-----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, MmLb18QMI227Ji6LEyI44jf4V/QPKKV1fty1Alf6anNBYFqQtQDU/X7sKd2JS1ra uylRRDkOpPRejCUkww1XfQ== 0000944209-99-000430.txt : 19990402 0000944209-99-000430.hdr.sgml : 19990402 ACCESSION NUMBER: 0000944209-99-000430 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99582621 BUSINESS ADDRESS: STREET 1: 9920 S LA CIENEGA BLVD CITY: INGLEWOOD STATE: CA ZIP: 90301 BUSINESS PHONE: 3104175600 MAIL ADDRESS: STREET 2: PO BOX 92991 CITY: LOS ANGELES STATE: CA ZIP: 90009 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1998 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 1, 1999: $569,865,829. Number of Shares of Common Stock outstanding as of March 1, 1999: 41,888,374 shares. DEBT SECURITIES: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due 1999. As of December 31, 1998, $1,106,000 in principal amount of such Notes and $999,000 in principal amount of such Debentures were outstanding. CAPITAL SECURITIES: 9.98% Series B Capital Securities of Imperial Trust Capital Trust I Due 2026. As of December 31, 1998, $73,372,000 in net 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, 1998, are incorporated by reference into Part III hereof. This report includes a total of 79 pages. Exhibit Index begins on page 78. 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 Five Year Summary of Selected Financial Information ....................... 4 Financial Review .......................................................... 5 Average Balances, Yields and Rates Paid ................................. 8 Asset Liability Management .............................................. 11 Analysis of the Allowance for Loan Losses ............................... 20 Allocated Allowance for Loan Losses ..................................... 21 Financial Statements Consolidated Balance Sheet .............................................. 28 Consolidated Statement of Income ........................................ 29 Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income .................................................. 30 Consolidated Statement of Cash Flows .................................... 31 Notes to Consolidated Financial Statements .............................. 32 Independent Auditors' Report ............................................ 63 Selected Statistical Information Securities .............................................................. 64 Maturity Distribution of Loans .......................................... 64 Financial Ratios ........................................................ 64 Common Stock and Shareholder Data ....................................... 65 Quarterly Data .......................................................... 65 Analysis of Changes in Net Interest Margin .............................. 67 Description of Business ................................................... 68 Directory ................................................................. 73 Signatures ................................................................ 76 Form 10-K Cross Reference Index ........................................... 77 Exhibits Index ............................................................ 78 3 FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION IMPERIAL BANCORP AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Summary of operations Interest income ..................................... $ 359,459 $ 282,972 $ 209,156 $ 174,779 $ 135,772 Interest expense .................................... 102,648 81,637 68,054 60,154 37,415 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income ............................... 256,811 201,335 141,102 114,625 98,357 Provision for loan losses ........................... 33,375 22,892 6,881 16,122 12,174 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 223,436 178,443 134,221 98,503 86,183 Noninterest income .................................. 65,687 76,661 63,080 43,546 34,572 Gains - Imperial Credit Industries, Inc. stock ...... -- 4,977 36,411 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total operating income .............................. 289,123 260,081 233,712 142,049 120,755 Personnel expense ................................... 114,599 85,065 64,876 47,702 47,087 Other noninterest expense ........................... 102,327 83,966 63,256 62,622 63,078 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes .......................... 72,197 91,050 105,580 31,725 10,590 Income tax provision .............................. 28,449 36,502 43,278 10,071 3,968 Income from continuing operations ................... 43,748 54,548 62,302 21,654 6,622 Income (loss) from discontinued operation, net of tax -- 629 (8,168) 1,523 21 Net income .......................................... $ 43,748 $ 55,177 $ 54,134 $ 23,177 $ 6,643 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share/(1)/ Earnings per share from continuing operations ..... $ 0.99 $ 1.24 $ 1.47 $ 0.53 $ 0.16 Earnings per share ................................ 0.99 1.25 1.28 0.56 0.17 Dilutive average common shares outstanding ........ 44,175,544 43,972,438 42,344,677 41,089,901 40,178,530 - ----------------------------------------------------------------------------------------------------------------------------------- At year end Assets .............................................. $ 6,189,180 $ 4,726,279 $ 3,350,170 $ 2,788,374 $ 2,378,709 Net loans ........................................... 3,389,466 2,737,465 2,026,997 1,661,945 1,335,074 Deposits ............................................ 5,569,647 4,174,598 2,950,277 2,363,616 1,959,710 Other borrowings .................................... 62,996 59,172 49,352 165,542 199,072 Capital securities .................................. 73,372 73,314 -- -- -- Shareholders' equity ................................ 381,822 352,024 286,351 228,236 197,776 Financial ratios Return on average equity ............................ 11.58% 17.53% 20.83% 11.03% 3.46% Return on average assets ............................ 0.88 1.51 1.94 1.00 0.30 Average equity-to-average assets .................... 7.58 8.62 9.33 9.04 8.64 Capital ratios for Imperial Bancorp Tier I leverage ratio ............................... 8.12% 10.28% 9.32% 9.13% 9.17% Tier I capital ratio ................................ 9.59 11.14 9.96 9.96 10.70 Total capital ratio ................................. 10.89 12.48 11.24 11.30 12.10 Average balances Total assets ........................................ $ 4,983,885 $ 3,653,267 $ 2,785,089 $ 2,326,308 $ 2,224,856 Earning assets ...................................... 4,487,719 3,247,448 2,449,148 2,031,551 1,887,389 Loans, net .......................................... 3,318,454 2,397,626 1,836,864 1,540,940 1,361,630 Total deposits ...................................... 4,351,225 3,136,189 2,412,150 2,006,737 1,903,203 Shareholders' equity ................................ 377,854 314,765 259,823 210,188 192,172 Common share and shareholder data/(1)/ Market price, end of year ........................... $ 15.40 $ 30.44 $ 13.47 $ 8.49 $ 4.17 Book value, end of year ............................. 9.12 8.31 6.96 5.65 5.10 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for stock dividends declared and paid in 1994 through 1997, 3-for-2 stock splits effected in 1996 and first quarter 1998, and an 8% stock dividend paid March 5, 1999, to shareholders of record on February 19, 1999. Earnings per share for the current year and all prior periods presented reflect the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." - -------------------------------------------------------------------------------- 4 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, liquidity and capital resources 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, 1998, decreased to $43.7 million, or $0.99 a diluted share, from $55.2 million, or $1.25 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 Imperial Credit Industries, Inc. ("ICII") (NASDAQ: 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 December 31, 1998, on an after-tax basis was $10.6 million, or $0.25 a share, compared with net income of $11.7 million, or $0.27 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 attributed to volatility in the financial markets. 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 Imperial Financial Group ("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 $0.99 a diluted share for the twelve months ended December 31, 1998, compared with $54.5 million, or $1.24 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 $1.29 a diluted share, from $41.3 million, or $0.94 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 DATA) 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) Gain on sale of merchant card company .............. -- (2,054) Restructuring charges .............................. 2,828 -- Consulting expense ................................. -- 2,922 Charitable contribution expense .................... -- 2,105 - -------------------------------------------------------------------------------- NORMALIZED INCOME FROM CONTINUING OPERATIONS .............................. $ 57,126 $ 41,263 - -------------------------------------------------------------------------------- NORMALIZED DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS .............................. $ 1.29 $ 0.94 - -------------------------------------------------------------------------------- /(1)/ Adjustment increases (decreases) reported income. - -------------------------------------------------------------------------------- Earnings per share calculations for all periods presented have been adjusted for an 8% stock dividend paid on March 5, 1999, to shareholders of record as of February 19, 1999. 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 5 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. 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 $920.8 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 $256.8 million for the year ended December 31, 1998, from $201.3 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 5.72% for 1998 from 6.20% 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 20% to $65.7 million for the year ended December 31, 1998, from $81.6 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 68% to $83.9 million for the year ended December 31, 1998, from $50.0 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 and sale of equity warrants made a significant contribution to noninterest income in 1998. Gains on the exercise and sale of warrants totaled $21.7 million for the year ended December 31, 1998, which includes a $16.1 million gain on the exercise and sale of warrants held in a single company, compared with $4.3 million for the prior year. The Company expects to recognize gains on the exercise and sale of equity warrants in the future, but not at the level reported for 1998. Noninterest expense totaled $216.9 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 and sale of equity warrants 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 healthcare 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 0.33% 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 $3.5 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 1.81% of total loans and 205% of nonaccrual loans, compared with $51.1 million, or 1.83% of total loans and 483% 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. 