-----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, M8upb72XKF6ErI8KrjwXBAXRnFZ+5iPcDbh9j3bK1cbw09baFNKfNvK7cEaywMXI Y25GYo9WqeAnTi4XOtiOqg== 0000898430-97-001129.txt : 19970326 0000898430-97-001129.hdr.sgml : 19970326 ACCESSION NUMBER: 0000898430-97-001129 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 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: 97561900 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 FOR THE PERIOD 12/31/96 - -------------------------------------------------------------------------------- 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 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996 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 of (I.R.S. Employer incorporation or organization) Identification Number) 9920 South La Cienega Boulevard Inglewood, California 90301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 417-5600 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, 1997: $496,492,406. Number of Shares of Common Stock outstanding as of March 1, 1997: 25,608,354 shares. Debt Securities: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due 1999. As of December 31, 1996, $3,373,000 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, 1996 are incorporated by reference into Part III hereof. This report includes a total of 67 pages. Exhibit Index begins on page 62. 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) 2 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........................ 16 Financial Statements Consolidated Balance Sheet.................................. 21 Consolidated Statement of Income............................ 22 Consolidated Statement of Changes in Stockholders' Equity... 23 Consolidated Statement of Cash Flows........................ 24 Notes to Consolidated Financial Statements.................. 25 Independent Auditors' Report................................ 47 Selected Statistical Information Securities................................................. 48 Maturity Distribution of Loans............................. 48 Deposits................................................... 48 Financial Ratios........................................... 49 Common Stock and Shareholder Data.......................... 49 Quarterly Data............................................. 50 Analysis of Changes in Net Interest Margin................. 51 Description of Business..................................... 52 Directory................................................... 57 Signatures.................................................. 59 Form 10-K Cross Reference Index............................. 60 Exhibits Index.............................................. 61
3 FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION IMPERIAL BANCORP AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, ----------------------------------------------------------------------------- EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- Summary of Operations Interest income....................... $ 209,156 $ 174,779 $ 135,772 $ 139,704 $ 220,619 Interest expense...................... 68,054 60,154 37,415 36,280 101,683 - ---------------------------------------------------------------------------------------------------------------------- Net interest income................. 141,102 114,625 98,357 103,424 118,936 Provision for loan losses............. 6,881 16,122 12,174 41,977 20,859 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses.......... 134,221 98,503 86,183 61,447 98,077 Noninterest income.................... 63,080 43,546 34,572 38,015 60,023 Gains - Imperial Credit Industries, Inc. stock............... 36,411 -- -- 14,538 5,033 - ---------------------------------------------------------------------------------------------------------------------- Total operating income................ 233,712 142,049 120,755 114,000 163,133 Personnel expense..................... 64,876 47,702 47,087 40,483 58,538 Other noninterest expense............. 63,256 62,622 63,078 72,557 80,925 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest................ 105,580 31,725 10,590 960 23,670 Income tax provision (benefit)...... 43,278 10,071 3,968 (345) 12,756 Minority interest in income of consolidated subsidiary............ -- -- -- -- 2,974 Income from continuing operations..... 62,302 21,654 6,622 1,305 7,940 (Loss) income from operations of discontinued operation, net of tax.. (8,168) 1,523 21 (251) -- Net income............................ $ 54,134 $ 23,177 $ 6,643 $ 1,054 $ 7,940 - ---------------------------------------------------------------------------------------------------------------------- Income per Share(1) Income per share from continuing operations.............. $2.39 $0.86 $0.27 $0.06 $0.34 Net income per share................ 2.07 0.92 0.27 0.05 0.34 - ---------------------------------------------------------------------------------------------------------------------- At Year End Assets................................ $ 3,350,170 $ 2,788,374 $2,378,709 $2,794,517 $3,405,971 Net loans............................. 2,026,997 1,661,945 1,335,074 1,431,959 1,615,641 Deposits.............................. 2,950,277 2,363,616 1,959,710 2,387,759 3,027,493 Short-term borrowings................. 44,897 159,636 190,919 193,616 149,273 Long-term borrowings.................. 4,455 5,906 8,153 9,866 11,252 Stockholders' equity.................. 286,351 228,236 197,776 185,205 184,048 Financial Ratios Return on average equity.............. 20.83% 11.03% 3.46% 0.57% 4.35% Return on average assets.............. 1.94 1.00 0.30 0.04 0.22 Average equity-to-average assets...... 9.33 9.04 8.64 7.02 5.11 Capital Ratios for Imperial Bank Leverage ratio........................ 8.7% 8.6% 9.0% 6.9% 6.1% Risk based capital Tier I capital...................... $ 260,654 $ 211,212 $ 190,355 $ 185,142 $ 201,644 Total capital....................... 296,024 239,678 213,003 209,462 229,868 Tier I capital ratio................ 9.2% 9.3% 10.6% 9.6% 9.0% Total capital ratio................. 10.5 10.6 11.9 10.9 10.2 Average Balances Total assets.......................... $ 2,785,089 $ 2,326,308 $2,224,856 $2,645,492 $3,568,402 Earning assets........................ 2,449,148 2,031,551 1,887,389 2,207,159 3,189,583 Loans................................. 1,836,864 1,540,940 1,361,630 1,481,231 1,794,586 Total deposits........................ 2,412,150 2,006,737 1,903,203 2,258,201 3,122,316 Stockholders' equity.................. 259,823 210,188 192,172 185,712 182,362 Common Share and Stockholder Data(1) Market price, end of year............. $21.82 $13.75 $6.75 $6.75 $4.61 Book value, end of year............... 11.28 9.27 8.24 8.02 8.00 Average common and common equivalent shares outstanding................... 26,116,767 25,168,985 24,200,733 23,431,464 23,304,714 - ---------------------------------------------------------------------------------------------------------------------- (1) Adjusted for stock dividends declared and paid in 1992 through first quarter 1997 and a 3-for-2 stock split effected in 1996. - ----------------------------------------------------------------------------------------------------------------------
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 1996. Net income for the year ended December 31, 1996 increased 134% to $54.1 million or $2.07 per share. For 1995, the Company earned $23.2 million or $0.92 per share. Net income for 1996 was positively impacted by an after-tax gain of $21.0 million realized from the sale of a portion of the Company's investment in Imperial Credit Industries, Inc. (NASDAQ: NM: ICII) ("ICII"), and from the sale of stock by ICII. Additionally, net income increased $6.8 million after-tax which represented the Company's share of ICII's total gain associated with the sale of a portion of its investment in Southern Pacific Funding Corporation (NYSE: SFC) ("SPFC") through an initial public offering. These increases were partially offset by losses of $8.2 million, net of tax, associated with the Company's discontinued precious metals operation. Income as measured by return on average total assets was 1.94% for the year ended December 31, 1996, as compared to 1.00% for the year ended December 31, 1995. Return on average stockholders' equity was 20.83% for the year ended December 31, 1996, a significant increase from the 11.03% return on average stockholders' equity for 1995. The increase in net income, excluding the gains associated with ICII mentioned above, the discontinued operation, the impact of donations of ICII stock to not- for-profit organizations, and the 1995 gain on sale of merchant accounts, ("core net income") in 1996 was driven by several factors, including a 19% increase in average loans from the prior year; improved net interest income; decreases in loan loss provision and net real estate-owned ("REO") expense, and continued growth in fee-based activities. The increase in core net income was partially offset by increases in salaries and benefits expense, customer services and professional and consulting fees. Net interest income and net interest margin for the year ended December 31, 1996 were $141.1 million and 5.8%. This compares to net interest income and net interest margin of $114.6 million and 5.7% for the year ended December 31, 1995. Noninterest income for year ended December 31, 1996 totaled $99.5 million compared to $43.5 million for 1995. Excluding non-core business items, noninterest income for the year ended December 31, 1996 totaled $47.6 million compared to $37.1 million for 1995, a 28% improvement. The increase for the year was mainly attributable to a $16.3 million improvement in the Company's share of income from ICII of which $11.8 million represented the Company's share of the gains realized by ICII on its sale of SPFC stock. The Company also recorded improvements in other fee-based income in 1996, including trust fees, international fees, service charges on deposits and commissions related to the sale of non-proprietary mutual funds. Offsetting these increases was a reduction in merchant card servicing fees. Noninterest expenses amounted to $128.1 million for the year ended December 31, 1996. This compares to $110.3 million reported for 1995. This increase was primarily related to the addition of personnel and the opening of one new regional office and several loan production offices during 1996 as well as increases in customer services and professional and consulting expenses. Partially offsetting these increases were reductions in REO expense, regulatory assessments and data processing costs. At December 31, 1996, the Company's total assets were $3.4 billion, total loans were $2.1 billion and stockholders' equity and allowance for loan losses totaled $322 million. This compares favorably to total assets of $2.8 billion, total loans of $1.7 billion and stockholders' equity and allowance for loan losses of $266 million at December 31, 1995. Total deposits at December 31, 1996, were $3.0 billion of which $1.5 billion, or 50%, were noninterest bearing demand deposits. At the previous year end, total deposits were $2.4 billion, including $1.1 billion, or 48%, 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 $20.4 million at December 31, 1996 decreased $8.5 million from year end 1995 while REO of $2.1 million at December 31, 1996, decreased $8.2 million from year end 1995. For the year ended December 31, 1996, the provision for loan losses totaled $6.9 million, a decrease of $9.2 million from the year ended December 31, 1995. REO expenses totaled $1.9 million for 1996 as compared to $8.5 million in 1995. At December 31, 1996, the allowance for loan losses amounted to $36.1 million or 1.8% of total loans as compared to $37.4 million or 2.2% of total loans at December 31, 1995. The allowance for loan losses coverage of nonaccrual loans at year end 1996 approximated 177%, an increase from 129% at December 31, 1995. Imperial Bank is classified "Well Capitalized" with leverage, Tier I and total capital ratios at December 31, 1996, of 8.7%, 9.2% and 10.5%, respectively, as compared to 8.6%, 9.3% and 10.6%, respectively, the year earlier. 5 EARNINGS PERFORMANCE AVERAGE BALANCES, YIELDS AND RATES PAID (1) - -------------------------------------------------------------------------------
1996 - ------------------------------------------------------------------------------- INTEREST AVERAGE INCOME/ AVERAGE (IN THOUSANDS) BALANCE EXPENSE RATE % - ------------------------------------------------------------------------------- Earning assets: Loans (2)............................. $1,836,864 $173,734(3) 9.5% Deposits placed with banks............ -- -- -- Trading instruments................... 59,767 2,971 5.0 Securities available for sale......... 357,837 21,675 6.1 Securities held to maturity........... 4,313 306 7.1 Federal funds sold and securities purchased under resale agreements.... 185,659 9,970 5.4 Loans held for sale................... 4,708 500 10.6 - ------------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS $2,449,148 $209,156 8.5% - ------------------------------------------------------------------------------- Allowance for loan losses............... (39,429) Cash.................................... 249,341 Other assets............................ 126,029 ---------- Total assets.......................... $2,785,089 ---------- Interest-bearing liabilities: Savings............................... 18,277 $ 456 2.5% Money market.......................... 485,295 14,802 3.1 Time - under $100,000................. 218,064 12,467 5.7 Time - $100,000 and over.............. 671,357 36,826 5.5 - ------------------------------------------------------------------------------- TOTAL INTEREST-BEARING DEPOSITS $1,392,993 $ 64,551 4.6% - ------------------------------------------------------------------------------- Short-term borrowings................. 61,361 3,160 5.1 Long-term borrowings.................. 5,154 343 6.7 - ------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES $1,459,508 $ 68,054 4.7% - ------------------------------------------------------------------------------- Demand deposits....................... 1,019,157 Other liabilities..................... 46,601 Stockholders' equity.................. 259,823 ---------- Total liabilities and stockholders' equity.............. $2,785,089 ---------- NET INTEREST INCOME/ NET INTEREST MARGIN $141,102 5.8% -------- ---- - -------------------------------------------------------------------------------
(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 fee income of $9.7 million, $5.4 million, $4.4 million and $3.9 million for the years ended December 31, 1996, 1995, 1994 and 1993, 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 cost of 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, 1996, net interest income increased to $141.1 million from $114.6 million in 1995. The Company's net interest margin increased slightly to 5.8% for 1996 from 5.7% for 1995. Net interest income and net interest margin for the year ended December 31, 1995 were negatively impacted by the Company's derivative financial instruments outstanding during 1995. The impact 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. Excluding the $7.2 million reduction in net interest income for the year ended December 31, 1995, net interest margin for 1996 decreased by 32 basis points. This decline in spread resulted primarily from the decrease in the Company's base lending rate which averaged 8.29% for 1996 compared with 8.83% for 1995 and decreased more rapidly than its borrowing rates. Despite the decline in spread, net interest income increased $19.3 million in 1996, excluding the $7.2 million reduction to net interest income in 1995. 6
- ----------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BALANCE EXPENSE RATE % BALANCE EXPENSE RATE % BALANCE EXPENSE RATE % - ----------------------------------------------------------------------------------------------------------------------------- $1,540,940 $143,627(3) 9.4% $1,361,630 $112,799(3) 8.3% $1,481,231 $113,671(3) 7.7% -- -- -- -- -- -- 14,953 846 5.7 52,759 3,516 6.7 42,179 2,366 5.6 85,916 4,709 5.5 265,422 17,349 6.5 295,283 12,459 4.2 329,903 10,423 3.2 5,619 311 5.5 5,860 345 5.9 12,383 813 6.6 164,359 9,707 5.9 172,070 7,153 4.2 273,964 8,663 3.2 2,452 269 11.0 10,367 650 6.3 8,809 579 6.6 - ----------------------------------------------------------------------------------------------------------------------------- $2,031,551 $174,779 8.7% $1,887,389 $135,772 7.2% $2,207,159 $139,704 6.3% - ----------------------------------------------------------------------------------------------------------------------------- (39,993) (41,869) (39,582) 210,500 229,031 292,365 124,250 150,305 185,550 - ------------ ------------- ------------ $2,326,308 $2,224,856 $2,645,492 - ------------ ------------- ------------ $ 24,554 $ 613 2.5% $ 26,420 $ 654 2.5% $ 29,812 $ 720 2.4% 442,702 12,614 2.8 465,755 11,129 2.4 480,751 11,092 2.3 233,726 14,682 6.3 174,655 7,575 4.3 178,103 7,243 4.1 462,818 27,582 6.0 324,384 13,826 4.3 330,667 12,017 3.6 - ----------------------------------------------------------------------------------------------------------------------------- $1,163,800 $ 55,491 4.8% $991,214 $ 33,184 3.3% $1,019,333 $ 31,072 3.0% - ----------------------------------------------------------------------------------------------------------------------------- 72,077 4,135 5.7 99,208 3,606 3.6 170,194 4,486 2.6 7,260 528 7.3 9,176 625 6.8 10,607 722 6.8 - ----------------------------------------------------------------------------------------------------------------------------- $1,243,137 $ 60,154 4.8% $1,099,598 $ 37,415 3.4% $1,200,134 $ 36,280 3.0% - ----------------------------------------------------------------------------------------------------------------------------- 842,937 911,989 1,238,868 30,046 21,097 20,778 210,188 192,172 185,712 - ------------ ------------- ------------- $2,326,308 $2,224,856 $2,645,492 - ------------ ------------- ------------- $ 114,625 5.7% $ 98,357 5.2% $103,424 4.7% ------------------------- ------------------------ ----------------------- - -----------------------------------------------------------------------------------------------------------------------------
As illustrated by the table above and the Analysis of Changes in Net Interest Margin (see page 51), the growth in the Company's loan portfolio had a much greater impact on net interest income than the change in rates. The Company's average loan portfolio for the year ended December 31, 1996 grew $296 million, or 19% from 1995. Average demand deposit levels for the year ended December 31, 1996 increased approximately $176 million from the prior year while average CD balances increased $193 million. The growth in the Company's CD portfolio and the demand deposit base funded the Company's growth in average earning assets which grew $418 million, or 21% from 1995. 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 $11.2 million and $8.8 million, respectively, for the years ended December 31, 1996 and 1995. The net interest margin for both years would have been 5.3%. 7 NONINTEREST INCOME: Noninterest income amounted to $99.5 million for 1996 as compared to $43.5 million for 1995. The table below shows the major components of noninterest income.
