase in interest income
|
|
|
(4,451
|
)
|
|
|
11,161
|
|
|
|
6,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
(7,402
|
)
|
|
|
3,907
|
|
|
|
(3,495
|
)
|
FHLB
advances and other borrowings
|
|
|
(673
|
)
|
|
|
3,008
|
|
|
|
2,335
|
|
Junior
subordinated debentures
|
|
|
(349
|
)
|
|
|
—
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(decrease) increase in interest expense
|
|
|
(8,424
|
)
|
|
|
6,915
|
|
|
|
(1,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in net interest income
|
|
$
|
3,973
|
|
|
$
|
4,246
|
|
|
$
|
8,219
|
|
Total
interest income increased $6.7 million to $69.4 million for the
current quarter as compared to $62.7 million for the same period last year.
The increase in interest income was primarily attributable to a $785.3 million
increase in the average balance on cash and investments, as well as an increase
of 314 basis points in the average yield earned on cash and
investments. These increases were partially offset by a 113 basis
point decline in the average yield earned on total loans receivable and a $173.6
million decline in the average balance of loans outstanding.
The
average balance of cash and investment securities increased to $1.1 billion
during the quarter compared to $349.8 million during the same period last
year. This increase was primarily due to an increase in the average
balance of our investment securities held-to-maturity, which totaled $955.4
million as of September 30, 2008, as compared to $171.5 million as of September
30, 2007. These increases were primarily related to the purchase of
approximately $861.6 million of AAA rated corporate sponsored CMOs during the
current year, which are secured by Alt A first lien residential mortgage loans,
predominantly all of which carry fixed interest rates. These CMOs
were acquired at an average cost of 87% of their current par value (actual cost
ranged from 68% to 97% of current par value, depending on estimated average
lives, credit enhancement through subordination levels, and underlying
collateral performance). These investments were priced to earn a
weighted average effective yield of approximately 9.0%, and they carry an
average credit enhancement of 8.6% through subordination provided by junior CMO
tranches that bear the initial losses on the underlying loans. The
average expected life of these CMOs is approximately five years. The
average yield earned on our cash and investment securities was 7.96% during the
three months ended September 30, 2008, as compared to 4.82% during the same
period last year. This increase was also primarily related to the CMO
purchases during the current year. The average yield earned during
the current quarter on our investment securities held-to-maturity was 8.42%, as
compared to 4.19% during the same period last year.
The
average aggregate balance of our loan portfolio was $2.9 billion and $3.1
billion for the quarters ended September 30, 2008 and 2007,
respectively. Commercial real estate loans had an average aggregate
balance of $574.1 million during the quarter ended September 30, 2008, compared
to $596.8 million during the same period last year. Construction and
land loans had an average aggregate balance of $458.7 million during the quarter
ended September 30, 2008, compared to $396.7 million during the same period last
year. Multi-family real estate loans had an average aggregate balance
of $1.8 billion during the quarter ended September 30, 2008, compared to $2.0
billion during the same period last year. Single-family
residential loans had an average aggregate balance of $11.5 million during the
quarter ended September 30, 2008, compared to $18.5 million during the same
period last year. The average aggregate balance of entertainment
finance loans was $63.1 million and $68.4 million during the quarters ended
September 30, 2008 and 2007, respectively.
The
average yield earned on total loans decreased to 6.31% during the quarter ended
September 30, 2008 as compared to 7.44% during the same period last
year. The decrease in yield was primarily due to higher yielding
loans paying off and being replaced by loan production that was originated at
lower spreads over our cost of funds due to competitive pricing pressures, our
adjustable rate loans repricing to lower current market interest rates and a
decline in the average balance of loans outstanding during the
period. To a lesser extent, the average loan yield was also impacted
by the increase in non-performing loans, as well as the reversal of all
previously accrued but uncollected interest on loans placed on non-accrual
status during the period against our current period operating
results. A significant portion of our loan portfolio is comprised of
adjustable rate loans indexed to either six month LIBOR or the Prime Rate, most
with interest rate floors and caps below and above which the loan’s contractual
interest rate may not adjust. Approximately 49.7% of our loan
portfolio was adjustable at September 30, 2008, and approximately 41.8% of the
loan portfolio was comprised of hybrid loans, which after an initial fixed rate
period of three or five years, will convert to an adjustable interest rate for
the remaining term of the loan. As of September 30, 2008, our hybrid
loans had a weighted average of 2.8 years remaining until conversion to an
adjustable rate loan and a weighted average interest rate of
6.64%. Our adjustable rate loans generally reprice on a quarterly or
semi-annual basis with increases generally limited to maximum adjustments of 2%
per year up to 5% for the life of the loan. At September 30, 2008,
approximately $2.4 billion, or 84.3%, of our adjustable and hybrid loan
portfolio contained interest rate floors, below which the loans’ contractual
interest rate may not adjust. The inability of our loans to adjust
downward can contribute to increased income in periods of declining interest
rates, and also assists us in our efforts to limit the risks to earnings
resulting from changes in interest rates, subject to the risk that borrowers may
refinance these loans during periods of declining interest rates. At
September 30, 2008, the weighted average floor interest rate of these loans was
6.88%. At that date, approximately $723.7 million, or 25.0%, of these
loans were at the floor interest rate. At September 30, 2008, 47.6%
of the adjustable rate loans outstanding had a lifetime interest rate cap. The
weighted-average lifetime interest rate cap on our adjustable rate loan
portfolio was 11.92% at that date. At September 30, 2008, none of
these loans were at their cap rate.
Total
interest expense decreased by $1.5 million to $40.5 million during the current
quarter, compared to $42.0 million for the same period last year. The
decrease in interest expense was primarily attributable to a decline in average
rates paid of 124 basis points and 26 basis points on interest bearing deposits
and FHLB advances and other borrowings, respectively, as deposits repriced to
lower current market interest rates and FHLB advances matured and were replaced
with new advances at lower current market interest rates. These
decreases were partially offset by increases in interest expense related to an
increase in the average balances of deposits and FHLB advances and other
borrowings of $330.4 million and $272.2 million, respectively.
Our
average cost of funds decreased to 4.21% during the three months ended September
30, 2008, compared to 5.17% for the same period last year. As
discussed above, the decrease in the average funding costs was primarily due to
deposits repricing and FHLB advances maturing and being replaced with new
advances at lower current market interest rates. The average rate
paid on deposit accounts was 4.00% during the three months ended September 30,
2008 as compared to 5.24% for the same period last year. The average
balance of deposit accounts was $2.5 billion for the three months ended
September 30, 2008 as compared to $2.2 billion for the same period last
year. The average rate paid on FHLB advances and other borrowings was
4.37% during the three months ended September 30, 2008 compared to 4.63% for the
same period last year. FHLB advances and other borrowings averaged
$1.3 billion during the current quarter, compared to $980.8 million for the same
period last year.