6 STOCK REPURCHASE PROGRAM On September 24, 1998, the Company announced that the Board of Directors had authorized the Company to repurchase 1,080,000 shares of its common stock, adjusted for an 8% stock dividend paid on March 5, 1999, in addition to the existing repurchase plan announced in January 1997 under which 1,782,000 shares, as adjusted for stock dividends and splits, were authorized to be repurchased. As of December 31, 1998, the Company had repurchased 1,849,542 shares, adjusted for the 8% stock dividend, of the total 2,862,000 shares authorized for repurchase. SPIN-OFF In September 1998, the Company canceled plans to spin-off its wholly owned subsidiary, IFG, as a separate publicly traded company. The decision to cancel the spin-off was due to volatility in the financial markets which contributed to a significant decline in the market value of ICII common stock. The proposed transaction involved the spin-off, in a tax-free distribution to shareholders, of a portion of the Company's specialty lending and finance businesses (The Lewis Horwitz Organization, the Small Business Administration lending division ("SBA"), Imperial Trust Company and the Company's 24.3% ownership interest in ICII) into IFG. The distribution had been set to occur on October 1, 1998. Noninterest expense for 1998 includes a $4.9 million restructuring charge recorded in the third quarter for the canceled spin-off. The restructuring charge included $2.4 million to establish an allowance for estimated expenses incurred during the restructuring process. At December 31, 1998, the balance of the restructuring allowance was $1.3 million. INVESTMENT IN ICII STOCK In December 1998, the Company announced plans to sell its 8.9 million shares of ICII common stock. The Company is actively pursuing opportunities to sell these shares. STOCK DIVIDEND On February 3, 1999, the Company announced an 8% stock dividend paid on March 5, 1999, to shareholders of record as of February 19, 1999. ORGANIZATION In January 1998, the Company increased its ownership interest in U S Audiotex, LLC, to 80%. U S Audiotex, located in San Ramon, California, provides payment processing services to counties and cities throughout the country. It is currently participating in a pilot program to provide credit card processing for the Internal Revenue Service. In September 1998, the Company acquired Houston, Texas-based Altair Corporation for approximately $4.4 million in cash and stock. Altair is a leading provider of software systems to bankruptcy trustees and practitioners. During the fourth quarter of 1998, the Company acquired bank charters in Arizona for $800,000 and Colorado for $1.1 million. Following acquisition of the charters, the Company merged its Imperial Bank Arizona subsidiary with Imperial Bank to form an Arizona banking office of Imperial Bank and opened a banking office in Denver, Colorado. 7 EARNINGS PERFORMANCE AVERAGE BALANCES, YIELDS AND RATES PAID /(1)/ - ------------------------------------------------------------------------------- 1998 - ------------------------------------------------------------------------------- INTEREST AVERAGE INCOME/ AVERAGE (DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE % - ------------------------------------------------------------------------------- Earning assets: Loans /(2)/ ............................. $ 3,318,454 $294,623/(3)/ 8.88% Trading instruments ..................... 32,717 1,813 5.54 Securities available for sale ........... 666,163 37,425 5.62 Securities held to maturity ............. 4,004 287 7.17 Federal funds sold and securities purchased under resale agreements ...... 454,651 24,170 5.32 Loans held for sale ..................... 11,730 1,141 9.73 - ------------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS $ 4,487,719 $359,459 8.01% - ------------------------------------------------------------------------------- Allowance for loan losses ................ (58,124) Cash ..................................... 341,385 Other assets ............................. 212,905 ------------- Total assets ............................ $ 4,983,885 ------------- Interest-bearing liabilities: Savings ................................. $ 27,247 $ 691 2.54% Money market ............................ 949,634 31,618 3.33 Time - under $100,000 .................. 189,387 10,875 5.74 Time - $100,000 and over ................ 890,686 47,482 5.33 - ------------------------------------------------------------------------------- TOTAL INTEREST-BEARING DEPOSITS $ 2,056,954 $ 90,666 4.41% - ------------------------------------------------------------------------------- Short-term borrowings ................... 97,350 5,299 5.44 Long-term borrowings: Floating rate notes and fixed rate debentures ........................... 3,141 232 7.39 Capital securities .................... 73,342 6,451 8.80 - ------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES $ 2,230,787 $102,648 4.60% - ------------------------------------------------------------------------------- Demand deposits ......................... 2,294,271 Other liabilities ....................... 80,973 Shareholders' equity .................... 377,854 ------------- Total liabilities and shareholders' equity ............................... $ 4,983,885 ------------- Net interest income/net interest margin.. $256,811 5.72% ------------------------ - ------------------------------------------------------------------------------- (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, $19.8 million, $9.7 million and $5.4 million for the years ended December 31, 1998, 1997, 1996 and 1995, respectively. NET INTEREST INCOME: The Company's operating results depend primarily on net interest income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. For the year ended December 31, 1998, net interest income increased to $256.8 million from $201.3 million for 1997. The increase in net interest income was driven by growth in earning assets, primarily loans. Total average earning assets increased to $4.5 billion for the year ended December 31, 1998, from $3.2 billion for 1997. Average loan balances increased $920.8 million to $3.3 billion for 1998 from $2.4 billion for the year earlier. Increases in the average balance of securities available for sale and Federal funds sold also contributed to the increase in net interest income for 1998 compared with 1997. The Company's net interest margin decreased to 5.72% for the year ended December 31, 1998, from 6.20% for 1997. 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 8.88% for 1998 from 9.72% 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. 8
- ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE (DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE % BALANCE EXPENSE RATE % BALANCE EXPENSE RATE% - ----------------------------------------------------------------------------------------------------------------------------------- Earning assets: Loans /(2)/ ....................... $ 2,397,626 $233,124(3) 9.72% $1,836,864 $173,734(3) 9.46% $1,540,940 $143,627(3) 9.32% Trading instruments ............... 37,604 2,473 6.58 59,767 2,971 4.97 52,759 3,516 6.66 Securities available for sale ..... 564,563 33,239 5.89 357,837 21,675 6.06 265,422 17,349 6.54 Securities held to maturity ....... 4,130 292 7.07 4,313 306 7.09 5,619 311 5.53 Federal funds sold and securities purchased under resale agreements 237,186 13,145 5.54 185,659 9,970 5.37 164,359 9,707 5.91 Loans held for sale ............... 6,339 699 11.03 4,708 500 10.62 2,452 269 10.97 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS $ 3,247,448 $282,972 8.71% $2,449,148 $209,156 8.54% $2,031,551 $174,779 8.60% - ----------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses .......... (42,108) (39,429) (39,993) Cash ............................... 269,772 249,341 210,500 Other assets ....................... 178,155 126,029 124,250 -------------- -------------- -------------- Total assets ...................... $ 3,653,267 $2,785,089 $2,326,308 -------------- -------------- -------------- Interest-bearing liabilities: Savings ........................... $ 20,923 $ 527 2.52% $ 18,277 $ 456 2.49% $ 24,554 $ 613 2.50% Money market ...................... 769,225 25,259 3.28 485,295 14,802 3.05 442,702 12,614 2.85 Time - under $100,000.............. 148,676 8,473 5.70 218,064 12,467 5.72 233,726 14,682 6.28 Time - $100,000 and over .......... 706,684 38,527 5.45 671,357 36,826 5.49 462,818 27,582 5.96 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING DEPOSITS . $ 1,645,508 $ 72,786 4.42% $1,392,993 $ 64,551 4.63% $1,163,800 $ 55,491 4.77% - ----------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings ............. 76,303 4,072 5.34 61,361 3,160 5.15 72,077 4,135 5.74 Long-term borrowings: Floating rate notes and fixed rate debentures .......... 3,942 270 6.85 5,154 343 6.66 7,260 528 7.27 Capital securities .............. 50,803 4,509 8.88 -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES .................. $ 1,776,556 $ 81,637 4.60% $1,459,508 $ 68,054 4.66% $1,243,137 $ 60,154 4.84% - ----------------------------------------------------------------------------------------------------------------------------------- Demand deposits ................... 1,490,681 1,019,157 842,937 Other liabilities ................. 71,265 46,601 30,046 -------------- -------------- -------------- Shareholders' equity .............. 314,765 259,823 210,188 -------------- -------------- -------------- Total liabilities and shareholders' equity ........... $ 3,653,267 $2,785,089 $2,326,308 -------------- -------------- -------------- Net interest income/net interest margin................. $201,335 6.20% $141,102 5.76% $114,625 5.64% -------------------- -------------------- ------------------ - -----------------------------------------------------------------------------------------------------------------------------------
