-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EwOaYPnr7EQyyo4U17RyKmeBGamS/eQ2xXNW5eq9VULufuAmBDggk/ajiuRNsB1a rW/8lojrpReS7GaycYFhsQ== 0000898430-96-000929.txt : 19960325 0000898430-96-000929.hdr.sgml : 19960325 ACCESSION NUMBER: 0000898430-96-000929 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL BANCORP CENTRAL INDEX KEY: 0000049899 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 952575576 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08196 FILM NUMBER: 96537723 BUSINESS ADDRESS: STREET 1: 9920 S LA CIENEGA BLVD CITY: INGLEWOOD STATE: CA ZIP: 90301 BUSINESS PHONE: 3104175600 MAIL ADDRESS: STREET 2: PO BOX 92991 CITY: LOS ANGELES STATE: CA ZIP: 90009 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________________________ to ____________________________ Commission file number 0-7722 IMPERIAL BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 95-2575576 (State of other jurisdiction (I.R.S. Employer Identification of incorporation or organization) Number) 9920 SOUTH LA CIENEGA BOULEVARD INGLEWOOD, CALIFORNIA 90301 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (Zip Code) Registrant's telephone number, including area code: (310) 417-5600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK: Aggregate market value of Common Stock held by non-affiliates as of March 1, 1996: $273,743,390. Number of Shares of Common Stock outstanding as of March 1, 1996: 14,962,714 shares. DEBT SECURITIES: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due 1999. As of December 31, 1995, $4,824,000 in principal amount of such Notes and $1,082,000 in principal amount of such Debentures were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Sections of a Proxy Statement which will be filed within 120 days of Fiscal Year Ended December 31, 1995 are incorporated by reference into Part III hereof. This report includes a total of 60 pages. Exhibit Index begins on page 59. INDICATE BY CHECKMARK 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 REPORT(S)), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____ ----- - -------------------------------------------------------------------------------- [THIS PAGE INTENTIONALLY LEFT BLANK] ================================================================================ TABLE OF CONTENTS Five Year Summary of Selected Financial Information........................4 Financial Review...........................................................5 Average Balances, Yields and Rates Paid...............................6 Interest Rate Sensitivity............................................10 Analysis of the Allowance for Loan Losses............................16 Allocated Allowance for Loan Losses..................................17 Financial Statements Consolidated Balance Sheet................................................20 Consolidated Statement of Income..........................................21 Consolidated Statement of Changes in Stockholders' Equity.................22 Consolidated Statement of Cash Flows......................................23 Notes to Consolidated Financial Statements................................24 Independent Auditors' Report..............................................44 Selected Statistical Information Securities.........................................................45 Maturity Distribution of Loans.....................................45 Deposits...........................................................45 Financial Ratios...................................................46 Common Stock and Shareholder Data..................................46 Quarterly Data.....................................................47 Analysis of Changes in Net Interest Margin.........................48 Description of Business...................................................49 Directory.................................................................53 Signatures................................................................57 Form 10-K Cross Reference Index...........................................58 Exhibits Index............................................................59
3 ================================================================================ FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION IMPERIAL BANCORP AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 1992/(3)/ 1991 - ---------------------------------------------------------------------------------------------------------------- Summary of Operations Interest income.......................... $ 176,527 $ 135,807 $ 139,704 $ 220,619 $ 267,850 Interest expense......................... 60,154 37,415 36,280 101,683 141,470 - ---------------------------------------------------------------------------------------------------------------- Net interest income................... 116,373 98,392 103,424 118,936 126,380 Provision for loan losses................ 16,122 12,174 41,977 20,859 29,914 - ---------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses....................... 100,251 86,218 61,447 98,077 96,466 Noninterest income....................... 46,220 35,882 52,928 65,056 34,702 - ---------------------------------------------------------------------------------------------------------------- Total operating income................... 146,471 122,100 114,375 163,133 131,168 Personnel expense........................ 48,683 47,717 41,068 58,538 48,631 Other noninterest expense................ 63,422 63,756 72,782 80,925 80,396 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest........................ 34,366 10,627 525 23,670 2,141 Income tax provision (benefit)........ 11,189 3,984 (529) 12,756 (403) Minority interest in income of consolidated subsidiary............. --- --- --- 2,974 --- Net income............................... $ 23,177 $ 6,643 $ 1,054 $ 7,940 $ 2,544 - ---------------------------------------------------------------------------------------------------------------- Income per Share/(1)/ Net income per share.................. $ 1.52 $ 0.45 $ 0.07 $ 0.56 $ 0.18 Cash dividends per share.............. $ --- $ --- $ --- $ --- $ 0.32 - ---------------------------------------------------------------------------------------------------------------- At Year End Assets................................... $2,788,374 $2,378,709 $2,794,517 $3,405,971 $3,826,824 Net loans................................ 1,661,945 1,335,074 1,431,959 1,615,641 1,801,541 Deposits................................. 2,363,616 1,959,710 2,387,759 3,027,493 3,375,287 Short-term borrowings.................... 159,636 190,919 193,616 149,273 224,123 Long-term borrowings..................... 5,906 8,153 9,866 11,252 12,838 Stockholders' equity..................... 228,236 197,776 185,205 184,048 176,532 Financial Ratios/(2)/ Return on equity......................... 11.03% 3.46% 0.57% 4.35% 1.39% Return on assets......................... 1.00% 0.30% 0.04% 0.22% 0.08% Equity-to-assets......................... 9.04% 8.64% 7.02% 5.11% 5.46% Capital Ratios for Imperial Bank Leverage ratio........................... 8.6% 9.0% 6.9% 6.1% 5.1% Risk based capital Tier I capital........................ $ 211,212 $ 190,355 $ 185,142 $ 201,644 $ 167,105 Total capital......................... 239,678 213,003 209,462 229,868 214,112 Tier I capital ratio.................. 9.3% 10.6% 9.6% 9.0% 7.1% Total capital ratio................... 10.6% 11.9% 10.9% 10.2% 8.7% Average Balances Total assets............................. $2,326,308 $2,224,856 $2,645,492 $3,568,402 $3,343,008 Earning assets........................... 2,031,551 1,887,389 2,207,159 3,189,583 2,995,457 Loans.................................... 1,540,940 1,361,630 1,481,231 1,794,586 1,992,710 Total deposits........................... 2,006,737 1,903,203 2,258,201 3,122,316 2,923,219 Stockholders' equity..................... 210,188 192,172 185,712 182,362 182,452 Common Share and Stockholder Data/(1)/ Market price, end of year................ $ 22.69 $ 11.13 $ 11.13 $ 7.60 $ 6.85 Book value, end of year.................. 15.29 13.59 13.23 13.20 12.67 Common dividends......................... --- --- --- --- 4,244 Dividend payout ratio.................... --- --- --- --- 173.91% Average common and common equivalent shares outstanding....................... 15,253,929 14,667,111 14,200,887 14,124,069 13,915,947 - ----------------------------------------------------------------------------------------------------------------
(1) Adjusted for stock dividends declared and paid in the first quarters of 1992 - 1996. (2) Ratios are based on average balances. (3) Restated to reflect the financial impact of FAS 109, Accounting for Income Taxes. ================================================================================ 4 ================================================================================ FINANCIAL REVIEW The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes in trends related to the financial condition of Imperial Bancorp ("the Company") and its results of operations. It should be read in conjunction with the audited consolidated financial statements and footnotes appearing elsewhere in this report. PERFORMANCE SUMMARY The Company posted significantly improved income for 1995. Net income for the year ended December 31, 1995 increased 249% to $23,177,000 or $1.52 per share. For 1994, the Company earned $6,643,000 or $0.45 per share. Income as measured by return on average total assets was 1.00% for the twelve months ended December 31, 1995, as compared to 0.30% for the twelve months ended December 31, 1994. Return on average stockholders' equity was 11.03% for the year ended December 31, 1995, a significant increase from the 3.46% return on average stockholders' equity for 1994. The increase in net income in 1995 was attributable to several factors: 13% growth in average loans from the prior year; an improved net interest margin; a reduction in the FDIC deposit insurance premium; continued growth in fee based and trading activities; the sale of a portion of the Company's merchant card accounts; and overall efforts to reduce operating costs. These positive factors were partially offset by an increase in the provision for loan losses. Net interest income and net interest margin for the year ended December 31, 1995 were $116.4 million and 5.7%. This compares to net interest income and net interest margin of $98.4 million and 5.2% for the year ended December 31, 1994. Noninterest income for year ended December 31, 1995 totaled $46.2 million as compared to $35.9 million for 1994. Although the Company is continuing its merchant card servicing business, the Company sold a portion of its merchant card accounts for an after-tax gain of $3.7 million in the fourth quarter of 1995. Increased gains from the Company's SBA, foreign currency and precious metals trading activities contributed to the 1995 improvement in noninterest income. Trading income from these activities increased $3.3 million over the prior year. The Company also recorded improvements in other fee income businesses in 1995. Trust revenues from the Company's trust subsidiary, Imperial Trust Company, increased $0.8 million, or 12% from 1994 and income from the leasing of precious metals increased $1.0 million, or 215%, from 1994. Noninterest expenses amounted to $112.1 million for the year ended December 31, 1995. This compares to $111.5 million reported for 1994. Regulatory assessments decreased from 1994 due to a reduction in the FDIC deposit insurance premium starting in the third quarter of 1995. The Company also saw reductions in occupancy and equipment expenses, data processing costs and professional fees as a result of its efforts to reduce operating costs. Offsetting these decreases in noninterest expense was an increase in other noninterest expense primarily related to increased service costs associated with demand deposits, charges related to mortgage repurchase obligations and amortization of the deposit premium paid in early 1995 to acquire the insured deposits of Guardian Bank. In 1994, noninterest expense was favorably impacted by a $1.6 million recovery of an operational loss. At December 31, 1995, the Company's total assets were $2.8 billion, total loans were $1.7 billion and stockholders' equity and allowance for loan losses totaled $266 million. This compares favorably to total assets of $2.4 billion, total loans of $1.4 billion and stockholders' equity and allowance for loan losses of $238 million at December 31, 1994. Total deposits at December 31, 1995, were $2.4 billion of which $1.1 billion, or 48%, were noninterest bearing demand deposits. At the previous year end, total deposits were $2.0 billion, including $928 million, or 47%, demand deposits. The overall funding base of the Company is enhanced by a sizable level of demand deposits resulting from the Company's long standing relationships with the real estate services industry. Nonaccrual loans of $28.9 million at December 31, 1995, increased $10.7 million from year end 1994 while real estate owned ("REO") of $10.3 million at December 31, 1995, decreased $18.7 million from year end 1994. For the year ended December 31, 1995, the provision for loan losses totaled $16.1 million an increase of approximately $4.0 million from the year ended December 31, 1994. REO expenses totaled $8.5 million for 1995 as compared to $7.7 million in 1994. These expenses increased in 1995 as the Company incurred higher costs while disposing of over $42 million of REO during the year. In 1995, restructured loans increased $27.7 million primarily as a result of two loans secured by real estate which were modified in the fourth quarter. At December 31, 1995, the allowance for loan losses amounted to $37.4 million or 2.2% of total loans as compared to $40.1 million or 2.9% of total loans at December 31, 1994. The allowance for loan losses coverage of nonaccrual loans at year end 1995 approximated 129%, as compared to 221% at December 31, 1994. Imperial Bank was classified "Well Capitalized" with leverage, Tier I and total capital ratios at December 31, 1995, of 8.6%, 9.3% and 10.6%, respectively, as compared to 9.0%, 10.6% and 11.9%, respectively, the year earlier. 5 =============================================================================== EARNINGS PERFORMANCE AVERAGE BALANCES, YIELDS AND RATES PAID/(1)/
- --------------------------------------------------------------------------------------- 1995 - --------------------------------------------------------------------------------------- INTEREST AVERAGE INCOME/ AVERAGE (IN THOUSANDS) BALANCE EXPENSE RATE % - --------------------------------------------------------------------------------------- Earning assets: Loans/(2)/............................. $1,540,940 $ 145,375/(3)/ 9.4% Deposits placed with banks............. --- --- --- Trading account securities............. 52,759 3,516 6.7 Securities available for sale.......... 265,422 17,349 6.5 Securities held to maturity............ 5,619 311 5.5 Federal funds sold and securities purchased under resale agreements...... 164,359 9,707 5.9 Loans held for sale.................... 2,452 269 11.0 - --------------------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS $2,031,551 $ 176,527 8.7% - --------------------------------------------------------------------------------------- Allowance for loan losses................. (39,993) Cash...................................... 210,500 Other assets.............................. 124,250 ------------ Total assets........................... $2,326,308 ------------ Interest-bearing liabilities: Savings................................ $ 24,554 $ 613 2.5% Money market........................... 442,702 12,614 2.8 Time - under $100,000.................. 233,726 14,682 6.3 Time - $100,000 and over............... 462,818 27,582 6.0 - --------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING DEPOSITS $1,163,800 $ 55,491 4.8% - --------------------------------------------------------------------------------------- Short-term borrowings.................. 72,077 4,135 5.7 Long-term borrowings................... 7,260 528 7.3 - --------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES $1,243,137 $ 60,154 4.8% - --------------------------------------------------------------------------------------- Demand deposits........................ 842,937 Other liabilities...................... 30,046 Minority interest in consolidated subsidiary............................ --- Stockholders' equity................... 210,188 ------------ Total liabilities and stockholders' $2,326,308 ------------ equity.............................. NET INTEREST INCOME/NET INTEREST MARGIN $ 116,373 5.7% ----------------------------- =======================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects are not material. (2) Average balance includes nonaccrual loans. (3) Includes net loan fees of $5.4 million, $4.4 million, $3.9 million and $3.7 million for the years ended December 31, 1995, 1994, 1993 and 1992, respectively. NET INTEREST INCOME: The Company's operating results depend primarily on net interest income. A primary factor affecting the level of net interest income is the Company's interest rate margin between the yield earned on interest-earning assets and interest-bearing liabilities as well as the difference between the relative amounts of average interest-earning assets and average interest-bearing liabilities. For the year ended December 31, 1995, net interest income increased to $116.4 million from $98.4 million in 1994. 6 ================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BALANCE EXPENSE RATE % BALANCE EXPENSE RATE % BALANCE EXPENSE RATE % - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,361,630 $ 112,834(3) 8.3% $1,481,231 $ 113,671(3) 7.7% $1,794,586 $ 142,080(3) 7.9% -- -- -- 14,953 846 5.7 15,149 393 2.6 42,179 2,366 5.6 85,916 4,709 5.5 128,645 7,598 5.9 295,283 12,459 4.2 329,903 10,423 3.2 92,192 7,091 7.7 5,860 345 5.9 12,383 813 6.6 455,483 20,519 4.5 172,070 7,153 4.2 273,964 8,663 3.2 373,266 14,515 3.9 10,367 650 6.3 8,809 579 6.6 330,262 28,423 8.6 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,887,389 $ 135,807 7.2% $2,207,159 $ 139,704 6.3% $3,189,583 $ 220,619 6.9% - ------------------------------------------------------------------------------------------------------------------------------------ (41,869) (39,582) (39,726) 229,031 292,365 294,258 150,305 185,550 124,287 - ----------------- ---------------- -------------- $ 2,224,856 $2,645,492 $3,568,402 - ----------------- ---------------- -------------- $ 26,420 $ 654 2.5% $ 29,812 $ 720 2.4% $ 74,733 $ 2,563 3.4% 465,755 11,129 2.4 480,751 11,092 2.3 450,283 13,788 3.1 174,655 7,575 4.3 178,103 7,243 4.1 586,468 33,915 5.8 324,384 13,826 4.3 330,667 12,017 3.6 831,363 43,529 5.2 - ------------------------------------------------------------------------------------------------------------------------------------ $ 991,214 $ 33,184 3.3% $1,019,333 $ 31,072 3.0% $1,942,847 $ 93,795 4.8% - ------------------------------------------------------------------------------------------------------------------------------------ 99,208 3,606 3.6 170,194 4,486 2.6 206,379 7,058 3.4 9,176 625 6.8 10,607 722 6.8 12,165 830 6.8 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,099,598 $ 37,415 3.4% $1,200,134 $ 36,280 3.0% $2,161,391 $ 101,683 4.7% - ------------------------------------------------------------------------------------------------------------------------------------ 911,989 1,238,868 1,179,469 21,097 20,778 38,076 -- -- 7,104 192,172 185,712 182,362 - ------------------ --------------- ------------- $ 2,224,856 $2,645,492 $3,568,402 - ------------------ --------------- ------------- $ 98,392 5.2% $ 103,424 4.7% $ 118,936 3.7% ----------------------- ----------------------- ------------------------------
================================================================================ The Company's net interest margin increased to 5.7% for 1995 from 5.2% for 1994. The increased spread resulted primarily from an increase in the CompanyOs base lending rate which rose an average of 169 basis points from 1994. In addition to the increase in interest rates, the Company's average loan portfolio for the year ended December 31, 1995 grew $179 million, or 13% from 1994. As illustrated by the table above and the Analysis of Changes in Net Interest Margin (see page 48), the growth in the Company's loan portfolio had as significant an impact on net interest income for year ended December 31, 1995 as the increase in the Company's base lending rate. Concurrently, the Company's borrowing rates have increased, although not as rapidly as its lending rates, resulting in part from the Company's efforts to supplement its funding base with certificates of deposit ("CD"). Average demand deposit levels for the year ended December 31, 1995 declined approximately $69 million from the prior year while average CD balances increased $198 million. The decrease in average demand deposits directly related to reduced mortgage refinance activities during 1995, as the Company's deposit base includes many customers in the real estate related service industries, e.g., title and escrow companies. The growth in the Company's CD portfolio along with the demand deposit base funded the Company's growth in average earning assets which grew $144 million, or 8% from 1994. As previously discussed, this growth in average earning assets was primarily in the Company's loan portfolio. Net interest income and net interest margin for the year ended December 31, 1995 were impacted by derivative financial instruments outstanding during 1995. There was a $7.2 million reduction in net interest income and a 35 basis point reduction in net interest margin for the year ended December 31, 1995 as a result of the Company's derivative financial instruments (see Asset/Liability Management). The impact of ================================================================================ 7 ================================================================================ these derivative financial instruments included the recognition of a $2.3 million option premium which had been deferred until the final maturity of the associated options in the fourth quarter of 1995. The impact of these instruments for the year ended December 31, 1994 was $4.9 million and 27 basis point reductions in net interest income and net interest margin, respectively. In conformity with banking industry practice, payments for accounting, courier and other deposit related services provided to the Company's real estate related customers are recorded as noninterest expense. If these deposits were treated as interest-bearing and the payments reclassified as interest expense, the Company's reported net interest income and noninterest expense would have been reduced by $8.8 million and $7.3 million, respectively, for the years ended December 31, 1995 and 1994. The net interest margin for each period would have been 5.3% and 4.8%, respectively. NONINTEREST INCOME: Noninterest income amounted to $46.2 million for 1995 as compared to $35.9 million for 1994. The table below shows the major components of noninterest income.
================================================================================ (IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------------- Service charges on deposit accounts.................... $ 4,328 $ 4,635 Trust fees............................................. 7,646 6,857 Gain on origination and sale of loans.................. 2,265 3,840 Equity in net earnings of Imperial Credit Industries, Inc................................ 5,192 3,489 Other service charges and fees......................... 7,921 6,566 Merchant and credit card fees.......................... 4,855 6,152 Gain (loss) on securities available forsale............ 260 (272) Gain on trading account securities..................... 4,108 822 Gain on sale of merchant card accounts................. 6,400 -- Gain on sale of real property.......................... 75 462 Gain on sale of bank owned premises.................... -- 1,578 Other income........................................... 3,170 1,753 - -------------------------------------------------------------------------------- TOTAL $ 46,220 $ 35,882 ================================================================================
Although the Company is continuing its merchant card servicing business, the Company sold a portion of its merchant card accounts for a gain of $6.4 million in the fourth quarter of 1995. Excluding the gain associated with the sale of merchant card accounts and a gain recognized in 1994 from the sale of a bank owned premises, noninterest income for 1995 increased $5.5 million, or 16%, from 1994. The improvement partially results from increased gains in the Company's various trading activities: SBA securities trading income improved $1.3 million, foreign currency exchange income was up $1.5 million and precious metals trading income increased $0.5 million. Also in 1995, the Company recorded improvements in other fee income businesses. Trust revenues from the Company's trust subsidiary, Imperial Trust Company, increased $0.8 million, or 12% from 1994 as a result of the both the Trust Company's strategy to target higher margin business relationships and the increase in assets under management and administration from $5.5 billion at December 31, 1994 to $6.8 billion at December 31, 1995. The increase in other income relates primarily to income from the leasing of precious metals which improved $1.0 million, or 215%, from 1994 as leasing volumes doubled in 1995. In addition, the Company realized $1.4 million from the exercise and sale of stock warrants during 1995. At December 31, 1994, the Company owned 3.9 million shares, or 40.2%, of the common stock of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII) ("ICII"). During 1995, ICII common stock was split at the ratio of three new shares for every two shares outstanding. The Company received an additional 1.9 million shares increasing its total shares held to 5.8 million at December 31, 1995. In February 1996, ICII declared and paid a 10% stock dividend which increased shares held by the Company to approximately 6.4 million. The Company's ownership percentage has dropped slightly from 40.2% to 40.0% as a result of the exercise of employee stock options at ICII. The Bank's share of earnings from ICII in 1995 increased to $5.2 million from $3.5 million in 1994. The increase was primarily attributable to expanded securitization activity primarily transacted through ICII's new finance subsidiaries. Partially offsetting the overall increase in noninterest income were the following items. Gains from the origination and sale of loans for the year ended December 31, 1995 represented earnings from Small Business Administration ("SBA") lending activities. The $1.6 million decline in earnings from the prior year related primarily to the dissolution of the Company's mortgage banking division in the fourth quarter of 1994. The income generated from the origination and sale of SBA loans remained relatively level year to year. As a result of the fourth quarter 1995 sale of a portion of the Company's merchant card accounts, fee income related to this line of business decreased $1.3 million from 1994. Service charges on deposit accounts for 1995 have declined $0.3 million from the prior year primarily due to the decrease in average demand deposits. NONINTEREST EXPENSE: Noninterest expense totaled $112.1 million for the year ended December 31, 1995 as compared to $111.5 million for the prior year. The table below shows the major components of noninterest expense.
================================================================================ (IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------------- Salary and employee benefits....................... $ 48,683 $ 47,717 Net occupancy expense.............................. 8,899 9,757 Furniture and equipment............................ 4,952 5,352 Data processing.................................... 7,783 9,358 Customer services.................................. 8,843 7,311 Net real estate owned expense...................... 8,508 7,719 Regulatory assessments............................. 3,225 5,934 Professional and consulting........................ 3,526 4,921 Business development............................... 3,100 3,298 Lawsuit settlements................................ (1,134) (1,334) Other expense...................................... 15,720 11,440 - -------------------------------------------------------------------------------- TOTAL $ 112,105 $ 111,473 ================================================================================
8 ================================================================================ Excluding the collection of a $1.6 million operational loss which reduced noninterest expense in the prior year, noninterest expense for the year ended December 31, 1995 decreased $1.0 million from 1994. Regulatory assessments decreased $2.7 million from 1994 due to a reduction in the FDIC deposit insurance premium in the third quarter of 1995. The premium was reduced again for fiscal year 1996. Net occupancy expense decreased $0.9 million in 1995 as the Company renewed several of its operating leases for office space at more favorable terms. Also, the Company saw the positive results of its major data processing conversion which occurred during 1994 through reduced costs related to data processing. Net occupancy, equipment expense and data processing costs, along with reduced professional and consulting fees related to the prior year data processing conversion, decreased a combined $4.2 million from 1994. Offsetting these decreases in noninterest expense were increases in the following components of noninterest expense. Salary and employee benefits expense for the year ended December 31, 1995 increased $1.0 million from 1994 resulting primarily from the Company's $2.0 million contribution to its employee profit sharing plan in 1995. In the prior year, the Company made a contribution to its Employee Stock Ownership Plan approximating $1.2 million. Service costs related to demand deposits including accounting, courier and other deposit related services increased $1.5 million in 1995 due to increased interest rates during the year as these service costs are a function of interest rates as well as deposit volume. Other expenses increased $4.3 million in 1995 as a result of the following: a $1.6 million charge for mortgage repurchase obligations related to the initial sale of ICII in 1992; $0.9 million in amortization expense related to the deposit premium paid in early 1995 to acquire the insured deposits of Guardian Bank; and a $1.5 million charge to write off an equity investment in Healthtronics, Inc., as this entity was liquidated in 1995. REO expenses totaled $8.5 million for 1995 as compared to $7.7 million the prior year. These costs increased in 1995 as the Company incurred higher costs while holding and disposing of over $42 million of REO. REO expense is made up primarily of two components: valuation adjustments and direct holding costs. Direct holding costs were up $1.5 million from 1994 due mainly to additional property taxes approximating $1.0 million that the Company was required to pay to secure clear title. INCOME TAXES The Company recorded income taxes of $11.2 million for the year ended December 31, 1995 representing an effective tax rate of approximately 33%. For 1994, the Company's income taxes and effective tax rate approximated $4.0 million and 38%, respectively. During 1995, the Company recorded a $0.9 million reduction of taxes to reflect the finalization of prior years income tax issues and reversed its $2.3 million valuation allowance. Excluding these reductions of income taxes, the Company's effective tax rate would have been 42% for 1995. At December 31, 1995, the Company had a net deferred tax receivable of $5.5 million, as compared to a $6.3 million net deferred tax receivable, net of a $2.3 million valuation allowance at December 31, 1994. The elimination of the valuation allowance for deferred tax assets during 1995 primarily results from the level of taxable income experienced in 1995 and the Company's projection of taxable income for 1996. The Company's net deferred tax receivable is supported by carryback and carryforward provisions of the tax laws as well as the Company's projection of taxable income for 1996. ASSET LIABILITY MANAGEMENT LIQUIDITY: For the Company, as with most commercial banking institutions, liquidity is the ability to roll over substantial amounts of maturing liabilities and to acquire new liabilities at levels consistent with management's financial targets. The key to this on-going replacement activity is the Company's reputation in the domestic money markets, which is based upon its financial condition and its capital base. The overall liquidity position of the Company has been enhanced by a sizable base of demand deposits resulting from the Company's long standing relationships with the real estate services industry which have provided a relatively stable and low cost funding base. Demand deposits averaged $843 million for the year ended December 31, 1995 as compared to $912 million for 1994. The decrease in average demand deposits directly related to reduced mortgage refinance activities during 1995 as the Company's deposit base included many customers in the real estate related service industries. The Company's average demand deposits and average stockholders' equity funded 45% and 50%, respectively, of average total assets for the years ended December 31, 1995, and 1994. These funding sources are augmented by payments of principal and interest on loans and the routine liquidation of securities from the trading and available for sale portfolios and Federal funds sold and securities purchased under resale agreements. During 1995, the Company experienced a net cash outflow from its investing activities of $375 million. This net outflow in investing activities resulted primarily from the growth in the Company'/ loan portfolio, an outflow of $336 million, and from the investment in highly liquid short-term Federal funds sold, an outflow of $149 million. The outflows were offset by the $372 million net cash provided by the Company's financing activities consisting mainly of deposit inflows including $254 million in certificates of deposit and $150 million in demand deposits, money market and savings accounts. Imperial Bancorp ("the Parent Company") liquidity is managed through the purchase and sale of securities available for sale. This activity is directly correlated to the activity in commercial paper. The Parent Company's only source of funds for its annual sinking fund obligations on the Floating Rate Notes and Debentures and other operating expenses is preferred and common stock dividends received from Imperial Bank, the Company's principal subsidiary ("the Bank"). The stock dividends were subject to limitation under the Bank's Memoran- 9 ================================================================================ dum of Understanding until its termination in late 1995 (see Capital). This source of funds is adequate to meet the annual sinking fund obligation of the Parent Company. Interest Rate Sensitivity Management The primary objectives of the asset liability management process are to provide a stable net interest margin, generate net interest income to meet the Company's earnings objectives, and manage balance sheet risks. These risks include liquidity risk, capital adequacy and overall interest rate risk inherent in the Company's balance sheet. In order to manage its interest rate sensitivity, the Company has adopted policies which attempt to limit the change in pre-tax net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as interest rates change. The Company's Asset Liability Committee ("ALCO") chooses strategies in conformance with its policies to achieve an appropriate trade off between interest rate sensitivity and the volatility of pre-tax net interest income and net interest margin. Each month the Company assesses its overall exposure to potential changes in interest rates and the impact such changes may have on pre-tax interest income and net interest margin by simulating various interest rate scenarios over future time periods. Through the use of these simulations, the Company can approximate the impact of these projected rate changes on its entire on and off- balance sheet position or any particular segment of the balance sheet. The following table sets out the maturity and rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1995. The cumulative interest sensitivity gap ("gap") as reflected in the table represents the difference between interest-earning assets and interest-bearing liabilities maturing or repricing, whichever is earlier, at a given point in time and is not necessarily indicative of the position on other dates.
