-----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, UABk2LTuDSgOc9Blrvs/wNt+6STBfIlRe6wmOc43TSQBc15mJIPvHAhll9hjRPlv 1NQyYK44Qn7nJjzoc0+o2g== 0000944209-00-000458.txt : 20000331 0000944209-00-000458.hdr.sgml : 20000331 ACCESSION NUMBER: 0000944209-00-000458 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: SEC FILE NUMBER: 001-08196 FILM NUMBER: 584599 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 REGISTRATION STATEMENT 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, 1999 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 incorporation (I.R.S. Employer 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 24, 2000: $868,425,356. Number of Shares of Common Stock outstanding as of March 24, 2000: 45,041,500. Debt Securities: Imperial Bank Subordinated Capital Notes Due 2009. As of December 31, 1999, $100,000,000 in principal amount of such Notes was outstanding. Capital Securities: 9.98% Series B Capital Securities of Imperial Capital Trust I Due 2026. As of December 31, 1999, $75,000,000 in principal amount was outstanding. Documents Incorporated By Reference: Sections of a Proxy Statement which will be filed within 120 days of Fiscal Year Ended December 31, 1999, are incorporated by reference into Part III hereof. This report includes a total of 94 pages. Exhibit Index begins on page 94. 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 --- ---
TABLE OF CONTENTS Page Five Year Summary of Selected Financial Information 4 Financial Review 5 Average Balances, Yields and Rates Paid 9 Analysis of the Allowance for Loan Losses 20 Allocated Allowance for Loan Losses 22 Asset Liability Management 24 Financial Statements Consolidated Balance Sheet 36 Consolidated Statement of Income 37 Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income 38 Consolidated Statement of Cash Flows 39 Notes to Consolidated Financial Statements 40 Independent Auditors' Report 78 Description of Business 79 Directory 85 Form 10-K Cross Reference Index 92 Signatures 93 Exhibits Index 94
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA IMPERIAL BANCORP AND SUBSIDIARIES =================================================================================================================================== (Dollars in thousands, except per share data) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Summary of operations Interest income $ 388,795 $ 361,345 $ 283,397 $ 209,156 $ 174,779 Interest expense 119,060 102,648 81,637 68,054 60,154 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 269,735 258,697 201,760 141,102 114,625 Provision for loan losses 32,220 33,375 22,892 6,881 16,122 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 237,515 225,322 178,868 134,221 98,503 Noninterest income 90,526 82,006 49,616 37,627 31,954 Noninterest income-normalizing items 59,600 (18,205) 31,597 61,864 11,592 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating income 387,641 289,123 260,081 233,712 142,049 Salary and employee benefits expense 137,182 114,599 85,065 64,876 47,702 Other noninterest expense and minority interest 104,769 102,327 83,966 63,256 62,622 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 145,690 72,197 91,050 105,580 31,725 Income tax provision 58,864 28,449 36,502 43,278 10,071 Income from continuing operations 86,826 43,748 54,548 62,302 21,654 Income (loss) from discontinued operation, net of tax - - 629 (8,168) 1,523 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 86,826 $ 43,748 $ 55,177 $ 54,134 $ 23,177 - ----------------------------------------------------------------------------------------------------------------------------------- Per Share Data (1) Basic earnings per share: Income from continuing operations $ 1.93 $ 0.95 $ 1.21 $ 1.42 $ 0.51 Net income 1.93 0.95 1.22 1.23 0.55 Diluted earnings per share: Income from continuing operations $ 1.87 $ 0.92 $ 1.15 $ 1.36 $ 0.49 Net income 1.87 0.92 1.16 1.18 0.52 Basic average common shares outstanding 44,949,028 45,994,411 45,252,920 43,816,225 42,513,002 Diluted average common shares outstanding 46,528,939 47,709,588 47,490,233 45,732,251 44,377,093 =================================================================================================================================== Balance Sheet Data-at year end Assets $ 6,856,702 $ 6,184,603 $ 4,725,926 $ 3,350,170 $ 2,788,374 Loans, net 3,540,471 3,384,889 2,734,509 2,026,997 1,661,945 Deposits 5,904,600 5,569,647 4,174,598 2,950,277 2,363,616 Other borrowings 260,199 62,996 59,172 49,352 165,542 Capital securities of subsidiary trust 73,430 73,372 73,314 - - Shareholders' equity 473,407 381,822 352,024 286,351 228,236 Balance Sheet Data-average balances Assets $ 5,702,470 $ 4,981,938 $ 3,652,463 $ 2,785,089 $ 2,326,308 Earning assets 5,168,358 4,485,772 3,250,214 2,449,148 2,031,551 Loans, net 3,862,087 3,258,383 2,358,284 1,797,435 1,500,947 Deposits 4,960,104 4,351,225 3,136,189 2,412,150 2,006,737 Shareholders' equity 409,951 377,854 314,765 259,823 210,188 Asset Quality Nonaccrual loans $ 27,589 $ 30,615 $ 10,578 $ 20,390 $ 28,926 Restructured loans 4,081 9,770 23,970 28,681 33,608 Performance Ratios Return on average equity 21.18% 11.58% 17.53% 20.83% 11.03% Return on average assets 1.52% 0.88% 1.51% 1.94% 1.00% Net interest margin 5.21% 5.76% 6.21% 5.76% 5.64% Average equity-to-average assets 7.19% 7.58% 8.62% 9.33% 9.04% Asset Quality Ratios Nonaccrual loans to total loans 0.76% 0.89% 0.38% 0.99% 1.70% Allowance for loan losses to total loans 1.98% 1.82% 1.84% 1.75% 2.20% Net charge-offs as a percentage of average loans 0.49% 0.66% 0.33% 0.45% 1.22% Capital Ratios for Imperial Bancorp Tier I leverage ratio 9.20% 8.12% 10.28% 9.32% 9.13% Tier I capital ratio 10.61% 9.59% 11.14% 9.96% 9.96% Total capital ratio 13.72% 10.89% 12.48% 11.24% 11.30% - ----------------------------------------------------------------------------------------------------------------------------------- (1) Adjusted for all stock dividends and stock splits. ===================================================================================================================================
4 MANAGEMENT DISCUSSION AND ANALYSIS Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward- looking terminology including "may", "will", "intend", "should", "expect", "anticipate", "estimate" or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth in documents filed with the Securities and Exchange Commission. FINANCIAL REVIEW The following discussion provides information about the results of operations, financial condition, capital resources and liquidity of Imperial Bancorp ("the Company"). This information is intended to facilitate the understanding and assessment of the financial condition of the Company and trends impacting future operations. It should be read in conjunction with the audited Consolidated Financial Statements of the Company and notes thereto. Performance Summary Net income for the year ended December 31, 1999, increased 98% to $86.8 million, or $1.87 a share, from $43.7 million, or $0.92 a share, for 1998. Net income for 1999 includes after-tax income of $19.3 million, or $0.42 a share, related to the initial public offering of common stock by Official Payments Corporation ("OPAY") (Nasdaq: OPAY), a majority-owned subsidiary of Imperial Bank, net of transaction expenses and the Company's share of OPAY's operating losses. Net income for 1999 also includes net after-tax income of $0.1 million representing the Company's equity in Imperial Credit Industries, Inc. ("ICII") (Nasdaq: ICII) first quarter 1999 earnings net of the loss incurred on the sale of 8.9 million shares of ICII common stock after transaction expenses, and a $5.1 million after-tax gain on the sale of the Company's trust business. Net income for 1998 includes a $10.6 million after-tax loss representing the Company's equity in ICII's losses, and a $2.8 million after-tax restructuring charge related to the canceled spin-off of Imperial Financial Group ("IFG"). Normalized net income increased 9% for the year ended December 31, 1999, to $62.2 million, or $1.34 a share, from $57.1 million, or $1.20 a share, for the year earlier. For purposes of this comparison, normalized net income for 1999 excludes the gains and operating losses related to OPAY, equity in the earnings of ICII, the net loss on the sale of ICII common stock and the gain on the sale of the trust business. The normalizing adjustments decreased net income by $24.6 million for the year. Normalized earnings for 1998 excludes equity in the losses of ICII and the IFG restructuring charge. The normalizing adjustments increased net income by $13.4 million for the year. Earnings per share calculations for all periods reported reflect an 8% stock dividend paid on February 18, 2000, to shareholders of record on February 4, 2000. 5
================================================================================================================================ For the period ended December 31, (Dollars in thousands, except per share data) 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 86,826 $43,748 After-tax adjustments: (1) Equity in net loss (income) of ICII (953) 10,550 Loss on sale of ICII common stock net of transaction expenses 839 - Net gain resulting from the sale of stock by Official Payments Corporation (24,035) - Net gain on sale of trust business (5,110) - OPAY operating losses 4,682 - Restructuring charges - 2,828 - -------------------------------------------------------------------------------------------------------------------------------- Normalized net income $ 62,249 $57,126 ================================================================================================================================ Normalized diluted earnings per share $ 1.34 $ 1.20 Normalized return on average assets (2) 1.10% 1.16% Normalized return on average equity 15.18% 15.12% - -------------------------------------------------------------------------------------------------------------------------------- (1) Adjustment increases (decreases) reported income. (2) Average assets excludes the Company's investment in ICII. ================================================================================================================================
The increase in net income for the year ended December 31, 1999, compared with the year earlier was driven in large part by growth in commercial and residential tract construction loans and service-related fee income.
============================================================================================================================ FINANCIAL RATIOS 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Net income as a percentage of: Average shareholders' equity 21.18% 11.58% 17.53% 20.83% 11.03% Average total assets 1.52% 0.88% 1.51% 1.94% 1.00% Average earning assets 1.68% 0.98% 1.70% 2.21% 1.14% Shareholders' equity at year-end as a percentage of: Total assets at year-end 6.90% 6.17% 7.45% 8.55% 8.19% Total gross loans at year end 13.11% 11.08% 12.64% 13.88% 13.43% Total deposits at year end 8.02% 6.86% 8.43% 9.71% 9.66% Average shareholders' equity as a percentage of: Average total assets 7.19% 7.58% 8.62% 9.33% 9.04% Average gross loans 10.43% 11.39% 13.11% 14.14% 13.64% Average total deposits 8.26% 8.68% 10.04% 10.77% 10.47% ============================================================================================================================
The return on average assets was 1.52% for 1999, up from 0.88% for 1998. Based on normalized net income, the Company's return on average assets decreased to 1.10% for 1999, from 1.16% for 1998. The return on average assets for 1999 was impacted by growth in earning assets, primarily loans, coupled with a decline in the overall yield on earning assets compared with the year earlier. The return on average shareholders' equity increased to 21.18% for 1999, from 11.58% for 1998. The return on average shareholders' equity, based on normalized net income, increased to 15.18% for 1999, from 15.12% for 1998. Net interest income increased 4% for the year ended December 31, 1999, to $269.7 million from $258.7 million for the year earlier. The increase in net interest income for the year was primarily due to loan growth. The increase in net interest income due to loan growth was partially offset by a decline in the net interest margin compared with the year earlier. The net interest margin decreased to 5.21% for 1999, from 5.76% for the year earlier. The net interest margin was impacted by lower yields on loans and by the temporary addition of short-term time certificates of deposit during fourth quarter 1999 to increase liquidity in preparation for Year 2000 ("Y2K"). 6 Noninterest income increased to $150.1 million for the year ended December 31, 1999, from $63.8 million for the year earlier. Normalized noninterest income increased 10% to $90.5 million for 1999, from $82.0 million for 1998. For purposes of this comparison, normalized noninterest income for 1999 excludes a $44.0 million gain related to OPAY stock, OPAY's noninterest income of $2.9 million, $1.6 million representing the Company's equity in ICII's first quarter 1999 earnings, a gain of $2.3 million on the sale of 8.9 million shares of ICII common stock and a $8.8 million gain on the sale of the Company's trust business. Increases in other service charges and fees and merchant card processing fees compared with the year earlier were offset in part by decreases in trust fees and warrant-related income. Gains on the exercise of warrants and sale of equity securities totaled $17.7 million for 1999, compared with $21.7 million for the year earlier. Gains on the exercise of warrants and sale of equity securities for 1998 included $16.1 million on a transaction recorded by one of the Company's nonbank subsidiaries. The Company holds equity warrants in over 300 companies and expects to continue to recognize gains on the sale of equity securities obtained through warrants, dependent on market conditions. The reduction in trust fee income compared with 1998 is due to the sale of the Company's trust business during the second quarter of 1999. Noninterest expense totaled $244.5 million for the year ended December 31, 1999, compared with $217.0 million for the year earlier. Normalized noninterest expense increased 7% to $226.0 million for 1999, from $212.1 million for 1998. For purposes of this comparison, normalized noninterest expense for 1999 excludes OPAY's noninterest expense of $12.3 million, $2.5 million of expense associated with OPAY's common stock offering and $3.7 million of expense associated with the sale of ICII common stock. Noninterest expense for 1998 excludes a $4.9 million IFG restructuring charge. The increase in normalized noninterest expense for 1999 compared with 1998 is primarily due to increases in salary and benefits expense, occupancy expense and business development expense related to the Company's growth. Salaries expense also reflects higher commissions due to an increase in warrant income that was eligible for commissions. Increases in these expense categories were offset in part by a reduction in customer services expense associated with deposit balances generated by the Financial Services Division. Loan loss provisions decreased to $32.2 million for the year ended December 31, 1999, from $33.4 million a year earlier. Net charge-offs decreased to $19.2 million, or 0.49% of average loans for 1999, from $21.9 million, or 0.66% of average loans for 1998. Total assets grew 11% to $6.9 billion at December 31, 1999, from $6.2 billion at December 31, 1998. Investment securities increased 49% to $1.0 billion at December 31, 1999, from $698.7 million at December 31, 1998. Loans increased 5% to $3.6 billion at December 31, 1999, from $3.4 billion at December 31, 1998. Total deposits increased 6% to $5.9 billion at December 31, 1999, from $5.6 billion at December 31, 1998. Increases in interest-bearing money market and time certificate of deposit accounts offset a decline in demand deposits at year-end 1999, compared with a year earlier. Shareholders' equity increased 24% to $473.4 million from $381.8 million. Nonaccrual loans decreased to $27.6 million, or 0.76% of total loans, at December 31, 1999, compared with $30.6 million, or 0.89% of total loans, at December 31, 1998. Restructured loans decreased to $4.1 million at December 31, 1999, from $9.8 million at December 31, 1998. The percentage of nonaccrual and restructured loans to total loans decreased to 0.88% at December 31, 1999, from 1.17% a year earlier. At December 31, 1999, the allowance for loan losses was $71.7 million, or 1.98% of gross loans outstanding and 260% of nonaccrual loans, compared with $62.6 million, or 1.82% of total loans and 205% of nonaccrual loans, at December 31, 1998. Imperial Bancorp is categorized as well capitalized with leverage, Tier 1 and total capital ratios of 9.20%, 10.61% and 13.72% at December 31, 1999, respectively. These ratios were 8.12%, 9.59%, and 10.89% at December 31, 1998, respectively. Subordinated Debt Issue In April 1999, Imperial Bank issued $100 million of 8.5% Subordinated Capital Notes due in 2009. The Notes qualify as Tier 2 capital under regulatory guidelines. 7 Sale of Trust Business On May 14, 1999, the Company closed the sale of the business portfolio of Imperial Trust Company ("ITC") to Union Bank of California, N.A. ("UBOC"). The Company recorded a pretax gain of $8.8 million on the sale. An additional gain of up to $3.5 million may be recorded in the second quarter of 2000, based on business retention as measured by trust fee revenues of the trust business for UBOC. ITC was not considered to be a significant operating segment. Investment in ICII Common Stock In 1999, the Company sold the remaining 8,941,106 shares it owned of ICII common stock. The Company sold 3,682,536 shares to ICII for $8.00 a share in May 1999, and 5,258,570 shares to an institutional investor for $6.00 a share in July 1999. The Company recorded a pretax loss on the two sales totaling $1.4 million after expenses. Expenses associated with the transactions included a $3.7 million settlement of a 1992 consulting agreement with a director. The Company did not exercise significant control over the operations of ICII, therefore, ICII's operating results were accounted for in the Company's financial statements as an equity investment until its ownership percentage dropped below 20% following the sale of shares in May 1999. The Company's remaining shares of ICII were held as securities available for sale until they were sold in July 1999. Sale of Lewis Horwitz Organization In October 1999, the Company finalized an agreement to sell the assets of the Lewis Horwitz Organization, a division of Imperial Bank, to ICII. ICII is purchasing the assets over a 15-month period ending in December 2000 at a fixed price approximating the net book value at the time of the agreement. At December 31, 1999, the balance of LHO loans held for sale was $62.0 million. Regional Office Opened in Kirkland, Washington. The Company's loan production office previously located in Bellevue, Washington relocated to Kirkland and expanded to a full-service regional banking office effective October 20, 1999. The Company now operates 15 regional banking offices: 12 located throughout California; and out-of-state locations in Phoenix, Arizona; Denver, Colorado; and Kirkland, Washington. Official Payments Corporation The Company's majority-owned subsidiary, Official Payments Corporation (OPAY: Nasdaq), formerly U S Audiotex, LLC, completed an initial public offering ("IPO") on November 23, 1999, of 5 million shares of common stock priced at $15 per share. An underwriters overallotment option of 750,000 shares was also exercised. The Company recorded a pretax gain of $44.0 million, before transaction expenses, representing the increase in its basis in OPAY common stock as a result of the IPO. Following the offering, the Company owns 12,000,000 shares, or 56.4% of total outstanding shares, of OPAY's common stock. OPAY's operating results are reported on a consolidated basis for financial reporting purposes. Stock Repurchase Program On December 16, 1999, the Board of Directors authorized the Company to purchase an additional 1,620,000 shares, adjusted for an 8% stock dividend paid on February 18, 2000, under its existing repurchase plan originally approved on January 24, 1997. The total number of shares authorized for repurchase under the plan is 4,710,960, adjusted for stock dividends and splits. As of December 31, 1999, the Company had repurchased 2,431,836 of the total shares authorized for repurchase. Stock Dividend The Company paid an 8% stock dividend on February 18, 2000, to shareholders of record as of February 4, 2000. 8
============================================================================================================================= 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1) - ----------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees(2) $3,930,041 $322,309(3) 8.20% $3,316,507 $296,509 (3) 8.94% Trading instruments 63,213 3,499 5.54% 32,717 1,813 5.54% Securities available for sale(4) 700,158 37,039 5.26% 666,163 37,425 5.58% Securities held to maturity 3,822 282 7.38% 4,004 287 7.17% Federal funds sold and securities purchased under resale agreements 422,262 21,512 5.09% 454,651 24,170 5.32% Loans held for sale 48,862 4,154 8.50% 11,730 1,141 9.73% - ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $5,168,358 $388,795 7.52% $4,485,772 $361,345 8.05% ============================================================================================================================= Allowance for loan losses (67,954) (58,124) Cash 378,345 341,385 Other assets 223,721 212,905 ----------- ----------- Total assets $5,702,470 $4,981,938 =========== =========== Interest-bearing liabilities: Savings $ 28,039 $ 509 1.82% $ 27,247 $ 691 2.54% Money market 1,151,407 32,876 2.86% 949,634 31,618 3.33% Time-under $100,000 160,015 8,368 5.23% 189,387 10,875 5.74% Time-$100,000 and over 1,213,958 60,720 5.00% 890,686 47,482 5.33% - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits $2,553,419 $102,473 4.01% $2,056,954 $ 90,666 4.41% - ----------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 79,540 3,991 5.02% 97,350 5,299 5.44% Long-term borrowings 78,821 6,449 8.18% 3,141 232 7.39% Capital securities 73,400 6,147 8.37% 73,342 6,451 8.80% - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $2,785,180 $119,060 4.27% $2,230,787 $102,648 4.60% ============================================================================================================================= Demand deposits 2,406,685 2,294,271 Other liabilities 100,654 79,026 Shareholders' equity 409,951 377,854 ----------- ----------- Total liabilities and shareholders' equity $5,702,470 $4,981,938 =========== =========== Net interest income/net interest margin $269,735 5.21% $258,697 5.76% ========= ======= ========= ======= =============================================================================================================================
(1) The yields are not presented on a tax-equivalent basis as the effects are immaterial. (2) Average balance includes nonaccrual loans. (3) Includes net loan fee income and amortization of $23.4 million and $23.9 million for the years ended December 31, 1999 and 1998, respectively. (4) Average balance includes unrealized gains and losses while yield is based on amortized cost. Net Interest Income 1999 Compared with 1998 The Company's operating results depend primarily on net interest income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest margin is net interest 9 income expressed as a percentage of average interest-earning assets. For the year ended December 31, 1999, net interest income increased 4% to $269.7 million from $258.7 million for the year earlier. The increase in net interest income was driven by growth in earning assets, primarily loans. Average loan balances increased 18% to $3.9 billion for 1999, from $3.3 billion for 1998. The growth in average loans was distributed across the Company's operating segments: Financial Services $216.4 million, Commercial Banking $170.4 million, Real Estate $81.8 million, Entertainment $61.6 million and Special Markets $52.3 million. The Company's net interest margin decreased to 5.21% for the year ended December 31, 1999, from 5.76% for the year earlier. The decrease in the net interest margin is largely due to a decrease in the yield on loans. The average yield on loans decreased to 8.20% for 1999, from 8.94% for 1998. The Company's loans are generally tied to an index rate, either the national prime rate or the London Interbank Offered Rate ("LIBOR"), plus a spread. The prime rate averaged 7.99% for 1999, compared with 8.36% for 1998. Although the yield on loans decreased for the year ended December 31, 1999, compared with the year earlier, the yield on loans increased during the second half of 1999 due to increases in the prime rate. Loans tied to LIBOR tend to produce a lower yield than prime-based loans. The market favors LIBOR-based pricing for certain types of loans, such as syndicated loans and entertainment loans. LIBOR-based loans comprised approximately 23% of the loan portfolio at December 31, 1999 and 1998, respectively. The 3-month LIBOR rate averaged 5.47% in 1999 compared with 5.55% for 1998. A decrease in the cost of interest-bearing deposits to 4.01% for 1999, from 4.41% for 1998 had a favorable impact on the net interest margin. Average interest-bearing deposit balances increased 24% to $2.6 billion for 1999, from $2.1 billion for 1998. The increase occurred primarily in time certificates of deposit over $100,000. The increase in these balances is due in part to the addition of short-term time certificates of deposit in preparation for Year 2000. The deposits raised for this purpose matured early in 2000. The average balance of noninterest-bearing demand deposits increased 5% to $2.4 billion for 1999, from $2.3 billion for 1998. While the balance of demand deposits generated by the Financial Services Group declined during 1999 in response to rising interest rates, the Special Markets Division experienced strong growth in demand deposits. Average demand deposits comprised 49% of total average deposits for 1999, a decrease from 53% of total average deposits for 1998. The increase in the average balance of long-term borrowings for 1999, compared with 1998, is due to the issuance of $100 million of 8.5% Subordinated Capital Notes by Imperial Bank during the second quarter of 1999. 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. Nonaccrual loans are included in average loans used to compute this table. The table is not presented on a tax equivalent basis as the effects are not material. 10
========================================================================================================================= Year ended December 31, 1999 over 1998 (Dollars in Thousands) Volume Rate Volume Total - -------------------------------------------------------------------------------------------------------------------------- Loans $54,852 $(24,517) $(4,535) $25,800 Trading instruments 1,690 (2) (2) 1,686 Securities available for sale 1,898 (2,172) (112) (386) Securities held to maturity (13) 8 - (5) Federal funds sold and securities purchased under resale agreements (1,722) (1,008) 72 (2,658) Loans held for sale 3,612 (144) (455) 3,013 - -------------------------------------------------------------------------------------------------------------------------- Total interest income $60,317 $(27,835) $(5,032) $27,450 ========================================================================================================================== Savings $ 20 (196) (6) $ (182) Money market 6,718 (4,503) (957) 1,258 Time-under $100,000 (1,687) (971) 151 (2,507) Time-$100,000 and over 17,233 (2,931) (1,064) 13,238 - -------------------------------------------------------------------------------------------------------------------------- Total deposits $22,284 $ (8,601) $(1,876) $11,807 - -------------------------------------------------------------------------------------------------------------------------- Short-term borrowings (970) (414) 76 (1,308) Long-term borrowings 5,590 25 602 6,217 Capital securities 5 (309) - (304) - -------------------------------------------------------------------------------------------------------------------------- Total interest expense $26,909 $ (9,299) $(1,198) $16,412 ========================================================================================================================== Changes in net interest income $33,408 $(18,536) $(3,834) $11,038 ==========================================================================================================================
The Company uses derivative financial instruments to protect against fluctuations in the net interest margin. The use of derivatives resulted in a $3.1 million increase in net interest income and a 6 basis point increase in net interest margin for 1999. In 1998, the Company's use of derivative financial instruments resulted in a $1.5 million increase in net interest income and a 3 basis point increase in the net interest margin. In conformity with banking industry practice, payments for accounting, courier and other deposit-related services provided to the Company's real estate services customers are recorded as noninterest expense. If these deposits were treated as interest-bearing and the payments reclassified as interest expense, the Company's reported net interest income and noninterest expense would have been reduced by $22.1 million and $27.2 million for the years ended December 31, 1999 and 1998, respectively. The net interest margin would have been 4.79% for 1999 and 5.16% for 1998. 11 1998 Compared with 1997
============================================================================================================================= Year ended December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate(1) Balance Expense Rate(1) - ----------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees(2) $3,316,507 $296,509(3) 8.94% $2,400,392 $233,549(3) 9.73% Trading instruments 32,717 1,813 5.54% 37,604 2,473 6,58% Securities available for sale(4) 666,163 37,425 5.58% 564,563 33,239 5.92% Securities held to maturity 4,004 287 7.17% 4,130 292 7.07% Federal funds sold and securities purchased under resale agreements 454,651 24,170 5.32% 237,186 13,145 5.54% Loans held for sale 11,730 1,141 9.73% 6,339 699 11.03% - ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $4,485,772 $361,345 8.05% $3,250,214 $283,397 8.73% ============================================================================================================================= Allowance for loan losses (58,124) (42,108) Cash 341,385 269,772 Other assets 212,905 174,585 ----------- ----------- Total assets $4,981,938 $3,652,463 =========== =========== Interest-bearing liabilities: Savings $ 27,247 $ 691 2.54% $ 20,923 $ 527 2.52% Money market 949,634 31,618 3.33% 769,225 25,259 3.28% Time-under $100,000 189,387 10,875 5.74% 148,676 8,473 5.70% Time-$100,000 and over 890,686 47,482 5.33% 706,684 38,527 5.45% - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits $2,056,954 $ 90,666 4.41% $1,645,508 $ 72,786 4.42% - ----------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 97,350 5,299 5.44% 76,303 4,072 5.34% Long-term borrowings 3,141 232 7.39% 3,942 270 6.85% Capital securities 73,342 6,451 8.80% 50,803 4,509 8.88% - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $2,230,787 $102,648 4.60% $1,776,556 $ 81,637 4.60% ============================================================================================================================= Demand deposits 2,294,271 1,490,681 Other liabilities 79,026 70,461 Shareholders' equity 377,854 314,765 ----------- ----------- Total liabilities and shareholders' equity $4,981,938 $3,652,463 =========== =========== Net interest income/Net interest margin $258,697 5.76% $201,760 6.21% ========= ======= ========= ======= =============================================================================================================================
(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 and amortization of $23.9 million and $19.8 million for the years ended December 31, 1998 and 1997, respectively. (4) Average balance includes unrealized gains and losses while yield is based on amortized cost. For the year ended December 31, 1998, net interest income increased 28% to $258.7 million from $201.8 million for the year earlier. The increase in net interest income was driven by growth in earning assets, primarily loans. Average loan 12 balances increased 38% to $3.3 billion for 1998, from $2.4 billion for 1997. The growth in average loans was distributed across the Company's operating segments: Commercial Banking $284.6 million, Financial Services $200.9 million, Special Markets $182.9 million, Entertainment $172.8 million and Syndicated Finance $128.4 million. These increases in average loans were partially offset by decreases in other segments. The Company's net interest margin decreased to 5.76% for the year ended December 31, 1998, from 6.21% for the year earlier. The decrease in the net interest margin is largely due to a decrease in the yield on loans. The average yield on loans decreased to 8.94% for 1998, from 9.73% for 1997. The Company's loans are generally tied to an index rate, either the national prime rate or the London Interbank Offered Rate ("LIBOR"), plus a spread. At December 31, 1998, approximately 77% of the Company's loan portfolio was tied to the prime rate. The prime rate averaged 8.36% for 1998, compared with 8.44% for 1997. The 3- month LIBOR rate averaged 5.55% for 1998 and 5.66% for 1997. Average demand deposits increased to $2.3 billion, or 53% of total average deposits, for 1998 from $1.5 billion, or 48% of total average deposits, for 1997. The increase is largely due to balances held by the Company's customers in the real estate services industry. The company's overall cost of funds remained stable at 4.60% for both 1998 and 1997. The following table provides information regarding changes in interest income and interest expense due to rate and volume for the years indicated.