The prime rate averaged 8.36% for 1998 compared with 8.44% for 1997. Loans tied to LIBOR tend to produce a lower yield. In recent years, the Company has experienced a trend in the market that favors LIBOR-based loan products, which has contributed to an increase in LIBOR-based loans in the portfolio. The yield on commercial loans was also impacted by the increase in nonaccrual loans. To a lesser extent, the increase in short-term Federal funds sold as a percentage of total average earning assets also contributed to the decline in the net interest margin for 1998 compared with 1997. The level of Federal funds sold tends to correspond with demand deposit balances. 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 Analysis of Changes in Net Interest Margin located on page 67 illustrates that the growth in net interest income and the net interest margin is substantially due to growth in the loan portfolio. 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 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 9 Company's reported net interest income and noninterest expense would have been reduced by $27.2 million and $18.7 million, respectively, for the years ended December 31, 1998 and 1997. The net interest margin would have been 5.12% for 1998 and 5.63% for 1997. NONINTEREST INCOME: Noninterest income totaled $65.7 million for the year ended December 31, 1998, compared with $81.6 million for 1997. The table below provides the major components of noninterest income for 1998 and 1997: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------- Service charges on deposit accounts .............. $ 6,705 $ 5,473 Trust fees ....................................... 8,608 7,840 Gain on origination and sale of loans ............ 4,764 3,944 Equity in net (loss) income of Imperial Credit Industries, Inc. ......................... (18,205) 20,260 Other service charges and fees ................... 16,537 10,622 Merchant and credit card fees .................... 7,242 3,570 International fees ............................... 11,751 7,857 Gain on securities available for sale ............ 173 987 Gain on trading instruments ...................... 1,152 4,482 Gain on sale of investment in Imperial Credit Industries, Inc. ......................... -- 4,977 Gain on exercise and sale of equity warrants ..... 21,672 4,317 Gain on sale of equity investment ................ -- 3,544 Appreciation of donated Imperial Credit Industries, Inc. common stock ................... -- 2,816 Other income ..................................... 5,288 949 ================================================================================ TOTAL ........................................... $ 65,687 $81,638 ================================================================================ Excluding the $18.2 million equity in the net loss of ICII, noninterest income for the year ended December 31, 1998, increased 68% to $83.9 million for 1998 from $50.0 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 transaction processing company for 1997. Noninterest income for 1998 includes gains on the sale and exercise of equity warrants totaling $21.7 million, which includes a $16.1 million gain on the exercise and sale of warrants held in a single company. Significant components also include increases in other service charges and fees ($5.9 million), international fees ($3.9 million) and merchant card processing fees ($3.7 million). The increase in other service charges and fees occurred in factoring fees ($1.9 million), commissions on the sale of nonproprietary mutual funds ($1.9 million), commitment fees ($361,000), loan servicing fees ($333,000) and loan documentation fees ($232,000). The remaining increase in other service charges and fees is spread throughout several smaller categories. Other noninterest income categories that increased for the year ended December 31, 1998, compared with 1997 include other income, which increased $4.3 million due in part to fee income generated by US Audiotex and Altair Corporation totaling $1.7 million, service charges on deposits, which increased by $1.2 million largely due to increased volume, gains on the origination and sale of loans by the Company's SBA lending business ($820,000) and trust fees ($768,000). The increases in noninterest income for 1998 compared with 1997 were partially offset by a $3.3 million reduction in gains on the sale of trading instruments. NONINTEREST EXPENSE: Noninterest expense increased 28% to $216.9 million for the year ended December 31, 1998, from $169.0 million for 1997. The table below provides the major components of noninterest expense for the periods indicated: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) ........................ 1998 1997 - -------------------------------------------------------------------------------- Salary and employee benefits .................. $114,599 $ 85,065 Net occupancy expense ......................... 10,426 9,077 Furniture and equipment ....................... 9,792 6,702 Data processing ............................... 9,969 7,525 Customer services ............................. 27,212 18,663 Net real estate and other assets owned expense ................................ (989) 615 Restructuring charges ......................... 4,880 -- Professional and legal fees ................... 10,777 11,892 Business development .......................... 5,855 5,154 Charitable donations .......................... 288 3,802 Other expense ................................. 24,117 20,536 ================================================================================ TOTAL ........................................ $216,926 $169,031 ================================================================================ The increase in noninterest expense for the year ended December 31, 1998, compared with 1997 occurred primarily in salaries and employee benefits, occupancy and equipment expense, data processing expense and customer services expense. In addition, noninterest expense for 1998 includes restructuring charges of $4.9 million associated with the canceled spin-off of IFG. Noninterest expense growth for the coming year is expected to moderate from the levels experienced in 1998 and 1997. 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, to a lesser extent, the addition of new offices. The average number of full-time equivalent staff increased 24% to 1,136 for 1998 from 917 for 1997. At December 31, 1998, total full-time equivalent staff was 1,229 compared with 1,012 at December 31, 1997. Operations support staff increased by approximately 120 staff at December 31, 1998, compared with year-end 1997. The staff increases were necessary to support the growth in transaction volumes, maintain high levels of customer service and to support key project initiatives such as the 10 Year 2000 project. See- "Year 2000." During 1998, the Company added a loan production office in Virginia, expanded operations at its San Fernando Valley office to a full-service regional office, formed an equipment leasing division and purchased Houston, Texas-based Altair Corporation. The Company also opened a banking office in Denver, Colorado, in November 1998. Benefits expense for the year ended December 31, 1998, includes $4.0 million of commissions paid to employees, related to the exercise and sale of equity warrants compared with $1.3 million for the prior year. The $2.4 million increase in data processing expense for the year ended December 31, 1998, compared with 1997 can be attributed to the following: increased bankcard processing expense due to higher volumes ($810,000), increased software-related expense due to purchase of new software, upgrades of existing software and maintenance ($637,000), increases in data processing equipment expense to support the Company's growth and upgrades of equipment related to the Year 2000 project ($541,000) and increased processing expense associated with the Company's main data processing system ($467,000). 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. Customer services expense increased to $27.2 million for the year ended December 31, 1998, from $18.7 million for 1997. The average balance of these demand deposits increased to $1.4 billion for the year ended December 31, 1998, from $767.1 million for 1997. Other noninterest expense increased $3.6 million for the year ended December 31, 1998, compared with 1997. Noninterest expense includes $1.1 million related to the Company's investment in qualified low income housing tax credits. The Company's gross investment in these tax credits increased to $8.5 million at December 31, 1998, from $2.6 million at December 31, 1997. Other noninterest expense for 1998 reflects increases in a number of categories related to the Company's growth including: travel ($985,000), supplies ($893,000), telecommunications ($822,000), personnel recruiting expense ($639,000), broker fees ($633,000), postage and courier ($626,000) and dues ($351,000). The remaining increases occurred in a number of smaller categories. The increases in noninterest expense were partially offset by a reduction in lawsuit settlement expense ($1.2 million) and expenses associated with the initial formation of IFG that were incurred in 1997 ($1.2 million). INCOME TAXES The Company recorded income taxes of $28.4 million for the year ended December 31, 1998, representing an effective tax rate of approximately 39.4%. For 1997, the Company's income taxes and effective tax rate were $36.5 million and 40.1%, respectively. At December 31, 1998, the Company reported a net deferred tax asset of $21.8 million, compared with a net deferred tax asset of $355,000 at December 31, 1997. The increase in the net deferred tax asset in 1998 compared with the year earlier is largely due to increases in the deferred tax benefits associated with the loan loss provision and deferred compensation accounts totaling $10.2 million and to an $8.3 million decrease in the deferred tax liability associated with the Company's investment in ICII. 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 1999. ASSET LIABILITY MANAGEMENT LIQUIDITY: Liquidity management involves the Company's ability to meet the cash flow requirements of its lending and deposit businesses. For the Company, as with most commercial banking institutions, this involves an ongoing process of managing the cash inflows and outflows associated with a commercial deposit base. The Company's ability to acquire new deposits at pricing levels consistent with management's targets is largely based upon its financial condition and capital base. The Company's liquid assets consist of cash, 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 38% and 62%, respectively, at December 31, 1998. 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 $2.3 billion for the year ended December 31, 1998, compared with $1.5 billion for 1997. The Company's average demand deposits and average shareholders' equity funded 54% and 49% of average total assets for the years ended December 31, 1998 and 1997, 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 11 sold and securities purchased under resale agreements. During 1998, the Company experienced a net cash outflow from its investing activities of $1.4 billion. The net outflow from investing activities can be attributed to a net $648.9 million increase in the Company's loan portfolio and a $681.0 million increase in Federal funds sold. The net outflow from investing activities was offset by $1.4 billion provided by the Company's financing activities due to an increase in deposits. Imperial Bancorp's ("the Parent Company") liquidity is managed through the purchase and sale of securities available for sale. This activity is directly correlated to the sale of commercial paper. The Parent Company's only source of funds for its annual sinking fund obligations on the Floating Rate Notes and Debentures, interest payments on its Junior Subordinated Debentures (see - "Capital Securities") 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, 1998, the Bank had $132.4 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 which attempt to limit the change in pretax net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as interest rates change. 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. 12 The following table sets forth the maturity and rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1998. 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.