Net
interest margin increased to 2.82% for the three months ended September 30, 2008
as compared to 2.37% for the same period last year. This increase was
caused by a 55 basis point increase in our net interest spread, primarily
attributable to our CMO purchases, partially offset by a $611.6 million increase
in our average interest earning assets.
Provision
for Loan Losses
Management
periodically assesses the adequacy of the allowance for loan losses by reference
to many quantitative and qualitative factors that may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements:
|
•
|
the
risk characteristics of various classifications of
loans;
|
|
•
|
general
portfolio trends relative to asset and portfolio
size;
|
|
•
|
potential
credit and geographic
concentrations;
|
|
•
|
delinquency
trends within the loan portfolio;
|
|
•
|
changes
in the volume and severity of past due loans, classified loans and other
loans of concern;
|
|
•
|
historical
loss experience and risks associated with changes in economic, social and
business conditions; and
|
|
•
|
the
underwriting standards in effect when the loan was
made.
|
Accordingly,
the calculation of the adequacy of the allowance for loan losses is not based
solely on the level of non-performing assets. The quantitative
factors, included above, are utilized by our management to identify two
different risk groups (1) individual loans (loans with specifically identifiable
risks); and (2) homogeneous loans (groups of loans with similar
characteristics). The allocation for individual loans is based on a specific
reserve analysis, which is performed on our impaired loans.
Loans
evaluated by our specific reserve analysis are based on estimated cash flows
discounted at the loan’s original effective interest rate or, for collateral
dependent loans, based on the underlying collateral
value. Homogeneous loans pools are assessed by our risk rating
process are assigned a risk-rating grade, as well as a loss
ratio. Risk ratings and loss ratios are determined based on
historical loss experience, augmented by the experience of management with
similar assets and our independent loan review process. The loan
review process begins at the loan’s origination where we obtain information
about the borrower and the real estate collateral, such as personal financial
statements, FICO scores, property rent rolls, property operating statements,
appraisals, market assessments, and other pertinent data. Throughout
the loan life, we obtain updated information such as rent rolls, property cash
flow statements, personal financial statements, and for certain loans, updated
property inspection reports. This information, at the individual
borrower and loan level, provides input into our risk profile of our borrowers,
and serves as the primary basis for each loan’s risk grade.
Loss
ratios and specific reserves for all categories of loans are evaluated on a
quarterly basis. Loss ratios associated with historical loss
experience are determined based on a rolling migration analysis of each loan
category within our portfolio. This migration analysis estimates loss
factors based on the performance of each loan category over a specified time
period. Historically, this time period has been five years; however,
due to the pronounced deterioration of current economic conditions, we have
shortened the time frame to 18 months, which we believe more accurately captures
the current trends and loss attributes within our loan
portfolio. These loss factors are then adjusted for other
identifiable risks specifically related to each loan category or risk
grade. We utilize market and other economic data, which we accumulate
on a quarterly basis, to evaluate and identify the economic and real estate
related trends within each regional market that we operate. In
addition to the information gathered from this data, we also typically consider
other risk factors, such as specific risks within a loan category, peer analysis
reports, and any other relevant trends or data, in determining any necessary
adjustments to our historical loss factors. To the extent that known
risks or trends exist, the loss ratios are adjusted accordingly, and
incorporated into our assessment of the adequacy of our allowance for loan
losses.
The
qualitative factors, included above, are also utilized to identify other risks
inherent in the portfolio and to determine whether the estimated credit losses
associated with the current portfolio might differ from historical loss trends
or the loss ratios discussed above. We evaluate each applicable
qualitative factor to determine the current condition and trend of each
factor. Based on this evaluation, we adjust the loss ratio for each
loan group to reflect the estimated impact of each factor. Because of
the subjective nature of these factors and the judgments required to determine
these adjustments, the actual losses incurred can vary significantly from the
estimated amounts.
While
management believes the estimates and assumptions used in its determination of
the adequacy of the allowance are reasonable, there can be no assurance that
such estimates and assumptions will not be proven incorrect in the future, or
that the actual amount of future provisions will not exceed the amount of past
provisions or that any increased provisions that may be required will not
adversely impact our financial condition and results of operations. In addition,
the determination of the amount of the Bank’s allowance for loan losses is
subject to review by bank regulators, as part of the routine examination
process, which may result in the establishment of additional reserves based upon
their judgment of information available to them at the time of their
examination.
The
consolidated provision for loan losses was $10.1 million and $5.3 million for
the quarters ended September 30, 2008 and 2007, respectively. The
provision for loan losses was recorded based on an analysis of the factors
referred to above. The increase in provision for loan losses during
the quarter was primarily due to the increase in our non-performing
loans. Non-performing loans as of September 30, 2008 were $176.3
million, compared to $116.8 million and $38.0 million at June 30, 2008 and
December 31, 2007, respectively. As a percentage of our total loan
portfolio, the amount of non-performing loans was 6.13% and 1.20% at September
30, 2008 and December 31, 2007, respectively. The increase in
non-performing loans during the year was primarily related to non-performing
construction and land loans, which increased from $8.8 million at December 31,
2007 to $129.2 million at September 30, 2008.
With the
housing and secondary mortgage markets continuing to deteriorate and showing no
signs of stabilizing in the near future, we continue to aggressively monitor our
real estate loan portfolio, including our residential and condominium conversion
construction and land loan portfolio. Within our residential and
condominium conversion construction and land loan portfolio, at September 30,
2008, approximately 59.1%, 20.5%, 6.4% and 5.1% were located in California, New
York, Arizona and Florida, respectively. At September 30, 2008, we
had $117.8 million of non-performing loans within our residential and
condominium conversion construction and land loan portfolio, consisting of 16
lending relationships. Of these non-performing construction and land
loans, ten relationships, with an aggregate balance of $97.3 million, were
located in California (Huntington Beach, Cathedral City, Indio, Riverside, Palm
Desert, Van Nuys, Tulare and Palmdale).
The
allowance for loan losses as a percentage of our total loans was 1.80% at
September 30, 2008 compared to 1.51% at December 31, 2007. We believe
that these reserves levels were adequate to support known and inherent losses in
our loan portfolio and for specific reserves as of September 30, 2008 and
December 31, 2007, respectively. The allowance for loan losses is
impacted by inherent risk in the loan portfolio, including the level of our
non-performing loans and other loans of concern, as well as specific reserves
and charge-off activity. Other loans of concern increased from $27.4
million at December 31, 2007 to $136.5 million at September 30, 2008, as
compared to $144.4 million at June 30, 2008. The increase in other
loans of concern during the current year was primarily caused by the addition of
$30.7 million of residential and condominium construction and land loans, $26.6
million of other construction projects, and $53.7 million of commercial and
multi-family real estate loans. Other loans of concern consist of
loans with respect to which known information concerning possible credit
problems with the borrowers or the cash flows of the collateral securing the
respective loans has caused management to be concerned about the ability of the
borrowers to comply with present loan repayment terms, which may result in the
future inclusion of such loans in the nonaccrual category.