==================================================================================================================================== Year ended December 31, 1998 over 1997 (Dollars in thousands) Volume Rate Rate/Volume Total - ------------------------------------------------------------------------------------------------------------------------------------ Loans $ 89,134 $(18,944) $(7,230) $62,960 Trading instruments (322) (389) 51 (660) Securities available for sale 6,011 (1,874) 49 4,186 Securities held to maturity (9) 4 - (5) Federal funds sold and securities purchased under resale agreements 12,052 (536) (491) 11,025 Loans held for sale 594 (82) (70) 442 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income $107,460 $(21,821) $(7,691) $77,948 ==================================================================================================================================== Savings 160 3 1 164 Money market 5,924 352 83 6,359 Time-under $100,000 2,320 64 18 2,402 Time-$100,000 and over 10,031 (854) (222) 8,955 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits $ 18,435 $ (435) $ (120) $17,880 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings 1,124 81 22 1,227 Long-term borrowings (55) 21 (4) (38) Capital securities 2,000 (40) (18) 1,942 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense $ 21,504 $ (373) $ (120) $21,011 ==================================================================================================================================== Changes in net interest income $ 85,956 $(21,448) $(7,571) $56,937 ====================================================================================================================================
The Company's use of derivative financial instruments resulted in a $1.5 million increase in net interest income and a 3 basis point increase in net interest margin for 1998. In 1997, the Company's use of derivative financial instruments resulted in a $507,300 increase in net interest income and a 2 basis point increase in the net interest margin. In conformity 13 with banking industry practice, payments for accounting, courier and other deposit-related services provided to the Company's real estate services customers are recorded as noninterest expense. If these deposits were treated as interest-bearing and the payments reclassified as interest expense, the Company's reported net interest income and noninterest expense would have been reduced by $27.2 million and $18.7 million for the years ended December 31, 1998 and 1997, respectively. The net interest margin would have been 5.16% for 1998 and 5.64% for 1997. Noninterest Income Noninterest income totaled $150.1 million for the year ended December 31, 1999, compared with $63.8 million for 1998. The table below provides the major components of noninterest income for 1999 and 1998:
============================================================================================================================= (Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 7,466 $ 6,705 Trust fees 3,382 8,608 Gain on origination and sale of loans 3,916 4,764 Other service charges and fees 20,442 14,651 Merchant and credit card fees 11,333 7,242 International fees 11,939 11,751 Gain on securities available for sale 3,222 173 Gain on trading instruments 2,108 1,152 Gain on exercise of warrants and related sale of equity securities 17,658 21,672 Other income 9,060 5,288 - ----------------------------------------------------------------------------------------------------------------------------- Subtotal-normalized noninterest income $ 90,526 $ 82,006 - ----------------------------------------------------------------------------------------------------------------------------- Equity in net income (loss) of Imperial Credit Industries, Inc. 1,644 (18,205) Gain on the sale of Imperial Credit Industries, Inc. stock 2,255 - Gain resulting from the sale of stock by Official Payments Corporation 43,976 - OPAY noninterest income 2,908 - Gain on sale of the trust business 8,817 - - ----------------------------------------------------------------------------------------------------------------------------- Total noninterest income $150,126 $ 63,801 =============================================================================================================================
Noninterest income increased to $150.1 million for the year ended December 31, 1999, from $63.8 million for the year earlier. Normalized noninterest income increased 10% to $90.5 million for 1999, from $82.0 million for 1998. Increases in other service charges and fees, merchant card processing fees and other income compared with the year earlier were offset in part by decreases in trust fees and warrant-related income. The increase in other service charges and fees compared with the year earlier is primarily due to a $3.1 million increase in commissions on the sale of mutual funds and a $2.1 million increase in broker fees related to SBA loan sales and referrals. The increase in merchant card processing fees is due to higher processing volumes. The increase in other income is comprised of a $2.5 million gain on the sale of a software license recognized by one of the Company's nonbank subsidiaries, a $1.6 million increase in fee income generated by the Company's nonbank subsidiaries that specialize in payment processing and bankruptcy account processing, $1.5 million related to the sale of an investment by a nonbank subsidiary and $0.9 million related to life insurance funding the Company's deferred compensation plan. The remaining increase in other income occurred throughout several smaller categories. The increases in other income were partially offset by a $1.3 million decline in gains on sales of SBA loans. Gains on the exercise of warrants and sale of equity securities totaled $17.7 million for 1999, compared with $21.7 million for the year earlier. Gains on the exercise of warrants and sale of equity securities for 1998 included $16.1 million on a transaction recorded by one of the Company's nonbank subsidiaries. At year-end 1999, the Company held equity warrants in over 300 companies up from 200 companies a year ago. Based on market valuations as of December 31, 1999, the Company has substantial unrealized gains related to approximately 60 warrant positions in publicly traded companies. The Company is restricted from exercising many of these warrants as they are subject to lockups, which typically release over the subsequent three quarters. The Company is generally locked up for a period once a customer goes public and is precluded from using any type of derivative instrument to secure the current unrealized gains associated with warrants. The amount of income realized from equity instruments in future periods may vary materially from the current unrealized amount, due to fluctuations in the market prices of the underlying common stock of the warrant issuing companies. Furthermore, the 14 Company may reinvest some or all of the income realized from the disposition of equity instruments in pursuing its business activities, making them unavailable for shareholder distributions. The reduction in trust fee income compared with 1998 is due to the sale of the Company's trust business during the second quarter of 1999. Noninterest Expense
============================================================================================================================ (Dollars in thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits $125,292 $114,599 Net occupancy expense 10,205 10,426 Furniture and equipment 12,125 9,792 Data processing 10,659 9,969 Customer services 22,133 27,212 Net real estate and other assets owned expense (income) 333 (989) Professional and legal fees 9,147 10,777 Business development 7,777 5,855 Charitable donations 188 288 Other expense 28,103 24,159 - ---------------------------------------------------------------------------------------------------------------------------- Subtotal-normalized noninterest expense $225,962 $212,088 - ---------------------------------------------------------------------------------------------------------------------------- OPAY noninterest expense excluding minority interest 12,295 - Consulting expense related to the sale of ICII common stock 3,704 - Consulting expense related to OPAY's sale of common stock 2,500 - IFG restructuring charges - 4,880 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest expense $244,461 $216,968 ============================================================================================================================
Noninterest expense totaled $244.5 million for the year ended December 31, 1999, compared with $217.0 million for the year earlier. Normalized noninterest expense increased 7% to $226.0 million for 1999, from $212.1 million for 1998. For purposes of this comparison, normalized noninterest expense excludes OPAY's noninterest expense of $12.3 million, $2.5 million of expense associated with OPAY's common stock offering and $3.7 million of expense associated with the sale of ICII common stock. Noninterest expense for 1998 excludes a $4.9 million IFG restructuring charge. The increase in normalized noninterest expense for 1999 compared with 1998 is primarily due to increased salary and benefits expense, occupancy expense and business development expense related to the Company's growth. Salaries expense also reflects higher commissions due to increased eligible realized warrant income. The average number of full-time equivalent staff increased 10% to 1,253 for 1999, from 1,136 for 1998. Increases in salaries and benefits and occupancy related expenses were offset in part by a reduction in customer services expense associated with deposit balances generated by the Financial Services Division. Customer services expense includes accounting, courier and other deposit-related service costs that the Company pays on behalf of its depositors in the real estate services industry. Customer services expense is a function of the volume of these deposits and interest rates. The average balance of demand deposits held by these depositors declined modestly in 1999 to $1.3 billion from $1.4 billion for 1998 due to a slow down in refinancing activity following an increase in mortgage interest rates. Other noninterest expense increased $3.9 million for 1999, compared with 1998. The increase in noninterest expense includes $1.4 million related to operating losses, 1998 included a $1.2 million recovery of an operating loss incurred by the Company's former precious metals business. Other increases in noninterest expense compared with the prior year include: $1.1 million related to the Company's investment in qualified low income housing tax credits, $0.2 million of brokers fees, $0.6 million due to increases in telecommunications costs, $0.5 million increase in dues and memberships and a $0.5 million increase in goodwill amortization. These increases in expense were partially offset by a $1.1 million reduction in expense related to the sale of the trust portfolio. The remaining net change in noninterest expense occurred in several smaller categories. 15 The normalizing adjustments to noninterest expense include $3.7 million and $2.5 million paid to directors of the Company for consulting services provided in connection with the sale of ICII stock and OPAY's initial public offering, respectively. Pursuant to the terms of a consulting agreement dated November 15, 1999, Lee Mikles, is entitled to receive additional consulting fees of 6.5% of the first $500 million of pretax net gains realized by the Company from sales of OPAY stock following the IPO and 7.5% of any such gains in excess of $500 million when, and if, realized by the Company from the Company's disposition of OPAY stock. Income Taxes The Company recorded income taxes of $58.9 million for the year ended December 31, 1999, representing an effective tax rate of approximately 40.4%. For 1998, the Company's income taxes and effective tax rate were $28.4 million and 39.4%, respectively. The Company reported a net deferred tax asset of $26.1 million and $21.8 million at December 31, 1999 and 1998, respectively. The increase in the net deferred tax asset in 1999 compared with the year earlier is largely due to a $10.0 million increase in the deferred tax benefits associated with the loan loss provision which was partially offset by an increase in the deferred tax liability associated with unrealized gains on securities available for sale. The reduction in deferred tax liabilities resulting from the Company's sale of its investment in ICII common stock was more that offset by the added deferred tax liability attributable to its investment in OPAY common stock. The Company's net 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 2000. Balance Sheet Analysis Cash and Due from Banks Cash and due from banks consists of cash on hand, deposits with correspondent banks and deposits with the Federal Reserve Bank which include required reserves. The Company maintains balances with correspondent banks to cover daily inclearings and other activity. Deposits with the Federal Reserve totaled $106.1 million at December 31, 1999. Cash and due from banks comprised approximately 7% of the Company's average total assets for both 1999 and 1998. Trading Instruments Trading instruments increased to $86.5 million at December 31, 1999, from $53.0 million at December 31, 1998. SBA loan certificates and mutual funds held by the Company's broker/dealer comprise the majority of the Company's trading instruments at December 31, 1999. The balance of SBA loan certificates increased to $77.8 million at December 31, 1999, from $45.3 million at December 31, 1998. Securities The Company's investment securities portfolio consists of SBA securities, U.S. Treasury securities, U.S. Government agency securities, mutual funds invested in short-term government securities, short-term commercial paper and equity securities obtained through the exercise of warrants. The Company currently classifies these investments as available for sale, with the exception of a $3.7 million investment in Industrial Revenue Bonds and the trading instruments discussed above, in order to maintain flexibility in managing the portfolio and in meeting its liquidity needs. Investment securities are reported in the Company's Consolidated Balance Sheet at their estimated fair value. There was a net unrealized gain on securities available for sale of $17.3 million at December 31, 1999, compared with a net unrealized loss of $889,000 at December 31, 1998. The net unrealized gain on securities available for sale at December 31, 1999, includes a $21.3 million unrealized gain on equity securities, obtained through the exercise of equity warrants, offset by a net unrealized loss of $4.0 million on the remaining investment portfolio. The following table provides a summary of the Company's investment portfolio by type of security for the periods indicated: 16
============================================================================================================================= At December 31, (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Industrial development bonds $ 3,744 $ 3,898 $ 4,026 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 3,744 $ 3,898 $ 4,026 ============================================================================================================================= Securities available for sale: U.S. Treasury and federal agencies $ 674,140 $563,355 $615,207 Mutual funds invested in short-term government securities 92,184 112,579 37,532 Other securities 273,961 18,880 16,527 - ---------------------------------------------------------------------------------------------------------------------------- Total $1,040,285 $694,814 $669,266 =============================================================================================================================
The average balance of investment securities available for sale increased to $700.2 million for 1999, from $666.2 million for 1998. The Company also utilizes Federal funds sold and securities purchased under resale agreements for short- term investments of excess liquidity. The balance of Federal funds sold and securities purchased under resale agreements increased to $1.6 billion at December 31, 1999, from $1.4 billion at December 31, 1998. The average balance of Federal funds sold and securities purchased under resale agreements decreased approximately $32.4 million for 1999 compared with 1998. Fluctuations in year- end and average balances of investment securities and Federal funds sold are a function of changes in deposit balances and liquidity requirements. Loans Held for Sale The increase in loans held for sale to $83.0 million at December 31, 1999, from $18.3 million at December 31, 1998, is primarily due to the reclassification of loans made by the Lewis Horwitz Organization ("LHO") to the held for sale category. At December 31, 1999, the balance of LHO loans held for sale was $62.0 million. The Company entered into an agreement to sell these loans at a fixed price to ICII over a 15-month period ending December 2000. SBA loans originated by the Company comprise the remaining balance of loans held for sale. The Company sells the guaranteed portion of these loans in the secondary market while retaining the unguaranteed portion for its own portfolio as well as the servicing rights. Loans The Company offers a wide array of specialized loan products to meet the credit needs of companies in diversified industries. The Company's primary lending activities include: commercial loans, asset-based loans, loans to emerging growth companies, accounts receivable factoring, equipment leasing, SBA loans and tract construction loans to developers of moderately priced housing. The Company also selectively participates in the syndicated loan market. The following table provides a summary of loans by type at the end of each of the past five years, net of unearned discounts and deferred loan fees:
=================================================================================================================================== At December 31, (Dollars in millions) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Commercial $3,017 $3,011 $2,347 $1,595 $1,238 Loan secured by real estate: Real estate term loans 100 143 233 362 389 Interim construction loans 457 259 175 86 65 Consumer loans 38 35 31 20 7 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans $3,612 $3,448 $2,786 $2,063 $1,699 ===================================================================================================================================
Commercial loans comprise 84% of the total loan portfolio at December 31, 1999, down from 87% at December 31, 1998. Loan demand in California remained strong, although the rate of growth slowed from that experienced in 1998. In addition, loan balances at out-of-state offices grew to $430.8 million at December 31, 1999, from $371.9 million at December 31, 1998. Management anticipates overall loan growth in the 15% range for 2000. As illustrated in the following table, the Company's commercial loan portfolio is broadly diversified across many industries including entertainment, high technology, manufacturing, health care, real estate services and retail trade with no significant concentrations. The Company experienced loan growth in most industry sectors with substantial growth in loans to manufacturing, entertainment, title and escrow, high technology and professional services. The following table sets forth the distribution of average commercial loans by industry type for the periods indicated: 17
=============================================================================================================== 1999 1998 Average Percent of Average Percent of (Dollars in thousands) Balance Portfolio Balance Portfolio - --------------------------------------------------------------------------------------------------------------- Industry type: Manufacturing $ 532,460 15.64% $ 505,351 17.57% Entertainment 452,782 13.30% 359,804 12.51% Title/escrow 439,198 12.90% 357,799 12.44% High technology 330,911 9.72% 276,707 9.62% Healthcare 212,302 6.24% 203,834 7.09% Professional services 209,958 6.17% 149,541 5.20% Wholesale trade 188,927 5.55% 196,582 6.83% Retail trade 178,067 5.23% 161,415 5.61% Real estate services 155,212 4.56% 137,730 4.79% Consumers 154,774 4.55% 129,636 4.51% Financial services 127,552 3.75% 115,589 4.02% Gaming 87,686 2.58% 87,489 3.04% Distribution 75,567 2.22% 73,984 2.57% Apparel and textile 39,835 1.17% 53,931 1.87% Other 219,658 6.42% 67,263 2.33% - --------------------------------------------------------------------------------------------------------------- Total $3,404,889 100.00% $2,876,655 100.00% ===============================================================================================================
Total real estate loans, excluding commercial loans to companies in real estate- related industries totaling $133.9 million, increased to $557.3 million at December 31, 1999, from $401.6 million at December 31, 1998. The growth occurred primarily in loans to developers of moderately priced housing located throughout California, Reno, Nevada and Phoenix, Arizona. Interim construction loans increased 76% to $457.3 million at December 31, 1999, from $258.8 million at December 31, 1998. The Company is managing the existing term real estate portfolio but does not anticipate significant new originations in this area. The Company's real estate loans, both term and construction, are secured by first deeds of trust and are distributed among a variety of project types including multi-family residential and to a lessor extent retail facilities. Although collateralized by real property, real estate loans are subject to similar credit evaluation, underwriting and monitoring standards as those applied to commercial loans. At December 31, 1999, approximately 93% of the Company's real estate loans were geographically concentrated in California. The following table provides a distribution of the Company's loan portfolio by type and maturity at December 31, 1999, net of unearned income and deferred loan fees and costs:
=============================================================================================================== (Dollars in thousands) (Less Than) (Greater Than) (Greater Than) 1 Year 1- 5 Years 5 Years Total - --------------------------------------------------------------------------------------------------------------- Commerical loans: Floating rate $2,026,646 $734,075 $ 96,918 $2,857,639 Fixed rate 45,314 84,522 29,220 159,056 Real estate loans: Floating rate 436,101 54,656 255 491,012 Fixed rate 29,729 35,792 816 66,337 Consumer loans: Floating rate 3,464 34,444 - 37,908 Fixed rate 25 171 - 196 - --------------------------------------------------------------------------------------------------------------- Total loans $2,541,279 $943,660 $127,209 $3,612,148 - --------------------------------------------------------------------------------------------------------------- Allowance for loan losses (71,677) - --------------------------------------------------------------------------------------------------------------- Net loans $2,541,279 $943,660 $127,209 $3,540,471 ===============================================================================================================
18 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. An internal credit review function regularly examines the Company's loan portfolio with the exception of loans generated by the Special Markets Division which are examined by external consultants. In addition, the Company's lending policies require extensive evaluation of new credit requests and continuing internal review of existing credits in order to promptly identify 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 and Other Assets Owned The Company recognizes income principally on the accrual basis of accounting. In determining income from loans, the Company generally adheres to a policy of not accruing interest on loans on which a default of principal or interest has existed for a period of 90 days or more. The Company's policy is to place a loan on nonaccrual status if either (i) principal or interest payments are past due in excess of 90 days; or (ii) the full collection of interest or principal becomes uncertain, regardless of the length of past due status. When a loan reaches nonaccrual status, any interest accrued on the loan is reversed and charged against current income. A summary of nonaccrual loans, restructured loans and real estate and other assets owned is presented in the following table for the periods indicated:
========================================================================================================================== At December 31, (Dollars in thousands) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $27,020 $29,853 $ 8,675 $ 9,382 $11,714 Real estate 569 692 1,903 10,760 17,212 Consumer - 70 - 248 - - -------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $27,589 $30,615 $10,578 $20,390 $28,926 ========================================================================================================================== Allowance for loan losses as a percent of total nonaccrual loans 259.8% 204.6% 483.5% 176.8% 129.3% Total nonaccrual loans as a percent of total loans outstanding 0.76% 0.89% 0.38% 0.99% 1.70% ========================================================================================================================== Restructured loans $ 4,081 $ 9,770 $23,970 $28,681 $33,608 ========================================================================================================================== Real estate and other assets owned: Real estate and other assets owned, gross $ 935 $ 2,309 $ 4,373 $ 2,895 $15,015 Less valuation allowance - - (1,089) (769) (4,686) - -------------------------------------------------------------------------------------------------------------------------- Real estate and other assets owned, net $ 935 $ 2,309 $ 3,284 $ 2,126 $10,329 ========================================================================================================================== Total $32,605 $42,694 $37,832 $51,197 $72,863 ==========================================================================================================================
Nonaccrual loans decreased to $27.6 million at December 31, 1999, from $30.6 million at December 31, 1998. The decrease in nonaccrual loans from year-end 1998 reflects additions totaling $75.9 million, offset in part by charge-offs of nonaccrual loans totaling $19.2 million, payments collected on nonaccrual loans totaling $45.8 million, a transfer of $0.6 million of nonaccrual loans to OREO and $13.3 million of nonaccrual loans that were returned to performing status. Payments received on nonaccrual loans in 1999 include the sale of approximately $8.0 million of entertainment loans net of related allowances. The Company financed a portion of the loan sales. No gain or loss was recognized on the sales. Interest forgone on nonaccrual loans approximated $1.2 million for 1999 and $1.4 million for 1998. At December 31, 1999, $391,000 of government-guaranteed SBA loans were past due 90 days or more and still accruing interest. The Company expects to collect all amounts due on these loans. Restructured loans, loans outstanding that have had their original terms modified, totaled $4.1 million at December 31, 1999, a reduction of $5.7 million from $9.8 million at December 31, 1998. Payments received on restructured loans during 1999 totaled $3.9 million and two loans totaling $1.8 million were removed from restructured status. Real estate and other assets owned ("OREO") includes properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the real estate or other collateral, less the estimated costs of 19 disposal, and the loan balance at the time of transfer to OREO is reflected in the allowance for loan losses as a charge-off. Any subsequent declines in the fair value of the OREO after the date of transfer are recorded through a provision for writedowns on OREO. Routine holding costs, net of any income and gains and losses on disposal, are reported as noninterest expense. OREO equaled $0.9 million at December 31, 1999, and $2.3 million at December 31, 1998. The activity in OREO during 1999 included the addition of three real estate properties totaling $0.4 million, the sale of nine properties with a total book value of $1.6 million and the receipt of payments totaling $0.2 million. The Company is actively marketing the remaining properties. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. Loans of $500,000 or more are evaluated for impairment on an individual basis. The following tables provide information on impaired loans for the periods indicated:
================================================================================================================================== Net Carrying Specific Net (Dollars in thousands) Amount Allowance Balance - ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1999 Loans with specific allowances $28,779 $(10,160) $18,619 Loans without specific allowances 11,978 - 11,978 - ---------------------------------------------------------------------------------------------------------------------------------- Total $40,757 $(10,160) $30,597 ================================================================================================================================== December 31, 1998 Loans with specific allowances $56,746 $(12,775) $43,971 Loans without specific allowances 4,847 - 4,847 - ---------------------------------------------------------------------------------------------------------------------------------- Total $61,593 $(12,775) $48,818 ==================================================================================================================================
Impaired loans were classified as follows:
============================================================================================================================== At December 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Current $12,920 $27,414 Past due 248 3,564 Nonaccrual 27,589 30,615 - ------------------------------------------------------------------------------------------------------------------------------ Total $40,757 $61,593 ==============================================================================================================================
At December 31, 1999 and 1998, the Company had classified $40.8 million and $61.6 million, respectively, of its loans as impaired with specific allowances of $10.2 million and $12.8 million, respectively. Impaired loans secured by real estate decreased to $7.8 million at December 31, 1999, from $9.5 million at December 31, 1998, due to payments received. The Company's average recorded investment in impaired loans for the years ended December 31, 1999 and 1998, was $63.4 million and $78.6 million, respectively. During 1999 and 1998, total interest recognized on impaired loans, on a cash basis, was $2.2 million and $5.8 million, respectively. Allowance and Provision for Loan Losses A certain degree of risk is inherent in the extension of credit. The allowance for loan losses is maintained at a level considered by management to be adequate to absorb estimated known and inherent risks in the existing portfolio. The Company's Credit Review Department performs 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 utilizes a migration model, a technique that estimates the inherent loss in the portfolio by applying loss factors to grades of loans, to determine the level of the allowance and provision for loan losses. The migration model utilizes an average loss rate over a rolling twelve quarter base period and incorporates a standard deviation analysis to provide probabilities for loss experience. The loss factors used in the model are updated quarterly. The primary qualitative factors considered in the assessment of loss factors are: changes in local economic and business conditions, including the condition of specific market segments; changes in 20 lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; the existence and effect of any concentrations within the portfolio and changes in the level of such concentrations; changes in the trend of delinquencies and in the volume and nature of adversely graded, nonaccrual and impaired loans; and external factors such as competition and legal and regulatory requirements that could potentially impact the level of estimated credit losses in the portfolio. Management believes that the allowance for loan losses was adequate at December 31, 1999. Future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. At December 31, 1999, the allowance for loan losses was $71.7 million, or 1.98% of total loans, compared with $62.6 million, or 1.82% of total loans, at December 31, 1998. The following table summarizes activity in the allowance for loan losses for the periods indicated:
================================================================================================================================= (Dollars in thousands) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses: Balance, beginning of year $ 62,649 $ 51,143 $ 36,051 $ 37,402 $ 40,072 - --------------------------------------------------------------------------------------------------------------------------------- Loans charged-off: Commercial (22,368) (21,487) (8,938) (7,265) (13,432) Real estate (304) (2,248) (1,423) (3,734) (7,470) Consumer (79) (58) (4) (26) (60) - --------------------------------------------------------------------------------------------------------------------------------- Total charge-offs $ (22,751) $ (23,793) $ (10,365) $ (11,025) $ (20,962) - --------------------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged-off: Commercial 3,485 1,761 1,056 2,745 1,690 Real estate 68 154 1,493 12 445 Consumer 6 9 19 21 35 - --------------------------------------------------------------------------------------------------------------------------------- Total loan recoveries $ 3,559 $ 1,924 $ 2,568 $ 2,778 $ 2,170 - --------------------------------------------------------------------------------------------------------------------------------- Net loans charged-off (19,192) (21,869) (7,797) (8,247) (18,792) Provision for loan losses 32,220 33,375 22,892 6,881 16,122 Provision for loan losses of discontinued operation - - (3) 15 - Portfolio transfer-loans held for sale (4,000) - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of year $ 71,677 $ 62,649 $ 51,143 $ 36,051 $ 37,402 - --------------------------------------------------------------------------------------------------------------------------------- Loans outstanding at end of year $3,612,148 $3,447,538 $2,791,564 $2,063,048 $1,699,347 - --------------------------------------------------------------------------------------------------------------------------------- Average amount of loans outstanding $3,930,041 $3,316,507 $2,400,392 $1,836,864 $1,540,940 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net charge-offs to average loans 0.49% 0.66% 0.32% 0.45% 1.22% Ratio of allowance for loan losses to average loans 1.82% 1.89% 2.13% 1.96% 2.43% Ratio of allowance for loan losses to loans outstanding at year end 1.98% 1.82% 1.83% 1.75% 2.20% Ratio of provision for loan losses to net charge-offs 168% 153% 294% 83% 86% =================================================================================================================================
The provision for loan losses totaled $32.2 million for the year ended December 31, 1999, down slightly from $33.4 million for 1998. Net charge-offs decreased to $19.2 million, or 0.49% of average loans, for 1999 compared with $21.9 million, or 0.66% of average loans, for 1998. 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 as of the dates indicated: 21
================================================================================================================================ At December 31, (Dollars in thousands) 1999 % 1998 % 1997 % 1996 % 1995 % - -------------------------------------------------------------------------------------------------------------------------------- Commercial $56,613 84% $50,465 87% $22,889 84% $17,545 77% $17,365 73% Real estate 5,645 15% 5,245 12% 13,120 15% 16,248 22% 16,773 26% Consumer loans 388 1% 141 1% 100 1% 165 1% 809 1% Unallocated 9,031 - 6,798 - 15,034 - 2,093 - 2,455 - - -------------------------------------------------------------------------------------------------------------------------------- Total allowance for loan losses $71,677 100% $62,649 100% $51,143 100% $36,051 100% $37,402 100% ================================================================================================================================