- ------------------------------------------------------------------------------------------------------------------------------------ Greater Greater Greater Greater Non- 0-3 than 3-6 than 6-12 than 1-5 than 5 Interest- At December 31, 1998 (Dollars in thousands) Months Months Months Years Years Bearing Total - ------------------------------------------------------------------------------------------------------------------------------------ Earning assets: Trading instruments(1) ................... $ 52,971 $ -- $ -- $ -- $ -- $ -- $ 52,971 Securities available for sale ............ 675,927 584 252 18,051 -- 694,814 Securities held to maturity .............. -- 932 2,966 -- -- -- 3,898 Federal funds sold and securities purchased under resale agreements ....... 1,446,000 -- -- -- -- -- 1,446,000 Loans held for sale(1) ................... 18,287 -- -- -- -- -- 18,287 Loans:(2) Commercial loans ....................... 2,861,639 10,267 12,032 71,957 29,384 29,853 3,015,132 Real estate loans ...................... 328,871 -- 7,794 55,814 8,458 692 401,629 Consumer loans ......................... 34,893 6 18 367 -- 70 35,354 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans .............................. $ 3,225,403 $ 10,273 $ 19,844 $ 128,138 $ 37,842 $ 30,615 $3,452,115 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses ................ -- -- -- -- -- (62,649) (62,649) Non-earning assets ....................... -- -- -- -- -- 583,744 583,744 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets ............................. $ 5,418,588 $ 11,789 $ 20,096 $ 131,104 $ 55,893 $ 551,710 $6,189,180 - ------------------------------------------------------------------------------------------------------------------------------------ Sources of funds: Deposits: Demand ................................. -- -- -- -- -- 3,298,070 3,298,070 Savings ................................ 25,135 -- -- -- -- -- 25,135 Money market ........................... 1,086,959 -- -- -- -- -- 1,086,959 Time - under $100,000 .................. 111,295 37,049 20,035 2,845 -- -- 171,224 Time - $100,000 and over ............... 784,316 166,094 37,180 669 -- -- 988,259 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits ........................... $ 2,007,705 $ 203,143 $ 57,215 $ 3,514 $ -- $ 3,298,070 $5,569,647 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings .................... 60,601 -- -- -- -- -- 60,601 Long-term borrowings: Floating rate notes and fixed rate debentures....................... 1,106 -- 999 -- -- -- 2,105 Other borrowed funds ................... -- -- -- -- 290 -- 290 Capital securities ..................... -- -- -- -- 73,372 -- 73,372 Noninterest-bearing liabilities .......... -- -- -- -- -- 101,343 101,343 Equity ................................... -- -- -- -- -- 381,822 381,822 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and equity ............. $ 2,069,412 $ 203,143 $ 58,214 $ 3,514 $ 73,662 $ 3,781,235 $6,189,180 - ------------------------------------------------------------------------------------------------------------------------------------ Gap before derivative instruments ........ 3,349,176 (191,354) (38,118) 127,590 (17,769) (3,229,525) -- Interest rate swaps - capital securities . 75,000 -- -- -- (75,000) -- -- Interest rate swaps - loans and deposits . 9,000 (5,000) -- -- (4,000) -- -- Gap adjusted for derivative instruments .. $ 3,433,176 $ (196,354) $ (38,118) $ 127,590 $ (96,769) $(3,229,525) $ -- - ------------------------------------------------------------------------------------------------------------------------------------ Cumulative interest sensitivity gap ...... $ 3,433,176 $3,236,822 $3,198,704 $3,326,294 $3,229,525 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------------
(1) Trading instruments and loans held for sale are sold within 90 days. (2) The noninterest-bearing column consists of nonaccrual loans. ================================================================================ 13 At December 31, 1998, the Company maintained a positive one-year gap of approximately $3.2 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 $2.2 billion at December 31, 1997. The increase in the positive cumulative one-year gap for 1998 compared with 1997 is primarily due to the growth in variable-rate commercial loans. In addition, growth in period-end demand deposits led to increased short-term investments in Federal funds sold. The Company's net interest margin is sensitive to sudden changes in interest rates. In addition, 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 and floors with strike prices that generally adjust quarterly and range from 100-250 basis points below or above (depending on the instrument) current market rates at the time the caps and floors were purchased. INTEREST RATE CAPS AND FLOORS: In March 1998, the Company purchased an over-the-counter interest rate cap with a notional value of $1.0 billion. The cap provides protection in the event the three-month LIBOR rate increases above the 8.33% strike price. The unrealized gain on the cap was approximately $454,000 at December 31, 1998. The unamortized premium on the cap was $353,000 at year end. The cap expires in March 2001. In addition, at December 31, 1998, the Company owned interest rate caps and collars with a notional value totaling $25.6 million that hedge specific lending transactions. The unrealized loss on these contracts approximated $31,000 at December 31, 1998. The strike prices on the caps and collars are tied to prime or LIBOR consistent with the pricing on the underlying lending transaction. These caps and collars expire as follows: $9.0 million in the first quarter of 1999, $6.0 million in the second quarter of 1999, $4.0 million in the fourth quarter of 1999 and $6.6 million in the first quarter of 2000. At December 31, 1998, the Company owned exchange traded floors totaling $4.75 billion that expire at the rate of $1.25-$1.75 billion per quarter through the third quarter of 1999. The floors provide the Company protection in the event that the three-month LIBOR rate drops below their respective strike prices. The floors have an average strike price of 4.0%. The unrealized gain on the floors approximated $344,000 at December 31, 1998. The unamortized premium relating to the floors was $1.8 million at year end. Exchange traded floors owned at December 31, 1997, expired at the rate of $1.0 billion per quarter in the first, second and third quarters of 1998. In June 1998, the Company purchased exchange traded floors with a notional value of $1.5 billion. The floors had a strike price of 4.75% and expire in June 1999. In July 1998, the Company purchased exchange traded floors with a notional value of $250.0 million. The floors had a strike price of 4.75% and expire in June 1999. In August 1998, the Company purchased exchange traded floors with a notional value of $500.0 million. The floors had a strike price of 4.75% and expire in September 1999. In October 1998, following a decline in the LIBOR rate, the Company sold the exchange traded floor contracts with a notional amount totaling $4.5 billion in order to reset the strike price on the floors from 4.75% to 4.00%. The Company concurrently purchased exchange traded floor contracts with a notional amount totaling $4.75 billion. The gain on the sale of the floors is being amortized over the term of the original floors and will be fully amortized by the end of the third quarter 1999. The balance of the deferred gain at December 31, 1998, was $3.3 million. INTEREST RATE SWAPS: In June 1998, the Company entered into two fixed-for- floating interest rate swaps with a total notional value of $5.0 million. The swaps require the Company to pay three-month LIBOR and receive a fixed rate of 5.95%. The swaps mature in June 1999. Concurrently, the Company entered into interest rate swaps with its subsidiary, Crown American Bank. The notional amount, maturity and payment due dates on the swaps coincide with the original swaps, however, the payment terms require the Company to pay a fixed rate of 5.95% and receive three-month LIBOR. The purpose of the swaps is to convert to a floating rate a similar amount of one-year fixed rate time certificates of deposit acquired on behalf of Crown American Bank as part of a $35.0 million time deposit acquisition program. The unrealized gain on the swaps approximated $11,000 at December 31, 1998. In July 1998, the Company entered into an interest rate swap with a notional value of $4.0 million. The swap requires the Company to pay a fixed rate of 5.95% and receive three-month LIBOR. The swap matures in July 2004. The purpose of the swap is to convert a fixed rate loan to a commercial borrower to a floating rate. The unrealized loss on the swap approximated $151,000 at December 31, 1998. 14 The following table summarizes the Company's derivative instruments at December 31, 1998 and 1997:
- ----------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1998 NOTIONAL WEIGHTED (DOLLARS IN THOUSANDS) AMOUNT AVERAGE RATE TERMS AND MATURITY - ----------------------------------------------------------------------------------------------------------------------------------- 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 first quarter 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. Interest rate swaps Loans: Pay-fixed rate..................... $ 4,000 5.95% Matures third quarter 2004. Receive-3 month LIBOR.............. $ 4,000 5.31% Deposits: Pay-3 month LIBOR plus 32 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% - ----------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1997 NOTIONAL WEIGHTED (DOLLARS IN THOUSANDS) AMOUNT AVERAGE RATE TERMS AND MATURITY - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate floors purchased Exchange traded.................... $5,250,000 n/a $1.0 billion expiring per quarter in first, second, third and fourth quarter 1998 $1.25 billion expiring first quarter 1999. Interest rate swaps Time deposits: Pay-3 month LIBOR less 10 basis points............................ $ 27,000 5.63% Matures first quarter 2007, callable by the Company first quarter 1998 and semi-annually thereafter. Receive-fixed rate ................ $ 27,000 7.15% Capital securities: Pay-3 month LIBOR ................. $ 75,000 5.75% Matures second quarter 2007. Receive-fixed rate ................ $ 75,000 7.18% - -----------------------------------------------------------------------------------------------------------------------------------
In the first quarter of 1997, the Company sold $27.0 million of ten-year certificates of deposit with a fixed rate of 7.15%. These long-term certificates of deposit were callable by the Company after one year and semi-annually after that. In order to minimize the interest rate risk of paying out a fixed rate for ten years, the Company executed an interest rate swap transaction with a notional value of $27.0 million in the first quarter of 1997. The swap was callable at the option of the counterparty after one year and semi-annually thereafter. The interest rate swap required the Company to pay a rate of three-month LIBOR less 10 basis points, quarterly for ten years. Simultaneously, the Company received quarterly interest payments at a fixed rate of 7.15% for ten years. On July 28, 1998, the swap was called by the counterparty and the Company paid off the certificates of deposit. In April 1997, the Company issued $75.0 million of 9.98% capital securities (the "Capital Securities") and entered into three fixed-for-floating interest rate swaps with a total notional value of $75.0 million in order to convert the Capital Securities to a floating rate. The swaps require the Company to pay three-month LIBOR and receive a fixed rate of 7.18% on $25.0 million, 7.186% on $25.0 million and 7.187% on the remaining $25.0 million. The maturity and fixed payment due dates on the swaps coincide with the call date and payment dates of the Capital Securities. The unrealized gain on the swaps approximated $9.1 million at December 31, 1998. The impact of the Company's derivative financial instruments was a $1.5 million and $507,300 increase in net interest income, and a 3 basis point and 2 basis point increase in net interest margin for the years ended December 31, 1998 and 1997, respectively. For the year ended December 31, 1996, the Company's derivative financial instruments resulted in a $700,000 increase in net interest income and a 3 basis point increase in net interest margin. 15 The following table shows 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, 1998. Market risk sensitive instruments are generally defined as on- and off-balance sheet financial instruments.