During
the quarters ended September 30, 2008 and 2007, we had net loan charge-offs of
$9.5 million and $3.6 million, respectively. The charge-offs taken
during the current period were previously specifically reserved for under our
allowance for loan loss methodology discussed above. See also –
“Financial Condition – Credit Risk”.
Non-Interest
Income (Loss)
Non-interest
loss was $4.4 million for the quarter ended September 30, 2008 as compared to
non-interest income of $949,000 for the same period last year. The
loss primarily related to a $4.6 million other than temporary impairment
recorded during the current quarter on our investment in FNMA preferred
stock. At September 30, 2008, the new cost basis of the preferred
stock was approximately $400,000. The substantial decline in value
occurred following the United States Department of Treasury and Federal Housing
Finance Agency (FHFA) announcement on September 7, 2008 that FNMA was being
placed under conservatorship, that control of its management was being given to
its regulator, the FHFA, and that it was prohibited from paying dividends on its
common and preferred stock. There can be no assurance that the
remaining value of the FNMA preferred stock will not decline further, or that we
will not have to recognize additional impairment charges related to this
investment. Non-interest income typically consists of fees and other
miscellaneous income earned on customer accounts.
Non-Interest
Expense
Non-interest
expense totaled $13.5 million for both the current quarter and the same period
last year. Our efficiency ratio (defined as general and
administrative expenses as a percentage of net revenue) was 52.5% for the
quarter ended September 30, 2008, as compared to 61.3% for the same period last
year. The improvement in our efficiency ratio was primarily caused by
the $8.2 million increase in net interest income, partially offset by a $5.4
million decline in non-interest income.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Executive
Summary
Consolidated
net income and diluted EPS were $3.6 million and $0.66, respectively, for the
nine months ended September 30, 2008, compared to $14.5 million and $2.58 for
the same period last year. The decline in net income was primarily
caused by a $14.1 million increase in provision for loan losses recorded during
the current period and a $7.8 million decline in non-interest income, partially
offset by a $7.3 million increase in net interest income. The decline
in non-interest income was primarily caused by a $4.6 million other than
temporary impairment recognized in September 2008 on our investment in FNMA
preferred stock. See “—Non-Interest Income (Loss).”
Net
interest income before provision for loan losses increased 10.9% to $73.7
million for the nine months ended September 30, 2008, compared to $66.5 million
for the same period last year. The increase was primarily due to an
increase in interest earned on our investment securities held-to-maturity which,
as discussed within the comparison of the three months ended September 30, 2008
and 2007, primarily related to the purchase of approximately $861.6 million of
AAA rated corporate sponsored CMOs. The increase was also due to a
decrease in our average cost of funds, as deposits have repriced to current
market interest rates. During the nine months ended September 30,
2008 and 2007, the average balance of our investment securities held-to-maturity
was $562.1 million and $181.0 million, respectively. This increase
was partially offset by the decline in the yield earned on our loan portfolio,
as higher yielding loans have paid-off and were replaced by loan production that
was originated at lower spreads over our cost of funds due to competitive
pricing pressures and adjustable rate loans repricing to lower current market
interest rates.
The
provision for loan losses was $20.6 million and $6.5 million, respectively, for
the nine months ended September 30, 2008 and 2007. As discussed in
detail above, the increase in provision for loan losses during the current nine
month period was primarily due to the increase in our non-performing
loans.
The
return on average assets was 0.12% for the nine months ended September 30, 2008,
compared to 0.56% for the same period last year. The return on
average shareholders’ equity was 2.10% for the nine months ended September 30,
2008, compared to 8.55% for the same period last year.
Loan
originations were $278.1 million for the nine months ended September 30, 2008,
compared to $1.0 billion for the same period last year. During the
current nine month period, we originated $120.8 million of commercial real
estate loans, $87.1 million of small balance multi-family real estate loans, and
$70.1 million of entertainment finance loans. Loan originations for
the same period last year consisted of $644.0 million of commercial real estate
loans, $281.2 million of small balance multi-family real estate loans, and $92.0
million of entertainment finance loans. As discussed above, loan
originations during the current period were impacted by a decline in customer
demand as a result of uncertainty regarding current real estate market
conditions. In addition, our wholesale loan operations acquired $47.3
million of commercial and multi-family real estate loans during the nine months
ended September 30, 2007.
Net
Interest Income and Margin
The
following table presents for the nine months ended September 30, 2008 and 2007,
our condensed average balance sheet information, together with interest income
and yields earned on average interest earning assets and interest expense and
rates paid on average interest bearing liabilities. Average balances
are computed using daily average balances. Nonaccrual loans are
included in loans receivable.