- ------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------- Service charges on deposit accounts..... $ 4,892 $ 4,328 Trust fees.............................. 8,592 7,646 Gain on origination and sale of loans... 3,222 2,265 Equity in net income of Imperial Credit Industries, Inc........................ 21,444 5,192 Other service charges and fees.......... 10,122 6,500 Merchant and credit card fees........... 2,395 4,855 Gain on securities available for sale... 229 260 Gain on trading instruments............. 3,197 2,852 Gain on sale of merchant card accounts.. -- 6,400 Gain on sale of investment in Imperial Credit Industries, Inc................. 25,650 -- Gain resulting from sale of stock by Imperial Credit Industries, Inc........ 10,761 -- Appreciation of donated Imperial Credit Industries, Inc. common stock.......... 3,698 -- Other income............................ 5,289 3,248 - ------------------------------------------------------------- TOTAL $99,491 $43,546 - -------------------------------------------------------------
Noninterest income for the year ended December 31, 1996 was significantly impacted by gains realized from the sale of a portion of the Company's investment in ICII. In April 1996, the Company sold 1.5 million shares of ICII as a part of an offering which included the sale of approximately 2.2 million new ICII shares by ICII to the public. An additional 0.5 million shares were sold by ICII to the public in May 1996. The Company recorded a $25.6 million pre-tax gain on the sale of its ICII shares. After the sales of ICII shares, the book value of ICII common stock approximated $8.72 per share. As such, the Company recorded a $10.8 million pre-tax gain which approximated the excess of ICII's book value per share over the book value of the Company's remaining investment in ICII. In addition, the Company realized a significant increase in equity in the net income of ICII in 1996. In June 1996, ICII sold 2.3 million shares of their subsidiary, SPFC, in connection with SPFC's initial public offering of 5.7 million shares. In the fourth quarter of 1996, ICII sold an additional 1.0 million shares of SPFC to the public. ICII's sale of its SPFC stock resulted in a pre-tax gain to ICII of $82.7 million. The Company's net equity in this pre- tax gain realized by ICII approximated $11.8 million and is included in the consolidated statement of income as "Equity in net income of Imperial Credit Industries, Inc." Excluding the gains from the SPFC transaction, the equity in net income of ICII increased $4.4 million in 1996 despite the reduction in ownership percentage to approximately 25%. The improvement was due to ICII's greater volume and higher profitability on loan sales executed through securitization transactions as well as a full year of income realized by ICII from new businesses acquired by ICII in 1995. Also increasing noninterest income was $3.7 million in appreciation of ICII stock which was donated to not-for-profit organizations during 1996. The appreciation represents the difference between the market value and book value of the ICII shares on the date they were donated. The Company recorded a corresponding charitable donation expense in noninterest expenses (see Noninterest Expense). Excluding the non-core items, noninterest income for 1996 increased $10.4 million, or 28% from 1995. The Company recorded higher gains from the origination and sales of SBA loans as loan volumes have increased over the prior year. This line of business generated an additional $1.0 million for the year ended December 31, 1996. Trust revenues from the Company's trust subsidiary, Imperial Trust Company, increased $0.9 million, or 12% from 1995 as a result of the Trust Company's increase in assets under management from $6.8 billion at December 31, 1995 to $7.5 billion at December 31, 1996. The $3.6 million increase in other service charges and fees that occurred in 1996 related to various activities, most significant of which were the following: loan processing and servicing fees increased $1.8 million; commissions related to the sale of non-proprietary mutual funds improved $0.8 million; and international fees increased $0.6 million. These increases were all related to larger volumes in their respective operations. Other income improved $2.0 million in 1996 mainly due to an improvement in income on other equity investments and gain on sales of the Company's other equity investments. Partially offsetting the overall increase in noninterest income was a $2.5 million decline in merchant and credit card fees that resulted from the fourth quarter 1995 sale of a portion of the Company's merchant card accounts. NONINTEREST EXPENSE: Noninterest expense totaled $128.1 million for the year ended December 31, 1996 compared to $110.3 million for the prior year. The table below shows the major components of noninterest expense.
- ------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------- Salary and employee benefits....... $ 64,876 $ 47,702 Net occupancy expense.............. 9,165 8,861 Furniture and equipment............ 5,048 4,935 Data processing.................... 6,419 7,738 Customer services.................. 11,178 8,842 Net real estate owned expense...... 1,876 8,508 Regulatory assessments............. 298 3,225 Professional and consulting........ 5,967 3,526 Business development............... 3,659 3,079 Lawsuit settlements................ 679 (1,134) Charitable donations............... 5,024 142 Other expense...................... 13,943 14,900 - ------------------------------------------------------------- TOTAL $128,132 $110,324 - -------------------------------------------------------------
8 The increase in noninterest expense was partially attributable to the charitable donations of ICII stock during 1996 and to the favorable settlement of a lawsuit which reduced noninterest expense for 1995. Excluding the impact of the donations and prior year lawsuit settlement, noninterest expense rose $11.7 million in 1996. This increase was primarily due to the rise in salary and benefit costs. In addition to opening a new banking office in Fresno, California and loan production offices in Boston, Massachusetts: Austin, Texas: and Phoenix, Arizona, the Company's focus on growth has centered around an investment in people resulting in a $5.9 million increase in personnel expenses for the year ended 1996 when compared to the year ended 1995. This investment was made to take advantage of the growing California economy and to enhance the Company's existing presence in various industry segments. Also, the Company adopted an additional deferred compensation plan on January 1, 1996 which added approximately $3.2 million to benefit costs for the year. As a result of the greater profitability realized in 1996, expenses related to incentive compensation for the year ended 1996 increased $4.8 million over the prior year. Effective January 1, 1996, the Company increased the match on its 401-K Plan which increased expenses related to the plan by $0.6 million for 1996 when compared to 1995. Customer service costs related to demand deposits including accounting, courier and other deposit related services increased $2.3 million in 1996 due to increased average demand deposits volumes as these costs are a function of deposit volume and interest rates. The Company incurred higher professional and consulting fees during the year ended December 31, 1996. Increased consulting expenses accounted for approximately $1.3 million of the increase. The Company had retained the services of outside consultants to assist in the implementation of its cost containment and revenue enhancement programs. Offsetting these increases in noninterest expense were decreases in the following components of noninterest expense. Regulatory assessments decreased $2.9 million in 1996 due to a reduction in the FDIC deposit insurance premium that occurred in the third quarter of 1995. The decline in data processing costs of $1.3 million in 1996 resulted partially from the sale of the Company's merchant card accounts in the fourth quarter of 1995. REO expenses totaled $1.9 million in 1996, a decrease of $6.6 million from 1995. This decline was mainly due to a decrease in REO activity in 1996 resulting in direct holding costs decreasing by $3.1 million and the provision for REO decreasing by $4.1 million as compared to 1995. INCOME TAXES The Company recorded income tax expense from continuing operations of $43.3 million for the year ended December 31, 1996 representing an effective tax rate of approximately 41.0%. For 1995, the Company's income tax expense from continuing operations and effective tax rate approximated $10.1 million and 31.7%. During 1995, the Company recorded a $0.9 million reduction of tax expense to reflect the finalization of prior years income tax issues. Also in 1995, the Company reduced the valuation allowance on its deferred tax assets by approximately $2.3 million. Excluding these items, the Company's effective tax rate from continuing operations would have been 41.7% for 1995. At December 31, 1996, the Company had a net deferred tax liability of $1.5 million, compared to a $4.4 million net deferred tax asset at December 31, 1995. The Company's deferred tax asset is supported by carryback and carryforward provisions of the tax laws as well as the Company's projection of taxable income for 1997. DISCONTINUED OPERATION: In the second quarter of 1996, management of the Company decided to discontinue the precious metals business which had been engaged in trading and leasing of precious metals in addition to making loans secured by precious metals since 1993. The decision to exit this line of business was made in the wake of several operational losses for which the Company provided approximately $9.8 million, net of tax, in 1996. This included provisions for operational losses of $2.8 million, net of tax, recorded as a result of recent developments occurring during the fourth quarter of 1996. The provision, in addition to all of the results of operations from this division, is reflected in the consolidated statement of income as "(Loss) income from operations of discontinued operation, net of tax." Substantially all of the activities of the precious metals division were terminated as of December 31, 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 $1.0 billion for the year ended December 31, 1996 compared to $843 million for 1995. The Company's average demand deposits and average stockholders' equity funded 46% and 45%, respectively, of average total assets for the years ended December 31, 1996 and 1995. 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 1996, the Company experienced a net cash outflow from its investing activities of $386 million. This net outflow in investing activities resulted primarily from the growth in the Company's loan portfolio, an outflow of $359 million. The outflows were offset by the $473 million net cash provided by the Company's financing activities consisting mainly of deposit 9 inflows including $104 million in certificates of deposit and $483 million in demand deposits, savings and money market accounts. These deposit inflows were partially offset by $115 million of outflows attributable to short-term borrowings. 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"). 10 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 consolidated 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 consolidated 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, 1996. 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.
- ----------------------------------------------------------------------------------------------------------------------------------- GREATER GREATER GREATER GREATER THAN THAN THAN THAN NON 0-3 3-6 6-12 1-5 5 INTEREST- (IN THOUSANDS) MONTHS MONTHS MONTHS YEARS YEARS BEARING TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Earning Assets: Trading instruments(1)............... $ 64,887 $ -- $ -- $ -- $ -- $ -- $ 64,887 Securities available for sale......... 398,284 10,039 406 10,309 7,298 -- 426,336 Securities held to maturity........... -- -- 998 -- 3,195 -- 4,193 Federal funds sold and securities purchased under resale agreements.... 357,000 -- -- -- -- -- 357,000 Loans held for sale(1)............... 5,531 -- -- -- -- -- 5,531 Loans:(2) Commercial loans.................... 1,520,237 1,809 8,614 44,253 10,307 9,382 1,594,602 Real estate loans................... 155,001 16,062 39,061 187,374 39,584 10,760 447,842 Consumer loans...................... 19,844 9 43 460 -- 248 20,604 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LOANS $1,695,082 $ 17,880 $ 47,718 $ 232,087 $ 49,891 $ 20,390 $2,063,048 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses............. -- -- -- -- -- (36,051) (36,051) Non-earning assets.................... -- -- -- -- -- 465,226 465,226 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $2,520,784 $ 27,919 $ 49,122 $ 242,396 $ 60,384 $ 449,565 $3,350,170 - ------------------------------------------------------------------------------------------------------------------------------------ Sources of Funds: Deposits: Demand.............................. -- -- -- -- -- 1,465,324 1,465,324 Savings............................. 17,324 -- -- -- -- -- 17,3324 Money market........................ 596,967 -- -- -- -- -- 596,967 Time - under $100,000............... 81,652 29,509 55,821 2,511 -- -- 169,493 Time - $100,000 and over............ 517,644 100,959 80,614 1,952 -- -- 701,169 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS $1,213,587 $ 130,468 $ 136,435 $ 4,463 $ -- $ 1,465,324 $2,950,277 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings................. 44,897 -- -- -- -- -- 44,897 Long-term borrowings.................. 3,373 -- -- 1,082 -- -- 4,455 Noninterest bearing liabilities....... -- -- -- -- -- 64,190 64,190 Equity................................ -- -- -- -- -- 286,351 286,351 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND EQUITY $1,261,857 $ 130,468 $ 136,435 $ 5,545 $ -- $ 1,815,865 $3,350,170 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST SENSITIVITY GAP $1,258,927 $ (102,549) $ (87,313) $ 236,851 $ 60,384 $(1,366,300) $ -- - ------------------------------------------------------------------------------------------------------------------------------------ CUMULATIVE INTEREST SENSITIVITY GAP $1,258,927 $1,156,378 $1,069,065 $1,305,916 $1,366,300 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------------ (1) Trading account securities and loans held for sale are sold within 90 days. (2) The noninterest bearing column consists of nonaccrual loans. - ------------------------------------------------------------------------------------------------------------------------------------
11 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. As illustrated by the table, the Company maintained positive three month and one year gaps at December 31, 1996 of approximately $1.3 billion and $1.1 billion, respectively, as compared to positive three month and one year gaps of $986 million and $759 million at December 31, 1995. 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 1995 as it is no longer impacted by its interest rate swaps which matured in the first quarter of 1996. In addition, the Company's demand deposit balances at year end exceeded its average demand deposits for the year by approximately $446 million. As this excess liquidity at year end is invested in highly liquid instruments such as Federal funds sold and securities available for sale, the result is 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. 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. 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 which generally adjust quarterly and are approximately 200 basis points below or above (depending on the instrument) current market rates at the time the floors and caps are purchased. Based on its strategy and the general asset sensitive nature of the consolidated balance sheet, the Company purchased over the counter interest rate floors in the first quarter of 1996 to protect against a drop in interest rates. The interest rate floors, with a notional value of $500 million at December 31, 1996, matured unexercised in the first quarter of 1997. In the first, second, and third quarter of 1996, the Company purchased $2.0 billion of exchange traded interest rate floors. The floors mature at the rate of $500 million per quarter beginning in the second quarter of 1997. The floors maturing in the second and third quarter of 1997 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 while the remaining floors have a strike price of 4.25%. The unrealized gain of these floors approximated $50,000 at December 31, 1996. In the fourth quarter of 1996, the Company purchased an additional $2.0 billion of exchange traded interest rate floors. The floors mature at the rate of $1.0 billion per quarter beginning in the second quarter of 1998. The floors provide the Company protection in the event that the three month LIBOR drops below the strike price of 4.0%. The unrealized gain of these floors approximated $150,000 at December 31, 1996. In January 1996, the Company purchased exchange traded interest rate caps with a notional value of $500 million at December 31, 1996. The caps provide protection in the event that the three month LIBOR increases above the 6.5% strike price of the caps and mature during the second quarter of 1997. The unrealized gain on these caps approximated $6,000 at December 31, 1996. In the fourth quarter of 1996, the Company purchased an additional $1.0 billion of exchange traded caps. The caps mature at the rate of $500 million per quarter beginning in the third quarter of 1997 and provide the Company protection in the event that the three month LIBOR increases above the 7.5% strike price. The approximate unrealized gain of these caps at December 31, 1996 approximated $31,000. The unamortized premiums paid for floors and caps described above approximated $0.5 million at December 31, 1996. The following table summarizes the Company's derivative instruments at December 31, 1996.
- ----------------------------------------------------------------------------- NOTIONAL (IN THOUSANDS) AMOUNT TERMS AND MATURITY - ----------------------------------------------------------------------------- INTEREST RATE CAPS PURCHASED Exchange traded.............. $ 1,500,000 $500,000 maturing per quarter in second, third and fourth quarter 1997 INTEREST RATE FLOORS PURCHASED Exchange traded.............. $ 4,000,000 $500,000 maturing per quarter in second, third and fourth quarter 1997, first quarter 1998. $1,000,000 maturing per quarter in second and third quarter 1998 Over the counter............. $ 500,000 Matured but unexercised in first quarter 1997 - -----------------------------------------------------------------------------
12 Many of the derivative financial contracts entered into in late 1993 and 1994, which included interest rate swaps with embedded options and associated written options, and purchased options, expired during 1995 although some were still outstanding at year end 1995. The interest rate swaps with embedded options had a notional value of $200 million at December 31, 1995 and matured 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. The interest rate swaps with linked written options had a notional value of $100 million at December 31, 1995 and matured in the first quarter of 1996. The linked options, in the same manner as the embedded options, were intended to cap the rate received on the interest rate swaps at escalating strike prices built into the options. These linked options expired during 1995. The impact of the Company's derivative financial instruments discussed above was a $0.7 million increase in net interest income and a 3 basis point increase in net interest margin for the year ended December 31, 1996. For the years ended December 31, 1995 and 1994, the economic impact of the Company's derivative financial instruments were $7.2 million and $4.9 million reductions in net interest income and 35 basis point and 27 basis point reductions in net interest margin, respectively. The impact of these instruments in 1995 was partially offset by the recognition of a $2.3 million premium received on the linked written option which had been deferred until the final maturity of the these options in the fourth quarter of 1995. BALANCE SHEET ANALYSIS CASH AND DUE FROM BANKS: On average in 1996, nine percent of the Company's assets were maintained in cash and due from banks. This reflects the large volume and size of demand deposits. Average cash and due from banks for the year ended December 31, 1996 was $249 million, up from the prior year average of $211 million primarily due to the increase in average demand deposits. SECURITIES: Trading instruments totaled $64.9 million at December 31, 1996 as compared to $40.1 million at year end 1995. The Company maintained average balances in its trading portfolio of $59.8 million and $52.8 million, respectively, for the years ended 1996 and 1995. The Company engages in trading SBA loan certificates, foreign currencies and in a limited capacity, precious metals. Due to the discontinuance of the precious metals division in 1996, the Company traded precious metals as a courtesy to those customers in the process of leaving the Bank. Approximately $41.4 million of the Company's year end trading account balances were related to SBA loan certificates, $16.5 million related to the Company's net long position in its precious metals trading portfolio and $3.2 million related to its physical position in foreign currency. The increase in the trading instruments balance was mainly attributable to a change from a net short position in 1995 to a net long position in the Company's precious metals trading portfolio. The Company's short-term investments, including securities available for sale and Federal funds sold and securities purchased under resale agreements, averaged $544 million for 1996 compared to $430 million for 1995. These investments amounted to $783 million at year end 1996 and $721 million at year end 1995. The increase in the year end 1996 balance of these securities is directly related to the increase in demand deposits at year end 1996. The following table illustrates the carrying value of the Company's investment and available for sale portfolios for each of the past three years.