- ------------------------------------------------------------------------------------------------------------------- EXPECTED MATURITY DATE AT DECEMBER 31, 1998/(1)/ (DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 - ------------------------------------------------------------------------------------------------------------------- Financial assets: Trading account assets ..................... $ 52,971 $ -- $ -- $ -- $ -- Average interest rate ..................... 5.54% -- -- -- -- Investment securities ...................... 144,332 -- -- 50 -- Average interest rate ..................... 5.22% -- -- 7.99% -- Federal funds sold ......................... 1,446,000 -- -- -- -- Average interest rate ..................... 5.32% -- -- -- -- Loans held for sale ........................ 18,287 -- -- -- -- Average interest rate ..................... 10.48% -- -- -- -- Loans Commercial ................................ 1,525,831 301,380 221,031 343,357 357,582 Average interest rate ................... 8.15% 8.13% 8.34% 8.25% 7.84% Real estate term .......................... 40,825 40,907 8,324 24,779 19,142 Average interest rate ................... 9.58% 8.80% 8.93% 9.48% 8.31% Real estate construction .................. 208,669 50,094 -- -- -- Average interest rate ................... 9.03% 8.81% -- -- -- Consumer .................................. 12,533 11,300 11,336 105 80 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 - ------------------------------------------------------------------------------------------------------------------- Financial liabilities: Deposits: Rate sensitive demand ..................... $ 457,510 $ 366,008 $ 292,806 $ 234,245 $ 187,396 Savings and money market .................. 166,814 155,694 144,572 133,451 122,330 Average interest rate ................... 3.31% 3.31% 3.31% 3.31% 3.31% Time certificates of deposit - under $100,000 .......................... 168,379 2,845 -- -- -- Average interest rate ................... 5.74% 5.16% -- -- -- Time certificates of deposit - over $100,000 ........................... 987,590 669 -- -- -- Average interest rate ................... 5.33% 5.35% -- -- -- Short-term borrowings ..................... 60,601 -- -- -- -- Average interest rate ................... 5.48% -- -- -- -- Long-term borrowings ...................... 2,105 -- -- -- -- Average interest rate ................... 7.07% -- -- -- - ------------------------------------------------------------------------------------------------------------------- TOTAL FINANCIAL LIABILITIES $1,842,999 $ 525,216 $ 437,378 $ 367,696 $ 309,726 - ------------------------------------------------------------------------------------------------------------------- Off-balance sheet financial instruments: Interest rate swaps ........................ $ 5,000 $ -- $ -- $ -- $ -- Interest rate caps and collars purchased ... 18,993 6,600 1,000,000 -- -- Interest rate floors purchased ............. 4,750,000 -- -- -- -- Spot and forwards to purchase foreign currency .......................... 71,259 -- -- -- -- Spot and forwards to sell foreign currency .......................... 71,005 -- -- -- -- - ----------------------------------------------------------------------------------------- ESTIMATED FAIR (DOLLARS IN THOUSANDS) THEREAFTER TOTAL VALUE - ----------------------------------------------------------------------------------------- Financial assets: Trading account assets ..................... $ -- $ 52,971 $ 52,971 Average interest rate ..................... -- Investment securities ...................... 554,330 698,712 698,712 Average interest rate ..................... 5.66% Federal funds sold ......................... -- 1,446,000 1,446,000 Average interest rate ..................... -- Loans held for sale ........................ -- 18,287 19,416 Average interest rate ..................... -- Loans Commercial ................................ 265,951 3,015,132 2,999,639 Average interest rate ................... 7.78% Real estate term .......................... 8,889 142,866 142,458 Average interest rate ................... 8.05% Real estate construction .................. -- 258,763 262,138 Average interest rate ................... -- Consumer .................................. -- 35,354 35,235 Average interest rate ................... -- - ----------------------------------------------------------------------------------------- TOTAL FINANCIAL ASSETS $ 829,170 $ 5,668,085 $ 5,656,569 - ----------------------------------------------------------------------------------------- Financial liabilities: Deposits: Rate sensitive demand ..................... $ 749,585 $ 2,287,550 $ 2,287,550 Savings and money market .................. 389,233 1,112,094 1,112,094 Average interest rate ................... 3.31% Time certificates of deposit - under $100,000 ........................... -- 171,224 171,379 Average interest rate ................... -- Time certificates of deposit - over $100,000 ........................... -- 988,259 988,059 Average interest rate ................... -- Short-term borrowings ..................... -- 60,601 60,601 Average interest rate ................... -- Long-term borrowings ...................... 73,662 75,767 79,688 Average interest rate ................... -- - ----------------------------------------------------------------------------------------- TOTAL FINANCIAL LIABILITIES $ 1,212,480 $ 4,695,495 $ 4,699,371 - ----------------------------------------------------------------------------------------- Off-balance sheet financial instruments: Interest rate swaps ........................ $ 79,000 -- $ 8,916 Interest rate caps and collars purchased ... -- (353) 423 Interest rate floors purchased ............. -- (1,813) 344 Spot and forwards to purchase foreign currency .......................... -- 1,661 1,661 Spot and forwards to sell foreign currency .......................... -- (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 demand 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 interest 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. Total for off-balance sheet financial instruments represents carrying amount. Expected maturity represents notional amount. ================================================================================ 16 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 $68.9 million at December 31, 1998. For 1998 and 1997, cash and due from banks comprised approximately 7% of the Company's average total assets. SECURITIES: Trading instruments increased to $53.0 million at December 31, 1998, from $35.8 million at December 31, 1997. 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, 1998. The balance of SBA loan certificates increased to $45.3 million at December 31, 1998, from $26.8 million at December 31, 1997. In addition to trading instruments, the Company's investment securities portfolio consists primarily of SBA securities, U.S. Treasury securities, U.S. Government agency securities, and mutual funds invested in short-term government securities. The Company currently classifies its entire investment portfolio as available for sale, with the exception of a $3.9 million investment in Industrial Revenue Bonds, 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 loss on securities available for sale of $889,000 at December 31, 1998, compared with a net unrealized gain of $2.9 million at December 31, 1997. The following table provides a summary of the Company's investment portfolio by type of security for the periods indicated: - -------------------------------------------------------------------------------- AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------- Securities held to maturity: Industrial development bonds ............. $ 3,898 $ 4,026 $ 4,193 - -------------------------------------------------------------------------------- TOTAL .................................. $ 3,898 $ 4,026 $ 4,193 - -------------------------------------------------------------------------------- Securities available for sale: U.S. Treasury and federal agencies ....... $563,355 $615,207 $387,667 Mutual funds invested in short-term government securities ................... 112,579 37,532 31,095 Other securities ......................... 18,880 16,527 7,574 - -------------------------------------------------------------------------------- TOTAL .................................. $694,814 $669,266 $426,336 ================================================================================ The balance of available for sale investment securities increased to $694.8 million at December 31, 1998, from $669.3 million at December 31, 1997. The average balance of investment securities increased by $101.6 million to $666.2 million at December 31, 1998, from $564.6 million for 1997. 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 $1.4 billion at December 31, 1998, from $765.0 million at December 31, 1997. The average balance of these investments increased approximately $217.5 million for 1998 compared with the prior year. The increases in the year-end and average balances of investment securities and Federal funds sold is a function of the growth in demand deposits during 1998. LOANS HELD FOR SALE: Loans held for sale totaled $18.3 million and $3.8 million at December 31, 1998 and 1997, respectively. SBA loans originated by the Company comprise the 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 broad range of products designed to meet the credit needs of its borrowers in targeted industries. The Company's primary lending activities include: commercial loans, asset-based loans, loans to emerging growth companies, accounts receivable factoring, SBA loans, and medium-term real estate loans secured by commercial properties and loan participations and syndications. The Company also offers construction financing to developers of moderately priced housing. 17 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) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- Commercial loans .................... $3,015 $2,350 $1,595 $1,238 $ 920 Loans secured by real estate: Real estate term loans ............. 143 233 362 389 337 Interim construction loans ......... 259 175 86 65 117 Consumer loans ...................... 35 31 20 7 1 - -------------------------------------------------------------------------------- TOTAL LOANS ...................... $3,452 $2,789 $2,063 $1,699 $1,375 ================================================================================ The loan portfolio totaled $3.5 billion at December 31, 1998, an increase of $663.0 million from year-end 1997. Commercial loan balances increased by $665.0 million, or 28%, for 1998 compared with 1997. The Company experienced strong loan demand in its core California markets during 1998. In addition, loan balances at out-of-state offices grew to $234.1 million at December 31, 1998, from $131.8 million at December 31, 1997. Management anticipates overall loan growth in the 15-20% range for 1999. Commercial loans comprised 87% of the total loan portfolio at December 31, 1998, up from 84% of the total portfolio at December 31, 1997. As illustrated in the following table, 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. The Company experienced loan growth across most industry sectors with substantial growth in loans to manufacturing, entertainment, high technology, healthcare, title and escrow and retail trade businesses. The following table sets forth the distribution of average commercial loans by industry type: - -------------------------------------------------------------------------------- 1998 1997 AVERAGE PERCENT OF AVERAGE PERCENT OF (DOLLARS IN THOUSANDS) BALANCE PORTFOLIO BALANCE PORTFOLIO - -------------------------------------------------------------------------------- Industry type: Manufacturing ................ $ 507,298 17.62% $ 293,410 15.23% Entertainment ................ 359,804 12.50 234,479 12.17 Title/escrow ................. 357,799 12.43 122,072 6.34 High technology .............. 276,707 9.61 164,175 8.52 Healthcare ................... 203,834 7.08 136,283 7.07 Wholesale trade .............. 