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
|
(dollars
in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
739,774
|
|
|
$
|
40,418
|
|
|
|
7.30
|
%
|
|
$
|
362,806
|
|
|
$
|
13,337
|
|
|
|
4.91
|
%
|
Loans
receivable
|
|
|
3,055,638
|
|
|
|
151,442
|
|
|
|
6.62
|
%
|
|
|
3,075,913
|
|
|
|
175,677
|
|
|
|
7.64
|
%
|
Total
interest earning assets
|
|
|
3,795,412
|
|
|
$
|
191,860
|
|
|
|
6.75
|
%
|
|
|
3,438,719
|
|
|
$
|
189,014
|
|
|
|
7.35
|
%
|
Non-interest
earning assets
|
|
|
81,452
|
|
|
|
|
|
|
|
|
|
|
|
67,871
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(50,049
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,352
|
)
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,826,815
|
|
|
|
|
|
|
|
|
|
|
$
|
3,461,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$
|
32,981
|
|
|
$
|
776
|
|
|
|
3.14
|
%
|
|
$
|
25,096
|
|
|
$
|
685
|
|
|
|
3.65
|
%
|
Money
market and passbook
|
|
|
281,335
|
|
|
|
7,822
|
|
|
|
3.71
|
%
|
|
|
234,163
|
|
|
|
8,741
|
|
|
|
4.99
|
%
|
Time
certificates
|
|
|
1,970,853
|
|
|
|
65,771
|
|
|
|
4.46
|
%
|
|
|
1,848,410
|
|
|
|
73,126
|
|
|
|
5.29
|
%
|
Total interest bearing deposit
accounts
|
|
|
2,285,169
|
|
|
|
74,369
|
|
|
|
4.35
|
%
|
|
|
2,107,669
|
|
|
|
82,552
|
|
|
|
5.24
|
%
|
FHLB
advances and other borrowings
|
|
|
1,178,684
|
|
|
|
38,187
|
|
|
|
4.33
|
%
|
|
|
993,903
|
|
|
|
33,710
|
|
|
|
4.53
|
%
|
Junior
subordinated debentures
|
|
|
86,600
|
|
|
|
5,556
|
|
|
|
8.57
|
%
|
|
|
86,600
|
|
|
|
6,268
|
|
|
|
9.68
|
%
|
Total
interest bearing liabilities
|
|
|
3,550,453
|
|
|
$
|
118,112
|
|
|
|
4.44
|
%
|
|
|
3,188,172
|
|
|
$
|
122,530
|
|
|
|
5.14
|
%
|
Non-interest
bearing demand accounts
|
|
|
9,332
|
|
|
|
|
|
|
|
|
|
|
|
10,674
|
|
|
|
|
|
|
|
|
|
Other
non-interest bearing liabilities
|
|
|
39,531
|
|
|
|
|
|
|
|
|
|
|
|
35,913
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
227,499
|
|
|
|
|
|
|
|
|
|
|
|
226,479
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’
equity
|
|
$
|
3,826,815
|
|
|
|
|
|
|
|
|
|
|
$
|
3,461,238
|
|
|
|
|
|
|
|
|
|
Net
interest spread
(1)
|
|
|
|
|
|
|
|
|
|
|
2.31
|
%
|
|
|
|
|
|
|
|
|
|
|
2.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision
for
loan losses
|
|
|
|
|
|
$
|
73,748
|
|
|
|
|
|
|
|
|
|
|
$
|
66,484
|
|
|
|
|
|
Net
interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
(1)
|
Average
yield on interest earning assets minus average rate paid on interest
bearing liabilities.
|
(2)
|
Net
interest income divided by total average interest earning
assets.
|
The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in average interest earning asset and
interest bearing liability balances and changes in average interest
rates. The change in interest due to both volume and rate has been
allocated to change due to volume and rate in proportion to the relationship of
absolute dollar amounts of each.
|
|
For
the Nine Months Ended
September
30, 2008 and 2007
|
|
|
|
Increase
(Decrease) Due to:
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest
and fees earned from:
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
8,639
|
|
|
$
|
18,442
|
|
|
$
|
27,081
|
|
Loans
|
|
|
(23,094
|
)
|
|
|
(1,141
|
)
|
|
|
(24,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(decrease) increase in interest income
|
|
|
(14,455
|
)
|
|
|
17,301
|
|
|
|
2,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
(14,780
|
)
|
|
|
6,597
|
|
|
|
(8,183
|
)
|
FHLB
advances and other borrowings
|
|
|
(1,546
|
)
|
|
|
6,023
|
|
|
|
4,477
|
|
Junior
subordinated debentures
|
|
|
(712
|
)
|
|
|
—
|
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(decrease) increase in interest expense
|
|
|
(17,038
|
)
|
|
|
12,620
|
|
|
|
(4,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in net interest income
|
|
$
|
2,583
|
|
|
$
|
4,681
|
|
|
$
|
7,264
|
|
Total
interest income increased $2.8 million to $191.9 million for the nine
months ended September 30, 2008 as compared to $189.0 million for the same
period last year. The increase in interest income was primarily attributable to
a $377.0 million and 239 basis point increase in the average balance and yield
earned on cash and investments, partially offset by a $20.3 million and 102
basis point decrease in the average balance and yield earned on total loans
receivable.
The
average balance of cash and investment securities increased to $739.8 million
for the nine months ended September 30, 2008, as compared to $362.8 million
during the same period last year. This increase was primarily due to
an increase in the average balance of our investment securities
held-to-maturity, which totaled $562.1 million during the nine months ended
September 30, 2008, as compared to $181.0 million for the same period last
year. The average yield earned on our cash and investment securities
increased to 7.30% during the nine months ended September 30, 2008, as compared
to 4.91% for the same period last year. The average yield earned
during the nine months ended September 30, 2008 on our investment securities
held-to-maturity was 7.76%, as compared to 4.20% for the same period last
year. These increases were primarily related to our CMO purchases
during the current year, as discussed above.
The
average aggregate balance of our loan portfolio was $3.1 billion for both nine
month periods ended September 30, 2008 and 2007. Commercial real
estate loans had an average aggregate balance of $597.6 million during the nine
months ended September 30, 2008 compared to $565.8 million during the same
period last year. Construction and land loans had an average
aggregate balance of $438.7 million during the nine months ended September 30,
2008 compared to $400.6 million during the same period last
year. Multi-family real estate loans had an average aggregate balance
of $1.9 billion during the nine months ended September 30, 2008 compared to $2.0
billion during the same period last year. Single-family residential
loans had an average aggregate balance of $12.5 million during the nine months
ended September 30, 2008 compared to $28.0 million during the same period last
year. The average aggregate balance of entertainment finance loans
was $66.5 million and $72.7 million during the nine months ended September 30,
2008 and 2007, respectively.
The
average yield earned on total loans decreased to 6.62% during the nine months
ended September 30, 2008 as compared to 7.64% during the same period last
year. The decrease in yield was primarily due to higher yielding
loans paying off and being replaced by loan production that was originated at
lower spreads over our cost of funds due to competitive pricing pressures, as
well as our adjustable rate loan portfolio repricing to lower current market
interest rates. To a lesser extent, the average loan yield was also
impacted by the increase in non-performing loans, as well as the reversal of all
previously accrued but uncollected interest against our current period operating
results.
Total
interest expense decreased by $4.4 million to $118.1 million for the nine months
ended September 30, 2008, compared to $122.5 million for the same period last
year. The decrease in interest expense was primarily attributable to
an 89 basis points decline in the average rate paid on interest bearing
deposits, as deposits repriced to lower current market interest
rates. This decrease was partially offset by increases in the average
balances of deposits and FHLB advances and other borrowings of $177.5 million
and $184.8 million, respectively.
Our
average cost of funds decreased to 4.44% during the nine months ended September
30, 2008, compared to 5.14% for the same period last year. As
discussed above, the decrease in the average funding costs was primarily due to
deposits repricing to lower current market interest rates. The
average rate paid on deposit accounts was 4.35% during the nine months ended
September 30, 2008, as compared to 5.24% for the same period last
year. The average balance of deposit accounts increased by $177.5
million to $2.3 billion for the nine months ended September 30, 2008 as compared
to $2.1 billion for the same period last year. The average rate paid
on FHLB advances and other borrowings was 4.33% during the nine months ended
September 30, 2008 compared to 4.53% for the same period last
year. This decline was primarily attributable to FHLB advances
maturing and being replaced with new advances at lower current market interest
rates. FHLB advances and other borrowings averaged $1.2 billion
during the nine months ended September 30, 2008, compared to $993.9 million for
the same period last year.