- ------------------------------------------------------------------------------ AT DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------ Securities held to maturity: Industrial development bonds.......... $ 4,193 $ 4,376 $ 4,546 Other securities...................... -- 599 1,600 - ------------------------------------------------------------------------------ TOTAL $ 4,193 $ 4,975 $ 6,146 - ------------------------------------------------------------------------------ Securities available for sale: U.S. Treasury and federal agencies.... $387,667 $245,919 $320,949 Mutual funds invested in short-term government securities................ 31,095 43,052 56,915 Other securities...................... 7,574 6,341 10,385 - ------------------------------------------------------------------------------ TOTAL $426,336 $295,312 $388,249 - ------------------------------------------------------------------------------
Securities available for sale were utilized as the primary liquidity tool during 1996 as they averaged $358 million in 1996 compared to $265 million in 1995. For both 1996 and 1995, securities available for sale were comprised mainly of SBA, federal agency, 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 1996. These securities averaged $186 million during 1996 compared to $164 million in 1995. The Company maintains securities available for sale at fair value with unrealized gains and losses reported as a separate component of stockholders' equity net of tax. The Company reported unrealized gains of $1.2 million and $2.7 million at December 31, 1996 and 1995, respectively. LOANS HELD FOR SALE: Loans held for sale approximated $5.5 million and $2.6 million at December 31, 1996 and 1995, respectively. These balances are comprised entirely of SBA loans originated by the Company. The Company sells the guaranteed portion and the allowable unguaranteed portion of these loans into the secondary market while retaining a percentage of the unguaranteed portion for its own portfolio as well as the servicing rights. 13 LOAN COMPOSITION: The loan portfolio totaled $2.1 billion at December 31, 1996, an increase of $364 million from the prior year end. The increase in loan balances came primarily from the Bank's commercial loan portfolio which grew $356 million, or 29%, mainly as a result of increased loan demand in 1996. Included in the commercial loan growth was increased participation in nationally syndicated credit facilities which accounted for $140 million, or 39%, of the Company's loan growth during 1996. These participated credits are primarily Fortune 500 companies diversified among various commercial industries and the gaming industry. All other commercial loans are broadly diversified among many industries including high technology, entertainment, health care, manufacturing, distribution, retail 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) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------- Commercial loans................ $1,595 $1,238 $ 920 $1,002 $1,025 Loans secured by real estate: Real estate term loans........ 362 389 337 347 403 Interim construction loans.... 86 65 117 123 216 Consumer loans.................. 20 7 1 3 11 - ------------------------------------------------------------------------------- TOTAL LOANS $2,063 $1,699 $1,375 $1,475 $1,655 - -------------------------------------------------------------------------------
As illustrated by the above table, total real estate loans remained relatively flat year to year. The Company saw reductions approximating $27 million in its real estate term loan portfolio mainly as a result of loan payoffs. Offsetting the decrease in this portfolio was growth in the Company's construction loan portfolio of approximately $22 million due to the issuance of new construction loans to builders of single-family tract housing. 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, 28%, and retail facilities, 21% (see loans by project type 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, 1996, 85% were geographically concentrated in Southern California, 10% in Northern California and 5% 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 $20.4 million at December 31, 1996 as compared to $28.9 million at year end 1995. The decrease from year end 1995 was related in part to charge-offs of loans on nonaccrual status at year end 1995, approximating $3.5 million, paydowns approximating $8.8 million and delinquencies which were cured, approximating $4.6 million. Offsetting these decreases from year end 1995 were commercial loans approximating $8.6 million placed on nonaccrual during 1996. Foregone interest on nonaccrual loans approximated $2.2 million in both 1996 and 1995. 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. 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. Restructured loans, loans outstanding whose original terms have been modified, totaled $28.7 million at December 31, 1996 compared to $33.6 million at prior year end. The decrease in restructured loans resulted in part from a $13.7 million loan which was restructured in the fourth quarter of 1995 and performed in accordance with its modified terms during 1996. As a result, the loan was no longer classified as restructured at year end 1996. Real estate owned ("REO") of $2.1 million, net of a $0.8 million valuation allowance, at December 31, 1996 decreased $8.2 million from $10.3 million, net of a $4.7 million valuation allowance, at year end 1995. The Company was successful in disposing of 18 REO properties during 1996. The total net book value of these properties approximated $8.6 million of which the Company collected net sales proceeds of $4.2 million and made $4.1 million in loans to facilitate the sales of the REO. 14 Detailed information regarding nonaccrual loans, restructured loans and real estate owned is presented below.
- ------------------------------------------------------------------------------------------------------------------------ AT DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ Nonaccrual loans: Commercial loans...................... $ 9,382 $ 11,714 $ 10,884 $ 23,489 $ 20,174 Real estate loans..................... 10,760 17,212 7,272 12,029 26,429 Consumer loans........................ 248 -- -- -- 65 - ------------------------------------------------------------------------------------------------------------------------ TOTAL NONACCRUAL LOANS $ 20,390 $ 28,926 $ 18,156 $ 35,518 $ 46,668 - ------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses as a percent of total nonaccrual loans............. 176.8% 129.3% 220.7% 120.5% 84.0% Total nonaccrual loans as a percent of total loans outstanding............... 1.0 1.7 1.3 2.4 2.8 - ------------------------------------------------------------------------------------------------------------------------ RESTRUCTURED LOANS $ 28,681 $ 33,608 $ 5,948 $ 4,662 $ 65,003 - ------------------------------------------------------------------------------------------------------------------------ Real estate owned: Foreclosed assets..................... $ 2,895 $ 15,015 $ 35,446 $ 30,171 $ 48,187 In-substance foreclosures............. -- -- -- 28,163 27,133 - ------------------------------------------------------------------------------------------------------------------------ REO, gross.......................... $ 2,895 $ 15,015 $ 35,446 $ 58,334 $ 75,320 Less valuation allowance.............. (769) (4,686) (6,475) (3,084) (6,500) - ------------------------------------------------------------------------------------------------------------------------ REO, NET $ 2,126 $ 10,329 $ 28,971 $ 55,250 $ 68,820 - ------------------------------------------------------------------------------------------------------------------------ TOTAL $ 51,197 $ 72,863 $ 53,075 $ 95,430 $ 180,491 - ------------------------------------------------------------------------------------------------------------------------
The following table contains information for loans deemed impaired.
- ------------------------------------------------------------------------------- NET CARRYING SPECIFIC NET (IN THOUSANDS) VALUE ALLOWANCE BALANCE - ------------------------------------------------------------------------------- December 31, 1996 Loans with specific allowances........ $102,116 $(14,993) $ 87,123 Loans without specific allowances..... 15,484 -- 15,484 - ------------------------------------------------------------------------------- TOTAL $117,600 $(14,993) $102,607 - ------------------------------------------------------------------------------- December 31, 1995 Loans with specific allowances........ 85,242 (11,770) 73,472 Loans without specific allowances..... 37,512 -- 37,512 - ------------------------------------------------------------------------------- TOTAL $122,754 $(11,770) $110,984 - -------------------------------------------------------------------------------
Impaired loans were classified as follows:
- ------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------- Current................................ $ 97,210 $ 93,253 Past due............................... -- 575 Nonaccrual............................. 20,390 28,926 - ------------------------------------------------------------------------------- TOTAL $117,600 $122,754 - -------------------------------------------------------------------------------
Included in current impaired loans were restructured loans of $26.5 million at December 31, 1996 and $29.5 million at December 31, 1995. A significant portion, 77% at December 31, 1996 and 82% at December 31, 1995, of the impaired loans were secured by real estate. Impaired loans averaged $131.0 million in 1996 and $48.8 million in 1995. During 1996 and 1995, total interest recognized on the impaired loan portfolio, on a cash basis, was $10.3 million and $3.4 million, respectively. ALLOWANCE AND PROVISION FOR LOAN LOSSES: The allowance for loan losses is maintained at a level considered appropriate by management and is based on an ongoing assessment of the risks inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net charge-offs during the period. The Company's determination of the level of the allowance for loan losses, and correspondingly, the provision for loan losses 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, 1996, future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. 15 At December 31, 1996, the allowance for loan losses amounted to $36.1 million or 1.8% of total loans as compared to $37.4 million or 2.2% of total loans at December 31, 1995. The following table summarizes changes in the allowance for loan losses over the past five years.
- ------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ Allowance for loan losses: Balance, beginning of year............ $ 37,402 $ 40,072 $ 42,800 $ 39,219 $ 36,640 Loans charged off: Commercial............................ (7,265) (13,432) (9,120) (27,396) (12,784) Real estate........................... (3,734) (7,470) (8,506) (10,148) (5,558) Consumer.............................. (26) (60) (108) (704) (902) - ------------------------------------------------------------------------------------------------------------------ TOTAL LOANS CHARGED OFF $(11,025) $(20,962) $(17,734) $ (38,248) $ (19,244) - ------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial............................ 2,745 1,690 2,729 1,506 703 Real estate........................... 12 445 47 118 171 Consumer.............................. 21 35 56 191 90 - ------------------------------------------------------------------------------------------------------------------ TOTAL LOAN RECOVERIES $ 2,778 $ 2,170 $ 2,832 $ 1,815 $ 964 - ------------------------------------------------------------------------------------------------------------------ Net loans charged off................. (8,247) (18,792) (14,902) (36,433) (18,280) Net effect of deconsolidation of Imperial Credit Industries, Inc...... -- -- -- (1,963) -- Provision for loan losses............. 6,881 16,122 12,174 41,977 20,859 Provision for loan losses of discontinued operation............... 15 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ BALANCE, END OF YEAR $ 36,051 $ 37,402 $ 40,072 $ 42,800 $ 39,219 - ------------------------------------------------------------------------------------------------------------------ LOANS OUTSTANDING AT END OF YEAR $2,063,048 $1,699,347 $1,375,146 $1,474,759 $1,654,860 - ------------------------------------------------------------------------------------------------------------------ AVERAGE AMOUNT OF LOANS OUTSTANDING $1,836,864 $1,540,940 $1,361,630 $1,481,231 $1,794,586 - ------------------------------------------------------------------------------------------------------------------ Ratio of net charge-offs to average loans................................ 0.45% 1.22% 1.09% 2.46% 1.02% Ratio of allowance for loan losses to average loans........................ 1.96 2.43 2.94 2.89 2.19 Ratio of allowance for loan losses to loans outstanding at end of year..... 1.75 2.20 2.91 2.90 2.37 Ratio of provision for loan losses to net charge-offs...................... 83 86 82 115 114 - ------------------------------------------------------------------------------------------------------------------
The provision for loan losses totaled $6.9 million for the year ended December 31, 1996 as compared to $16.1 million for 1995. Net charge-offs totaled $8.2 million for the year ended December 31, 1996 down from $18.8 million for the year ended December 31, 1995. The decrease in net charge-offs experienced in 1996 resulted from management's efforts to improve the quality of the Company's loan portfolio, a stabilizing real estate market and an improving California economy. As a percentage of average loans outstanding, net charge-offs were 0.45% and 1.22%, respectively, for the years ended December 31, 1996 and 1995. 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 loan losses by loan category and the ratio of each loan category to total loans over the past five years.
- -------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1996 % 1995 % 1994 % 1993 % 1992 % - -------------------------------------------------------------------------------------------------------------------------------- Commercial....................... $17,545 77% $17,365 73% $24,628 66% $ 29,196 67% $ 23,137 62% Real Estate...................... 16,248 22 16,773 26 11,515 33 10,161 32 11,275 37 Consumer......................... 165 1 809 1 175 1 433 1 867 1 Unallocated...................... 2,093 -- 2,455 -- 3,754 -- 3,010 -- 3,940 -- - -------------------------------------------------------------------------------------------------------------------------------- TOTAL $36,051 100% $37,402 100% 40,072 100% $ 42,800 100% $ 39,219 100% - --------------------------------------------------------------------------------------------------------------------------------
16 The allowance allocated to the loan categories shown in the previous table 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 $3.0 billion at December 31, 1996 as compared to $2.4 billion at the end of 1995. Of the year end balance of total deposits, 50% and 48%, respectively, represented noninterest-bearing demand deposits at December 31, 1996 and 1995. Average demand deposits were $1.0 billion for 1996, a $176 million, or 21%, increase from 1995. Average interest- bearing time certificates of deposit grew $193 million, or 28%, in 1996. The Company utilized the time deposit market to supplement its funding base in order to keep pace with loan demand in 1996. 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 $61.4 million for 1996, a decrease of $10.7 million, or 15%, from 1995. As a percentage of average interest-bearing liabilities, average short-term borrowings approximated 4.2% for 1996 and 5.8% for 1995. 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, 1996, stockholders' equity totaled $286 million compared to $228 million at December 31, 1995. The Company recorded an additional $4.1 million in 1996 and $3.4 million in 1995 of stockholders' equity from the exercise of employee stock options. The Company generally receives a tax deduction 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 $3.2 million in 1996 and $1.9 million in 1995. Management is committed to maintaining capital at a sufficient level 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 the Prompt Corrective Action Law, 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, 1996 were 9.2% and 10.5%, respectively, compared to 9.3% and 10.6%, respectively, the year earlier. From the prior year, total assets have increased approximately 20% resulting in lower capital ratios. 17 CAPITAL RATIOS FOR IMPERIAL BANK(1)
- -------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------- Tier I: Common stockholders' equity and preferred stock(2)................... $ 261,551 $ 213,286 Disallowed assets..................... (897) (2,074) - -------------------------------------------------------------------------- TIER I CAPITAL $ 260,654 $ 211,212 - -------------------------------------------------------------------------- Tier II: Allowance for loan losses allowable in Tier II........................... 35,370 28,466 - -------------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL $ 296,025 $ 239,678 - -------------------------------------------------------------------------- RISK WEIGHTED BALANCE SHEET ASSETS $2,344,383 $1,942,903 - -------------------------------------------------------------------------- Risk-weighted off-balance sheet items: Commitments to make or purchase loans. 364,814 259,363 Standby letters of credit............. 104,330 64,775 Other................................. 16,985 12,277 - -------------------------------------------------------------------------- TOTAL RISK WEIGHTED OFF-BALANCE SHEET ITEMS $ 486,129 $ 336,415 - -------------------------------------------------------------------------- Disallowed assets....................... (897) (2,074) Allowance for loan losses not included in Tier II............................. (512) (8,936) - -------------------------------------------------------------------------- TOTAL RISK WEIGHTED ASSETS $2,829,103 $2,268,308 - -------------------------------------------------------------------------- Risk-based capital ratios: Tier I capital........................ 9.2% 9.3% Total capital......................... 10.5 10.6 Leverage ratio........................ 8.7 8.6 - --------------------------------------------------------------------------
(1) As reported on the December 31, 1996 and 1995 FDIC call reports. (2) Excludes unrealized gain 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 8.7% at December 31, 1996 as compared to 8.6% the prior year well in excess of the regulatory minimum of 3.0% and the Bank's regulatory requirement of 6.5%. SUBSEQUENT EVENT On February 20, 1997, the Company's Board of Directors approved a plan to spin off to stockholders in a tax-free distribution a portion of its specialty lending and finance businesses that focus on the entertainment industry, as well as certain other operations. These businesses and assets will be transferred to a newly formed corporation. The spin-off company, to be known as Imperial Financial Group, Inc. ("IFG"), will comprise Imperial Bank's Lewis Horwitz Organization, which specializes in entertainment industry lending; the Bank's small business lending group; Imperial Trust Company, a California-licensed trust company; and the Bank's interest in ICII. Also, in connection with the spin-off, IFG intends to form a separate broker-dealer and a thrift and loan, which also will be part of its business. The spin-off is subject to receipt of a private letter ruling from the Internal Revenue Service to the effect that the transaction will not be taxable to the Company's stockholders, the Company or the Bank, as well as approval from the Company's regulators. It is anticipated that the separation will occur in late 1997 or early 1998. Total assets of the entities comprising IFG approximated $140 million at December 31, 1996. Revenues of IFG, including interest income and noninterest income but excluding the gains on ICII shares realized in 1996, approximated $40 million for the year ended December 31, 1996. The Company has retained a financial advisor to assess alternatives to assure that capital levels at the Company and the Bank meet regulatory guidelines after the spin-off and provide for future growth. NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," ("FAS 125") which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies the following: when financial assets and liabilities are to be removed from an entity's financial statements; the accounting for servicing assets and liabilities; and the accounting for assets that can 18 be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under FAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. FAS 125 requires that the selling entity continue to carry retained interests relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. Under FAS 125, certain collateralized borrowings may result in assets no longer being recognized if the assets are provided as collateral and the secured party takes control of the collateral. This determination is based upon whether: (1) the secured party is permitted to repledge or sell the collateral and (2) the debtor does not have the right to redeem the collateral on short notice. Extinguishments of liabilities are recognized only when the debtor pays the creditor and is relieved of its obligation for the liability, or when the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. FAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset is to be amortized in proportion to, and over the period of, net servicing income. Servicing assets and liabilities are to be assessed for impairment based on their fair value. FAS 125 modifies the accounting for interest-only strips or retained interests in securitizations, such as capitalized servicing fees receivable, that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment. In this case, it requires that they be classified as available for sale or as trading securities. Interest-only strips and retained interests are to be recorded at market value. Changes in market value are included in operations, if classified as trading securities, or in stockholders' equity as unrealized holding gains or losses, net of the related tax effect, if classified as available for sale. During 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No 125" ("FAS 127"). FAS 127 defers for one year the effective date (a) of paragraph 15 of FAS 125 and (b) for repurchase agreement, dollar-roll, securities lending, and similar transactions, of paragraphs 9 - 12 and 237 (b) of FAS 125. FAS 127 provides additional guidance on the types of transactions for which the effective date of FAS 125 has been deferred. It is required that if it is not possible to determine whether a transfer occurring during calendar- year 1997 is part of a repurchase agreement, dollar-roll, securities lending or similar transaction, then paragraphs 9 - 12 of FAS 125 should be applied to that transfer. The Company adopted the applicable provisions of FAS 125 effective January 1, 1997. Management does not expect the adoption of FAS 125 to have a material impact on the Company's financial position, results of operations or liquidity. COMPARISON OF 1995 VERSUS 1994 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. Income from continuing operations for the year ended December 31, 1995 increased 227% to $21.7 million or $0.86 per share. For 1994, the Company earned $6.6 million or $0.27 per share. Income as measured by return on average total assets was 1.00% for the twelve months ended December 31, 1995, 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. Nonaccrual loans of $28.9 million at December 31, 1995, increased $10.7 million from year end 1994 while 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. The provision for loan losses was $16.1 million for 1995, up from $12.2 million for 1994. Net charge-offs amounted to $18.8 million in 1995 versus $14.9 million in 1994. The allowance for loan losses at December 31, 1995 was $37.4 million or 2.2% of total loans as compared to $40.1 million or 2.9% of total loans the year earlier. Net interest income and net interest margin for the year ended December 31, 1995 were $114.6 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. The 1995 improvement was negatively 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. The impact of these derivative financial instruments was partially offset by 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 were $4.9 million and 27 basis point reductions in net interest income and net interest margin, respectively. 19 Noninterest income for year ended December 31, 1995 totaled $43.5 million, compared to $34.6 million for 1994. 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. 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 $2.6 million, or 7.4%, from 1994. The improvement partially results from increased gains in the Company's various trading activities: SBA securities trading income improved $1.3 million and foreign currency exchange income was up $1.5 million. Also in 1995, the Company recorded improvements in other fee based businesses. Trust revenues from the Company's trust subsidiary, Imperial Trust Company, increased $0.8 million, or 12% from 1994 as a result of both the Trust Company's strategy to target higher margin business relationships and its increase in assets under management. Noninterest expenses amounted to $110.3 million for the year ended December 31, 1995, compared to $110.2 million reported for 1994. Excluding the recovery of a $1.6 million operational loss which reduced noninterest expense in 1994, noninterest expense for the year ended December 31, 1995 decreased $1.4 million from 1994. Regulatory assessments in 1995 decreased $2.7 million due to a reduction in the FDIC deposit insurance premium in the third quarter of 1995. During 1995, the Company renewed several of its operating leases for office space at terms more favorable to the Company. Also, the Company saw the positive results of its major data processing conversion which occurred during 1994 through reduced costs related to data processing. Combined, these items along with reduced professional and consulting fees related to the prior year data processing conversion, decreased $3.8 million from 1994. Offsetting these decreases in noninterest expense were increases the following components of noninterest expense. Salaries expense for the year ended December 31, 1995 increased $0.6 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 costs are a function of interest rates and deposit volume. Excluding the collection of a $1.6 million operational recovery in 1994, other expenses increased $2.6 million in 1995 as a result of the following: a $1.6 million charge related to mortgage repurchase obligations; $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. 20
CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------------------------ IMPERIAL BANCORP AND SUBSIDIARIES AT DECEMBER 31, (iN IHOUSANDS, EXCEPT SHARE DATA) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks.................................................................... $ 325,014 $ 242,018 Trading instruments........................................................................ 64,887 40,050 Securities available for sale.............................................................. 426,336 295,312 Securities held to maturity (market value of $4,193 and $4,975 for 1996 and 1995, respectively)............................................................................. 4,193 4,975 Federal funds sold and securities purchased under resale agreements........................ 357,000 425,300 Loans held for sale (market value of $6,058 and $2,842 for 1996 and 1995, respectively)............................................................................. 5,531 2,648 Loans: Loans, net of unearned income and deferred loan fees..................................... 2,063,048 1,699,347 Less allowance for loan losses....................................................... (36,051) (37,402) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET LOANS $2,026,997 $1,661,945 - ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net................................................................ 18,413 16,003 Accrued interest receivable................................................................ 15,547 15,284 Real estate owned, net..................................................................... 2,126 10,329 Income taxes receivable.................................................................... 1,893 4,008 Investment in Imperial Credit Industries, Inc.............................................. 57,736 36,126 Other assets............................................................................... 44,497 34,376 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $3,350,170 $2,788,374 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand.................................................................................... $1,465,324 $1,145,720 Savings................................................................................... 17,324 15,708 Money market.............................................................................. 596,967 435,674 Time-under $100,000....................................................................... 169,493 227,262 Time-$100,000 and over.................................................................... 701,169 539,252 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS $2,950,277 $2,363,616 - ------------------------------------------------------------------------------------------------------------------------------------ Accrued interest payable................................................................... 5,943 5,576 Short-term borrowings...................................................................... 44,897 159,636 Long-term borrowings....................................................................... 4,455 5,906 Other liabilities.......................................................................... 58,247 25,404 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $3,063,819 $2,560,138 - ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Common stock--no par, 50,000,000 shares authorized; 23,079,715 shares at December 31, 1996 and 13,821,125 shares at December 31, 1995 issued and outstanding................... 163,748 130,780 Unrealized gain on securities available for sale, net of taxes............................ 1,206 2,747 Retained earnings......................................................................... 121,397 94,709 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 286,351 $ 228,236 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,350,170 $2,788,374 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. - ------------------------------------------------------------------------------------------------------------------------------------
21
CONSOLIDATED STATEMENT OF INCOME - ----------------------------------------------------------------------------------------------------------------------------------- IMPERIAL BANCORP AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income: Loans....................................................................... $173,734 $143,627 $112,799 Trading instruments......................................................... 2,971 3,516 2,366 Securities available for sale............................................... 21,675 17,349 12,459 Securities held to maturity................................................. 306 311 345 Federal funds sold and securities purchased under resale agreements......... 9,970 9,707 7,153 Loans held for sale......................................................... 500 269 650 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME $209,156 $174,779 $135,772 - ----------------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits.................................................................... 64,551 55,491 33,184 Short-term borrowings....................................................... 3,160 4,135 3,606 Long-term borrowings........................................................ 343 528 625 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE $ 68,054 $ 60,154 $ 37,415 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income.......................................................... 141,102 114,625 98,357 Provision for loan losses.................................................... 6,881 16,122 12,174 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $134,221 $ 98,503 $ 86,183 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest income: Service charges on deposit accounts......................................... 4,892 4,328 4,635 Trust fees.................................................................. 8,592 7,646 6,857 Gain on origination and sale of loans....................................... 3,222 2,265 3,840 Equity in net income of Imperial Credit Industries, Inc..................... 21,444 5,192 3,489 Other service charges and fees.............................................. 10,122 6,500 6,116 Merchant and credit card fees............................................... 2,395 4,855 6,152 Gain (loss) on securities available for sale................................ 229 260 (272) Gain on trading instruments................................................. 3,197 2,852 31 Gain on sale of merchant card accounts...................................... - 6,400 - Gain on sale of investment in Imperial Credit Industries, Inc............... 25,650 - - Gain resulting from sale of stock by Imperial Credit Industries, Inc........ 10,761 - - Appreciation of donated Imperial Credit Industries, Inc. common stock....... 3,698 - - Other income................................................................ 5,289 3,248 3,724 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL NONINTEREST INCOME $ 99,491 $ 43,546 $ 34,572 - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salary and employee benefits................................................ 64,876 47,702 47,087 Net occupancy expense....................................................... 9,165 8,861 9,724 Furniture and equipment..................................................... 5,048 4,935 5,339 Data processing............................................................. 6,419 7,738 9,304 Customer services........................................................... 11,178 8,842 7,311 Net real estate owned expense............................................... 1,876 8,508 7,719 Regulatory assessments...................................................... 298 3,225 5,934 Professional and consulting................................................. 5,967 3,526 4,920 Business development........................................................ 3,659 3,079 3,277 Lawsuit settlements......................................................... 679 (1,134) (1,334) Charitable donations........................................................ 5,024 142 157 Other expense............................................................... 13,943 14,900 10,727 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NONINTEREST EXPENSE $128,132 $110,324 $110,165 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations before income taxes........................ 105,580 31,725 10,590 Income tax provision......................................................... 43,278 10,071 3,968 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS $ 62,302 $ 21,654 $ 6,622 - ------------------------------------------------------------------------------------------------------------------------------------ (Loss) income from operations of discontinued operation, net of tax.......... (8,168) 1,523 21 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 54,134 $ 23,177 $ 6,643 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations per share.................................. 2.39 0.86 0.27 (Loss) income per share of discontinued operation............................ (0.32) 0.06 - - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE $ 2.07 $ 0.92 $ 0.27 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. - ------------------------------------------------------------------------------------------------------------------------------------
22
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ IMPERIAL BANCORP AND SUBSIDIARIES NUMBER UNREALIZED TOTAL (IN THOUSANDS, EXCEPT NUMBER OF OF SHARES COMMON GAIN (LOSS) RETAINED STOCKHOLDER'S SHARES DATA) OUTSTANDING STOCK ON SECURITIES EARNINGS EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1993 11,757,136 $ 102,065 $ - $ 83,140 $ 185,205 - ------------------------------------------------------------------------------------------------------------------------------------ Net income--1994............................... - - - 6,643 6,643 Stock dividends............................... 587,204 8,294 - (8,304) (10) Common stock issued under employee stock option plans........................... 497,004 4,143 - - 4,143 Retirement of common stock.................... (8,735) (175) - - (175) Net change in guarantee of ESOP debt.......... - 1,159 - - 1,159 Effect of difference between fair value and cost of ESPO 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) 1,075,473 15,079 (847) (1,661) 12,571 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 12,832,609 $ 117,144 $ (847) $ 81,479 $ 197,776 - ------------------------------------------------------------------------------------------------------------------------------------ Net income--1995............................. - - - 23,177 23,177 Stock dividends.............................. 641,017 9,936 - (9,947) (11) Common stock issued under employee stock option plans................ 417,924 3,377 - - 3,377 Retirement of common stock................... (70,425) (1,538) - - 1,538 Tax benefit of employee stock options........ - 1,861 - - 1,861 Net change in unrealized gain on securities.. available for sale, net of taxes............. - - 3,594 - 3,594 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE 988,516 13,636 3,594 13,230 30,460 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 13,821,125 $ 130,780 $ 2,747 $ 94,709 $ 228,236 - ------------------------------------------------------------------------------------------------------------------------------------ Net income--1996.......................... - - - 54,134 54,134 Stock splits and dividends................ 8,798,926 27,417 - (27,446) (29) Common stock issued under employee employee stock option plans.............. 536,012 4,140 - - 4,140 Retirement of common stock................ (76,348) (1,788) - - (1,788) Tax benefit of employee stock options..... - 3,199 - - 3,199 Net change in unrealized gain on securities available for sale, net of taxes......... - - (1,541) - (1,541) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) 9,258,590 32,968 (1,541) 26,688 58,115 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 23,079,715 $ 163,748 $ 1,206 $ 121,397 $ 286,351 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. - ------------------------------------------------------------------------------------------------------------------------------------
23
CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------------------ IMPERIAL BANCORP AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income....................................................... $ 54,134 $ 23,177 $ 6,643 Adjustments for non-cash charges (credits): Depreciation and amortization.................................. (3,387) 1,775 542 Accretion of purchase loan discount............................ (227) (2,129) - Provision for loan losses...................................... 6,881 16,122 12,174 Provision for operational losses in discontinued operation..... 15,485 - - Provision for real estate owned................................ 476 4,547 5,291 Equity in net income of Imperial Credit Industries, Inc........ (21,444) (5,192) (3,489) Gains - Imperial Credit Industries, Inc. stock................. (36,411) - - Loss (gain) on sale of real estate owned....................... 151 (384) (446) Gain on sale of real property held for sale or investment...... - (75) (462) Gain on sale of premises and equipment......................... - (27) (1,357) Provision (benefit) for deferred taxes......................... 6,320 1,621 (3,452) Write down for impairment of equity investment................. - 1,500 503 (Gain) loss on securities available for sale................... (229) (260) 272 Net change in trading instruments.............................. (24,837) 33,978 (51,384) Net change in loans held for sale.............................. (2,883) (1,880) 21,936 Net change in accrued interest receivable...................... (263) (2,515) (4,290) Net change in accrued interest payable......................... 367 367 2,524 Net change in income taxes receivable.......................... (4,205) (2,056) (11,835) Net change in other liabilities................................ 17,358 8,462 1,556 Net change in other assets..................................... (11,341) (754) (11,563) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (4,055) $ 76,277 $ (13,167) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from securities held to maturity....................... 183 170 3,079 Purchase of securities held to maturity......................... - (499) (1,600) Proceeds from sale of securities available for sale............. 2,785,935 1,592,179 2,032,510 Proceeds from maturities of securities available for sale....... 294,223 503,136 977,511 Purchase of securities available for sale....................... (3,208,635) (1,997,393) (2,977,483) Proceeds from sale of Imperial Credit Industries, Inc. common stock................................................... 35,079 - - Net change in Federal funds sold and securities purchased under resale agreements........................................ 68,300 (148,800) 293.519 Net change in loans............................................. (358,612) (336,201) 99,744 Capital expenditures............................................ (6,425) (4,083) (7,476) Proceeds from sale of real estate owned......................... 4,207 16,072 15,030 Proceeds from sale of real property held for sale or investment..................................................... - 309 15,297 Proceeds from sale of premises and equipment.................... - 21 2,037 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $ (385,745) $ (375,089) $ 452,168 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in demand deposits, savings and money market accounts.......................................... 482,513 150,077 (445,058) Net change in time deposits..................................... 104,148 253,829 17,009 Net change in short-term borrowings............................. (114,739) (31,283) (1,538) Retirement of long-term borrowings.............................. (1,451) (2,247) (1,713) Repayment of ESOP debt.......................................... - - (1,159) Proceeds from exercise of employee stock options................ 2,352 1,839 3,968 Other........................................................... (27) (11) (10) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 472,796 $ 372,204 $ (428,501) - ------------------------------------------------------------------------------------------------------------------------------------ NET CHANGE IN CASH AND DUE FROM BANKS $ 82,996 $ 73,392 $ 10,500 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND DUE FROM BANKS, BEGINNING OF YEAR $ 242,018 $ 168,626 $ 158,126 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND DUE FROM BANKS, END OF YEAR $325,014 $ 242,018 $ 168,626 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. - ------------------------------------------------------------------------------------------------------------------------------------
24 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 consolidated financial statements for 1995 and 1994 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, 1996, the Company owned 9.4 million shares of Imperial Credit Industries, Inc. ("ICII") stock at an equivalent book value of $6.16 per share, representing approximately 25% 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 Purchases and sales of investments are recorded on the trade date. Amortization of premiums and accretion of discounts are recognized in interest income on securities held to maturity and securities available for sale using the interest method in the consolidated statement of income. TRADING INSTRUMENTS SECURITIES: Trading securities, primarily the guaranteed portion of Small Business Administration ("SBA") loans, are carried at market value with unrealized market value adjustments recorded in the consolidated statement of income as "Gain on trading instruments." PRECIOUS METALS: Precious metals activities included 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 "(Loss) income from operations of discontinued operation, net of tax." 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 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 stockholders' equity reflected as "Unrealized gain on securities available for sale, net of taxes" in the consolidated balance sheet and statement of changes in stockholders' 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. 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 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. 25 (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 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. 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. 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 "Net real estate owned expense" in the consolidated statement of income. (h) INCOME TAXES The Company accounts for income taxes using an asset and liability approach, the objective of which 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 company's 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 INVESTMENT IN EQUITY INVESTEE The sale of shares of the Company's equity investment in ICII to the public is recorded as "Gain on sale of investment in Imperial Credit Industries, Inc." in the 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) GAIN RESULTING FROM SALE OF STOCK BY EQUITY INVESTEE The impact on the Company's investment in ICII for the sale of previously unissued stock by ICII to the public is recorded as "Gain resulting from sale of stock by Imperial Credit Industries, Inc." in the consolidated statement of income. This gain results from ICII's sale of previously unissued stock in a public offering at a per share offering price that exceeds the Company's per share carrying amount for its equity investment in the common stock of ICII. (k) 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 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. 26 (l) STOCK BASED COMPENSATION On January 1, 1996, the Company adopted 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 Company did not adopt the fair value standards set forth in FAS 123 for purposes of preparing its basic financial statements. The pro forma disclosures include the impact of the fair value method on net income and income per share as if FAS 123 had been adopted for options granted during 1996 and 1995. NOTE (2) STATEMENT OF CASH FLOWS The following information supplements the statement of cash flows.
- -------------------------------------------------------------------------------- December 31, (In Thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Interest paid........................... $ 67,687 $59,787 $ 34,891 Taxes paid.............................. 30,902 13,506 4,107 Taxes refunded.......................... 244 1,089 10,611 Significant noncash transactions: Real estate loans transferred to real estate owned........................... 731 13,913 9,176 Loans made in conjunction with the sale of real estate owned................... 4,100 14,206 16,171 Net change in unrealized gain (loss) on securities available for sale, net of taxes.................................. (1,541) 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, 1996, 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................. $ -- $ -- $ 105,156 $ 105,149 Due after one year through five years... -- -- 20,327 20,338 Due after five years through ten years.. -- -- -- -- Due after ten years..................... 4,193 4,193 298,927 300,849 - ---------------------------------------------------------------------------------------------------------- Total $ 4,193 4,193 $ 424,410 $ 426,336 ==========================================================================================================
The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law totaled $224 million as of December 31, 1996. 27 (a) Securities Held to Maturity The following is a summary for the major categories of securities held to maturity.
======================================================================================================= Gross Gross Amortized Unrealized Unrealized (In Thousands) Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------- December 31, 1996 Industrial development bonds... $ 4,193 $ -- $ -- $ 4,193 - ------------------------------------------------------------------------------------------------------- Total $ 4,193 $ -- $ -- $ 4,193 - ------------------------------------------------------------------------------------------------------- December 31, 1995 Industrial development bonds... $ 4,376 $ -- $ -- $ 4,376 Other securities............... 599 -- -- 599 - ------------------------------------------------------------------------------------------------------- Total $ 4,975 $ -- $ -- $ 4,975 =======================================================================================================
There were no gross realized gains and gross realized losses for the years ended December 31, 1996 and 1994. For the year ended December 31, 1995, gross realized gains and losses were zero and $1,500,000, respectively. (b) Securities Available for Sale The following is a summary for the major categories of securities available for sale.
======================================================================================================== Gross Gross Amortized Unrealized Unrealized (In Thousands) Cost Gains Losses Fair Value - -------------------------------------------------------------------------------------------------------- December 31, 1996 U.S. Treasury and federal agencies... $385,903 $ 1,772 $ (8) $ 387,667 Mutual funds......................... 31,095 -- -- 31,095 Other securities..................... 7,412 226 (64) 7,574 - -------------------------------------------------------------------------------------------------------- Total $424,410 $ 1,998 $ (72) $ 426,336 - -------------------------------------------------------------------------------------------------------- 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 ========================================================================================================
Mutual funds at December 31, 1996 and 1995 were comprised of Monarch government cash, cash and treasury funds. Other securities at December 31, 1996 and 1995 were primarily comprised of certificates of originator fees associated with the guaranteed portion of Small Business Administration loans. The Bank's broker/dealer subsidiary, Imperial Securities Corp, receives fees for performing certain distribution and service activities on behalf of Monarch Funds (a family of mutual funds). These fees, totaling $1.3 million, $0.4 million and $0.2 million for the years ended December 31, 1996, 1995 and 1994, respectively, are reflected as "Other service charges and fees" in the consolidated statement of income. Of the five trustees of the Monarch Funds, two are members of the Company's management. As of December 31, 1996, the Company's investment in the Monarch Funds represented approximately 4.6% of the net asset value of all Monarch Funds. Gross realized gains and losses related to the available for sale portfolio were $274,000 and $45,000, respectively, for the year ended December 31, 1996, $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. At December 31, 1996 and 1995, the Company reported unrealized gains, net of tax, of $1.2 million and $2.7 million, respectively, in the consolidated balance sheet. 28 NOTE (4) LOANS The carrying amount of loans, net of unearned income and deferred loan fees, consisted of the following:
==================================================================== 1996 1995 Carrying Carrying At December 31, (In Thousands) Amount Amount - -------------------------------------------------------------------- Commercial loans................. $1,594,602 $1,238,148 Loans secured by real estate: Real estate term loans......... 361,426 388,713 Interim construction loans..... 86,416 64,869 Consumer loans................... 20,604 7,617 - -------------------------------------------------------------------- Total loans...................... 2,063,048 1,699,347 Less allowance for loan losses... (36,051) (37,402) - -------------------------------------------------------------------- Net loans $2,026,997 $1,661,945 ====================================================================
Net deferred loan fees and costs, included in total loans, approximated $8.7 million and $5.5 million at December 31, 1996 and 1995, respectively. The following table contains information for loans deemed impaired.