The allowance allocated to the loan categories shown above is based on previous loan loss experience and management's evaluation of the current loan portfolio and should not be interpreted as an indication that charge-offs will occur in these amounts or proportions. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories as the total allowance is a general allowance applicable to the entire portfolio. The unallocated portion of the allowance for loan losses as a percentage of the total allowance will vary from year to year based on factors such as anticipated loan growth, seasoning of the loan portfolio and the level of nonaccrual loans. Funding Sources Deposits Total deposits grew 6% to $5.9 billion at December 31, 1999, from $5.6 billion a year earlier largely due to increases in interest-bearing money market accounts ("MMDA") and time certificates of deposit. Increases in these balances offset a $759.2 million decrease in noninterest-bearing demand deposits. The decrease in demand deposits at year-end 1999 is attributable to a $1.1 billion decline in balances held by customers in the real estate services industry compared with year-end 1998 due to a slow down of mortgage refinancing activity. The decrease in real estate services deposits at year end was partially offset by a $305.0 million increase in demand deposits generated by the Special Markets Division. Average demand deposits increased 5% to $2.4 billion for 1999, from $2.3 billion for 1998. Average demand deposits comprised 49% and 53% of total deposits at December 31, 1999 and 1998, respectively. Growth in MMDA generated by the Special Markets Division accounted for $284.3 million of the total $405.2 million increase in MMDA at December 31, 1999, compared with a year earlier. Average money market accounts increased by $201.8 million for 1999, compared with 1998. The Special Markets Division contributed approximately half of this increase. Time certificates of deposit increased 60% to $1.9 billion at December 31, 1999, from $1.2 billion a year earlier. The average balance of time certificates of deposits increased 27% to $1.4 billion for 1999, from $1.1 billion for 1998. Approximately half of the increase in the year-end balance represents funding raised to support future loan growth. The remaining increase is primarily due to the addition of short-term certificates of deposit in preparation for Year 2000. These deposits matured early in 2000. Borrowed Funds The Company uses short-term borrowings as a means to manage the interest rate sensitivity and liquidity position of the balance sheet. Short-term borrowings generally consist of Federal funds purchased, obligations under securities repurchase agreements, commercial paper and Treasury, tax and loan notes. Average short-term borrowings totaled $79.5 million for 1999, compared with $97.4 million for 1997. The decrease in short-term borrowings in 1999 compared with the year earlier is due to decreases in Treasury, tax and loan balances and commercial paper. In March 1999, the Company borrowed $6.0 million to fund the purchase of Imperial Bancorp common stock for the Employee Stock Ownership Plan. Principal is due in 8 quarterly installments of $750,000 beginning in June 1999. The loan bears interest at LIBOR plus 1%, adjusted quarterly. The balance outstanding at December 31, 1999, was $3.8 million. In April 1999, Imperial Bank issued $100 million of 8.5% Subordinated Capital Notes due in 2009. The proceeds from the issuance were used for general corporate purposes. Capital Prior to 1997, the primary source of new capital for the Company had been retained earnings from operations, with the 22 exception of its long-term debt offering in 1979, and on a smaller scale, the exercise of employee stock options. On April 23, 1997, Imperial Capital Trust, a wholly owned subsidiary of the Company, issued in a private placement transaction $75 million of 9.98% Capital Securities. See-NOTE 11 "Long-Term Borrowings" to the Company's Consolidated Financial Statements. In April 1999, Imperial Bank issued $100 million of 8.5% Subordinated Capital Notes due in 2009. The notes qualify as Tier 2 capital under the capital guidelines of the Federal Reserve. At December 31, 1999, shareholders' equity totaled $473.4 million, a 24% increase over $381.8 million December 31, 1998. The Company recorded additional shareholders' equity of $1.4 million in 1999 and $2.9 million in 1998 from the exercise of employee stock options. The Company receives a tax deduction for the difference between the option price and the market value of shares issued. The tax benefit associated with shares exercised during 1999 and 1998, which is recorded as a component of shareholders' equity, approximated $585,000 in 1999 and $8.7 million in 1998. In 1999, the Company recorded additional shareholders' equity of $5.2 million representing the Company's share of amortization of deferred stock compensation recorded by a nonbank subsidiary, and a $3.6 million reduction of shareholders' equity for shares of common stock purchased but not yet released to the Company's ESOP plan net of a tax benefit related to the difference between the cost and fair value of shares purchased for the ESOP. Management is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company and its bank subsidiaries are financially sound. The Company and its bank subsidiaries are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. The risk-based capital guidelines assign risk weightings to assets both on and off-balance sheet and place increased emphasis on common equity. Federal law requires each federal banking agency to take prompt corrective action to resolve problems of insured depository institutions including, but not limited to, those that fall below one or more prescribed capital ratios. According to the regulations, institutions whose Tier I and total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be "well capitalized." Tier I capital basically consists of common shareholders' equity and noncumulative perpetual preferred stock and minority interest of consolidated subsidiaries minus intangible assets. Based on the guidelines, the Company's Tier I and total capital ratios at December 31, 1999, were 10.61% and 13.72%, respectively, compared with 9.59% and 10.89%, respectively, for 1998. The capital securities discussed above qualify as Tier 1 capital. The increase in the Company's risk-based capital ratios at December 31, 1999, compared with a year earlier is primarily due to the addition of the $100 million of Subordinated Capital Notes issued by Imperial Bank and to growth in earnings. The following table compares the Company's actual capital ratios at December 31, 1999 and 1998, to those required by regulatory agencies for capital adequacy and well capitalized classification purposes: 23
================================================================================================================================ To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------------------- At December 31, 1999 Total capital (to risk-weighted assets): Company $733,506 13.72% $427,852 8.00% $534,816 10.00% Bank 659,214 12.47% 423,062 8.00% 528,828 10.00% Tier I capital (to risk-weighted assets): Company $567,183 10.61% $213,926 4.00% $320,889 6.00% Bank 493,633 9.33% 211,531 4.00% 317,297 6.00% Tier I capital (to average assets): Company $567,183 9.20% $184,987 3.00% $308,312 5.00% Bank 493,633 8.11% 182,652 3.00% 304,420 5.00% ================================================================================================================================ At December 31, 1998 Total capital (to risk-weighted assets): Company $507,556 10.89% $373,025 8.00% $466,281 10.00% Bank 480,571 10.45% 367,968 8.00% 459,960 10.00% Tier I capital (to risk-weighted assets): Company $447,112 9.59% $186,512 4.00% $279,769 6.00% Bank 423,015 9.20% 183,984 4.00% 275,976 6.00% Tier I capital (to average assets): Company $447,112 8.12% $165,147 3.00% $275,246 5.00% Bank 423,015 7.76% 163,454 3.00% 272,423 5.00% ================================================================================================================================
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 leverage ratio is defined as Tier I capital divided by average total assets for the most recent quarter. The minimum leverage ratio applies to banking organizations that do not anticipate significant growth and have well diversified risk, excellent asset quality, high liquidity and strong earnings. Other banking organizations not in this category are expected to have leverage ratios of at least 4% to 5%. The Company's leverage ratio was 9.20% and 8.12% at December 31, 1999 and 1998, respectively, well in excess of the minimum regulatory requirement. Although the Company has ample capital for its current activities, in connection with its strategic planning activities, the Company is actively pursuing a strategy that would enable the Company to raise additional capital in a tax efficient manner. Possible future uses for such additional capital include, among other items, (1) capital to pursue the expanded merchant banking activities permitted under the recently enacted Gramm-Leach Bliley Act (the Company intends to become a Financial Holding Company under the Act), and (2) capital to fund the acquisitions of other financial services companies (in lieu of use of the Company's stock in anticipation of the elimination of the pooling-of-interests method of accounting for acquisitions). As the Act was recently passed, the ultimate regulatory capital requirements for the new activities is still uncertain. The strategy includes the formation of a wholly owned subsidiary Regulated Investment Company to hold selected investments and loans. The expectation is that by separating and managing the selected assets, once a performance history for that portfolio has been established, it will facilitate the process of obtaining credit ratings and issuance of securities by the subsidiary. As it will take a period of time to develop the earnings history, this strategy is not an immediate source of future capital. Implementation of this strategy is also expected to result in a substantial reduction in the amount of income tax expense. No assurances can be given as to whether the Company will implement the tax efficient capital raising strategy, raise additional equity, pursue merchant banking activities, or acquire other financial services companies. Asset Liability Management Liquidity Liquidity management involves the Company's ability to meet the cash flow requirements of its lending and deposit businesses. For the Company, as with most commercial banking institutions, this involves an ongoing process of managing the cash inflows and outflows associated with a commercial deposit base. The Company's ability to acquire new deposits 24 at pricing levels consistent with management's targets is largely based upon its financial condition and capital base. The Company's liquid assets consist of cash, Federal funds sold, securities purchased under resale agreements and investment securities, excluding those pledged as collateral. The majority of the Company's securities portfolio is held as available for sale. Available for sale securities can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. It is the Company's policy to maintain a minimum liquidity ratio (liquid assets to liabilities) of 20% and to limit gross loans to no more than 80% of deposits. The Company's liquidity ratio and loan- to-deposit ratio were 42% and 61% at December 31, 1999, respectively. The overall liquidity position of the Company has been enhanced by a sizable base of demand deposits resulting from the Company's long-standing relationship with the real estate services industry which has provided a relatively stable and low cost funding base. Total demand deposits averaged $2.4 billion for the year ended December 31, 1999, compared with $2.3 billion for 1998. The Company's average demand deposits and average shareholders' equity funded 49% and 54% of average total assets for the years ended December 31, 1999 and 1998, respectively. These funding sources are augmented by payments of principal and interest on loans, the routine liquidation of securities from the trading and available for sale portfolios and Federal funds sold and securities purchased under resale agreements. During 1999, the Company experienced a net cash outflow from its investing activities of $614.1 million. The net outflow from investing activities was partially offset by $516.0 million provided by the Company's financing activities due to increases in deposits and borrowed funds. Imperial Bancorp's ("the Parent Company") liquidity is managed through the purchase and sale of securities available for sale. The Parent Company's only source of funds for interest payments on its Junior Subordinated Debentures and other operating expenses is preferred and common stock dividends received from Imperial Bank. The dividends provide the Parent Company with adequate funds to meet its obligations. At December 31, 1999, the Bank had $109.1 million available to distribute to the Parent Company in the form of dividends. Interest Rate Sensitivity Management The primary objective of the asset liability management process is to manage the Company's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. In order to manage its interest rate sensitivity, the Company has adopted policies and practices which attempt to limit the change in pretax net interest income assuming various interest rate scenarios. The Company utilizes derivative financial instruments to hedge the cash flows generated by its loan and investment portfolios. The intent is that changes in cash flows and interest income due to fluctuations in interest rates will be offset by corresponding changes in the hedging instruments. The Company's Asset Liability Committee ("ALCO") chooses strategies that conform with its policies to achieve an appropriate trade off between interest rate sensitivity and the volatility of pretax net interest income and net interest margin. Each month, the Company assesses its overall exposure to potential changes in interest rates and the impact such changes may have on net interest income and net interest margin by simulating various interest rate scenarios over future time periods. Through the use of these simulations, the Company can approximate the impact these projected rate changes may have on its entire on- and off-balance sheet position, on any particular segment of the balance sheet, and overall profitability. The following tables set forth the maturity and rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1999. 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. The gap is considered to be positive when interest-earning assets exceed interest-bearing liabilities and negative when interest-bearing liabilities exceed interest-earning assets. 25
- --------------------------------------------------------------------------------------------------------------------------------- At December 31, 1999 0-3 >3-6 >6-12 >1-5 >5 Non- (Dollars in thousands) Months Months Months Years Years Interest Bearing Total - --------------------------------------------------------------------------------------------------------------------------------- Earning assets: Trading securities (1) $ 86,540 $ - $ - $ - $ - $ - $ 86,540 Securities available for sale 845,595 3,923 - 163,272 - 27,495 1,040,285 Securities held to maturity - 894 2,850 - - - 3,744 Fed funds sold and securities purchased under resale agreements 1,555,000 - - - - - 1,555,000 Loans held for sale (1) 83,044 - - - - - 83,044 Loans: (2) Commercial 2,850,194 9,668 9,650 92,107 28,056 27,020 3,016,695 Real estate 509,447 9,520 874 36,656 317 535 557,349 Consumer 37,875 4 20 171 - 34 38,104 - --------------------------------------------------------------------------------------------------------------------------------- Total loans $3,397,516 $ 19,192 $ 10,544 $ 128,934 $ 28,373 $ 27,589 $3,612,148 - --------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses - - - - - (71,677) (71,677) Non-earning assets - - - - - 547,618 547,618 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $5,967,695 $ 24,009 $ 13,394 $ 292,206 $ 28,373 $ 531,025 $6,856,702 ================================================================================================================================= Sources of funds: Deposits: Demand - - - - - 2,538,850 2,538,850 Savings 21,075 - - - - - 21,075 Money market 1,492,138 - - - - - 1,492,138 Time - under $100,000 93,973 34,983 23,567 2,074 - - 154,597 Time - $100,000 and over 1,129,000 296,933 270,977 1,030 - - 1,697,940 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits $2,736,186 $ 331,916 $ 294,544 $ 3,104 $ - $ 2,538,850 $5,904,600 - --------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 156,663 - - - - - 156,663 Long-term borrowings: Subordinated capital notes - - - - 99,411 - 99,411 ESOP borrowing 3,750 - - - - - 3,750 Other borrowed funds - - - 375 - - 375 Capital securities - - - - 73,430 - 73,430 Noninterest-bearing liabilities - - - - - 145,066 145,066 Equity - - - - - 473,407 473,407 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities & equity $2,896,599 $ 331,916 $ 294,544 $ 3,479 $ 172,841 $ 3,157,323 $6,856,702 - --------------------------------------------------------------------------------------------------------------------------------- Gap before derivatives 3,071,096 (307,907) (281,150) 288,727 (144,468) (2,626,298) - Swaps-loans/deposits 280,789 - - (66,087) (214,702) - - Swaps-subordinated debt 100,000 - - - (100,000) - - Swaps-capital securities 75,000 - - - (75,000) - - - --------------------------------------------------------------------------------------------------------------------------------- Gap adjusted for derivatives $3,526,885 $ (307,907) $ (281,150) $ 222,640 $ (534,170) $(2,626,298) - - --------------------------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity $3,526,885 $3,218,978 $2,937,828 $3,160,468 $2,626,298 $ - ================================================================================================================================= (1) Trading instruments and loans held for sale are sold within 90 days. (2) The noninterest-bearing column consists of nonaccrual loans. =================================================================================================================================
26 At December 31, 1999, the Company maintained a positive cumulative one-year gap of approximately $2.9 billion. This positive cumulative gap position indicates that the Company is asset sensitive. A positive gap tends to result in increased net interest income during a period of rising interest rates, but also exposes the Company to decreased interest income during a period of falling interest rates. The Company had a positive cumulative one-year gap of $3.2 billion at December 31, 1998. The decrease in the positive cumulative one-year gap for 1999 compared with 1998 is primarily due to the growth in money market deposits and short-term time certificates of deposit. The Company's net interest margin is sensitive to sudden changes in interest rates. The majority of 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. The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's prime-based assets and LIBOR-correlated liabilities. The Company has developed strategies to protect both net interest income and net interest margin from significant movements in interest rates. These strategies involve purchasing interest rate caps, floors and swaps. The following tables provide information concerning the Company's derivative financial instruments for the periods indicated: 27
============================================================================================================================ At December 31, 1999 Weighted Notional Average (Dollars in thousands) Amount Rate Terms - ---------------------------------------------------------------------------------------------------------------------------- Interest rate caps and collars purchased Over the counter $1,000,000 n/a Expires March 2001. Over the counter 13,163 n/a Expires $6.6 million March 2000 and $6.6 million third quarter 2003. Contracts hedge specifc lending transactions. Interest rate floors purchased Exchange traded $7,009,000 n/a Expires $2 billion March 2000, $2 billion June 2000, $2 billion September 2000, and $1.009 billion December 2000. The floors have an average strike price of 4.63%. Interest rate swaps Loans and leases: Pay-fixed rate $ 50,789 6.41% Matures $23.2 million September 2003, Receive-3 month LIBOR 50,789 6.10% $9.2 million March 2004, $7.3 million July 2004, $6.4 million August 2004, $2.4 September 2006, and $2.3 million November 2006. Deposits: Pay 3 month LIBOR less 10-15 basis pts $ 230,000 6.04% $20 million matures November 2004, $30 Receive-fixed rate 230,000 7.20% million matures October 2006, $20 million matures November 2006, $35 million matures June 2009, $40 million matures July 2009, $15 million matures August 2009, $20 million matures September 2009, $30 million matures October 2009 and $20 million matures November 2009. The swaps are callable by the counterparty six months after the effective date and semi-annually thereafter. Subordinated Capital Notes: Pay 3-month LIBOR $ 100,000 6.08% Matures April 2009. Receive-fixed rate 100,000 6.06% Capital securities: Pay 3-month LIBOR $ 75,000 6.35% Matures second quarter 2007. Receive-fixed rate 75,000 7.18% =========================================================================================================================
28
============================================================================================================================== Notional Unrealized Unamortized At December 31, 1999 (Dollars in thousands) Amount Gain (Loss) Premium - ------------------------------------------------------------------------------------------------------------------------------ Interest rate caps and collars purchased Over the counter $1,000,000 $ 144 $171 Over the counter 13,163 30 - Interest rate floors purchased Exchange traded $7,009,000 $ 126 $411 Interest rate swaps Loans and leases $ 50,788 $ 315 $ - Deposits 230,000 (3,040) - Subordinated Capital Notes 100,000 (7,767) 680 Capital securities 75,000 112 - ==============================================================================================================================
==================================================================================================================================== At December 31, 1998 Weighted Notional Average (Dollars in thousands) Amount Rate Terms - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate caps and collars purchased Over the counter $1,000,000 n/a Expires March 2001. Over the counter 25,593 n/a Expires $9.0 million March 1999, $6.0 million second quarter 1999, $4.0 million fourth quarter 1999 and $6.6 million first quarter 2000. Contracts hedge specific lending transactions. Interest rate floors purchased Exchange traded $4,750,000 n/a $1.25 billion expires first quarter 1999, $1.75 billion expires second and third quarter 1999. The floors have an average strike price of 4.0%. Interest rate swaps Loans and leases: Pay-fixed rate $ 4,000 5.95% Matures third quarter 2004. Receive-3 month LIBOR 4,000 5.31% Deposits: Pay 3 month LIBOR less 10-15 basis points $ 5,000 5.43% Matures second quarter 1999. Receive-fixed rate 5,000 5.95% Capital securities: Pay 3-month LIBOR $ 75,000 5.73% Matures second quarter 2007. Receive-fixed rate 75,000 7.18% ====================================================================================================================================
29
============================================================================================================================ Notional Unrealized Unamortized At December 31, 1998 (Dollars in thousands) Amount Gain (Loss) Premium - ---------------------------------------------------------------------------------------------------------------------------- Interest rate caps and collars purchased Over the counter $1,000,000 $ 454 $ 353 Over the counter 25,593 (31) Interest rate floors purchased Exchange traded (1) $4,750,000 $ 344 $1,813 Interest rate swaps Loans and leases $ 4,000 $ (151) $ - Deposits 5,000 11 - Capital securities 75,000 9,055 - =============================================================================================================================
(1) In October 1998, following a decline in the LIBOR rate, the Company sold exchange-traded floors with a notional amount totaling $4.5 billion in order to reset the strike price on the floors from 4.75% to approximately 4.00%. The $3.3 million gain on the sale of the floors was amortized over the term of the original floors and was fully amortized as of September 30, 1999. =============================================================================== The following tables show the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and estimated fair values for the instruments at December 31, 1999 and 1998. Market risk sensitive instruments are generally defined as on- and off-balance sheet financial instruments. 30 =================================================================================================================================== Expected Maturity Date at December 31, 1999 (1) Estimated Fair (Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total Value - ----------------------------------------------------------------------------------------------------------------------------------- Financial assets: Trading instruments $ 86,540 $ - $ - $ - $ - $ - $ 86,540 $ 86,540 Average interest rate 5.54% - - - - - Investment securities 345,686 163,272 50 - - 531,277 1,040,285 1,040,285 Average interest rate 6.09% 5.56% 8.25% - - 6.16% Federal funds sold 1,555,000 - - - - - 1,555,000 1,555,000 Average interest rate 5.09% - - - - - Loans held for sale 83,044 - - - - - 83,044 83,613 Average interest rate 8.50% - - - - - Loans Commercial 2,078,559 237,097 221,547 168,220 175,344 135,928 3,016,695 2,969,271 Average interest rate 9.05% 8.76% 9.24% 9.20% 8.69% 8.13% Real estate term 46,781 12,039 16,524 9,923 12,850 1,895 100,012 95,291 Average interest rate 9.54% 8.90% 9.14% 9.10% 9.19% 7.84% Real estate construction 418,959 38,378 - - - - 457,337 456,582 Average interest rate 10.43% 10.26% - - - - Consumer 14,850 11,440 11,447 294 73 - 38,104 38,055 Average interest rate 10.44% 8.90% 8.90% 10.28% 9.83% - - ----------------------------------------------------------------------------------------------------------------------------------- Total financial assets $4,629,419 $ 462,226 $249,568 $178,437 $188,267 $ 669,100 $6,377,017 $6,324,637 =================================================================================================================================== Financial liabilities: Deposits: Rate sensitive demand $ 231,827 $ 185,462 $148,370 $118,696 $ 94,957 $ 379,826 $1,159,138 $1,159,138 Savings and money market 226,982 211,850 196,718 181,586 166,453 529,624 1,513,213 1,513,213 Average interest rate 2.83% 2.83% 2.83% 2.83% 2.83% 2.83% Time certificates of deposit- under $100,000 152,523 2,074 - - - - 154,597 154,376 Average interest rate 5.60% 6.30% - - - - Time certificates of deposit- over $100,000 1,696,910 1,030 - - - - 1,697,940 1,697,385 Average interest rate 5.55% 6.18% - - - - Short-term borrowings 156,663 - - - - - 156,663 156,663 Average interest rate 5.02% - - - - - Long-term borrowings 3,750 - - 375 - 99,411 103,536 96,968 Average interest rate 6.82% - - 12.67% - 8.57% Capital securities - - - - - 73,430 73,430 66,660 Average interest rate - - - - - 8.37% - ----------------------------------------------------------------------------------------------------------------------------------- Total financial liabilities $2,468,655 $ 400,416 $345,088 $300,657 $261,410 $1,082,291 $4,858,517 $4,844,403 =================================================================================================================================== Off-balance sheet financial instruments: Interest rate swaps $ - $ - $ - $ 23,131 $ 42,956 $ 389,702 $ 680 $ (10,380) Interest rate caps and collars 6,600 1,000,000 - 6,563 - - 171 174 Interest rate floors 7,009,000 - - - - - 411 126 Spot and forwards to purchase foreign currency 65,597 - - - - - 1,764 1,764 Spot and forwards to sell foreign currency 62,538 - - - - - (1,020) (1,020) ===================================================================================================================================
(1) Expected maturities are generally based upon contractual maturities adjusted for anticipated prepayments of principal, and for commercial loans, anticipated renewals. For deposit liabilities, in accordance with standard industry practice, run-off factors ranging from 11%-20% per year have been applied depending upon deposit type. The Company categorizes its real estate services deposits as rate sensitive because the level of real estate activity and the associated demand balances tend to fluctuate inversely with the level of market rates. The actual maturities of the Company's financial instruments could vary substantially depending on future changes in interest rates and economic conditions in its market areas. The total for off-balance sheet financial instruments represents the carrying amount. Balances reported under expected maturity represent the notional amount. 31
================================================================================================================================== Expected Maturity Date at December 31, 1998(1) Estimated (Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- Financial assets: Trading instruments $ 52,971 $ - $ - $ - $ - $ - $ 52,971 $ 52,971 Average interest rate 5.54% - - - - - Investment securities 144,332 - - 50 - 554,330 698,712 698,712 Average interest rate 5.22% - - 7.99% - 5.66% Federal funds sold 1,446,000 - - - - - 1,446,000 1,446,000 Average interest rate 5.32% - - - - - Loans held for sale 18,287 - - - - - 18,287 19,416 Average interest rate 10.48% - - - - - Loans Commercial 1,525,831 301,380 221,031 343,357 357,582 265,951 3,015,132 2,999,639 Average interest rate 8.15% 8.13% 8.34% 8.25% 7.84% 7.78% Real estate term 40,825 40,907 8,324 24,779 19,142 8,889 142,866 142,458 Average interest rate 9.58% 8.80% 8.93% 9.48% 8.31% 8.05% Real estate construction 208,669 50,094 - - - - 258,763 262,138 Average interest rate 9.03% 8.81% - - - - Consumer 12,533 11,300 11,336 105 80 - 35,354 35,235 Average interest rate 7.87% 8.15% 8.14% 8.66% 7.86% - - ----------------------------------------------------------------------------------------------------------------------------------- Total financial assets $3,449,448 $403,681 $ 240,691 $368,291 $376,804 $ 829,170 $5,668,085 $5,656,569 =================================================================================================================================== Financial liabilities: Deposits: Rate sensitive demand $ 457,510 $ 366,008 $ 292,806 $234,245 $187,396 $ 749,585 $2,287,550 $2,287,550 Savings and money market 166,814 155,694 144,572 133,451 122,330 389,233 1,112,094 1,112,094 Average interest rate 3.31% 3.31% 3.31% 3.31% 3.31% 3.31% Time certificates of deposit- under $100,000 168,379 2,845 - - - - 171,224 171,379 Average interest rate 5.74% 5.16% - - - - Time certificates of deposit- over $100,000 987,590 669 - - - - 988,259 988,059 Average interest rate 5.33% 5.35% - - - - Short-term borrowings 60,601 - - - - - 60,601 60,601 Average interest rate 5.48% - - - - - Long-term borrowings 2,105 - - - - 290 2,395 2,416 Average interest rate 7.07% - - - - 9.75% Capital securities - - - - - 73,372 73,372 77,272 Average interest rate - - - - 8.80% - ----------------------------------------------------------------------------------------------------------------------------------- Total financial liabilities $1,842,999 $525,216 $ 437,378 $367,696 $309,726 $1,212,480 $4,695,495 $4,699,371 =================================================================================================================================== Off-balance sheet financial instruments: Interest rate swaps $ 5,000 $ - $ - $ - $ - $ 79,000 $ - $ 8,916 Interest rate caps and collars 18,993 6,600 1,000,000 - - - (353) 423 Interest rate floors 4,750,000 - - - - - (1,813) 344 Spot and forwards to purchase foreign currency 71,259 - - - - - 1,661 1,661 Spot and forwards to sell foreign currency 71,005 - - - - (2,359) (2,359) ===================================================================================================================================
(1) Expected maturities are generally based upon contractual maturities adjusted for anticipated prepayments of principal, and for commercial loans, anticipated renewals. For deposit liabilities, in accordance with standard industry practice, run-off factors ranging from 11%-20% per year have been applied depending upon deposit type. The Company categorizes its real estate services deposits as rate sensitive because the level of real estate activity and the associated demand balances tend to fluctuate inversely with the level of market rates. The actual maturities of the Company's financial instruments could vary substantially depending on future changes in interest rates and economic conditions in its market areas. The total for off-balance sheet financial instruments represents the carrying amount. Balances reported under expected maturity represent the notional amount. 32 Year 2000 The Company successfully completed the transition to Year 2000 processing with no disruptions in operations. The Company incurred operating expenses totaling $2.8 million, compared with a project budget of $2.5 million, and capital expenditures totaling $2.5 million, equal to budget, in preparation for Year 2000. Common Stock and Shareholder Data Information concerning the Company's stock is provided in the following table for the periods indicated:
================================================================================================================ 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Market price: High for year $24.59 $28.30 $28.36 $12.73 $ 7.86 Low for year 13.66 9.16 12.02 7.13 3.66 At year end 22.34 14.26 28.19 12.47 7.86 Book value at year end 10.54 8.44 7.69 6.45 5.30 Market price/book value at year end 212.0% 169.0% 366.6% 193.3% 148.3% - ----------------------------------------------------------------------------------------------------------------
Note: Per share data reflects an 8 percent stock dividend declared on January 13, 2000, paid on February 18, 2000, to shareholders of record on February 4, 2000. ================================================================================ On January 13, 2000, the Company announced an 8% stock dividend that was paid on February 18, 2000, to shareholders of record on February 4, 2000. On February 3, 1999, the Company announced an 8% stock dividend that was paid on March 5, 1999, to shareholders of record on February 19, 1999. On January 21, 1998, the Company announced a three-for-two stock split which was effected on February 6, 1998, to shareholders of record on February 2, 1998. 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 shareholders of record on February 15, 1996. A 5% stock dividend was declared on January 24, 1995, payable February 24, 1995, to shareholders of record on February 15, 1995. The ratios and amounts in the above table have been adjusted for the effect of these dividends for all periods presented. The Company's common stock trades on the New York Stock Exchange ("NYSE") under the stock symbol "IMP." 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." As of March 1, 2000, shareholders of record approximated 1,582 exclusive of shares held in street name at brokerage firms. Accounting for Derivative Instruments and Hedging Activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. Implementation of SFAS No. 133 has been postponed to fiscal quarters of all fiscal years beginning after June 15, 2000, and will be effective for the Company on January 1, 2001. Early implementation is permitted under this statement. The Company does not believe that the adoption of SFAS No. 133 will have a material impact on its operations and financial position. Comparison of 1998 versus 1997 Net income for the year ended December 31, 1998, decreased to $43.7 million, or $0.92 a diluted share, from $55.2 million, or $1.16 a diluted share for the year ended December 31, 1997. Although the Company experienced strong earnings growth in its core banking operations, overall financial results for 1998 were significantly impacted by the loss derived from its investment in ICII. At December 31, 1998, the Company held 8.9 million shares of ICII common stock or approximately 24.3% of the total shares outstanding. The Company's share of ICII's net loss for the twelve months ended 33 December 31, 1998, on an after-tax basis was $10.6 million, or $0.22 a share, compared with net income of $11.7 million, or $0.25 a diluted share, for 1997. ICII's net loss for 1998 reflects charges related to a discontinued business and write downs in the carrying value of its securities and held for sale loan portfolios. The Company's net income for 1998 also includes an after-tax restructuring charge of $2.8 million, or $0.06 a share, due to the canceled spin-off of IFG. Net income for 1997 includes an after-tax gain of approximately $2.1 million on the sale of a merchant card transaction processing company. Net income from continuing operations was $43.7 million, or $0.92 a diluted share for the twelve months ended December 31, 1998, compared with $54.5 million, or $1.15 a diluted share for 1997. The $629,000 of net income reported for discontinued operations in 1997 includes a $695,000 after-tax recovery, net of additional expenses incurred, related to the Company's former precious metals business which was discontinued in 1996. Excluding equity in the net losses of ICII and the restructuring charges, normalized net income from continuing operations increased 38% for the year ended December 31, 1998, to $57.1 million, or $1.20 a diluted share, from $41.3 million, or $0.87 a diluted share, for the year earlier. The normalizing adjustments increased 1998 net income by $13.4 million. For purposes of this comparison, net income for 1997 excludes equity in the net income of ICII, gains on the sale of ICII stock, appreciation on donated ICII stock, the gain on the sale of a merchant card processing company, expense associated with the settlement of a consulting agreement and charitable contribution expense associated with the donation of ICII shares to a nonprofit institution. The normalizing adjustments decreased 1997 net income from continuing operations by $13.3 million. The increase in normalized net income from continuing operations for the year ended December 31, 1998, compared with the prior year reflects solid growth in the Company's core commercial banking business.