==================================================================================================================================== NON 0-3 >3-6 >6-12 >1 - 5 >5 INTEREST- (IN THOUSANDS) MONTHS MONTHS MONTHS YEARS YEARS BEARING TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Earning Assets: Trading account securities (1)......................... $ 40,050 $ -- $ -- $ -- $ -- $ -- $ 40,050 Securities available for sale........................ 287,939 -- 446 636 6,291 -- 295,312 Securities held to maturity (2)................ -- -- 4,376 -- -- 599 4,975 Federal funds sold and securities purchased under resale agreements..... 425,300 -- -- -- -- -- 425,300 Loans held for sale (1)...... 2,648 -- -- -- -- -- 2,648 Loans: (3) Commercial loans.......... 1,167,441 4,049 7,220 38,746 8,978 11,714 1,238,148 Real estate loans......... 160,212 6,528 20,372 210,359 38,899 17,212 453,582 Consumer loans............ 6,791 35 26 765 -- -- 7,617 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LOANS $1,334,444 $ 10,612 $ 27,618 $ 249,870 $ 47,877 $ 28,926 $1,699,347 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses.... -- -- -- -- -- (37,402) (37,402) Non-earning assets........... -- -- -- -- -- 358,144 358,144 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $2,090,381 $ 10,612 $ 32,440 $ 250,506 $ 54,168 $ 350,267 $2,788,374 - ------------------------------------------------------------------------------------------------------------------------------------ Sources of Funds: Deposits: Demand.................... -- -- -- -- -- 1,145,720 1,145,720 Savings................... 15,708 -- -- -- -- -- 15,708 Money market.............. 435,674 -- -- -- -- -- 435,674 Time - under $100,000..... 116,448 70,427 33,935 6,452 -- -- 227,262 Time - $100,000 and over.. 372,228 132,993 33,051 980 -- -- 539,252 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS $ 940,058 $ 203,420 $ 66,986 $ 7,432 $ -- $ 1,145,720 $2,363,616 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings....... 159,636 -- -- -- -- -- 159,636 Long-term borrowings........ 4,824 -- -- 1,082 -- -- 5,906 Noninterest bearing liabilities................ -- -- -- -- -- 30,980 30,980 Equity...................... -- -- -- -- -- 228,236 228,236 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND EQUITY $1,104,518 $ 203,420 $ 66,986 $ 8,514 $ -- $ 1,404,936 $2,788,374 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST SENSITIVITY GAP $ 985,863 (192,808) (34,546) $ 241,992 $ 54,168 (1,054,669) $ -- - ------------------------------------------------------------------------------------------------------------------------------------ CUMULATIVE INTEREST SENSITIVITY GAP $ 985,863 $ 793,055 $ 758,509 $1,000,501 $1,054,669 $ -- $ -- - --------------------------------------------------------------------------------
(1) Trading account securities and loans held for sale are sold within 90 days. (2) The noninterest bearing column consists of equity investments held by the Company's small business investment company subsidiary. (3) The noninterest bearing column consists of nonaccrual loans. ================================================================================ 10 ================================================================================ The gap is considered positive when the amount of interest rate sensitive assets which reprice over a given time period exceeds the amount of interest rate sensitive liabilities and is negative when the reverse is true. During a period of rising interest rates, a positive gap tends to result in increased net interest income while a negative gap would have an adverse effect on net interest income. Conversely, during a period of decreasing interest rates, positive gap tends to result in decreased interest income while negative gap tends to result in increased interest income. As illustrated by the table, the Company maintained positive three month and one year cumulative gaps at December 31, 1995 of approximately $986 million and $758 million, respectively, as compared to positive three month and one year cumulative gaps of $138 million and $278 million at December 31, 1994. These positive cumulative gap positions indicate that the Company is asset sensitive and positioned for increased net interest income during a period of rising interest rates but also exposed to an adverse impact on net interest income in a falling rate environment. The Company's asset sensitivity, as measured by its cumulative positive one year gap, increased from year end 1994 as it is no longer impacted by interest rate swaps which mature in the first quarter of 1996. In addition, the Company's demand deposit balances at year end 1995 exceeded its average demand deposits for the year by approximately $303 million. As this excess liquidity at year end was invested in highly liquid instruments such as Federal funds sold and securities available for sale, the result was an increase in the three month and one year positive gaps and in turn, the Company's asset sensitivity. The Company's net interest margin is sensitive to sudden changes in interest rates. In addition, the Company's interest-earning assets, primarily its loans are tied to the Prime Rate, an index which tends to react more slowly to changes in market rates than other money market indices such as LIBOR (London Interbank Offered Rate). The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's Prime based assets and LIBOR correlated liabilities. In October 1993, the Company's expectation was that interest rates would gradually rise in 1994. Concurrently, two major banks lowered their Prime Rate causing some degree of concern that interest rates could fall in the short term. An analysis of the historic relationship between the Prime Rate and LIBOR showed that the spread between the indices narrows in an environment of rising interest rates and widens in a falling rate environment. Due to the level of asset sensitivity and the potential for a narrowing of the Prime Rate and LIBOR spread in late 1993, the Company responded by selecting $500 million of Prime based assets whose characteristics were to be synthetically altered to create an asset with reduced interest rate sensitivity that was insulated against a narrowing of the Prime Rate and LIBOR spread for a period of two years. To achieve this goal, the Company entered into a series of derivative financial contracts in late 1993 and early 1994 to establish a balance sheet position which would provide some protection against a decrease in interest rates while providing an increasing rate asset whose characteristics would meet the objectives of the Company's asset liability policy. The purpose of the instruments was to synthetically alter the sensitivity of a portion of the Company's Prime based loan portfolio while retaining some positive asset sensitivity in the event of an increase in interest rates. The Company entered into interest rate swaps in which it was committed to pay the daily average of the Prime Rate less a designated spread and receive three month LIBOR. The swaps were intended to reduce the potential compression of the Company's net interest margin in the event that LIBOR rose faster than Prime. The interest rate swaps had a notional value of $200 million at December 31, 1995 and mature in the first quarter of 1996. The swaps contained embedded option contracts with strike prices which increased at the rate of 25 basis points per quarter which capped the rate received on the interest rate swap. The embedded options were intended to provide a limited degree of protection against a narrowing of the net interest margin in the event of a decrease in short-term interest rates while providing an increasing LIBOR indexed asset to retain some asset sensitivity. Also in 1994, the Company entered into a similar transaction consisting of interest rate swaps with a notional value of $300 million of which a notional value of $100 million was outstanding at December 31, 1995. In conjunction with these interest rate swaps, the Company sold exchange traded options to cap the rate received on the swaps at escalating strike prices associated with the options. These packaged options were stacked and expired at the rate of $300 million per quarter during the first three quarters of 1995 with the final $100 million expiring in the fourth quarter of 1995. These linked option expirations mirrored the interest rate resets of the linked interest rate swaps which matured in the fourth quarter of 1995 and the first quarter of 1996. Using both swaps with embedded options and linked exchange traded options to yield the same result, the Company utilized the combination which provided the most economical method of accomplishing the synthetic alteration. The interest rate swaps and linked options, as synthetic alterations of the Company's interest received on its loan portfolio, are recorded "as settled" (or according to the settlement accounting method) with the resulting gains or losses recorded as an adjustment to interest income. As interest rates continued to rise more quickly than anticipated in 1994 and other market related events caused a deterioration in the values of derivative instruments, the strike prices of the escalating linked options were exceeded by LIBOR. To prevent further negative impact on interest income from the interest rate swaps with both embedded and linked options, the Company purchased options during the second half of 1994 with terms similar to the linked options and embedded options thus effectively capping the CompanyOs exposure to further losses. These options expired during 1995 in conjunction with the linked and embedded options discussed previously. The combined economic impact of the CompanyOs derivative financial instruments discussed above was a $7.2 million reduction in net interest income and a 35 basis point reduction in net interest margin for the year ended December 31, 1995. 11 ================================================================================ The impact of these instruments was partially offset by the recognition of a $2.3 million premium received on the linked written options which had been deferred until the final maturity of these options in the fourth quarter of 1995. The impact of these instruments was $4.9 million and 27 basis point reductions in net interest income and net interest margin, respectively, for the year ended December 31, 1994. The cash requirement and negative impact on net interest income associated with the derivative transactions would be $0.3 million if interest rates remain unchanged through the final maturity of these instruments in early 1996. Although the Company's balance sheet remains asset sensitive, management had fewer concerns about potential compression of the Company's interest rate margin in early 1995 then it did in late 1993 and early 1994. During 1995, concerns of the spread between the Prime Rate and LIBOR narrowing were partially alleviated as the Prime Rate moved toward the characteristics of a retail rate and away from those of a wholesale rate. This was evidenced by the interest rate swap markets in 1995 as the spread between Prime and LIBOR increased from approximately 217 basis points to 250 basis points. The Company developed strategies to protect both net interest income and net interest margin from significant movements in interest rates both up and down. These strategies involve purchasing interest rate floors and caps with strike prices generally adjusting quarterly and approximately 200 basis points below or above (depending on the instrument) market rates at the date of purchase. In response to its strategy and the general asset sensitive nature of the balance sheet, the Company purchased interest rate floors in the first quarter of 1995 to protect against a drop in interest rates. The interest rate floors, with a notional value of $500 million at December 31, 1995, mature in the third quarter of 1997. The floors provide protection to the Company in the event that the three month LIBOR drops below the strike price of 4.0% associated with the floor. The deferred gain of the floors approximated $1.6 million at December 31, 1995. During the second and third quarters of 1995, the Company purchased both exchange traded and over the counter interest rate caps to protect its fixed rate loans from an increase in interest rates which would narrow the Company's net interest margin. The exchange traded caps had a notional value of $1.2 billion at December 31, 1995 and mature at the rate of $400 million per quarter for the first, second and third quarters of 1996. The over the counter caps had a notional value of $100 million at December 31, 1995. These caps reset quarterly in March, June and September 1996 and mature in December 1996. All of the caps provide protection to the Company in the event that the three month LIBOR rises above the strike prices of the caps which range from 8.0% to 8.5%. The deferred loss of the caps approximated $180,000 at December 31, 1995. In January 1996, the Company purchased additional interest rate caps with a notional value of $1.0 billion. The caps provide protection in the event that the three month LIBOR increases above the 6.5% strike price of the caps. These caps mature at the rate of $500 million per quarter during the fourth quarter of 1996 and the first quarter of 1997. The following table summarizes the Company's derivative instruments for the year ended December 31, 1995.
- ------------------------------------------------------------------------------------------------------------------------------- WEIGHTED NOTIONAL AVERAGE RATE (IN THOUSANDS) AMOUNT FOR 1995 TERMS AND MATURITY - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS WITH EMBEDDED OPTIONS Pay - Prime less a designated spread............ $ 200,000 6.3% First quarter 1996 Receive - 3 month LIBOR......................... 200,000 4.8 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS SYNTHETICALLY ALTERED BY LINKED EXCHANGE TRADED OPTIONS Pay - Prime less a designated spread............ $ 100,000 6.7% First quarter 1996 Receive - 3 month LIBOR/(1)/.................... 100,000 4.9 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE CAPS PURCHASED Exchange traded................................. $1,200,000 n/a $400,000 maturing per quarter through third quarter 1996 Reset quarterly in first, second and third Over the counter................................ 100,000 n/a quarter 1996; matures fourth quarter 1996 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE FLOORS PURCHASED Over the counter................................ $ 500,000 n/a Third quarter 1997 - -------------------------------------------------------------------------------------------------------------------------------
(1) Weighted average rate reflects impact of linked exchange traded options. ================================================================================ BALANCE SHEET ANALYSIS CASH AND DUE FROM BANKS: On average in 1995, 9% of the Company's assets were maintained in cash and due from banks. This reflects the large volume of demand deposits. Average cash and due from banks for the year ended December 31, 1995 was $211 million, down from the prior year average of $229 million primarily due to the decline in average demand deposits and an effort by the Company to improve its cash management. 12 ================================================================================ SECURITIES: Trading account securities totaled $40.1 million at December 31, 1995 as compared to $74.0 million at year end 1994. The Company maintained average balances in its trading portfolio of $52.8 million and $42.2 million, respectively, for the years ended 1995 and 1994. The Company engages in trading SBA loan certificates, precious metals and foreign currencies. Approximately $34.4 million of the Company's year end trading account balances were related to SBA loan certificates as the Company maintained a net short position in its precious metals trading portfolio and a relatively small physical position in foreign currency. The Company experienced increased gains from trading in 1995 as a result of improved market conditions and increased volumes of instruments traded, especially SBA loan certificates and foreign currencies. The Company's short-term investments, including securities available for sale and Federal funds sold and securities purchased under resale agreements, averaged $430 million for 1995 compared to $467 million for 1994. These investments amounted to $721 million at year end 1995 and $665 million at year end 1994. The increase in the year end 1995 balance of these securities is directly related to the increase in demand deposits at year end 1995. The following table illustrates the carrying value of the Company's held to maturity and available for sale portfolios for each of the past three years.
- ---------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1995 1994 1993 - ---------------------------------------------------------------------------- Securities held to maturity: Industrial development bonds........... $ 4,376 $ 4,546 $ 7,633 Other securities....................... 599 1,600 3,446 - ---------------------------------------------------------------------------- TOTAL $ 4,975 $ 6,146 $ 11,079 - ---------------------------------------------------------------------------- Securities available for sale: U.S. Treasury and federal agencies..... $245,919 $320,949 $199,865 Mutual funds invested in short-term government securities................. 43,052 56,915 191,590 Municipal revenue bonds................ --- --- 24,994 Other securities....................... 6,341 10,385 767 - ---------------------------------------------------------------------------- TOTAL $295,312 $388,249 $417,216 ============================================================================
Securities available for sale were utilized as the primary liquidity tool during 1995 as they averaged $265 million in 1995 as compared to $295 million in 1994. For both 1995 and 1994, securities available for sale were comprised mainly of SBA federal agency and U.S. Treasury securities and short-term government cash mutual funds. To a lesser extent, the Company also used Federal funds sold and securities purchased under resale agreements to manage its liquidity during 1995. These securities averaged $164 million during 1995 as compared to $172 million in 1994. The Company maintains securities available for sale at fair value with unrealized gains and losses reported as a separate component of shareholders' equity, net of tax. The Company reported a net unrealized gain of $2.7 million at December 31, 1995 and a net unrealized loss of $0.8 million at year end 1994. LOANS HELD FOR SALE: Loans held for sale approximated $2.6 million and $0.8 million at December 31, 1995 and 1994, respectively. The current year end balance is comprised entirely of SBA loans originated by the Company. The Company sells the guaranteed portion of these loans into the secondary market while retaining the unguaranteed portion for its own portfolio. The Company services the guaranteed portion of SBA loans, approximately $36.0 million at December 31, 1995, for investors. LOAN COMPOSITION: The loan portfolio totaled $1.7 billion at December 31, 1995, an increase of $324 million from the prior year end. The increase in loan balances came primarily from the Bank's commercial loan portfolio which grew $318 million, or 35%, mainly as a result of increased loan demand in 1995. In addition, the Company increased its participation in nationally syndicated credit facilities which accounted for $86 million, or 27%, of the Company's loan growth during 1995. Commercial loans, which comprise 73% of the total loan portfolio, are broadly diversified among many industries including high technology, entertainment, health care and garment with no significant concentrations. The following table sets forth the amount of loans outstanding by type at the end of each of the past five years, net of unearned discounts and deferred loan fees.
- -------------------------------------------------------------------------------------------------------- At December 31, (In Millions) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------- Commercial loans..................................... $1,238 $ 920 $1,002 $1,025 $1,065 Loans secured by real estate: Real estate term loans............................ 389 337 347 403 397 Interim construction loans........................ 65 117 123 216 363 Consumer loans....................................... 7 1 3 11 14 - -------------------------------------------------------------------------------------------------------- Total loans $1,699 $1,375 $1,475 $1,655 $1,839 ========================================================================================================
As illustrated by the above table, total real estate loans remained flat year to year. The Company saw overall reductions approximating $98 million in its construction loan portfolio through loan pay offs and refinancings to term loans during 1995. Offsetting the decrease in this portfolio were new construction loans to builders of single-family tract housing and the purchase of a $25.5 million portfolio of construction loans, at a discount, from the FDIC as receiver for Guardian 13 ================================================================================ Bank of Los Angeles. Combined these loans approximated $46 million, or 71%, of the Company's construction loan portfolio at December 31, 1995. The $52 million increase in the Company's real estate term loan portfolio resulted primarily from take out financing of a portion of the Company's construction loans and to a lesser degree, credits to facilitate the sale of real estate owned. The Company's real estate loans, both term and construction loans, are secured by first deeds of trust and are distributed among a variety of project types including multi-family residential, 26%, and retail facilities, 24% (see loans by project type and geographic concentration in Note (4)). While real estate lending activities are collateralized by real property, these transactions are subject to similar credit evaluation, underwriting and monitoring standards as those applied to commercial loans. At December 31, 1995, 79% of the Company's real estate loans were geographically concentrated in Southern California, 15% in Northern California and 6% outside of California. A certain degree of risk is inherent in the extension of credit. The Company assesses and manages credit risk on an ongoing basis through diversification, lending limits, credit review, approval policies and internal monitoring. As a part of the control process, an independent credit review function regularly examines the Company's loan portfolio. In addition, the Company's lending policies require extensive evaluation of new credit requests and continuing internal review of existing credits in order to identify early and quantify any evidence of deterioration of quality or potential loss. The Company seeks to manage and control its risk through diversification of the loan portfolio by type of loan, geographic and industry concentration and type of borrower. Diversification helps to reduce risk by minimizing the adverse impact of any single event or set of circumstances. NONACCRUAL LOANS, RESTRUCTURED LOANS AND REAL ESTATE OWNED: Nonaccrual loans, which includes loans 90 days or more past due, totaled $28.9 million at December 31, 1995 as compared to $18.2 million at year end 1994. The increase was related primarily to nonaccrual real estate loans which were up $9.9 million from year end 1994. Accounting for approximately 70% of this increase was a $6.8 million term loan placed on nonaccrual status in the fourth quarter of 1995. This loan, which was more than 90 days past due at December 31, 1995, is secured by a multi-family residential property in Southern California. In addition, the Company placed a $3.2 million real estate term loan secured by a single-family residential property on nonaccrual status during 1995. In this case, the borrower filed for bankruptcy protection under Chapter 11. As of December 31, 1995, the Company was awaiting a resolution from the bankruptcy court. Foregone interest on nonaccrual loans approximated $2.2 million in 1995 and $2.0 million in 1994. Consistent with prior reporting periods, there were no loans past due 90 days or more which were still accruing interest and all interest associated with nonaccrual loans had been reversed. It has been the Company's policy to recognize interest on nonaccrual loans only as collected. Restructured loans, loans outstanding whose original terms have been modified, totaled $33.6 million at December 31, 1995 as compared to $5.9 million at prior year end. The increase in restructured loans resulted from the modification of two real estate secured loans totaling $29.5 million in the fourth quarter of 1995. The modified loans carried market rates of interest but are classified as restructured because the Company anticipates debt forgiveness on one of the loans in return for a partial principal paydown and additional collateral and because the Company deferred a principal reduction on the other. All restructured loans were current as to principal and interest at December 31, 1995. The average yield on restructured loans was 7.98% at December 31, 1995. 14 ================================================================================ Real estate owned ("REO") of $10.3 million, net of a $4.7 million valuation allowance, at December 31, 1995 decreased $18.6 million from $29.0 million, net of a $6.5 million valuation allowance, at year end 1994. The Company was successful in disposing of nineteen REO properties during 1995. At the date of acquisition the total book value of these properties approximated $42 million of which the Company collected net sales proceeds of $36 million. Detailed information regarding nonaccrual loans, restructured loans and real estate owned is presented below.
- ----------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS).......................................... 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial loans..................................................... $ 11,714 $ 10,884 $ 23,489 $ 20,174 $14,479 Real estate loans.................................................... 17,212 7,272 12,029 26,429 23,355 Consumer loans....................................................... --- --- --- 65 396 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL NONACCRUAL LOANS............................................. $ 28,926 $ 18,156 $ 35,518 $ 46,668 $38,230 - ----------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses as a percent of total nonaccrual loans........ 129.3% 220.7% 120.5% 84.0% 95.8% Total nonaccrual loans as a percent of total loans outstanding.......... 1.7 1.3 2.4 2.8 2.1 - ----------------------------------------------------------------------------------------------------------------------------------- RESTRUCTURED LOANS...................................................... $ 33,608 $ 5,948 $ 4,662 $ 65,003 $ 4,700 - ----------------------------------------------------------------------------------------------------------------------------------- Real estate owned: Foreclosed assets.................................................... $ 15,015 $ 35,446 $ 30,171 $ 48,187 $26,609 In-substance foreclosures............................................ --- --- 28,163 27,133 --- - ----------------------------------------------------------------------------------------------------------------------------------- REO, gross......................................................... $ 15,015 $ 35,446 $ 58,334 $ 75,320 $26,609 Less valuation allowance............................................. (4,686) (6,475) (3,084) (6,500) --- - ----------------------------------------------------------------------------------------------------------------------------------- REO, NET........................................................... $ 10,329 $ 28,971 $ 55,250 $ 68,820 $26,609 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL.............................................................. $ 72,863 $ 53,075 $ 95,430 $180,491 $69,539 ===================================================================================================================================
On January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" ("FAS 118"). FAS 114 requires the measurement of impaired loans to be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral dependent loan. The adoption of FAS 114 did not have a material effect on the Company's financial position or results of operations and did not result in additional provisions for loan losses. The Company considers a loan to be impaired when it is "probable" that it will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. In determining impairment, the Company considers loans with the following characteristics: nonaccrual loans, restructured loans, and performing loans for which it is probable the contractual terms of the original loan agreement will not be met. The Company bases the measurement of collateral dependent impaired loans on the fair value of the loan's collateral. Non-collateral dependent loans are valued based on a present value calculation of expected future cash flows discounted at the loan's effective rate. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Principal deemed to be uncollectible is recorded through a charge-off to the allowance for loan losses. At December 31, 1995, the recorded investment in loans which have been deemed impaired in accordance with FAS 114 totaled $122.7 million, of which $28.9 million were on nonaccrual status and $29.5 were classified as restructured loans. A significant portion, 82%, of the impaired loans were secured by real estate. At September 30, 1995, the Company reported impaired loans of $37.9 million. The significant increase from third quarter 1995 resulted from the transfer of loans, totaling $49.5 million, from potential problem loan status to impaired status. This $49.5 million of loans designated as impaired consisted of several loans to one borrower for various retail, office and hotel facilities in Northern California. The loans matured and were renewed in the fourth quarter of 1995. At that time, the loans which are all cross collateralized were determined to be impaired as they were collateral dependent. Also contributing to the increase were the loans totaling $29.5 million restructured in the fourth quarter of 1995. Restructured loans meet the definition of impaired under FAS 114. Impaired loans totaling $85.2 million required a specific allowance for potential losses. The total specific allowance for potential losses related to such loans was $11.8 million. The remaining $37.5 million of loans classified as impaired did not require a specific allowance for potential losses. Impaired loans averaged $48.8 million during 1995. During 1995, total interest recognized on the impaired loan portfolio, on a cash basis, 15 was $3.4 million. At December 31, 1995, $92.1 million of the impaired loans were current as to principal and interest. There were $3.9 million in loans classified as potential problems at December 31, 1995. ALLOWANCE AND PROVISION FOR LOAN LOSSES: The allowance for loan losses is maintained at a level considered appropriate by management and is based on an ongoing assessment of the risks inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net charge-offs during the period. The Company's determination of the level of the allowance for loan losses, and correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general economic conditions (especially in California), loan portfolio composition and concentrations, prior loan loss experience, collateral value, identification of problem and potential problem loans and other relevant data to identify the risks in the loan portfolio. While management believes that the allowance for loan losses is adequate at December 31, 1995, future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. At December 31, 1995, the allowance for loan losses amounted to $37.4 million or 2.2% of total loans as compared to $40.1 million or 2.9% of total loans at December 31, 1994. The following table summarizes changes in the allowance for loan losses over the past five year ends.
- ------------------------------------------------------------------------------------------------------------------------------------ AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses: Balance, beginning of year.................................. $ 40,072 $ 42,800 $ 39,219 $ 36,640 $ 32,460 Loans charged off: Commercial.................................................. (13,432) (9,120) (27,396) (12,784) (15,438) Real estate................................................. (7,470) (8,506) (10,148) (5,558) (11,293) Consumer.................................................... (60) (108) (704) (902) (600) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LOANS CHARGED OFF $(20,962) $ (17,734) $ (38,248) $ (19,244) $ (27,331) - ------------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial.................................................. 1,690 2,729 1,506 703 1,362 Real estate................................................. 445 47 118 171 107 Consumer.................................................... 35 56 191 90 128 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LOAN RECOVERIES $ 2,170 $ 2,832 $ 1,815 $ 964 $ 1,597 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans charged off....................................... (18,792) (14,902) (36,433) (18,280) (25,734) Net effect of deconsolidation of Imperial Credit Industries, Inc............................................. -- -- (1,963) -- -- Provision for loan losses................................... 16,122 12,174 41,977 20,859 29,914 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF YEAR $ 37,402 $ 40,072 $ 42,800 $ 39,219 $ 36,640 - ------------------------------------------------------------------------------------------------------------------------------------ LOANS OUTSTANDING AT END OF YEAR $1,699,347 $1,375,146 $1,474,759 $1,654,860 $1,838,181 - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE AMOUNT OF LOANS OUTSTANDING $1,540,940 $1,361,630 $1,481,231 $1,794,586 $1,992,710 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net charge-offs to average loans................... 1.22% 1.09% 2.46% 1.02 % 1.29% Ratio of allowance for loan losses to average loans......... 2.43 2.94 2.89 2.19 1.84 Ratio of allowance for loan losses to loans outstanding at end of year............................................ 2.20 2.91 2.90 2.37 1.99 Ratio of provision for loan losses to net charge-offs....... 86 82 115 114 116 ====================================================================================================================================
The provision for loan losses totaled $16.1 million for the year ended December 31, 1995 as compared to $12.2 million for 1994. The increased provision for loan losses provided for increased net charge-offs which amounted to $18.8 million for the year ended December 31, 1995 up from $14.9 million for the year ended December 31, 1994. The increase in net charge-offs experienced in 1995 resulted from management's desire to aggressively resolve potential problem credits identified by the Company's internal credit review function and supported by the Company's most recent regulatory exam. As a percentage of average loans outstanding, net charge-offs were 1.22% and 1.09%, respectively, for the years ended December 31, 1995 and 1994. 16 Although the Company evaluates the adequacy of its allowance on an overall basis rather than by specific categories of loans, the following table reflects management's allocation of the allowance for loans losses by loan category and the ratio of each loan category to total loans over the past five years.