================================================================================ Net Carrying Specific Net (In Thousands) Value Allowance Balance - -------------------------------------------------------------------------------- December 31, 1996 Loans with specific allowances........ $102,116 $(14,993) $ 87,123 Loans without specific allowances..... 15,484 -- 15,484 - --------------------------------------------------------------------------------- Total $117,600 $(14,993) $102,607 - --------------------------------------------------------------------------------- December 31, 1995 Loans with specific allowances........ 85,242 (11,770) 73,472 Loans without specific allowances..... 37,512 -- 37,512 - --------------------------------------------------------------------------------- Total $122,754 (11,770) $110,984 =================================================================================
Impaired loans were classified as follows:
==================================================================== At December 31, (In Thousands) 1996 1995 - -------------------------------------------------------------------- Current................................. $ 97,210 $ 93,253 Past due................................ -- 575 Nonaccrual.............................. 20,390 28,926 - -------------------------------------------------------------------- Total $117,600 $122,754 ====================================================================
Included in current impaired loans were restructured loans of $26.5 million at December 31, 1996 and $29.5 million at December 31, 1995. A significant portion, 77% at December 31, 1996 and 82% at December 31, 1995, of the impaired loans were secured by real estate. Impaired loans averaged $131.0 million in 1996 and $48.8 million in 1995. During 1996 and 1995, total interest recognized on the impaired loan portfolio, on a cash basis, was $10.3 million and $3.4 million, respectively. At December 31, 1996, 1995 and 1994, total restructured loans were $28.7 million, $33.6 million and $5.9 million, respectively, and were performing in accordance with their modified terms. There were $327,000 of related commitments to lend additional funds on restructured loans at December 31, 1996. There were no related commitments to lend additional funds on restructured loans in 1995 or 1994. In 1996, 1995 and 1994, respectively, $2.6 million, $2.8 million and $0.7 million of gross interest income would have been recorded had the loans been current in accordance with their original terms compared to $2.6 million, $2.7 million and $0.4 million of interest income which was included in net income for the same periods. The average yield on restructured loans was 8.4% at December 31, 1996. Nonaccrual loans totaled $20.4 million, $28.9 million and $18.2 million at December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the related commitments to lend additional funds approximated $319,000 and $607,000, respectively. There was no recorded interest receivable on nonaccrual loans at December 31, 1996 or 1995. Interest income foregone on nonaccrual loans approximated $2.2 million in 1996, $2.2 million in 1995 and $2.0 million in 1994. Interest income recognized on nonaccrual loans was approximately $1.1 million in 1996, $2.0 million in 1995 and $1.0 million in 1994. 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, 1996, within the loan portfolio, approximately 77% were categorized as commercial and 22% as real estate. Commercial loans are broadly diversified by industry and geographically concentrated in California. At year-end 1996, real estate loans totaled $447.8 million. Not included in the following table are commercial loans to real estate related customers totaling $79.1 million. At December 31, 1996, these loans consisted of the following: $59.5 million to real estate agents, operators and lessors, $9.1 million to subcontractors and developers, $5.8 million to title and escrow companies and $4.7 million to builders. 29 The following table shows the distribution of real estate loans and unfunded commitments by type of project.
- --------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1996 (IN THOUSANDS) - --------------------------------------------------------------------------------------------------------------------------- TOTAL % TOTAL LOANS % LOANS NONACCRUAL NONACCRUAL UNFUNDED CONSTRUCTION BY TYPE BY TYPE BY TYPE BY TYPE COMMITMENTS - --------------------------------------------------------------------------------------------------------------------------- Acquisition and land development............. $ 9,240 11 % $ -- -- % $ 3,667 Condominiums................................. 6,330 7 -- -- 23,737 Multi-family residential..................... 693 1 -- -- 6,501 Single-family residential.................... 66,840 77 -- -- 133,906 - --------------------------------------------------------------------------------------------------------------------------- TOTAL RESIDENTIAL $ 83,103 96 % $ -- -- % $167,811 - --------------------------------------------------------------------------------------------------------------------------- Other non-residential........................ 3,313 4 -- -- -- - --------------------------------------------------------------------------------------------------------------------------- TOTAL NON-RESIDENTIAL $ 3,313 4 % $ -- -- % $ -- - --------------------------------------------------------------------------------------------------------------------------- TOTAL CONSTRUCTION $ 86,416 100 % $ -- -- % $167,811 - --------------------------------------------------------------------------------------------------------------------------- TERM LOANS - --------------------------------------------------------------------------------------------------------------------------- Acquisition and land development............. $ 317 -- % $ -- -- % $ -- Condominiums................................. 17,388 5 -- -- -- Multi-family residential..................... 117,424 34 6,079 56 323 Single-family residential.................... 8,168 2 4,468 42 130 - --------------------------------------------------------------------------------------------------------------------------- TOTAL RESIDENTIAL $143,297 41 % $ 10,547 98 % $ 453 - --------------------------------------------------------------------------------------------------------------------------- Retail facilities............................ 92,538 26 -- -- 115 Office building.............................. 71,025 20 213 2 11 Industrial................................... 6,159 2 -- -- -- Hotels....................................... 23,678 7 -- -- 48 Other........................................ 13,969 4 -- -- -- - --------------------------------------------------------------------------------------------------------------------------- TOTAL NON-RESIDENTIAL $207,369 59 % $ 213 2 % $ 163 - --------------------------------------------------------------------------------------------------------------------------- TOTAL TERMS LOANS $350,666 100 % 10,760 100 % $ 616 - --------------------------------------------------------------------------------------------------------------------------- TOTAL REAL ESTATE LOANS $437,082 $ 10,760 $168,427 - ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1996, 85% of the Company's real estate loan portfolio was geographically concentrated in Southern California, 10% in Northern California, and 5% outside of California. The principal amount of loans pledged to secure public deposits and for other purposes required or permitted by law approximated $102 million at December 31, 1996. 30 NOTE (5) ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses was as follows:
- ------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Balance, beginning of year........................ $ 37,402 $ 40,072 $ 42,800 Provision for losses.............................. 6,881 16,122 12,174 Provision for loan losses of discontinued operation........................... 15 -- -- Loans charged off................................. (11,025) (20,962) (17,734) Recoveries on loans previously 2,778 2,170 2,832 charged off...................................... - ------------------------------------------------------------------------------------------------- NET CHARGE-OFFS $ (8,247) (18,792) $(14,902) - ------------------------------------------------------------------------------------------------- BALANCE, END OF YEAR $ 36,051 $ 37,402 $ 40,072 - -------------------------------------------------------------------------------------------------
NOTE (6) PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
- ------------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------------- Land.............................................. $ 1,765 $ 1,765 Buildings & improvements.......................... 3,737 3,682 Leasehold improvements............................ 7,110 8,082 Furniture, fixtures & equipment................... 31,955 26,331 - ------------------------------------------------------------------------------------------------- LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (26,154) (23,857) - ------------------------------------------------------------------------------------------------- PREMISES AND EQUIPMENT, NET $ 18,413 $ 16,003 - -------------------------------------------------------------------------------------------------
NOTE (7) REAL ESTATE OWNED The following table presents real estate owned by type of project.
- ------------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------------- Acquisition and land development.................. $ 2,708 $ 6,908 Multi-family residential.......................... -- 162 Single-family residential......................... 187 1,325 - ------------------------------------------------------------------------------------------------- TOTAL RESIDENTIAL $ 2,895 $ 8,395 - ------------------------------------------------------------------------------------------------- Acquisition and land development.................. -- 5,420 Retail facilities................................. -- 1,200 - ------------------------------------------------------------------------------------------------- TOTAL NON-RESIDENTIAL $ -- $ 6,620 - ------------------------------------------------------------------------------------------------- REO, GROSS $ 2,895 $ 15,015 - ------------------------------------------------------------------------------------------------- Less valuation allowance (769) (4,686) - ------------------------------------------------------------------------------------------------- REO, NET $ 2,126 $ 10,329 - -------------------------------------------------------------------------------------------------
Net real estate owned expense was comprised of the following:
- ------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Net loss (gain) on sale of real estate owned........................................... $ 151 $ (384) $ (446) Valuation adjustments charged to operations...................................... 476 4,547 5,291 Direct holding costs............................. 1,249 4,345 2,874 - ------------------------------------------------------------------------------------------------- NET REAL ESTATE OWNED EXPENSE $ 1,876 $ 8,508 $ 7,719 - -------------------------------------------------------------------------------------------------
The following table sets forth information regarding the Company's valuation allowance for REO.
- ------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Balance, beginning of year....................... $ 4,686 $ 6,475 $ 3,084 Provision for REO................................ 476 4,547 5,291 REO charged off.................................. (4,393) (6,336) (1,900) - ------------------------------------------------------------------------------------------------- BALANCE, END OF YEAR $ 769 $ 4,686 $ 6,475 - -------------------------------------------------------------------------------------------------
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 and splits. 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 26,116,767 in 1996, 25,168,985 in 1995 and 24,200,733 in 1994. The weighted average number of shares used to compute income per common share was retroactively adjusted to reflect stock splits and dividends as appropriate. On January 24, 1997, the Company declared a 10% stock dividend payable on February 24, 1997 to stockholders of record on February 17, 1997. In the first quarter of 1996, the Company declared and paid an 8% stock dividend. In the fourth quarter of 1996, the Company split its common stock at the ratio of one new share for every two shares outstanding. In 1994 and 1995, the Company declared and paid 5% stock dividends. On January 24, 1997, the Company's Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to one million shares of its common stock from time to time in the open market depending on market conditions, share price and other factors. The stock repurchase program will reduce the shares outstanding and shares repurchased may later be issued to the Company's employee stock ownership plan and under the employee stock option plan. The repurchased shares will reduce the dilution from issuances in connection with those plans as well as from any future stock dividends. The stock repurchase program will continue until the full number of shares are acquired or the program is discontinued. NOTE (9) DEPOSITS Interest expense on time certificates of deposit with balances of $100,000 or more amounted to $36.8 million in 1996, $27.6 million in 1995 and $13.8 million in 1994. 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 ser- 31 vices" in the accompanying consolidated statement of income. During 1996 and 1995, the average balances of such deposit accounts were $670.5 million and $546.0 million, respectively. 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) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Balance, end of year............................. $ 12,450 $126,500 $103,246 Weighted average interest rate, end of year............................................ 4.93 % 4.31 % 6.22 % Average amount outstanding during the year............................................ $ 16,489 $ 19,121 $ 26,906 Weighted average interest rate for the year............................................ 5.04 % 5.57 % 2.90 % Maximum amount outstanding at any month-end....................................... $ 37,700 $156,930 $166,134 - -------------------------------------------------------------------------------------------------
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 $0.8 million, $1.1 million and $0.8 million, respectively, for 1996, 1995 and 1994. 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) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Balance, end of year............................. $ 8,011 $ 11,562 $ 11,903 Weighted average interest rate, end of year............................................ 5.11 % 5.73 % 5.52 % Average amount outstanding during the year............................................ $ 18,613 $ 7,849 $ 13,890 Weighted average interest rate for the year............................................ 5.45 % 5.89 % 3.50 % Maximum amount outstanding at any month-end....................................... $ 25,707 $ 11,861 $ 19,758 - -------------------------------------------------------------------------------------------------
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 which matured in 1995 and was not renewed or utilized during 1995. 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) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Balance, end of year............................. $ 24,436 $ 21,574 $ 75,770 Weighted average interest rate, end of year............................................. 6.01 % 4.48 % 4.69 % Average amount outstanding during the year............................................ $ 26,259 $ 38,427 $ 57,383 Weighted average interest rate for the year............................................. 5.00 % 5.60 % 3.92 % Maximum amount outstanding at any month-end........................................ $ 89,579 $ 91,339 $ 89,211 - -------------------------------------------------------------------------------------------------
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, 1996, $3,373,000 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, 1995, the outstanding Notes and Debentures totaled $4,824,000 and $1,082,000, 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 1996 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, 1996. NOTE (12) INCOME TAXES Income tax expense (benefit) is included in the accompanying consolidated statement of income as follows:
- ------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Income tax expense from: Continuing operations......................... $ 43,278 $ 10,071 $ 3,968 Discontinued operations....................... (6,000) 1,118 16 - ------------------------------------------------------------------------------------------------- TOTAL $ 37,278 $ 11,189 $ 3,984 - -------------------------------------------------------------------------------------------------
32 The income tax provision for both continuing and discontinued operations in the consolidated statement of income is comprised of the following current and deferred amounts.
- ------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Current: Federal............................... $19,858 $ 8,152 $ 3,575 State................................. 6,949 1,978 1,757 - ------------------------------------------------------------------------------------------------- TOTAL $26,807 $10,130 $ 5,332 - ------------------------------------------------------------------------------------------------- Deferred: Federal............................... 4,524 2,880 (2,041) State................................. 1,796 2,138 (1,225) - ------------------------------------------------------------------------------------------------- TOTAL $ 6,320 $ 5,018 $ (3,266) - ------------------------------------------------------------------------------------------------- Total: Federal............................... 24,382 11,032 1,534 State................................. 8,745 4,116 532 - ------------------------------------------------------------------------------------------------- Taxes (charged) credited to stockholders' equity................. 4,506 (792) 2,104 - ------------------------------------------------------------------------------------------------- Reversal of overaccrued taxes from prior years.......................... (355) (907) -- - ------------------------------------------------------------------------------------------------- Change in valuation allowance for deferred tax receivable.............. -- (2,260) (186) ------------------------------------------------------------------------------------------------- TOTAL $37,278 $11,189 $ 3,984 - -------------------------------------------------------------------------------------------------
The amounts previously reported as the current and deferred portions of the tax provision for 1995 were revised based upon determinations made when the 1995 tax returns were filed. 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 1996 and 1995, the Company recorded $0.4 million and $0.9 million reductions of income tax expense to reflect the finalization of prior years income tax issues. The Company had a current income tax receivable of $3.4 million at December 31, 1996. Current income taxes payable totaled $394,000 at December 31, 1995. Of the $4.5 million in taxes charged directly to stockholders' equity, $3.2 million represents current taxes receivable associated with employee stock options and $1.3 million representing the reduction in deferred taxes associated with the unrealized gain on securities available for sale. 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 (liability) receivable.