196,582 6.83 168,362 8.74 Retail trade ................. 161,415 5.61 101,927 5.29 Professional services ........ 149,541 5.19 102,361 5.31 Real estate services ......... 137,730 4.78 122,734 6.37 Consumers .................... 129,636 4.50 62,390 3.24 Gaming ....................... 87,489 3.04 77,355 4.02 Distribution ................. 73,984 2.57 60,167 3.12 Apparel and textile .......... 53,931 1.87 58,481 3.04 Other ........................ 182,852 6.37 222,345 11.54 - -------------------------------------------------------------------------------- TOTAL ...................... $2,878,602 100.00% $1,926,541 100.00% ================================================================================ Total real estate loans decreased slightly to $402.0 million at December 31, 1998, from $408.0 million at December 31, 1997. A $90.0 million decrease in the Company's term real estate loans, due to payoffs, was largely offset by an $84.0 million increase in construction loans. Growth in the Company's construction loan portfolio occurred primarily in the affordable housing segment of the market. 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 retail facilities. While 18 real estate lending activities are collateralized by real property, these transactions are subject to similar credit evaluation, underwriting and monitoring standards as those applied to commercial loans. At December 31, 1998, 96% of the Company's real estate loans were geographically concentrated in California and 4% were to borrowers outside of California. A certain degree of risk is inherent in the extension of credit. The Company assesses and manages credit risk on an ongoing basis through diversification, lending limits, credit review, approval policies and internal monitoring. As a part of the control process, an independent credit review function regularly examines the Company's loan portfolio. In addition, the Company's lending policies require extensive evaluation of new credit requests and continuing internal review of existing credits in order to 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. Nonaccrual loans increased $20.0 million to $30.6 million at December 31, 1998, from $10.6 million at year-end 1997. The increase in nonaccrual loans from year-end 1997 reflects additions totaling $69.9 million, offset in part by charge-offs of nonaccrual loans totaling $13.0 million, payments collected on nonaccrual loans totaling $12.5 million, a sale of $11.1 million of nonaccrual entertainment loans, a transfer of $1.8 million of nonaccrual loans to OREO and $11.5 million of nonaccrual loans that were returned to performing status. The Company financed the sale of the nonaccrual entertainment loans to a new borrower. No gain or loss was recognized on the sale. Interest forgone on nonaccrual loans approximated $1.4 million for 1998 and $1.3 million for 1997. At December 31, 1998, there were $364,000 of government-guaranteed SBA loans that 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 $9.8 million at December 31, 1998, a $14.2 million reduction from $24.0 million at December 31, 1997. Additions to restructured loans as of December 31, 1998, totaling $5.7 million were offset by decreases due to the payoff of a $14.3 million loan on a shopping center, the removal of two loans totaling $4.6 million from restructured status, and to the receipt of payments on restructured loans totaling approximately $1.0 million. 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 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 $2.3 million at December 31, 1998, and $3.3 million, net of a $1.1 million valuation allowance, at December 31, 1997. Seven real estate properties totaling $1.9 million were added to OREO during 1998. The Company sold eight OREO properties during 1998. The book value of the OREO sold was $2.5 million. Payments totaling $395,000 were received on OREO property during 1998. The Company is actively marketing the remaining properties. 19 Detailed information regarding nonaccrual loans, restructured loans and real estate and other assets owned is presented in the table below for the periods indicated:
- --------------------------------------------------------------------------------------------------------- AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial loans .......................... $ 29,853 $ 8,675 $ 9,382 $ 11,714 $ 10,884 Real estate loans ......................... 692 1,903 10,760 17,212 7,272 Consumer loans ............................ 70 -- 248 -- -- - --------------------------------------------------------------------------------------------------------- TOTAL NONACCRUAL LOANS .................. $ 30,615 $ 10,578 $ 20,390 $ 28,926 $ 18,156 - --------------------------------------------------------------------------------------------------------- Allowance for loan losses as a percent of total nonaccrual loans ........ 204.6% 483.5% 176.8% 129.3% 220.7% Total nonaccrual loans as a percent of total loans outstanding ............... 0.89 0.38 0.99 1.70 1.32 - --------------------------------------------------------------------------------------------------------- Restructured loans ......................... $ 9,770 $ 23,970 $ 28,681 $ 33,608 $ 5,948 - --------------------------------------------------------------------------------------------------------- Real estate and other assets owned: Real estate and other assets owned, gross . $ 2,309 $ 4,373 $ 2,895 $ 15,015 $ 35,446 Less valuation allowance .................. -- (1,089) (769) (4,686) (6,475) - --------------------------------------------------------------------------------------------------------- REAL ESTATE AND OTHER ASSETS OWNED, NET . $ 2,309 $ 3,284 $ 2,126 $ 10,329 $ 28,971 - --------------------------------------------------------------------------------------------------------- TOTAL ................................... $ 42,694 $ 37,832 $ 51,197 $ 72,863 $ 53,075 =========================================================================================================
The following tables provide information on impaired loans for the periods indicated: - -------------------------------------------------------------------------------- NET CARRYING SPECIFIC NET (DOLLARS IN THOUSANDS) VALUE ALLOWANCE BALANCE - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- December 31, 1997 Loans with specific allowances ........................... $ 85,612 $(11,881) $ 73,731 Loans without specific allowances ........................... 7,374 -- 7,374 - -------------------------------------------------------------------------------- TOTAL ................................. $ 92,986 $(11,881) $ 81,105 ================================================================================ Impaired loans were classified as follows: - -------------------------------------------------------------------------------- AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------- Current ........................................ $27,414 $79,109 Past due ....................................... 3,564 3,299 Nonaccrual ..................................... 30,615 10,578 - -------------------------------------------------------------------------------- TOTAL ......................................... $61,593 $92,986 ================================================================================ At December 31, 1998 and 1997, the Company had classified $61.6 million and $93.0 million, respectively, of its loans as impaired with specific allowances of $12.8 million and $11.9 million, respectively. At December 31, 1998, 15% of the impaired loans were secured by real estate compared with 83% at December 31, 1997. Impaired loans secured by real estate decreased to $9.5 million at December 31, 1998, from $78.4 million at December 31, 1997, primarily due to payoffs received. The Company's average recorded investment in impaired loans for the years ended December 31, 1998 and 1997, was $78.6 million and $101.3 million, respectively. During 1998 and 1997, total interest recognized on impaired loans, on a cash basis, was $5.8 million and $8.5 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. Management 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's determination of the level of the allowance for loan losses, and correspondingly, the provision for loan losses is based upon various judgments and assumptions, including general economic conditions (especially in California), loan portfolio composition and concentrations, prior loan loss experience, collateral value, identification of problem and potential problem loans and other relevant data to identify the risks in the loan portfolio. Management believes that the allowance for loan losses was adequate at December 31, 1998. Future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. 20 At December 31, 1998, the allowance for loan losses was $62.6 million, or 1.81% of total loans, compared with $51.1 million, or 1.83% of total loans, at December 31, 1997. The following table summarizes activity in the allowance for loan losses for the periods indicated:
- -------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses: Balance, beginning of year ............... $ 51,143 $ 36,051 $ 37,402 $ 40,072 $ 42,800 Loans charged off: Commercial ............................... (21,487) (8,938) (7,265) (13,432) (9,120) Real estate .............................. (2,248) (1,423) (3,734) (7,470) (8,506) Consumer ................................. (58) (4) (26) (60) (108) - -------------------------------------------------------------------------------------------------------------------------- Total loans charged off ................ $ (23,793) $ (10,365) $ (11,025) $ (20,962) $ (17,734) - -------------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial ............................... 1,761 1,056 2,745 1,690 2,729 Real estate .............................. 154 1,493 12 445 47 Consumer ................................. 9 19 21 35 56 - -------------------------------------------------------------------------------------------------------------------------- Total loan recoveries .................. $ 1,924 $ 2,568 $ 2,778 $ 2,170 $ 2,832 - -------------------------------------------------------------------------------------------------------------------------- Net loans charged off .................... (21,869) (7,797) (8,247) (18,792) (14,902) Provision for loan losses ................ 33,375 22,892 6,881 16,122 12,174 Provision for loan losses of discontinued operation .................. -- (3) 15 -- -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF YEAR ...................... $ 62,649 $ 51,143 $ 36,051 $ 37,402 $ 40,072 - -------------------------------------------------------------------------------------------------------------------------- Loans outstanding at end of year .......... $ 3,452,115 $ 2,788,608 $ 2,063,048 $ 1,699,347 $ 1,375,146 - -------------------------------------------------------------------------------------------------------------------------- Average amount of loans outstanding ....... $ 3,318,454 $ 2,397,626 $ 1,836,864 $ 1,540,940 $ 1,361,630 - -------------------------------------------------------------------------------------------------------------------------- Ratio of net charge-offs to average loans ................................... 0.66% 0.33% 0.45% 1.22% 1.09% Ratio of allowance for loan losses to average loans ........................ 1.89 2.13 1.96 2.43 2.94 Ratio of allowance for loan losses to loans outstanding at end of year .................................... 1.81 1.83 1.75 2.20 2.91 Ratio of provision for loan losses to net charge-offs ...................... 153 294 83 86 82 ==========================================================================================================================