- --------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------------------- 1995 % 1994 % 1993 % 1992 % 1991 % - --------------------------------------------------------------------------------------------------------------------------------- Commercial...... $ 17,365 73% $ 24,628 66% $ 29,196 67% $ 23,137 62% $ 18,041 58% Real Estate..... 16,773 26 11,515 33 10,161 32 11,275 37 15,238 41 Consumer........ 809 1 175 1 433 1 867 1 838 1 Unallocated..... 2,455 -- 3,754 -- 3,010 -- 3,940 -- 2,523 -- - --------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 37,402 100% $ 40,072 100% $ 42,800 100% $ 39,219 100% $ 36,640 100% =================================================================================================================================
The allowance allocated to the loan categories shown above is based on previous loan loss experience and management's evaluation of the current loan portfolio and should not be interpreted as an indication that charge-offs will occur in these amounts or proportions. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories as the total allowance is a general allowance applicable to the entire portfolio. FUNDING SOURCES DEPOSITS: Total deposits amounted to $2.4 billion at December 31, 1995 as compared to $2.0 billion at the end of 1994. Of the year end balance of total deposits, 48% and 47%, respectively, represented noninterest-bearing demand deposits at December 31, 1995 and 1994. Average demand deposits were $843 million for 1995, a $69 million, or 8%, decrease from 1994. This was partially offset by the increase in average interest-bearing time deposits which grew $198 million, or 40%, in 1995. The Company returned to the CD market to supplement its funding base in order to keep up with loan demand in 1995. In 1995, the Company purchased the insured deposits of Guardian Bank of Los Angeles. The Company paid a premium of 1% for Guardian's gross deposits of $262 million. The majority of these deposits were noninterest-bearing demand deposits from Guardian's title and escrow industry customers. OTHER BORROWINGS: The Company uses short-term borrowings as a means to manage the interest rate sensitivity and liquidity position of the balance sheet. Average short-term borrowings totaled $72.1 million for 1995, a decrease of $27.1 million, or 27%, from 1994. As a percentage of average interest-bearing liabilities, average short-term borrowings approximated 5.8% for 1995 and 9.0% for 1994. CAPITAL: Retained earnings from operations has been the primary source of new capital for the Company, with the exception of its long-term debt offering in 1979, and on a smaller scale, the exercise of employee stock options. At December 31, 1995, stockholders' equity totaled $228 million as compared to $198 million at December 31, 1994. The Company recorded an additional $3.4 million in 1995 and $4.2 million in 1994 of stockholders' equity from the exercise of employee stock options. During 1995, $1.5 million of common stock was exchanged and retired in conjunction with the exercise of stock options. Common stock retirements were immaterial in 1994. The Company receives a tax deduction from the exercise of non-qualified stock options for the difference between the option price and the market value of the shares issued. The tax benefit associated with shares exercised, which is recorded as a component of stockholders' equity, approximated $1.9 million in 1995 and $1.5 million in 1994. Management is committed to maintaining capital at a level sufficient to assure stockholders, customers and regulators that the Company and the Bank are financially sound. Risk-adjusted capital guidelines, issued by bank regulatory agencies, assign risk weightings to assets both on and off-balance sheet and place increased emphasis on common equity. Under Prompt Corrective Action guidelines, institutions whose Tier I and total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be "well capitalized". Tier I capital basically consists of common stockholders' equity and noncumulative perpetual preferred stock and minority interest of consolidated subsidiaries minus intangible assets. Based on the guidelines, the Bank's Tier I and total capital ratios at December 31, 1995 were 9.3% and 10.6%, respectively, as compared to 10.6% and 11.9%, respectively, the year earlier. From the prior year, total assets have increased approximately 17% resulting in lower capital ratios. 17 ================================================================================ CAPITAL RATIOS FOR IMPERIAL BANK(1)
- -------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, (IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Tier I: Common stockholders' equity and preferred stock(2).......................... $ 213,286 $ 190,355 Disallowed assets........................................................... (2,074) -- - -------------------------------------------------------------------------------------------------------------------------- TIER I CAPITAL $ 211,212 $ 190,355 - -------------------------------------------------------------------------------------------------------------------------- Tier II: Allowance for loan losses allowable in Tier II.............................. 28,466 22,648 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL $ 239,678 $ 213,003 - -------------------------------------------------------------------------------------------------------------------------- RISK WEIGHTED BALANCE SHEET ASSETS $1,942,903 $1,649,974 - -------------------------------------------------------------------------------------------------------------------------- Risk-weighted off-balance sheet items: Commitments to make or purchase loans....................................... 259,363 84,657 Standby letters of credit................................................... 64,775 45,932 Other....................................................................... 12,277 31,313 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RISK WEIGHTED OFF-BALANCE SHEET ITEMS $ 336,415 $ 161,902 - -------------------------------------------------------------------------------------------------------------------------- Disallowed assets.............................................................. (2,074) -- Allowance for loan losses not included in Tier II.............................. (8,936) (17,424) - -------------------------------------------------------------------------------------------------------------------------- TOTAL RISK WEIGHTED ASSETS $2,268,308 $1,794,452 - -------------------------------------------------------------------------------------------------------------------------- Risk-based capital ratios: Tier I capital.............................................................. 9.3% 10.6% Total capital............................................................... 10.6% 11.9% Leverage ratio.............................................................. 8.6% 9.0% - --------------------------------------------------------------------------------------------------------------------------
(1) As reported on the December 31, 1995 and 1994 FDIC call reports. (2) Excludes unrealized gain/loss on securities available for sale. ================================================================================ In addition to the risk-weighted ratios, all banks are required to maintain leverage ratios, to be determined on an individual basis, but not below a minimum of 3%. The ratio is defined as Tier I capital to average total assets for the most recent quarter. The Bank's leverage ratio was 8.6% at December 31, 1995 as compared to 9.0% the prior year well in excess of the regulatory minimum requirement of 3.0%. Since the third quarter of 1993, the Bank operated under a revised Memorandum of Understanding ("MOU") with the Federal Deposit Insurance Company ("FDIC") and the California State Banking Department ("State") which required a reduction in classified assets, the prior written approval of dividends of the Bank by the FDIC and the State and a minimum leverage ratio of 6.5%. The FDIC and the State terminated the Bank's MOU in the fourth quarter of 1995. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 121 requires that long-lived assets and certain identifiable intangibles held for use be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, FAS 121 requires that long-lived assets and certain identifiable intangibles held for disposal be reported at the lower of book value or fair value less selling costs. FAS 121 must be adopted for financial statements beginning after December 15, 1995. The Company does not expect the impact of adopting FAS 121 to be material. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS 123"). FAS 123 applies to all transactions in which the Company acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based on the Company's common stock price, except for the Employee Stock Ownership Plan. A new method of accounting for stock based compensation arrangements with employees is established by FAS 123. The new method is based on the fair value method rather than the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). FAS 123 does not require companies to adopt the new fair value method for purposes of preparing their basic financial statements. Entities are allowed to either continue to use the APB 25 method or adopt the fair value method set forth in FAS 123. Companies that do not adopt the new fair value method in FAS 123 for purposes of preparing their basic financial statements are required to include pro-forma disclosures in the notes to the basic financial statements. The pro- forma disclosures should include the impact of the fair value method on net income and income per share as if FAS 123 had been adopted. 18 ================================================================================ FAS 123 may be adopted for fiscal years beginning after December 31, 1995. The impact on the Company of adopting FAS 123 would not be material. Management has decided not to adopt the fair value standards set forth in FAS 123 for purposes of preparing its basic financial statements. COMPARISON OF 1994 VERSUS 1993 At December 31, 1994, the Company's total assets were $2.4 billion, total loans amounted to $1.4 billion and stockholders' equity and allowance for loan losses approximated $238 million. This compares to total assets of $2.8 billion, total loans of $1.5 billion and stockholders' equity and allowance for loan losses of $228 million at December 31, 1993. Net income for 1994 amounted to $6,643,000 or $0.45 per share, as compared with $1,054,000 or $0.07 per share earned during 1993. A significant portion of the increase in net income from a year ago was due to a lower loan loss provision. Earnings as measured by return on assets was 0.30% for 1994, up from 0.04% in the prior year. Return on equity approximated 3.46% in 1994 compared to 0.57% in 1993. Asset quality improved significantly during 1994. Nonaccrual loans at year end amounted to $18.2 million, a 49% decrease from $35.5 million at December 31, 1993. At December 31, 1994, real estate owned ("REO") totaled $29.0 million, compared with REO of $55.3 million, which included in-substance foreclosures ("ISF") of $28.2 million at December 31, 1993. There were no ISFs at December 31, 1994. Restructured loans totaled $5.9 million at December 31, 1994 as compared to $4.7 million at December 31, 1993. The improvement in asset quality was also reflected in a lower provision for loan losses and net loan charge-offs. The provision for loan losses was $12.2 million for 1994, down from $42.0 million for 1993. Net charge-offs amounted to $14.9 million in 1994 versus $36.4 million in 1993. The allowance for loan losses at December 31, 1994 was $40.1 million or 2.9% of total loans, as compared with $42.8 million or 2.9% of total loans the year earlier. Net interest income and net interest margin in 1994 were $98.4 million and 5.2%, respectively, compared to $103.4 million and 4.7%, respectively, for 1993. The 1994 improvement in net interest margin was offset by the significant decrease in the Company's average earning assets and by the Company's derivative instruments which reduced net interest income by $4.9 million. The increase in interest rates during 1994 resulted in an improved net interest margin. Noninterest income amounted to $35.9 million in 1994, compared to $52.9 million in 1993. Included in 1993 is a pre-tax gain of $14.5 million realized from the Company's sale of 2.8 million shares of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII) common stock. Additionally, 1994 reflects lower earnings of ICII. The Company's equity pick-up decreased $4.4 million due to a reduction in the Bank's ownership percentage as well as the decrease in ICII's reported earnings. Exclusive of the equity in earnings of ICII and 1993 gain on sale of ICII stock, noninterest income increased $1.9 million from 1993 to 1994. Trust fees increased $1.2 million, or 21%, from 1993 as a result of the Company's trust subsidiary's successful strategy to solicit higher margin business relationships. The gain on origination and sale of loans, which increased $2.3 million over 1993, represents the income generated from the Company's SBA lending division and mortgage banking division which was dissolved in the fourth quarter of 1994. Due to the fact that the Company had begun these operations in 1993, they generated significantly increased volumes during 1994. During 1994, the Company realized a $1.6 million gain on the sale of a Company owned facility. Offsetting these increases in noninterest income were decreases in service charges on deposits and trading gains. Service charges on deposits declined during 1994 due to reduced demand deposit levels and underlying deposit activity from year to year. Service charges on deposits decreased $1.2 million to a total of $4.6 million for 1994 versus $5.8 million in 1993. Due to market conditions which existed in 1994, trading gains decreased $2.9 million from 1993. Operating expenses amounted to $111.5 million, compared to $113.9 million in 1993. Compensation expense increased in 1994 due to the re-establishment of incentive based compensation as well as management's decision to fully fund the Company's Employee Stock Ownership Plan. Together these items contributed an additional $3.9 million to 1994 compensation expense. Additionally, as a result of the death of George M. Eltinge, Chairman of the Board, on August 12, 1994, his estate received the benefit from the Death Benefit Only Compensation Agreement put in place in 1986. A $935,000 pre-tax compensation expense related to this death benefit, net of life insurance proceeds in the amount of $741,000 was recognized. The after tax effect of funding the death benefit obligation amounted to approximately $225,000. Costs related to the conversion of data processing systems resulted in higher data processing expense for 1994. Data processing costs increased to $9.4 million in 1994 as compared to $7.6 million in 1993. Service costs associated primarily with real estate related demand deposits decreased to $7.3 million in 1994 from $10.5 million in 1993. These costs, attributable to accounting, courier and other deposit related services provided to real estate related service customers, declined primarily as a result of the $284 million decrease in average demand deposits from 1993. During 1994, the resolution of a favorable lawsuit judgment netted the Company $1.7 million. Included in 1993 lawsuit settlements was the resolution of the only two material lawsuits totaling $3.7 million then pending against the Company. Neither of the lawsuits settled in 1993 involved lender liability. During 1994, the Company collected a $1.6 million operational loss incurred in prior years which was the primary reason for the decrease in other expense from 1993 to 1994. 19 ================================================================================ CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------------------------- IMPERIAL BANCORP AND SUBSIDIARIES DECEMBER 31, (IN THOUSANDS, EXCEPT SHARE DATA) 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks............................................................................. $ 242,018 $ 168,626 Trading account securities.......................................................................... 40,050 74,028 Securities available for sale....................................................................... 295,312 388,249 Securities held to maturity (market value of $4,975 and $6,146 for 1995 and 1994, respectively)..... 4,975 6,146 Federal funds sold and securities purchased under resale agreements................................. 425,300 276,500 Loans held for sale (market value of $2,842 and $768 for 1995 and 1994, respectively)............... 2,648 768 Loans: Loans, net of unearned income and deferred loan fees.............................................. 1,699,347 1,375,146 Less allowance for loan losses................................................................. (37,402) (40,072) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL NET LOANS $ 1,661,945 $ 1,335,074 - ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net......................................................................... 16,003 18,254 Accrued interest receivable......................................................................... 15,284 12,769 Real estate owned, net.............................................................................. 10,329 28,971 Income taxes receivable............................................................................. 4,008 3,573 Investment in Imperial Credit Industries, Inc....................................................... 36,126 30,934 Other assets........................................................................................ 34,376 34,817 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 2,788,374 $ 2,378,709 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand............................................................................................ $ 1,145,720 $ 928,728 Savings........................................................................................... 15,708 27,207 Money market...................................................................................... 435,674 491,090 Time--under $100,000.............................................................................. 227,262 168,044 Time--$100,000 and over........................................................................... 539,252 344,641 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS $ 2,363,616 $ 1,959,710 - ----------------------------------------------------------------------------------------------------------------------------------- Accrued interest payable............................................................................ 5,576 5,209 Short-term borrowings............................................................................... 159,636 190,919 Long-term borrowings................................................................................ 5,906 8,153 Other liabilities................................................................................... 25,404 16,942 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $ 2,560,138 $ 2,180,933 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock--no par, 50,000,000 shares authorized; 13,821,125 shares at December 31, 1995 and 12,832,609 shares at December 31, 1994 issued and outstanding................................ 130,780 117,144 Unrealized gain (loss) on securities available for sale, net of taxes............................. 2,747 (847) Retained earnings................................................................................. 94,709 81,479 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 228,236 $ 197,776 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,788,374 $ 2,378,709 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. ================================================================================ 20 ================================================================================ CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------ IMPERIAL BANCORP AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans......................................................................... $145,375 $112,834 $113,671 Deposits placed with banks.................................................... -- -- 846 Trading account securities.................................................... 3,516 2,366 4,709 Securities available for sale................................................. 17,349 12,459 10,423 Securities held to maturity................................................... 311 345 813 Federal funds sold and securities purchased under resale agreements........... 9,707 7,153 8,663 Loans held for sale........................................................... 269 650 579 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME $176,527 $135,807 $139,704 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense: Deposits...................................................................... 55,491 33,184 31,072 Short-term borrowings......................................................... 4,135 3,606 4,486 Long-term borrowings.......................................................... 528 625 722 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE $ 60,154 $ 37,415 $ 36,280 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income............................................................. 116,373 98,392 103,424 Provision for loan losses....................................................... 16,122 12,174 41,977 - ------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $100,251 $ 86,218 $ 61,447 - ------------------------------------------------------------------------------------------------------------------------------ Noninterest income: Service charges on deposit accounts........................................... 4,328 4,635 5,827 Trust fees.................................................................... 7,646 6,857 5,667 Gain on origination and sale of loans......................................... 2,265 3,840 1,494 Gain on sale of stock in Imperial Credit Industries, Inc...................... -- -- 14,538 Equity in net income of Imperial Credit Industries, Inc....................... 5,192 3,489 7,898 Other service charges and fees................................................ 7,921 6,566 6,502 Merchant and credit card fees................................................. 4,855 6,152 5,501 Gain (loss) on securities available for sale.................................. 260 (272) 24 Gain on trading account securities............................................ 4,108 822 3,695 Gain on sale of merchant card accounts........................................ 6,400 -- -- Gain on sale of real property held for sale or investment..................... 75 462 (534) Gain on sale of bank owned premises........................................... -- 1,578 -- Other income.................................................................. 3,170 1,753 2,316 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL NONINTEREST INCOME $ 46,220 $ 35,882 $ 52,928 - ------------------------------------------------------------------------------------------------------------------------------ Noninterest expense: Salary and employee benefits.................................................. 48,683 47,717 41,068 Net occupancy expense......................................................... 8,899 9,757 10,613 Furniture and equipment....................................................... 4,952 5,352 5,029 Data processing............................................................... 7,783 9,358 7,638 Customer services............................................................. 8,843 7,311 10,460 Net real estate owned expense................................................. 8,508 7,719 8,037 Regulatory assessments........................................................ 3,225 5,934 6,723 Professional and consulting................................................... 3,526 4,921 4,313 Business development.......................................................... 3,100 3,298 2,167 Lawsuit settlements........................................................... (1,134) (1,334) 3,714 Other expense................................................................. 15,720 11,440 14,088 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL NONINTEREST EXPENSE $112,105 $111,473 $113,850 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes...................................................... 34,366 10,627 525 Income tax provision (benefit).................................................. 11,189 3,984 (529) - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 23,177 $ 6,643 $ 1,054 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE $1.52 $0.45 $0.07 - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. ================================================================================ 21 ================================================================================ CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------- IMPERIAL BANCORP AND SUBSIDIARIES UNREALIZED TOTAL COMMON (GAIN) LOSS RETAINED STOCKHOLDERS' (IN THOUSANDS) STOCK ON SECURITIES(1) EARNINGS EQUITY - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1992 $ 94,016 $ -- $ 90,032 $ 184,048 - ------------------------------------------------------------------------------------------------------------------------------- Net income--1993................................................. -- -- 1,054 1,054 Stock dividends.................................................. 7,936 -- (7,946) (10) Common stock issued under employee stock option plans............ 515 -- -- 515 Retirement of common stock....................................... (217) -- -- (217) Net change in guarantee of ESOP debt............................. (185) -- -- (185) - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) 8,049 -- (6,892) 1,157 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 $ 102,065 $ -- $ 83,140 $ 185,205 - ------------------------------------------------------------------------------------------------------------------------------- Net income--1994................................................. -- -- 6,643 6,643 Stock dividends.................................................. 8,294 -- (8,304) (10) Common stock issued under employee stock option plans............ 4,143 -- -- 4,143 Retirement of common stock....................................... (175) -- -- (175) Net change in guarantee of ESOP debt............................. 1,159 -- -- 1,159 Effect of difference between fair value and cost of ESOP shares released..................................................... 180 -- -- 180 Tax benefit of employee stock options............................ 1,478 -- -- 1,478 Unrealized loss on securities available for sale, net of taxes... -- (847) -- (847) - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) 15,079 (847) (1,661) 12,571 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 $ 117,144 (847) $ 81,479 $ 197,776 - ------------------------------------------------------------------------------------------------------------------------------- Net income--1995................................................. -- -- 23,177 23,177 Stock dividends.................................................. 9,936 -- (9,947) (11) Common stock issued under employee stock option plans............ 3,377 -- -- 3,377 Retirement of common stock....................................... (1,538) -- -- (1,538) Tax benefit of employee stock options............................ 1,861 -- -- 1,861 Net change in unrealized gain on securities available taxes for sale, net of....................................... -- 3,594 -- 3,594 - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE 13,636 3,594 13,230 30,460 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 $ 130,780 $ 2,747 $ 94,709 $ 228,236 - -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. (1) Represents unrealized gain (loss) on securities available for sale, net of taxes. ================================================================================ 22 ================================================================================ CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income............................................... $ 23,177 $ 6,643 $ 1,054 Adjustments for non-cash charges (credits): Depreciation and amortization......................... 1,775 542 782 Accretion of purchase loan discount................... (2,129) -- -- Provision for loan losses............................. 16,122 12,174 41,977 Provision for real estate owned....................... 4,547 5,291 4,839 Equity in net income of Imperial Credit Industries, Inc...................................... (5,192) (3,489) (7,898) Gain on sale of real estate owned..................... (384) (446) (568) (Gain) loss on sale of real property held for sale or investment................................... (75) (462) 534 (Gain) loss on sale of premises and equipment............................................ (27) (1,357) 500 Provision (benefit) for deferred taxes................ 1,621 (3,452) (1,066) Write down for impairment of equity investment........................................... 1,500 503 -- (Gain) loss on securities available for sale............................................. (260) 272 (24) Gain on sale of stock in Imperial Credit Industries, Inc...................................... -- -- (14,538) Net change in trading account securities.............. 33,978 (51,384) 257,485 Net change in loans held for sale..................... (1,880) 21,936 (22,704) Net change in accrued interest receivable........................................... (2,515) (4,290) 4,113 Net change in accrued interest payable................ 367 2,524 (736) Net change in income taxes receivable................. (2,056) 11,835 2,698 Net change in other liabilities....................... 8,462 1,556 2,804 Net change in other assets............................ (754) (11,563) 10,359 - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 76,277 $ (13,167) $ 279,611 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from securities held to maturity................................................ 170 3,079 2,749 Purchase of securities held to maturity.................. (499) (1,600) (2,245) Proceeds from sale of securities available for sale...................................... 1,592,179 2,032,510 4,228,449 Proceeds from maturities of securities available for sale...................................... 503,136 977,511 2,451,863 Purchase of securities available for sale................ (1,997,393) (2,977,483) (6,607,589) Net change in Federal funds sold and securities purchased under resale agreements....................... (148,800) 293,519 (265,019) Net change in loans...................................... (336,201) 99,744 20,442 Capital expenditures..................................... (4,083) (7,476) (14,714) Proceeds from sale of real estate owned.................. 16,072 15,030 56,625 Proceeds from sale of real property held for sale or investment.................................. 309 15,297 4,009 Proceeds from sale of premises and equipment............................................... 21 2,037 -- - ---------------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $(375,089) $ 452,168 $(125,430) - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in demand deposits, savings and money market accounts............................... 150,077 (445,058) (143,360) Net change in time deposits.............................. 253,829 17,009 (93,035) Net change in short-term borrowings...................... (31,283) (1,538) 14,158 Retirement of long-term borrowings....................... (2,247) (1,713) (1,386) Proceeds from sale of stock in subsidiary.............................................. -- -- 30,747 (Repayment) proceeds of ESOP debt........................ -- (1,159) 185 Proceeds from exercise of employee stock options................................................. 1,839 3,968 298 Other.................................................... (11) (10) (10) - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 372,204 $(428,501) $(192,403) - ---------------------------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND DUE FROM BANKS $ 73,392 $ 10,500 $ (38,22) - ---------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS, BEGINNING OF YEAR $ 168,626 $ 158,126 $ 196,348 - ---------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS, END OF YEAR $ 242,018 $ 168,626 $ 158,126 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. ================================================================================ 23 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPERIAL BANCORP AND SUBSIDIARIES NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of Imperial Bancorp ("the Company") and its wholly owned subsidiaries are summarized below. Certain accounts in the financial statements for 1994 and 1993 have been reclassified to conform with the current year presentation. (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. The principal subsidiary is Imperial Bank ("the Bank"), a commercial bank. All material intercompany balances and transactions have been eliminated. At December 31, 1995, the Company owned 5.8 million shares of Imperial Credit Industries, Inc. ("ICII") stock at an equivalent book value of $6.23 per share, representing approximately 40.0% of all outstanding ICII shares. The Company does not exercise significant control over the operations of ICII, and therefore, the results of ICII operations are accounted for in the Company's consolidated financial statements as an equity investment. The results of operations of ICII are reflected as "Equity in net income of Imperial Credit Industries, Inc." in the consolidated statement of income. (B) BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowances for loan losses and real estate owned. While management believes that these allowances are currently adequate, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as a part of their examination process, periodically review the allowances for loan losses and real estate owned. Such agencies may require the Company to recognize additions to these allowances based on their judgments about information available to them at the time of their examination. (C) INVESTMENTS The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on January 1, 1994. TRADING INSTRUMENTS SECURITIES: Trading securities, primarily the guaranteed portion of Small Business Administration (OSBAO) loans, are carried at market value with unrealized market value adjustments recorded in the consolidated statement of income as gain or loss on trading account securities. Purchases and sales of trading securities are recorded on the trade date. PRECIOUS METALS: Precious metals activities include leasing, purchases and sales of precious metals for forward delivery and options on precious metals. Precious metals, outstanding open positions in contracts for forward delivery and option contracts are revalued monthly at prevailing market rates. The resultant net realized and unrealized gains or losses are reflected in noninterest income as gain or loss on trading instruments. To protect against the risk of adverse price movement, the Company substantially hedges its positions in precious metals with futures contracts and forward commitments to sell or purchase. FOREIGN EXCHANGE: Trading positions in foreign currencies, including spot, forward and futures positions, are valued at prevailing market rates. Realized and unrealized gains and losses are included in noninterest income as gain or loss on trading instruments. SECURITIES AVAILABLE FOR SALE The Company holds certain securities, primarily U.S. Treasury and federal agency securities and mutual funds invested in short-term government securities, to manage its overall liquidity. These securities are carried at fair value. Unrealized gains and losses are excluded from income and reported as a separate component of equity reflected as OUnrealized gain (loss) on securities available for sale, net of taxesO in the consolidated balance sheet and statement of changes in stockholdersO equity, unless the security is determined to be other than temporarily impaired. Realized gains and losses on securities available for sale are computed using the specific identification method. For other than temporarily impaired securities, unrealized losses are recorded in the consolidated statement of income. SECURITIES HELD TO MATURITY Securities held to maturity are so designated when acquired based upon intent and ability to hold them until maturity. These securities are carried at amortized cost using the specific identification method, adjusted for amortization of premiums and accretion of discounts. Such amortization and accretion are recognized in interest income on securities held to maturity in the accompanying consolidated statement of income. When a decline in value has occurred and is deemed to be other than temporary, such decline is charged to income. (D) LOANS HELD FOR SALE Currently, the Company designates its SBA loans originated as held for sale. These loans are carried at the lower of aggregate cost or market. Origination fees on loans held for sale, net of 24 ================================================================================ certain costs of processing and closing the loans, are deferred until the time of sale and are included in the computation of the gain or loss from the sale of the related loans. (E) LOANS Loans are stated at the amount of principal outstanding. Nonrefundable loan fees and related direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The net deferred fees and costs are recognized into income over the loan term using a method which approximates the interest method. Interest income on loans is accrued as earned. Interest accruals on commercial and real estate loans are generally discontinued whenever the payment of interest or principal is 90 days past due. When a loan is placed on nonaccrual status, the accrued and unpaid interest is charged against current income and recognition of net deferred fees and costs into income is discontinued. Future collections of interest are included in interest income or applied to the loan balance based on an assessment of the likelihood that the principal will be collected. On January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" (FAS 118"). Under FAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to provision for loan losses. Additionally, FAS 114 eliminates the requirement that a creditor account for certain loans as foreclosed assets until the creditor has taken possession of the collateral. FAS 118 permits creditors to use existing methods for recognizing interest income on impaired loans. The adoption of these statements did not have a material impact on the Company's financial position or results of operations. Loans deemed by management to be uncollectible are charged to the allowance for loan losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan losses are charged to expense and added to the allowance to maintain it at an appropriate level. In evaluating the adequacy of the allowance, management considers numerous factors including economic conditions, loan portfolio composition and risk, loan loss experience, ongoing review of specific loans and the review of the Company's regulators. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in the aforementioned factors. (F) PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation. Depreciation on the Company's owned premises is calculated using the straight- line method over its estimated useful life of 39 years. Depreciation on equipment is calculated using the straight-line method over the estimated useful lives of the assets (3 to 7 years). Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or the estimated useful lives of the leasehold improvements, whichever is shorter. (G) REAL ESTATE OWNED Real estate owned ("REO") is transferred from the loan portfolio at fair value as determined by an appraisal obtained at the time of foreclosure. The excess carrying value, if any, of the loan over the estimated fair value is charged to the allowance for loan losses. Estimated selling costs and any subsequent impairments in value are recognized through a valuation allowance. Subsequent increases in fair value are credited to income and reduce the valuation allowance, but only to the extent that decreases in fair value were recorded for the same property through the valuation allowance. Gains and losses from sales of REO and net operating expenses are recorded in operations and included in the caption "Net real estate owned expense" in the accompanying consolidated statement of income. (H) INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). FAS 109 requires an asset and liability approach for accounting for income taxes. Its objective is to recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in a companyOs financial statements or tax returns. The measurement of tax assets and liabilities is based on enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence. (I) SALE OF STOCK The sale of shares of the Company's equity investment in ICII to the public is recorded as "Gain on sale of stock in Imperial Credit Industries, Inc." in the accompanying consolidated statement of income. This gain represents actual proceeds from the sale of stock reduced by the Company's recorded investment in those shares and expenses related to the stock offering. (J) INTEREST RATE DERIVATIVE CONTRACTS Interest rate derivative contracts, such as swaps, futures, and options including interest rate caps and floors are used in conjunction with asset liability management strategies to synthetically alter the interest income or expense flows of certain assets or liabilities. Gains and losses on linked financial futures and options used in asset liability management are recorded as a component of the interest income or expense reported on the related asset or liability. Amounts payable and receivable relating to interest rate swaps are accrued until settled, the effect of which is included in the interest income or expense reported 25 ================================================================================ on the asset or liability whose payment streams have been synthetically altered. Fees received for linked financial contracts are deferred and recognized into interest income upon expiration of the related contracts. Fees paid for financial contracts are amortized over their contractual life as a component of the interest reported on the related asset or liability. NOTE (2) STATEMENT OF CASH FLOWS The following information supplements the statement of cash flows.
- -------------------------------------------------------------------------------- DECEMBER 31, (IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Interest paid........................... $ 59,787 $ 34,891 $ 37,016 Taxes paid.............................. 13,506 4,107 -- Taxes refunded.......................... 1,089 10,611 2,225 Significant noncash transactions: Real estate loans transferred to real estate owned........................... 13,913 9,176 38,453 Loans made in conjunction with the sale of real estate owned................... 14,206 16,171 30,062 Net change in unrealized gain (loss) on securities available for sale, net of taxes.................................. 3,594 (847) -- - --------------------------------------------------------------------------------
NOTE (3) SECURITIES The amortized cost and fair value of securities held to maturity and securities available for sale at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
- ----------------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE ------------------------------------------------------------------------------- AMORTIZED AMORTIZED (IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE - ----------------------------------------------------------------------------------------------------------------------------------- Due in one year or less............................. $ -- $ -- $ 77,814 $ 77,823 Due after one year through five years............... -- -- 640 636 Due after five years through ten years.............. 4,376 4,376 16,348 16,529 Due after ten years................................. 599 599 195,736 200,324 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 4,975 $ 4,975 $ 290,538 $ 295,312 ===================================================================================================================================
The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law totaled $222.3 million as of December 31, 1995. (A) SECURITIES HELD TO MATURITY The following is a summary for the major categories of securities held to maturity.