- --------------------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS) 1996 1995 - --------------------------------------------------------------------------------------------------------- Components of the deferred tax asset: Bad debt deduction..................................................... $ 12,612 $ 14,334 Deferred compensation.................................................. 6,277 3,605 State franchise taxes.................................................. 3,261 1,017 Goodwill amortization.................................................. 831 367 Other.................................................................. 388 142 - --------------------------------------------------------------------------------------------------------- TOTAL $ 23,369 $ 19,465 - --------------------------------------------------------------------------------------------------------- Valuation allowance.................................................... -- -- - --------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE $ 23,369 $ 19,465 - --------------------------------------------------------------------------------------------------------- Components of the deferred tax liability: Prepaid expense........................................................ (614) (361) Installment sale of real estate owned.................................. (21) (55) Depreciation........................................................... (225) (297) Deferred loan fees..................................................... (847) (786) Investment in Imperial Credit Industries, Inc.......................... (22,184) (10,798) Unrealized gain on securities available for sale....................... (883) (2,210) Charitable donations................................................... -- (463) Other.................................................................. (86) (93) - --------------------------------------------------------------------------------------------------------- TOTAL $ (24,860) $ (15,063) - --------------------------------------------------------------------------------------------------------- NET DEFERRED TAX (LIABILITY) ASSET $ (1,491) $ 4,402 - ---------------------------------------------------------------------------------------------------------
The Company's deferred tax asset, net of valuation allowance, is supported by carry back and carry forward provisions of the tax laws as well as certain tax strategies which create future taxable income. 33 The total income tax provision differs from the amount computed by applying the statutory Federal income tax rate for the following reasons:
------------------------------------------------------------------ 1996 1995 1994 ------------------------------------------------------------------ % OF % OF % OF PRETAX PRETAX PRETAX (IN THOUSANDS) AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME - ------------------------------------------------------------------------------------------------------------------------------------ Income tax provision at statutory rate...................... $ 31,994 35.0% 12,028 35.0% $ 3,720 35.0% (Reduction) increase in taxes resulting from: Tax exempt interest......................................... (167) (0.2) (146) (0.4) (169) (1.6) Cash surrender value of officers life insurance............. (90) (0.1) (220) (0.7) (357) (3.4) Appreciation of donated Imperial Credit Industries, Inc common stock............................................... (1,294) (1.4) -- -- -- -- State franchise taxes, net of Federal income tax benefit.... 6,470 7.1 2,537 7.4 715 6.8 Change in valuation allowance............................... -- -- (2,260) (6.6) (186) (1.8) Reversal of overaccrued taxes from prior year............... (355) (0.4) (907) (2.6) -- -- Other....................................................... 720 0.8 157 0.5 261 2.5 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 37,278 40.8% $11,189 32.6% $ 3,984 37.5% - ------------------------------------------------------------------------------------------------------------------------------------
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. There were no discretionary contributions to the plan during 1996. The Company contributed $2.0 million to the profit-sharing plan in 1995. The trust created by the plan held 1,037,479 shares at December 31, 1996 and 1,065,638 shares at December 31, 1995. The shares held by the plan represented approximately 4.1% of the Company's total shares outstanding at December 31, 1996. 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. The trust created by the plan held 302,946 shares at December 31, 1996 and 329,406 shares at December 31, 1995. The Company contributed $2.5 million to the ESOP in 1996. Using the $2.5 million contribution, the plan purchased 107,317 shares in January 1997. There were no discretionary contributions to the plan during 1995. Effective December 31, 1996, the ESOP was merged with the profit-sharing plan and all assets of the ESOP transferred to the profit-sharing plan. The account of each participant or former participant in the ESOP as of December 31, 1996 was transferred to the profit-sharing plan and will continue to be held and administered under the terms of the profit-sharing plan as a separate account in the name of the participant. 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 50% of any 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 $950,000 in 1996, $453,000 in 1995 and $403,000 in 1994. 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 497,065 shares at December 31, 1996 and 492,235 shares at December 31, 1995. 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 50% for 1996 and 40% for 1995. Each par- 34 ticipant's "account balance" earns interest at a rate established annually (Moody's Seasoned Corporate Bond Rate). The rates for 1996 and 1995 were 7.30% and 8.94%, respectively. The rate for 1997 will be 7.41%. 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. The expense of funding the deferred compensation plans totaled $2.3 million, $1.0 million and $0.8 million, respectively, for the years ended December 31, 1996, 1995 and 1994. To offset the deferred compensation plan liability, the Company purchased life insurance policies during 1996 for which it is the beneficiary. The policies have a cash surrender value which substantially offsets the premiums paid for the policies. The net expense of the policies included in the accompanying consolidated statement of income approximated $50,000 for the year ended December 31, 1996. 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 current Chairman, then 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. Excluding the expense related to the death of George M. Eltinge, as described above, the Company's net benefit of funding the death benefit only plan amounted to $276,000, $277,000, and $223,000, respectively, for the years ended December 31, 1996, 1995 and 1994. SPLIT DOLLAR LIFE INSURANCE PLAN: In 1996, the Company established a Split Dollar Life Insurance Plan to provide certain death benefits to the estate of the Company's Chairman and his spouse. The insurance policy purchased under the plan provides for a lump sum payment to the estate of the Company's Chairman in amounts ranging from $10.5 million in year one to $5.2 million in year 26, depending on the time of death. The Company is obligated to make annual premium payments of $830,000 with respect to the policy for a twelve-year period. At the end of the thirteenth year, the Company will receive back an amount equal to the aggregate premiums paid without interest or earnings. The cash surrender value generated by the policy offsets the amount of premiums paid over the life of the policy. The net expense of the policy in the consolidated statement of income for the year ended December 31, 1996 approximated $350,000. STOCK OPTION PLAN: The Company has a stock option plan for directors and certain 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) 1996* 1995* - ------------------------------------------------------------------------------- Options outstanding, beginning of year.. 2,727,852 3,276,852 Options granted......................... 1,364,583 215,619 Options exercised....................... (885,099) (744,952) Options cancelled....................... (66,807) (19,667) - ------------------------------------------------------------------------------ OPTIONS OUTSTANDING, END OF YEAR 3,140,529 2,727,852 - ------------------------------------------------------------------------------
There were 206,328* option shares available for future grants at December 31, 1996. Information regarding stock option activity and prices of the shares is as follows:
- ------------------------------------------------------------------------------------------------------ AVERAGE OPTION OPTION NUMBER PRICE RANGE PER PRICE OF SHARES* SHARE* PER SHARE* - ------------------------------------------------------------------------------------------------------ Shares under option at: December 31, 1996................... 3,140,529 3.64 - 19.89 $ 9.24 December 31, 1995................... 2,727,852 3.64 - 12.49 5.25 Options exercisable at: December 31, 1996................... 2,031,915 3.64 - 16.59 7.78 December 31, 1995................... 2,000,863 3.64 - 8.15 4.72 Options exercised during the year: December 31, 1996................... 885,099 11.43 - 21.48 4.59 December 31, 1995................... 744,952 8.42 - 13.47 4.47 - ------------------------------------------------------------------------------------------------------
*Adjusted for stock dividends declared and paid in 1996 and first quarter 1997 and a 3-for-2 stock split effected in 1996. The Company recorded an additional $4.1 million in 1996 and $3.4 million in 1995 of stockholders' 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 35 value of the shares issued. The tax benefit associated with shares exercised which was recorded as a component of stockholders' equity approximated $3.2 million in 1996 and $1.9 million in 1995. During 1996 and 1995, $1.8 million and $1.5 million of common stock were exchanged and retired in conjunction with the exercise of stock options. The Company applies APB 25 in accounting for the stock option plan and, accordingly, no compensation cost has been recognized in the consolidated financial statements for the fair value of stock options granted. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under FAS 123, the Company's net income would have been reduced to the pro forma amounts indicated in the table below:
- ------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - ------------------------------------------------------------------------------ Income from continuing operations....... As Reported $ 62,302 $ 21,654 Pro Forma 60,735 21,568 Net income.............................. As Reported $ 54,134 $ 23,177 Pro Forma 52,567 23,091 Fully diluted income per share from continuing operations.................. As Reported $ 2.39 $ 0.86 Pro Forma 2.32 0.86 Fully diluted net income per share...... As Reported $ 2.07 $ 0.92 Pro Forma 2.01 0.92 - -------------------------------------------------------------------------------
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1996 and 1995:
- --------------------------------------------------- 1996 1995 - --------------------------------------------------- Dividend yield.................. -- -- Expected life of option (years): Officers..................... 6.5 6.5 Directors.................... 3.5 -- Stock price volatility: Officers..................... 44% 44% Directors.................... 45% -- - ---------------------------------------------------
The risk-free interest rates used in the Black-Scholes option-pricing model were equal to comparable U.S. Treasury rates at each respective grant date. The weighted average fair value at the date of grant for options granted during 1996 and 1995 was $8.43 per option and $6.32 per option, respectively. Pro forma income from continuing operations and pro forma net income reflect only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options is not reflected in the pro forma income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. NOTE (14) LOANS TO OFFICERS Pursuant to an Employee Loan Program and under by-laws approved by stockholders in 1984, the Company had $3,633,000 and $4,238,000 in loans to certain officers and directors, outstanding at December 31, 1996 and 1995, 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 1996 additional loans made to officers were $124,000 and payments received were $729,000. 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 3.1% for 1996 and will be 3.6% for 1997. 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 financing 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 consolidated balance sheet. 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, 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 36 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) 1996 1995 - ------------------------------------------------------------------- Commitments to extend credit............ $1,381,980 $ 840,340 Standby letters of credit............... 132,079 82,115 Commercial letters of credit............ 53,314 55,633 When-issued securities.................. 2,416 1,794 Asset/liability management: Interest rate swaps..................... -- 300,000 Interest rate caps purchased............ 1,500,000 1,300,000 Interest rate floors purchased.......... 4,500,000 500,000 Trading contracts: Spot and forwards to purchase foreign 110,856 51,655 currency............................... Spot and forwards to sell foreign 105,960 46,583 currency............................... Futures and forwards to purchase 3 14,213 precious metals........................ Futures and forwards to sell precious 17,006 14,253 metals................................. - -------------------------------------------------------------------
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. 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. 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 which generally adjust quarterly and are approximately 200 basis points below or above (depending on the instrument) current market rates at the time the floors and caps are purchased. Based on its strategy and the general asset sensitive nature of the consolidated balance sheet, the Company purchased over the counter interest rate floors in the first quarter of 1996 to protect against a drop in interest rates. The interest rate floors, with a notional value of $500 million at December 31, 1996, matured unexercised in the first quarter of 1997. In the first, second, and third quarter of 1996, the Company purchased $2.0 billion of exchange traded interest rate floors. The floors mature at the rate of $500 million per quarter beginning in the second quarter of 1997. The floors maturing in the second and third quarter of 1997 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 while the remaining floors have a strike price of 4.25%. The unrealized gain of these floors approximated $50,000 at December 31, 1996. In the fourth quarter of 1996, the Company purchased an additional $2.0 billion of exchange traded interest rate floors. The floors mature at the rate of $1.0 billion per quarter beginning in the second quarter of 1998. The floors provide the Company protection in the event that the three month LIBOR drops below the strike price of 4.0%. The unrealized gain of these floors approximated $150,000 at December 31, 1996. In January 1996, the Company purchased exchange traded interest rate caps with a notional value of $500 million at December 31, 1996. The caps provide protection in the event that the three month LIBOR increases above the 6.5% strike price of the caps and mature during the second quarter of 1997. The unrealized gain on these caps approximated $6,000 at December 31, 1996. In the fourth quarter of 1996, the Company purchased an additional $1.0 billion of exchange traded caps. The caps mature at the rate of $500 million per quarter beginning in the third quarter of 1997 and provide the Company protection in the event that the three month LIBOR increases above the 7.5% strike price. The unrealized gain of these caps at December 31, 1996 approximated $31,000. The unamortized premiums paid for floors and caps described above approximated $0.5 million at December 31, 1996. 37 The following table summarizes the Company's derivative instruments for the years ended December 31, 1996 and 1995.
- --------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1996 (IN NOTIONAL WEIGHTED THOUSANDS) AMOUNT AVERAGE RATE(1) TERMS AND MATURITY - --------------------------------------------------------------------------------------------------------------------------------- Interest rate caps purchased Exchange traded............................. $1,500,000 n/a $500,000 maturing per quarter in second, third and fourth quarter 1997 Interest rate floors purchased Exchange traded............................. $4,000,000 n/a $500,000 maturing per quarter in second, third and fourth quarter 1997 and first quarter 1998. $1,000,000 maturing per quarter in second and third quarter 1998 Over the counter............................ $ 500,000 n/a Matured but unexercised in first quarter 1997. - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1995 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------------ 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 1998 Receive - 3 month LIBOR (1)................. 100,000 4.9 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE CAPS PURCHASE Exchange traded............................. $1,200,000 n/a $400,000 maturing per quarter through third quarter 1996 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 First quarter 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (1) Weighted average rate reflects impact of linked exchange traded options. - ------------------------------------------------------------------------------------------------------------------------------------
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 matured 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. The impact of the Company's derivative financial instruments discussed above was a $0.7 million increase in net interest income and a 3 basis point increase in net interest margin for the year ended December 31, 1996. For the years ended December 31, 1995 and 1994, the economic impact of the Company's derivative financial instruments were $7.2 million and $4.9 million reductions in net interest income and 35 basis point and 27 basis point reductions in net interest margin, respectively. The impact of these instruments in 1995 was partially offset by the recognition of a $2.3 million premium received on the linked written option which had been deferred until the final maturity of the these options in the fourth quarter of 1995. 38 As of December 31, 1996, SBA loans serviced for others approximated $57.4 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 $7.8 billion and $6.8 billion at December 31, 1996 and 1995, 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 consolidated statement of income for the years ended December 31, 1996, 1995 and 1994 amounted to approximately $6,277,000 $6,609,000 and $7,774,000, respectively. Aggregate minimum rental commitments under these leases net of $1,780,000 of income to be received from noncancelable subleases are as follows:
- ----------------------------- (In Thousands) Amounts - ----------------------------- 1997............. $ 6,075 1998............. 4,991 1999............. 4,610 2000............. 3,206 2001............. 3,357 Thereafter....... 18,272 - ----------------------------- Total $40,511 - -----------------------------
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 $2,890,000 in 1996, $2,911,000 in 1995 and $3,836,000 in 1994 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 - --------------------------- 1997............. $1,515 1998............. 1,641 1999............. 1,701 2000............. 1,706 2001............. 1,706 Thereafter....... 995 - --------------------------- Total $9,264 - ---------------------------
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. 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, borrowings 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. 39 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 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, caps, floors, futures, spot and forward contracts 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. 40 The estimated fair values of the Company's financial instruments are as follows:
1996 1995 ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AT DECEMBER 31, (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------------ FINANCIAL ASSETS: Cash and due from banks................. $ 325,014 $ 325,014 $ 242,018 $ 242,018 Trading account assets.................. 64,887 64,887 40,050 40,050 Securities available for sale........... 426,336 426,336 295,312 295,312 Securities held to maturity............. 4,193 4,193 4,975 4,975 Federal funds sold and securities purchased under resale agreements...... 357,000 357,000 425,000 425,300 Loans held for sale..................... 5,531 6,058 2,648 2,842 Loans: Commercial loans...................... 1,594,602 1,609,344 1,238,148 1,256,580 Real estate loans..................... 447,842 430,443 453,582 444,390 Consumer loans........................ 20,604 20,425 7,617 7,607 - ------------------------------------------------------------------------------------------------------- Total loans $2,063,048 $2,060,212 $1,699,347 $1,708,577 ------------------------------------------------------------------------------------------------------ Less allowance for loan losses........ $ (36,051) $ -- $ (37,402) $ -- - ------------------------------------------------------------------------------------------------------- Net loans $2,026,997 2,060,212 $1,661,945 $1,708,577 - ------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: Deposits: Demand................................ $1,465,324 1,465,324 $1,145,720 $1,145,720 Savings............................... 17,324 17,324 15,708 15,708 Money market.......................... 596,967 596,967 435,674 435,674 Time deposits - under $100,000........ 169,493 169,624 227,262 227,722 Time deposits - over $100,000......... 701,169 700,883 539,252 539,687 Short-term borrowings................... 44,897 44,897 159,636 159,636 Long-term borrowings.................... 4,455 4,501 5,906 5,975 - ------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: ASSET/LIABILITY MANAGEMENT: Interest rate swaps(1).................. $ -- $ -- $ -- $ (166) Interest rate caps purchased(1)......... (95) 38 (180) -- Interest rate floors purchased(1)....... (347) 200 1,606 170 Trading contracts: Spot and forwards to purchase foreign currency............................... (170) (170) (136) (136) Spot and forwards to sell foreign currency............................... 528 528 520 520 Futures and forwards to purchase precious metals........................ -- -- -- -- Futures and forwards to sell precious metals................................. (4) (4) 26 26 Credit instruments: Commitment to extend credit............. -- (20,730) -- (12,605) Standby letters of credit............... -- (1,981) -- (1,232) Commercial letters of credit............ -- (800) -- (834) - ------------------------------------------------------------------------------------------------------- (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 1996, the Bank maintained average reserves of approximately $81.4 million. NOTE (18) IMPERIAL CREDIT INDUSTRIES, INC. At December 31, 1996, the Company owned 9,396,016 shares, or 24.5%, of the common stock of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII) ("ICII"). 41 The following table illustrates the changes in the Company's investment in ICII during 1996 and 1995.
1996 1995 - ------------------------------------------------------------- Shares owned, beginning of year.... 5,801,052 3,867,368 Stock splits and stock dividends... 5,281,658 1,933,684 Sale of shares..................... (1,500,000) -- Charitable donation of shares...... (186,604) -- - ------------------------------------------------------------- SHARES OWNED, END OF YEAR 9,396,106 5,801,052 - -------------------------------------------------------------
In accordance with two consulting agreements, one between the Bank and a senior executive of the Bank, and the second between the Bank and a director of the Company, the Bank is obligated to pay commissions upon the sale of ICII shares. Each individual will receive an incentive fee of 2.5% of the realized pre-tax gains received by the Bank, when and if realized, from the disposition of the remaining ICII shares held by the Bank. If such sale by the Bank has not occurred, the agreements require that the Bank will have considered to have sold an amount equal to 20% of any such security as of January 1 of each year from 1997 through 2001, at a price equal to the arithmetic average of the daily average stock price of ICII common stock as reported by NASD during the preceding year. Based on the daily average market price for 1996 of $14.50 per share, less each individual's basis of $0.89 per share as of December 31, 1996, as adjusted for stock splits and dividends, the liability relating to these agreements approximated $6.4 million at December 31, 1996. This liability is being accrued over the vesting period and will be remeasured quarterly for changes in the average market price. If the Company had sold all of its investment in ICII on December 31, 1996, the liability related to these agreements would have been $9.5 million. The commissions paid as a result of the shares sold in 1996 approximated $1.7 million and were netted against "Gain on sale of investment in Imperial Credit Industries, Inc." in the consolidated statement of income. At December 31, 1996, the Company carried its investment in ICII at an equivalent book value of $6.16 per share. On February 28, 1997, the market value of ICII common stock was $24.13, representing a pre-tax unrealized gain of the Company's investment of over $160 million. 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) 1996 1995 1994 - -------------------------------------------------------------------------------- Loans held for sale..................... $ 943,623 $ 1,341,810 $ 263,807 Total assets............................ 2,472,881 2,510,635 1,420,409 Deposits................................ 1,076,707 1,092,989 934,621 Total liabilities....................... 2,233,373 2,416,533 1,344,536 Total equity............................ 239,508 94,102 75,873 - -------------------------------------------------------------------------------- Total revenues.......................... 257,054 90,759 77,954 Total expenses.......................... 99,170 66,629 66,664 Income before taxes, minority interest & extraordinary item................... 157,884 24,130 11,290 Minority interest....................... 12,026 208 -- Extraordinary item...................... -- -- 919 Net income.............................. 75,984 14,193 7,524 - --------------------------------------------------------------------------------
NOTE (19) CAPITAL MATTERS Imperial Bank is subject to various regulatory requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amount and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. The Bank, as a California corporation, is limited in making distribution to its stockholder, the Company, to the lesser 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, 1996, the Bank could distribute at least $73.1 million. As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. 42 The following table compares the Company's actual capital ratios at December 31, 1996 to those required by regulatory agencies for capital adequacy and well capitalized classification purposes.
- ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) TO BE WELL CAPITALIZED UNDER ACTUAL FOR CAPITAL ADEQUACY PURPOSES PROMPT CORRECTIVE ACTION PROVISIONS ----------------------------------------------------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO Total capital (to risk weighted assets): Company.............................. $320,708 11.3% *$227,927 *8.0% *$284,909 *10.0% Bank................................. $296,024 10.5% *$226,013 *8.0% *$282,516 *10.0% Tier I Capital (to risk weighted assets): Company.............................. $284,248 10.0% *$113,964 *4.0% *$170,945 *6.0% Bank................................. $260,654 9.2% *$113,006 *4.0% *$169,509 *6.0% Tier I Capital (to average assets): Company.............................. $284,248 9.4% *$ 90,297 *3.0% *$151,042 *5.0% Bank................................. $260,654 8.7% *$ 90,297 *3.0% *$150,496 *5.0% - ------------------------------------------------------------------------------------------------------------------------------------ *greater than or equal to
NOTE (20) DISCONTINUED OPERATION In the second quarter of 1996, management of the Company decided to discontinue the precious metals business which had been engaged in trading and leasing of precious metals in addition to making loans secured by precious metals since 1993. The decision to exit this line of business was made in the wake of several operational losses for which the Company provided approximately $9.8 million, net of tax, in 1996. This included provisions for operational losses of $2.8 million, net of tax, recorded as a result of recent developments occurring during the fourth quarter of 1996. The provision, in addition to all of the results of operations from this division, is reflected in the consolidated statement of income as "(Loss) income from operations of discontinued operation, net of tax." In accordance with the Company's disposal plan, customers of the precious metals division were notified of the Company's decision to exit the line of business and given an appropriate amount of time to liquidate their outstanding positions. Substantially all of the activities of the precious metals division were terminated as of December 31, 1996.
- ------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------- (Loss) income from operations of discontinued operation, net of income taxes of $(6,000), $1,118, and $16..... $ (8,168) $ 1,523 $ 21 Loss on disposal of discontinued operation.............................. -- -- -- - -------------------------------------------------------------------------------- Total $ (8,168) $ 1,523 $ 21 - --------------------------------------------------------------------------------
Summary information of the precious metals division's assets and liabilities are provided below:
- ------------------------------------------------------------------------------ AT DECEMBER 31, (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------ Loans................................... $ 3,797 $ 24,382 Total assets............................ 19,931 25,475 Total liabilities....................... 14,769 583 - ------------------------------------------------------------------------------
NOTE (21) NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 125") which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies the following: when financial assets and liabilities are to be removed from an entity's financial statements; the accounting for servicing assets and liabilities; and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under FAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. FAS 125 requires that the selling entity continue to carry retained interests relating to assets it no longer recognizes. Such 43 retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. Under FAS 125, certain collateralized borrowings may result in assets no longer being recognized if the assets are provided as collateral and the secured party takes control of the collateral. This determination is based upon whether: (1) the secured party is permitted to repledge or sell the collateral and (2) the debtor does not have the right to redeem the collateral on short notice. Extinguishments of liabilities are recognized only when the debtor pays the creditor and is relieved of its obligation for the liability, or when the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. FAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset is to be amortized in proportion to, and over the period of, net servicing income. Servicing assets and liabilities are to be assessed for impairment based on their fair value. FAS 125 modifies the accounting for interest-only strips or retained interests in securitizations, such as capitalized servicing fees receivable, that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment. In this case, it requires that they be classified as available for sale or as trading securities. Interest-only strips and retained interests are to be recorded at market value. Changes in market value are included in operations, if classified as trading securities, or in stockholders' equity as unrealized holding gains or losses, net of the related tax effect, if classified as available for sale. During 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No 125" ("FAS 127"). FAS 127 defers for one year the effective date (a) of paragraph 15 of FAS 125 and (b) for repurchase agreement, dollar-roll, securities lending, and similar transactions, of paragraphs 9 - 12 and 237 (b) of FAS 125. FAS 127 provides additional guidance on the types of transactions for which the effective date of FAS 125 has been deferred. It is required that if it is not possible to determine whether a transfer occurring during calendar- year 1997 is part of a repurchase agreement, dollar-roll, securities lending or similar transaction, then paragraphs 9 - 12 of FAS 125 should be applied to that transfer. The Company adopted the applicable provisions of FAS 125 effective January 1, 1997. Management does not expect the adoption of FAS 125 to have a material impact on the Company's financial position, results of operations or liquidity. NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY)
- ------------------------------------------------------------------------------- CONDENSED BALANCE SHEET - ------------------------------------------------------------------------------- At December 31, (In Thousands, Except Share Data) 1996 1995 - ------------------------------------------------------------------------------- ASSETS Cash.................................... $ 188 $ 800 Securities available for sale (at fair value at December 31, 1996 and 1995)... 14,022 16,442 Securities purchased under resale agreements from Imperial Bank.......... 32,000 -- Loans to officers....................... 3,633 4,238 Investments in subsidiaries: Imperial Bank......................... 264,359 216,417 Other subsidiaries.................... 4,447 538 Other assets............................ 15,301 14,267 - ------------------------------------------------------------------------------- TOTAL ASSETS $305,150 $252,702 - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper........................ $ 8,011 $ 11,562 Long-term borrowings.................... 4,455 5,906 Other liabilities....................... 6,333 6,998 - ------------------------------------------------------------------------------- TOTAL LIABILITIES $ 18,799 $ 24,466 - ------------------------------------------------------------------------------- Stockholders' equity: Common stock, no par 50,000,000 shares authorized; 23,079,715 shares at December 31, 1996 and 13,821,125 shares at December 31, 1995 issued and outstanding...................... 163,748 130,780 Subsidiaries' unrealized gain on securities available for sale, net of tax............................... 1,206 2,747 Retained earnings..................... 121,397 94,709 - ------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $286,351 $228,236 - ------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $305,150 $252,702 - -------------------------------------------------------------------------------
44 NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
- -------------------------------------------------------------------------------------------- CONDENSED STATEMENT OF INCOME - -------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------------------- Revenue: Dividends - Imperial Bank and Imperial Bank Realty Company, Inc.... $ 4,120 $ 2,367 $ 4,610 Interest income: Securities available for sale....... 1,195 694 456 Securities purchased under resale agreements from Imperial Bank....... 141 12 -- Loans to officers................... 119 199 179 Other income.......................... 15 16 25 - -------------------------------------------------------------------------------------------- TOTAL REVENUE $ 5,590 $ 3,288 $ 5,270 ------------------------------------------------------------------------------------------- Expense: Salary................................ 137 137 198 Other employee benefits(1)............ 206 (206) 1,284 Interest expense: Commercial paper.................... 1,015 463 487 Long-term borrowings................ 343 528 625 Other expense......................... 890 535 518 - -------------------------------------------------------------------------------------------- TOTAL EXPENSE $ 2,591 $ 1,457 $ 3,112 - -------------------------------------------------------------------------------------------- Income before income taxes.............. 2,999 1,831 2,158 Applicable income tax benefit........... (603) (490) (1,472) - -------------------------------------------------------------------------------------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 3,602 2,321 3,630 - -------------------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries........................... 50,532 20,856 3,013 - -------------------------------------------------------------------------------------------- NET INCOME $54,134 $23,177 $ 6,643 - -------------------------------------------------------------------------------------------- (1) Includes the accrual for benefit costs less the benefit associated with the policies funding the plan (see Note 13). - --------------------------------------------------------------------------------------------
45 NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
- ----------------------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income............................ $ 54,134 $ 23,177 $ 6,643 Adjustments for non-cash charges (credits): Undistributed income of subsidiaries (50,532) (20,856) (3,013) Net change in other liabilities(1).. 1,198 798 235 Net change in other assets.......... (1,034) (693) 1,603 - ----------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,766 $ 2,426 $ 5,468 - ----------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sale of securities available for sale................... 416,117 188,630 217,179 Purchase of securities available for sale................................. (413,471) (189,966) (223,952) Investments in subsidiaries........... (1,750) -- -- Net change in securities purchased under resale agreements.............. (3,200) -- -- Net change in loans made to officers.. 605 244 3,579 - ----------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES $ (1,699) (1,092) $ (3,194) - ----------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in commercial paper........ (3,551) (341) (5,497) Retirement of long-term borrowings.... (1,451) (2,247) (1,713) Advances from subsidiaries............ -- -- 990 Net proceeds from exercise of employee stock options............... 2,352 1,839 3,968 Other................................. (29) (11) (10) - ----------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES $ (2,679) $ (760) $ (2,262) - ----------------------------------------------------------------------------------------------- NET CHANGE IN CASH $ (612) $ 574 $ 12 - ----------------------------------------------------------------------------------------------- CASH, BEGINNING OF YEAR $ 800 $ 226 $ 214 - ----------------------------------------------------------------------------------------------- CASH, END OF YEAR $ 188 $ 800 $ 226 - ----------------------------------------------------------------------------------------------- (1) The Parent Company recorded a tax benefit in stockholders' equity for its employee stock options of $1,863,000 in 1996, $153,000 in 1995 and $1,478,000 in 1994. - -----------------------------------------------------------------------------------------------
In 1996, 1995 and 1994, the Parent Company paid $1.4 million, $1.0 million and $1.3 million in interest, respectively. NOTE (23) SUBSEQUENT EVENTS (UNAUDITED) On February 20, 1997, the Company's Board of Directors approved a plan to spin off to stockholders in a tax-free distribution a portion of its specialty lending and finance businesses that focus on the entertainment industry, as well as certain other operations. These businesses and assets will be transferred to a newly formed corporation. The spin-off company will be known as Imperial Financial Group, Inc. ("IFG") and will comprise Imperial Bank's Lewis Horwitz Organization, which specializes in entertainment industry lending; the Bank's small business lending group; Imperial Trust Company, a California-licensed trust company; and the Bank's interest in ICII. Also, in connection with the spin-off, IFG intends to form a separate broker-dealer and a thrift and loan, which also will be part of its business. The spin-off is subject to receipt of a private letter ruling from the Internal Revenue Service to the effect that the transaction will not be taxable to the Company's stockholders, the Company or the Bank, as well as approval from the Company's regulators. It is anticipated that the separation will occur in late 1997 or early 1998. Total assets of the entities comprising IFG approximated $140 million at December 31, 1996. Revenues of IFG, including interest income and noninterest income but excluding the gains from sale of ICII shares in 1996, approximated $40 million for the year ended December 31, 1996. The Company has retained a financial advisor to assess alternatives to assure that capital levels at the Company and the Bank meet regulatory guidelines after the spin-off and provide for future growth. 46 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California January 22, 1997 47 Selected Statistical Information SECURITIES The following table shows the maturities of securities held to maturity and securities available for sale at December 31, 1996 and their weighted average yields.
- ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) MATURING - ----------------------------------------------------------------------------------------------------------------------------------- LESS THAN GREATER THAN GREATER THAN GREATER THAN 1 YEAR 1 - 5 YEARS 5 - 10 YEARS 10 YEARS TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ----------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Industrial development bonds....... $ -- --% $ -- --% $ -- --% $ 4.2 7.1% $ 4.2 7.1% - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL $ -- -- $ -- -- $ -- -- $ 4.2 7.1% $ 4.2 7.1% - ----------------------------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Treasury and federal agencies.. $ 74.0 5.2% $20.3 5.6% $ -- --% $293.3 6.6% $387.6 6.3% Mutual funds........................ 31.1 5.3 -- -- -- -- -- -- 31.1 5.3 Other securities.................... -- -- 0.1 7.9 -- -- 7.5 8.8 7.6 8.8 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL $105.1 5.3% $20.4 5.6% $ -- -- $300.8 6.7% $426.3 6.3% - -----------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF LOANS The following table shows the maturity schedule of the Company's loan portfolio at December 31, 1996, net of unearned income and deferred loan fees and costs.
- ------------------------------------------------------------------------------- GREATER LESS THAN GREATER THAN 1 TO 5 THAN (IN THOUSANDS) 1 YEAR YEARS 5 YEARS TOTAL - ------------------------------------------------------------------------------- Commercial loans: Floating rate............... $ 777,993 $543,367 $159,051 $1,480,411 Fixed rate.................. 57,300 46,583 10,308 114,191 Real estate loans: Floating rate............... 81,240 22,529 16,759 120,529 Fixed rate.................. 91,202 193,449 42,663 327,313 Consumer loans: Floating rate............... 16,444 3,637 -- 20,081 Fixed rate.................. 63 460 -- 523 - ------------------------------------------------------------------------------- TOTAL LOANS $1,024,242 $810,025 $228,781 $2,063,048 - ------------------------------------------------------------------------------- Allowance for loan losses... (36,051) - ------------------------------------------------------------------------------- NET LOANS $2,026,997 - -------------------------------------------------------------------------------
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, 1996 and 1995.
- ----------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - ----------------------------------------------------------------- 3 months or less...................... $517,644 $372,228 Over 3 through 6 months............... 100,959 132,993 Over 6 through 12 months.............. 80,614 33,051 Over 12 months........................ 1,952 980 - ----------------------------------------------------------------- TOTAL $701,169 $539,252 - -----------------------------------------------------------------
48 FINANCIAL RATIOS
- ------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- Net income as a percentage of: Average stockholders' equity...................... 20.83% 11.03% 3.46% 0.57% 4.35% Average total assets.............................. 1.94 1.00 0.30 0.04 0.22 Average earning assets............................ 2.10 1.14 0.35 0.05 0.25 Stockholders' equity at year-end as a percentage of: Total assets at year-end.......................... 8.55% 8.19% 8.31% 6.63% 5.40% Total gross loans at year-end..................... 13.88 13.43 14.38 12.56 11.12 Total deposits at year-end........................ 9.71 9.66 10.09 7.76 6.08 Average stockholders' equity as a percentage of: Average total assets.............................. 9.33% 9.04% 8.64% 7.02% 5.11% Average gross loans............................... 14.14 13.64 14.11 12.54 10.16 Average total deposits............................ 10.77 10.47 10.10 8.22 5.84 - -------------------------------------------------------------------------------------------------------
COMMON STOCK AND STOCKHOLDER DATA
- ------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- Market price: High for year..................................... $ 22.27 $ 13.75 $10.28 $ 7.64 $ 7.27 Low for year...................................... 12.48 6.41 6.48 4.48 3.52 At year end....................................... 21.82 13.75 6.75 6.75 4.61 Book value at year end.............................. 11.28 9.27 8.24 8.02 8.00 Market price/book value at year end................. 193.4% 148.4% 81.9% 84.1% 57.6% - -------------------------------------------------------------------------------------------------------
On January 24, 1997, the Company declared a 10% stock dividend, payable on February 24, 1997 to shareholders of record on February 17, 1997. In the fourth quarter of 1996, the Company split its common stock at the ratio of one new share for every two shares outstanding. 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. During the first eleven months of 1996, the common stock of the Company was 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." On December 9, 1996, the Company's common stock began trading on the New York Stock Exchange ("NYSE") under the stock symbol "IMP." As of March 1, 1997, stockholders of record approximated 1,490 exclusive of individual participants in security position listings. 49 QUARTERLY DATA The following table sets forth the range of the high and low prices for the calendar periods indicated as adjusted for stockdividends declared and paid in 1996 and first quarter 1997 and a 3-for-2 stock split effected in 1996.
- --------------------------------------------------------------- 1996 1995 ----------------------------------- STOCK MARKET QUOTATIONS HIGH LOW HIGH LOW - --------------------------------------------------------------- First Quarter............. $15.36 $12.48 $ 9.68 $ 6.41 Second Quarter............ 15.30 13.48 11.64 8.70 Third Quarter............. 17.88 13.48 13.33 10.66 Fourth Quarter............ 22.27 16.59 13.75 12.48 - ---------------------------------------------------------------
Quarterly financial information for the Company and its subsidiaries for the two years ended December 31, 1996 is summarized below.
- ------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------------------------------------ 1996 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 - ------------------------------------------------------------------------------------------------------------ Total interest income................... $56,227 $54,513 $50,326 $48,090 Net interest income..................... 37,908 36,084 34,889 32,221 Provision for loan losses............... (2,948) 3,803 3,357 2,669 Noninterest income...................... 14,974 12,586 23,229 12,291 Gains - Imperial Credit Industries, Inc. stock............................. -- -- 36,411 -- Income from continuing operations before taxes........................... 21,368 14,347 58,185 11,680 (Loss) income from operations of discontinued operation, net of tax..... (2,543) 373 (6,114) 116 - ------------------------------------------------------------------------------------------------------------ NET INCOME $10,009 $ 8,676 $28,653 $ 6,796 - ------------------------------------------------------------------------------------------------------------ Net income from continuing operations per share.............................. 0.47 0.32 1.34 0.26 (Loss) income per share of discontinued operations............................. (0.10) 0.01 (0.24) -- - ------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE $ 0.37 $ 0.33 $ 1.10 $ 0.26 - ------------------------------------------------------------------------------------------------------------ 1995 DECEMBER 1 SEPTEMBER 30 JUNE 30 MARCH 31 - ------------------------------------------------------------------------------------------------------------ Total interest income................... $48,104 $45,014 $43,234 $38,427 Net interest income..................... 33,155 29,036 27,542 24,892 Provision for loan losses............... 5,305 6,261 3,176 1,380 Noninterest income...................... 16,421 10,453 8,753 7,919 Income from continuing operations before taxes........................... 12,662 7,080 6,677 5,306 Income from operations of discontinued operation, net of tax.................. 465 480 350 228 - ------------------------------------------------------------------------------------------------------------ NET INCOME $ 8,723 $ 5,150 $ 4,648 $ 4,656 - ------------------------------------------------------------------------------------------------------------ Net income from continuing operations per share LDRS......................... 0.32 0.18 0.17 0.18 Income per share of discontinued operations............................. 0.02 0.02 0.01 0.01 - ------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE $ 0.34 $ 0.20 $ 0.18 $ 0.19 - ------------------------------------------------------------------------------------------------------------ Per share data has been adjusted for stock dividends declared and paid in 1996 and 1997 and a 3-for-2 stock split effected in 1996. - ------------------------------------------------------------------------------------------------------------
50 - ------------------------------------------------------------------------------- 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.