Net
interest margin increased to 2.60% for the nine months ended September 30, 2008
as compared to 2.58% for the same period last year.
Provision
for Loan Losses
The
consolidated provision for loan losses was $20.6 million and $6.5 million for
the nine months ended September 30, 2008 and 2007, respectively. The
provision for loan losses was recorded based on an analysis of the factors
referred to above in the discussion regarding the three months ended September
30, 2008 and 2007. During the nine months ended September 30, 2008
and 2007, we had net loan charge-offs of $16.6 million and $7.9 million,
respectively. See management’s discussion of the provision for loan losses for
the three months ended September 30, 2008 and 2007 for additional discussion
regarding the provision for loan losses incurred during the current period and
the corresponding methodology.
Non-Interest
Income (Loss)
Non-interest
loss was $5.3 million for the nine months ended September 30, 2008 as compared
to non-interest income of $2.5 million for the same period last
year. As discussed above, the decline in non-interest income
primarily related to a $4.6 million other than temporary impairment recognized
in September 2008 on our investment in FNMA preferred
stock. Non-interest income was further negatively impacted by a loss
provision recorded during the nine months ended September 30, 2008 for unfunded
commitments, as well as a loss on sale of loans recognized in connection with
the sale of approximately $53.2 million of multi-family loans in June
2008.
Non-Interest
Expense
Non-interest
expense totaled $41.9 million for the nine months ended September 30, 2008,
compared to $38.1 million for the same period last year. The increase
in non-interest expense primarily related to a decline in the deferral of
general and administrative costs incurred related to the origination of
loans. As the volume of our loan production decreased during the
current nine month period as compared to the same period last year, the
deferrable portion of these loan costs has also declined. Further
contributing to the increase was a $2.3 million increase in expenses associated
with real estate owned and other foreclosed assets. This increase
primarily related to a $1.3 million provision recorded during the year in
connection with a decline in the estimated fair value of these properties, as
well as $463,000 of losses recorded on the sale of other real estate
owned. Our efficiency ratio was 57.0% for the nine months ended
September 30, 2008, as compared to 54.5% for the same period last
year. The increase in our efficiency ratio was primarily caused by
the $1.4 million increase in general and administrative expenses and the $7.8
million decrease in non-interest income, partially offset by the $7.3 million
increase in net interest income.
FINANCIAL
CONDITION
Total
assets increased $554.2 million to $4.1 billion at September 30, 2008 as
compared to $3.6 billion at December 31, 2007. The increase in total
assets was primarily due to a $798.9 million increase in our investment
securities held-to-maturity, resulting from the CMOs purchased during the
current year, as discussed above, partially offset by a $295.5 million decrease
in our loan portfolio. At September 30, 2008, gross loans totaled
$2.9 billion, including approximately $2.3 billion of real estate loans, $456.5
million of construction and land loans, $46.0 million of entertainment finance
loans, and $10.6 million of other loans.
Deposits
and FHLB advances and other borrowings increased by $390.0 million and $162.7
million, respectively, during the nine months ended September 30,
2008. Total deposit accounts increased to $2.6 billion at September
30, 2008, compared to $2.2 billion at December 31, 2007. The increase
in deposits included a $308.8 million increase in time deposits, as well as an
$81.1 million increase in savings and checking accounts. Brokered
deposits represented approximately $746.1 million and $379.4 million of our time
deposits as of September 30, 2008 and December 31, 2007,
respectively. Management believes that a significant portion of time
deposits will remain with us upon maturity based on our historical experience
regarding retention of deposits. FHLB advances and other borrowings increased to
$1.2 billion as of September 30, 2008 compared to $1.0 billion at December 31,
2007. The increase in FHLB advances were primarily utilized to match
fund the CMO acquisitions during the year.
CREDIT
RISK
Non-performing
Assets, Other Loans of Concern and Allowance for Loan Losses
The
following table sets forth our non-performing assets by category and troubled
debt restructurings as of the dates indicated.
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(dollars
in thousands)
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
Real
estate
|
|
$
|
45,845
|
|
|
$
|
29,145
|
|
Construction
and land
|
|
|
129,178
|
|
|
|
8,804
|
|
Other
|
|
|
1,295
|
|
|
|
13
|
|
Total
nonaccrual loans
|
|
|
176,318
|
|
|
|
37,962
|
|
Other
real estate and other assets owned, net
|
|
|
27,207
|
|
|
|
19,396
|
|
Total
non-performing assets
|
|
|
203,525
|
|
|
|
57,358
|
|
Performing
troubled debt restructurings
|
|
|
8,012
|
|
|
|
7,802
|
|
Total
non-performing assets and performing troubled debt
restructurings
|
|
$
|
211,537
|
|
|
$
|
65,160
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans to total loans
|
|
|
6.13
|
%
|
|
|
1.20
|
%
|
Allowance
for loan losses to nonaccrual loans
|
|
|
29.39
|
%
|
|
|
125.87
|
%
|
Non-performing
assets to total assets
|
|
|
4.96
|
%
|
|
|
1.62
|
%
|
Non-performing
assets were $203.5 million and $57.4 million, representing 4.96% and 1.62% of
total assets as of September 30, 2008 and December 31, 2007,
respectively. The increase in non-performing assets during the nine
months ended September 30, 2008 consisted of the addition of $195.3 million of
non-performing loans, partially offset by paydowns received of $21.7 million,
charge-offs of $16.9 million and loan upgrades from non-performing to performing
status of $2.3 million. As of September 30, 2008, non-performing
loans primarily consisted of $85.3 million residential and condominium
construction real estate loans, $32.5 million of residential land loans, $11.4
million of other construction projects and $45.8 million of multi-family and
commercial real estate loans. The allowance for loan loss coverage
ratio (defined as the allowance for loan losses divided by non-accrual loans)
was 29.4% at September 30, 2008 as compared to 125.9% at December 31,
2007. In addition, our other real estate and other assets owned
increased to $27.2 million at September 30, 2008, as compared to $19.4 million
at December 31, 2007. During the nine months ended September 30,
2008, we foreclosed on 25 properties representing $15.7 million, sold nine
properties representing $6.4 million and recorded an aggregate charge-off of
$1.3 million on seven different properties.