- -------------------------------------------------------------------------------------------------------- AMORTIZED GROSS GROSS COST UNREALIZED UNREALIZED (IN THOUSANDS) GAINS LOSSES FAIR VALUE - -------------------------------------------------------------------------------------------------------- December 31, 1995 Industrial development bonds............ $ 4,376 $ -- $ -- $ 4,376 Other securities........................ 599 -- -- 599 - -------------------------------------------------------------------------------------------------------- TOTAL $ 4,975 $ -- $ -- $ 4,975 - -------------------------------------------------------------------------------------------------------- December 31, 1994 Industrial development bonds............ $ 4,546 $ -- $ -- $ 4,546 Other securities........................ 1,600 -- -- 1,600 - -------------------------------------------------------------------------------------------------------- TOTAL $ 6,146 $ -- $ -- $ 6,146 ========================================================================================================
Gross realized gains and gross realized losses for the year ended December 31, 1995 were zero and $1,500,000, respectively. There were no gross realized gains or losses for the year ended December 31, 1994 or 1993. 26 ================================================================================ (B) SECURITIES AVAILABLE FOR SALE The following is a summary for the major categories of securities available for sale.
- -------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR (IN THOUSANDS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------- December 31, 1995 U.S. Treasury and federal agencies.. $ 241,649 $ 4,274 $ (4) $ 245,919 Mutual funds........................ 43,052 -- -- 43,052 Other securities.................... 5,837 504 -- 6,341 - -------------------------------------------------------------------------------------------------- TOTAL $ 290,538 $ 4,778 $ (4) $ 295,312 - -------------------------------------------------------------------------------------------------- December 31, 1994 U.S. Treasury and federal agencies.. $ 321,455 $ 11 $ (517) $ 320,949 Mutual funds........................ 56,915 -- -- 56,915 Other securities.................... 11,352 2 (969) 10,385 - -------------------------------------------------------------------------------------------------- TOTAL $ 389,722 $ 13 $ (1,486) $ 388,249 ==================================================================================================
Mutual funds at December 31, 1995 and 1994 were comprised of Monarch government cash, cash and treasury funds. Other securities at December 31, 1995 was primarily comprised of certificates of originator fees associated with the guaranteed portion of Small Business Administration loans. Other securities at December 31, 1994 was primarily comprised of a treasury bill issued by the Canadian government and certificates of originator fees associated with the guaranteed portion of Small Business Administration loans. Gross realized gains and losses related to this portfolio were $423,000 and $163,000, respectively, for the year ended December 31, 1995 and $125,000 and $397,000, respectively for the year ended December 31, 1994. These amounts were immaterial in 1993. At December 31, 1995, the Company reported an unrealized gain, net of tax, of $2.7 million in the consolidated balance sheet. This amount was an unrealized loss, net of tax, of $0.8 million at December 31, 1994. NOTE (4) LOANS At December 31, the carrying amount of loans, net of unearned income and deferred loan fees, consisted of the following:
- ------------------------------------------------------------- 1995 1994 CARRYING CARRYING (IN THOUSANDS) AMOUNT AMOUNT - ------------------------------------------------------------- Commercial loans................ $1,238,148 $ 919,610 Loans secured by real estate: Real estate term loans......... 388,713 337,069 Interim construction loans..... 64,869 116,930 Consumer loans.................. 7,617 1,537 - ------------------------------------------------------------- Total loans..................... 1,699,347 1,375,146 Less allowance for loan losses.. (37,402) (40,072) - ------------------------------------------------------------- NET LOANS $1,661,945 $1,335,074 =============================================================
Net deferred loan fees, included in total loans, approximated $5.5 million and $2.8 million at December 31, 1995 and 1994, respectively. At December 31, 1995, 1994 and 1993, restructured loans performing in accordance with their modified terms totaled $33.6 million, $5.9 million and $4.7 million, respectively. There were no related commitments to lend additional funds on restructured loans in 1995 or 1994 and these commitments were immaterial at December 31, 1993. In 1995, 1994 and 1993, respectively, $2.8 million, $0.7 million and $3.7 million of gross interest income would have been recorded had the loans been current in accordance with their original terms compared to $2.7 million, $0.4 million and $3.1 million of interest income which was included in net income for the same periods. The average yield on restructured loans was 7.98% at December 31, 1995. Nonaccrual loans totaled $28.9 million, $18.2 million and $35.5 million at December 31, 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, the related commitments to lend additional funds approximated $607,000 and $617,000, respectively. There was no recorded interest receivable on nonaccrual loans at December 31, 1995 or 1994. Interest income foregone on nonaccrual loans approximated $2.2 million in 1995, $2.0 million in 1994 and $3.9 million in 1993. Interest income recognized on nonaccrual loans was approximately $2.0 million in 1995, $1.0 million in 1994 and $1.4 million in 1993. At December 31, 1995, the recorded investment in loans which have been deemed impaired in accordance with FAS 114 totaled $122.7 million, of which $28.9 million were on nonaccrual status and $29.5 million were classified as restructured loans. Restructured loans meet the definition of impaired under FAS 114. A significant portion, 82%, of the impaired loans were secured by real estate. Impaired loans totaling $85.2 million required a specific allowance for potential losses. The total specific allowance for potential losses related to such loans was $11.8 million. The remaining $37.5 million of loans classified as impaired did not require a specific allowance for potential losses. Impaired loans averaged $48.8 million during 1995. During 1995, total interest recognized on the impaired 27 ================================================================================ loan portfolio, on a cash basis, was $3.4 million. At December 31, 1995, $92.1 million of the impaired loans were current as to principal and interest. An effort is made to pool and diversify risk with the objective of achieving high rates of return and minimizing losses for the benefit of stockholders and protection of depositors. Diversification of the loan portfolio by type of loan, geographic and industry concentration and type of borrower also tends to reduce the overall risk by minimizing the adverse impact of any single event or set of occurrences. At December 31, 1995, within the loan portfolio, approximately 73% were categorized as commercial and 26% as real estate. Commercial loans are broadly diversified by industry and geographically concentrated in California. At year-end 1995, real estate loans totaled $453.6 million. Not included in the following table are commercial loans to real estate related customers totaling $108.2 million. At December 31, 1995, these loans consisted of the following: $90.5 million to real estate agents, operators and lessors, $7.9 million to subcontractors and developers, $7.3 million to title and escrow companies and $2.5 million to builders. The following table shows the distribution of real estate loans and unfunded commitments, by type of project and geographical concentration.
- ---------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1995 (IN THOUSANDS) NORTHERN CALIFORNIA SOUTHERN CALIFORNIA - ---------------------------------------------------------------------------------------------------------------------------------- NONACCRUAL UNFUNDED NONACCRUAL UNFUNDED CONSTRUCTION TOTAL LOANS LOANS COMMITMENTS TOTAL LOANS LOANS COMMITMENTS - ---------------------------------------------------------------------------------------------------------------------------------- Acquisition and land development........ $ -- $ -- $ -- $ 7,413 $ -- $ 9,110 Condominiums............................ -- -- -- 20,690 -- 537 Multi-family residential................ -- -- -- 1,366 1,366 -- Single-family residential............... 1,362 -- 3,497 24,173 -- 90,066 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RESIDENTIAL $ 1,362 $ -- $ 3,497 $ 53,642 $ 1,366 $ 99,713 - ---------------------------------------------------------------------------------------------------------------------------------- Other non-residential................... -- -- -- 3,643 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-RESIDENTIAL $ -- $ -- $ -- $ 3,643 $ -- $ -- - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CONSTRUCTION $ 1,362 $ -- $ 3,497 $ 57,285 $ 1,366 $ 99,713 - ---------------------------------------------------------------------------------------------------------------------------------- TERM LOANS - ---------------------------------------------------------------------------------------------------------------------------------- Acquisition and land development........ $ -- $ -- $ -- $ 2,525 $ 1,551 $ 175 Condominiums............................ -- -- -- 13,183 -- 62 Multi-family residential................ 8,604 350 -- 106,355 6,812 323 Single-family residential............... 94 -- -- 14,647 3,928 109 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RESIDENTIAL $ 8,698 $ 350 $ -- $136,710 $ 12,291 $ 669 - ---------------------------------------------------------------------------------------------------------------------------------- Retail facilities....................... 17,860 -- -- 80,400 -- 1,708 Office building......................... 35,846 -- 124 51,244 -- 448 Industrial.............................. -- -- -- 5,872 -- 179 Hotels.................................. 2,736 -- -- 8,197 -- -- Other................................... 1,241 -- -- 19,133 3,205 -- - --------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-RESIDENTIAL $ 57,683 $ -- $ 124 $164,846 $ 3,205 $ 2,335 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL TERMS LOANS $ 66,381 $ 350 $ 124 $301,556 $ 15,496 $ 3,004 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL REAL ESTATE LOANS $ 67,743 $ 350 $ 3,621 $358,841 $ 16,862 $102,717 =================================================================================================================================
(1) Consisting primarily of properties located in Arizona and Hawaii. 28 ================================================================================
=================================================================================================================================== OUT OF STATE/(1)/ - -------------------------------------------------- ------------------------------------------------------------------- TOTAL % NONACCRUAL UNFUNDED TOTAL LOANS % LOANS NONACCRUAL NONACCRUAL TOTAL LOANS LOANS COMMITMENTS BY TYPE BY TYPE BY TYPE BY TYPE - -------------------------------------------------- -------------------------------------------------------------------- $ -- $ -- $ -- $ 7,413 12% $ -- --% 6,222 -- 778 26,912 42 -- -- -- -- -- 1,366 1 1,366 100 -- -- -- 25,535 39 -- -- - -------------------------------------------------- -------------------------------------------------------------------- $ 6,222 $ -- $ 778 $ 61,226 94% $ 1,366 100% - -------------------------------------------------- -------------------------------------------------------------------- -- -- -- 3,643 6% -- -- - -------------------------------------------------- -------------------------------------------------------------------- $ -- $ -- $ -- $ 3,643 6% $ -- -- - -------------------------------------------------- -------------------------------------------------------------------- $ 6,222 $ -- $ 778 $ 64,869 100% $ 1,366 100% - -------------------------------------------------- -------------------------------------------------------------------- - -------------------------------------------------- -------------------------------------------------------------------- $ -- $ -- $ -- $ 2,525 1% $ 1,551 10% -- -- -- 13,183 3 -- -- -- -- -- 114,959 30 7,162 45 -- -- -- 14,741 4 3,928 25 - -------------------------------------------------- -------------------------------------------------------------------- $ -- $ -- $ -- $ 145,408 38% $ 12,641 80% - -------------------------------------------------- -------------------------------------------------------------------- 8,511 -- -- 106,771 27 -- -- -- -- -- 87,090 22 -- -- -- -- -- 5,872 2 -- -- 12,265 -- 48 23,198 6 -- -- -- -- -- 20,374 5 3,205 20 - -------------------------------------------------- -------------------------------------------------------------------- $ 20,776 $ -- $ 48 $ 243,305 62% $ 3,205 20% - -------------------------------------------------- -------------------------------------------------------------------- $ 20,776 $ -- $ 48 $ 388,713 100% $ 15,846 100% - -------------------------------------------------- -------------------------------------------------------------------- $ 26,998 $ -- $ 826 $ 453,582 $ 17,212 ================================================== =====================================================================
The principal amount of loans pledged to secure public deposits and for other purposes required or permitted by law approximated $81 million at December 31, 1995. 29 ================================================================================ NOTE (5) ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses was as follows:
- ----------------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Balance, beginning of year.......................... $ 40,072 $ 42,800 $ 39,219 Provision for losses charged to expense........................................... 16,122 12,174 41,977 Loans charged off................................... (20,962) (17,734) (38,248) Recoveries on loans previously charged off....................................... 2,170 2,832 1,815 - ----------------------------------------------------------------------------------------------------- NET CHARGE-OFFS $ (18,792) $ (14,902) $ (36,433) - ----------------------------------------------------------------------------------------------------- Net effect of deconsolidation of Imperial Credit Industries, Inc. -- -- (1,963) - ----------------------------------------------------------------------------------------------------- BALANCE, END OF YEAR $ 37,402 $ 40,072 $ 42,800 =====================================================================================================
NOTE (6) PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
- --------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1995 1994 - --------------------------------------------------------------------------------------------- Land........................................... $ 1,765 $ 1,765 Buildings & improvements....................... 3,682 3,653 Leasehold improvements......................... 8,082 7,909 Furniture, fixtures & equipment................ 26,331 26,782 - --------------------------------------------------------------------------------------------- LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (23,857) (21,855) - --------------------------------------------------------------------------------------------- PREMISES AND EQUIPMENT, NET $ 16,003 $ 18,254 =============================================================================================
During the third quarter of 1994, the Company sold a Company owned facility recording a $1.6 million gain in the consolidated statement of income. NOTE (7) REAL ESTATE OWNED The following table presents real estate owned by type of project.
==================================================================================================== AT DECEMBER 31, (IN THOUSANDS) 1995 1994 - ---------------------------------------------------------------------------------------------------- Acquisition and land development............ $ 6,908 $ 15,010 Multi-family residential.................... 162 -- Single-family residential................... 1,325 14,579 - --------------------------------------------------------------------------------------------------- TOTAL RESIDENTIAL $ 8,395 $ 29,589 - --------------------------------------------------------------------------------------------------- Acquisition and land development............ 5,420 255 Retail facilities........................... 1,200 2,214 Office building............................. -- 3,388 - --------------------------------------------------------------------------------------------------- TOTAL NON-RESIDENTIAL $ 6,620 $ 5,857 - ---------------------------------------------------------------------------------------------------- REO, GROSS $ 15,015 $ 35,446 - ---------------------------------------------------------------------------------------------------- Less valuation allowance (4,686) (6,475) - ---------------------------------------------------------------------------------------------------- REO, NET $ 10,329 $ 28,971 =====================================================================================================
For the years ended December 31, 1995, 1994 and 1993, net real estate owned expense was comprised of the following:
==================================================================================== (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------ Net gain on sale of real estate owned $ (384) $ (446) $ (568) Valuation adjustments charged to operations............................. 4,547 5,291 4,839 Direct holding costs.................... 4,345 2,874 3,766 - ------------------------------------------------------------------------------------ NET REAL ESTATE OWNED EXPENSE $ 8,508 $ 7,719 $ 8,037 ====================================================================================
The following table sets forth information regarding the Company's valuation allowance for REO.
========================================================================== (IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------- Balance, beginning of year.............. $ 6,475 $ 3,084 $ 6,500 Provision for REO....................... 4,547 5,291 4,839 REO charged off......................... (6,336) (1,900) (8,255) - -------------------------------------------------------------------------- BALANCE, END OF YEAR $ 4,686 $ 6,475 $ 3,084 ==========================================================================
NOTE (8) INCOME PER COMMON SHARE Income per common share is computed based on the weighted average number of shares of common stock outstanding during each year after giving retroactive effect to stock dividends. Common stock equivalents are included in the calculations unless the effect is determined to be antidilutive or immaterial. The weighted average number of shares including common stock equivalents was 15,253,929 in 1995, 14,667,111 in 1994 and 14,200,887 in 1993. The weighted average number of shares used to compute income per common share was retroactively adjusted to reflect stock dividends as appropriate. On January 25, 1996, the Company declared an 8% stock dividend payable on February 23, 1996 to stockholders of record on February 15, 1996. In 1993, 1994 and 1995, the Company declared and paid 5% stock dividends. NOTE (9) DEPOSITS Interest expense on time certificates of deposit with balances of $100,000 or more amounted to $27.6 million in 1995, $13.8 million in 1994 and $12.0 million in 1993. Included in the Company's noninterest bearing demand deposits are deposits of customers in the real estate related services industry. While these deposits are noninterest bearing, the Company incurs customer service expenses in the form of payments to third parties who provide accounting, courier and other deposit related services for these customers. The costs associated with these deposits are included in "Customer services" in the accompanying consolidated statement of income. During 1995 and 1994, the average balances of such deposit accounts were $546.0 million and $541.7 million, respectively. 30 ================================================================================ NOTE (10) SHORT-TERM BORROWINGS The following table sets forth information with respect to Federal funds purchased and securities sold under agreements to repurchase.
================================================================================ (IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Balance, end of year.................... $126,500 $103,246 $113,753 Weighted average interest rate, end of year................................... 4.31% 6.22% 1.72% Average amount outstanding during the year................................... $ 19,121 $ 26,906 $ 80,798 Weighted average interest rate for the year................................... 5.57% 2.90% 2.33% Maximum amount outstanding at any month-end.............................. $156,930 $166,134 $148,032 ================================================================================
Securities subject to repurchase agreements are retained by the Company's custodian under written agreements that recognize the customers' interests in the securities. Interest expense associated with Federal funds purchased and securities sold under repurchase agreements totaled $1.1 million, $0.8 million and $1.9 million, respectively, for 1995, 1994 and 1993. The Company issues commercial paper which matures within 270 days. The following table sets forth information regarding the Company's outstanding commercial paper.
================================================================================ (IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Balance, end of year.................... $11,562 $11,903 $17,400 Weighted average interest rate, end of year................................... 5.73% 5.52% 3.06% Average amount outstanding during the year................................... $ 7,849 $13,890 $22,021 Weighted average interest rate for the year................................... 5.89% 3.50% 3.05% Maximum amount outstanding at any month-end.............................. $11,861 $19,758 $26,460 ================================================================================
The Bank is a designated depository for federal tax collections. These tax collections, as set forth in the following table, bear interest at 25 points below the Federal funds rate.
================================================================================ (IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Balance, end of year.................... $21,574 $75,770 $ 61,304 Weighted average interest rate, end of year................................... 4.48% 4.69% 2.60% Average amount outstanding during the year................................... $38,427 $57,383 $ 66,300 Weighted average interest rate for the year................................... 5.60% 3.92% 2.78% Maximum amount outstanding at any month-end.............................. $91,339 $89,211 $114,624 ================================================================================
In connection with the issuance of commercial paper, the Company had a back-up line of credit established with a bank for $15,000,000 at December 31, 1994. This back-up line of credit matured in 1995 and was not utilized during 1995 or 1994. NOTE (11) LONG-TERM BORROWINGS In 1979, the Company issued $16,500,000 of Floating Rate Notes ("the Notes") which mature on August 1, 1999. The Notes were convertible at the option of the holder at any time prior to August 1, 1986 into an equivalent principal amount of Debentures. At December 31, 1995, $4,824,000 in Notes and $1,082,000 in Debentures were outstanding and the current interest rates on the Notes and Debentures were 6.25% and 9.0%, respectively. At December 31, 1994, the outstanding Notes and Debentures totaled $5,943,000 and $2,210,000, respectively. The Notes and Debentures may be redeemed after August 1, 1989 at the option of the Company until maturity at a declining premium, plus accrued interest. The Company is required under the indenture to make equal annual mandatory sinking fund payments of $1,650,000 in each of the years 1992 through 1998 which will be sufficient to retire at par approximately 90% of the aggregate principal amount of Notes and Debentures prior to maturity. The 1995 sinking fund payment was made in the third quarter of the year. The Trust Indentures for the Notes and Debentures include provisions which restrict the sale or issuance of capital stock of the Bank, the payment of dividends and the disposition of assets. The Company was in compliance with the provisions of the respective Trust Indentures at December 31, 1995. NOTE (12) INCOME TAXES The income tax provision (benefit) in the accompanying consolidated statement of income is comprised of the following current and deferred amounts.
============================================================================ AT DECEMBER 1995 1994 1993 (IN THOUSANDS) - ---------------------------------------------------------------------------- Current: Federal............................... $ 8,426 $ 3,575 $ 490 State................................. 2,841 1,757 47 - ---------------------------------------------------------------------------- TOTAL $ 11,267 $ 5,332 $ 537 - ---------------------------------------------------------------------------- Deferred: Federal............................... 2,606 (2,041) (1,607) State................................. 1,275 (1,225) (128) - ---------------------------------------------------------------------------- TOTAL $ 3,881 $ (3,266) $(1,735) - ---------------------------------------------------------------------------- Total: Federal............................... 11,032 1,534 (1,117) State................................. 4,116 532 (81) - ---------------------------------------------------------------------------- Taxes (charged) credited to stockholders' equity................. (792) 2,104 -- - ---------------------------------------------------------------------------- Reversal of overaccrued taxes from prior years.......................... (907) -- -- - ---------------------------------------------------------------------------- Change in valuation allowance for deferred tax receivable.............. (2,260) (186) 669 - ---------------------------------------------------------------------------- TOTAL $ 11,189 $ 3,984 $ (529) ============================================================================
The amounts previously reported as the current and deferred portions of the tax provision for 1994 were revised based upon determinations made when the 1994 tax returns were filed. 31 ================================================================================ Such changes within the total provision occur because all tax alternatives available to the Company are not decided upon until all relevant tax data have been accumulated several months after year-end. During 1995, the Company recorded a $0.9 million reduction of taxes to reflect the finalization of prior years income tax issues. Current income taxes payable totaled $1,532,000 and $2,536,000, respectively, at December 31, 1995 and 1994. Of the $0.8 million in taxes charged directly to stockholders' equity, $1.9 million represents current taxes receivable associated with employee stock options offset by $2.7 million representing deferred taxes payable associated with the provisions of FAS 115. Deferred income taxes arise from differences on the timing of recognition of income and expense for tax and financial reporting purposes. The following table shows the primary components of the Company's net deferred tax receivable.