The provision for loan losses totaled $33.4 million for the year ended December 31, 1998, an increase of $10.5 million over $22.9 million for 1997. The increase in the loan loss provision from the prior year is due to growth in the loan portfolio and to an increase in net charge-offs. Net charge-offs for 1998, totaling $21.9 million, include $10.5 million on one commercial loan to a company in the healthcare industry. 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 0.33% of total average loans, for 1997. Although the Company evaluates the adequacy of its allowance on an overall basis rather than by specific categories of loans, the following table reflects management's allocation of the allowance for loans losses by loan category and the ratio of each loan category to total loans as of the dates indicated:
- --------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 % 1997 % 1996 % 1995 % 1994 % - --------------------------------------------------------------------------------------------------------------------- Commercial ................ $50,465 87% $22,889 84% $17,545 77% $17,365 73% $24,628 66% Real estate ............... 5,245 12 13,120 15 16,248 22 16,773 26 11,515 33 Consumer .................. 141 1 100 1 165 1 809 1 175 1 Unallocated ............... 6,798 -- 15,034 -- 2,093 -- 2,455 -- 3,754 -- - --------------------------------------------------------------------------------------------------------------------- TOTAL .................... $62,649 100% $51,143 100% $36,051 100% $37,402 100% $40,072 100% =====================================================================================================================
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. In 1997, management increased the unallocated portion of the allowance for loan losses to 29% of the total allowance in response to strong growth in the loan portfolio. As projected, 21 the seasoning of the portfolio resulted in the allocation of a greater proportion of the allowance to the growing commercial portfolio in 1998, which reduced the unallocated portion of the allowance from 29% to 11%. Similarly, coverage of nonperforming loans was increased to 483% in 1997, due to strong loan growth and indications of economic weakness in Asia. The resulting increase in entertainment nonaccruals in 1998 reduced allowance coverage of nonaccruals to 205%, an increase from 177% in 1996. FUNDING SOURCES DEPOSITS: Total deposits increased to $5.6 billion at December 31, 1998, from $4.2 billion at December 31, 1997. Noninterest-bearing demand deposits comprised 59% and 57%, respectively, of total deposits at December 31, 1998 and 1997. Average demand deposits increased to $2.3 billion for 1998 from $1.5 billion for 1997, a 54% increase. The growth in average demand deposit balances is primarily due to a $650.0 million increase in the average balance of real estate services deposits. Average interest-bearing deposits grew $411.4 million, or 25%, in 1998 compared with 1997. Average money market accounts increased by $180.4 million, due in part to a $64.2 million increase in bankruptcy deposits, and time certificates of deposit balances grew by $224.7 million. The remaining increase in interest-bearing deposits occurred in savings. The mix of average money market deposits and average time certificates of deposit as a percentage of total average deposits was 22% and 25%, respectively, for 1998 and 25% and 27%, respectively, for 1997. OTHER BORROWINGS: 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 $97.4 million for 1998 compared with $76.3 million for 1997. The increase in short-term borrowings in 1998 compared with 1997 is primarily due to increases in commercial paper and Federal funds purchased and repurchase agreements of $10.7 and $7.3 million, respectively. CAPITAL: Prior to 1997, the primary source of new capital for the Company had been retained earnings from operations, with the 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 $75.0 million of 9.98% capital securities. See - "Capital Securities." At December 31, 1998, shareholders' equity totaled $381.8 million, a $29.8 million, or 8.5%, increase over $352.0 million at December 31, 1997. The Company recorded an additional $2.9 million in 1998 and $4.8 million in 1997 of shareholders' equity 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 1998 and 1997, which is recorded as a component of shareholders' equity, approximated $8.7 million in 1998 and $7.6 million in 1997. 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, 1998, were 9.59% and 10.89%, respectively, compared with 11.14% and 12.48%, respectively, for 1997. The capital securities discussed above qualify as Tier 1 capital. The reduction in the Company's risk-based capital ratios at December 31, 1998, compared with the prior year-end is primarily due to the growth in loans and Federal funds sold. 22 The following table compares the Company's actual capital ratios at December 31, 1998 and 1997, to those required by regulatory agencies for capital adequacy and well capitalized classification purposes:
- ------------------------------------------------------------------------------------------------------------- FOR CAPITAL ADEQUACY ACTUAL PURPOSES (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------- At December 31, 1998 Total capital (to risk-weighted assets): Company ............ $507,556 10.89% Greater than or equal to $373,025 Greater than or equal to 8.0% Bank ............... 480,571 10.45 Greater than or equal to 367,968 Greater than or equal to 8.0% Tier I capital (to risk-weighted assets): Company ............ $447,112 9.59% Greater than or equal to $186,512 Greater than or equal to 4.0% Bank ............... 423,015 9.20 Greater than or equal to 183,984 Greater than or equal to 4.0% Tier I capital (to average assets): Company ............ $447,112 8.12% Greater than or equal to $165,147 Greater than or equal to 3.0% Bank ............... 423,015 7.76 Greater than or equal to 163,454 Greater than or equal to 3.0% - ------------------------------------------------------------------------------------------------------------- At December 31, 1997 Total capital (to risk-weighted assets): Company ............ $471,898 12.48% Greater than or equal to $302,542 Greater than or equal to 8.0% Bank ............... 398,741 10.65 Greater than or equal to 299,519 Greater than or equal to 8.0% Tier I capital (to risk-weighted assets): Company ............ $421,321 11.14% Greater than or equal to $151,271 Greater than or equal to 4.0% Bank ............... 351,890 9.40 Greater than or equal to 149,759 Greater than or equal to 4.0% Tier I capital (to average assets): Company ............ $421,321 10.28% Greater than or equal to $122,973 Greater than or equal to 3.0% Bank ............... 351,890 8.70 Greater than or equal to 121,405 Greater than or equal to 3.0% - ----------------------------------------------------------------------------------------- TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS (DOLLARS IN THOUSANDS) AMOUNT RATIO - ----------------------------------------------------------------------------------------- At December 31, 1998 Total capital (to risk-weighted assets): Company ............ Greater than or equal to $466,281 Greater than or equal to 10.0% Bank ............... Greater than or equal to 459,960 Greater than or equal to 10.0% Tier I capital (to risk-weighted assets): Company ............ Greater than or equal to $279,769 Greater than or equal to 6.0% Bank ............... Greater than or equal to 275,976 Greater than or equal to 6.0% Tier I capital (to average assets): Company ............ Greater than or equal to $275,246 Greater than or equal to 5.0% Bank ............... Greater than or equal to 272,423 Greater than or equal to 5.0% - ------------------------------------------------------------------------------------------ At December 31, 1997 Total capital (to risk-weighted assets): Company ............ Greater than or equal to $378,178 Greater than or equal to 10.0% Bank ............... Greater than or equal to 374,398 Greater than or equal to 10.0% Tier I capital (to risk-weighted assets): Company ............ Greater than or equal to $226,907 Greater than or equal to 6.0% Bank ............... Greater than or equal to 224,639 Greater than or equal to 6.0% Tier I capital (to average assets): Company ............ Greater than or equal to $204,954 Greater than or equal to 5.0% Bank ............... Greater than or equal to 202,342 Greater than or equal to 5.0% - ------------------------------------------------------------------------------------------
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 good 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 8.12% and 10.28% at December 31, 1998 and 1997, respectively, well in excess of the minimum regulatory requirement. 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 proceeds thereof in 9.98% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") issued by the Company and engaging in certain other limited activities. The Junior Subordinated Debentures held by the Trust will mature on December 31, 2026. 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 23 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 prepayable 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 prepayment. 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, 1998. The Company used $67.2 million of the net proceeds from the sale of the Junior Subordinated Debentures to make additional investments in Imperial 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, 1998. YEAR 2000: To fulfill the Company's business responsibility and ensure compliance with regulatory requirements, the Company has established a Year 2000-readiness program ("Y2K") with the objective of having the Company Y2K compliant by mid-1999. The Y2K issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computers that have date-sensitive software may recognize a date using "00" as the year 1900 rather than year 2000. The Company's Y2K readiness program is managed by an enterprise-wide Program Office ("Office") under the guidance of the Company's Management Committee. The Office is staffed with representatives from each of the Company's primary business units. Within some business units, the Office representative is supported by a business unit Y2K project team. The Company's Y2K program is modeled on the approach set forth by the Federal Financial Institutions Examination Council ("FFIEC"). This approach is based on five crucial phases: awareness, assessment, remediation, validation, and implementation. The Company's approach considers the FFIEC guidelines to be a minimum set of prudent business practices needed to become Y2K ready. AWARENESS: As of the end of 1998, the Company has done extensive internal and external communication related to the Y2K issue. The communication has been in the form of customer statement stuffers, Web site disclosures, monthly and quarterly reports to the Company's Management Committee, internal mailings and periodic meetings. ASSESSMENT: The Company has conducted a comprehensive review of its information technology ("IT") and non-IT computer systems. All systems have been evaluated and classified as critical, important or ordinary. Systems requiring upgrades or replacement have been identified. The Company utilizes the services of third-party service providers and software vendors for substantially all of its data processing functions. As such, the Company has focused on monitoring the Y2K compliance progress of its primary vendors and providers. The Company has identified its significant customers as funds providers, funds takers and counterparties. The initial evaluation and assignment of risk for the Company's funds providers, funds takers, and counterparties has been completed. Contingency plans are being designed to mitigate the risks associated with (1) the failure to successfully complete renovation, validation or implementation of its Y2K readiness plan (Remediation Contingency Plan), and (2) the failure of systems at critical dates (Business Resumption Contingency Plan) ("BRCP"). The Company has completed the Remediation Contingency Plan and anticipates completing the BRCP by June 30, 1999. Approximately 50% of the BRCPs being developed by the business units have been submitted to the Office for review. REMEDIATION, VALIDATION AND IMPLEMENTATION: The Company does not employ a programming staff, nor does it customize application code that affects the books of record or customer accounting. The Company's vendors and service providers are committed to delivering Y2K ready capabilities. 