The
following table provides certain information with respect to our allowance for
loan losses, including charge-offs, recoveries and selected ratios for the
periods indicated.
|
|
For
the Nine
Months
Ended
September
30,
2008
|
|
|
For
the Year
Ended
December
31,
2007
|
|
|
For
the Nine
Months
Ended
September
30,
2007
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
47,783
|
|
|
$
|
46,049
|
|
|
$
|
46,049
|
|
Provision
for loan losses
|
|
|
20,625
|
|
|
|
11,077
|
|
|
|
6,516
|
|
Charge-offs
|
|
|
(17,261
|
)
|
|
|
(10,873
|
)
|
|
|
(8,453
|
)
|
Recoveries
|
|
|
670
|
|
|
|
1,530
|
|
|
|
553
|
|
Net
charge-offs
|
|
|
(16,591
|
)
|
|
|
(9,343
|
)
|
|
|
(7,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
51,817
|
|
|
$
|
47,783
|
|
|
$
|
44,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage
of
loans, net
|
|
|
1.80
|
%
|
|
|
1.51
|
%
|
|
|
1.41
|
%
|
Liquidity
Liquidity
refers to our ability to maintain cash flows adequate to fund operations and
meet obligations and other commitments on a timely basis, including the payment
of maturing deposits and the origination or purchase of new loans. We
maintain a cash and investment securities portfolio designed to satisfy
operating liquidity requirements while preserving capital and maximizing
yield. As of September 30, 2008, we held $67.8 million of cash and
cash equivalents (consisting primarily of short-term investments with original
maturities of 90 days or less) and $97.1 million of investment securities
classified as available-for-sale.
Short-term
fixed income investments classified as cash equivalents consisted of interest
bearing deposits at financial institutions, overnight repurchase agreement
investments, government money market funds and short-term government agency
securities, while investment securities available-for-sale consisted primarily
of fixed income instruments, which were rated “AAA”, or equivalent by nationally
recognized rating agencies. In addition, our liquidity position is
supported by credit facilities with the Federal Home Loan Bank of San Francisco
and the Federal Reserve Bank of San Francisco. As of September 30,
2008, we had remaining available borrowing capacity under the Federal Home Loan
Bank of San Francisco credit facility of $268.0 million, net of the $4.1 million
of additional Federal Home Loan Bank stock that we would be required to purchase
to support those additional borrowings. As of September 30, 2008, we
had an available borrowing capacity under the Federal Reserve Bank of San
Francisco credit facility of $109.6 million. We also had available
$83.0 million of uncommitted, unsecured lines of credit with four unaffiliated
financial institutions.
Capital
Resources
The
Company, the Bank’s holding company, had Tier 1 leverage, Tier 1 risk based and
total risk-based capital ratios at September 30, 2008 of 7.31%, 9.69% and
11.23%, respectively, which represents $94.9 million, $114.3 million and $38.2
million, respectively, of capital in excess of the amount required to be “well
capitalized”. These ratios were 8.44%, 9.73% and 11.29% as of
December 31, 2007, respectively.
The Bank
had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at
September 30, 2008 of 7.20%, 9.55% and 10.80%, respectively, which represents
$89.9 million, $109.3 million and $24.7 million, respectively, of capital in
excess of the amount required to be “well capitalized” for regulatory purposes.
These ratios were 8.31%, 9.60% and 10.85% as of December 31, 2007,
respectively.
At
September 30, 2008, shareholders' equity totaled $225.5 million, or 5.5% of
total assets. Our book value per share of common stock was $44.92 as
of September 30, 2008, as compared to $44.22 as of December 31, 2007, and $44.19
as of September 30, 2007.
On March
19, 2008, we announced that our Board of Directors determined that, following
the payment of our cash dividend for that quarter, our regular quarterly cash
dividend would be suspended for the remainder of 2008. This decision
was made in order to preserve our capital during the extraordinarily difficult
current operating environment. The Board plans to reassess the
dividend when economic conditions and capital markets normalize.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Our
estimated sensitivity to interest rate risk, as measured by the estimated
interest earnings sensitivity profile and the interest sensitivity gap analysis,
has not materially changed from the information disclosed in our annual report
on Form 10-K for the year ended December 31, 2007.
Item
4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Act”)) was carried out as of September 30,
2008 under the supervision and with the participation of the Company’s Chief
Executive Officer, Chief Financial Officer and several other members of the
Company’s senior management. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures
have been designed to meet, and management believes that they meet, reasonable
assurance standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Based on their
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that, as of September 30, 2008, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level in ensuring that the
information required to be disclosed by the Company in the reports it files or
submits under the Act is (i) accumulated and communicated to the Company’s
management (including the Chief Executive Officer and Chief Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
(b)
Changes in Internal Control over Financial Reporting: During the
quarter ended September 30, 2008, no change occurred in the Company’s internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
The
Company does not expect that its internal control over financial reporting will
prevent all error and all fraud. A control procedure, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control procedure are
met. Because of the inherent limitations in all control procedures,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any
control procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control procedure, misstatements due to error or fraud may occur and not be
detected.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
We are
party to certain legal proceedings incidental to our
business. Management believes that the outcome of such currently
pending proceedings, in the aggregate, will not have a material effect on our
financial condition or results of operations.
Our
business is subject to general economic risks that could adversely impact our
results of operations and financial condition.
·
|
Changes
in economic conditions, particularly a further economic slowdown in
California, could hurt our
business.
|
Our
business is directly affected by market conditions, trends in industry and
finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond our
control. In 2007, the housing and real estate sectors experienced an
economic slowdown that has continued into 2008. Further deterioration
in economic conditions, particularly within the State of California, could
result in the following consequences, among others, any of which could hurt our
business materially:
·
|
loan
delinquencies may increase;
|
·
|
problem
assets and foreclosures may
increase;
|
·
|
demand
for our products and services may decline;
and
|
·
|
collateral
for our loans may decline in value, in turn reducing a customer’s
borrowing power and reducing the value of assets and collateral securing
our loans.
|
·
|
Recent
negative developments in the financial industry and credit markets may
continue to adversely impact our financial condition and results of
operations.
|
Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage
market and the securitization markets for such loans, together with other
factors, have resulted in uncertainty in the financial markets in general and a
related general economic downturn, which have continued in 2008. Many
lending institutions, including us, have experienced declines in the performance
of their loans, including construction and land loans, and commercial and
multi-family real estate loans. Moreover, competition among
depository institutions for deposits and quality loans has increased
significantly. In addition, the values of real estate collateral supporting many
loans have declined and may continue to decline. Bank and bank holding company
stock prices have been negatively affected, as has the ability of banks and bank
holding companies to raise capital or borrow in the debt markets compared to
recent years. These conditions may have a material adverse effect on our
financial condition and results of operations. In addition, as a
result of the foregoing factors, there is a potential for new federal or state
laws and regulations regarding lending and funding practices and liquidity
standards, and bank regulatory agencies are expected to be very aggressive in
responding to concerns and trends identified in
examinations. Negative developments in the financial industry and the
impact of new legislation in response to those developments could restrict our
business operations, including our ability to originate loans, and adversely
impact our results of operations and financial condition.