====================================================================================================================== At December 31, (In Thousands) 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- Components of the deferred tax receivable: Bad debt deduction....................................................... $ 14,694 $ 14,900 Deferred compensation.................................................... 3,618 2,589 Unrealized loss on securities available for sale......................... -- 670 State franchise taxes.................................................... 1,208 -- Goodwill amortization.................................................... 369 -- Other.................................................................... 308 329 ====================================================================================================================== TOTAL $ 20,197 $ 18,488 - ---------------------------------------------------------------------------------------------------------------------- Valuation allowance...................................................... -- (2,260) - ---------------------------------------------------------------------------------------------------------------------- DEFERRED TAX RECEIVABLE, NET OF VALUATION ALLOWANCE $ 20,197 $ 16,228 ====================================================================================================================== Components of the deferred tax liability: Prepaid expense.......................................................... (363) (292) Installment sale of real estate owned.................................... (56) (541) Depreciation............................................................. (283) (437) Deferred loan fees....................................................... (789) (332) Undistributed income of Imperial Credit Industries, Inc.................. (10,907) (8,319) Unrealized gain on securities available for sale......................... (2,218) -- Other.................................................................... (42) (54) - ---------------------------------------------------------------------------------------------------------------------- TOTAL (14,658) (9,975) - ---------------------------------------------------------------------------------------------------------------------- NET DEFERRED TAX RECEIVABLE $ 5,539 $ 6,253 ======================================================================================================================
The Company's net deferred tax receivable is supported by carry back and carry forward provisions of the tax laws as well as certain tax strategies which create future taxable income. Additionally, at December 31, 1995, the Company determined that its current profitability and projections of income indicate taxable income for 1996. The net change in the valuation allowance for deferred tax receivable in 1995 of $2.3 million is primarily related to taxable income reported in 1995 and to the 1996 projection of taxable income. The total income tax provision (benefit) differs from the amount computed by applying the statutory Federal income tax rate for the following reasons:
-------------------------------------------------------------- 1995 1994 1993 -------------------------------------------------------------- % OF % OF % OF PRETAX PRETAX PRETAX (IN THOUSANDS) AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME - ---------------------------------------------------------------------------------------------------------------------------------- Income tax provision at statutory rate...................... $ 12,028 35.0% $ 3,720 35.0% $ 179 34.0% (Reduction) increase in taxes resulting from: Tax exempt interest........................................ (146) (0.4) (169) (1.6) (353) (67.2) Cash surrender value of officers life insurance............ (220) (0.7) (357) (3.4) (362) (69.0) State franchise taxes, net of Federal income tax benefit... 2,537 7.4 715 6.8 (48) (9.1) Change in valuation allowance.............................. (2,260) (6.6) (186) (1.8) 669 127.4 Reversal of overaccrued taxes from prior year.............. (907) (2.6) -- -- -- -- Other...................................................... 157 0.5 261 2.5 (724) (137.9) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 11,189 32.6% $ 3,984 37.5% (529) (100.8)% ==================================================================================================================================
32 ================================================================================ NOTE (13) EMPLOYEE BENEFIT PLANS The Company has established the following employee benefit plans. IMPERIAL BANCORP PROFIT-SHARING PLAN: The Company has a noncontributory profit-sharing plan in which employees of the Company, Bank and certain subsidiaries are eligible to participate at year-end if they have been employed for at least 1,000 hours during the year. Investments and distribution of vested benefits to terminated participants are made in accordance with the contribution allocation form signed by the employee. Distributions are made at the option of the Company in either cash or common stock of the Company or a combination thereof. The Company contributed $2.0 million to the profit-sharing plan in 1995. There were no contributions to the plan in 1994. The trust created by the plan held 645,841 shares at December 31, 1995 and 833,005 shares at December 31, 1994. The shares held by the plan represented approximately 4.3% of the Company's total shares outstanding at December 31, 1995. IMPERIAL BANCORP EMPLOYEE STOCK OWNERSHIP PLAN: During 1990, the Company established an Employee Stock Ownership Plan ("ESOP") in which employees of the Company, Bank and certain subsidiaries are eligible to participate at year-end if they have been employed for at least 1,000 hours during the year. Distribution of vested benefits to terminated participants is made in common stock of the Company. In 1993, the ESOP received financing from a bank other than Imperial Bank as a $1,159,000 term note, payable in fourteen equal quarterly installments starting in the first quarter of 1994. The proceeds of this note were used to purchase the Company's common stock in the open market. Contributions from the Company and its subsidiaries were used to service the debt which was repaid in full on December 31, 1994. As a result, 134,348 shares of the Company's common stock were released to the plan during 1994. The Company adopted Statement of Position 93-6 "Employers" Accounting for Employee Stock Ownership Plans' on January 1, 1994 and as such recorded an additional $180,000 in compensation expense in 1994. There were no discretionary contributions to the plan during 1995. The trust created by the plan held 199,640 shares at December 31, 1995 and 209,897 shares at December 31, 1994. IMPERIAL BANCORP 401-K PLAN: The Company has a 401-K Plan in which all employees of the Company, Bank and certain subsidiaries may elect to enroll each January 1 or July 1 of every year provided that they have been employed for at least six months prior to the semi-annual enrollment date. Employees may contribute up to 14% of their salaries with the Company matching 33% of any contribution not to exceed 2% of the employee's salary. Effective January 1, 1996, the Company will match 50% of any employee contribution, not to exceed 4% of the employee's salary. Only active 401-K Plan members at December 31 of any year are eligible to receive Company matching contributions for that year. The Company's matching contributions under the 401-K Plan approximated $430,000 in 1995, $403,000 in 1994 and $336,000 in 1993. Distributions of employee and matching contributions to terminated participants are made in accordance with the contribution allocation form signed by the employee in either common stock of the Company or cash or a combination thereof. The trust created by the plan held 298,324 shares at December 31, 1995 and 294,842 shares at December 31, 1994. SUPPLEMENTAL COMPENSATION PLANS DEFERRED COMPENSATION PLAN: In 1992, the Company adopted a Deferred Compensation Plan ("the 1992 Plan") in order to provide specified benefits to certain key employees and directors. Participants are allowed to defer portions of their compensation each plan year, subject to a minimum and a maximum dollar amount of deferral. In any plan year, the Company will make a matching contribution of not less than 10% or more than 50% of the participants' deferral for that year. The exact ratio will be determined by a formula based on return on stockholders' equity. The matching contribution ratio as calculated was 40% for 1995 and 10% for 1994. Each participant's "account balance" earns interest at a rate established annually (Moody's Seasoned Corporate Bond Rate). The rates for 1995 and 1994 were 8.94% and 7.25%, respectively. The rate for 1996 will be 7.30%. Effective January 1, 1996, the Company adopted a second Deferred Compensation Plan ("the 1996 Plan"), with features similar to the 1992 Plan. The 1996 Plan allows participants to alter their initial deferral percentage in subsequent plan years which is not allowable under the 1992 Plan. In addition, participants in the 1992 Plan will be permitted to transfer compensation deferred under the 1992 Plan to the 1996 Plan when the 1992 Plan expires in 1999. DEATH BENEFIT ONLY PLAN: The Death Benefit Only Plan ("DBO Plan") was established in 1986 to provide certain death benefits to the Company's then Chairman and Vice Chairman, so long as they remain in the employ of the Company. The DBO Plan provides for lump sum payments to the estate of each individual in amounts ranging from $2.5 million in year one to $5.1 million in year fifteen, depending on the time of death. The DBO Plan was funded by the Company through the purchase of life insurance for which it is the beneficiary. The benefits specified by the DBO Plan are accrued over 15 years (expected mortality). The DBO Plan was designed such that, if the assumptions made with respect to mortality experience, policy dividends and other factors are realized, the Company will recover all costs including life insurance premiums and benefits paid by it, plus a factor for the use of its money. As a result of the death of George M. Eltinge, then Chairman of the Board, on August 12, 1994, his estate received the benefit from the DBO Plan during 1994. The Company recorded a $935,000 pre-tax compensation expense during the year related to this death benefit, net of life insurance proceeds in the amount of $741,000 received in 1994. The after-tax effect of funding the death benefit obligation approximated $225,000. 33 ================================================================================ Excluding the expense related to the death of George M. Eltinge, as described above, the Company's net expense (benefit) of funding both the deferred compensation and death benefit only plans amounted to $767,000, $620,000 and ($195,000), respectively, for the years ended December 31, 1995, 1994 and 1993. STOCK OPTION PLAN: The Company has two stock option plans for directors and employees. Options are granted at the market price of the Company's common stock at the date of grant, and become exercisable immediately for all directors. Options which have been granted to employees are exercisable at either 25% or 16.7% per year beginning one year after the date of grant. A summary of changes in outstanding options is as follows:
======================================================================== (IN THOUSANDS) 1995* 1994* - ------------------------------------------------------------------------ Options outstanding, beginning of year.. 1,986,075 2,455,397 Options granted......................... 130,679 116,064 Options exercised....................... (451,517) (563,641) Options cancelled....................... (11,921) (21,745) - ------------------------------------------------------------------------ OPTIONS OUTSTANDING, END OF YEAR 1,653,316 1,986,075 ========================================================================
There were 164,635* options available for future grants at December 31, 1995. Information as to stock option activity and prices of the shares is as follows:
======================================================================== NUMBER OF OPTION PRICE SHARES* PER SHARE* - ------------------------------------------------------------------------ Shares under option at: December 31, 1995.................... 1,653,316 $ 6.00 - $20.60 December 31, 1994.................... 1,986,075 $ 6.00 - $13.44 Options exercisable at: December 31, 1995.................... 1,212,681 $ 6.00 - $13.44 December 31, 1994.................... 1,449,585 $ 6.00 - $12.79 Options exercised during the year: December 31, 1995.................... 451,517 $ 6.76 - $11.33 December 31, 1994.................... 563,641 $ 6.76 - $ 8.00 ========================================================================
*Adjusted for stock dividends declared and paid in the first quarters of 1992 - 1996. The Company recorded an additional $3.4 million in 1995 and $4.2 million in 1994 of stockholdersO equity from the exercise of employee stock options. The Company receives a tax deduction from the exercise of non-qualified stock options for the difference between the option price and the market value of the shares issued. During 1995, $1.5 million of common stock was exchanged and retired in conjunction with the exercise of stock options. Common stock retirements were immaterial in 1994. The tax benefit associated with shares exercised which was recorded as a component of stockholdersO equity approximated $1.9 million in 1995 and $1.5 million in 1994. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS 123"). FAS 123 applies to all transactions in which the Company acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based on the Company's common stock price, except for the Employee Stock Ownership Plan. A new method of accounting for stock based compensation arrangements with employees is established by FAS 123. The new method is based on the fair value method rather than the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). FAS 123 does not require companies to adopt the new fair value method for purposes of preparing their basic financial statements. Entities are allowed to either continue to use the APB 25 method or adopt the fair value method set forth in FAS 123. Companies that do not adopt the new fair value method in FAS 123 for purposes of preparing their basic financial statements are required to include pro-forma disclosures in the notes to the basic financial statements. The pro-forma disclosures should include the impact of the fair value method on net income and income per share as if FAS 123 had been adopted. FAS 123 may be adopted for fiscal years beginning after December 31, 1995. The impact on the Company of adopting FAS 123 would not be material. The Company has decided not to adopt the fair value standards set forth in FAS 123 for purposes of preparing its basic financial statements. NOTE (14) LOANS TO OFFICERS Pursuant to an Employee Loan Program and under by-laws approved by stockholders in 1984, the Company had $4,238,000 and $4,482,000 in loans to certain officers and directors, outstanding at December 31, 1995 and December 31, 1994, respectively. With respect to loans made to the Company's Chairman, one loan matures at the earlier of his termination of employment or January 1, 2002 and is secured by his interest in the DBO Plan (note 13). A second loan to the Company's Chairman is unsecured and matures at the earlier of his termination of employment or August 15, 2000. During 1995 additional loans made to officers were $65,000 and payments received were $309,000. Loans to other officers are unsecured, are due in seven equal annual principal payments or on demand, and mature at the earlier of each individual's termination of employment or August 15, 2000. These loans accrue interest at a rate which is equal to 60% of the average of the one year and three year Treasury securities rates as published in the Wall Street Journal at the end of each calendar year, to be fixed at that rate for the coming year. The rate was 4.5% for 1995 and will be 3.1% for 1996. The difference between the rate on the loans and the market rate is recorded as compensation expense. NOTE (15) COMMITMENTS AND CONTINGENT LIABILITIES FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financ- 34 ================================================================================ ing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, interest rate cap and floor contracts, interest rate swaps, options, and forward and financial futures contracts. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Commitments to extend credit, standby letters of credit and financial guarantees only represent exposure to off-balance sheet risk in the event the contract is drawn upon and the other party to the contract defaults. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. The Company does not anticipate any material losses as a result of these transactions. For interest rate cap, floor and swap transactions, forward and financial futures contracts, and options written, the contract or notional amounts do not represent exposure to credit loss. Risk originates from the inability of counterparties to meet the terms of the contracts and from market movements in securities' values and interest rates. It is currently estimated that the related credit risk of these investments is an immaterial percentage of the notional amounts. The Company controls the credit risk of its interest rate cap, floor and swap agreements and forward and financial futures contracts through credit approvals, limits and monitoring procedures. A summary of the contract or notional amounts of significant commitments and contingent liabilities is as follows:
========================================================================== AT DECEMBER 31, (IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------- Commitments to extend credit................... $ 840,340 $ 536,218 Standby letters of credit...................... 82,115 61,336 Commercial letters of credit................... 55,633 64,992 When-issued securities......................... 1,794 14,392 Asset/liability management: Interest rate swaps............................ 300,000 500,000 Linked futures contracts....................... -- 801,000 Linked interest rate caps...................... -- 199,000 Interest rate caps purchased................... 1,300,000 1,800,000 Interest rate floors purchased................. 500,000 -- Trading contracts: Spot and forwards to purchase foreign currency. 51,655 785 Spot and forwards to sell foreign currency..... 46,583 785 Futures and forwards to purchase precious metals........................................ 14,213 6,759 Futures and forwards to sell precious metals... 14,253 14,891 ==========================================================================
The Company's net interest margin is sensitive to sudden changes in interest rates. In addition, the Company's interest-earning assets, primarily its loans are tied to the Prime Rate, an index which tends to react more slowly to changes in market rates than other money market indices such as LIBOR (London Interbank Offered Rate). The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's Prime based assets and LIBOR correlated liabilities. In October 1993, the Company's expectation was that interest rates would gradually rise in 1994. Concurrently, two major banks lowered their Prime Rate causing some degree of concern that interest rates could fall in the short term. An analysis of the historic relationship between the Prime Rate and LIBOR showed that the spread between the indices narrows in an environment of rising interest rates and widens in a falling rate environment. Due to the level of asset sensitivity and the potential for a narrowing of the Prime Rate and LIBOR spread in late 1993, the Company responded by selecting $500 million of Prime based assets whose characteristics were to be synthetically altered to create an asset with reduced interest rate sensitivity that was insulated against a narrowing of the Prime Rate and LIBOR spread for a period of two years. To achieve this goal, the Company entered into a series of derivative financial contracts in late 1993 and early 1994 to establish a balance sheet position which would provide some protection against a decrease in interest rates while providing an increasing rate asset whose characteristics would meet the objectives of the Company's asset liability policy. The purpose of the instruments was to synthetically alter the sensitivity of a portion of the Company's Prime based loan portfolio while retaining some positive asset sensitivity in the event of an increase in interest rates. The Company entered into interest rate swaps in which it was committed to pay the daily average of the Prime Rate less a designated spread and receive three month LIBOR. The swaps were intended to reduce the potential compression of the Company's net interest margin in the event that LIBOR rose faster than Prime. The interest rate swaps had a notional value of $200 million at December 31, 1995 and mature in the first quarter of 1996. The swaps contained embedded option contracts with strike prices which increased at the rate of 25 basis points per quarter which capped the rate received on the interest rate swap. The embedded options were intended to provide a limited degree of protection against a narrowing of the net interest margin in the event of a decrease in short-term interest rates while providing an increasing LIBOR indexed asset to retain some asset sensitivity. Also in 1994, the Company entered into a similar transaction consisting of interest rate swaps with a notional value of $300 million of which a notional value of $100 million was outstanding at December 31, 1995. In conjunction with these interest rate swaps, the Company sold exchange traded options to cap the rate received on the swaps at escalating strike prices associated with the options. These packaged options were stacked and expired at the rate of $300 million per quarter during the first three quarters of 1995 with the final $100 mil- 35 ================================================================================ lion expiring in the fourth quarter of 1995. These linked option expirations mirrored the interest rate resets of the linked interest rate swaps which matured in the fourth quarter of 1995 and the first quarter of 1996. Using both swaps with embedded options and linked exchange traded options to yield the same result, the Company utilized the combination which provided the most economical method of accomplishing the synthetic alteration. The interest rate swaps and linked options, as synthetic alterations of the Company's interest received on its loan portfolio, are recorded "as settled" (or according to the settlement accounting method) with the resulting gains or losses recorded as an adjustment to interest income. As interest rates continued to rise more quickly than anticipated in 1994 and other market related events caused a deterioration in the values of derivative instruments, the strike prices of the escalating linked options were exceeded by LIBOR. To prevent further negative impact on interest income from the interest rate swaps with both embedded and linked options, the Company purchased options during the second half of 1994 with terms similar to the linked options and embedded options thus effectively capping the Company's exposure to further losses. These options expired during 1995 in conjunction with the linked and embedded options discussed above. The combined economic impact of the Company's derivative financial instruments discussed above was a $7.2 million reduction in net interest income and a 35 basis point reduction in net interest margin for the year ended December 31, 1995. The impact of these instruments included the recognition of a $2.3 million premium received on the linked written option which had been deferred until the final maturity of these options in the fourth quarter of 1995. The impact of these instruments was $4.9 million and 27 basis point reductions in net interest income and net interest margin, respectively, for the year ended December 31, 1994. The cash requirement and negative impact on net interest income associated with the derivative transactions would be $0.3 million if interest rates remain unchanged through the final maturity of these instruments in early 1996. Although the Company's balance sheet remains asset sensitive, management had fewer concerns about potential compression of the Company's interest rate margin in early 1995 then it did in late 1993 and early 1994. During 1995, concerns of the spread between the Prime Rate and LIBOR narrowing were partially alleviated as the Prime Rate moved toward the characteristics of a retail rate and away from those of a wholesale rate. This was evidenced by the interest rate swap markets in 1995 as the spread between Prime and LIBOR increased from approximately 217 basis points to 250 basis points. The Company developed new strategies to protect both net interest income and net interest margin from significant movements in interest rates both up and down. These strategies involve purchasing interest rate floors and caps with strike prices generally adjusting quarterly and approximately 200 basis points below or above (depending on the instrument) market rates at the date of purchase. In response to its strategy and the general asset sensitive nature of the balance sheet, the Company purchased interest rate floors in the first quarter of 1995 to protect against a drop in interest rates. The interest rate floors, with a notional value of $500 million at December 31, 1995, mature in the third quarter of 1997. The floors provide protection to the Company in the event that the three month LIBOR drops below the strike price of 4.0% associated with the floor. The deferred gain of the floors approximated $1.6 million at December 31, 1995. During the second and third quarters of 1995, the Company purchased both exchange traded and over the counter interest rate caps to protect its fixed rate loans from an increase in interest rates which would narrow the Company's net interest margin. The exchange traded caps had a notional value of $1.2 billion at December 31, 1995 and mature at the rate of $400 million per quarter for the first, second and third quarters of 1996. The over the counter caps had a notional value of $100 million at December 31, 1995. These caps reset quarterly in March, June and September 1996 and mature in December 1996. All of the caps provide protection to the Company in the event that the three month LIBOR rises above the strike prices of the caps which range from 8.0% to 8.5%. The deferred loss of the caps approximated $180,000 at December 31, 1995. In January 1996, the Company purchased additional interest rate caps with a notional value of $1.0 billion. The caps provide protection in the event that the three month LIBOR increases above the 6.5% strike price of the caps. These caps mature at the rate of $500 million per quarter during the fourth quarter of 1996 and the first quarter of 1997. 36 ================================================================================ The following table summarizes the Company's derivative instruments for the years ended December 31, 1995 and 1994.
- ------------------------------------------------------------------------------------------------------------------------------------ NOTIONAL WEIGHTED DECEMBER 31, 1995 (IN THOUSANDS) AMOUNT AVERAGE RATE TERMS AND MATURITY - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS WITH EMBEDDED OPTIONS Pay - Prime less a designated spread............. $ 200,000 6.3% First quarter 1996 Receive - 3 month LIBOR.......................... 200,000 4.8 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS SYNTHETICALLY ALTERED BY LINKED EXCHANGE TRADED OPTIONS Pay - Prime less a designated spread............. $ 100,000 6.7% First quarter 1996 Receive - 3 month LIBOR/(1)/..................... 100,000 4.9 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE CAPS PURCHASED Exchange traded.................................. $1,200,000 n/a $400,000 maturing through third Over the counter................................. 100,000 n/a Resets quarterly in first, second and third quarter 1996; matures fourth quarter 1996 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE FLOORS PURCHASED Over the counter................................. $ 500,000 n/a Third quarter 1997 - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1994 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS WITH EMBEDDED OPTIONS Pay - Prime less a designated spread............. $ 200,000 4.8% First quarter 1996 Receive - 3 month LIBOR.......................... 200,000 3.9 Embedded options - $200,000 expiring per quarter through fourth quarter 1995 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS SYNTHETICALLY ALTERED BY LINKED EXCHANGE TRADED OPTIONS Pay - Prime less a designated spread............. $ 300,000 5.1% Fourth quarter 1995 - First quarter 1996 Receive - 3 month LIBOR /(1)/.................... 300,000 3.9 Linked exchange traded options................... 1,000,000 n/a $200,000 expiring per quarter through third quarter 1995; $100,000 expiring per quarter through fourth quarter 1995 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE CAPS PURCHASED Exchange traded.................................. $1,000,000 n/a $300,000 expiring per quarter through third quarter 1995; $100,000 million expiring fourth quarter 1995 Over the counter................................. 800,000 n/a $200,000 expiring per quarter through fourth quarter 1995 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Weighted average rate reflects impact of linked exchange traded options. ================================================================================ 37 ================================================================================ The table below illustrates the interest rates and, if extended, the future cash requirements associated with the CompanyOs derivative instruments under various interest rate scenarios.
- ---------------------------------------------------------------------------------------------------------------------------------- INTEREST RATES/CASH REQUIREMENTS FOR DERIVATIVE INSTRUMENTS/(1)/ (DOLLARS IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------------------------------- PERIOD IF THEN IF THEN NOTIONAL AMOUNT FROM/(5)/ TO PAY/(2)/ LIBOR LESS THAN/(3)/ RECEIVE LIBOR MORE THAN RECEIVE - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS WITH LINKED AND EMBEDDED OPTIONS $100,000 11/15/95 2/15/96 P-2.49 5.25% LIBOR 5.25% 5.25% 100,000 12/1/95 3/1/96 P-2.54 5.40% LIBOR 5.40% 5.40% 100,000 12/21/95 3/20/96 P-2.01 5.50% LIBOR 5.50% 5.50% - ---------------------------------------------------------------------------------------------------------------------------------- EXCHANGE TRADED OPTIONS PURCHASED/(4)/ $100,000 11/15/95 2/15/96 n/a 8.50% -0- 8.50% LIBOR-8.50% 100,000 12/1/95 3/1/96 n/a 8.47% -0- 8.47% LIBOR-8.47% 100,000 12/21/95 3/20/96 n/a 8.49% -0- 8.49% LIBOR-8.49% - ----------------------------------------------------------------------------------------------------------------------------------
(1) Table does not reflect the impact of premiums received on linked options and paid for purchased options. (2) "P" reflects the Prime Rate which represents the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks. (3) "LIBOR" reflects the London Interbank Offered Rate which is the average of interbank offered rates for dollar deposits in the London market based on quotations at five major banks. (4) Purchased options are not exercised if LIBOR does not exceed the strike price; thus the cash received is not applicable. (5) Represents expiration dates of options. ================================================================================ As of December 31, 1995, SBA loans serviced for others approximated $36.0 million. In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers of loans. Under certain circumstances, loans must be repurchased if there has been a breach of representations or warranties. The Company's wholly owned subsidiary, Imperial Trust Company, a California licensed trust company, had total assets under management of approximately $6.8 billion and $5.5 billion at December 31, 1995 and 1994, respectively. LEASE COMMITMENTS: The Company leases the land and buildings for certain of its premises under noncancelable operating leases which expire in various years to 2012. Lease payments net of sublease income charged to net occupancy expense in the accompanying consolidated statement of income for the years ended December 31, 1995, 1994 and 1993 amounted to approximately $6,609,000, $7,774,000 and $8,339,000, respectively. Aggregate minimum rental commitments under these leases net of $3,197,000 of income to be received from noncancelable subleases are as follows:
- ------------------------------------------ (IN THOUSANDS) AMOUNTS - ------------------------------------------ 1996......................... $ 6,651 1997......................... 5,769 1998......................... 4,846 1999......................... 4,394 2000......................... 3,194 Thereafter................... 21,592 - ------------------------------------------ TOTAL $46,446 ==========================================
Certain of the aforementioned leases contain provisions such that the Company may at its option renew the leases at a specified rental for a specified period. Certain of the leases also contain provisions such that the Company must pay all property taxes on the premises or any increase in property taxes after specified years. In addition, the Company has entered into long-term agreements for certain data processing and computer software products and services. These agreements expire in various years to 2002 and contain provisions that allow renewal at a specified amount for a specified period. Total expense from these agreements amounted to $2,911,000 in 1995, $3,836,000 in 1994 and $3,061,000 in 1993 and are included in data processing in the consolidated statement of income. Aggregate minimum contractual payments under these agreements are as follows:
- ----------------------------------------- (IN THOUSANDS) AMOUNTS - ----------------------------------------- 1996............ $ 1,384 1997............ 1,515 1998............ 1,641 1999............ 1,701 2000............ 1,706 Thereafter...... 2,701 - ----------------------------------------- TOTAL $10,648 =========================================
LEGAL ACTION: The Company and its subsidiaries are defendants in various lawsuits arising from the normal course of business. Management believes, based upon the opinion of legal counsel, that the ultimate resolution of the pending litigation will not have a material effect upon the financial position or future results of operations of the Company. 38 ================================================================================ NOTE (16) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Values of Financial Instruments" ("FAS 107") requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate. Such instruments include securities, loans receivable, time deposits and various off-balance sheet items. Because no market exists for a significant portion of the Company's loan portfolio, fair value estimates are based on judgments regarding credit risk, investor expectations of future economic conditions, normal cost of administration of these instruments and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the value of the Company's fiduciary contracts for trust services and the value of the Company's investment in subsidiaries are not considered financial instruments; therefore, their values are not incorporated into the fair value estimates. Additionally, there is a value in the Company's core deposit base which is unrelated to the interest rate assumptions used to compute the fair value estimates. Such demand deposits are a significant source of low cost funds to the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS: The carrying values reported in the balance sheet approximate fair values due to the short-term nature of the assets. SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE AND TRADING ACCOUNT SECURITIES: Fair values are based on bid prices and quotations published and/or received from securities dealers. LOANS HELD FOR SALE: Fair value is based on quoted market prices and/or forward delivery contracts. LOANS: The fair value of the loan portfolio is generally estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such instruments. Expected future cash flows are estimated using maturity dates for performing loans, with cash flows on nonaccrual loans estimated on an individual basis. For nonaccrual and potential problem loans secured by real property, estimated fair value has been determined on an individual basis, considering the value of the collateral as determined by a current third party appraisal and estimated foreclosure, holding and selling costs. For consumer loans, market rates of interest are based on current market rates charged for these loans. DEPOSITS: The fair values for demand, savings and money market accounts are estimated at the amount payable on demand. Fair values for certificates of deposit, both under and over $100,000, are estimated by discounting the expected cash flows at current market rates over expected maturities. SHORT-TERM BORROWINGS: The carrying amounts of Federal funds purchased, borrowings under repurchase agreements, federal tax collection accounts and commercial paper approximate their fair values, due to the short-term nature of the borrowings. LONG-TERM BORROWINGS: Fair value is estimated using market prices or by discounting the expected future cash flows at market rates for similar instruments trading currently. OFF-BALANCE SHEET INSTRUMENTS: Fair values of the Company's interest rate swaps and caps and forward commitments are based on quoted market prices. Fair values of letters of credit and commitments to extend credit are based on fees currently charged to enter into similar agreements. 39 ================================================================================ The estimated fair values of the Company's financial instruments are as follows: - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AT DECEMBER 31, (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL ASSETS: Cash and due from banks............................................. $ 242,018 $ 242,018 $ 168,626 $ 168,626 Trading account assets.............................................. 40,050 40,050 74,028 74,028 Securities available for sale....................................... 295,312 295,312 388,249 388,249 Securities held to maturity......................................... 4,975 4,975 6,146 6,146 Federal funds sold and securities purchased under resale agreements. 425,300 425,300 276,500 276,500 Loans held for sale................................................. 2,648 2,842 768 768 Loans: Commercial loans................................................. 1,238,148 1,256,580 919,610 905,625 Real estate loans................................................ 453,582 444,390 453,999 437,464 Consumer loans................................................... 7,617 7,607 1,537 1,525 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans $ 1,699,347 $ 1,708,577 $ 1,375,146 $ 1,344,614 - ------------------------------------------------------------------------------------------------------------------------------------ Less allowance for loan losses................................... $ (37,402) $ -- $ (40,072) $ -- - ------------------------------------------------------------------------------------------------------------------------------------ Net loans $ 1,661,945 $ 1,708,577 $ 1,335,074 $ 1,344,614 - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL LIABILITIES: Deposits: Demand........................................................... $ 1,145,720 $ 1,145,720 $ 928,728 $ 928,728 Savings.......................................................... 15,708 15,708 27,207 27,207 Money market..................................................... 435,674 435,674 491,090 491,090 Time deposits - under $100,000................................... 227,262 227,722 168,044 167,371 Time deposits - over $100,000.................................... 539,252 539,687 344,641 343,759 Short-term borrowings............................................... 159,636 159,636 190,919 190,919 Long-term borrowings................................................ 5,906 5,975 8,153 7,935 - ------------------------------------------------------------------------------------------------------------------------------------ OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: ASSET/LIABILITY MANAGEMENT: Interest rate swaps/(1)/............................................ $ -- $ (166) $ -- $ (7,631) Interest rate caps written/(1)/..................................... -- -- -- (1,325) Interest rate futures contracts/(1)/................................ -- -- -- (5,016) Interest rate caps purchased/(1)/................................... (180) -- -- 1,882 Interest rate floors purchased/(1)/................................. 1,606 170 -- -- TRADING CONTRACTS: Spot and forwards to purchase foreign currency...................... (136) (136) -- -- Spot and forwards to sell foreign currency.......................... 520 520 -- -- Futures and forwards to purchase precious metals.................... (7) (7) (2) (2) Futures and forwards to sell precious metals........................ 26 26 (15) (15) CREDIT INSTRUMENTS: Commitment to extend credit......................................... -- (12,605) -- (8,043) Standby letters of credit........................................... -- (1,232) -- (920) Commercial letters of credit........................................ -- (834) -- (975) - ------------------------------------------------------------------------------------------------------------------------------------ (1) Estimated fair value represents net unrealized (losses) gains. ====================================================================================================================================
NOTE (17) RESTRICTIONS ON CASH BALANCES Federal Reserve Board regulations require that the Bank maintain certain reserve balances on deposit with the Federal Reserve Bank. Cash balances maintained to meet reserve requirements are not available for use by the Bank or the Company. During 1995, the Bank maintained average reserves of approximately $66.7 million. 40 ================================================================================ NOTE (18) REGULATORY MATTERS Since the third quarter of 1993, the Bank operated under a revised Memorandum of Understanding ("MOU") with the Federal Deposit Insurance Corporation ("FDIC") and the California State Banking Department ("State") which required a reduction in classified assets, prior written approval of dividends of the Bank by the FDIC and the State and a minimum leverage ratio of 6.5%. The FDIC and the State terminated the MOU in the fourth quarter of 1995. NOTE (19) IMPERIAL CREDIT INDUSTRIES, INC. At December 31, 1994, the Company owned 3,867,368 shares, or 40.2%, of the common stock of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII) ("ICII"). During 1995, ICII common stock was split at the ratio of three new shares for every two shares outstanding. The Company received an additional 1,933,684 shares increasing its total shares held to 5,801,052 at December 31, 1995. In February 1996, ICII declared and paid a 10% stock dividend which increased shares held by the Company to approximately 6,381,000. The Company's ownership percentage has dropped slightly from 40.2% to 40.0% as a result of the exercise of employee stock options at ICII. After the 10% stock dividend, the Company carried its investment in ICII at an equivalent book value of $5.66 per share. On February 29, 1996, the market value of ICII common stock was $25.38, representing a pre-tax unrealized gain of the Company's investment of over $125 million. On February 26, 1996, ICII announced its plans to offer up to 2,000,000 shares in an underwritten public offering. This offering could dilute the Company's ownership percentage to 35.3% if all of the proposed shares are sold. The Company has retained the services of an investment banking firm. Among other things, the role of the firm will be to assist management in evaluating strategies related to the Company's investment in ICII which maximize shareholder value. As the Company does not exercise significant control over the operations of ICII, the results of ICII operations are accounted for in the Company's financial statements as an equity investment. The equity investment in ICII is carried at cost adjusted for equity in undistributed income. Transactions between ICII and the Company occur during the normal course of business. All transactions are carried out at substantially the same terms as those prevailing at the same time for comparable transactions with others. The following represents summarized financial information with respect to the operations of ICII.