================================================================================================================================ For the period ended December 31, (Dollars in thousands, except per share amounts) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations $43,748 $ 54,548 After-tax adjustments: (1) Equity in net loss (income) of ICII 10,550 (11,742) Gain on sale of ICII common stock - (2,884) Appreciation of donated ICII common stock - (1,632) Net gain on sale of merchant card company - (2,054) Net gain on sale of trust business - - Consulting expense - 2,922 Restructuring charges 2,828 - Charitable contribution expense - 2,105 - -------------------------------------------------------------------------------------------------------------------------------- Normalized income from continuing operations $57,126 $ 41,263 ================================================================================================================================ Normalized diluted earnings per share from continuing operations $ 1.20 $ 0.87 Normalized return on average assets (2) 1.16% 1.15% Normalized return on average equity 15.12% 13.11% - -------------------------------------------------------------------------------------------------------------------------------- (1) Adjustment increases (decreases) reported income. (2) Average assets excludes the Company's investments in ICII. ================================================================================================================================
Earnings per share calculations for all periods presented have been adjusted for an 8% stock dividend paid on February 18, 2000, to shareholders of record as of February 4, 2000. The Company's return on average total assets was 0.88% for the year ended December 31, 1998, compared with 1.51% for the year earlier. Based on normalized net income from continuing operations, the Company's return on average total assets increased to 1.16% for 1998, from 1.15% for 1997. Return on average shareholders' equity was 11.58% for the year ended December 31, 1998, compared with 17.53% for the year earlier. The return on average shareholders' equity based on normalized net income increased to 15.12% for 1998, from 13.11% for 1997. 34 The increase in normalized earnings for the year ended December 31, 1998, compared with 1997, was primarily due to growth in loans and continued growth in fee-based services. Average loan balances for 1998 increased $916.1 million, or approximately 38%, over 1997. Increases in net interest income and noninterest income for the year were partially offset by increases in salaries and benefits expense, occupancy and equipment expense, data processing expense and customer services expense. Net interest income increased 28% to $258.7 million for the year ended December 31, 1998, from $201.8 million for the year earlier. The increase in net interest income is primarily due to growth in commercial loans. The Company's net interest margin (net interest income expressed as a percentage of average- earning assets) decreased to 5.76% for 1998 from 6.21% for 1997. The decline in net interest margin compared with the prior year can be attributed to a decrease in the yield on commercial loans and an increase in lower-yielding Federal funds sold tied to the growth in demand deposits. Noninterest income decreased 21% to $63.8 million for the year ended December 31, 1998, from $81.2 million for 1997. The decrease in noninterest income compared with the prior year is primarily due to the reduction in earnings derived from the Company's investment in ICII. Excluding equity in the net loss of ICII, noninterest income increased 65% to $82.0 million for the year ended December 31, 1998, from $49.6 million, excluding $20.3 million equity in the net income of ICII, a $5.0 million gain on the sale of ICII stock, $2.8 million of appreciation on donated ICII stock and a $3.5 million gain on the sale of a merchant card processing company for 1997. In addition to growth in fee-based services including international fees, merchant card processing fees and service charges on deposits, gains on the exercise of warrants and sale of equity securities made a significant contribution to noninterest income in 1998. Gains on the exercise of warrants and sale of equity securities totaled $21.7 million for the year ended December 31, 1998, which includes a $16.1 million gain on the exercise of warrants and sale of equity securities held in a single company, compared with $4.3 million for the prior year. Noninterest expense totaled $217.0 million for the year ended December 31, 1998, compared with $169.0 million for 1997. The increase in noninterest expense for 1998 compared with 1997 occurred primarily in salaries and benefits, occupancy and equipment expense, data processing expense and customer services expense. Noninterest expense for 1998 also includes $4.9 million of restructuring charges related to the canceled spin-off of IFG. The increase in salaries and benefits expense and occupancy and equipment expense is the result of growth in the Company's lending and deposit businesses, enhanced support operations and the addition of new offices. The average number of full-time equivalent staff increased 24% to 1,136 for 1998 from 917 for 1997. Benefits expense for the year ended December 31, 1998, includes $4.0 million of commissions paid to employees, related to the exercise of warrants and sale of equity securities compared with $1.3 million for the prior year. The increase in customer services expense is directly related to growth in deposit balances generated by the Financial Services Division that services the real estate industry. These deposits remain an important source of funding for the Company. Loan loss provisions totaled $33.4 million for the year ended December 31, 1998, compared with $22.9 million for 1997. The increase in the loan loss provision for 1998 compared with the prior year is due to loan growth and to an increase in net charge-offs. Net charge-offs for 1998, totaling $21.9 million, include $10.5 million on a single commercial loan to a health-care company. Excluding this loan, net charge-offs for 1998 were $11.4 million, or 0.34% of total average loans, compared with net charge-offs of $7.8 million, or 0.32% of total average loans, for 1997. Total assets at December 31, 1998, were $6.2 billion, a 31% increase from $4.7 billion at December 31, 1997. Total loans increased 24% to $3.4 billion at December 31, 1998, from $2.8 billion at December 31, 1997. Total deposits grew 33% to $5.6 billion at December 31, 1998, from $4.2 billion at December 31, 1997. Noninterest-bearing demand balances comprised 59% and 57% of total deposits at December 31, 1998 and 1997, respectively. Shareholders' equity increased 8% to $381.8 million at December 31, 1998, from $352.0 million at December 31, 1997. Nonaccrual loans increased to $30.6 million, or 0.89% of total loans, at December 31, 1998, from $10.6 million, or 0.38% of total loans, at December 31, 1997. At December 31, 1998, the allowance for loan losses was $62.6 million, or 1.82% of total loans and 205% of nonaccrual loans, compared with $51.1 million, or 1.83% of total loans and 484% of nonaccrual loans, at December 31, 1997. Imperial Bancorp is classified as well capitalized with leverage, Tier I and total capital ratios at December 31, 1998, of 8.12%, 9.59% and 10.89%, respectively, compared with 10.28%, 11.14%, and 12.48%, respectively, at December 31, 1997. 35
CONSOLIDATED BALANCE SHEET =================================================================================================================================== Imperial Bancorp and Subsidiaries At December 31, (Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 307,770 $ 355,317 Federal funds sold and securities purchased under resale agreements 1,555,000 1,446,000 Trading instruments 86,540 52,971 Securities available for sale, at fair value 1,040,285 694,814 Securities held to maturity (fair value of $3,744 and $3,898 for 1999 and 1998, respectively) 3,744 3,898 Loans held for sale (fair value of $83,613 and $19,416 for 1999 and 1998, respectively) 83,044 18,287 Loans: Loans, net of unearned income and deferred loan fees 3,612,148 3,447,538 Less allowance for loan losses (71,677) (62,649) - ----------------------------------------------------------------------------------------------------------------------------------- Total net loans $3,540,471 $3,384,889 =================================================================================================================================== Premises and equipment, net 41,245 30,938 Accrued interest receivable 33,565 25,505 Real estate and other assets owned, net 935 2,309 Deferred tax asset 26,092 21,809 Income taxes receivable 10,594 - Investment in Imperial Credit Industries, Inc. - 56,796 Other assets 127,417 91,070 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $6,856,702 $6,184,603 =================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $2,538,850 $3,298,070 Savings 21,075 25,135 Money market 1,492,138 1,086,959 Time - under $100,000 154,597 171,224 Time - $100,000 and over 1,697,940 988,259 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits $5,904,600 $5,569,647 =================================================================================================================================== Accrued interest payable 15,883 5,428 Income taxes payable - 1,504 Short-term borrowings 156,663 60,601 Long-term borrowings: Long-term notes and debentures 99,411 2,105 Other borrowed funds 4,125 290 Capital securities of subsidiary trust: Company-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of the Company, net 73,430 73,372 Minority interest 35,528 195 Other liabilities 93,655 89,639 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities $6,383,295 $5,802,781 =================================================================================================================================== Shareholders' equity: Common Stock - no par, 50,000,000 shares authorized; 44,903,937 shares at December 31, 1999, and 41,863,935 shares at December 31, 1998, issued and outstanding 312,677 224,433 Unearned employee stock ownership plan shares; 176,996 shares (3,659) - Deferred stock compensation (37,615) - Accumulated other comprehensive income (loss) ("OCI"), net of tax 9,998 (515) Retained earnings 192,006 157,904 - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity $ 473,407 $ 381,822 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $6,856,702 $6,184,603 =================================================================================================================================== See accompanying notes to consolidated financial statements. ===================================================================================================================================
36 CONSOLIDATED STATEMENT OF INCOME
=================================================================================================================================== Imperial Bancorp and Subsidiaries For the year ended December 31, (Dollars in thousands, except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans $322,309 $296,509 $233,549 Trading instruments 3,499 1,813 2,473 Securities available for sale 37,039 37,425 33,239 Securities held to maturity 282 287 292 Federal funds sold and securities purchased under resale agreements 21,512 24,170 13,145 Loans held for sale 4,154 1,141 699 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income $388,795 $361,345 $283,397 ==================================================================================================================================== Interest expense: Deposits 102,473 90,666 72,786 Short-term borrowings 3,991 5,299 4,072 Long-term borrowings 12,596 6,683 4,779 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense $119,060 $102,648 $ 81,637 ==================================================================================================================================== Net interest income 269,735 258,697 201,760 Provision for loan losses 32,220 33,375 22,892 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses $237,515 $225,322 $178,868 ==================================================================================================================================== Noninterest income: Service charges on deposit accounts 7,466 6,705 5,473 Trust fees 3,382 8,608 7,840 Gain on sale of loans 3,916 4,764 3,944 Equity in net income (loss) of Imperial Credit Industries, Inc. 1,644 (18,205) 20,260 Gain on sale of Imperial Credit Industries, Inc. common stock 2,255 - 4,977 Gain resulting from the sale of common stock by Official Payments Corporation 43,976 - - Other service charges and fees 20,442 14,651 10,197 Merchant and credit card fees 11,333 7,242 3,570 International fees 11,939 11,751 7,857 Gain on securities available for sale 3,222 173 987 Gain on trading instruments 2,108 1,152 4,482 Gain on exercise of warrants and related sale of equity securities 17,658 21,672 4,317 Gain on sale of the trust business 8,817 - - Other income 11,968 5,288 7,309 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income $150,126 $ 63,801 $ 81,213 ==================================================================================================================================== Noninterest expense: Salary and employee benefits 137,182 114,599 85,065 Net occupancy expense 10,580 10,426 9,077 Furniture and equipment 12,125 9,792 6,702 Data processing 10,659 9,969 7,525 Customer services 22,133 27,212 18,663 Net real estate and other assets owned expense (income) 333 (989) 615 Restructuring charges - 4,880 - Professional and legal fees 15,418 10,777 11,892 Business development 7,902 5,855 5,154 Charitable donations 188 288 3,802 Other expense 27,941 24,159 20,536 - ------------------------------------------------------------------------------------------------------------------------------------ Total non interest expense $244,461 $216,968 169,031 ==================================================================================================================================== Minority interest in loss of consolidated subsidiaries 2,510 42 - Income from continuing operations before income taxes 145,690 72,197 91,050 Income tax provision 58,864 28,449 36,502 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations 86,826 43,748 54,548 - ------------------------------------------------------------------------------------------------------------------------------------ Income from discontinued operation, net of tax - - 629 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 86,826 $ 43,748 $ 55,177 ==================================================================================================================================== Basic income per share from continuing operations $ 1.93 $ 0.95 $ 1.21 Diluted income per share from continuing operations $ 1.87 $ 0.92 $ 1.15 Basic net income per share $ 1.93 $ 0.95 $ 1.22 Diluted net income per share $ 1.87 $ 0.92 $ 1.16 ==================================================================================================================================== See accompanying notes to consolidated financial statements. ====================================================================================================================================
37 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
================================================================================================================================ Imperial Bancorp and Subsidiaries Number Deferred Total (Dollars in thousands, except number of Shares Common Stock Retained Accumulated Shareholders' of shares data) Outstanding Stock Compensation Earnings OCI Equity - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 24,926,092 $163,748 $ - $121,397 $ 1,206 $286,351 ================================================================================================================================ Common stock dividend 2,507,604 62,400 - (62,418) - (18) Common stock issued under option plan 919,886 4,787 - - - 4,787 Retirement of common stock (83,334) (1,928) - - - (1,928) Common stock repurchased (20,304) (470) - - - (470) Tax benefit of employee stock options - 7,649 - - - 7,649 Comprehensive income: Net income - - - 55,177 - 55,177 Other comprehensive income, net of tax Reclassification adjustments for gains included in net income net of tax effect ($206) - - - - (283) (283) Unrealized gain on securities available for sale, net of tax effect ($551) - - - - 759 759 ----------- Total comprehensive income - - - - 55,653 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) 3,323,852 72,438 - (7,241) 476 65,673 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 28,249,944 $236,186 $ - $114,156 $ 1,682 $352,024 ================================================================================================================================ Common stock split 14,147,020 - - - - - Common stock issued for an acquisition 400,964 3,922 - - - 3,922 Common stock issued under option plan 924,903 2,855 - - - 2,855 Common stock repurchased (1,858,896) (27,243) - - - (27,243) Tax benefit of employee stock options - 8,713 - - - 8,713 Comprehensive income: Net income - - 43,748 - 43,748 Other comprehensive income, net of tax: Reclassification adjustments for gains included in net income net of tax effect ($2) - - - - (3) (3) Unrealized loss on securities available for sale, net of tax effect ($1,592) - - - - (2,194) (2,194) ----------- Total comprehensive income 41,551 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) 13,613,991 (11,753) - 43,748 (2,197) 29,798 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 41,863,935 $224,433 $ - $157,904 $ (515) $381,822 ================================================================================================================================ Common stock dividend 3,349,537 52,705 - (52,724) - (19) Common stock issued under option plan 248,577 1,446 - - - 1,446 Common stock repurchased (552,636) (9,248) - - - (9,248) Tax benefit of employee stock options - 585 - - - 585 Unearned ESOP shares - (3,585) - - - (3,585) Deferred stock compensation - 42,904 (42,904) - - - Amortization of deferred stock compensation 7,940 7,940 Minority interest in amortization of deferred stock compensation (2,768) (2,768) Canceled escrow shares (5,476) (105) - - - (105) Comprehensive income: Net income - - - 86,826 - 86,826 Other comprehensive income, net of tax: Reclassification adjustments for gains included in net income net of tax effect ($12) - - - - 16 16 Unrealized gain on securities available for sale, net of tax effect ($7,616) - - - - 10,497 10,497 ----------- Total comprehensive income 97,339 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) 3,040,002 84,702 (37,732) 34,102 10,513 91,585 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 44,903,937 $309,135 $(37,732) $192,006 $ 9,998 $473,407 ================================================================================================================================ See accompanying notes to consolidated financial statements. ================================================================================================================================
38 CONSOLIDATED STATEMENT OF CASH FLOWS
=================================================================================================================================== Imperial Bancorp and Subsidiaries For the year ended December 31, (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 86,826 $ 43,748 $ 55,177 Adjustments for noncash charges (credits): Depreciation and amortization (5,036) (19,983) (14,192) Provision for loan losses 32,220 33,375 22,892 Provision for real estate and other assets owned - - 556 Equity in net (income) loss of Imperial Credit Industries, Inc. (1,644) 18,205 (20,260) Gain on sale of Imperial Credit Industries, Inc. stock (2,255) - (4,977) Gain on exercise of warrants and sale of equity securities (17,658) (21,672) (4,317) Gain resulting from the sale of common stock by OPAY (43,976) - - Gain on sale of the trust business (8,817) - - Loss (gain) on sale of real estate and other assets owned 116 (1,164) (352) Loss (gain) on sale of premises and equipment 314 (9) 9 Benefit for deferred taxes (4,283) (21,454) (2,147) Gain on securities available for sale (3,222) (173) (987) Net change in trading instruments (33,569) (17,189) 29,105 Net change in loans held for sale 17,197 (14,524) 1,768 Net change in accrued interest receivable (8,060) (3,293) (6,665) Net change in accrued interest payable 10,455 223 (738) Net change in income taxes receivable (10,594) 7,590 2,401 Net change in income taxes payable (1,504) - - Net change in minority interest 35,333 195 - Net change in other liabilities 9,081 32,250 3,719 Net change in other assets (286) (18,466) (14,929) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 50,638 $ 17,659 $ 46,063 =================================================================================================================================== Cash flows from investing activities: Proceeds from securities held to maturity 154 128 167 Proceeds from maturities of securities available for sale 1,585,943 880,760 602,342 Proceeds from sale of securities available for sale 3,240,657 4,293,282 2,901,745 Purchase of securities available for sale (5,152,589) (5,197,928) (3,745,226) Proceeds from sale of Imperial Credit Industries, Inc. stock 60,695 - 7,156 Proceeds from exercise of warrants and sale of equity securities 17,658 10,572 4,458 Proceeds from sale of the trust business 8,817 - - Net change in Federal funds sold and securities purchased under resale agreements (109,000) (681,000) (408,000) Net change in loans (247,239) (648,940) (716,649) Capital expenditures (20,992) (14,685) (10,146) Proceeds from sale of real estate and other assets owned 1,618 3,972 875 Proceeds from sale of premises and equipment 138 35 353 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $ (614,140) $(1,353,804) $(1,362,925) =================================================================================================================================== Cash flows from financing activities: Net change in demand deposits, savings, and money market accounts (358,101) 1,068,873 1,261,676 Net change in time deposits 693,054 326,176 (37,355) Net change in short-term borrowings 96,062 4,686 11,018 Net proceeds from issuance of capital securities - - 73,314 Net proceeds from issuance of subordinated capital notes 98,364 - - Net proceeds from ESOP loan 5,985 - - Net change in long-term borrowings (4,270) (862) (1,198) Repurchase of common stock for ESOP (5,985) - - Proceeds from exercise of employee stock options 1,446 2,855 2,859 Repurchase of common stock (9,248) (27,243) (470) Debt issuance costs (1,333) - (1,378) Other (19) 377 (18) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 515,955 $ 1,374,862 $ 1,308,448 - ----------------------------------------------------------------------------------------------------------------------------------- Net change in cash and due from banks $ (47,547) $ 38,717 $ (8,414) - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks, beginning of year $ 355,317 $ 316,600 $ 325,014 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of year $ 307,770 $ 355,317 $ 316,600 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 39 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 and majority-owned subsidiaries are summarized below. Certain amounts in the Consolidated Financial Statements for 1998 and 1997 have been reclassified to conform with the current year presentation. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly and majority-owned subsidiaries. The principal subsidiary is Imperial Bank ("the Bank"), a state-chartered commercial bank located in California. All material intercompany balances and transactions have been eliminated. At December 31, 1999, the Company owned 12.0 million shares of Official Payments Corporation ("OPAY") common stock at an equivalent book value of $3.82 per share, representing approximately 56.4% of OPAY's common shares outstanding. Minority interest, representing the portion of OPAY's net losses allocable to minority shareholders, is reported in the Consolidated Statement of Income. 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, liabilities and contingencies 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 allowance for loan losses. While management believes that this allowance is 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 allowance for loan losses. Such agencies may require the Company to recognize additions to this allowance based on their judgments about information available to them at the time of their examination. 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: Small Business Administration ("SBA") loan certificates comprise the majority of the Company's trading instruments. All securities held by the Company's broker/dealer are also classified as trading instruments. Trading instruments are carried at market value with unrealized market value adjustments recorded in the Consolidated Statement of Income as "Gain on trading instruments." Foreign Exchange: Trading positions in foreign currencies, including spot, forward and future 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, mutual funds invested in short-term government securities and short-term commercial paper, to manage its overall liquidity. In addition, the Company periodically holds equity securities obtained through the exercise of stock warrants. These equity securities may be subject to certain lock up arrangements or other restrictions that affect when the securities can be sold. These restrictions generally expire within six months or less from the date the stock is acquired. Securities available for sale are carried at fair value. Unrealized gains and losses, net of tax, on securities available for sale are reported as a separate component of other shareholders' equity until realized, 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. 40 Securities held to maturity Securities held to maturity are so designated when acquired based upon the Company's 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 that is deemed to be other than temporary, such decline is charged to income. Gain resulting from the sale of stock by a majority-owned subsidiary On November 23, 1999, the Company's majority-owned subsidiary, Official Payments Corporation ("OPAY") (formerly U S Audiotex, LLC), completed an initial public offering of common stock to the public. The gain resulting from OPAY's sale of stock was recorded in "Gain resulting from the sale of common stock by Official Payments Corporation" in the Consolidated Statement of Income. The Company's ownership percentage of OPAY stock decreased to 56.4% from 80% following the sale. Deferred taxes have been provided on this gain. Loans held for sale Loans held for sale include loans of the Lewis Horwitz Organization ("LHO"), which are committed to be sold to ICII over a 15 month period ending in December 2000, and SBA loans originated and held for sale. Loans held for sale are carried at the lower of aggregate cost or market. Gains on the sale of SBA loans are reported in "Gain on origination and sale of loans" in the Consolidated Statement of Income. 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 amortized 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 amortization of net deferred fees and costs into income is discontinued. In order to be returned to accrual status, all past due payments must be received and the loan must be paying in accordance with its payment terms. A loan is classified as impaired when it is "probable" that the Company will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. Loans of $500,000 or more (excluding nonaccrual loans) are evaluated for impairment on an individual basis. 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 valuation of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to provision for loan losses. All loans on nonaccrual status are considered to be impaired, however, not all impaired loans are on nonaccrual status. To remain on accrual status, payments on an impaired loan must be current. 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 reviews by 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. Lease financing transactions Loans include the Company's aggregate rentals on lease financing transactions and residual values net of unearned income. Lease financing transactions are primarily direct financing leases. Unearned income on lease financing transactions is amortized utilizing the interest method. Gains and losses from sales of residual values of leased equipment are included in other income. 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. 41 Real Estate and Other Assets Owned Real estate and other assets owned ("OREO") are 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 OREO and net operating expenses are recorded in "Net real estate and other assets owned expense (income)" in the Consolidated Statement of Income. Income Taxes The Company accounts for income taxes using the 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. Equity Investments The Company's equity investments are carried at cost adjusted for equity in an investee's undistributed income when the Company owns 20% to 50% of an investee's common stock. Management evaluates the Company's equity investments for impairment on a regular basis by monitoring the trading price of the investee's stock relative to the book value. Fluctuations deemed other than temporary will result in a charge to income. In 1999, the Company sold its remaining investment in the common stock of Imperial Credit Industries, Inc. ("ICII"). The sale was 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 sale. Investments in Qualified Low Income Housing Tax Credits The Company makes investments in qualified limited partnerships that generate income tax credits and deductible operating losses associated with the construction of low income housing under government-sponsored programs. The investments are amortized to expense over the anticipated life of each underlying project. The balance of the investment and accumulated amortization are reported in "Other assets" in the Consolidated Balance Sheet. The related amortization expense is reported in "Other noninterest expense" in the Consolidated Statement of Income. Employee Stock Ownership Plan The Company accounts for its Employee Stock Ownership Plan ("ESOP") in accordance with Statement of Position 93-6. Accordingly, the Company reports compensation expense equal to the fair value of the shares allocated. Compensation expense associated with the ESOP is reported in "Salary and employee benefits" in the Consolidated Statement of Income. Foreign Exchange Operations The Company engages in foreign exchange transactions on behalf of middle market companies and financial institutions. Stated trading limits are maintained and monitored to ensure efficient operations. The majority of transactions are settled on a cash-and-carry basis to minimize settlement risk to the Company. The Company requires cash collateral or an approved line of credit on all forward transactions. 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 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 paid for financial contracts are amortized over their contractual life as a component of the interest reported on the related asset or liability. 42 Stock-Based Compensation The Company uses the intrinsic-value method to account for stock-based compensation. Accordingly, compensation expense for stock-based compensation is measured as the excess, if any, of the market price of the Company's stock on the date of each option grant over the option exercise price. Expense associated with stock compensation is amortized on a straight-line basis over the vesting period of the individual awards ranging from 12 to 48 months. The Company includes pro forma disclosures reflecting the impact of the fair value method on net income and income per share for stock options granted in years after 1994 as if SFAS No. 123, "Accounting for Stock-Based Compensation," had been adopted for purposes of preparing its financial statements. Earnings Per Share The Company computes and presents both basic and diluted earnings per share ("EPS") in the Consolidated Statement of Income. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings. Unallocated ESOP shares are not considered to be outstanding shares for purposes of determining the number of weighted average shares for the EPS calculation. A reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is provided in the notes to the Consolidated Financial Statements. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company makes loans to small businesses ("SBA loans"), sells the guaranteed portion of the loans, and retains the servicing rights and interest-only strips relating to those loans. The portion of the contractually specified servicing fee that exceeds the fee that a substitute servicer would demand to assume the servicing on SBA loans sold after January 1, 1997, is recorded as a servicing asset and amortized in proportion to the net servicing income. A substitute servicing fee is deemed to be 40 basis points for loans sold at par or less and 100 basis points for loans sold in excess of par based on the 1993 National Association for Government Guaranteed Loans survey. Any cash flow expected to be received in excess of the contractually specified servicing fees is recorded as an interest-only security at its allocated carrying amount and subsequently measured at fair value as either a security available for sale or trading instrument under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Capital Securities In the second quarter of 1997, the Company established Imperial Capital Trust I ("the Trust"), a wholly owned subsidiary which issued in a private placement transaction $75.0 million of 9.98% Capital Securities ("Capital Securities") which represent undivided preferred beneficial interest in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust. The purpose of issuing the Capital Securities was to provide the Company with a cost effective means of obtaining Tier I Capital for regulatory purposes. The Capital Securities are reflected in the Consolidated Balance Sheet as "Capital Securities of subsidiary trust." The Capital Securities were issued at a discount which is accreted to interest expense using the interest method. Comprehensive Income Comprehensive income consists of net income and net unrealized gains (losses) on securities available for sale and is presented in the Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income. Segment Reporting Operating segments are determined by how management has organized the business for making operating decisions and assessing performance. Accounting for Derivative Instruments and Hedging Activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. The effective date requiring implementation of SFAS No. 133 has been deferred and shall be effective for all fiscal quarters beginning after June 15, 2000, and will be 43 effective for the Company on January 1, 2001. Early implementation is permitted under this statement. The Company does not believe that the adoption of SFAS No. 133 will have a material impact on its operations and financial position. NOTE (2) STATEMENT OF CASH FLOWS Cash and due from banks consists of cash and amounts due from banks with an initial term of less than three months. The following information supplements the statement of cash flows:
=================================================================================================================================== December 31, (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Interest paid $108,605 $102,425 $82,375 Taxes paid 81,098 31,903 34,807 Taxes refunded - - 431 Significant noncash transactions: Transfer of LHO loans to loans held for sale 93,164 - - Reclassification of investment in ICII stock to securities available for sale 34,370 - - Loans made in conjunction with the sale of loans 7,210 - - Loans transferred to real estate and other assets owned 394 1,827 2,762 Loans made in conjunction with the sale of real estate owned - - 211 Net change in accumulated other comprehensive income, net of tax 10,513 (2,197) 476 Common stock issued for an acquisition - 3,922 - ====================================================================================================================================
NOTE (3) SECURITIES The following table provides the amortized cost and fair value of securities held to maturity and securities available for sale at December 31, 1999, by contractual maturity. 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 (Dollars in thousands) Cost Fair Value Cost Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ - $ - $ 326,635 347,968 Due after one year through five years - - 164,933 163,322 Due after five years through ten years - - - - Due after ten years 3,744 3,744 531,464 528,995 - ----------------------------------------------------------------------------------------------------------------------------------- Total $3,744 $3,744 $1,023,032 $1,040,285 ===================================================================================================================================
The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law totaled $539.4 million and $475.0 million as of December 31, 1999 and 1998, respectively. Securities Held to Maturity A summary of securities held to maturity by type is provided below for the periods indicated:
Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------- December 31, 1999 Industrial development bonds $3,744 $ - $ - $3,744 - ----------------------------------------------------------------------------------------------------- Total $3,744 $ - $ - $3,744 ===================================================================================================== December 31, 1998 Industrial development bonds $3,898 $ - $ - $3,898 - ----------------------------------------------------------------------------------------------------- Total $3,898 $ - $ - $3,898 =====================================================================================================
44 There were no gross realized gains or losses on securities held to maturity for the years ended December 31, 1999, 1998 and 1997. Securities Available for Sale The following is a summary of securities available for sale by type for the periods indicated:
============================================================================================================================== Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------- December 31, 1999 U.S. Treasury and federal agencies $ 678,462 $ - $(4,322) $ 674,140 Commercial paper 228,670 - - 228,670 Mutual funds 92,184 - - 92,184 Other securities 23,718 21,573 - 45,291 - --------------------------------------------------------------------------------------------------------------------------- Total $1,023,034 $21,573 $(4,322) $1,040,285 =========================================================================================================================== December 31, 1998 U.S. Treasury and federal agencies $ 560,332 $ 3,024 $ (1) $ 563,355 Mutual funds 112,579 - - 112,579 Other securities 22,792 - (3,912) 18,880 - --------------------------------------------------------------------------------------------------------------------------- Total $ 695,703 $ 3,024 $(3,913) $ 694,814 ===========================================================================================================================
Mutual funds at December 31, 1999 and 1998, were comprised of government, municipal, treasury and cash funds. Other securities at December 31, 1999 and 1998, were primarily interest-only strips associated with the guaranteed portion of Small Business Administration loans and equity securities obtained through the exercise of warrants. The Bank's broker/dealer subsidiary, Imperial Securities Corporation, receives fees for performing certain distribution and service activities on behalf of Monarch Funds (a family of mutual funds). These fees, totaling $6.7 million, $3.6 million and $1.7 million for the years ended December 31, 1999, 1998 and 1997, respectively, are included in "Other service charges and fees" in the Consolidated Statement of Income. Of the five trustees of the Monarch Funds, one is a member of the Company's management. As of December 31, 1999 and 1998, the Company's investment in the Monarch Funds represented approximately 3.6% and 7.8%, respectively, of the net asset value of all Monarch Funds. Gross realized gains and losses related to the available for sale portfolio were $3.3 million and $112,000, respectively, for the year ended December 31, 1999, $178,000 and $5,000, respectively, for the year ended December 31, 1998, and $1.1 million and $71,000, respectively, for the year ended December 31, 1997. At December 31, 1999 and 1998, the Company reported unrealized gains, net of tax, of $10.0 million and unrealized losses, net of tax, of $515,000, respectively, in the Consolidated Balance Sheet. The following table sets forth information with respect to Federal funds sold and securities purchased under resale agreements:
========================================================================================================================== (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Balance, end of year $1,555,000 $1,446,000 $765,000 Weighted average interest, end of year 4.73% 4.92% 5.58% Average balance outstanding during the year $ 422,262 $ 454,651 $237,186 Weighted average interest rate for the year 5.09% 5.32% 5.54% Maximum amount outstanding at any month end $1,555,000 $1,515,000 $765,000 ==========================================================================================================================
Depending on the nature of the securities obtained under the resale agreements, the collateral is held by a third party custodian or by the Company's custodian under written agreements that recognize the Company's interest in the securities. 45 NOTE (4) LOANS The carrying amount of loans, net of unearned income and deferred loan fees, consisted of the following:
==================================================================================================== 1999 1998 Carrying Carrying At December 31, (Dollars in thousands) Amount Amount - ---------------------------------------------------------------------------------------------------- Commercial loans $3,016,695 $3,010,555 Loan secured by real estate: Real estate term loans 100,012 142,866 Interim construction loans 457,337 258,763 Consumer loans 38,104 35,354 - ---------------------------------------------------------------------------------------------------- Total loans 3,612,148 3,447,538 Less allowance for loan losses (71,677) (62,649) - ---------------------------------------------------------------------------------------------------- Net loans $3,540,471 $3,384,889 ====================================================================================================
Net deferred loan fees included in total loans approximated $18.4 million and $13.4 million at December 31, 1999 and 1998, respectively. The following table contains information for loans deemed impaired:
=============================================================================================================== Net Carrying Specific Net (Dollars in thousands) Amount Allowance Balance - --------------------------------------------------------------------------------------------------------------- December 31, 1999 Loans with specific allowances $28,779 $(10,160) $18,619 Loans without specific allowances 11,978 - 11,978 - --------------------------------------------------------------------------------------------------------------- Total $40,757 $(10,160) $30,597 =============================================================================================================== December 31, 1998 Loans with specific allowances $56,746 $(12,775) $43,971 Loans without specific allowances 4,847 - 4,847 - --------------------------------------------------------------------------------------------------------------- Total $61,593 $(12,775) $48,818 ===============================================================================================================
Impaired loans were classified as follows:
================================================================================================= At December 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------- Current $12,920 $27,414 Past due 248 3,564 Nonaccrual 27,589 30,615 - ------------------------------------------------------------------------------------------------- Total $40,757 $61,593 =================================================================================================
Impaired loans totaled $40.8 million and $61.6 million at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, 19% and 15%, respectively, of impaired loans were secured by real estate. Impaired loans averaged $63.4 million in 1999, $78.6 million in 1998 and $101.3 million in 1997. During 1999, 1998, and 1997, total interest recognized on the impaired loan portfolio, on a cash basis, was $2.2 million, $5.8 million and $8.5 million, respectively. Nonaccrual loans included as impaired loans totaled $27.6 million, $30.6 million and $10.6 million at December 31, 1999, 1998 and 1997, respectively. There were no commitments to lend additional funds on nonaccrual loans at December 31, 1999. Interest income foregone on nonaccrual loans approximated $1.2 million in 1999, $1.4 million in 1998 and $1.3 million in 1997. Payments received on nonaccrual loans were applied to principal in 1999. Interest income recognized on nonaccrual loans was approximately $1.5 million in 1998 and $0.4 million in 1997. 46 At December 31, 1999, 1998 and 1997, restructured loans were $4.1 million, $9.8 million and $24.0 million, respectively. At December 31, 1999, restructured loans were performing in accordance with their modified terms. At December 31, 1999, there were no commitments to lend additional funds on restructured loans. Interest recorded in 1999, 1998 and 1997 on restructured loans totaled $0.8 million, $2.2 million and $2.3 million, respectively. Interest that would have been recorded in 1999, 1998 and 1997 had the loans performed in accordance with their original terms was $0.8 million, $2.3 million and $2.3 million, respectively. The average yield on restructured loans was 10.5% for 1999, 9.27% for 1998 and 8.35% for 1997. An effort is made to diversify risk within the loan portfolio with the objective of achieving desired rates of return and minimizing losses for the benefit of shareholders and protection of depositors. Diversification of the loan portfolio by type of loan, geographic and industry concentration also reduces the overall risk by minimizing the adverse impact of any single event or set of occurrences. Commercial loans comprised approximately 84% and 87% of the total loan portfolio at December 31, 1999 and 1998, respectively. The Company's commercial loan portfolio is broadly diversified among many industries including entertainment, high technology, manufacturing, healthcare, real estate services and retail trade with no significant concentrations. For 1999, average loans to manufacturing, entertainment and real estate services companies each exceeded 10% of total average loans. No other single industry represents over 10% of average loans. The Company experienced loan growth across most industry sectors, with substantial growth in loans to manufacturing, entertainment, title/escrow, high technology, health care and retail trade businesses. The Company's real estate loans, both term and construction, are secured by first deeds of trust. Term loans are distributed among a variety of projects. The majority of the Company's construction loans are to builders of moderately priced residential tract homes. At year-end 1999, real estate loans totaling $557.3 million do not include commercial loans to real estate related customers totaling $133.9 million. At December 31, 1999, these loans consisted of the following: $53.6 million to real estate agents, operators and lessors, $3.2 million to subcontractors and developers, $41.9 million to title and escrow companies and $35.2 million to builders. The principal amount of loans pledged to secure public deposits and a credit line with the Federal Reserve approximated $293.7 million and $231.0 million at December 31, 1999 and 1998, respectively. NOTE (5) ALLOWANCE FOR LOAN LOSSES A summary of activity in the allowance for loan losses for the periods indicated is presented below:
====================================================================================================================== (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 62,649 $ 51,143 $ 36,051 Provision for losses 32,220 33,375 22,892 Transfer to loans held for sale (4,000) - - Provision for losses of discontinued operation - - (3) Loans charged off (22,751) (23,793) (10,365) Recoveries on loans previously charged-off 3,559 1,924 2,568 - ---------------------------------------------------------------------------------------------------------------------- Net charge-offs $(19,192) $(21,869) $ (7,800) ====================================================================================================================== Balance, end of year $ 71,677 $ 62,649 $ 51,143 ======================================================================================================================
47 NOTE (6) PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
================================================================================================================================ At December 31, (Dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Land $ 1,765 $ 1,765 Buildings & improvements 4,025 3,980 Leasehold improvements 8,972 9,041 Furniture, fixtures & equipment 74,492 54,628 - -------------------------------------------------------------------------------------------------------------------------------- Less: accumulated depreciation and amortization $(48,009) (38,476) - -------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net $ 41,245 $ 30,938 ================================================================================================================================
NOTE (7) REAL ESTATE AND OTHER ASSETS OWNED The following table provides a summary of real estate and other assets owned ("OREO") by type of property for the periods indicated:
=============================================================================================================================== At December 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Real estate owned: Commercial $935 $1,362 Acquisition and land development - 255 Single-family residential - 164 - ------------------------------------------------------------------------------------------------------------------------------- Total $935 $1,781 - ------------------------------------------------------------------------------------------------------------------------------- Other assets owned: Film distribution rights - 528 - ------------------------------------------------------------------------------------------------------------------------------- Real estate and other assets owned, gross $935 $2,309 - ------------------------------------------------------------------------------------------------------------------------------- Less: valuation allowance - - - ------------------------------------------------------------------------------------------------------------------------------- Real estate and other assets owned, net $935 $2,309 ===============================================================================================================================
The following comprises net real estate and other assets owned expense (income) for the periods indicated:
================================================================================================================================ For the years ended December 31, (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Net loss (gain) on sale of real estate and other assets owned $122 $(1,164) $(352) Valuation adjustments charged to operations - - 556 Direct holding costs 211 175 411 - -------------------------------------------------------------------------------------------------------------------------------- Net real estate and other assets owned expense (income) $333 $ (989) $ 615 ================================================================================================================================
The following table sets forth information regarding the Company's valuation allowance for OREO for the periods indicated:
- -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ - $ 1,089 $ 769 Provision for OREO - - 556 OREO sold / charged off - (1,089) (236) - -------------------------------------------------------------------------------------------------------------------------------- Balance, end of year $ - $ - $1,089 ================================================================================================================================
48 NOTE (8) EARNINGS PER COMMON SHARE/COMMON STOCK OUTSTANDING Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings. Unallocated ESOP shares are not considered to be outstanding shares for purposes of determining the number of weighted average shares for the EPS calculation. Reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is presented in the following table:
========================================================================================================================== For the year ended December 31, 1999 1998 ---------------------------------- -------------------------------- Per Per (Dollars in thousands, except per share Share Share amounts) Income Shares Amount Income Shares Amount - -------------------------------------------------------------------------------------------------------------------------- Basic EPS Net income $86,826 44,949,028 $1.93 $43,748 45,994,411 $0.95 Effect of dilutive securities Incremental shares from outstanding common stock options 1,579,911 1,715,177 ---------- ---------- Diluted EPS Net income $86,826 46,528,939 $1.87 $43,748 47,709,588 $0.92 ============================================================================================================================
========================================================================================================== For the year ended December 31, 1997 -------------------------------- Per Share (Dollars in thousands, except per share amounts) Income Shares Amount - ---------------------------------------------------------------------------------------------------------- Basic EPS Income from continuing operations $54,548 45,252,920 $1.21 Income from discontinued operations 629 0.01 ------- ------- Net income $55,177 $1.22 Effect of dilutive securities Incremental shares from outstanding common stock options 2,237,313 ---------- Diluted EPS Income from continuing operations $54,548 47,490,233 $1.15 Income from discontinued operations 629 0.01 ------- ------- Net income $55,177 $1.16 ===========================================================================================================
The number of shares used to compute basic and diluted income per common share has been retroactively adjusted to reflect stock splits and dividends as appropriate. On February 18, 2000, the Company paid an 8% stock dividend. The number of common shares outstanding for all periods presented has been adjusted to reflect this stock dividend. The Company paid an 8% stock dividend on March 5, 1999, and split its common stock at the ratio of one share for every two shares outstanding on February 6, 1998. In the first quarter of 1997, the Company declared and paid a 10% stock dividend. 49 Securities that could potentially dilute basic earnings per share in the future that were not included in the calculation of diluted earnings per share for 1999 because their effect was antidilutive totaled approximately 92,000 shares. In December 1999, the Company announced that the Board of Directors had increased the number of shares authorized for repurchase under its existing repurchase plan approved in January 1997, by 1,620,000 shares adjusted for the 8% stock dividend paid in February 2000. This action increased the total number of shares authorized for repurchase as of December 31, 1999, to 4,710,960 shares, adjusted for stock dividends and splits. As of December 31, 1999, the Company had repurchased 2,431,836 shares, adjusted for the 8% stock dividend, under the program. The stock repurchase program will reduce the shares outstanding, and shares repurchased may later be issued to the Company's employee stock ownership plan or issued under the employee stock option plan. The repurchased shares will reduce dilution from shares issued in conjunction with those plans as well as from any future stock dividends. NOTE (9) DEPOSITS Interest expense on time certificates of deposit with balances of $100,000 or more totaled $60.7 million in 1999, $47.5 million in 1998 and $38.5 million in 1997. Included in the Company's noninterest-bearing demand deposits are deposits of customers in the real estate services industry. While these deposits are noninterest bearing, the Company incurs customer services expense in the form of payments to third parties that provide accounting, courier and other deposit- related services for these customers. The costs associated with these deposits are included in "Customer services" in the accompanying Consolidated Statement of Income. During 1999 and 1998, the average balances of such deposit accounts were $1.3 billion and $1.4 billion, respectively. The following table shows the time remaining to maturity of time certificates of deposit at December 31, 1999 and 1998:
======================================================================================================================= $100,000 and over Under $100,000 (Dollars in thousands) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- 3 months or less $1,129,000 $784,316 $ 93,973 $111,295 Over 3 through 6 months 296,933 166,094 34,983 37,049 Over 6 through 12 months 270,977 37,180 23,567 20,035 3 year through 5 years 1,030 669 2,074 2,845 - ------------------------------------------------------------------------------------------------------------------------ Total $1,697,940 $988,259 $154,597 $171,224 ========================================================================================================================
NOTE (10) SHORT-TERM BORROWINGS The following table sets forth information with respect to Federal funds purchased and securities sold under agreements to repurchase:
============================================================================================================================ (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Balance, end of year $55,139 $25,141 $39,000 Weighted average interest rate, end of year 5.12% 4.70% 5.39% Average amount outstanding during the year $35,704 $34,659 $27,353 Weighted average interest rate for the year 4.77% 5.35% 5.32% Maximum amount outstanding at any month end $74,051 $140,850 $80,300 =============================================================================================================================
Securities subject to repurchase agreements are retained by the Company's custodian under written agreements that recognize the customers' interests in the securities. Interest expense associated with Federal funds purchased and securities sold under repurchase agreements totaled $1.7 million, $1.9 million and $1.5 million for 1999, 1998 and 1997, respectively. At December 31, 1999, the Company had unused borrowing capacity under Federal funds lines of $230.0 million. The Company also had approximately $86.5 million available on a credit line with the Federal Reserve at December 31, 1999. The Company incurred no commitment fees relating to short-term credit lines during 1999. Federal funds purchased and securities sold under agreements to repurchase outstanding at December 31, 1999, matured on the next business day. 50 The Company issues commercial paper. The following table sets forth information regarding the Company's outstanding commercial paper for the periods indicated:
==================================================================================================================================== (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of year $ 3,430 $ 30,447 $15,898 Weighted average interest rate, end of year 4.90% 5.01% 5.26% Average amount outstanding during the year $19,742 $ 24,677 $13,960 Weighted average interest rate for the year 5.00% 5.33% 5.30% Maximum amount outstanding at any month end $34,774 $ 30,812 $19,931 ====================================================================================================================================
Interest expense associated with commercial paper totaled $986,000, $1.5 million and $740,000 for 1999, 1998 and 1997, respectively. Commercial paper outstanding at December 31, 1999, matured on January 5, 2000. The Bank is a designated depository for federal tax collections ("T,T&L"). These tax collections, as set forth in the following table, bear interest at 25 basis points below the Federal funds rate:
=================================================================================================================================== (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, end of year $98,094 $ 5,013 $ 1,017 Weighted average interest rate, end of year 3.74% 4.54% 5.59% Average amount outstanding during the year $23,807 $ 38,014 $34,990 Weighted average interest rate for the year 5.30% 5.32% 5.35% Maximum amount outstanding at any month end $98,094 $107,910 $97,155 ====================================================================================================================================
Interest expense associated with T,T & L balances totaled $1.3 million, $2.0 million and $1.9 million for 1999, 1998 and 1997, respectively. NOTE (11) LONG-TERM BORROWINGS Floating Rate Notes and Fixed Rate Debentures In 1979, the Company issued $16,500,000 of Floating Rate Notes ("the Notes") which matured and were paid off on August 1, 1999. At December 31, 1998, $1,106,000 in Notes and $999,000 in Debentures were outstanding. In April 1999, Imperial Bank issued $100 million of 8.5%, 10-year Subordinated Capital Notes due in 2009. The original issue discount on the Notes totaled $636,000. The proceeds from the issuance were used for general corporate purposes. The notes qualify as Tier 2 capital under the capital guidelines of the Federal Reserve. Other Borrowed Funds In March 1999, the Company borrowed $6.0 million to fund the purchase of the Company's common stock for the ESOP. The note bears interest at the LIBOR rate plus 1%. The interest rate is reset quarterly. Principal payments in the amount of $750,000 and related interest are due quarterly through March 2001. The note had a balance of $3.8 million at December 31, 1999. Other borrowed funds includes $375,000 representing amounts due under capital lease obligations of the Company's OPAY subsidiary. The average balance of other borrowed funds for the year was $287,000 and the average rate paid was approximately 12.7%. Capital Securities On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business trust and wholly owned subsidiary of the Company, issued in a private placement transaction $75.0 million of 9.98% Capital Securities (the "Capital Securities") which represent undivided preferred beneficial interests in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust (the "Common Securities") together with the Capital Securities (the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the 51 proceeds thereof in 9.98% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") issued by the Company and engaging in certain other limited activities. The excess of the stated redemption price at maturity of the Junior Subordinated Debentures over their original issue price resulted in an original issue discount of $1.8 million. The Junior Subordinated Debentures held by the Trust will mature on December 31, 2026, at which time the Company is obligated to redeem the Capital Securities. Holders of the Capital Securities are entitled to receive cumulative cash distributions, accumulating from April 23, 1997, the date of original issuance, and payable semi-annually in arrears on June 30 and December 31 of each year, commencing June 30, 1997, at an annual rate of 9.98% of the liquidation amount of $1,000 per Trust Security. The Company has the right under certain circumstances to defer payments of interest on the Junior Subordinated Debentures at any time and from time to time for a period not exceeding 10 consecutive semi-annual periods with respect to each deferral period, provided that no deferral period may end on a day other than an interest payment date or extend beyond the stated maturity date of the Junior Subordinated Debentures. If and for so long as interest payments on the Junior Subordinated Debentures are so deferred, cash distributions on the Trust Securities will also be deferred and the Company will not be permitted, subject to certain exceptions, to declare or pay any cash distributions with respect to the Company's capital stock (which includes common and preferred stock) or to make any payment with respect to debt securities of the Company that rank equal with or junior to the Junior Subordinated Debentures. Upon the repayment on December 31, 2026, the stated maturity date, or prepayment prior to this date of the Junior Subordinated Debentures, the proceeds from such repayment or prepayment shall be applied to redeem the Trust Securities upon not less than 30 nor more than 60 days notice of a date of redemption at the applicable redemption price. At maturity, the redemption price shall equal the principal of and accrued and unpaid interest on the Junior Subordinated Debentures. Subject to the Company having received prior approval of the Board of Governors of the Federal Reserve System, if then required under applicable capital guidelines or policies of the Federal Reserve, the Junior Subordinated Debentures will be pre-payable prior to the maturity date at the option of the Company on or after June 30, 2007, in whole or in part, at a prepayment price equal to 105.113% of the principal amount thereof on the prepayment date, declining ratably on each June 30 thereafter to 100% on or after June 30, 2017, plus accrued and unpaid interest thereon to the date of pre-payment. The Indenture for the Capital Securities includes provisions that restrict the payment of dividends under certain conditions and changes in ownership of the Trust. The Indenture also includes provisions relating to the payment of expenses associated with the issuance of the Capital Securities. The Company was in compliance with the provisions of the Indenture at December 31, 1999. The unamortized discount on the Capital Securities was $1.6 million at December 31, 1999. The Company used $67.2 million of the net proceeds from the sale of the Junior Subordinated Debentures to make additional investments in the Bank. An investment of $30.0 million was made in September 1997 and an investment of $37.2 million was made in January 1998. The remainder of the proceeds has been used to implement the Company's stock repurchase plan. The Capital Securities qualify as Tier I capital under the capital guidelines of the Federal Reserve. The net principal balance of the Capital Securities was $73.4 million at December 31, 1999. NOTE (12) INCOME TAXES Income tax expense is included in the accompanying Consolidated Statement of Income as follows:
============================================================================================================== For the years ended December 31, (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Income tax expense from: Continuing operations $58,864 $28,449 $36,502 Discontinued operations - - 456 - -------------------------------------------------------------------------------------------------------------- Total $58,864 $28,449 $36,958 ==============================================================================================================
52 The income tax provision in the Consolidated Statement of Income is comprised of the following current and deferred amounts:
======================================================================================================================= For the years ended December 31, (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Current: Federal $49,351 $ 29,234 $24,366 State 20,845 10,362 7,044 - ----------------------------------------------------------------------------------------------------------------------- Total $70,196 $ 39,596 $31,410 - ----------------------------------------------------------------------------------------------------------------------- Deferred: Federal $(1,024) (16,274) (2,701) State (3,259) (5,180) 554 - ----------------------------------------------------------------------------------------------------------------------- Total $(4,283) $(21,454) $(2,147) - ----------------------------------------------------------------------------------------------------------------------- Total: Federal 48,327 12,960 21,665 State 17,586 5,182 7,598 - ----------------------------------------------------------------------------------------------------------------------- Taxes (debited) credited to shareholders' equity (7,049) 10,307 7,239 - ----------------------------------------------------------------------------------------------------------------------- Total $58,864 $ 28,449 $36,502 =======================================================================================================================
The Company had a current income tax receivable of $10.6 million at December 31, 1999, and a current income tax payable of $1.5 million at December 31, 1998. The $7.0 million tax liability recorded directly to shareholders' equity in 1999 includes $7.6 million representing the increase in deferred taxes associated with the unrealized gain on securities available for sale offset in part by a net tax benefit of $531,200 associated with employee stock options and the employee stock ownership plan. Deferred income taxes arise from differences in 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 asset: 53
=========================================================================================================== At December 31, (Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------- Components of the deferred tax asset: Bad debt deduction $ 32,672 $ 22,699 Deferred compensation 16,377 15,682 State franchise taxes 5,565 2,927 Accrued expenses 903 1,715 Deferred gain - 1,495 Goodwill amortization 1,204 1,194 Unrealized loss on securities available for sale - 407 Other 1,861 811 - ----------------------------------------------------------------------------------------------------------- Total $ 58,582 $ 46,930 =========================================================================================================== Valuation allowance - - - ----------------------------------------------------------------------------------------------------------- Deferred tax asset, net of valuation allowance $ 58,582 $ 46,930 =========================================================================================================== Components of the deferred tax liability: Prepaid expense $ (538) $ (722) Deferred loan fees (2,210) (1,326) Investment in Official Payments Corporation (19,404) - Investment in Imperial Credit Industries, Inc. - (21,960) Unrealized gain on securities available for sale (7,908) - Low income housing (997) (411) Other (1,433) (702) - ----------------------------------------------------------------------------------------------------------- Total $(32,490) $(25,121) =========================================================================================================== Net deferred tax asset $ 26,092 $ 21,809 ===========================================================================================================
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Management believes that it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The income tax provision differs from the amount computed by applying the statutory Federal income tax rate as follows:
=========================================================================================================================== 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- % of % of % of Pretax Pretax Pretax (Dollars in thousands) Amount Income Amount Income Amount Income - --------------------------------------------------------------------------------------------------------------------------- Income tax provision at statutory rate $50,992 35.0% $25,269 35.0% $31,867 35.0% (Reduction) increase in taxes resulting from: Tax-exempt interest (119) (0.1) (102) (0.1) (102) (0.1) Cash surrender value of officers life insurance (458) (0.3) (318) (0.4) (428) (0.4) Appreciation of donated ICII common stock - - - - (986) (1.1) State franchise taxes, net of Federal tax benefit 8,302 5.7 5,096 7.1 6,222 6.8 Reversal of overaccrued taxes from prior year - - - - (410) (0.4) Low income housing tax credit (2,165) (1.5) (1,854) (2.6) - - Transaction costs-OPAY 1,051 0.7 - - - - Other 1,261 0.9 358 0.4 339 0.3 - --------------------------------------------------------------------------------------------------------------------------- Total $58,864 40.4% $28,449 39.4% $36,502 40.1% ===========================================================================================================================
54 NOTE (13) EMPLOYEE BENEFIT PLANS The Company has established the following employee benefit plans. All share amounts have been adjusted for the 8% stock dividend paid on February 18, 2000. Imperial Bancorp Profit-Sharing and Employee Stock Ownership Plans The Company has a noncontributory profit-sharing plan and an employee stock ownership plan ("ESOP") in which employees of the Company, Bank and certain subsidiaries are eligible to participate if they have completed 1,000 hours of employment prior to the January 1 enrollment date for a given plan year. Company contributions to the plans are discretionary. The ESOP is externally leveraged. In March 1999, the Company borrowed $6.0 million from a correspondent bank to fund the purchase of 290,704 shares of common stock for future contribution to the ESOP. See-NOTE (11) "Long-Term Borrowings." Principal payments of $750,000 and related interest are due quarterly through March 2001. Shares are deemed to be available for release to the ESOP as quarterly loan payments are made, however, shares are actually released to the ESOP annually on December 31. For 1999, a total of 113,708 shares of Company stock, having a cost basis of $2.3 million, were released to the ESOP. Shares released to the ESOP are allocated among participants on the basis of eligible compensation in the year of allocation. Benefits become 100% vested after 5 years of credited service. Vesting accelerates upon retirement, death or disability of the participant or in the event of a change in control of the Company. Forfeitures are reallocated among remaining participants in the same proportion as contributions. Distributions may be payable upon death, retirement, disability or separation from service. Distribution of vested benefits to terminated participants are made in accordance with the report of termination form signed by the employee. Distributions are made in common stock of the Company with cash paid for fractional shares. At December 31, 1999, unearned compensation related to the ESOP of $3.7 million is reflected as a reduction of shareholders' equity in the Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income. A summary of ESOP activity is provided in the following table:
======================================================================= Year ended December 31, 1999 - ----------------------------------------------------------------------- Unallocated shares at beginning of year - Shares purchased 290,704 Shares allocated (113,708) - ----------------------------------------------------------------------- Unallocated shares at end of year 176,996 =======================================================================
The fair value of unallocated ESOP shares totaled $4.0 million at December 31, 1999. A contribution of $1.8 million was made to the profit-sharing plan in the first quarter of 2000 for 1999 performance. Contributions to the two plans totaled $2.8 million and $3.5 million for 1998 and 1997, respectively. The trusts created by the plans held 1,659,324 and 1,571,775 shares of common stock at December 31, 1999 and 1998, respectively. The shares held by the plans represented approximately 3.7% of the Company's total shares outstanding at December 31, 1999. 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, up to the first 8% of eligible earnings contributed by the employee. Active participants on December 31 who worked 1,000 hours during the plan year are eligible to receive Company matching contributions for that year. The Company's matching contributions under the 401(k) Plan approximated $2.2 million in 1999, $1.7 million in 1998 and $1.2 million in 1997. Distributions of employee and matching contributions to terminated participants are made in accordance with the report of termination form signed by the employee in common stock of the Company with cash paid for fractional shares. The trust created by the plan held 799,967 shares at December 31, 1999, and 874,535 shares at December 31, 1998. 55 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 were allowed to defer portions of their compensation each plan year, subject to a minimum and a maximum dollar amount of deferral. The Company made a matching contribution of not less than 10% nor more than 50% of participants' deferrals for each plan year. The 1992 Plan expired on December 31, 1998, and participants were permitted to transfer certain compensation deferred under the plan to a second plan, the 1996 Plan, which was adopted on January 1, 1996. Balances not transferred to the 1996 Plan were paid out to the participants in accordance with the payout election made at the time they entered the Plan. The 1996 Plan initially allowed participants to defer up to 20% of their base annual salary and 20% of their bonus. The 1996 Plan was amended effective January 1, 1999, to allow participants to defer up to 100% of their annual salary and bonus. Under the amended Plan, the Company match percentage may range from 10% to 50% of the participants' deferrals as determined by a formula based on the Company's return on shareholders' equity for a given plan year. The Company match percentage may be zero if the Company fails to meet certain performance goals in addition to the return on equity targets established by the Deferred Compensation Plan Committee. The match percentage is applied to participants' deferrals subject to certain thresholds established by the Plan. Based on the return on equity calculation, the match percentage was 50% for 1999, 10% for 1998 and 50% for 1997. The balance in each participants' deferred compensation account earns interest at a rate established annually. Prior to September 1, 1997, the rate of interest for both the 1992 and 1996 Plan was based upon the Moody's Seasoned Corporate Bond Rate. The Company amended both the 1992 and 1996 Plans effective September 1, 1997, to compute interest based on the 10-Year Treasury Bond Yield plus 250 basis points. The 1996 Plan was further amended for the 1999 plan year, to establish separate interest crediting rates for deferrals up to 40% of total eligible compensation and for deferrals over 40% of total eligible compensation. For 1999, the interest crediting rate on deferrals up to 40% of eligible compensation was 7.21%. The interest crediting rate on deferrals over 40% of eligible compensation was 4.75%. The latter rate is based on the Federal funds rate on the last business day of November preceding each plan year. The interest crediting rate was 8.37% for 1998 and averaged 7.89% for 1997. The expense of funding the deferred compensation plans totaled $4.7 million, $2.3 million and $2.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. Deferred compensation expense for 1999 is net of a $377,000 death benefit paid on one of the life insurance policies funding the plan. In 1996 and 1999, the Company purchased life insurance polices on certain plan participants to fund the projected benefits payable under the deferred compensation plans. The Company is the beneficiary of the policies. Over time, increases in the cash surrender values of the life insurance policies substantially offsets the insurance premiums paid. The net expense (income) derived from the policies included in the accompanying Consolidated Statement of Income approximated $227,000, ($33,000) and ($466,000) for the years ended December 31, 1999, 1998 and 1997, respectively. Death Benefit Only Plan The Death Benefit Only Plan ("DBO Plan") was established in 1986 to provide certain death benefits to the Company's then Chairman and Vice Chairman, so long as they remained employed by 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 Company purchased life insurance policies to fund the benefits payable under the plan. The benefits specified by the DBO Plan are accrued over fifteen 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 the costs associated with the plan including life insurance premiums and plan benefits paid. A death benefit of $3.6 million was paid in December 1994 following the death of the Vice Chairman. Income derived from increases in the cash surrender value of life insurance funding the plan exceeded the expense accrued for plan benefits by $198,000, $222,000 and $254,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 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 56 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 plus $120,000. Increases in the cash surrender value of the insurance policy offsets the premiums paid over the life of the policy. The net income derived from the policy in the Consolidated Statement of Income for the years ended December 31, 1999, 1998 and 1997 approximated $261,000, $215,000 and $99,000, respectively. Stock Option Plans Imperial 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:
============================================================================================================== 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 4,316,318 4,490,401 5,573,046 Options granted 327,473 2,774,724 446,146 Options exercised (261,895) (1,072,263) (1,523,612) Options canceled (124,577) (1,876,544) (5,179) - -------------------------------------------------------------------------------------------------------------- Options outstanding, end of year 4,257,319 4,316,318 4,490,401 ==============================================================================================================
There were 782,003 option shares available for future grants at December 31, 1999. Information regarding stock option activity and prices of the shares is provided in the table below:
================================================================================================================= Average Number Option Option of Price Range Price Shares* Per Share* Per Share* - ----------------------------------------------------------------------------------------------------------------- Shares under option at: December 31, 1999 4,257,319 $2.08-$22.86 $9.98 December 31, 1998 4,316,318 $2.07-$27.44 $9.31 December 31, 1997 4,490,401 $2.08-$27.72 $7.15 Options exercisable at: December 31, 1999 3,061,836 $2.34-$22.86 $8.53 December 31, 1998 2,661,927 $2.07-$27.44 $7.93 December 31, 1997 2,762,908 $2.07-$26.51 $5.84 Options exercised during the year: December 31, 1999 261,895 $2.56-$15.36 $7.40 December 31, 1998 1,072,263 $2.56-$10.62 $5.06 December 31, 1997 1,523,612 $ 2.34-$9.48 $3.19 - ----------------------------------------------------------------------------------------------------------------- *Adjusted for stock dividends and splits. =================================================================================================================
The weighted average fair value at the date of grant for options granted during 1999, 1998 and 1997 was $17.71, $13.09 and $9.38 per option, respectively. The Company recorded additional shareholders' equity of $1.4 million in 1999, $2.9 million in 1998 and $4.8 million in 1997 related to the exercise of employee stock options. The Company receives a tax deduction from the exercise of non-qualified stock options for the difference between the option price and the market value of the shares issued. The tax benefit associated with shares exercised, which was recorded as a component of shareholders' equity, approximated $585,000 in 1999, $8.7 million in 1998 and $7.6 million in 1997. During 1999 and 1998, $219,000 and $1.3 million of common stock was exchanged and retired in conjunction with the exercise of stock options. 57 During 1998, adverse market conditions led to a drop in the Company's stock price. Options granted between October 1, 1997 and December 2, 1998, were repriced at $16.00 a share. The number of options granted was also adjusted. Recipients of option grants for 1,000-3,000 shares received repriced options for 70% of the original number of shares; recipients of option grants for over 3,000 shares received repriced options for 60% of the original number of shares; and executive officers and directors received repriced options for 50% of the original number of shares. The repriced options have a grant date of December 2, 1998, and the option vesting schedule was revised accordingly. Option holders were given the opportunity to accept the offer of repriced options or retain their original options. Options surrendered for repricing were canceled and new options issued. A total of 1.5 million options, with an average price of $24.83, were canceled and 895,995 new options were issued under the program. OPAY Plan In August 1999, the directors of OPAY adopted the 1999 Stock Option Plan (the "Incentive Plan"). The Incentive Plan provides for the grant of nonstatutory stock options to employees and outside directors. A total of 6.9 million shares of OPAY common stock are reserved for issuance under the Incentive Plan, 900,000 of which are available for grants to outside directors. Options granted under the Incentive Plan may be designated as qualified or nonqualified at the discretion of OPAY's board of directors with exercise prices for incentive stock options of not less than the fair value of the underlying stock at the date of grant. Options granted under the Incentive Plan vest annually over a maximum three-year period and expire ten years from the date of grant. A summary of OPAY's stock option activity for 1999 is provided below:
================================================================================ 1999 - -------------------------------------------------------------------------------- Options outstanding, beginning of year - Options granted at fair value 1,495,820 Options granted at less than fair value 4,654,923 Options exercised - Options canceled - - -------------------------------------------------------------------------------- Options outstanding, end of year 6,150,743 ================================================================================
There were 749,257 options available for future grants at December 31, 1999. The following table summarizes information about OPAY's stock options outstanding as of December 31, 1999:
================================================================================================================= Average Number Option Option of Price Range Price Shares Per Share Per Share - ----------------------------------------------------------------------------------------------------------------- Shares under option at: December 31, 1999 6,150,743 $1.33-$40.29 $ 4.68 Options exercisable at: December 31, 1999 685,161 $ 1.33 $ 1.33 =================================================================================================================
The weighted average fair value of options granted during the year at fair value was $9.72. The weighted average fair value of options granted during the year at less than fair value was $10.24. The Company and OPAY use the intrinsic value-based method of accounting for employee stock-based compensation plans. Accordingly, compensation expense is not recognized in the Consolidated Financial Statements for the fair value of stock options granted when the exercise price of each option equals or exceeds the fair value of the underlying common stock. Had the Company and OPAY determined compensation expense based on the fair value at the grant date for stock options under SFAS No. 123, the Company's consolidated net income would have been reduced to the pro forma amounts indicated in the table below: 58
========================================================================================================================== (Dollars in thousands, except per share amounts) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Income from continuing operations: As reported $86,826 $43,748 $54,548 Pro forma 80,429 41,234 52,317 Net income: As reported $86,826 $43,748 $55,177 Pro forma 80,429 41,234 52,946 Basic income per share from continuing operations: As reported $ 1.93 $ 0.95 $ 1.21 Pro forma 1.79 0.90 1.16 Basic net income per share: As reported $ 1.93 $ 0.95 $ 1.22 Pro forma 1.79 0.90 1.17 Diluted income per share from continuing operations: As reported $ 1.87 $ 0.92 $ 1.15 Pro forma 1.73 0.86 1.10 Diluted net income per share As reported $ 1.87 $ 0.92 $ 1.16 Pro forma 1.73 0.86 1.11 ==========================================================================================================================
The fair value of each option granted by the Company and OPAY was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for the years presented:
=============================================================================================================== 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- Dividend yield-Company - - - Dividend yield-OPAY - - - Expected life of option (years): Officers-Company 6.7 6.1 6.8 Directors-Company 1.8 4.6 2.8 OPAY 4.0 4.0 4.0 Stock price volatility: Officers-Company 46% 44% 42% Directors-Company 41% 39% 39% OPAY 85% - - ===============================================================================================================
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 Company used a 10-year rate for valuing officers' options and a 5-year rate for valuing directors' options based upon the respective terms of the options. The full impact of calculating compensation expense for stock options is not reflected in the pro forma income amounts presented above because compensation expense is reflected over the vesting period of the options and excludes compensation expense for options granted prior to January 1, 1995. NOTE (14) LOANS TO OFFICERS Pursuant to an Employee Loan Program and under by-laws approved by shareholders in 1984, the Company had loans outstanding to certain officers and directors totaling $4.2 million and $3.4 million at December 31, 1999 and 1998, 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. See NOTE (13) "Employee Benefit Plans." 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 1999, loans made to officers and directors totaled $1.0 million and payments received totaled $254,000. New loans for 1999 include a $900,000 bridge loan made to an officer pending the sale of his former residence. The loan matures on or 59 before July 27, 2000, or the earlier closing of the sale of his residence. Interest is due on the unpaid principal balance at the rate of prime plus 1%. Interest is accrued on the director loans 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 2.8% for 1999 and will be 3.7% for 2000. 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. These 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 these 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, collar, 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 its interest rate cap, collar, 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, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Commitments to extend credit $3,425,853 $2,764,908 Standby letters of credit 218,139 159,811 Commercial letters of credit 59,077 81,874 When-issued securities 16,419 18,341 Asset/liability management: Interest rate swaps 455,788 84,000 Interest rate caps and collars purchased 1,013,163 1,025,593 Interest rate floors purchased 7,009,000 4,750,000 Trading contracts: Spot and forwards to purchase foreign currency 65,597 71,259 Spot and forwards to sell foreign currency 62,538 71,005 ========================================================================================================================
The Company's net interest margin is sensitive to sudden changes in interest rates. Additionally, the majority of the Company's loans are tied to the prime rate, an index which tends to react more slowly to changes in market rates than other money market indices such as LIBOR (London Interbank Offered Rate). The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's prime-based assets and LIBOR-correlated liabilities. The Company has developed strategies to protect both net interest income and net interest margin from significant movements in interest rates. These strategies involve purchasing interest rate caps, floors and swaps. Information concerning the Company's derivative financial instruments for the years ended December 31, 1999 and 1998, is provided in the following tables: 60
================================================================================================================================== At December 31, 1999 Weighted Notional Average (Dollars in thousands) Amount Rate Terms - ---------------------------------------------------------------------------------------------------------------------------------- Interest rate caps and collars purchased Over the counter $1,000,000 n/a Expires March 2001. Over the counter 13,163 n/a Expires $6.6 million March 2000 and $6.6 million third quarter 2003. Contracts hedge specifc lending transactions. Interest rate floors purchased Exchange traded $7,009,000 n/a Expires $2 billion March 2000, $2 billion June 2000, $2 billion September 2000, and $1.009 billion December 2000. The floors have an average strike price of 4.63%. Interest rate swaps Loans and leases: Pay-fixed rate $ 50,789 6.41% Matures $23.2 million September 2003, Receive-3 month LIBOR 50,789 6.10% $9.2 million March 2004, $7.3 million July 2004, $6.4 million August 2004, $2.4 September 2006, and $2.3 million November 2006. Deposits: Pay 3 month LIBOR less 10-15 basic pts $ 230,000 6.04% $20 million matures November 2004, Receive-fixed rate 230,000 7.20% $30 million matures October 2006, $20 million matures November 2006, $35 million matures June 2009, $40 million matures July 2009, $15 million matures August 2009, $20 million matures September 2009, $30 million matures October 2009 and $20 million matures November 2009. The swaps are callable by the counterparty six months after the effective date and semi- annually thereafter. Subordinated Capital Notes: Pay 3-month LIBOR $ 100,000 6.08% Matures April 2009. Receive-fixed rate 100,000 6.06% Capital securities: Pay 3-month LIBOR $ 75,000 6.35% Matures second quarter 2007. Receive-fixed rate 75,000 7.18% ==================================================================================================================================
61
================================================================================================================================== Notional Unrealized Unamortized At December 31, 1999 (Dollars in thousands) Amount Gain (Loss) Premium - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate caps and collars purchased Over the counter $1,000,000 $ 144 $171 Over the counter 13,163 30 - Interest rate floors purchased Exchange traded $7,009,000 $ 126 $411 Interest rate swaps Loans and leases $ 50,788 $ 315 $ - Deposits 230,000 (3,040) - Subordinated Capital Notes 100,000 (7,767) 680 Capital securities 75,000 112 - =================================================================================================================================== =================================================================================================================================== At December 31, 1998 Weighted Notional Average (Dollars in thousands) Amount Rate Terms - ---------------------------------------------------------------------------------------------------------------------------------- Interest rate caps and collars purchased Over the counter $1,000,000 n/a Expires March 2001. Over the counter 25,593 n/a Expires $9.0 million March 1999, $6.0 million second quarter 1999, $4.0 million fourth quarter 1999 and $6.6 million first quarter 2000. Contracts hedge specific lending transactions. Interest rate floors purchased Exchange traded $4,750,000 n/a $1.25 billion expires first quarter 1999, $1.75 billion expires second and third quarter 1999. The floors have an average strike price of 4.0%. Interest rate swaps Loans and leases: Pay-fixed rate $ 4,000 5.95% Matures third quarter 2004. Receive-3 month LIBOR 4,000 5.31% Deposits: Pay 3 month LIBOR less 10-15 basis points $ 5,000 5.43% Matures second quarter 1999. Receive-fixed rate 5,000 5.95% Capital securities: Pay 3-month LIBOR $ 75,000 5.73% Matures second quarter 2007. Receive-fixed rate 75,000 7.18% ====================================================================================================================================
62
========================================================================================================================== Notional Unrealized Unamortized At December 31, 1998 (Dollars in thousands) Amount Gain (Loss) Premium - -------------------------------------------------------------------------------------------------------------------------- Interest rate caps and collars purchased Over the counter $1,000,000 $ 454 $ 353 Over the counter 25,593 (31) Interest rate floors purchased Exchange traded(1) $4,750,000 $ 344 $1,813 Interest rate swaps Loans and leases $ 4,000 $ (151) $ - Deposits 5,000 11 - Capital securities 75,000 9,055 - - --------------------------------------------------------------------------------------------------------------------------
(1) In October 1998, following a decline in the LIBOR rate, the Company sold exchange-traded floors with a notional amount totaling $4.5 billion in order to reset the strike price on the floors from 4.75% to approximately 4.00%. The $3.3 million gain on the sale of the floors was amortized over the term of the original floors and was fully amortized as of September 30, 1999 . ================================================================================ The impact of the Company's use of derivative financial instruments was a $3.1 million and $1.5 million increase in net interest income, and a 6 basis point and 3 basis point increase in net interest margin for the years ended December 31, 1999 and 1998, respectively. For the year ended December 31, 1997, the Company's use of derivative financial instruments resulted in a $507,000 increase in net interest income and a 2 basis point increase in net interest margin. Other Commitments As of December 31, 1999 and 1998, SBA loans serviced for others approximated $153.8 million and $103.4 million, respectively. 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 these representations or warranties. 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, 1999, 1998 and 1997, totaled approximately $8.3 million, $7.9 million and $6.8 million, respectively. Aggregate minimum rental commitments under these leases net of $344,000 of income to be received from noncancelable subleases are as follows:
================================================================================================= (Dollars in thousands) Amount - ------------------------------------------------------------------------------------------------- 2000 $ 8,111 2001 8,303 2002 7,868 2003 7,242 2005 6,342 Thereafter 14,138 - ------------------------------------------------------------------------------------------------- Total $52,004 =================================================================================================
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. 63 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 associated with these agreements was $3.9 million in 1999, $3.7 million in 1998 and $3.3 million in 1997 and is included in data processing in the Consolidated Statement of Income. Aggregate minimum contractual payments under these agreements are as follows:
===================================================================== (Dollars in thousands) Amount - --------------------------------------------------------------------- 2000 $2,786,592 2001 2,786,592 2002 1,625,512 - --------------------------------------------------------------------- Total $7,198,696 =====================================================================
Related Party Transactions In 1999, the Bank settled a dispute that arose in the prior year with Second Southern Corporation, a corporation owned by one of its directors. The dispute concerned the existence and content of an alleged modification to a consulting agreement dated as of November 1, 1991, relating to the formation of Imperial Credit Industries, Inc. The dispute was settled for $5.0 million, of which $3.7 million was expensed in 1999. The remainder had been expensed in prior years. The Bank paid a $316,000 consulting fee to a director, Lee Mikles, for services provided in connection with the sale of its investment in ICII common stock. See NOTE 18 "Imperial Credit Industries, Inc." On November 15, 1999, the Bank entered into a consulting agreement with Lee Mikles to compensate him for consulting services provided in connection with the Bank's pursuit of a public offering for Official Payments Corporation ("OPAY"). Lee Mikles was paid $2.5 million following OPAY's initial public offering in November 1999. The agreement provides that he will receive additional consulting fees of 6.5% of the first $500 million of pretax net gains realized by the Bank following the IPO and 7.5% of any such gains in excess of $500 million when, and if, realized by the Bank from the Bank's disposition of OPAY stock. See NOTE 19 "Official Payments Corporation." 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 Company. NOTE (16) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Values of Financial Instruments" ("SFAS No. 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, 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 to be financial instruments. For example, the value of the Company's investment in subsidiaries are not considered to be financial instruments; therefore, their values are not incorporated into the fair value estimates. Additionally, there is a value in the Company's core deposit base which is unrelated to the interest rate assumptions used to compute the fair value estimates. Such demand deposits are a significant source of low cost funds to the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. Cash and Due From Banks and Federal Funds Sold and Securities Purchased Under Resale Agreements The carrying values reported in the balance sheet approximate fair values due to the short-term nature of the assets. 64 Securities Held to Maturity, Securities Available for Sale and Trading Instruments 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 and Leases The fair value of the loan and lease portfolio is generally estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated using current rates for comparable instruments adjusted for credit risk factors. Expected future cash flows are estimated using maturity dates for performing loans. The fair value of nonaccrual loans not secured by real estate is estimated at 50% of book value. 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. The estimated fair values of the Company's financial instruments are as follows: 65
================================================================================================================================ 1999 1998 Estimated Estimated Carrying Fair Carrying Fair At December 31, (Dollars in thousands) Amount Value Amount Value - -------------------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and due from banks $ 307,770 $ 307,770 $ 355,317 $ 355,317 Trading instruments 86,540 86,540 52,971 52,971 Securities available for sale 1,040,285 1,040,285 694,814 694,814 Securities held to maturity 3,744 3,744 3,898 3,898 Federal funds sold and securities purchased under resale agreements 1,555,000 1,555,000 1,446,000 1,446,000 Loans held for sale 83,044 83,613 18,287 19,416 Loans Commercial 3,016,695 2,969,271 3,010,555 2,999,639 Real estate term 557,349 551,873 401,629 404,596 Consumer 38,104 38,055 35,354 35,235 - -------------------------------------------------------------------------------------------------------------------------------- Total loans $3,612,148 $3,559,199 $3,447,538 $3,439,470 ================================================================================================================================ Less allowance for loan losses $ (71,677) $ - $ (62,649) $ - - -------------------------------------------------------------------------------------------------------------------------------- Net loans $3,540,471 $3,559,199 $3,384,889 $3,439,470 ================================================================================================================================ Financial liabilities: Deposits: Demand $2,538,850 $2,538,850 $3,298,070 $3,298,070 Savings 21,075 21,075 25,135 25,135 Money market 1,492,138 1,492,138 1,086,959 1,086,959 Time deposits - under $100,000 154,597 154,376 171,224 171,379 Time deposit - over $100,000 1,697,940 1,697,385 988,259 988,059 Short-term borrowings 156,663 156,663 60,601 60,601 Long-term borrowings Subordinated capital notes 99,411 92,843 - - ESOP borrowing 3,750 3,750 - - Floating rate note and fixed rate debentures - - 2,105 2,126 Other borrowed funds 375 375 290 290 Capital securities 73,430 66,660 73,372 77,272 - -------------------------------------------------------------------------------------------------------------------------------- Off-balance sheet financial instruments: Asset/liability management: Interest rate swaps (1) $ 680 $ (10,380) $ - $ 8,916 Interest rate caps and collars purchased (1) 171 174 (353) 423 Interest rate floors purchased (1) 411 126 (1,813) 344 Trading contracts: Spot and forwards to purchase foreign currency 1,764 1,764 1,661 1,661 Spot and forwards to sell foreign currency (1,020) (1,020) (2,359) (2,359) Credit instruments: Commitment to extend creit - (51,388) - (41,474) Standby letters of credit - (3,272) - (2,397) Commercial lettes of credit - (886) - (1,228) When issued securities - (246) - (275) - -------------------------------------------------------------------------------------------------------------------------------- (1) Estimated fair value represents net unrealized gains (losses). ================================================================================================================================
NOTE (17) RESTRICTIONS ON CASH BALANCES Federal Reserve Board regulations require that the Bank maintain balances on deposit with the Federal Reserve Bank to meet reserve requirements. Cash balances maintained to meet reserve requirements are not available for use by the Bank or the Company. In addition to reserve balances, the Bank also maintains balances with the Federal Reserve to meet operating needs. During 1999 and 1998, the Bank maintained average balances with the Federal Reserve of approximately $79.0 million and $71.1 million, respectively. 66 NOTE (18) IMPERIAL CREDIT INDUSTRIES, INC. In 1999, the Company sold the remaining 8,941,106 shares it owned of Imperial Credit Industries, Inc. (Nasdaq: ICII) ("ICII") common stock. The Company sold 3,682,536 shares to ICII for $8.00 a share in May 1999 and 5,258,570 shares to an institutional investor for $6.00 a share in July 1999. The Company recorded a pretax loss on the two sales totaling $1.4 million after expenses. Expenses associated with the transactions included a $3.7 million settlement of a 1992 consulting agreement with a director. The Company did not exercise significant control over the operations of ICII, therefore, ICII's operating results were accounted for in the Company's financial statements as an equity investment until its ownership percentage dropped below 20% following the sale of shares in May 1999. The Company's remaining shares of ICII were held as securities available for sale until they were sold in July 1999. The Company had previously received notification from the FDIC and Federal Reserve Bank that it was in violation of banking laws and regulations with regards to its ownership of ICII common stock. The Company eliminated this violation when the ICII shares were sold. NOTE (19) OFFICIAL PAYMENTS CORPORATION The Company's majority-owned subsidiary, Official Payments Corporation (Nasdaq: OPAY) ("OPAY"), completed an initial public offering ("IPO") on November 23, 1999, of 5 million shares of common stock priced at $15 per share. An underwriters' overallotment option of 750,000 shares was also exercised. As a result of the offering, the Company's ownership percentage of OPAY common stock decreased from 80% to 56.4% of total outstanding shares. At December 31, 1999, the Company owned 12,000,000 shares of OPAY's common stock. The Company recognized a $44.0 million pretax gain representing the increase in its basis in OPAY stock due to the IPO. The gain is reflected in "Gain resulting from the sale of common stock by Official Payments Corporation" in the Consolidated Statement of Income. OPAY's operating results are reported on a consolidated basis within the Company's financial statements. OPAY is a leading provider of electronic payment options to government entities enabling customers to use their credit cards to pay, by telephone or through the internet, personal federal and state income taxes, sales and use taxes, property taxes and fines for traffic violations. NOTE (20) CAPITAL MATTERS Imperial Bank and the Company are 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 judgments 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 dollar amounts 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, 1999, that the Bank meets all capital adequacy requirements to which it is subject. The Bank, as a California corporation, is limited in making distributions to its sole shareholder, 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, Debentures and Capital Securities also have restrictions on distributions. At December 31, 1999, the Bank could distribute up to $109.1 million to the Parent Company in the form of dividends. As of December 31, 1999 and 1998, the then 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 under the risk-based capital guidelines. 67 The following table compares the Company's actual capital ratios at December 31, 1999 and 1998, to those required by regulatory agencies for capital adequacy and well capitalized classification purposes: ================================================================================================================================== To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------------------- At December 31, 1999 Total capital (to risk-weighted assets): Company $733,506 13.72% $427,852 8.00% $534,816 10.00% Bank 659,214 12.47% 423,062 8.00% 528,828 10.00% Tier I capital (to risk-weighted assets): Company $567,183 10.61% $213,926 4.00% $320,889 6.00% Bank 493,633 9.33% 211,531 4.00% 317,297 6.00% Tier I capital (to average assets): Company $567,183 9.20% $184,987 3.00% $308,312 5.00% Bank 493,633 8.11% 182,652 3.00% 304,420 5.00% - ---------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 Total capital (to risk-weighted assets): Company $507,556 10.89% $373,025 8.00% $466,281 10.00% Bank 480,571 10.45% 367,968 8.00% 459,960 10.00% Tier I capital (to risk-weighted assets): Company $447,112 9.59% $186,512 4.00% $279,769 6.00% Bank 423,015 9.20% 183,984 4.00% 275,976 6.00% Tier I capital (to average assets): Company $447,112 8.12% $165,147 3.00% $275,246 5.00% Bank 423,015 7.76% 163,454 3.00% 272,423 5.00% ==================================================================================================================================
NOTE (21) QUARTERLY DATA The following table provides the high and low prices for the Company's stock for the periods indicated. All amounts reported have been adjusted for the 8% stock dividend paid on February 18, 2000.