- --------------------------------------------------------------------------------------------------------------------------------- 1996 OVER 1995 1995 OVER 1994 RATE/ RATE/ (IN THOUSANDS) VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL - --------------------------------------------------------------------------------------------------------------------------------- Increase/(Decrease) in: Loans (1)...................... $27,817 $ 897 $1,393 $30,107 $14,883 $14,978 $ 967 $30,828 Trading instruments............ 470 (912) (103) (545) 592 464 94 1,150 Securities available for sale... 6,007 (1,175) (506) 4,326 (1,254) 6,792 (648) 4,890 Securities held to maturity.... (72) 90 (23) (5) (14) (23) 3 (34) Federal funds sold and securities purchased under resale agreements....... 1,257 (871) (123) 263 (324) 2,925 (47) 2,554 Loans held for sale............ 248 (9) (8) 231 (498) 487 (370) (381) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME $35,727 $(1,980) $ 630 $34,377 $13,385 $25,623 $ (1) $39,007 - --------------------------------------------------------------------------------------------------------------------------------- Savings........................ (157) (1) 1 (157) (41) -- -- (41) Money market................... 1,193 1,107 (112) 2,188 (553) 1,863 175 1,485 Time - under $100,000.......... (987) (1,362) 134 (2,215) 2,540 3,493 1,074 7,107 Time - $100,000 and over....... 12,512 (2,382) (886) 9,244 5,953 5,515 2,288 13,756 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS $12,561 (2,638) (863) $ 9,060 $ 7,899 $10,871 $ 3,537 $22,307 - --------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings.......... (611) (397) 33 (975) (977) 2,083 (577) 529 Long-term borrowings........... (154) (47) 16 (185) (130) 46 (13) (97) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE $11,796 (3,082) (814) $ 7,900 $ 6,792 $13,000 $ 2,947 $22,739 - --------------------------------------------------------------------------------------------------------------------------------- CHANGES IN NET INTEREST $23,931 $ 1,102 $1,444 $26,477 $ 6,593 $12,623 $(2,948) $16,268 INCOME - --------------------------------------------------------------------------------------------------------------------------------- (1) The rate change for interest income on loans includes a $0.7 million positive impact and a $7.2 million negative impact of derivative instruments for the years ended December 31, 1996 and 1995. Loans are net of unearned income and deferred loan fees. - ---------------------------------------------------------------------------------------------------------------------------------
51 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 11 banking offices located throughout California and loan production offices located in Boston, Massachusetts; Austin, Texas; and Phoenix, Arizona. The Bank, among the eighth 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, 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 licensed as an insurance agent and engages in insurance agency activities as permitted under applicable law. As of December 31, 1996, the Bank and its subsidiaries had total assets of $3.3 billion and total deposits of $3.0 billion. Net income for 1996 was $54.5 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 $7.5 billion at December 31, 1996. The Trust Company reported net income of $1.7 million for 1996. Imperial Ventures, Inc. ("IVI") was organized in 1977 and is licensed as a small business investment company. IVI reported net income of $0.2 million for 1996. As of December 31, 1996, IVI had total assets of approximately $1.3 million. 52 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 as a broker dealer in 1993, reported net income of $0.7 million for 1996. As of December 31, 1996, ISC had total assets of $3.6 million. Pacific Bancard Association, Inc. ("PBA") was implemented in 1994 to facilitate merchant bankcard processing activities. PBA had total assets of $0.8 million at December 31, 1996, and reported net income of $0.2 million for 1996. Nonbank Subsidiaries: In addition to the Bank and its subsidiaries, the Company has two active wholly owned direct subsidiaries. Imperial Bank Realty Company, Inc. ("Realty") holds leases on 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, 1996, Realty's total assets approximated $0.6 million. Net income in 1996 was approximately $42,000. Imperial Creditcorp ("ICC") seeks to generate capital appreciation through medium term equity investments made in financial sector related opportunities. As of December 31, 1996, ICC's total assets approximated $1.7 million. Net income for 1996 approximated $167,000. 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 and effected a two-for-one stock split in late 1996. In the second quarter of 1996, the Company sold 1.5 million shares of its investment in ICII. At the same time, ICII completed a secondary public offering in which 2.8 million new shares were sold to the public. These events reduced the Company's ownership of ICII to approximately 24.5%. 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. On February 20, 1997, the Company's Board of Directors approved a plan to spin off to stockholders, in a tax-free distribution, a portion of specialty lending and finance businesses that focus on the entertainment industry, as well as certain other operations including its investment in ICII. The spin-off is subject to receipt of a private letter ruling from the Internal Revenue Service to the effect that the transaction will not be taxable to the Company's stockholders or the Company. It is anticipated that the separation will occur in late 1997 or early 1998. 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 53 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 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 lesser 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, 1996, the Bank could distribute at least $73.1 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 Bank Insurance Fund ("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. In September 1996, Congress passed the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Budget Act") which provided that, among other things, Savings Association Insurance Fund ("SAIF") members and BIF members would have the same risk-based deposit insurance assessment schedule with respect to FDIC deposit insurance premiums, effective January 1, 1997, whereas previously, FDIC insurance premiums were based on the level of reserves in the BIF and the SAIF. The assessment schedule proposed by the FDIC ranges from 0% to 0.27% of deposits and is based upon the capital position and a supervisory evaluation of each institution. As of January 1, 1997, assessments have been set at the following percentages of deposits:
- -------------------------------------------------------------- Group A Group B Group C - -------------------------------------------------------------- Well Capitalized......... 0.00% 0.03% 0.17% Adequately Capitalized... 0.03% 0.10% 0.24% Undercapitalized......... 0.10% 0.24% 0.27% - --------------------------------------------------------------
The Bank has been assigned the assessment risk classification of Group A and is well capitalized. As a result, its FDIC insurance premium for the semi-annual period of January to June 1997 is zero. Prior to the enactment of the Budget Act, FDIC assessments for interest payments on bond obligations issued by the Financing Corporation ("FICO") were solely paid by SAIF member institutions. Under the Budget Act, both BIF and SAIF members will now share in the cost of the FICO bond interest payments. Beginning January 1, 1997 and continuing through December 31, 1999, partial sharing will occur. During this initial period, SAIF member institutions will pay 0.0648% of domestic deposits while BIF member institutions, such as the Bank, will pay 0.013% of domestic deposits. Full pro rata sharing of the FICO bond interest payments will take effect on January 1, 2000. 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 54 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. 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. 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 stockholder's 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, 1996 were 9.2% and 10.5%, 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 55 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, 1996 was 8.7%. 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, 1996. 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 1997 to 2012, exclusive of renewal options. Annual rentals, net of sublease income, for all leased premises were $6,277,000 for 1996. The Bank houses its Corporate Service Center at 2015 Manhattan Beach Boulevard, Redondo Beach, California. The property is owned by the Bank. 56 Directory IMPERIAL BANCORP, SUBSIDIARIES AND ENTERPRISES Imperial Bancorp & Imperial Bank Executive Offices Century Boulevard at the San Diego Freeway P. O. Box 92991 Los Angeles, California 90009 (310) 417-5600 - ------------------------------------------------------------------------------ Imperial Bank Realty Company, Inc. Century Boulevard at the San Diego Freeway P. O. Box 92991 Los Angeles, California 90009 (310) 417-5600 - ------------------------------------------------------------------------------ Imperial Credit Industries, Inc. 23550 Hawthorne Blvd., Building 1, Suite #110 Torrance, CA 90505 (310) 373-1704 - ------------------------------------------------------------------------------ Imperial Creditcorp Century Boulevard at the San Diego Freeway P. O. Box 92991 Los Angeles, California 90009 (310) 417-5600 - ------------------------------------------------------------------------------ Imperial Financial Group, Inc. Century Boulevard at the San Diego Freeway P. O. Box 92991 Los Angeles, California 90009 (310) 417-5600 - ------------------------------------------------------------------------------ DIRECTORS George L. Graziadio, Jr. Chairman of the Board, President and Chief Executive Officer, Imperial Bancorp; Chairman of the Board and Co-Founder, Imperial Bank; Chairman of the Board, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Norman P. Creighton Vice Chairman and Chief Executive Officer, Imperial Bank; Director, Imperial Bancorp and Imperial Bank - ------------------------------------------------------------------------------ Richard K. Eamer Chairman Emeritus, Tenet Healthcare Corp.; Director, Imperial Bancorp and Imperial Bank - ------------------------------------------------------------------------------ Robert M. Franko President, Director, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ G. Louis Graziadio III President, Ginarra Holdings, Inc.; Director, Imperial Bancorp; Co-Chairman of the Board, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Robert "Chip" Harris Senior Vice President, AMC Entertainment; Director, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Bernard G. LeBeau Retired Chairman of the Board, Imperial Bank; Director, Imperial Bancorp and Imperial Bank - ------------------------------------------------------------------------------ Perry A. Lerner Managing Director, Crown Capital Group; Director, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Jack H. Leylegian II President, Leylegian Investment Management; Director, Imperial Bank - ------------------------------------------------------------------------------ William L. MacDonald President and Chief Executive Officer, Compensation Resource Group; Director, Imperial Bank - ------------------------------------------------------------------------------ Lee E. Mikles Chairman, Mikles/Miller Management; Director, Imperial Bancorp and Imperial Bank; Director, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Paul A. Novelly President, Apex Oil Co.; Director, Imperial Bank; Director, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Charles T. Owen President and Publisher, San Diego Business Journal; Director, Imperial Bank - ------------------------------------------------------------------------------ H. Wayne Snavely Chairman and Chief Executive Officer, Imperial Credit Industries, Inc.; Director, Imperial Bancorp and Imperial Bank; Director, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Dr. M. Norvel Young Chancellor Emeritus, Pepperdine University; Director, Imperial Bancorp and Imperial Bank - ------------------------------------------------------------------------------ IMPERIAL BANK MANAGEMENT COMMITTEE Norman P. Creighton Vice Chairman and Chief Executive Officer - ------------------------------------------------------------------------------ Daniel R. Mathis President and Chief Operating Officer - ------------------------------------------------------------------------------ J. Richard Barkley Executive Vice President and Director, Human Resources - ------------------------------------------------------------------------------ William L. Capps Executive Vice President and Chief Administrative Officer - ------------------------------------------------------------------------------ Richard J. Casey Executive Vice President - ------------------------------------------------------------------------------ H.W. Duke Chenoweth Executive Vice President - ------------------------------------------------------------------------------ James R. Daley Executive Vice President - ------------------------------------------------------------------------------ Robert M. Franko President, Director, Imperial Financial Group, Inc. - ------------------------------------------------------------------------------ Eldon K. Lloyd Executive Vice President, Chief Credit Officer - ------------------------------------------------------------------------------ Christine M. McCarthy Executive Vice President and Chief Financial Officer - ------------------------------------------------------------------------------ Robert S. Muehlenbeck Executive Vice President - ------------------------------------------------------------------------------ 57 DIRECTORY OF BANK OFFICES SOUTHERN CALIFORNIA . Beverly Hills (310) 281-2400 . Downtown Los Angeles (213) 484-3700 . Los Angeles International Airport (310) 417-5600 . Orange County - Costa Mesa (714) 641-2200 . San Diego (619) 338-1500 . Sherman Oaks (818) 379-2901 NORTHERN CALIFORNIA . Central Valley - Fresno (209) 244-3900 . East Bay - Walnut Creek (510) 941-1900 . Sacramento (916) 491-1300 . San Francisco (415) 954-5000 . Santa Clara Valley - San Jose (408) 451-8500 LOAN PRODUCTION OFFICES . Austin, Texas (512) 349-2333 . Boston, Massachusetts (617) 521-9400 . Phoenix, Arizona (602) 952-6028 SPECIALTY OFFICES . Apparel and Textile Industries Group Downtown Los Angeles . Imperial Entertainment Group Beverly Hills . International, Foreign Exchange Redondo Beach; San Francisco . The Lewis Horwitz Organization Century City . Merchant Card Processing Redondo Beach . Residential Lending San Diego; Fresno; Sacramento; Los Angeles . SBA Loan Department Fresno; Los Angeles; Oakland; Orange County; Sacramento; San Diego; San Francisco; Santa Barbara; Santa Clara; Sherman Oaks; Torrance; Walnut Creek; Phoenix, Arizona; Las Vegas, Nevada; Portland, Oregon; Seattle, Washington . Special Markets Group - Emerging Technology Costa Mesa; Menlo Park; San Diego; Austin, Texas; Boston, Massachusetts . Wine Industry Group Sacramento IMPERIAL BANK -- SUBSIDIARIES & DIVISIONS . Commercial Banking Division . Corporate Cash Management . Financial Accounts Management Services Division (Factoring) . Financial Institutions Division . Financial Services Group: Association Bank Services, Bankruptcy Deposit Division, Title/Escrow Division, Labor Management Division . Health Care Technology Group . Imperial Securities Corporation . Imperial Trust Company . Imperial Ventures, Inc. . Mortgage Warehouse Division . Pacific Bancard Association . Real Estate Division . Real Estate Finance Division . Syndicated Finance STOCKHOLDER INFORMATION Requests for financial information, annual reports, quarterly reports and SEC filings should be addressed to: Imperial Bancorp Investor Relations Department P. O. Box 92991 Los Angeles, California 90009 (800) 957-8483 invrelat@imperialbank.com Stock Transfer Agent and Registrar American Stock Transfer and Trust Co. 40 Wall Street New York, NY 10025 (800) 937-5449 Independent Auditors KPMG Peat Marwick LLP Stock Listings NYSE - IMP* NASDAQ - ICII* *Stock Symbol: IMP - Imperial Bancorp ICII - Imperial Credit Industries, Inc. For other information visit our World Wide Web site: http:/www.imperialbank.com 58 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 20, 1997, on its behalf by the undersigned, thereunto duly authorized. Date /s/ George L. Graziadio March 20, 1997 --------------------------------- George L. Graziadio, Jr. Chief Executive Officer /s/ Robert M. Franko March 20, 1997 --------------------------------- 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 20, 1997 by the following persons on behalf of the registrant and in the capacities indicated. Date /s/ George L. Graziadio, Jr. March 20, 1997 --------------------------------- George L. Graziadio, Jr. Chairman of the Board, President and Chief Executive Officer /s/ Bernard G. LeBeau March 20, 1997 --------------------------------- Bernard G. LeBeau Director /s/ Norman P. Creighton March 20, 1997 --------------------------------- Norman P. Creighton Director /s/ G. Louis Graziadio, III March 20, 1997 --------------------------------- G. Louis Graziadio, III Director /s/ Richard K. Eamer March 20, 1997 --------------------------------- Richard K. Eamer Director /s/ M. Norvel Young March 20, 1997 --------------------------------- M. Norvel Young Director /s/ H. Wayne Snavely March 20, 1997 --------------------------------- H. Wayne Snavely Director /s/ Lee E. Mikles March 20, 1997 --------------------------------- Lee E. Mikles Director 59 Form 10-K Cross-Reference Index
- -------------------------------------------------------------------------------- Part I Page - -------------------------------------------------------------------------------- Item 1. Business Financial Review ...........................5-20 Selected Statistical Information ...........4, 6-7, 11, 15-16, 48-51 Description of Business ....................52-56 Item 2. Properties .................................56 Item 3. Legal Proceedings ..........................39 Item 4. Submission of Matters to a vote of security holders ..........................* Executive Officers of the Registrant .......57 - -------------------------------------------------------------------------------- Part II Page - -------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................................4, 49 Item 6. Selected Financial Data ....................4, 49 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................5-20 Item 8. Financial Statements and Supplementary Data Imperial Bancorp and Subsidiaries - Consolidated Financial Statements .........21-24 Notes to Consolidated Financial Statements ......................25-46 Independent Auditors' Report ...............47 Selected Statistical Information ...........4, 6-7, 11, 14-16, 48-51 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 21. Subsidiaries of Registrant. Exhibit 23. Independent Auditors' Consent. Exhibit 27. Financial Data Schedule. Exhibit 99. Undertakings. Exhibit 99.1 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, 1996. *** Incorporated by reference from the Company's Form 10-K for the fiscal year ended December 31, 1995 which was filed on March 22, 1996. ++ Exhibits listed in Part IV have been filed with the Company's 1996 10-K. 60 Exhibit Index
- ---------------------------------------------------------------------- Exhibit Number Description - -------------- --------------------------------------------- 11 Computation of Income Per Share 21 Subsidiaries of Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule 99 Undertakings
61 (THIS PAGE INTENTIONALLY LEFT BLANK) 62 EX-11 2 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, 1996 and 1995, 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 26,043,809 in 1996, 25,083,959 in 1995 and 24,200,588 in 1994. The weighted average number of shares used to compute income per common share was retroactively adjusted to reflect a 10% stock dividend declared and paid in the first quarter of 1997, a 3-for-2 stock split effected in the fourth quarter of 1996, an 8% stock dividend declared in the first quarter of 1996 and a 5% stock dividend declared in the first quarter of 1995. The weighted average number of fully diluted shares including common stock equivalents was 26,116,767 in 1996, 25,168,985 in 1995 and 24,200,733 in 1994. The weighted average number of shares used to compute income per common share was retroactively adjusted to reflect a 10% stock dividend declared and paid in the first quarter of 1997, a 3-for-2 stock split effected in the fourth quarter of 1996, an 8% stock dividend declared in the first quarter of 1996 and a 5% stock dividend declared in the first quarter of 1995. EX-21 3 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 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% Company, Inc. 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 EX-23 4 INDEPENDENT AUDITORS REPORT EXHIBIT 23 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 22, 1997, relating to the consolidated balance sheet of Imperial Bancorp and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Imperial Bancorp. KPMG PEAT MARWICK LLP Los Angeles, California March 20, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 325,014 0 357,000 64,887 426,336 4,193 4,193 2,063,048 36,051 3,350,170 2,950,277 44,897 64,190 4,455 0 0 163,748 122,603 3,350,170 173,734 24,952 10,470 209,156 64,551 68,054 141,102 6,881 229 128,132 105,580 62,302 (8,168) 0 54,134 2.08 2.07 5.8 20,390 0 28,681 0 37,402 11,025 2,778 36,051 36,051 0 2,093
EX-99 6 UNDERTAKINGS EXHIBIT 99 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. (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. -----END PRIVACY-ENHANCED MESSAGE-----