============================================================================== (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------ Mortgage loans held for sale............ $ 948,006 $ 263,807 $1,238,007 Total assets............................ 2,515,091 1,420,409 1,572,663 Deposits................................ 1,094,824 934,621 1,001,468 Total liabilities....................... 2,424,200 1,344,536 1,504,411 Total equity............................ 90,891 75,873 68,253 - ------------------------------------------------------------------------------ Total revenues.......................... 90,759 77,954 72,945 Total expenses.......................... 66,630 66,664 41,472 Income before taxes & extraordinary item 24,130 11,290 31,473 Extraordinary item...................... -- 919 -- Net income.............................. 14,193 7,524 18,418 ==============================================================================
41 ================================================================================ NOTE (20) IMPERIAL BANCORP (PARENT COMPANY ONLY)
- ------------------------------------------------------------------------------------------------------------------------------------ CONDENSED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------------------------ AT DECEMBER 31, (IN THOUSANDS, EXCEPT SHARE DATA) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash......................................................................................................... $ 800 $ 226 Securities available for sale (at fair value at December 31, 1995 and 1994).................................. 16,442 15,106 Loans to officers............................................................................................ 4,238 4,482 Investments in subsidiaries: Imperial Bank............................................................................................. 216,417 190,120 Other subsidiaries........................................................................................ 538 412 Other assets................................................................................................. 14,267 13,574 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $252,702 $223,920 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper............................................................................................. $ 11,562 $ 11,903 Long-term borrowings......................................................................................... 5,906 8,153 Other liabilities............................................................................................ 6,998 6,088 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $ 24,466 $ 26,144 - ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Common stock, no par 50,000,000 shares authorized; 13,821,125 shares at December 31, 1995 and 12,832,609 shares at December 31, 1994 issued and outstanding....................................................... 130,780 117,144 Subsidiaries' unrealized gain (loss) on securities available for sale, net of tax......................... 2,747 (847) Retained earnings......................................................................................... 94,709 81,479 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $228,236 $197,776 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $252,702 $223,920 ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ CONDENSED STATEMENT OF INCOME - ------------------------------------------------------------------------------------------------------------------------------------ FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue: Dividends - Imperial Bank and Imperial Bank Realty Company, Inc............................. $ 2,367 $ 4,610 $ 2,669 Interest income: Securities available for sale............................................................ 694 456 334 Securities purchased under resale agreements from Imperial Bank.......................................................................... 12 -- 10 Loans to officers........................................................................ 199 179 219 Other income................................................................................ 16 25 17 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUE $ 3,288 $ 5,270 $ 3,249 - ------------------------------------------------------------------------------------------------------------------------------------ Expense: Salary...................................................................................... 137 198 244 Other employee benefits/(1)/................................................................ (206) 1,284 (350) Interest expense: Commercial paper......................................................................... 463 487 671 Long-term borrowings..................................................................... 528 625 722 Other expense............................................................................... 535 518 488 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL EXPENSE $ 1,457 $ 3,112 $ 1,775 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes..................................................................... 1,831 2,158 1,474 Applicable income tax benefit.................................................................. (490) (1,472) (926) - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARIES............................ 2,321 3,630 2,400 - ------------------------------------------------------------------------------------------------------------------------------------ Equity in undistributed income (loss) of subsidiaries.......................................... 20,856 3,013 (1,346) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 23,177 $ 6,643 $ 1,054 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes the accrual for benefit costs less the benefit associated with the policies funding the plan (see Note 13). ================================================================================ 42 ================================================================================ NOTE (20) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income.............................................................................. $ 23,177 $ 6,643 $ 1,054 Adjustments for non-cash charges (credits): Undistributed (income) loss of subsidiaries.......................................... (20,856) (3,013) 1,346 Net change in other liabilities(1)................................................... 798 235 2,219 Net change in other assets........................................................... (693) 1,603 (1,190) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,426 $ 5,468 $ 3,429 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sale of securities available for sale..................................... 188,630 217,179 127,597 Purchase of securities available for sale............................................... (189,966) (223,952) (135,929) Net change in securities purchased under resale agreements.............................. -- -- 3,910 Net change in loans made to officers.................................................... 244 3,579 258 - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES $ (1,092) $ (3,194) $ (4,164) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net change in commercial paper.......................................................... (341) (5,497) 1,860 Retirement of long-term borrowings...................................................... (2,247) (1,713) (1,386) Advances from subsidiaries.............................................................. -- 990 -- Net proceeds from exercise of employee stock options.................................... 1,839 3,968 298 Other................................................................................... (11) (10) (10) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $ (760) $ (2,262) $ 762 - ------------------------------------------------------------------------------------------------------------------------------------ NET CHANGE IN CASH $ 574 $ 12 $ 27 - ------------------------------------------------------------------------------------------------------------------------------------ CASH, BEGINNING OF YEAR $ 226 $ 214 $ 187 - ------------------------------------------------------------------------------------------------------------------------------------ CASH, END OF YEAR $ 800 $ 226 $ 214 - ------------------------------------------------------------------------------------------------------------------------------------ (1) The Parent Company recorded a tax benefit for its employee stock options of $153,000 in 1995 and $1,478,000 in 1994. This represents the only significant non-cash transaction recorded during 1995, 1994 and 1993. ====================================================================================================================================
In 1995, 1994 and 1993, the Parent Company paid $1,022,000, $1,252,000 and $1,466,000 in interest, respectively. 43 ================================================================================ INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS IMPERIAL BANCORP: We have audited the accompanying consolidated balance sheet of Imperial Bancorp and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Imperial Bancorp and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, Imperial Bancorp and subsidiaries adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994. KPMG PEAT MARWICK LLP Los Angeles, California January 25, 1996 44 ================================================================================ SELECTED STATISTICAL INFORMATION SECURITIES The following table shows the maturities of securities held to maturity and securities available for sale at December 31, 1995 and their weighted average yields.
- ------------------------------------------------------------------------------------------------------------------ (DOLLARS IN MILLIONS) MATURING - ------------------------------------------------------------------------------------------------------------------ LESS THAN 1 YEAR MORE THAN 1 - 5 YEARS MORE THAN 5 - 10 YEARS - ------------------------------------------------------------------------------------------------------------------ AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ------------------------------------------------------------------------------------------------------------------ Securities held to maturity: Industrial development bonds........ $ -- -- $ -- -- $ 4.4 6.8% Other securities.................... -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ TOTAL $ -- -- $ -- -- $ 4.4 6.8% - ------------------------------------------------------------------------------------------------------------------ Securities available for sale: U.S. Treasury and federal agencies.. $ 34.8 4.2% $ 0.6 5.9% $ 16.0 7.1% Mutual funds........................ 43.0 5.7 -- -- -- -- Other securities.................... -- -- -- -- 0.5 3.5 - ------------------------------------------------------------------------------------------------------------------ TOTAL $ 77.8 5.0% $ 0.6 5.9% $ 16.5 7.0% ================================================================================================================== - ---------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) MATURING - ---------------------------------------------------------------------------------- MORE THAN 10 YEARS TOTAL - ---------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD - ---------------------------------------------------------------------------------- Securities held to maturity: Industrial development bonds........ $ -- -- $ 4.4 6.8% Other securities.................... 0.6 -- 0.6 -- - ---------------------------------------------------------------------------------- TOTAL $ 0.6 -- $ 5.0 6.0% - ---------------------------------------------------------------------------------- Securities available for sale: U.S. Treasury and federal agencies.. $194.5 7.1% $245.9 6.7% Mutual funds........................ -- -- 43.1 5.7 Other securities.................... 5.8 3.5 6.3 3.5 - ---------------------------------------------------------------------------------- TOTAL $200.3 7.0% $295.3 6.5% ==================================================================================
MATURITY DISTRIBUTION OF LOANS The following table shows the maturity schedule of the Company's loan portfolio at December 31, 1995, net of unearned income and deferred loan fees.
============================================================================================================= (IN THOUSANDS) LESS THAN 1 YEAR MORE THAN 1 TO 5 YEARS MORE THAN 5 YEARS TOTAL - ------------------------------------------------------------------------------------------------------------- Commercial loans: Floating rate.............. $ 802,951 $ 278,102 $ 59,293 $1,140,346 Fixed rate................. 47,105 40,543 10,154 97,802 Real estate loans: Floating rate.............. 61,202 49,021 10,075 120,298 Fixed rate................. 74,961 218,112 40,211 333,284 Consumer loans: Floating rate.............. 351 6,416 -- 6,767 Fixed rate................. 85 765 -- 850 - ------------------------------------------------------------------------------------------------------------- TOTAL LOANS $ 986,655 $ 592,959 $ 119,733 $1,699,347 - ------------------------------------------------------------------------------------------------------------- Allowance for loan losses.. (37,402) - ------------------------------------------------------------------------------------------------------------- NET LOANS $1,661,945 =============================================================================================================
DEPOSITS The following table shows the schedule of time remaining to maturity of time certificates of deposits of $100,000 and over at December 31, 1995 and 1994.
=========================================================================== (IN THOUSANDS) 1995 1994 - --------------------------------------------------------------------------- 3 months or less....................... $ 372,228 $ 275,810 Over 3 through 6 months................ 132,993 43,137 Over 6 through 12 months............... 33,051 23,766 Over 12 months......................... 980 1,928 - --------------------------------------------------------------------------- TOTAL $ 539,252 $ 344,641 ===========================================================================
45
==================================================================================================================== FINANCIAL RATIOS - ------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------- Net income as a percentage of: Average stockholders' equity........................ 11.03% 3.46% 0.57% 4.35% 1.39% Average total assets................................ 1.00 0.30 0.04 0.22 0.08 Average earning assets.............................. 1.14 0.35 0.05 0.25 0.08 Stockholders' equity at year-end as a percentage of: Total assets at year-end............................ 8.19% 8.31% 6.63% 5.40% 4.62% Total gross loans at year-end....................... 13.43 14.38 12.56 11.12 9.62 Total deposits at year-end.......................... 9.66 10.09 7.76 6.08 5.24 Average stockholders' equity as a percentage of: Average total assets................................ 9.04% 8.64% 7.02% 5.11% 5.46% Average gross loans................................. 13.64 14.11 12.54 10.16 9.16 Average total deposits.............................. 10.47 10.10 8.22 5.84 6.24 ===================================================================================================================
COMMON STOCK AND STOCKHOLDER DATA - ------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------- Market price High for year........................................ $ 22.69 $ 16.97 $ 12.60 $ 12.00 $ 12.56 Low for year......................................... 10.58 10.70 7.40 5.80 6.39 At year end.......................................... 22.69 11.13 11.13 7.60 6.85 Dividend payout ratio................................... -- -- -- -- 173.91% Book value at year end.................................. $ 15.29 $ 13.59 $ 13.23 $ 13.20 $ 12.67 Market price/book value at year end..................... 148.4% 81.9% 84.1% 57.6% 54.1% ===================================================================================================================
The Company declared an 8% stock dividend on January 25, 1996, payable on February 23, 1996 to stockholders of record on February 15, 1996. In addition, 5% stock dividends were declared on January 24, 1995, payable February 24, 1995 to stockholders of record on February 15, 1995, on January 20, 1994, payable February 28, 1994 to stockholders of record on February 10, 1994, on January 21, 1993, payable February 26, 1993 to stockholders of record on February 5, 1993 and on January 23, 1992, payable on February 28, 1992 to stockholders of record on February 10, 1992. The ratios and amounts in the above table have been adjusted for the effect of these dividends for all periods presented. The common stock of the Company is traded in the over-the-counter market on the National Market System and quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the ticker symbol: IBAN. As of March 1, 1996, stockholders of record approximated 1,534 exclusive of individual participants in security position listings. 46 ================================================================================ QUARTERLY DATA The following table sets forth the range of the high and low prices for the calendar periods indicated as reported by NASDAQ.
============================================================================ 1995 1994 ------------------------------------------------- STOCK MARKET QUOTATIONS/(1)/ HIGH LOW HIGH LOW - ---------------------------------------------------------------------------- First Quarter $15.97 $10.58 $13.44 $10.70 Second Quarter 19.21 14.35 16.97 12.23 Third Quarter 21.99 17.59 16.09 14.77 Fourth Quarter 22.69 20.60 15.21 11.13 ============================================================================
Quarterly financial information for the Company and its subsidiaries for the two years ended December 31, 1995 is summarized below.
================================================================================================================== (IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------------------------------------------ 1995 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 - ------------------------------------------------------------------------------------------------------------------ Total interest income..................... $ 48,699 $ 45,573 $ 43,656 $ 38,599 Net interest income....................... 33,751 29,595 27,963 25,064 Provision for loan losses................. 5,305 6,261 3,176 1,380 Noninterest income........................ 17,227 11,178 9,379 8,436 Income before taxes....................... 13,467 7,913 7,285 5,701 - ------------------------------------------------------------------------------------------------------------------ NET INCOME $ 8,723 $ 5,150 $ 4,648 $ 4,656 - ------------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE/(1)/ $ 0.55 $ 0.33 $ 0.31 $ 0.31 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 1994 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 - ------------------------------------------------------------------------------------------------------------------ Total interest income..................... $ 35,385 $ 34,272 $ 33,395 $ 32,755 Net interest income....................... 24,665 24,437 24,720 24,570 Provision for loan losses................. 1,140 3,818 5,084 2,132 Noninterest income........................ 8,905 10,842 8,312 7,823 Income before taxes....................... 4,155 2,679 1,996 1,797 - ------------------------------------------------------------------------------------------------------------------ NET INCOME $ 2,401 $ 1,908 $ 1,209 $ 1,125 - ------------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE/(1)/ $ 0.16 $ 0.13 $ 0.08 $ 0.08 - ------------------------------------------------------------------------------------------------------------------
/(1)/ Adjusted for stock dividends declared and paid in the first quarters of 1992 - 1996. ================================================================================ 47 ================================================================================ ANALYSIS OF CHANGES IN NET INTEREST MARGIN Changes in the Company's net interest income are a function of both changes in rates and changes in volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the years indicated. The total change is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). The change in interest due to both rate and volume (changes in rate multiplied by changes in volume) is classified as rate/volume. Non-accrual loans are included in average loans used to compute this table. The table is not presented on a tax equivalent basis as the effects are not material.
- ----------------------------------------------------------------------------------------------------------------------------------- 1995 OVER 1994 1994 OVER 1993 RATE/ RATE/ (IN THOUSANDS) VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Increase/(Decrease) in: Loans /(1)/..................$ 14,883 $ 14,978 $ 2,680 $ 32,541 $ (9,209) $ 8,887 $ (515) $ (837) Interest-bearing deposits placed with banks........... -- -- -- -- (846) -- -- (846) Trading account securities... 592 464 94 1,150 (2,406) 86 (23) (2,343) Securities available for sale........................ (1,254) 6,792 (648) 4,890 (1,108) 3,299 (155) 2,036 Securities held to maturity.................... (14) (23) 3 (34) (574) (116) 222 (468) Federal funds sold and securities purchased under resale agreements..... (324) 2,925 (47) 2,554 (3,261) 2,740 (989) (1,510) Loans held for sale.......... (498) 487 (370) (381) 102 (26) (5) 71 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME $ 13,385 $ 25,623 $ 1,712 $ 40,720 $ (17,302) $ 14,870 $ (1,465) $ (3,897) - ----------------------------------------------------------------------------------------------------------------------------------- Savings...................... (41) -- -- (41) (109) 40 3 (66) Money market................. (553) 1,863 175 1,485 (345) 481 (99) 37 Time - under $100,000........ 2,540 3,493 1,074 7,107 (141) 356 117 332 Time - $100,000 and over..... 5,953 5,515 2,288 13,756 (226) 2,314 (279) 1,809 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS $ 7,899 $ 10,871 $ 3,537 $ 22,307 $ (821) $ 3,191 $ (258) $ 2,112 - ----------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings........ (977) 2,083 (577) 529 (1,846) 1,702 (736) (880) Long-term borrowings......... (130) 46 (13) (97) (97) -- -- (97) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE $ 6,792 $ 13,000 $ 2,947 $ 22,739 $ (2,764) $ 4,893 $ (994) $ 1,135 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGES IN NET INTEREST INCOME $ 6,593 $ 12,623 $ (1,235) $ 17,981 $ (14,538) $ 9,977 $ (471) $ (5,032) - -----------------------------------------------------------------------------------------------------------------------------------
/(1)/ The rate change for interest income on loans includes a $7.2 million and a $4.9 million impact of derivative instruments for the years ended December 31, 1995 and 1994. Loans are net of unearned income and deferred loan fees. ================================================================================ 48 ================================================================================ Description of Business IMPERIAL BANCORP: Imperial Bancorp ("the Company") is a bank holding company registered under the Bank Holding Company Act of 1956 ("the BHC Act"), as amended. The Company was incorporated under the laws of California on November 13, 1968, and has its principal executive offices at 9920 South La Cienega Boulevard, Inglewood, California 90301. The Company functions primarily as the sole stockholder of Imperial Bank ("the Bank") and the Bank's non-bank subsidiaries, and establishes general policies and activities of the operating subsidiaries. IMPERIAL BANK: The Bank is engaged in general commercial banking at 12 banking offices located throughout California and one loan production office. The Bank, among the ten largest in California, was incorporated in 1963 under the laws of the State of California and became a subsidiary of the Company in 1969. The Bank offers a wide variety of financial services. For business customers the Bank's services currently include: checking accounts; savings accounts; money market deposit accounts; certificates of deposit; business and real estate loans; ESOP financing; venture capital financing; SBA loans; depository of federal income, excise and withholding taxes; collection services; Mastercard and Visa depository; business account reconciliation; cash management services; automated payroll systems; accounts receivable financing; letters of credit, foreign currency exchange and trade financing; asset management services; escrow accounting system and other accounting systems. The Bank has historically devoted the major portion of its business development efforts toward customers in the medium size business range consisting of companies having annual sales of between $5 and $100 million. Additionally, the Bank has established specialized divisions to more directly serve certain market segments, such as the Entertainment Industries Group, International Banking, Asset Based Lending, Precious Metals, Title/Escrow Administration and Corporate Cash Management, Merchant Card Services, The Lewis Horwitz Organization, Special Markets, Health Care and Small Business Administration Lending. The accounts of any single depositor or affiliated group of depositors are not considered material in relation to the Bank's total deposits. For individual customers the Bank provides: personal checking, interest checking and savings accounts; individual retirement accounts and Keogh Plans; money market deposit accounts; certificates of deposit; auto, home improvement, home equity and other types of consumer loans; traveller's checks; money transfer services; and automatic overdraft protection. While the Bank offers these retail type services, it does so primarily as an accommodation to its business oriented customers within the geographic areas served. The Bank does not have trust powers. However, Imperial Trust Company, a subsidiary of the Bank, is licensed to operate a trust business under the laws of the State of California and operates from offices in Los Angeles, Costa Mesa and San Francisco. The Bank is a licensed municipal securities dealer and engages in permissible underwriting and trading of municipal securities. The Bank is also licensed as an insurance agent and engages in insurance agency activities as permitted under applicable law. As of December 31, 1995, the Bank and its subsidiaries had total assets of $2.8 billion and total deposits of $2.4 billion. Net income for 1995 was $23.1 million. Competition - All phases of the Bank's business are highly competitive. Some of the nation's largest commercial banks are headquartered in California and maintain large branch bank networks throughout the Bank's marketing areas. These large commercial banks have substantially greater assets and resources than the Bank. A number of California banks, as well as out-of-state banks, have larger total lending limits than the Bank and perform some banking related functions which the Bank does not presently offer. For customers needing services the Bank does not directly offer, the Bank makes arrangements with correspondent institutions to provide such specialized services. In addition, the Bank and all other banks compete in making loans and obtaining deposits with a variety of other financial institutions including savings and loan institutions, thrift and loan companies, small loan companies and others. Increased competition from foreign banks and nonbanks such as investment banking firms, insurance companies, credit unions and money market funds has intensified in recent years. In competing for banking business, including deposits and other related activities, the Company, the Bank and their affiliates employ personal contact, localized advertising, interest rate competition and availability of specialized services in order to meet the needs of various types of customers. Monetary policy - Banking, as a business, is affected by general economic conditions, both domestic and international, as well as the monetary and fiscal policies of the United States and its agencies. In particular, the Board of Governors of the Federal Reserve System ("the Board") exerts substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. government securities, varying the discount rate on member bank borrowings and setting reserve requirements against deposits. The Board's monetary policies have had a significant impact on the operating results of financial institutions in the past and are expected to continue to do so in the future. IMPERIAL BANK SUBSIDIARIES: Imperial Trust Company, a California licensed trust company, had total assets under management and administration of approximately $6.8 billion at December 31, 1995. The Trust Company reported net income of $1.4 million for 1995. 49 ================================================================================ Imperial Ventures, Inc. ("IVI") was organized in 1977 and is licensed as a small business investment company. IVI reported net loss of $1.1 million for 1995. As of December 31, 1995, IVI had total assets of approximately $4.0 million. Imperial Securities Corporation ("ISC"), a registered broker dealer, engages in the purchase and resale of financial instruments to corporations, financial institutions and high net worth individuals. ISC, organized in 1993, reported net income of $0.7 million for 1995. As of December 31, 1995, ISC had total assets of $3.4 million. Pacific Bancard Association, Inc. ("PBA") was implemented in 1994 to facilitate merchant bankcard processing activities. PBA had total assets of $0.6 million at December 31, 1995, and reported net income of $0.1 million for 1995. NONBANK SUBSIDIARIES: In addition to the Bank and its subsidiaries, the Company has one active wholly owned direct subsidiary. Imperial Bank Realty Company, Inc. ("Realty") holds leases on and manages certain real property occupied by the Company and the Bank. Realty is responsible for purchasing, leasing and maintaining all Bank and Company operating real properties. As of December 31, 1995, Realty's total assets approximated $0.7 million. Net income in 1995 was $0.1 million. INVESTMENT IN IMPERIAL CREDIT INDUSTRIES, INC.: Imperial Credit Industries, Inc. ("ICII"), capitalized in late 1991, is a diversified finance company. In 1992, ICII sold 2.3 million shares of stock in an initial public offering. During the second quarter of 1993, the Bank sold 2.8 million shares of ICII common stock reducing its ownership from 72.4% at December 31, 1992, to 40.3% at December 31, 1993 and 1994. During 1995, ICII common stock was split at the ratio of three new shares for every two shares outstanding. In addition, ICII declared and paid a 10% stock dividend in February 1996. Combined, these events increased ICII shares held by the Company to 6.4 million. The Company's ownership percentage has dropped slightly to approximately 40.0% as a result of the exercise of employee stock options. On February 26, 1996, ICII announced its plans to offer up to 2,000,000 shares of its common stock in an underwritten public offering. This offering would reduce the Company's ownership percentage to 35.3% if all of the proposed shares are sold. The Company has retained the services of an investment banking firm. Among other things, the role of the firm will be to assist management in evaluating strategies related to the Company's investment in ICII which maximize stockholder value. As the Company does not exercise significant control over the operation of ICII, the results of operations are accounted for as an equity investment in the Company's consolidated financial statements. SUPERVISION AND REGULATION: Bank holding companies, banks and their non-bank subsidiaries are extensively regulated under both federal and state law. The following is not intended to be a complete description of the statutes and regulations applicable to the Company's or the Bank's business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions. A number of changes to laws and regulations affecting the Bank and the Company and additional legislative and regulatory changes have occurred in the past several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted. Bank Holding Company - The Company is regulated under the BHC Act and as such is required to file annual reports of its operations with the Board and is subject to examination by it. The BHC Act requires, among other things, the Board's prior approval whenever a bank holding company proposes to (i) acquire all or substantially all the assets of a bank, (ii) acquire direct or indirect ownership or control of more than 5% voting shares of a bank, or (iii) merge or consolidate with another bank holding company. As contemplated by the BHC Act, numerous states have enacted laws, and nearly every state in the nation has contemplated laws, which would permit the acquisition of banks located within the state by out-of-state bank holding companies. In September 1994, full interstate banking legislation was adopted by Congress in the Riegle-Neal Interstate Banking and Branch Efficiency Act ("the Riegle-Neal Act"). Under the Riegle-Neal Act, interstate banking is allowed in three different ways: (i) effective September 1995, a bank owned by a holding company may acquire a subsidiary bank anywhere in the U.S., (ii) effective September 1995, a bank owned by a holding company may act as an agent in accepting deposits or servicing loans, and (iii) effective June 1, 1997, a bank may establish a branch or merge with a bank in another state, but only if the bank's home state permits interstate mergers and branches, and the other state has not passed a law to prohibit interstate mergers or branches. The Riegle-Neal Act is subject to certain phase in and opt out provisions. The State of California has passed interstate banking legislation. Any out-of- state bank holding company is permitted to acquire a California bank provided that reciprocal rights are granted to California bank holding companies. The BHC Act prohibits a bank holding company, with certain exceptions, from engaging in or acquiring direct or indirect control of 5% or more of the voting shares of any company engaged in non-banking activities. The Board is authorized to approve, among other things, a bank holding company's acquisition of control of any company engaged in activities which the Board has determined to be closely related to banking or managing or controlling banks. In making such determination, the Board is required to weigh the expected benefits of the acquisition to the public, such as greater convenience and increased competition or gains in efficiency, against the risks of possible adverse effects, such as undue concentration of 50 ================================================================================ resources, decreased or unfair competition, conflicts of interest and unsound banking practices. The Company, its non-banking subsidiaries and ICII are affiliates of the Bank within the meaning of the Federal Reserve Act. Under the Federal Reserve Act there are certain restrictions on loans by the Bank to the Company and to its non-banking affiliates and all such affiliates in the aggregate, on investments by the Bank in any affiliate's securities and on the Bank taking any affiliate's securities as collateral for loans to any borrower. The Bank is subject to certain restrictions with respect to engaging in the issue, flotation, underwriting, public sale or distribution of certain types of securities and the Company and all other affiliates may be subject to such restrictions. Under the BHC Act and the Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services. State Banks - The Bank is supervised by California's Superintendent of Banks ("the Superintendent"), and is a member of the Federal Deposit Insurance Corporation ("FDIC"). It is subject to the provisions of the Federal Deposit Insurance Act and to regular examinations by the Superintendent and the FDIC. The Bank is not a member of the Federal Reserve System ("Fed"), although it is subject to reserve requirements of the Fed. There are various requirements and restrictions under the laws of the State of California and of the United States affecting the Bank in its operations, and these laws and extensive administrative regulations cover many aspects of the Bank's business such as investments, branching, municipal securities and other activities, including restrictions on the nature and amount of loans which may be made. Although the Bank is governed by regulation of the Superintendent and the FDIC, the policies of the Board so permeate the banking industry as a whole, that the Bank, while not a member of the Fed, is to a large degree subject to the same policies that affect member banks. The Bank, as a California corporation, is limited in making distribution to its stockholder, the Company, to the lessor of the retained earnings of the Bank or the net income of the Bank for its last three fiscal years, less the amount of any distributions during such period. The Indentures of the Notes and Debentures also have restrictions on distributions. At December 31, 1995, the Bank could distribute at least $22.3 million. The Bank is insured by the FDIC and therefore subject to its regulations. Among other things the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provided authority for special assessments and required the FDIC to develop a general risk-based assessment system. Under this regulation, the amount of FDIC assessments paid by insured depository institutions is based on their relative risk as measured by regulatory capital ratios and certain other factors. Under this new system, in establishing the insurance premium assessment for each bank, the FDIC will take into consideration the probability that the BIF will incur a loss with respect to the bank, and will charge a bank with perceived higher inherent risks a higher insurance premium. The FDIC will also consider the different categories and concentrations of assets and liabilities of the institution, the likely amount of any such loss, the revenue needs of the BIF, and any other factors the FDIC deems relevant. Regardless of the potential risk to the BIF, FDICIA prohibits assessment rates from falling below the assessment rate of 23 cents per $100 of eligible deposits if the FDIC has outstanding borrowings from the U.S. Treasury Department, or the 1.25% designated reserve ratio has not been met. In 1995, the 1.25% ratio was met and the assessment rate reduced to the minimum of $2,000 per year for 1996. FDICIA also requires each insured depository institution to prepare annual financial statements in accordance with generally accepted accounting principles which must be audited by an independent public accountant. Each institution must also prepare a management report stating management's responsibility for preparing the institution's annual financial statements, for complying with designated safety and soundness laws and regulations and for other related matters. In addition, the report must contain an assessment by management of the effectiveness of internal controls and procedures over financial and regulatory reporting and of the institution's compliance with designated laws and regulations. The institution's independent public accountant must examine, attest to, and report separately on, assertions of management concerning internal controls and procedures and must apply procedures agreed to by the FDIC to test compliance by the institution with designated laws and regulations. The Bank is complying with these requirements. FDICIA required the establishment of minimum acceptable operational and managerial standards, and standards for asset quality, earnings, and valuation of publicly traded shares for depository institutions and their holding companies. The operational standards must cover internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and employee compensation. The asset quality and earnings standards must specify a maximum ratio of market value to book value for publicly traded shares. An institution which fails to meet such standards must submit a corrective action plan within 30 days. The federal bank regulatory agencies have adopted final regulations which require institutions to adopt written real estate lending policies that, among other things, must be consistent with guidelines adopted by the agencies. Among the guidelines adopted are maximum loan-to-value ratios for land loans (65%), development loans (75%), construction loans (80-85%), loans on owner occupied 1- 4 family property, including home equity loans (no limit, but loans at or above 90% require private mortgage insurance), and loans on other improved property (85%). The guidelines permit institutions to make loans in excess of the supervisory loan-to-value limits if such loans are supported by other credit factors, but the aggregate of such nonconforming loans should not exceed the institution's risk-based capital, and the aggregate of nonconforming loans secured by real estate other than 1-4 family property should not exceed 30% of risk-based capital. 