================================================================================================================================ 1999 1998 --------------------------------------------------------------------------------- Stock Market Quotations High Low High Low - -------------------------------------------------------------------------------------------------------------------------------- First Quarter $19.84 $13.66 $28.30 $24.00 Second Quarter 19.73 14.58 27.93 22.51 Third Quarter 20.61 15.45 26.68 10.34 Fourth Quarter 24.59 18.45 23.51 9.16 ================================================================================================================================
68 Summarized quarterly financial information for the years ended December 31, 1999 and 1998, is provided in the following table:
================================================================================================================================ (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------------------------------------------------------- 1999 December 31 September 30 June 30 March 31 - -------------------------------------------------------------------------------------------------------------------------------- Total interest income $109,999 $ 99,147 $92,217 $87,432 Net interest income 72,991 68,424 65,493 62,827 Provision for loan losses 11,400 6,000 10,026 4,794 Noninterest income 74,765 16,771 36,602 21,988 Noninterest expense including minority interest 72,514 54,557 58,425 56,455 Income from continuing operations before taxes 63,842 24,638 33,644 23,566 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 37,940 $ 14,852 $19,811 $14,223 =============================================================================================================================== Basic net income per share $ 0.85 $ 0.33 $ 0.44 $ 0.31 Diluted net income per share $ 0.82 $ 0.32 $ 0.43 $ 0.30 =============================================================================================================================== 1998 December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------------------------------- Total interest income $ 94,427 $ 92,186 $90,474 $84,258 Net interest income 67,456 65,020 65,397 60,824 Provision for loan losses 7,799 5,610 14,127 5,839 Noninterest income 21,338 (10,626) 35,173 17,916 Noninterest expense including minority interest 51,994 55,775 59,074 50,083 Income from continuing operations before taxes 29,001 (6,991) 27,369 22,818 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 16,905 $ (3,099) $16,567 $13,375 =============================================================================================================================== Basic net income (loss) per share $ 0.37 $ (0.07) $ 0.36 $ 0.29 Diluted net income (loss) per share $ 0.37 $ (0.07) $ 0.34 $ 0.28 ===============================================================================================================================
69 NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY)
============================================================================================================================= Condensed Balance Sheet At December 31, (Dollars in thousands, except share amounts) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 262 $ 443 Securities available for sale 28,612 5,346 Securities purchased under resale agreements from Imperial Bank 2,400 4,900 Loans to officers 4,172 3,422 Investments in subsidiaries: Imperial Bank 466,366 429,151 Other subsidiaries 35,883 23,755 Other assets 22,433 28,137 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $560,128 $495,154 ============================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper $ 3,430 $ 30,447 Floating rate notes and fixed rate debentures - 2,105 Junior subordinated debentures 75,701 75,642 Other borrowed funds 3,750 - Other liabilities 3,840 5,138 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities $ 86,721 $113,332 ============================================================================================================================= Shareholders' equity: Common stock, no par 50,000,000 shares authorized; 44,903,937 shares at December 31, 1999, and 41,863,935 shares at December 31, 1998, 275,062 224,433 issued and outstanding Accumulated other comprehensive income, net of tax 9,998 (515) Unearned employed stock ownership plan shares; 176,996 shares (3,659) - Retained earnings 192,006 157,904 - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity $473,407 $381,822 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $560,128 $495,154 =============================================================================================================================
70 NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY) continued
=================================================================================================================================== Condensed Statement of Income For the year ended December 31, (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Revenue: Dividends - Imperial Bank $61,120 $11,120 $ 1,120 Dividends - Nonbank Subsidiaries 1,732 - - Interest income: Securities available for sale 1,244 971 1,327 Securities purchased under resale agreements from Imperial Bank 120 366 166 Interest-bearing time deposit at Imperial Bank - 171 2,101 Loans to officers 133 123 131 Other income 10 9 8 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue $64,359 $12,760 $ 4,853 - ----------------------------------------------------------------------------------------------------------------------------------- Expense: Salary 250 211 171 Other employee benefits (1) (342) (260) (168) Interest expense: Commercial paper 986 1,315 740 Floating rate notes and subordinated debentures 96 197 270 Junior subordinated debentures, net 6,381 6,684 4,669 ESOP borrowing 278 - - Other expense 879 1,039 915 - ----------------------------------------------------------------------------------------------------------------------------------- Total expense $ 8,528 $ 9,186 $ 6,597 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 55,831 3,574 (1,744) Applicable income tax benefit (3,488) (3,535) (1,522) - ----------------------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed income (loss) of subsidiaries 59,319 7,109 (222) - ----------------------------------------------------------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries 27,507 36,639 55,399 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $86,826 $43,748 $55,177 ===================================================================================================================================
(1) Includes the accrual for benefit costs associated with the deferred compensation plan and DBO Plan less the increase in cash surrender value associated with the life insurance policies funding the plans (see NOTE 13 "Employee Benefit Plans"). ================================================================================ 71 NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY) continued
==================================================================================================================================== Condensed Statement of Cash Flows For the year ended December 31, (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 86,826 $ 43,748 $ 55,177 Adjustments for non-cash charges (credits): Undistributed income of subsidiaries (27,507) (36,639) (55,399) Net change in other liabilities (1) 7,455 (5,840) 3,164 Net change in other assets (1,897) (1,670) (3,758) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities $ 64,877 $ (401) $ (816) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sale of securities available for sale 266,019 492,760 231,794 Purchase of securities available for sale (285,170) (483,694) (232,409) Maturity (investment) in time deposit at Imperial Bank - 37,242 (37,242) Investments in subsidiaries (10,818) (40,067) (39,179) Net change in securities purchased under resale agreements 2,500 3,025 (4,725) Net change in loans made to officers (646) 204 114 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by investing activities $ (28,115) $ 9,470 $ (81,647) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net change in commercial paper (27,017) 14,549 7,887 Retirement of floating rate notes and subordinated debentures (2,105) (1,152) (1,198) Issuance of junior subordinated debentures - - 75,540 Net proceeds from exercise of employee stock options 1,446 2,855 2,407 Repurchase of common stock (9,248) (27,243) - Other (19) - 4 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities $ (36,943) $ (10,991) $ 84,640 - ------------------------------------------------------------------------------------------------------------------------------------ Net change in cash $ (181) $ (1,922) $ 2,177 - ------------------------------------------------------------------------------------------------------------------------------------ Cash, beginning of year 443 2,365 188 - ------------------------------------------------------------------------------------------------------------------------------------ Cash, end of year $ 262 $ 443 $ 2,365 ==================================================================================================================================== (1) The Parent Company recorded a tax benefit in shareholders' equity for its stock options of $585,000 in 1999, $8.7 million in 1998 and $7.6 million in 1997. ====================================================================================================================================
In 1999, 1998 and 1997, the Parent Company paid $7.7 million, $8.2 million and $5.7 million of interest, respectively. Dividends received from the Bank are subject to certain limitations. See-Note 20 Capital Matters. NOTE 23-OPERATING SEGMENT RESULTS The Company has identified seven principal operating segments for purposes of management reporting. Information related to the Company's remaining businesses and centralized functions has been aggregated and is included in either "Other Segments" or "Unallocated" as appropriate. The Company's management reporting is structured to support management's strategic focus on mid-sized companies, high- growth and niche markets, and new enterprises that exhibit solid growth potential. The table presents the operating results and other key financial measures for the individual operating segments for 1999, 1998 and 1997. Operating segment results are based on the Company's internal management reporting process, which reflects allocations of the items noted below. Any future changes in the Company's management structure or reporting methodologies may result in changes in the measurement of business line results. In that case, results for prior periods would be restated for comparability. Most balance sheet, revenue and expense items are derived from the internal management reporting system, where they are specifically attributable to individual businesses. There are no significant intersegment revenues. 72 Each operating segment within the management reporting structure receives an allocation of capital based on 10% of risk-weighted assets and an allocation of internal funding as required to fund the business. The difference between the aggregate capital allocated under this methodology and total consolidated capital is reported in "Unallocated." The difference between the aggregate internal funding allocated and the aggregate cost of funds is reported in "Unallocated." Various techniques are used to allocate certain costs associated with centralized operations and administrative functions, including the use of unit costs and service volumes. The provision for loan losses is allocated to operating segments based on a combination of actual loss experience, loan growth and the risk profile of a segment's loan portfolio. The tax rate applied to each operating segment is based on the Company's consolidated statutory tax rate. A discussion of the Company's principal operating segments follows: The Commercial Banking Division offers a wide range of credit products and financial services to mid-sized companies across a broad array of industries including manufacturing and distribution, healthcare, technology and apparel and textile. The companies served generally have sales in the $10 million to $150 million range, with the majority having sales of $10 million to $75 million. Products offered include commercial loans and lines of credit, trade finance, cash management services and a full range of deposit products. The Commercial Banking Division delivers these products and services through twelve regional offices located in the major metropolitan areas of California, and offices in Phoenix, Arizona, and Denver, Colorado. The Special Markets Division offers credit and deposit products and services to technology, multimedia, biotechnology and other growth companies, most of which are backed by venture capital, throughout the United States. The Division has four offices in California located in Irvine, Los Angeles, Menlo Park and San Diego; and offices in key technology centers out-side of California: Denver, Colorado; Boston, Massachusetts; Austin, Texas; Reston, Virginia; and Kirkland, Washington. The Boston office also offers financing for management buy-outs, leveraged buy-outs and recapitalizations. The Real Estate Division serves the construction financing needs of developers of moderately priced residential housing tracts. Loans range in size from $1.0 million to $10.0 million with an average of $5.0 million. The Division also services an existing portfolio of commercial real estate loans. Offices are located throughout California and in Phoenix, Arizona. Entertainment and Independent Film Production offers commercial banking products and services to independent film, cable and television producers, and to companies serving the entertainment industry (e.g., multimedia software, post production and sound). The entertainment business finances films, with budgets ranging from $2 million to $35 million, both domestically and internationally. Loans to independent producers are generally backed by presold distribution rights. The Entertainment Division has offices in Beverly Hills and Los Angeles, California. The Syndicated Finance Division buys and sells syndicated commercial loans in the primary and secondary markets. The Division provides the capability for generating commercial loans outside of the Company's network of regional offices and provides a mechanism for managing risk and liquidity within the commercial loan portfolio. Loans are typically purchased from money center banks; the total credit facility is usually in the $200 million-$1.0 billion range and ten or more banks may be participating. The Company's maximum participation in any one facility is generally $10 million. The Division provides advisory services to other lending units within the Company to ensure that loans are properly structured for sale or syndication to other financial institutions when a customer's credit requirements exceed the Company's limits or when there is a desire to diversify exposure to a particular customer or industry. The Division also develops and manages relationships with syndicate member banks and provides administrative support services for those relationships in which the Bank is the agent bank. The Syndicated Finance Division is based at the Company's headquarters. The Financial Services Division provides specialized deposit products and services to title and escrow companies, bankruptcy trustees, homeowners associations and labor unions. Through strategic alliances with software companies, the Company has participated in the development of accounting software packages that are offered to property management companies, bankruptcy trustees and title and escrow companies. Other products offered include commercial loans, cash 73 management and lockbox services. The Division has three offices in California: Orange County, San Francisco and San Diego. The Division also services customers in Arizona and Colorado through the Company's regional offices located in Phoenix and Denver. Imperial Credit Industries (Nasdaq: ICII) ("ICII") is a diversified financial services company located in Torrance, California that offers a variety of commercial, real estate and consumer loan products, investment banking and asset management services. The Company held 8.9 million shares, or approximately 24.3%, of the outstanding shares of ICII as an equity investment until mid-1999 when the shares were sold. Other Segments includes the Company's investment portfolio; the impact of asset liability management strategies the Company has implemented to manage interest rate sensitivity; an accounts receivable factoring business; government- guaranteed loans to small businesses generated by the Small Business Administration lending division; loans to small businesses serviced by the Company's Business Banking Division; the Company's registered broker dealer and custodial trust businesses; the processing division, a nationwide supplier of financial processing products to hospitals, medical offices, airports, casinos, restaurants, hotels and municipalities; and the Company's equity investments excluding ICII. Unallocated includes the net impact of transfer pricing loan and deposit balances, the cost of external debt, the elimination of intercompany balances, unallocated administrative expenses and asymmetrical allocations. Asymmetrical allocations occur when a balance is booked to one cost center and the associated income or expense is allocated to another cost center. Fixed assets and deferred fee balances are booked to a central cost center in the Company's general ledger. For purposes of management reporting, depreciation expense is charged to the cost center using the asset, and deferred fee income is credited to the lending unit responsible for the loan. OPERATING SEGMENT RESULTS
==================================================================================================================== For the year ended Entertainment and December 31, 1999 Commercial Special Real Independent Film Syndicated (Dollars in thousands) Banking Markets Estate Production Finance - -------------------------------------------------------------------------------------------------------------------- Net interest income $ 95,699 $ 45,883 $ 35,632 $ 28,484 $ 16,221 Provision for loan losses 13,592 4,050 1,908 2,367 4,813 Noninterest income 16,085 24,882 1,293 2,326 1,579 Noninterest expense including minority interest 61,893 32,596 6,623 11,698 2,591 - -------------------------------------------------------------------------------------------------------------------- Income before taxes 36,299 34,119 28,394 16,745 10,396 Income taxes 15,262 14,346 11,938 7,041 4,371 - -------------------------------------------------------------------------------------------------------------------- Net income $ 21,037 $ 19,773 $ 16,456 $ 9,704 $ 6,025 - -------------------------------------------------------------------------------------------------------------------- Average net loans $1,402,382 $538,529 $508,578 $452,852 $440,573 Average assets 1,412,801 549,160 515,757 454,972 443,654 Average deposits 1,296,393 782,050 15,250 88,084 - ====================================================================================================================
74
============================================================================================================================= For the year ended December 31, 1999 Financial Other (Dollars in thousands) Services ICII Segments Unallocated Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 50,810 $ - $ 12,401 $(15,395) $ 269,735 Provision for loan losses 127 - 1,919 3,444 32,220 Noninterest income 4,344 3,899 93,134 2,584 150,126 Noninterest expense including minority interest 43,740 3,704 54,754 24,352 241,951 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before taxes 11,287 195 48,862 (40,607) 145,690 Income taxes 4,746 82 21,595 (20,517) 58,864 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 6,541 $ 113 $ 27,267 $(20,090) $ 86,826 - ----------------------------------------------------------------------------------------------------------------------------- Average net loans $ 514,315 $ - $ 128,992 $(75,272) $3,910,949 Average assets 520,590 28,122 1,292,949 484,465 5,702,470 Average deposits 1,949,284 - 792,088 36,955 4,960,104 ============================================================================================================================= ============================================================================================================================= For the year ended Entertainment and December 31, 1998 Commercial Special Real Independent Film Syndicated (Dollars in thousands) Banking Markets Estate Production Finance - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 89,710 $ 37,057 $ 28,610 $ 29,944 $ 14,788 Provision for loan losses 15,354 7,149 2,463 2,550 944 Noninterest income 14,695 6,467 916 2,479 1,910 Noninterest expense including minority interest 59,265 23,859 6,233 10,581 1,975 - ----------------------------------------------------------------------------------------------------------------------------- Income before taxes 29,786 12,516 20,830 19,292 13,779 Income taxes 12,524 5,263 8,758 8,111 5,793 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 17,262 $ 7,253 $ 12,072 $ 11,181 $ 7,986 - ----------------------------------------------------------------------------------------------------------------------------- Average net loans $1,231,975 $486,221 $ 426,761 $391,275 $ 414,182 Average assets 1,261,980 489,652 435,068 394,171 416,874 Average deposits 1,235,995 480,368 13,587 81,396 - ============================================================================================================================= ============================================================================================================================= For the year ended December 31, 1998 Financial Other (Dollars in thousands) Services ICII Segments Unallocated Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 62,257 $ - $ 10,466 $(14,135) $ 258,697 Provision for loan losses 614 - 937 3,364 33,375 Noninterest income 435 (18,205) 49,033 6,071 63,801 Noninterest expense including minority interest 45,384 - 44,811 24,818 216,926 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before taxes 16,694 (18,205) 13,751 (36,246) 72,197 Income taxes 7,019 (7,655) 5,782 (17,146) 28,449 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 9,675 $(10,550) $ 7,969 $(19,100) $ 43,748 - ----------------------------------------------------------------------------------------------------------------------------- Average net loans $ 297,909 $ - $ 71,394 $(61,334) $3,258,383 Average assets 298,268 72,260 1,210,512 403,153 4,981,938 Average deposits 1,807,964 - 700,209 31,706 4,351,225 =============================================================================================================================
75
======================================================================================================================= For the year ended Entertainment and December 31, 1997 Commercial Special Real Independent Film Syndicated (Dollars in thousands) Banking Markets Estate Production Finance - ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 75,428 $ 28,128 $ 27,081 $ 22,821 $ 11,007 Provision for loan losses 5,218 2,245 (2,473) 3,212 635 Noninterest income 11,970 5,443 730 3,209 954 Noninterest expense including minority interest 50,785 17,351 6,187 7,552 2,233 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 31,395 13,975 24,097 15,266 9,093 Income taxes 13,200 5,876 10,132 6,419 3,823 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 18,195 $ 8,099 $ 13,965 $ 8,847 $ 5,270 - ----------------------------------------------------------------------------------------------------------------------- Average net loans $ 947,422 $303,352 $452,164 $ 218,430 $ 285,735 Average assets 953,987 304,676 460,616 219,462 287,390 Average deposits 1,045,941 406,839 6,932 86,044 - ======================================================================================================================= ======================================================================================================================= For the year ended December 31, 1997 Financial Other (Dollars in thousands) Services ICII Segments Unallocated Consolidated - ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 39,284 $ - $ 8,988 $ (10,977) $ 201,760 Provision for loan losses 616 - 1,422 12,017 22,892 Noninterest income 272 28,053 27,151 3,431 81,213 Noninterest expense including minority interest 28,027 8,676 31,616 16,604 169,031 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before taxes 10,913 19,377 3,101 (36,167) 91,050 Income taxes 4,589 8,147 1,304 (16,988) 36,502 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) from continuing operations $ 6,324 $ 11,230 $ 1,797 $ (19,179) $ 54,548 - ----------------------------------------------------------------------------------------------------------------------- Average net loans $ 97,024 $ - $ 64,322 $ (10,165) $2,358,284 Average assets 96,706 60,203 878,716 390,707 3,652,463 Average deposits 993,939 - 596,288 206 3,136,189 =======================================================================================================================
76 Detail of amounts included in unallocated is provided below:
============================================================================================================================ For the year ended December 31, (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income: Internal funding $(13,221) $(10,711) $ (9,590) Deferred loan fees (5,066) (5,295) (4,161) Reclass of late fees and factoring interest 2,575 - - Other 317 1,871 2,774 - ---------------------------------------------------------------------------------------------------------------------------- Total $(15,395) $(14,135) $(10,977) ============================================================================================================================ Loan loss provision: Unallocated allowance $ 3,483 $ 2,989 $ 11,224 Mortgage loans (39) 251 755 Other - 124 38 - ---------------------------------------------------------------------------------------------------------------------------- Total $ 3,444 $ 3,364 $ 12,017 ============================================================================================================================ Noninterest income: Item processing revenue $ 4,119 $ 3,974 $ 3,915 Reclass of late fees and factoring interest (2,575) - - Intercompany eliminations (693) - - Other 1,733 2,097 (484) - ---------------------------------------------------------------------------------------------------------------------------- Total $ 2,584 $ 6,071 $ 3,431 ============================================================================================================================ Noninterest expense: Unallocated administration and operations $ 31,307 $ 18,750 $ 18,690 Spin off and restructuring costs - 9,421 2,341 Formation of leasing division - 942 - Deferred loan costs (4,921) (5,131) (4,633) Operating loss recovery - (1,320) - Other (2,034) 2,156 206 - ---------------------------------------------------------------------------------------------------------------------------- Total $ 24,352 $ 24,818 $ 16,604 ============================================================================================================================
Balance Sheet: Unallocated average assets include the Company's cash and due from accounts with correspondent banks and the Federal Reserve, the unallocated portion of the allowance for loan losses, the balance of deferred fees and deferred taxes. Unallocated deposit balances include official checks and Treasury, Tax and Loan accounts. - -------------------------------------------------------------------------------- 77 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS IMPERIAL BANCORP: We have audited the accompanying consolidated balance sheet of Imperial Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California January 25, 2000 78 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 shareholder of Imperial Bank ("the Bank") and its non-bank subsidiaries. The Company establishes the general policies and oversees the activities of the operating subsidiaries. Imperial Bank The Bank is engaged in general commercial banking at 15 banking offices, 12 located throughout California; in Phoenix, Arizona; Denver, Colorado and Kirkland, Washington; and emerging growth loan production offices in Irvine, Los Angeles, Menlo Park and San Diego, California; Boston, Massachusetts; Austin, Texas; Reston, Virginia; and Kirkland, Washington; as well as Small Business loan production offices nationwide. The Bank 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 products and services to its business customers including: checking accounts; savings accounts; money market deposit accounts; certificates of deposit; business and real estate loans; credit cards; ESOP financing; venture capital financing; SBA loans; accounts receivable financing; accounts receivable factoring; equipment leasing; letters of credit, foreign currency exchange and trade financing; asset management services; federal income, excise and withholding tax depository services; collection services; Mastercard and Visa depository services; payment processing services; business account reconciliation services; cash management services; automated payroll systems; and escrow and bankruptcy accounting systems. The Bank has historically directed its business development efforts toward mid-sized businesses with annual sales of between $5 million and $100 million. Additionally, the Bank has established specialized divisions to more directly serve certain market segments such as the Special Markets Division, Imperial Entertainment Group, International Banking Division, Treasury Management Division, Real Estate Lending Division, Financial Services Division, Corporate Cash Management, Small Business Lending and the Imperial Processing Division. The Bank's loans and deposits are widely diversified across a number of industries. 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; credit cards; travelers 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 customers within the geographic areas it serves. The Bank does not have trust powers. The Bank is licensed as an insurance agent and can engage in insurance activities as permitted under applicable law. As of December 31, 1999, the Bank and its subsidiaries had total assets of $6.8 billion and total deposits of $5.9 billion. Net income for 1999 was $87.2 million. Competition - The banking and financial services business is highly competitive in the Bank's market areas. The competitive environment is impacted by changes in regulation, technology and product delivery systems and the ongoing consolidation among financial services providers. The Bank competes for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets, and offer a broader array of financial services than the Bank. In order to compete with the other financial services providers, the Bank relies on local promotional activities, personal relationships established by officers, directors and employees with customers, and specialized services tailored to meet customers' needs. In those instances where a customer desires a service that the Bank does not offer directly, the Bank may arrange for those services to be provided by its correspondents. 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 79 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 Ventures, Inc. ("IVI") was organized in 1977 and is licensed as a small business investment company. IVI had net income of $1.6 million for 1999. At December 31, 1999, IVI had total assets of $20.4 million. Imperial Securities Corporation ("ISC"), a registered broker dealer, engages in the purchase and resale of financial instruments to corporations, financial institutions and high net worth individuals. ISC, organized as a broker dealer in 1993, had net income of $2.2 million for 1999. At December 31, 1999, ISC had total assets of $9.9 million. Pacific Bancard Association, Inc. ("PBA") was formed in 1976 to facilitate merchant bankcard processing activities. PBA's assets at December 31, 1999, consisted of deposits totaling $3.3 million with Imperial Bank. PBA had net income of $85,000 for 1999. Official Payments Corporation (Nasdaq: OPAY) formerly U S Audiotex is an 56% owned subsidiary of the Bank that provides payment processing services to the IRS, government agencies and municipalities. OPAY had a net loss of $7.0 million for 1999. OPAY had a successful initial public offering in November 1999 which resulted in an after-tax gain of $19.3 million, net of transaction expenses and the Company's share of OPAY's operating losses. At December 31, 1999, OPAY had total assets of $84.6 million Imperial Trade Services, Ltd., ("ITS") was formed in 1997. Located in Hong Kong, ITS has established a strategic alliance with an international financial institution to issue, advise and pay letters of credit in the Asian market. ITS had net income of $1,000 for 1999. Nonbank Subsidiaries In addition to the Bank and its subsidiaries, the Company has four 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. At December 31, 1999, Realty's total assets consisted of deposits with Imperial Bank totaling $653,000. Net income for 1999 was $16,300. Imperial Capital Trust I ("the Trust") is a statutory business trust formed in April 1997. The Trust was formed for the sole purpose of issuing 9.98% Capital Securities, which was completed in April 1997, and investing the proceeds thereof in 9.98% Junior Subordinated Debentures issued by the Company. At December 31, 1999, the Trust had assets of $76.3 million, of which $75.7 million reflects its investment in the Junior Subordinated Debentures issued by the Company. The Trust had net income of $140,300 for 1999. Imperial Creditcorp ("ICC") seeks to generate capital appreciation through medium-term equity investments made in financial sector and emerging growth businesses. At December 31, 1999, ICC's total assets were $33.0 million. Net income for 1999 was $1.9 million. ROC Technology, Inc., formerly Altair Corporation, acquired in September 1998, provides software systems to bankruptcy trustees and practitioners. ROC had total assets of $4.8 million at December 31, 1999, and had net income of $1.1 million for the year. 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. 80 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. During 1997, the Company sold and donated 455,000 shares of ICII stock. At December 31, 1998, the Company owned approximately 24.3% of the total ICII shares outstanding. In 1999, the Company sold the balance of 8.9 million shares of ICII and reported a pretax loss of $1.4 million. Supervision and Regulation Bank holding companies, banks and their nonbank 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 Bank has established interstate offices in Arizona, Colorado and Washington. In late 1999, the Graham, Leach, Bliley Act was enacted to adopt financial modernization and repeal the Glass-Stegall Act limitations on combinations of banking, securities and insurance activities. The BHC Act as amended creates a new regulated entity, a financial institution holding company which can engage in expanded activities under the Act. The Act still prohibits a 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- financial activities other than in connections with merchant banking. The Board is authorized to approve, among other things, a holding company's acquisition of control of any company engaged in activities which the Board has determined to be closely related to banking or managing or controlling banks. In making such determination, the Board is required to weigh the expected benefits of the acquisition to the public, such as greater convenience and increased competition or gains in efficiency, against the risks of possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest and unsound banking practices. The Company has received notification from the FDIC and the Federal Reserve Bank that it was in violation of banking laws and regulations with regards to its ownership of ICII common stock. In 1999, all the holdings in ICII were sold, eliminating the violation. Following the successful initial public offering of Official Payments Corporation, the Bank owns 56% of its common stock. The FDIC has determined that it is involved in permissible activity and could be held by a national bank. So long as the Bank owns over 50% of OPAY's stock or can demonstrate its ability to control OPAY and prevent it from engaging in non permissible activities, the ownership is in compliance with applicable law. The Company and its nonbank subsidiaries 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 nonbank 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 81 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 Department of Financial Institutions ("DFI"), 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 DFI 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 DFI 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 distributions to its shareholder, 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, Debentures and Capital Securities also have restrictions on distributions. At December 31, 1999, the Bank could distribute up to $109.1 million to the Parent Company in the form of dividends. 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 system, in establishing the insurance premium assessment for each bank, the FDIC takes into consideration the probability that the Bank Insurance Fund ("BIF") will incur a loss with respect to the bank, and charges 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 were 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 2000 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 now share in the cost of the FICO bond interest payments. Beginning January 1, 1997 and continuing through December 31, 1999, partial sharing occurred. During this initial period, SAIF member institutions paid 0.0630% of domestic deposits while BIF member institutions, such as the Bank, paid 0.0126% of domestic deposits. Full pro rata sharing of the FICO bond interest payments will take effect on January 1, 2000. 82 FDICIA also requires each insured depository institution to prepare annual financial statements in accordance with generally accepted accounting principles which must be audited by an independent public accountant. Each institution must also prepare a management report stating management's responsibility for preparing the institution's annual financial statements, for complying with designated safety and soundness laws and regulations and for other related matters. In addition, the report must contain an assessment by management of the effectiveness of internal controls and procedures over financial and regulatory reporting and of the institution's compliance with designated laws and regulations. The institution's independent public accountant must examine, attest to, and report separately on, assertions of management concerning internal controls and procedures. 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 guide-lines 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 non-conforming loans secured by real estate other than 1-4 family property should not exceed 30% of risk-based capital. In a follow up to a policy statement originally issued in December 1993, on November 24, 1998, the FDIC and other regulatory agencies issued a Joint Interagency Statement ("the Statement") addressing the importance of depository institutions having prudent, conservative, but not excessive loan loss allowances. The Statement was issued to better ensure the consistent application of loan loss accounting policy and to address regulatory concerns that loan loss allowances be based on the underlying economics of the loan portfolio and not be used as an earnings management tool. The Statement requires that federally insured depository institutions maintain an allowance for loan losses adequate to cover probable losses that exist as of the balance sheet date. While recognizing that management's process for determining allowance adequacy involves judgment and results in a range of estimated losses, the Statement requires that the determination of the allowance be based on a comprehensive, adequately documented and consistently applied analysis of the loan portfo-lio. Each depository institution must ensure that its allowance is supportable in light of disclosures made to investors in SEC filings and footnotes to financial statements. This policy has not impacted the level of the Company's allowance for loan losses. In 1995, 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," ("SFAS No. 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 SFAS No. 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 83 regulations became generally effective on July 1, 1995, various provisions have different effective dates, and the new CRA evaluation criteria went into effect for examinations beginning on July 1, 1997. Although management cannot project 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. The most recent examination under the current regulations found the Bank to be rated Satisfactory. 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 shareholders' 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, 1999, were 9.33% and 12.47%, respectively. In addition to the risk-weighted ratios, the highest rated banks are required to maintain a minimum leverage ratio of 3%. All other banks are expected to maintain higher leverage ratios, to be determined on an individual basis. This ratio is defined as Tier I capital to average total assets for the most recent quarter. The Bank's leverage ratio at December 31, 1999, was 8.11%. The banking agencies have 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. 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 branch and subsidiary locations with expiration dates ranging from 1999 to 2012, exclusive of renewal options. Annual rentals, net of sublease income, for all leased premises were $8.3 million for 1999. The Bank houses its Corporate Service Center at 2015 Manhattan Beach Boulevard, Redondo Beach, California. The property is owned by the Bank. 84 Directory Imperial Bancorp, Subsidiaries and Enterprises Imperial Bancorp and 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 Creditcorp 226 Airport Parkway San Jose, California 95110 (408) 451-8555 Official Payments Corporation 445 Park Avenue, 10th Floor New York, New York 10022 (917) 322-2540 Roc Technology, Inc. 5757 Memorial Drive, Suite 200 Houston, Texas 77007 (800) 868-5755 Shareholder Information Stock Listing Imperial Bancorp (NYSE: IMP) Transfer Agent American Stock Transfer and Trust Co. 40 Wall Street, 46th Floor New York, New York 10005 (800) 937-5449 A copy of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission will be furnished without charge upon written request to the address listed below: Imperial Bancorp Investor Relations Department P.O. Box 92991 Los Angeles, CA 90009-2991 Or visit our Web site at www.imperialbank.com Independent Auditors KPMG LLP 85 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 Norman P. Creighton* Vice Chairman and Chief Executive Officer, Imperial Bank Director, Imperial Bancorp and Imperial Bank John A. Andreini Chairman, Andreini & Company Director, Imperial Bancorp and Imperial Bank G. Louis Graziadio, III President, Ginarra Holdings, Inc. Director, Imperial Bancorp Robert L. Harris President, Entertainment Properties Trust Director, Imperial Bank William L. MacDonald President and Chief Executive Officer, Compensation Resource Group Director, Imperial Bancorp and Imperial Bank Daniel R. Mathis* President and Chief Operating Officer, Imperial Bank Director, Imperial Bank Paul A. Novelly President, Apex Oil Co. Director, Imperial Bancorp and Imperial Bank Charles T. Owen President and Publisher, San Diego Business Journal Director, Imperial Bank Gregg E. Tryhus President and Owner, Grayhawk Development Company Director, 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 Richard J. Casey* Executive Vice President 86 H.W. Duke Chenoweth* Executive Vice President James R. Daley* Executive Vice President Dennis J. Lacey* Executive Vice President and Chief Financial Officer Mahlon L. Vigesaa Executive Vice President Stephen P. Yost* Executive Vice President and Chief Credit Officer Kathleen L. Berry Executive Vice President, Real Estate Division *Executive Committee 87 Imperial Bank Offices Arizona Phoenix (602) 417-1100 California Beverly Hills (310) 281-2400 Central California - Fresno (559) 244-3900 Downtown Los Angeles (213) 484-3700 East Bay - Walnut Creek (925) 941-1900 Los Angeles International Airport (310) 417-5600 North Orange County - Orange (714) 940-6700 Orange County - Costa Mesa (714) 641-2200 Sacramento (916) 491-1300 San Diego (619) 338-1500 San Fernando Valley - Sherman Oaks (818) 379-2901 San Francisco (415) 954-5000 San Gabriel Valley - City of Industry (626) 581-2000 Santa Clara Valley - San Jose (408) 451-8508 Colorado Denver (303) 294-3340 Washington Kirkland (425) 576-2800 Emerging Growth Offices Austin, Texas (512) 349-2333 88 Boston, Massachusetts (617) 521-9400 Irvine, California (949) 754-5100 Kirkland, Washington (425) 576-2800 Los Angeles, California (310) 281-2402 Menlo Park, California (650) 233-3000 Phoenix, Arizona (602) 417-1100 Reston, Virginia (703) 689-3768 San Diego, California (858) 509-2360 Imperial Bank Divisions and Subsidiaries Apparel and Textile Industries (213) 484-3728 Serves the unique needs of garment industry importers, manufacturers, distributors and wholesalers. Capital Markets (877) 369-6620 Assists companies in meeting their financial or investment objectives and designing risk protection strategies through a variety of customizable deposit and loan products as well as financial risk management instruments. Commercial Banking (800) 957-8483 Serves mid-sized companies in California, Arizona and Colorado with an emphasis on wholesalers, distributors and manufacturers. Equipment Leasing (877) 935-3274 Provides a full range of competitive leasing products and services, including operating leases, capital leases, and vendor programs to help companies conserve capital, protect against obsolescence and increase sales. Financial Services (800) 376-0430 Association Bank Services Bankruptcy Deposits Labor Management Special Corporate Financial Services Title/Escrow Offers specialized banking services to particular industries including title companies, independent escrow companies, labor management, homeowners associations, property management companies, bankruptcy trustees, law firms, the entertainment industry, emerging growth companies, trade associations and cooperatives. 89 Foreign Exchange (888) 423-9242 Assists companies and financial institutions in executing payments in foreign currency and provides risk management and international payment infrastructure consulting. Imperial Entertainment Group (310) 281-2400 Offers a full range of business banking products customized to industry needs, especially for mid-sized entertainment companies; independent film, cable and TV producers; and multimedia software developers. Imperial Processing (800) 982-9091 Gaming Industry Imperial Technology Solutions Merchant Services Pacific Bancard Association, Inc. Provider of financial processing products for hospitals, dental and doctors' offices, airports, casinos, restaurants, hotels and municipalities; specializes in electronic commerce for businesses interested in expanding on the Internet. Imperial Securities Corporation (310) 417-5790 Provides investment services to corporate treasurers, financial institutions and high net worth clients. A subsidiary of Imperial Bank and an NASD-registered broker dealer. International Banking (800) 733-6545 Assists clients seeking the most cost-effective ways to manage international trade finance transactions and use all types of Letters of Credit. Real Estate (800) 706-3700 Residential Construction Lending Serves the construction financing needs of residential home builders throughout California, Phoenix, Arizona, Denver, Colorado and Nevada. Small Business Lending (800) 633-5828 Offers SBA guaranteed loans and other financing to manufacturers, retail and service related businesses for real estate purchase or refinance, building improvement, machinery and equipment purchase, business acquisition and working capital. Special Markets (650) 846-6820 Emerging Growth Services Factoring and Commercial Finance Merchant Banking Services Venture Capital Services Venture Leasing Imperial Ventures, Inc., an SBIC Imperial Creditcorp Provides innovative venture banking solutions for early-stage, emerging technology, Internet and e-commerce companies; factoring as an alternative source of financing to undercapitalized young companies; finances management buy-outs; banking services to venture capital funds and their partners. 90 Syndicated Finance (310) 417-5600 Buys and sells syndicated commercial loans in the primary and secondary markets; also develops and manages relationships with syndicate member banks and provides administrative support services for those relationships in which Imperial Bank is the agent bank. Treasury Management (310) 417-5963 Assists mid-sized and large businesses to effectively and efficiently manage their cash and financial information resources. 91 FORM 10-K CROSS-REFERENCE INDEX
Part I Page Item 1. Business Financial Review 5 Selected Statistical Information 4, 6, 9-13, 17, 18-21, 31 Market Risk 31-32 Description of Business 79-84 Item 2. Properties 84 Item 3. Legal Proceedings 64 Item 4. Submission of Matters to a vote of security holders* Executive Officers of the Registrant 86 Part II. Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 4, 68 Item 6. Selected Financial Data 4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5-35 Item 8. Financial Statements and Supplementary Data Imperial Bancorp and Subsidiaries - Consolidated Financial Statements 36-39 Notes to Consolidated Financial Statements 40-77 Independent Auditors' Report 78 Selected Statistical Information 4, 6, 9-13, 17, 18-21, 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure* Part III 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. See Exhibit Index on page 94. (b) Form 8-K filed on March 30, 1999, to record fourth quarter 1998 earnings as a matter of public record is incorporated by reference.