·
|
We
may elect or be compelled to seek additional capital in the future, but
that capital may not be available when it is
needed.
|
We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. In addition, we may elect to
raise additional capital to support the growth of our business or to finance
acquisitions, if any, or we elect to raise additional capital for other
reasons. In that regard, a number of financial institutions have
recently raised considerable amounts of capital as a result of a deterioration
in their results of operations and financial condition arising from the turmoil
in the mortgage loan market, deteriorating economic conditions, declines in real
estate values and other factors. Should we be required by regulatory
authorities or otherwise elect to raise additional capital, we may seek to do so
through the issuance of, among other things, our common stock or securities
convertible into our common stock, which could dilute your ownership interest in
the Company.
Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial performance. Accordingly, we
cannot assure you of our ability to raise additional capital if needed or on
terms acceptable to us. If we cannot raise additional capital when needed or on
terms acceptable to us, it may have a material adverse effect on our financial
condition, results of operations and prospects.
·
|
There
can be no assurance that recently enacted legislation and other measures
undertaken by the Treasury, the Federal Reserve and other governmental
agencies will help stabilize the U.S. financial system or improve the
housing market.
|
On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (the “EESA”), which, among other measures, authorized
the Treasury Secretary to establish the Troubled Asset Relief Program
(“TARP”). EESA gives broad authority to Treasury to purchase, manage,
modify, sell and insure the troubled mortgage related assts that triggered the
current economic crisis as well as other “troubled assets.” EESA
includes additional provisions directed at bolstering the economy,
including:
·
|
authority
for the Federal Reserve to pay interest on depository institution
balances;
|
·
|
mortgage
loss mitigation and homeowner
protection;
|
·
|
temporary
increase in Federal Deposit Insurance Corporation (“FDIC”) insurance
coverage from $100,000 to $250,000 through December 31, 2009;
and
|
·
|
authority
to the Securities and Exchange Commission (the “SEC”) to suspend
mark-to-market accounting requirements for any issuer or class of category
of transactions.
|
Pursuant
to the TARP, the Treasury has the authority to, among other things, purchase up
to $700 billion (of which $250 billion is currently available) of mortgages,
mortgage-backed securities and certain other financial instruments from
financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets. Shortly following the enactment of EESA,
the Treasury announced the creation of specific TARP programs to purchase
mortgage-backed securities and whole mortgage loans. In addition,
under the TARP, the Treasury has created a capital purchase program, pursuant to
which it proposes to provide access to capital to financial institutions through
a standardized program to acquire preferred stock (accompanied by warrants) from
eligible financial institutions that will serve as Tier 1 capital.
EESA also
contains a number of significant employee benefit and executive compensation
provisions, some of which apply to employee benefit plans generally, and others
which impose on financial institutions that participate in the TARP program
restrictions on executive compensation.
EESA
followed, and has been followed by, numerous actions by the Federal Reserve,
Congress, Treasury, the SEC and others to address the currently liquidity and
credit crisis that has followed the sub-prime meltdown that commenced in
2007. These measures include homeowner relief that encourage loan
restructuring and modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment banks; the lowering
of the federal funds rate, including a 50 basis point decrease on October 8,
2008; emergency action against short selling practices; a temporary guaranty
program for money market funds; the establishment of a commercial paper funding
facility to provide back-stop liquidity to commercial paper issuers; coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector.
In
addition, the Internal Revenue Service has issued an unprecedented wave of
guidance in response to the credit crisis, including a relaxation of limits on
the ability of financial institutions that undergo an “ownership change” to
utilize their pre-change net operating losses and net unrealized built-in
losses. The relaxation of these limits may make significantly more
attractive the acquisition of financial institutions whose tax basis in their
loan portfolios significantly exceeds the fair market value of those
portfolios.
On
October 14, 2008, the FDIC announced the establishment of a temporary liquidity
guarantee program to provide insurance for all non-interest bearing transaction
accounts and guarantees of certain newly issued senior unsecured
debt issued by financial institutions (such as HomeStreet Bank), bank
holding companies and savings and loan holding companies (such as the
HomeStreet). Financial institutions are automatically covered by this
program for the 30-day period commencing October 14, 2008 and will continue to
be covered as long as they do not affirmatively opt out of the
program. Under the program, newly issued senior unsecured debt issued
on or before June 30, 2009 will be insured in the event the issuing institution
subsequently fails, or its holding company files for bankruptcy. The
debt includes all newly issued unsecured senior debt (e.g., promissory notes,
commercial paper and inter-bank funding). The aggregate coverage for an
institution may not exceed 125% of its debt outstanding on September 30, 2008
that was scheduled to mature before June 30, 2009. The guarantee will
extend to June 30, 2012 even if the maturity of the debt is after that
date. Many details of the program still remain to be worked
out.
There can
be no assurance as to the actual impact that EESA and such related measures
undertaken to alleviate the credit crisis will have generally on the financial
markets, including the extreme levels of volatility and limited credit
availability currently being experienced The failure of such measures
to help stabilize the financial markets and a continuation or worsening of
current financial market conditions could materially and adversely affect our
business, financial condition, results of operations, access to credit or the
trading price of our common stock.
·
|
Current
levels of market volatility are unprecedented
.
|
The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers without regard to
those issuers’ underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on our ability to
access capital and on our business, financial condition and results of
operations.
Other
than the additional risk factors set forth above, there have been no material
changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
following table sets forth the repurchases of our common stock for the fiscal
quarter ended September 30, 2008.
Period
|
|
Total
Number of Shares Purchased
(1)
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
(2)
|
|
July
1, 2008 to
July
31, 2008
|
|
|
10,060
|
|
|
$
|
6.65
|
|
|
|
—
|
|
|
|
110,486
|
|
August
1, 2008 to
August
31, 2008
|
|
|
98
|
|
|
|
9.10
|
|
|
|
—
|
|
|
|
110,486
|
|
September
1, 2008 to
September
30, 2008
|
|
|
3,078
|
|
|
|
9.80
|
|
|
|
—
|
|
|
|
110,486
|
|
Total
|
|
|
13,236
|
|
|
$
|
7.40
|
|
|
|
—
|
|
|
|
110,486
|
|
____________
|
(1)
Shares purchased during the quarter ended September 30, 2008, represent
open market purchases by the Company’s rabbi trust in connection with our
Nonqualified Deferred Compensation
Plan.
|
|
(2)
There were no repurchases under the twelfth extension of our stock
repurchase program during the three months ended September 30,
2008. The twelfth extension was announced on March 14, 2006,
and authorized the repurchase of an additional 5% of the outstanding
shares as of the authorization date. At September 30, 2008, a
total of 110,486 shares remained available for repurchase under this
extension.
|
Item
3. Defaults Upon Senior Securities
Not
applicable.