51 ================================================================================ On December 21, 1993, the FDIC and other regulatory agencies issued an interagency policy statement on the allowance for loan losses ("the Policy Statement"). The Policy Statement requires that federally insured depository institutions maintain an allowance for loan losses adequate to absorb credit losses associated with the loan portfolio, including all binding commitments to lend. The Policy Statement defines an adequate allowance for regulatory purposes as a level that is no less than the sum of all expected losses with respect to classified loans and losses expected over the following twelve months with respect to all other loans, given the appropriate facts and circumstances as of the evaluation date. The Policy Statement specified that the amount of allowance determined by the rules as described above is neither a floor nor a "safe harbor" level. However, examiners will review a shortfall relative to this amount as indicating a need to more closely review management's analysis to determine whether it is reasonable, supported by reliable evidence and that all relevant factors have been appropriately considered. This policy did not impact the level of the Company's allowance for loan losses. In 1995, the federal bank regulatory agencies determined that the allowance for loan losses established pursuant to Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("FAS 114") should be characterized as a general allowance (created against unidentified losses) rather than a specific allowance (created against identified losses). As a general allowance, the FAS 114 allowance is includable in Tier 2 capital, subject to existing regulatory capital limitations. The Bank is subject to the Community Reinvestment Act of 1977 as amended ("CRA"). CRA requires the Bank to ascertain and meet the credit needs of the communities it serves, including low and moderate income neighborhoods. The Bank's compliance with CRA is monitored by the FDIC, which assigns the Bank a publicly available CRA rating. An assessment of CRA compliance is required by both the FDIC and the Board in connection with applications for approval of certain activities, such as mergers with or acquisitions of other banks or bank holding companies. In April 1995, the federal regulatory agencies issued a comprehensive revision to the rules governing CRA compliance. In assigning a CRA rating to a bank, the new regulations place greater emphasis on measurements of performance in the areas of lending (specifically, the bank's home mortgage, small business, small farm and community development loans), investment (the bank's community development investments) and service (the bank's community development services and the availability of its retail banking services), although examiners are still given a degree of flexibility in taking into account unique characteristics and needs of the bank's community and its capacity and constraints in meeting such needs. The new regulations also require increased collection and reporting of data regarding certain kinds of loans. Although the new regulations became generally effective on July 1, 1995, various provisions have different effective dates, and the new CRA evaluation criteria will go into effect for examinations beginning on July 1, 1997. Although management cannot predict the impact of the substantial changes in the new rules on the Bank's CRA rating, it will continue to take steps to comply with the requirements in all respects. Capital adequacy guidelines - Risk-adjusted capital guidelines, issued by bank regulatory authorities, assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity. The guidelines currently require a minimum Tier I capital ratio of 4% and a total risk weighted capital ratio of 8% in order for an institution to be classified as adequately capitalized. Institutions which maintain a Tier I ratio of 6% and total capital ratio of 10% are defined as well capitalized. Tier I capital basically consists of common stockholders' equity and non-cumulative perpetual preferred stock and minority interest in consolidated subsidiaries minus intangible assets. The Bank's Tier I and total risk-weighted ratios at December 31, 1995 were 9.3% and 10.6%, respectively. In addition to the risk-weighted ratios, the highest rated banks are required to maintain a minimum leverage ratio of 3%. All other banks are expected to maintain higher leverage ratios, to be determined on an individual basis. This ratio is defined as Tier I capital to average total assets for the most recent quarter. The Bank's leverage ratio at December 31, 1995 was 8.6%. The banking agencies issued a final rule which requires them to revise their risk-based capital guidelines to ensure that their standards take adequate account of interest rate risk ("IRR"). These amendments to risk-based capital guidelines had not been finalized for banks as of December 31, 1995. PROPERTIES The principal executive offices of the Company and the Bank are located in leased premises in the Imperial Bank Building at 9920 South La Cienega Boulevard, Inglewood, California. The leases are either long-term or contain sufficient options for extension to assure availability of the space for 10 years. The Company leases office space for branches and subsidiaries locations with expiration dates ranging from 1996 to 2112, exclusive of renewal options. Annual rentals, net of sublease income, for all leased premises were $6,609,000 for 1995. The Bank houses its Corporate Service Center at 2015 Manhattan Beach Boulevard, Redondo Beach, California. The property is owned by the Bank. 52 ================================================================================ DIRECTORY IMPERIAL BANCORP AND SUBSIDIARIES
IMPERIAL BANCORP EXECUTIVE Offices IMPERIAL BANK EXECUTIVE OFFICES Century Boulevard at the San Diego Freeway Century Boulevard at the San Diego Freeway P. O. Box 92991 P. O. Box 92991 Los Angeles, California 90009 Los Angeles, California 90009 (310) 417-5600 (310) 417-5600 ---------------------------------------------------- -------------------------------------------------- IMPERIAL BANK REALTY Company, Inc. IMPERIAL CREDITCORP Century Boulevard at the San Diego Freeway Century Boulevard at the San Diego Freeway P. O. Box 92991 P. O. Box 92991 Los Angeles, California 90009 Los Angeles, California 90009 (310) 417-5600 (310) 417-5600 ---------------------------------------------------- -------------------------------------------------- DIRECTORS GEORGE L. GRAZIADIO, JR. H. WAYNE SNAVELY Co-Founder, Chairman of the Board, President and Chairman and Chief Executive Officer, Chief Executive Officer, Imperial Bancorp; Imperial Credit Industries, Inc.; Chairman of the Board, Imperial Bank Director, Imperial Bancorp and Imperial Bank ---------------------------------------------------- -------------------------------------------------- NORMAN P. CREIGHTON DR M. NORVEL YOUNG President and Chief Executive Officer, Imperial Bank Chancellor Emeritus, Pepperdine University; Director, Imperial Bancorp and Imperial Bank Director, Imperial Bancorp and Imperial Bank ---------------------------------------------------- -------------------------------------------------- RICHARD K. EAMER JACK H. LEYLEGIAN II Director, Unocal; President, Leylegian Investment Management; Director, Imperial Bancorp and Imperial Bank Director, Imperial Bank ---------------------------------------------------- -------------------------------------------------- G. LOUIS GRAZIADIO III WILLIAM L. MACDONALD President, Ginarra Holdings, Inc.; President and Chief Executive Officer, Director, Imperial Bancorp Compensation Resource Group; Director, Imperial Bank ---------------------------------------------------- -------------------------------------------------- BERNARD G. LEBEAU STEPHEN C. SCHOTT Retired Chairman of the Board, Imperial Bank; President/Owner, Citation Homes and Director, Imperial Bancorp and Imperial Bank Co-owner/President, Oakland A's; Director,Imperial Bank ---------------------------------------------------- -------------------------------------------------- LEE E. MIKLES Chairman, Mikles/Miller Management; Director, Imperial Bancorp and Imperial Bank ---------------------------------------------------- IMPERIAL BANK MANAGEMENT COMMITTEE NORMAN P. CREIGHTON ELDON K. LLOYD President and Chief Executive Officer Executive Vice President, Chief Credit Officer ---------------------------------------------------- -------------------------------------------------- WILLIAM L. CAPPS DANIEL R. MATHIS Executive Vice President and Chief Administrative Officer Executive Vice President ---------------------------------------------------- -------------------------------------------------- RICHARD J. CASEY ROBERT S. MUEHLENBECK Executive Vice President Executive Vice President ---------------------------------------------------- -------------------------------------------------- ROBERT M. FRANKO J. RICHARD BARKLEY Executive Vice President and Chief Financial Officer Senior Vice President and Director, Human Resources ---------------------------------------------------- --------------------------------------------------
53 ================================================================================ IMPERIAL BANK REGIONAL OFFICES
SOUTHERN CALIFORNIA NORTHERN CALIFORNIA ---------------------------------------------------- -------------------------------------------------- Executive Vice President: Executive Vice President: DANIEL R. MATHIS RICHARD J. CASEY Los Angeles Airport Regional Office San Francisco Regional Office 9920 S. La Cienega Boulevard 456 Montgomery Street Inglewood, California 90301 San Francisco, California 94104 (310) 417-5600 (415) 954-5000 ---------------------------------------------------- -------------------------------------------------- BEVERLY HILLS/SAN FERNANDO VALLEY FRESNO 9777 Wilshire Boulevard 5260 N. Palm, Suite 219B - Interim Location Beverly Hills, California 90212 Fresno, California 93704 (310) 338-3100 (209) 436-4694 Regional Vice President: Regional Vice President: CHARLES H. AVIS R. Gary Renner ---------------------------------------------------- -------------------------------------------------- DOWNTOWN LOS ANGELES/GARMENT CENTER MENLO PARK 201 N. Figueroa Street 2460 Sand Hill Road, Suite 102 Los Angeles, California 90012 Menlo Park, California 94025 (213) 484-3700 (415) 233-3000 Regional Vice President: Senior Vice President/Manager: TIMOTHY J. NOLAN EDGERTON SCOTT II - Special Markets ---------------------------------------------------- -------------------------------------------------- ENTERTAINMENT INDUSTRIES GROUP OAKLAND 9777 Wilshire Boulevard, 4th Floor 1999 Harrison Street Beverly Hills, California 90212 Oakland, California 94612 (310) 338-3100 (510) 446-1980 Senior Vice President/Manager: Regional Vice President: MORGAN RECTOR ARLENE L. GOULD ---------------------------------------------------- -------------------------------------------------- LOS ANGELES INTERNATIONAL AIRPORT SACRAMENTO 9920 S. La Cienega Boulevard 455 Capitol Mall, Suite 400 Inglewood, California 90301 Sacramento, California 95814 (310) 417-5600 (916) 443-5460 Regional Vice President: Regional Vice President: DONALD D. DOUTHWRIGHT LAWRENCE S. DANIEL ---------------------------------------------------- -------------------------------------------------- ORANGE COUNTY SAN FRANCISCO 695 Town Center Drive 456 Montgomery Street Costa Mesa, California 92626 San Francisco, California 94104 (714) 641-2200 (415) 954-5000 Regional Vice President: Regional Vice President: CAROLINE B. HARKINS JAMES R. DALEY ---------------------------------------------------- -------------------------------------------------- SAN DIEGO SANTA CLARA VALLEY 701 "B" Street 226 Airport Parkway San Diego, California 92101 San Jose, California 95110 (619) 338-1500 (408) 451-8500 Regional Vice President: Regional Vice President: JED HARRIS MICHAEL BENITO ---------------------------------------------------- --------------------------------------------------
54 ================================================================================
IMPERIAL BANK SUBSIDIARIES IMPERIAL SECURITIES CORPORATION IMPERIAL TRUST COMPANY 9920 South La Cienega Boulevard 201 North Figueroa Street, Suite 610 Inglewood, California 90301 Los Angeles, California 90012 (310) 417-5790 (213) 627-5600 President: President and Chief Executive Officer: Jack L. Singer Michael J. Vaughan ---------------------------------------------------- -------------------------------------------------- PACIFIC BANCARD ASSOCIATION, INC. IMPERIAL TRUST COMPANY 2015 Manhattan Beach Boulevard Northern California Regional Office Redondo Beach, California 90278 456 Montgomery Street (310) 725-4139 Suite 600 President: San Francisco, California 94104 William L. Capps (415) 954-5080 ---------------------------------------------------- -------------------------------------------------- IMPERIAL VENTURES, INC. IMPERIAL TRUST COMPANY 9920 South La Cienega Boulevard Orange County Regional Office Inglewood, California 90301 695 Town Center Drive (310) 417-5803 Suite 200 President: Costa Mesa, California 92625 Robert S. Muehlenbeck (714) 641-1142 ---------------------------------------------------- -------------------------------------------------- STOCKHOLDER INFORMATION Requests for annual reports, quarterly reports and STOCK TRANSFER AGENT AND REGISTRAR SEC filings should be addressed to: First Interstate Bank 707 Wilshire Boulevard, 11th Floor IMPERIAL BANCORP Los Angeles, California 90017 Investor Relations Department (800) 522-6645 Attn: Michelle Sparks P. O. Box 92991 Los Angeles, California 90009 Independent Auditors (310) 338-2606 KPMG Peat Marwick LLP misparks@imperialbank.com Investor requests for other financial information STOCK LISTINGS should be directed to: NASDAQ - IBAN* NASDAQ - ICII* IMPERIAL BANCORP Attn: Robert M. Franko *Stock Symbol: IBAN - Imperial Bancorp Executive Vice President and Chief Financial Officer ICII - Imperial Credit Industries, Inc. P. O. Box 92991 Los Angeles, California 90009 (310) 417-5822 For other information visit our World Wide Web site: rmfranko@imperialbank.com HTTP:/WWW.IMPERIALBANK.COM REGISTERED MARKET MAKERS /(1)/ Bear, Stearns & Co. Inc. Mayer & Schweitzer, Inc. Dean Witter Reynolds, Inc. Merrill Lynch, Pierce, Fenner The First Boston Corporation Oppenheimer & Co., Inc. Fox-Pitt, Kelton, Inc. Paine Webber Inc. Herzog, Heine, Geduld, Inc. Sherwood Securities Corp. Hoefer & Arnett, Incorporated Smith Barney Inc. J.J.B. Hilliard, W.L. Lyons Troster Singer Corp. Keefe, Bruyette & Woods, Inc. Wedbush Morgan Securities Inc. Lehman Brothers Inc.
/(1)/ Per NASDAQ as of January 31, 1996 55 [INTENTIONALLY LEFT BLANK] 56 ================================================================================ SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on March 21, 1996, on its behalf by the undersigned, thereunto duly authorized.
Date /s/ George L. Graziadio March 21, 1996 ---------------------------------- George L. Graziadio, Jr. Chief Executive Officer /s/ Robert M. Franko March 21, 1996 ---------------------------------- Robert M. Franko Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below on March 21, 1996 by the following persons on behalf of the registrant and in the capacities indicated.
Date /s/ George L. Graziadio, Jr. March 21, 1996 -------------------------------------- George L. Graziadio, Jr. Chairman of the Board, President and Chief Executive Officer /s/ Bernard G. LeBeau March 21, 1996 -------------------------------------- Bernard G. LeBeau Director /s/ Norman P. Creighton March 21, 1996 -------------------------------------- Norman P. Creighton Director /s/ G. Louis Graziadio, III March 21, 1996 -------------------------------------- G. Louis Graziadio, III Director /s/ Richard K. Eamer March 21, 1996 -------------------------------------- Richard K. Eamer Director /s/ M. Norvel Young March 21, 1996 -------------------------------------- M. Norvel Young Director /s/ H. Wayne Snavely March 21, 1996 -------------------------------------- H. Wayne Snavely Director /s/ Lee E. Mikles March 21, 1996 -------------------------------------- Lee E. Mikles Director
57 ================================================================================ FORM 10-K CROSS-REFERENCE INDEX
- --------------------------------------------------------------------------- PART I PAGE - --------------------------------------------------------------------------- ITEM 1. Business Financial Review..........................5-19 Selected Statistical Information..........4, 6-7, 10, 15-17, 45-48 Description of Business...................49-52 ITEM 2. Properties................................52 ITEM 3. Legal Proceedings.........................38 ITEM 4. Submission of Matters to a vote of security holders.........................* Executive Officers of the Registrant......53 - --------------------------------------------------------------------------- PART II. PAGE - --------------------------------------------------------------------------- ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................4, 46-47 ITEM 6. Selected Financial Data....................4, 46 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................5-19 ITEM 8. Financial Statements and Supplementary Data Imperial Bancorp and Subsidiaries - Consolidated Financial Statements.........20-23 Notes to Consolidated Financial Statements......................24-43 Independent Auditors' Report...............44 Selected Statistical Information...........4, 6-7, 9, 10, 13, 15-17, 45-48 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................* - --------------------------------------------------------------------------- PART III PAGE - --------------------------------------------------------------------------- ITEM 10. Directors and Executive Officers of the Registrant.........................** ITEM 11. Executive Compensation.....................** ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................** ITEM 13. Certain Relationships and Related Transactions......................** - --------------------------------------------------------------------------- PART IV+ - --------------------------------------------------------------------------- ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements (See Item 8 for a listing of all financial statements). (2) Financial Statement Schedules All schedules normally required by Form 10-K are omitted since they either are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits. Exhibit 10. Special Compensation Agreements re: George L. Graziadio, Jr. and Norman P. Creighton. Exhibit 11. Computation of Income Per Share. Exhibit 22. Subsidiaries of Registrant. Exhibit 24. Independent Auditors' Consent. Exhibit 27. Financial Data Schedule Exhibit 28. Undertakings. Exhibit 99. Consulting Agreements. (b) No reports on Form 8-K have been filed during the fourth quarter of the last year. - ---------------------------------------------------------------------------
* This item is omitted because it is either inapplicable or the answer thereto is in the negative. ** Incorporated by reference from the Company's proxy statement which will be filed within 120 days of fiscal year ended December 31, 1995. + Exhibits listed in Part IV have been filed with the Company's 1995 10-K. 58 ================================================================================ EXHIBIT INDEX
- ---------------------------------------------------------------------- EXHIBIT NUMBER DESCRIPTION - --------------- --------------------------------------------- 10 Special Compensation Agreements re: George L. Graziadio, Jr. and Norman P. Creighton 11 Computation of Income Per Share 22 Subsidiaries of Registrant 24 Independent Auditors' Consent 27 Financial Data Schedule 28 Undertakings 99 Consulting Agreements
59 [INTENTIONALLY LEFT BLANK] 60 EX-10 2 SPECIAL COMPENSATION AGREEMENT Exhibit 10 SPECIAL COMPENSATION AGREEMENT THIS SPECIAL COMPENSATION AGREEMENT (the "Agreement") is made and entered into this 11th day of December, 1989, by and among IMPERIAL BANCORP, a registered bank holding company ("Bancorp"), IMPERIAL BANK, a state banking corporation ("Bank") and NORMAN P . CREIGHTON, an individual (the "Executive"). (Bancorp and Bank shall be collectively referred to as "the Company"). RECITALS -------- A. The Executive is currently employed by Bank. B. This Agreement sets forth the Special Compensation (as defined in Section 3 below) which the Company agrees it will pay to the Executive upon a - --------- Termination Following Change in Control (as defined in Section 1 (p) below). ------------- C. The board of directors of both Bancorp and Bank, with the Executive specifically excluded from consideration of the matter, have approved the execution of this Agreement and the performance of the obligations hereunder. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration, it is hereby agreed among the parties hereto as follows: 1. Definitions ----------- (a) Average Annual Compensation. The average Compensation (as --------------------------- defined in Section 1 (e) below) paid by the Company to the Executive during the ------------- five (5) most recent calendar years ending prior to the Change in Control of the Company. For purposes of this Agreement only, the Average Annual Compensation shall include all compensation which the Executive may have deferred during such five-year period preceding the Change in Control under the Company's Executive Deferral Plan. Average Annual Compensation shall not include any Company Contribution pursuant to Section 3.3 of the Executive Deferral Plan. (b) Cause. For purposes of this Agreement only, termination for ----- "Cause" shall mean: (1) termination of the Executive's employment on the basis of fraud, misappropriation or embezzlement on the part of the Executive; (2) termination because Executive is convicted of (or pleads nolo contendere to) a crime of dishonesty or breach of trust or crime ---- ---------- leading to incarceration of more than 90 days (including, without limitation, embezzlement or theft against Company) or payment of a penalty or fine of not less than $10,000; or (3) termination after issuance of an Order by a regulatory agency, administrative tribunal or court pursuant to Section 8 of the Federal Deposit Insurance Act, Section 1913.5 of the California Financial Code or successor statutes. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until Bank delivers to the Executive a Notice of Termination (as defined in Section 1 (K) below) and a copy of the resolution ------------- duly adopted by the affirmative vote of not less than three-quarters of the entire membership of Bank's board of directors at a meeting of the board called and held for the purpose of termination of the Executive for Cause (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the board), finding that in the good faith opinion of the board the Executive was guilty of or the subject of any of the items specified above, and specifying the particulars thereof in detail. (c) Change in Control. A Change in Control shall be deemed ----------------- to have occurred contemporaneously with the occurrence of any one of the following events: (1) any consolidation or merger of Bank or Bancorp in which Bank or Bancorp is not a continuing or surviving corporation or pursuant to which the shares of Bank's or Bancorp's Common Stock are converted into cash, securities or other property, other than a merger of Bank or Bancorp in which the holders of Bank's or Bancorp's Common Stock immediately prior to the merger have the same proportion of ownership of common stock of the surviving corporation immediately after the merger; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Bank or Bancorp; (3) the shareholders of Bank or Bancorp approve any plan or proposal for the liquidation or dissolution of Bank or Bancorp; -2- (4) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, and the regulations thereunder (collectively, the "Exchange Act")) becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of Bank's or Bancorp's issued and outstanding Common Stock (beneficial owners of 5% or more of Bank's or Bancorp's issued and outstanding Common Stock on the date of this Agreement shall not be considered persons for purposes of this section); or (5) a majority of the members of Bank's or Bancorp's board of directors is replaced during any two-year period by directors whose appointment or election is not approved by two-thirds of the members of the board of directors at the start of such two-year period. (d) Code. The Internal Revenue Code of 1986, as amended. ---- (e) Compensation. The total compensation payable to the ------------ Executive by Company. (f) Date of Termination. The "Date of Termination" of ------------------- employment shall mean: (1) if this Agreement is terminated by the Company based on the Executive's Disability, 30 days after Notice of Termination is given to the Executive; provided, however, that the Executive shall not have returned to the -------- ------- performance of the Executive's duties on a full-time basis during such 30-day period; (2) if this Agreement is terminated based on the Executive's Retirement, the date on which the Notice of Termination is given; (3) if this Agreement is terminated based on the Executive's Death, Good Reason or for Other Reason, the effective date of such termination; or (4) if this Agreement is terminated for Cause, the date Bank delivers the resolution of Bank adopted in accordance with Section 1(b) ------------ above. (g) Death. Termination for "Death" shall mean termination of ----- the Executive's employment after the Executive has been declared legally dead pursuant to the applicable laws. (h) Disability. Termination for "Disability" shall mean ---------- termination of the Executive's employment because the Executive has been absent from his duties on a full time basis for six(6) months as a result of the ------ Executive's incapacity due -3- to physical or mental illness and, within 30 days of Notice of Termination, the Executive shall not have returned to full-time performance of the Executive's duties. (i) Excise Tax. The tax imposed by Section 4999 of the Code and ---------- any applicable state excise tax provision. (j) Good Reason. Termination for "Good Reason" shall mean ----------- termination of employment by the Executive based on any of the following events occurring without the Executive's express written consent: (1) Bank's assignment to the Executive of duties inconsistent with the Executive's position, duties, responsibilities and status with Bank or a change in the Executive's titles or offices as in effect immediately prior to a Change in Control, or any removal of the Executive from or any failure to reelect the Executive to any such positions, except in connection with the termination of the Executive's employment for Death, Disability, Retirement or Cause or by the Executive other than for Good Reason; (2) After a Change in Control, a reduction by Bank in the Executive's base salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement or Bank's failure to increase, within 12 months of the Executive's last increase in base salary, the Executive's base salary in an amount which at least equals, on a percentage basis, the average percentage increase in base salary for all executive officers of the Company effected in the preceding 12 months; (3) Any failure by the Company to continue in effect any material fringe benefit, plan or arrangement in which the Executive is participating at the time of a Change in Control (or any other plans providing the Executive with substantially similar benefits) (collectively the "Fringe Benefit Plans"), or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any Fringe Benefit Plan or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change in Control; (4) Any failure by the Company to continue in effect any monetary incentive plan or arrangement in which the Executive is participating at the time of a Change in Control (or any other plans or arrangements providing the Executive with substantially similar benefits) (collectively the "Monetary Incentive Plans")) or the taking of any action by the Company which would adversely affect the Executive's participation in such Monetary Incentive Plans or reduce the Executive's benefits under the Monetary Incentive Plans expressed as a percentage of -4- the Executive's base salary, by more than two percentage points in any fiscal year as compared to the immediately preceding fiscal year; (5) A relocation of the Company's principal executive offices to a location more than twenty (20) miles from the current location, or the Executive's relocation to any place other than the location at which the Executive performed executive duties prior to a Change in Control, except for required travel by the Executive on the Company's business to an extent substantially consistent with the Executive's business travel obligations at the time of a Change of Control; (6) Any material reduction by Bank in the number of annual paid vacation days to which the Executive is entitled after a Change in Control; (7) Any material breach by the Company of any provision of this Agreement; (8) Any failure by Bank or Bancorp to obtain the assumption of this Agreement by any successor or assign of the Company pursuant to Section ------- 5 hereof; or - - (9) Any purported termination of the Executive's employment (other than for Death) which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 1(k) below. ------------ (k) Notice of Termination. A written notice which (1) indicates --------------------- the specific termination provisions in this Agreement relied upon, (2) sets forth in reasonable detail the facts and circumstances claimed to provide the basis for termination of the Executive's employment under the provisions so indicated (and also provides the resolution specified in Section 1(b) if the ------------ termination is for Cause), and (3) is delivered to (A) the Executive if the grounds for termination are Disability (when no legal custodian has been appointed for the Executive), Retirement or Cause, or (B) the Executive's legal custodian if the grounds for termination are Disability and a legal custodian has been appointed for the Executive. (l) Other Reason. Termination for "Other Reason" shall mean ------------ termination of the Executive's employment either voluntarily or involuntarily for any reason other than Death, Disability, Retirement, Cause or Good Reason. (m) Payment Date. The Date of Termination. ------------ (n) Retirement. Termination for "Retirement" shall mean ---------- termination of the Executive's employment by Bank (after Notice of Termination) or termination by the Executive, -5- based on the Executive having reached age 70 or such other age as shall have been fixed in any arrangement established with the Executive's written consent. (o) Special Compensation. The term "Special Compensation" shall -------------------- have the meaning defined in Section 3 below. --------- (p) Termination Following Change in Control. If a Change in --------------------------------------- Control occurs while the Executive is still an employee of Bank, Termination Following Change in Control shall mean any termination of the Executive's employment with Bank unless such termination is as a result of (i) the ------ Executive's Death; (ii) the Executive's Disability; (iii) the Executive's Retirement; (iv) the Executive's termination by Bank for Cause; or (v) the Executive's decision to terminate employment for Other Reason. 2. Term of Agreement. ----------------- This Agreement shall terminate upon the earliest of the following events: (a) ten years from the date hereof if a Change in Control has not occurred within such ten year period; (b) the Date of Termination of the Executive's employment by Bank (i) prior to a Change in Control or (ii) after a Change in Control for Death, Disability, Retirement or Cause; (c) the Date of Termination of the Executive's employment by the Executive (i) prior to a Change in Control or (ii) after a Change in Control for Other Reason; or (d) the payment in full of all of the Company's obligations for Special Compensation as set forth in Section 3 below after Termination Following --------- Change in Control. 3. Special Compensation Upon Termination Following Change in --------------------------------------------------------- Control. - ------- (a) Special Compensation. Unless this Agreement has previously -------------------- terminated pursuant to Section 2 above, immediately upon a Termination Following --------- Change in Control, the Company shall pay to the Executive, in addition to any compensation to which the Executive may otherwise be entitled, an amount equal to the lesser of: (1) 2.99 times the Average Annual Compensation; or (2) the ------ largest gross Special Compensation amount which, in the opinion of the Company's independent auditors, will maximize the net payment to the Executive after consideration of the Executive's income taxes and the Excise Tax. The Special Compensation shall be paid in a lump sum, in cash, on -6- the Payment Date. All of the Special Compensation shall be paid by Bank. (b) Computation of Excise Tax. For purposes of determining ------------------------- whether any of the Special Compensation will be subject to the Excise Tax and the amount of such Excise Tax: (1) Any other payments or benefits received or to be received by the Executive in connection with a Change in Control (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person or entity whose actions result in a Change in Control or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered by the Executive within the meaning of Section 280G(b)(4) of the Code; (2) The amount of the Special Compensation which shall be treated as subject to the Excise Tax shall be equal to lesser of (A) the total amount of the Special Compensation or (B) the amount of excess parachute payments within the meaning of Section 280G(b)(1) and (4) (after applying clause (1) above); and (3) The value of any non-cash benefits and any present value computations shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. (4) The determination of the amount of the Excise Tax pursuant to the foregoing provisions shall be made by the Company's independent auditors and such determination shall be binding on both the Company and the Executive. The expense of such determination shall be borne solely by the Company. (c) The Company's Withholding Obligation. Bank shall withhold ------------------------------------ the amount of federal and state income tax and, if applicable, the Excise Tax applicable to the Special Compensation payable to the Executive pursuant to the provisions of Section 3 hereof, in the amount established by Company's --------- independent auditors. 4. No obligation to Mitigate Damages. --------------------------------- (a) Executive shall not be required to mitigate damages for the amount of any payment provided for under this -7- Agreement by seeking other employment or otherwise, nor shall the amounts of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The provisions in this Agreement and any payment provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time under any benefit plan, incentive plan, securities plan, employment agreement or other contract, plan or arrangement. 5. Successor to the Company. ------------------------ (a) The Company will require any successor or assign, whether direct or indirect, by purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of Bank or Bancorp to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. As used in this Agreement, Company shall mean the "Company" and any successor to its business and/or assets which executes and delivers the agreement provided in this Section 5 or which otherwise becomes bound by --------- all the terms and provisions of this Agreement by operation of law. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, advisees and legatees. If the Executive should die while any amounts are still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is none, to the Executive's estate. 6. Arbitration. Any controversy or claim arising out of or relating ----------- to this Agreement, or the breach thereof, other than matters pertaining to injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions, and permanent injunctions, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) shall be and may be entered in any court having jurisdiction thereof. The parties hereto hereby agree that the arbitrator(s) shall have jurisdiction to award punitive damages and the parties shall be permitted to conduct discovery in accordance with the provisions of Part 3, Title 9, Paragraphs 1280 et seq. of the California Code of Civil ------ -8- Procedure. Such arbitration shall take place in Los Angeles, California, unless otherwise agreed to in writing by the parties. 