_______________________________________________________________________________ * 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, 1999. 92 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 30, 2000, on its behalf by the undersigned, thereunto duly authorized. /s/ George L. Graziadio, Jr. _____________________________________ March 30, 2000 George L. Graziadio, Jr. Chief Executive Officer /s/ Dennis J. Lacey _____________________________________ March 30, 2000 Dennis J.Lacey Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below on March 30, 2000, by the following persons on behalf of the registrant and in the capacities indicated. /s/ George L. Graziadio, Jr. _____________________________________ March 30, 2000 George L. Graziadio, Jr. Chairman of the Board, President and Chief Executive Officer /s/ William L. MacDonald _____________________________________ March 30, 2000 William L. MacDonald Director /s/ Norman P. Creighton _____________________________________ March 30, 2000 Norman P. Creighton Director /s/ G. Louis Graziadio, III _____________________________________ March 30, 2000 G. Louis Graziadio, III Director /s/ John A. Andreini _____________________________________ March 30, 2000 John A. Andreini Director /s/ Paul A. Novelly _____________________________________ March 30, 2000 Paul A. Novelly Director 93 EXHIBIT INDEX Exhibit Number Description 10.1 Asset Purchase Agreement among Union Bank of California, N.A., Imperial Trust Company and Imperial Bank (a) 10.2 Transition Agreement between Union Bank of California, N.A., Imperial Trust Company and Imperial Bank (a) 10.3 First amendment to Asset Purchase Agreement among Union Bank of California, N.A., Imperial Trust Company and Imperial Bank (b) 10.4 Termination of Consulting Agreement, Settlement and Mutual Release between Imperial Bank, Imperial Financial Group and Second Southern Corp., Ginarra Holdings, Inc. and G. Louis Graziadio dated May 17, 1999 10.5 Consulting Services Agreement between Imperial Bank and Mr. Lee E. Mikles dated December 10, 1999 21.1 Subsidiaries of Registrant 23.1 Independent Auditors' Consent 27.1 Financial Data Schedule ________________________________________________________________________________ (a) This exhibit is contained in Imperial Bancorp's Quarterly Report on Form 10-Q for the period ended June 30, 1999, filed with the Commission on August 6, 1999, (Commission File No. 001-08196) and incorporated herein by reference. (b) This exhibit is contained in Imperial Bancorp's Quarterly Report on Form 10-Q for the period ended September 30, 1999, filed with the Commission on November 10, 1999, (Commission File No. 001-08196) and incorporated herein by reference. 94 EX-10.4 2 TERMINATION OF CONSULTING AGREEMENT DATED MAY 17, 1999 EXHIBIT 10.4 TERMINATION OF CONSULTING AGREEMENT, ----------------------------------- SETTLEMENT AGREEMENT AND MUTUAL RELEASE --------------------------------------- This Termination of Consulting Agreement, Settlement Agreement and Mutual Release (the "Agreement") is made as of May 17, 1999 (the "Effective Date") between Imperial Bank ("Imperial") and Imperial Financial Group, Inc. ("IFG") on the one hand (collectively, the "Imperial Parties"), and Second Southern Corp. ("Second Southern"), Ginarra Holdings, Inc. ("Ginarra") and G. Louis Graziadio, III ("Graziadio") as an individual (the "Graziadio Parties") on the other hand. RECITALS - -------- A. Imperial and Second Southern are parties to a Consulting Agreement dated November 1, 1991. Graziadio is the President, sole shareholder and chief executive officer of Second Southern. Graziadio is also the chief executive officer of Ginarra. B. Second Southern has made a claim against Imperial for immediate payment of $4,977,383.03, plus attorneys fees and interest, based upon an alleged modification of the Consulting Agreement (the "Second Southern Claim"). Ginarra has made certain claims against Imperial and/or IFG in connection with a Sublease between Ginarra and IFG dated August 31, 1998 and an Assignment and Assumption of Lease ("Assignment") between Ginarra and IFG dated August 31, 1998. Graziadio has made certain claims against Imperial and/or IFG for reimbursement of certain costs incurred in connection with the formation of IFG and based upon an employment agreement dated September 1, 1998 between Graziadio and IFG (the "Employment Agreement"). Collectively, the claims of Ginarra and of Griziadio are referred to as "Graziadio's Claim". C. The Board of Directors of Imperial appointed a Special Committee of the Board to investigate and resolve Second Southern's Claim. D. After extensive investigation and deliberation, the Special Committee determined that it is in the best interests of the Imperial Parties to settle, upon reasonable terms, Second Southern's Claim, Graziadio's Claim and all other claims by any of the Graziadio Parties against the Imperial Parties in connection with the Consulting Agreement, the Sublease and the Employment Agreement, and all claims (excluding any rights to indemnification) of the Graziadio Parties based upon or arising out of any amounts or obligations owing to and/or claimed by any of the Graziadio Parties from IFG. E. The parties wish to terminate the Consulting Agreement, the Sublease, the Assignment and the Employment Agreement, and to settle and compromise all claims (excluding any rights to indemnification) that have been or could have been made by the Graziadio Parties, or any of them, against the Imperial Parties, or any of them, and all claims that have been or could have been made by the Imperial Parties or any of them against Graziadio Parties or any of them, based upon or arising out of the Consulting Agreement, the Sublease, the Assignment and the Employment Agreement or any amounts or obligations owing to and/or claimed by any of the Graziadio Parties from IFG (excluding any rights to indemnification) on the terms set forth in this Agreement. THEREFORE, in consideration of the recitals and mutual promises and covenants contained herein, and for other good and sufficient consideration, the parties agree as follows: AGREEMENT - --------- 1. TERMINATION. The Consulting Agreement, the Sublease, the Assignment ----------- and the Employment Agreement and all other agreements, whether oral, written or otherwise, between the Imperial Parties, or any of them, and the Graziadio Parties, or any of them, that arise out of or are related to the Consulting Agreement, the Sublease, the Assignment, the Employment Agreement or any amounts or obligations owing to or claimed by any of the Graziadio Parties from IFG (excluding any rights to indemnification), are hereby terminated. This Agreement is the only agreement between the parties with respect to such matters. As of the Effective Date, neither party has any remaining rights or obligations arising out of or based upon the Consulting Agreement, the Sublease, the Assignment, the Employment Agreement or any other agreement, 2 whether written or oral, arising out of or relating to such agreements or to amounts or obligations owing to or claimed by any of the Graziadio Parties from IFG (excluding any rights to indemnification). 2. PAYMENT BY IMPERIAL. Upon the Effective Date of this Agreement, ------------------- Imperial will pay Graziadio the sum of five million dollars ($5,000,000.00) by electronic or wire transfer in immediately available funds to an account designated by Graziadio. 3. MUTUAL RELEASES --------------- 3.1 The Graziadio Parties' Release of the Imperial Releasees -------------------------------------------------------- 3.1.1 The Graziadio Parties, and each of them, hereby release and forever discharge the Imperial Parties, and each of them, and each of their respective affiliates, owners, stockholders, divisions, subsidiaries, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, insurers, representatives, lawyers, or any of them (the "Imperial Releasees"), of and from any and all manner of action or actions, cause or causes of action, in law or in equity, suits, debts, liens, liabilities, claims, demands, damages, loss, cost or expense, of any nature whatsoever, known or unknown, fixed or contingent (excluding any rights to indemnification) from the beginning of time to the Effective Date of this Agreement (hereinafter called "Claims"), that the Graziadio Parties, or any of them, now have or may hereafter have against the Imperial Releasees, or any of them, arising out of, based upon, or relating to the Consulting Agreement, the Sublease, the Assignment, the Employment Agreement or any amounts or obligations owing to or claimed by any of the Graziadio Parties from IFG, including but not limited to Second Southern's Claim and Graziadio's Claim. The parties hereto acknowledge and agree that this is a limited general release, that the parties are releasing only those claims described above and that except for the Claims specifically set forth above, none of 3 the Graziadio Parties are hereby releasing, and hereby expressly reserve, any and all other Claims, including but not limited to those claims which they hold in their capacities as shareholders, directors or employees of Imperial or its parent, Imperial Bancorp. 3.1.2 ALTHOUGH THIS IS A LIMITED GENERAL RELEASE, THE PARTIES ARE RELEASING "UNKNOWN" CLAIMS ARISING OUT OF, BASED UPON OR RELATING TO THE CONSULTING AGREEMENT, THE SUBLEASE, THE ASSIGNMENT, THE EMPLOYMENT AGREEMENT OR ANY AMOUNTS OR OBLIGATIONS OWING TO OR CLAIMED BY ANY OF THE GRAZIADIO PARTIES FROM IFG (EXCLUDING ANY RIGHTS TO INDENIFICATION). TO THE EXTENT THE RELEASE OF SUCH UNKNOWN CLAIMS CONSTITUTES A "GENERAL RELEASE" OF THOSE CLAIMS ONLY, THE PARTIES AGREE AS FOLLOWS: THE GRAZIADIO PARTIES, AND EACH OF THEM, ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED BY THEIR LEGAL COUNSEL AND ARE FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." THE GRAZIADIO PARTIES, BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVE ANY RIGHTS THEY MAY HAVE THEREUNDER, AS WELL AS 4 UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT. 3.1.3. The Graziadio Parties, and each of them, represent and warrant that there has been no assignment or other transfer of any interest in any Claims which they, or any of them, may have against the Imperial Releasees, or any of them, and the Graziadio Parties agree to indemnify and hold the Imperial Releasees, and each of them, harmless from any liability, Claims, demands, damages, costs, expenses and attorneys' fees incurred by the Imperial Releasees, or any of them, as a result of any person asserting any such assignment or transfer. It is the intention of the parties that this indemnity does not require payment to a third party as a condition precedent to recovery by the Imperial Releasees, or any of them, against the Graziadio Parties, and each of them, under this indemnity. 3.1.4 The Graziadio Parties agree that if they, or any of them, hereafter commence, join in, or in any manner seek relief through any suit arising out of, based upon, or relating to any of the Claims released hereunder, or in any manner assert against the Imperial Releasees, or any of them, any of the Claims released hereunder, then the Graziadio Parties, and each of them, shall pay to the Imperial Releasees, and each of them, in addition to any other damages caused thereby to the Imperial Releasees, all costs and attorneys' fees incurred by the Imperial Releasees, or any of them, in defending or otherwise responding to said suit or Claim. 4.1 The Imperial Parties of the Graziadio Releasees ----------------------------------------------- 4.1.1 The Imperial Parties, and each of them, hereby release and forever discharge the Graziadio Parties, and each of them, and each of their respective affiliates, owners, stockholders, divisions, subsidiaries, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, insurers, representatives, lawyers, or any of them (the "Graziadio 5 Releasees"), of and from any and all Claims from the beginning of time to the Effective Date of this Agreement, that the Imperial Parties, or any of them, now have or may hereafter have against the Graziadio Releasees, or any of them, arising out of, based upon, or relating to the Consulting Agreement, the Sublease, the Assignment, the Employment Agreement or any amounts or obligations owing to or claimed by any of the Graziadio Parties from IFG, including but not limited to, Second Southern's Claim and Graziadio's Claim. 4.1.2 ALTHOUGH THIS IS A LIMITED GENERAL RELEASE, THE PARTIES ARE RELEASING "UNKNOWN" CLAIMS ARISING OUT OF, BASED UPON OR RELATING TO THE CONSULTING AGREEMENT, THE SUBLEASE, THE ASSIGNMENT, THE EMPLOYMENT AGREEMENT OR ANY AMONTS OR OBLIGATIONS OWING TO OR CLAIMED BY ANY OF THE GRAZIADO PARTIES FROM IFG (EXCLUDING ANY RIGHTS TO INDEMNIFICATION) TO THE EXTENT THE RELEASE OF SUCH UNKNOWN CLAIMS CONSTITUTES A "GENERAL RELEASE" OF THOSE CLAIMS ONLY, THE PARTIES AGREE AS FOLLOWS: THE GRAZIADIO PARTIES, AND EACH OF THEM, ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED BY THEIR LEGAL COUNSEL AND ARE FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 6 THE GRAZIADIO PARTIES, BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVE ANY RIGHTS THEY MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT. 4.1.3. The Imperial Parties, and each of them, represent and warrant that there has been no assignment or other transfer of any interest in any Claims which they, or any of them, may have against the Graziadio Releasees, or any of them, and the Imperial Parties agree to indemnify and hold the Graziadio Releasees, and each of them, harmless from any liability, Claims, demands, damages, costs, expenses and attorneys' fees incurred by the Graziadio Releasees, or any of them, as a result of any person asserting any such assignment or transfer. It is the intention of the parties that this indemnity does not require payment to a third party as a condition precedent to recovery by the Graziadio Releasees, or any of them, against the Imperial Parties, and each of them, under this indemnity. 4.1.4. The Imperial Parties agree that if they or either of them hereafter commence, join in, or in any manner seek relief through any suit arising out of, based upon, or relating to any of the Claims released hereunder, or in any manner asserts against the Graziadio Releasees, or any of them, any of the Claims released hereunder, then the Imperial Parties, shall pay to the Graziadio Releasees, and each of them, in addition to any other damages caused thereby to the Graziadio Releasees all costs and attorneys' fees incurred by the Graziadio Releasees, or any of them, in defending or otherwise responding to said suit or Claim. 5. NO PENDING ACTIONS/COVENANT NOT TO SUE. Each of the Imperial Parties -------------------------------------- represents to each of the Graziadio Parties, and each of the Graziadio Parties represents to each of the Imperial Parties, that such party does not presently have on file any complaints, 7 charges or claims (civil, administrative, or criminal) against the other party, in any court or administrative forum, or before any governmental agency or entity. Each such party represents that he or it will not hereafter file any complaints, charges or claims (civil, administrative, or criminal) against the other party, with any administrative, state, federal or governmental entity, agency board or court based on any of the Claims released hereunder except to enforce the agreement. 6. FURTHER PROVISIONS ------------------ 6.1. The parties acknowledge that, in entering into this Agreement, they have had the opportunity to conduct a full and adequate investigation of the facts and claims in issue and have not relied upon any representations, warranties, promises or conditions not specifically set forth in this Agreement. All of the parties represent that they are represented by legal counsel and have been fully advised as to the meaning and consequence of all of the terms and provisions of this Agreement. 6.2. This Agreement shall be construed and enforced under and in accordance with the laws of the State of California, except that the provisions of Civil Code Section 1654 shall not be invoked to affect or alter the interpretation of this Agreement or any portion thereof. 6.3. Any action, whether in contract, tort or otherwise based upon or arising out of the negotiation, terms or performance of this Agreement, must be brought in the Superior Court of the County of Los Angeles, California. 6.4. In any action arising out of the negotiation, terms or performance of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and litigation expenses from the other party. 8 6.5. No waiver of the breach of any of the terms or provisions of this Agreement shall be a waiver of any preceding or succeeding breach of the Agreement or any other provisions of it. 6.6. Except for the provisions of paragraphs 2, 3 and 4, if any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, void, illegal, or unenforceable in any respect, such invalidity, voidness, illegality or unenforceability shall not affect any other provision of this Agreement, and the remaining portions shall remain in full force. 6.7. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter of this Agreement. This Agreement supersedes all prior agreements, negotiations and oral understandings, if any. This Agreement may not be modified, amended or supplemented except by an instrument in writing signed by each of the parties. 6.8. This Agreement is entered into for the settlement and compromise of disputed claims and shall never be treated as an admission of liability or a statement or admission as to any particular contention or issue by any party for any purpose, other than the liability of a party to perform in accordance with its terms after the execution of this Agreement. 6.9. Each of the parties shall execute and deliver any and all additional papers, documents and other assurances and shall do any and all acts and things reasonably necessary in connection with the performance of their obligations under, and to carry out the intent of the parties to this Agreement. 6.10. Each and every covenant, term, provision, and agreement in this Agreement shall be binding upon and inure to the benefit of the successors and assigns of the respective parties to this Agreement. 9 6.11. Some paragraphs of this Agreement have titles and some do not. The fact that some paragraphs hereof do not have titles shall have no significance. The titles are included for ease of reference only and shall not be used to construe the meaning of this Agreement. 6.12. All parties and corporate officers signing this Agreement represent and warrant that the execution, delivery and performance of this Agreement has been duly and validly authorized by all necessary corporate action on behalf of such parties and that this Agreement represents a valid and binding obligation of such parties enforceable in accordance with its terms. 6.13. All notices with respect to this Agreement shall be sent in writing, by first-class mail, to the parties at the following addresses: Second Southern Corporation Imperial Bank 2325 Palos Verdes Drive West, Suite 211 9920 South La Cienega Blvd. Palos Verdes Estates, CA 90274 Inglewood, CA 90301 Attn: Louis Graziadio, President Attn: Richard Baker, Esq. Fax: (310) 417 5695 Louis Graziadio Imperial Financial Group, Inc. 2325 Palos Verdes Drive West, Suite 211 9920 South La Cienega Blvd. Palos Verdes Estates, CA 90274 Inglewood, CA 90301 Attn: Richard Baker, Esq. Fax: (310) 417 5695 Ginarra Holdings, Inc. 2325 Palos Verdes Drive West, Suite 211 Palos Verdes Estates, CA 90274 Attn: Louis Graziadio, President and Chief Executive Officer 6.14. REFERENCE PROVISION: a. Other than the exercise of provisional ------------------- remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim ("Claim") between the parties arising out of or relating to this Agreement, which is not settled in writing within ten days after the "Claim Date" (defined as the date on which a 10 party gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in Los Angeles, California in accordance with the provisions of Section 638 et seq. of the -- --- California Code of Civil Procedure("CCP"), or their successor section, which shall constitute the exclusive remedy for the settlement of any Claim, including whether such Claim is subject to the reference proceeding and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Los Angeles (the "Court"). The referee shall be a retired Judge selected by mutual agreement of the parties, and if they cannot so agree within thirty days after the Claim Date, the referee shall be selected by the Presiding Judge of the Court. The referee shall be appointed to sit as a temporary judge, as authorized by law. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgement shall be entered pursuant to CCP 644 in the Court and such judgement shall be appealable under CCP 645. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and, request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. 11 b. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. 6.15 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates indicated below: IMPERIAL BANK SECOND SOUTHERN CORP. By: /s/ Daniel R. Mathis By: /s/ G. Louis Graziadio, III ----------------------------- --------------------------------- Title: President Title: President -------------------------- ----------------------------- By: /s/ Richard M. Baker Dated: 5-14-99 ----------------------------- ----------------------------- Title: SVP & Secretary -------------------------- Dated: 5-17-99 -------------------------- IMPERIAL FINANCIAL GROUP, INC. GINARRA HOLDINGS, INC. By: /s/ Richard M. Baker By: /s/ G. Louis Graziadio, III ----------------------------- ---------------------------------- Title: Secretary Title: President and Chief Executive -------------------------- Officer ------------------------------ Dated: 5-17-99 Dated: 5-14-99 -------------------------- ------------------------------ /s/ G. Louis Graziadio, III ------------------------------------- G. Louis Graziadio, III as an Individual and on behalf of all Graziadio Parties Dated: 5-14-99 ------------------------------- 13 EX-10.5 3 CONSULTING SERVICES AGREEMENT MIKLES DATED DEC 10, 1999 EXHIBIT 10.5 [LETTERHEAD OF IMPERIAL BANK] November 15, 1999 Mr. Lee E. Mikles c/o Mikles/Miller Management 1801 Century Park East, Suite 460 Los Angeles, California 90067 RE: Official Payments Corporation, formerly U.S. Audiotex Corporation ("OPAY") Consulting Services Dear Lee: This letter ("Agreement") sets forth the understanding and agreement between you and Imperial Bank ("Bank") concerning your services as a consultant in connection with the Bank's pursuit of a public offering for OPAY. As you are a director of Bank and Imperial Bancorp, this Agreement was approved by the Bank Board of Directors, without your participation, at the October 28, 1999, meeting. In consideration of your efforts to encourage Thomas R. Evans to accept the position of Chairman/CEO of OPAY without the use of an executive search firm, as well as your activities in pursuing OPAY becoming a public company, you will receive a one time payment of $2,500,000, payable within five (5) business days following the successful consummation and settlement of the initial public offering of OPAY within three years of the date hereof ("IPO"). In addition, in connection with your activities with the investment bankers and the pursuit of the IPO, you will receive an incentive fee of 6.5% of the first $500 million realized pretax gains received by the Bank following an IPO and 7.5% of any such gains in excess of $500 million when, as and if realized by the Bank from the Bank's disposition of OPAY stock (sales of securities by OPAY are not subject to any incentive fee), the gain to be calculated based on the proceeds to the Bank from a disposition and the Bank's GAAP basis in the OPAY stock immediately following the IPO. In the event the Bank distributes the stock of OPAY to its parent or an affiliate and the recipient of the stock agrees to assume the Bank's fee obligations under this Agreement, no compensation shall be due you from this Agreement as a result of such transfer as long as the Bank remains secondarily liable for such payments. After the Lee Mikles November 15, 1999 Page 2 of 4 IPO, any other distribution of OPAY stock by the Bank or its successor (a "nonaffiliate distribution") shall be considered a sale based on a price equal to the arithmetic average of the closing prices reported for the stock during the 30 calendar days preceding the date of the distribution. In the event of a change of control of the Bank or Imperial Bancorp after the IPO, you shall have the right to elect at that time to receive the incentive fee calculated in the same manner as upon a nonaffiliate distribution described in the preceding paragraph, with the date of distribution for purposes of the calculation being the effective date of the change of control. For purposes of this paragraph, a change of control shall mean a change of control as defined in the Bank Change of Control Act, 12 U.S.C. Section 1817(j) or (ii) a change, at one time, of a majority of the Board of Directors of Bank or Imperial Bancorp. This Agreement supercedes all prior negotiations and discussions concerning compensation to you regarding OPAY. No amendment or waiver of any provisions of this Agreement nor consent to any departure by either party therefrom shall, in any event, be effective unless the same shall be in writing and signed by an authorized representative of the other party, and any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. All rights and remedies of you and the Bank hereunder shall, except as otherwise specifically provided herein, be cumulative and nonexclusive of any right or remedy which either may have under any other agreement or instrument by operation of law or otherwise. This Agreement shall become effective when it is executed by both parties and shall thereafter be binding upon and inure to the benefit of the parties and their respective successors and assigns. You shall not have the right to assign your rights, obligations or interests hereunder without the prior written consent of the Bank, which shall not be unreasonably withheld. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in California without reference to principles of conflicts of laws. You, on your own behalf, your heirs, executors, successors and assigns ("Releasor") hereby irrevocably and unconditionally release, acquit and forever discharge Bank and its owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, attorneys, divisions, subsidiaries, affiliates (and agents, directors, officers, employees, representatives and attorneys of such parent companies, divisions, subsidiaries and affiliates), and all persons acting by, through, under or in concert with any of them, or any of them ("Releasee"), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, Lee Mikles November 15, 1999 Page 3 of 4 demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred) of any nature whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, rights under federal, state or local laws which Releasor now has, owns or holds, or claims to have, own or hold, or which Releasor at any time heretofore had, owned or held, or claimed to have, own or hold, or which Releasor any time hereinafter may have, own or hold, or claim to have, own or hold against Releasee arising out of or in connection with OPAY except for Bank's subsequent performance of its obligations under this Agreement. Notwithstanding the above, the foregoing release shall not be construed to apply to, limit or supercede any right you have to defense or indemnity from of the Bank, Imperial Bancorp or OPAY arising from or related to the performance of your activities as a consultant concerning OPAY or your duties as a director of Bank, Imperial Bancorp, or OPAY. This Agreement is intended as a full settlement and compromise of all claims in connection with Releasor's involvement with OPAY. No claims are reserved and Releasor expressly waives any and all rights which it may have under the provisions of Section 1542 of the Civil Code of the State of California, which provides: "Certain claims not affected by general release. A general ---------------------------------------------- release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." In the event of any dispute arising out of or in connection with this Agreement, the prevailing party, in addition to any other amounts which they may be entitled to, shall be entitled to recover from the other party reasonable attorneys' fees and administrative costs as shall be awarded in the resolution of such dispute. Any such dispute shall be submitted to an arbitration under the rules of JAMS/Endispute then applicable to arbitrations in Los Angeles County, California, where any such arbitration shall take place. The parties shall submit any such dispute to arbitration twenty days after notice from one party to the other of the existence of the dispute, which if not resolved in said twenty day period, shall thereafter be submitted to arbitration under said rules. The arbitration shall be subject to Rules of Law and Evidence and the single arbiter shall be required to provide a written Memorandum of Decision. Lee Mikles November 15, 1999 Page 4 of 4 Please acknowledge your acceptance and agreement of this letter by signing and returning the enclosed copy. Very truly yours, /s/ Norman P. Creighton Norman P. Creighton Vice Chairman & CEO /s/ Richard M. Baker Richard M. Baker Senior Vice President and General Counsel Accepted and agreed to on December 10/th/, 1999. /s/ Lee E. Mikles - --------------------- Lee E. Mikles EX-21.1 4 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 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 and Imperial Trade Services, Ltd., which is incorporated in Hong Kong. Each subsidiary is included in the Company's consolidated financial statements. Crown American Bank Imperial Bank 100% Imperial Asset Advisors, Inc. Imperial Bank 100% Imperial Asset Management, Inc. Imperial Bank 100% Imperial Bank Imperial Bancorp 100% Imperial Bank Realty Company, Inc. Imperial Bancorp 100% Imperial Capital Trust I Imperial Bancorp 100% Imperial Creditcorp Imperial Bancorp 100% Imperial International Bank Imperial Bank 100% Imperial Securities Corporation Imperial Bank 100% Imperial Trade Services, Ltd. Imperial Bank 100% Imperial Trust Company Imperial Bank 100% Imperial Ventures, Inc. Imperial Bank 100% Official Payments Corporation Imperial Bank 56% Pacific Bancard Association, Inc. Imperial Bank 100% ROC Technologies, Inc. Imperial Bancorp 100% Imperial Capital Markets Group, Inc. (1) Imperial Bank 100% Imperial Financial Group (1) Imperial Bank 100% Imperial Global Trading Company, Inc. (1) Imperial Bank 100% Imperial Holdings, Inc. (1) Imperial Bank 100% Imperial Management, Inc. (1) Imperial Bank 100% Imperial Municipal Services Group, Inc. (1)(2) Imperial Bank 100% Imperial Plan, Inc. (1) Imperial Bank 100% TNT Mortgage Services, Inc. (1) Imperial Bank 100%
(1) Not currently active (2) Previously known as Imperial Municipal Services Corporation EX-23.1 5 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 Independent Auditors' Consent The Board of Directors Imperial Bancorp: We consent to incorporation by reference in the registration statement (No. 2-75352), (No. 2-61660), (No. 2-98462) and (No. 2-75353) on Forms S-8 and S-16 of Imperial Bancorp of our report dated January 25, 2000, relating to the consolidated balance sheet of Imperial Bancorp and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Imperial Bancorp. KPMG LLP March 27, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 307,770 355,317 0 0 1,555,000 1,446,000 86,540 52,971 1,040,285 694,814 3,744 3,898 3,744 3,898 3,612,148 3,447,538 (71,677) (62,649) 6,856,702 6,184,603 5,904,600 5,569,647 156,663 60,601 145,066 96,766 176,966 75,767 0 0 0 0 312,677 224,433 160,730 157,389 6,856,702 6,184,603 322,309 296,509 40,820 39,525 25,666 25,311 388,795 361,345 102,473 90,666 119,060 102,648 269,735 258,697 32,220 33,375 3,222 173 241,951 216,926 145,690 72,197 86,826 43,748 0 0 0 0 86,826 43,748 1.93 0.95 1.87 0.92 5.21 5.76 27,589 30,615 0 0 4,081 9,770 0 0 62,649 51,143 22,751 23,793 3,559 1,924 71,677 62,649 0 0 0 0 0 0
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