Item
4. Submission of Matters to a Vote of Security
Holders
(a) On
August 6, 2008, the Company held its Annual Meeting of
Shareholders.
(b) Shareholders
voted on the following matters:
|
(i)
|
The
election of George W. Haligowski as director for a term to expire in
2011:
|
Votes
|
|
For
|
|
Withheld
|
|
|
4,284,090
|
|
555,082
|
|
(ii)
|
The
election of Hirotaka Oribe as director for a term to expire in
2011:
|
Votes
|
|
For
|
|
Withheld
|
|
|
4,005,592
|
|
833,580
|
|
(iii)
|
The
ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31,
2008:
|
Votes
|
|
For
|
|
Against
|
|
Withheld
|
|
|
4,801,287
|
|
29,597
|
|
8,288
|
Item
5. Other Information
None.
See
exhibit index.
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, thereunto
duly authorized.
|
IMPERIAL
CAPITAL BANCORP, INC.
|
|
|
|
|
Date:
November 10
,
2008
|
/s/ George W. Haligowski
|
|
|
George
W. Haligowski
|
|
|
Chairman
of the Board, President and
|
|
|
Chief
Executive Officer
|
|
Date:
November 10
,
2008
|
/s/ Timothy M. Doyle
|
|
|
Timothy
M. Doyle
|
|
|
Executive
Managing Director and
|
|
|
Chief
Financial Officer
|
|
EXHIBIT
INDEX
Regulation
S-K Exhibit Number
|
|
Document
|
|
Reference
to Prior Filling or Exhibit Number Attached Hereto
|
|
|
|
|
|
3.1
|
|
Certificate
of Incorporation
|
|
************
|
3.2
|
|
Bylaws,
as amended
|
|
***
|
4
|
|
Instruments
Defining the Rights of Security Holders, Including
Indentures
|
|
**********
|
10.1
|
|
2005
Re-Designated, Amended and Restated Stock Option Plan For Nonemployee
Directors (“NEDP”)
|
|
*****
|
10.2
|
|
2005
Re-Designated, Amended and Restated Employee Stock Incentive Plan
(“ESIP”)
|
|
********
|
10.3a
|
|
409A
Consolidated Nonqualified (Employer Securities Only) 2005 Deferred
Compensation Plan
|
|
***
|
10.3b
|
|
409A
Consolidated Nonqualified (Non-Employer Securities) 2005 Deferred
Compensation Plan
|
|
***
|
10.3c
|
|
Consolidated
Nonqualified (Employer Securities Only) Deferred Compensation
Plan
|
|
***
|
10.3d
|
|
Consolidated
Nonqualified (Non-Employer Securities) Deferred Compensation
Plan
|
|
***
|
10.4
|
|
Supplemental
Salary Savings Plan
|
|
*
|
10.5a
|
|
Amended
and Restated Employment Agreement with George W.
Haligowski
|
|
********
|
10.5b
|
|
Non-Competition
and Non-Solicitation Agreement with George W. Haligowski
|
|
********
|
10.6
10.7
10.8
10.9
|
|
Change
in Control Severance Agreement with Norval L. Bruce
Change
in Control Severance Agreement with Timothy M. Doyle
Change
in Control Severance Agreement with Lyle C. Lodwick
Change
in Control Severance Agreement with Phillip E. Lombardi
|
|
********
********
********
***********
|
10.10
|
|
Recognition
and Retention Plan
|
|
**
|
10.11
|
|
Voluntary
Retainer Stock and Deferred Compensation Plan for Outside
Directors
|
|
****
|
10.12
|
|
Amended
and Restated Supplemental Executive Retirement Plan
|
|
********
|
10.13
|
|
Amended
and Restated ITLA Capital Corporation Rabbi Trust
Agreement
|
|
*********
|
10.14
|
|
Amended
and Restated Salary Continuation Plan
|
|
********
|
10.15
|
|
Form
of Incentive Stock Option Agreement under ESIP
|
|
******
|
10.16
10.17
|
|
Form
of Non-Qualified Stock Option Agreement under the ESIP
Form
of Non-Qualified Stock Option Agreement under the NEDP
|
|
******
*******
|
10.18
|
|
Description
of Named Executive Officer Salary, Bonus and Perquisite
Arrangements for 2008
|
|
*************
|
10.19
|
|
Description
of Director Fee Arrangements
|
|
*************
|
10.20
|
|
Split
Dollar Agreement
|
|
*************
|
11
|
|
Statement
Regarding Computation of Per Share Earnings
|
|
Not
Required
|
13
|
|
Annual
Report to Security Holders
|
|
None
|
18
|
|
Letter
Regarding Change in Accounting Principles
|
|
None
|
21
|
|
Subsidiaries
of the Registrant
|
|
Not
Required
|
22
|
|
Published
Report Regarding Matters Submitted to Vote of Security
Holders
|
|
None
|
23.1
|
|
Consent
of Ernst & Young LLP
|
|
Not
Required
|
24
|
|
Power
of Attorney
|
|
None
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
31.1
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
31.2
|
32
|
|
Section
1350 Certifications of Chief Executive Officer and Chief Financial
Officer
|
|
32
|
*
|
Filed
as an exhibit to Imperial’s Registration Statement on Form S-1 (File No.
33-96518) filed with the Commission on September 1, 1995, pursuant to
Section 5 of the Securities Act of 1933.
|
*
*
|
Filed
as an exhibit to the Company’s Registration Statement on Form S-4 (File
No. 333-03551) filed with the Commission on May 10, 1996, pursuant to
Section 5 of the Securities Act of 1933.
|
* *
*
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
December 7, 2007.
|
* *
* *
|
Filed
as an exhibit to Amendment No. Two to the Company’s Registration Statement
on Form S-4 (File No. 333-03551) filed with the Commission on June 19,
1996.
|
* *
* * *
|
Filed
as an appendix to the Company’s definitive proxy materials filed on June
27, 2005.
|
* *
* * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on August
9, 2005.
|
* *
* * * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
November 4, 2005.
|
* *
* * * * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
February 24, 2006.
|
* *
* * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
2006.
|
* *
* * * * * * * *
|
The
Company hereby agrees to furnish the SEC, upon request, copies of the
instruments defining the rights of the holders of each issue of the
Company's long-term debt.
|
* *
* * * * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-K for the year ended December 31,
2006.
|
* *
* * * * * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
2007 (File No. 01-33199).
|
* *
* * * * * * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-K for the year ended December 31,
2007.
|