7. Miscellaneous. ------------- (a) No Employment Contract. This Agreement shall not constitute ---------------------- a contract of employment between Company and Executive. (b) Notice. All notices, requests, demands, and other ------ communications provided for hereunder shall be in writing or by telex or facsimile transmission and shall be deemed to have been duly given (1) on the date of service if delivered in person or by telex or facsimile transmission (with the telex or facsimile confirmation of transmission receipt acting as confirmation of service when sent and provided that telexed or telecopied notices are also mailed by first class, certified or registered mail, postage prepaid); or (2) seventy-two (72) hours after mailing by first class, registered or certified mail, postage prepaid, and properly addressed as follows or at such other address as the party affected may designate in a written notice to such other party in compliance with this section. If to the Company: Imperial Bancorp Attn: Richard Baker 9920 South La Cienega Blvd. Inglewood, California 90301 Telecopier No.: (213) 417-5695 If to the Executive: Norman P. Creighton P.O. Box 92991 Los Angeles, CA 90009 Telecopier No.: (213) 417-5874 (c) Waiver. No provisions of this Agreement may be modified, ------ waived or discharged unless such waiver, modification or discharge is pursuant to a written agreement signed by the Executive and the Company. No waiver by either party of any breach of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions. (d) Integration. No agreements or representations, oral or ----------- otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement and the terms and conditions of all previous agreements between the parties concerning the subject matter hereof are hereby superseded. (e) Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of California. -9- (f) Validity. The invalidity or unenforceability of any -------- provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. (g) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (h) Legal Fees and Expenses. In the event that any party shall ----------------------- bring any arbitration, action to enforce arbitration or any other legal action or proceeding (collectively, "action") arising out of or in connection with the performance, breach, interpretation, validity or enforceability of this Agreement, then the prevailing party in such action (as determined by the court, arbitrator(s) or other body having jurisdiction) shall be entitled to recover from the losing party, all reasonable costs and expenses of the action, including the fees of all arbitrators if the action has been arbitrated, reasonable attorneys' fees, court costs, costs of investigation and other costs reasonably related to such action, in such amounts as may be determined in the discretion of the court, arbitrator(s) or other body having jurisdiction. (i) Confidentiality. The Executive shall retain in confidence --------------- any and all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise properly disclosed. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EXECUTIVE" "BANCORP" IMPERIAL BANCORP, a registered bank holding company _________________________ By: /s/ Richard M. Baker Norman P. Creighton -------------------------------- Richard M. Baker Senior Vice President "BANK" IMPERIAL BANK, a state banking corporation By: /s/ Bernard G. LeBeau -------------------------------- Bernard G. LeBeau Chairman -10- SPECIAL COMPENSATION AGREEMENT THIS SPECIAL COMPENSATION AGREEMENT (the "Agreement") is made and entered into this 11th day of December, 1989, by and among IMPERIAL BANCORP, a registered bank holding company ("Bancorp"), IMPERIAL BANK, a state banking corporation ("Bank") and George L. Graziadio, Jr., an individual (the "Executive"). (Bancorp and Bank shall be collectively referred to as "the Company"). RECITALS -------- A. The Executive is currently employed by Bancorp and Bank. B. This Agreement sets forth the Special Compensation (as defined in Section 3 below) which the Company agrees it will pay to the Executive upon a - --------- Change in Control (as defined in Section 1(b) below). ------------ C. The board of directors of both Bancorp and Bank, with the Executive specifically excluded from consideration of the matter, have approved the execution of this Agreement and the performance of the obligations hereunder. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration, it is hereby agreed among the parties hereto as follows: 1. Definitions ----------- (a) Average Annual Compensation. The average Compensation (as --------------------------- defined in Section 1(d) below) paid by the Company to the Executive during the ------------ five (5) calendar years ending prior to the Change in Control of the Company. For purposes of this Agreement only, the Average Annual Compensation shall include all compensation which the Executive may have deferred during the five-year period preceding the Change in Control under the Company's Executive Deferral Plan. Average Annual Compensation shall not include any Company Contribution pursuant to Section 3.3 of the Executive Deferral Plan. (b) Change in Control. A Change in Control shall be deemed to ----------------- have occurred contemporaneously with the occurrence of any one of the following events: (1) any consolidation or merger of Bank or Bancorp in which Bank or Bancorp is not a continuing or surviving corporation or pursuant to which the shares of the Bank's or Bancorp's Common Stock are converted into cash, securities or other property, other than a merger of Bank or Bancorp in which the holders of Bank's or Bancorp's Common Stock immediately prior to the merger have the same proportion of ownership of common stock of the surviving corporation immediately after the merger; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Bank or Bancorp; (3) the shareholders of Bank or Bancorp approve any plan or proposal for the liquidation or dissolution of Bank or Bancorp; (4) any person (as such term is used in Sections 13(d) and 14 (d)(2) of the Securities Exchange Act of 1934, as amended, and the regulations thereunder (collectively, the "Exchange Act")) other than the Executive becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of Bank's or Bancorp's issued and outstanding Common Stock; (5) a majority of the members of Bank's or Bancorp's board of directors is replaced during any two-year period by directors whose appointment or election is not approved by two-thirds of the members of the board of directors at the start of such two-year period. (c) Code. The Internal Revenue Code of 1986, as amended. ---- (d) Compensation. The total compensation payable to the ------------ Executive by Bancorp and Bank. (e) Date of Termination. The "Date of Termination" of ------------------- employment shall mean: (1) if this Agreement is terminated by the Company based on the Executive's Disability, 30 days after Notice of Termination is given to the Executive; provided, however, that the Executive shall not have returned to the -------- ------- performance of the Executive's duties on a full-time basis during such 30-day period; (2) if this Agreement is terminated based on the Executive's Retirement, the date on which the Notice of Termination is given; or -2- (3) if this Agreement is terminated based on the Executive's Death or for Other Reason, the effective date of such termination. (f) Death. Termination for "Death" shall mean termination of ----- the Executive's employment after the Executive has been declared legally dead pursuant to the applicable laws. (g) Disability. Termination for "Disability" shall mean ---------- termination of the Executive's employment because the Executive has been absent from his duties on a full time basis for six (6) months as a result of the Executive's incapacity due to physical or mental illness and, within 30 days of Notice of Termination, the Executive shall not have returned to full-time performance of the Executive's duties. (h) Excise Tax. The tax imposed by Section 4999 of the Code and ---------- any applicable state excise tax provision. (i) Notice of Termination. A written notice which (1) indicates --------------------- the specific termination provisions in this Agreement relied upon, (2) sets forth in reasonable detail the facts and circumstances claimed to provide the basis for termination of the Executive's employment under the provisions so indicated, and (3) is delivered to (A) the Executive if the grounds for termination are Disability (when no legal custodian has been appointed for the Executive) or Retirement, or (B) the Executive's legal custodian if the grounds for termination are Disability and a legal custodian has been appointed for the Executive. (j) Other Reason. Termination for "Other Reason" shall mean ------------ termination of the Executive's employment either voluntarily or involuntarily for any reason other than Death, Disability or Retirement. (k) Payment Date. The date of the Change in Control. ------------ (l) Retirement. Termination for "Retirement" shall mean ---------- termination of the Executive's employment by the Company (after Notice of Termination) or termination by the Executive, based on the Executive having reached age 80 or such other age as shall have been fixed in any arrangement established with the Executive's written consent. (m) Special Compensation. The term "Special Compensation" shall -------------------- have the meaning defined in Section 3 below. --------- -3- 2. Term of Agreement. ----------------- This Agreement shall terminate upon the earliest of the following events: (a) ten (10) years from the date hereof if a Change in Control has not occurred within such ten-year period; (b) the Date of Termination of the Executive's employment with the Company based on Death, Disability, Retirement or Other Reason; or (c) the payment in full of all of the Company's obligations for Special Compensation as set forth in Section 3 below after a Change in Control. --------- 3. Special Compensation Upon Change in Control. ------------------------------------------- (a) Special Compensation. Unless this Agreement has previously -------------------- terminated pursuant to Section 2 above, immediately upon a Change in Control, --------- the Company shall pay to the Executive, in addition to any compensation to which the Executive may otherwise be entitled, an amount equal to the lesser of: (1) ------ 2.99 times the Average Annual Compensation; or (2) the largest gross Special Compensation amount which, in the opinion of the Company's independent auditors, will maximize the net payment to the Executive after consideration of the Executive's income taxes and the Excise Tax. The Special Compensation shall be paid in a lump sum, in cash, on the Payment Date. The Special Compensation shall be paid pro rata by Bancorp and Bank based on the respective Average Annual Compensation paid by each. (b) Computation of Excise Tax. For purposes of determining ------------------------- whether any of the Special Compensation will be subject to the Excise Tax and the amount of such Excise Tax: (1) Any other payments or benefits received or to be received by the Executive in connection with a Change in Control (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person or entity whose actions result in a Change in Control or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments or such excess parachute payments (in whole or in part) represent reasonable -4- compensation for services actually rendered by the Executive within the meaning of Section 280G(b)(4) of the Code; (2) The amount of the Special Compensation which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Special Compensation or (B) the amount of excess parachute payments within the meaning of Section 280G(b)(1) and (4) (after applying clause (1) above); and (3) The value of any non-cash benefits and any present value computations shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. (4) The determination of the amount of the Excise Tax pursuant to the foregoing provisions shall be made by the Company's independent auditors and such determination shall be binding on both the Company and the Executive. The expense of such determination shall be borne solely by the Company. (c) The Company's Withholding Obligation. The Company shall ------------------------------------ withhold the amount of federal and state income tax and, if applicable, the Excise Tax applicable to the Special Compensation payable to the Executive pursuant to the provisions of Section 3 hereof, in the amount established by --------- Company's independent auditors. 4. No Obligation to Mitigate Damages. --------------------------------- (a) Executive shall not be required to mitigate damages for the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amounts of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The provisions in this Agreement and any payment provided for hereunder shall not reduce any amounts otherwise payable, or in any diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time under any benefit plan, incentive plan, securities plan, employment agreement or other contract, plan or arrangement. 5. Successor to the Company. ------------------------ (a) The Company will require any successor or assign, whether direct or indirect, by purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of Bank or Bancorp to assume and agree to -5- perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. As used in this Agreement, Company shall mean the "Company" and any successor to its business and/or assets which executes and delivers the agreement provided in this Section 5 or which otherwise becomes bound by all the --------- terms and provisions of this Agreement by operation of law. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, advisees and legatees. If the Executive should die while any amounts are still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is none, to the Executive's estate. 6. Arbitration. Any controversy of claim arising out of or relating ----------- to this Agreement, or the breach thereof, other than matters pertaining to injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions, and permanent injunctions, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) shall be and may be entered in any court having jurisdiction thereof. The parties hereto hereby agree that the arbitrator(s) shall have jurisdiction to award punitive damages and the parties shall be permitted to conduct discovery in accordance with the provisions of Part 3, Title 9, Paragraphs 1280 et seq. of the California Code of Civil Procedure. Such -- --- arbitration shall take place in Los Angeles, California, unless otherwise agreed to in writing by the parties. 7. Miscellaneous. ------------- (a) Notice. All notices, requests, demands, and other ------ communications provided for hereunder shall be in writing or by telex or facsimile transmission and shall be deemed to have been duly given (1) on the date of service if delivered in person or by telex or facsimile transmission (with the telex or facsimile confirmation of transmission receipt acting as confirmation of service when sent and provided that telexed or telecopied notices are also mailed by first class, certified or registered mail, postage prepaid); or (2) seventy-two (72) hours after mailing by first class, registered or certified mail, postage prepaid, and properly addressed as follows or at such other address as the party affected may designate in a written notice to such other party in compliance with this section. -6- If to the Company: Imperial Bancorp Attn: Norman P. Creighton 9920 South La Cienega Blvd. Inglewood, California 90301 Telecopier No.: (213) 417-5874 If to the Executive: George L. Graziadio, Jr. P.O. Box 92991 Los Angeles, CA 90009 Telecopier No.: (213) 417-5874 (b) Waiver. No provisions of this Agreement may be modified, ------ waived or discharged unless such waiver, modification or discharge is pursuant to a written agreement signed by the Executive and the Company. No waiver by either party of any breach of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions. (c) Integration. No agreements or representations, oral or ----------- otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement and the terms and conditions of all previous agreements between the parties concerning the subject matter hereof are hereby superseded. (d) Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of California. (e) Validity. The invalidity or unenforceability of any -------- provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. (f) Counterparts. This Agreement may be executed in one or ------------ more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (g) Legal Fees and Expenses. In the event that any party shall ----------------------- bring any arbitration, action to enforce arbitration or any other legal action or proceeding (collectively "action") arising out of or in connection with the performance, breach, interpretation, validity or enforceability of this Agreement, then the prevailing party in such action (as determined by the court, arbitrator(s)or other body having jurisdiction) shall be entitled to recover from the losing party, all reasonable costs and expenses of the action, including the fees of all arbitrators if the action has been arbitrated, reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such action, in such -7- amounts as may be determined in the discretion of the court, arbitrator(s) or other body having jurisdiction. (h) Confidentiality. The Executive shall retain in confidence any --------------- and all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise properly disclosed. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EXECUTIVE" "BANCORP" IMPERIAL BANCORP, a registered bank holding company /s/ George L. Graziadio, Jr. By: /s/ Richard M. Baker - ---------------------------- ---------------------- GEORGE L. GRAZIADIO, JR. Richard M. Baker Senior Vice President "BANK" IMPERIAL BANK, a state banking corporation By: /s/ Bernard G. LeBeau ---------------------- Bernard G. LeBeau Chairman -8- EX-11 3 COMPUTATION OF INCOME PER SHARE EXHIBIT 11 ================================================================================ COMPUTATION OF INCOME PER SHARE As more fully described in note 13 of the notes to consolidated financial statements herein, the Company has outstanding certain employee stock option plans and a stock purchase plan. The shares and options within such plans have been determined to be common stock equivalents for purposes of computing income per share. During the years ended December 31, 1995 and 1994, the market price of the Company's common stock exceeded the exercise price of certain of these common stock equivalents. The weighted average number of primary shares including common stock equivalents was 15,202,400 in 1995, 14,667,023 in 1994 and 14,161,160 in 1993. The weighted average number of shares used to compute income per common share was retroactively adjusted to reflect an 8% stock dividend declared in the first quarter of 1996 and 5% stock dividends declared in the first quarters of 1994 and 1995. The weighted average number of fully diluted shares including common stock equivalents was 15,253,929 in 1995, 14,667,111 in 1994 and 14,200,887 in 1993. The weighted average number of shares used to compute income per common share was retroactively adjusted to reflect an 8% stock dividend declared in the first quarter of 1996 and 5% stock dividends declared in the first quarters of 1994 and 1995. EXHIBIT 11 ================================================================================ EX-22 4 SUBSIDIARIES OF IMPERIAL BANCORP EXHIBIT 22 ================================================================================ SUBSIDIARIES OF IMPERIAL BANCORP All of the following subsidiaries of the Company are California corporations except Imperial International Bank which is organized under the laws of the United States. Each subsidiary is included in the Company's consolidated financial statements.
========================================================================================================= PERCENTAGE OF VOTING SECURITIES OWNED BY NAME IMMEDIATE PARENT IMMEDIATE PARENT --------------------------------------------------------------------------------------------------------- Imperial Bank Imperial Bancorp 100% Imperial Bank Realty Company, Inc. Imperial Bancorp 100% Imperial Creditcorp Imperial Bancorp 100% Imperial Trust Company Imperial Bank 100% Imperial Asset Advisors, Inc. Imperial Bank 100% Imperial Ventures, Inc. Imperial Bank 100% Imperial International Bank Imperial Bank 100% Pacific Bancard Association, Inc. Imperial Bank 100% Imperial Securities Corporation Imperial Bank 100% Imperial Management, Inc. (1) Imperial Bank 100% TNT Mortgage Services, Inc. (1) Imperial Bank 100% Imperial Global Trading Company, Inc. (1) Imperial Bank 100% Imperial Plan, Inc. (1) Imperial Bank 100% Imperial Municipal Services Group, Inc. (1) (2) Imperial Bank 100% Imperial Capital Markets Group, Inc. (1) Imperial Bank 100% I.B. Mortgage Network, Inc. (1) Imperial Bank 100% =========================================================================================================
(1) Not currently active (2) Previously known as Imperial Municipal Services Corporation EXHIBIT 22 ================================================================================ EX-24 5 INDEPENDENT AUDITORS' CONSENT EXHIBIT 24 ================================================================================ INDEPENDENT AUDITORS' CONSENT The Board of Directors Imperial Bancorp: We consent to incorporation by reference in the registration statements (No. 2- 75352), (No. 2-61660), (No. 2-98462) and (No. 2-75353) on Forms S-8 and S-16 of Imperial Bancorp of our report dated January 25, 1996, relating to the consolidated balance sheet of Imperial Bancorp and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995 annual report on Form 10-K of Imperial Bancorp. Our report refers to the adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on January 1, 1994. KPMG PEAT MARWICK LLP Los Angeles, California March 21, 1996 EXHIBIT 24 ================================================================================ EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 242,018 0 425,300 40,050 295,312 4,975 4,975 1,699,347 37,402 2,788,374 2,363,616 159,636 30,980 5,906 130,780 0 0 97,456 2,788,374 145,375 21,176 9,976 176,527 55,491 60,154 100,251 16,122 260 112,105 34,366 23,177 0 0 23,177 1.52 1.52 5.7 28,926 0 33,608 3,900 40,072 20,962 2,170 37,402 37,402 0 2,455
EX-28 7 UNDERTAKINGS EXHIBIT 28 ================================================================================ To Be Incorporated By Reference Into Forms S-8 and S-16 Registration Statement Nos. 2-75352, 2-61660, 2-98462 and 2-75353. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S- 8 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (f) Employee plans on Form S-8. (1) The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus to each employee to whom the prospectus is sent or given a copy of the registrant's annual report to stockholders for its last fiscal year, unless such employee otherwise has received a copy of such report, in which case the registrant shall state in the prospectus that it will promptly furnish, without charge, a copy of such report on written request of the employee. If the last fiscal year of the registrant has ended within 120 days prior to the use of the prospectus, the annual report of the registrant for the preceding fiscal year may be so delivered, but within such 120 day period the annual report for the last fiscal year will be furnished to each such employee. EXHIBIT 28 ================================================================================ ================================================================================ (2) The undersigned registrant hereby undertakes to transmit or cause to be transmitted to all employees participating in the plan who do not otherwise receive such material as stockholders of the registrant, at the time and in the manner such material is sent to its stockholders, copies of all reports, proxy statements and other communications distributed to its stockholders generally. (3) Where interests in a plan are registered herewith, the undersigned registrant and plan hereby undertake to transmit or cause to be transmitted promptly, without charge, to any participant in the plan who makes a written request, a copy of the then latest annual report of the plan filed pursuant to section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report is filed separately on Form 11-K, such form shall be delivered upon written request. If such report is filed as a part of the registrant's annual report on Form 10-K, that entire report (excluding exhibits) shall be delivered upon written request. If such report is filed as a part of the registrant's annual report to stockholders delivered pursuant to paragraph (1) or (2) of this undertaking, additional delivery shall not be required. (i) Insofar as indemnification of liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ================================================================================ EX-99 8 CONSULTING AGREEMENT CONSULTING AGREEMENT -------------------- This Agreement is made and entered into as of November 1, 1991, by and between Imperial Bank, a California banking corporation, ("Bank") and Robert S. Muehlenbeck ("Consultant"), in connection with services to be provided to Bank by Consultant in the identification and implementation of an opportunity to raise capital for the benefit of Bank in connection with Bank's mortgage banking and thrift and loan activities which may be consolidated into a new company. Consultant has brought to the attention of Bank potential opportunities from time to time and has expended his time, effort and funds towards defining and perfecting such opportunities. Consultant has identified a specific potential transaction involving the Bank's Mortgage Division and Thrift subsidiary, and has performed sufficient market analysis and preliminary feasibility studies at its own cost and risk to provide Bank with the opportunity to assess the potential viability of the project. Consultant has offered and Bank has agreed that Consultant will pursue the matter, in coordination with designated Bank management, on a successful efforts basis with Bank being responsible only to third party costs and an agreed amount of overhead reimbursement absent the closing of a successful transaction. In order to pursue opportunities in connection with Bank's mortgage banking and thrift and loan activities and ongoing activities as hereinafter specified, Bank desires to engage Consultant effective as of the date hereof, and Consultant is willing to provide services to Bank involving the collection and analysis of relevant information, preparation of marketing oriented materials, selection of, negotiation with and coordination of appropriate professionals (legal, accounting and investment banking) to assist in the process leading to a potential securities offering or offerings ("Transaction") of a new company (the "Company") to raise capital to the benefit of Bank, and to provide ongoing advice and services with reference to the maximization of Bank's investment in Company over an extended period of time. In consideration of the mutual covenants and conditions hereof, the parties agree as follows: 1. Bank hereby engages Consultant and Consultant hereby agrees to perform services for Bank in connection with the Transaction and on an ongoing basis hereafter. 2. In the event a Transaction is consummated within one year from the date hereof, Bank shall pay to Consultant, in consideration of the services rendered and to be rendered in formatting and organizing the Company, analyzing and selecting financial alternatives, managing consultants and professionals, and providing ongoing services involving oversight of and advice in reference to Bank's investment in the Company for a period of ten (10) years from the date hereof, a fee equal to $125,000 payable upon a Transaction, plus an incentive fee of 2.5 percent of the realized pretax gains received by Bank when, as and if realized by Bank from Bank's disposition of securities issued by the Company. For purposes of this incentive fee, Bank shall be considered to have sold an amount equal to 20% of any securities holdings of the Company after any initial public offering as of January 1, 1997, 1998, 1999, 2000 and 2001, at a price equal to the arithmetic average of the daily average stock price of the Company as reported by the NASD during the preceding year, and Bank shall pay compensation based on such presumed sale to the extent that actual sales of Company securities by Bank during the preceding years have not been equal to or greater than the volume of presumed sales specified. 3. In the event Bank distributes the securities of the Company to its parent or an affiliate, and the recipient of the securities agrees to assume Bank's fee obligations under this Agreement, no compensation shall be due Consultant out of this Agreement as a result of such transfer so long as the Bank remains secondarily liable for such payments. Any other distribution of Company securities by Bank shall be considered a sale at the average price as would be applicable to a presumed sale provided for above. 4. Bank agrees to cooperate with Consultant in the providing of its services hereunder and Consultant shall be an independent contractor working under the general direction of Bank, but without the requirement of dedicating any particular personnel or specific hours of services in connection with this Agreement. Bank acknowledges that Consultant or its affiliates are Directors of Imperial Bank and/or Imperial Bancorp, Bank's parent, and that this relationship has been disclosed to Bank and to the Boards of Directors of both Bank and Imperial Bancorp, and this Agreement has been submitted to and approved by the respective Boards of both corporations without the participation of either G. Louis Graziadio III or Robert Muehlenbeck. 5. Any provision of this Agreement which is prohibited or unenforceable in any applicable jurisdiction shall, as to such jurisdiction, not be in effect to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. No amendment or waiver of any provision of this Agreement, nor consent to any departure by either party therefrom, shall in any event be effective unless the same shall be in writing and signed by an authorized representative of the other party and any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. All rights and remedies of the parties hereunder shall, except as otherwise specifically provided herein, be cumulative and non-exclusive of any rights or remedies which either may have under any other agreement or instrument, by operation of law, or otherwise. This Agreement shall become effective when it is executed by both parties and thereafter shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, except that Consultant shall not have the right to assign its rights, obligations or interests hereunder with the prior written consent of Bank. Consultant's obligation to provide continuing services hereunder shall terminate upon the death or permanent disability of Consultant. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in said State. 2 6. In the event of any dispute arising out of or in connection with this Agreement, and any documents executed pursuant hereto, the prevailing party, in addition to any other amounts which it may be entitled to, shall be entitled to recover from the other party reasonable attorneys' fees and court costs as shall be awarded in the resolution of such dispute. This Agreement is executed by or on behalf of the parties by duly authorized representatives as of the date first set forth above. IMPERIAL BANK By: /s/Norman P. Creighton ------------------------------------------ Norman P. Creighton, President and Chief Executive Officer /s/Robert S. Muehlenbeck ------------------------------------------ Robert S. Muehlenbeck 3 CONSULTING AGREEMENT -------------------- This Agreement is made and entered into as of November 1, 1991, by and between Imperial Bank, a California banking corporation, ("Bank") and Second Southern Corp. ("Consultant"), in connection with services to be provided to Bank by Consultant in the identification and implementation of an opportunity to raise capital for the benefit of Bank in connection with Bank's mortgage banking and thrift and loan activities which may be consolidated into a new company. Consultant has brought to the attention of Bank potential opportunities from time to time and has expended his time, effort and funds towards defining and perfecting such opportunities. Consultant has identified a specific potential transaction involving the Bank's Mortgage Division and Thrift subsidiary, and has performed sufficient market analysis and preliminary feasibility studies at its own cost and risk to provide Bank with the opportunity to assess the potential viability of the project. Consultant has offered and Bank has agreed that Consultant will pursue the matter, in coordination with designated Bank management, on a successful efforts basis with Bank being responsible only to third party costs and an agreed amount of overhead reimbursement absent the closing of a successful transaction. In order to pursue opportunities in connection with Bank's mortgage banking and thrift and loan activities and ongoing activities as hereinafter specified, Bank desires to engage Consultant effective as of the date hereof, and Consultant is willing to provide services to Bank involving the collection and analysis of relevant information, preparation of marketing oriented materials, selection of, negotiation with and coordination of appropriate professionals (legal, accounting and investment banking) to assist in the process leading to a potential securities offering or offerings ("Transaction") of a new company (the "Company") to raise capital to the benefit of Bank, and to provide ongoing advice and services with reference to the maximization of Bank's investment in Company over an extended period of time. In consideration of the mutual covenants and conditions hereof, the parties agree as follows: 1. Bank hereby engages Consultant and Consultant hereby agrees to perform services for Bank in connection with the Transaction and on an ongoing basis hereafter. 2. Consultant will be reimbursed for its costs in connection with providing the services hereunder on the basis of a payment of $12,500 per month for the time commitment of Consultant, it's employees and affiliates from the date hereof through the consummation of a Transaction or notice from Bank to Consultant to terminate its services. Consultant shall bill Bank monthly, including a detail of any ordinary and necessary out-of-pocket expenses incurred by Consultant in addition to its normal overhead cost, which costs shall be paid by Bank in addition to the monthly amount specified above. 3. In the event a Transaction is consummated within one year from the date hereof, Bank shall pay to Consultant, in consideration of the services rendered and to be rendered in formatting and organizing the Company, analyzing and selecting financial alternatives, managing consultants and professionals, and providing ongoing services involving oversight of and advice in reference to Bank's investment in the Company for a period of ten (10) years from the date hereof, a fee equal to $175,000 payable upon a Transaction, plus an incentive fee of 2.5 percent of the realized pretax gains received by Bank when, as and if realized by Bank from Bank's disposition of securities issued by the Company. For purposes of this incentive fee, Bank shall be considered to have sold an amount equal to 20% of any securities holdings of the Company after any initial public offering as of January 1, 1997, 1998, 1999, 2000 and 2001, at a price equal to the arithmetic average of the daily average stock price of the Company as reported by the NASD during the preceding year, and Bank shall pay compensation based on such presumed sale to the extent that actual sales of Company securities by Bank during the preceding years have not been equal to or greater than the volume of presumed sales specified. 4. In the event Bank distributes the securities of the Company to its parent or an affiliate, and the recipient of the securities agrees to assume Bank's fee obligations under this Agreement, no compensation shall be due Consultant out of this Agreement as a result of such transfer so long as the Bank remains secondarily liable for such payments. Any other distribution of Company securities by Bank shall be considered a sale at the average price as would be applicable to a presumed sale provided for above. 5. Bank agrees to cooperate with Consultant in the providing of its services hereunder and Consultant shall be an independent contractor working under the general direction of Bank, but without the requirement of dedicating any particular personnel or specific hours of services in connection with this Agreement. Bank acknowledges that Consultant or its affiliates are Directors of Imperial Bank and/or Imperial Bancorp, Bank's parent, and that this relationship has been disclosed to Bank and to the Boards of Directors of both Bank and Imperial Bancorp, and this Agreement has been submitted to and approved by the respective Boards of both corporations without the participation of either G. Louis Graziado III or Robert Muehlenbeck. 6. Any provision of this Agreement which is prohibited or unenforceable in any applicable jurisdiction shall, as to such jurisdiction, not be in effect to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. No amendment or waiver of any provision of this Agreement, nor consent to any departure by either party therefrom, shall in any event be effective unless the same shall be in writing and signed by an authorized representative of the other party and any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. All rights and remedies of the parties hereunder shall, except as otherwise specifically provided herein, be cumulative and non-exclusive of any 2 rights or remedies which either may have under any other agreement or instrument, by operation of law, or otherwise. This Agreement shall become effective when it is executed by both parties and thereafter shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, except that Consultant shall not have the right to assign its rights, obligations or interests hereunder with the prior written consent of Bank. Consultant's obligation to provide continuing services hereunder shall terminate upon the death or permanent disability of G. Louis Graziadio, III. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in said State. 7. In the event of any dispute arising out of or in connection with this Agreement, and any documents executed pursuant hereto, the prevailing party, in addition to any other amounts which it may be entitled to, shall be entitled to recover from the other party reasonable attorneys' fees and court costs as shall be awarded in the resolution of such dispute. This Agreement is executed by or on behalf of the parties by duly authorized representatives as of the date first set forth above. IMPERIAL BANK By: /s/ Norman P. Creighton ---------------------------------------- Norman P. Creighton, President and Chief Executive Officer SECOND SOUTHERN CORP. By: /s/ G. Louis Graziadio, III ---------------------------------------- G. Louis Graziadio, III 3 -----END PRIVACY-ENHANCED MESSAGE-----