24 At December 31, 1998, system testing was approximately 60% complete for critical systems, 65% complete for important systems and 55% complete for ordinary systems. Testing is scheduled for completion by March 1999. Systems requiring remediation are placed into production after testing has been completed and authorization from the business unit has been obtained. Non-IT systems, such as security systems, vault alarms and elevators, have been identified and the Company is in the process of evaluating the Y2K readiness of these systems. Most of the Company's facilities are leased; therefore, the Company's effort to determine that status of Y2K compliance and contingency plans for the non-IT systems has focused on monitoring the progress of the property managers of the leased facilities. The evaluation of leased locations was completed in March 1999. Through this process, seven key sites were identified that will be certified for Y2K readiness through inspection and/or testing of the non-IT systems. It is anticipated that these certifications will be completed by June 30, 1999. COSTS: Based upon its identification and analysis of necessary Y2K updates and enhancements, the Company anticipates that it will incur operating expenses of approximately $2.5 million and capital expenditures of approximately $1.9 million related to the Y2K project. The Company has incurred operating expenses of $1.5 million and capital expenditures of $1.1 million as of December 31, 1998. STATE OF READINESS: The Office presently believes that with updates and upgrades to existing software and minimal conversions to new software, the Company's computer systems will be Y2K compliant. However, the potential impact of the Y2K issue on the financial services industry could be significant due to the interdependent nature of banking transactions. Despite its efforts towards achieving Y2K readiness, the Company could be adversely impacted if the entities with which it transacts business do not address this issue successfully. NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 130 - REPORTING COMPREHENSIVE INCOME: On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") establishing standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. 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. Prior year financial statements have been reclassified to conform with the requirements of SFAS No. 130. SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION: Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131") establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends SFAS Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis consistent with that used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 requires that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise's general-purpose financial statements. It requires that all public business enterprises report information about the revenues derived from the enterprise's products or services (or groups of similar products and services), about the countries in which the enterprise earns revenues and holds assets, and about major customers regardless of whether that information is used in making operating decisions. However, SFAS No. 131 does not require an enterprise to report information that is not prepared for internal use if reporting it would be impracticable. SFAS No. 131 also requires that a public business enterprise report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. 25 SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. This Statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The Company adopted SFAS No. 131 for the year ended December 31, 1998. Prior year disclosures have been presented to conform with the requirements of SFAS No. 131. SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 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 position and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. 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 1997 VERSUS 1996 Net income for the year ended December 31, 1997, was $55.2 million, or $1.25 a diluted share, compared with $54.1 million, or $1.28 a diluted share, for 1996. Results for 1997 and 1996 include net income of $629,000 and a net loss of $8.2 million, respectively, related to the Company's discontinued Precious Metals operation. Net income from continuing operations was $54.5 million, or $1.24 a diluted share, for the year ended December 31, 1997, compared with $62.3 million, or $1.47 a diluted share for 1996. Normalized net income from continuing operations increased to $41.3 million, or $0.94 a diluted share, for the year ended December 31, 1997, from $29.5 million, or $0.70 a diluted share, for 1996. For purposes of this comparison, normalized net income for 1997 excludes equity in the net income of ICII, gains on the sale of ICII stock, appreciation on donated ICII stock, a 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. For 1996, normalized net income excludes equity in the net income of ICII, gains on the sale of ICII stock, appreciation on donated ICII stock and charitable contribution expense associated with the donation of ICII shares to a nonprofit institution. Detail of the normalizing adjustments for 1997 and 1996 are provided in the following table: - -------------------------------------------------------------------------------- FOR THE PERIOD ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 - -------------------------------------------------------------------------------- Income from continuing operations ............. $ 54,548 $ 62,302 After-tax adjustments:(1) Equity in net loss (income) of ICII .......... (11,742) (12,428) Gain on sale of ICII common stock ............ (2,884) (21,102) Appreciation of donated ICII common stock ................................ (1,632) (2,143) Gain on sale of merchant card company ........ (2,054) -- Consulting expense ........................... 2,922 -- Charitable contribution expense .............. 2,105 2,912 - -------------------------------------------------------------------------------- NORMALIZED INCOME FROM CONTINUING OPERATIONS ........................ $ 41,263 $ 29,541 - -------------------------------------------------------------------------------- NORMALIZED DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS ................... $ 0.94 $ 0.70 - -------------------------------------------------------------------------------- (1) Adjustment increases (decreases) reported income. - -------------------------------------------------------------------------------- Normalizing adjustments reduced net income by $13.3 million and $32.8 million for 1997 and 1996, respectively. Earnings per share calculations for all periods reported have been adjusted for an 8% stock dividend paid on March 5, 1999, to shareholders of record on February 19, 1999. The Company's return on average total assets was 1.51% for the twelve months ended December 31, 1997, compared with 1.94% for 1996. Based on normalized earnings from continuing operations, the Company's return on average total assets increased to 1.15% for 1997 from 1.08% for 1996. Return on average shareholders' equity was 17.53% for the year ended December 31, 1997, compared with 20.83% for 1996. The return on average shareholders' equity based on normalized earnings from continuing operations increased to 13.11% for 1997 from 11.37% for 1996. The increase in normalized earnings from continuing operations for the twelve months ended December 31, 1997, compared with 1996, was primarily due to growth in loans, an improved net interest margin and growth in fee-based service revenue. Average loan balances increased approximately 31% to $2.4 billion for 1997 from $1.8 billion for 1996. The Company's net interest margin increased to 6.20% for 1997 from 5.76% for 1996 primarily due to higher loan yields and a modest decrease in the overall cost of funds. The Company's use of derivative financial instruments resulted in a $507,300 increase 26 in net interest income and a 2 basis point increase in net interest margin for 1997. In 1996, use of derivatives resulted in a $700,000 increase in net interest income and a 3 basis point increase in net interest margin. Normalized noninterest income increased by $12.1 million, or 32%, to $50.0 million for the year ended December 31, 1997, from $37.9 million for 1996. The increase in noninterest income for 1997 compared with 1996 was primarily due to growth in fee-based services, particularly item processing fees and trade finance fees, and to increased gains on the exercise and sale of equity warrants. Normalized noninterest expense increased by $37.3 million, or 30%, to $160.4 million for the year ended December 31, 1997, from $123.1 million for 1996. The increase in noninterest expense for 1997 compared with the year earlier was primarily due to growth in salaries and benefits expense, customer services expense, and expenses associated with the formation and proposed spin-off of Imperial Financial Group. The increase in salaries and benefits for the year ended December 31, 1997, compared with 1996 reflects the full-year impact of new offices opened during the latter part of 1996 and additional offices opened in 1997. Support operations were also expanded to support the Company's growth. The average number of equivalent staff increased to approximately 917 for 1997 from 787 for 1996. Incentive compensation, which is tied to Company performance, increased by $5.9 million for 1997 compared with 1996. Customer services expense includes accounting, courier and other deposit-related costs that the Company pays on behalf of its customers in the real estate services industry. Customer services expense is a function of the volume of these deposits and interest rates. Customer services expense increased to $18.7 million for 1997 from $11.2 million for 1996. The average balance of these demand deposits increased to $767.1 million for 1997 from $460.9 million for 1996. Total assets increased 41% to $4.7 billion at December 31, 1997, from $3.4 billion at December 31, 1996. Total loans increased 35% to $2.8 billion at December 31, 1997, from $2.1 billion at December 31, 1996. Total deposits were $4.2 billion at December 31, 1997, an increase of 42% over the $3.0 billion reported at December 31, 1996. Noninterest-bearing demand balances comprised 57% of total deposits at December 31, 1997, compared with 50% of total deposits at December 31, 1996. Shareholders' equity was $352.0 million at December 31, 1997, up from $286.4 million at December 31, 1996. Nonaccrual loans decreased to $10.6 million, or 0.38% of total loans, at December 31, 1997, from $20.4 million, or 0.99% of total loans, at December 31, 1996. Net loan charge-offs for the year ended December 31, 1997, were $7.8 million, or 0.33% of average loans, compared with $8.2 million, or 0.45% of average loans for 1996. The loan loss provision increased to $22.9 million for the year ended December 31, 1997, from $6.9 million for 1996. The increase in the loan loss provision was primarily due to growth in the Company's loan portfolio. Other factors that impacted the level of provision for 1997 included the Company's expansion into selected commercial markets outside of California and to economic developments in Asia and Latin American markets that could potentially impact the Company's entertainment lending. At December 31, 1997, the allowance for loan losses was $51.1 million, or 1.83% of total loans and 483% of nonaccrual loans, compared with $36.1 million, or 1.75% of total loans and 177% of nonaccrual loans, at December 31, 1996. The Company was classified as well capitalized at December 31, 1997 and 1996. The Company's leverage, Tier I and total capital ratios were 10.28%, 11.14% and 12.48%, respectively, at December 31, 1997, and 9.32%, 9.96% and 11.24%, respectively, at December 31, 1996. 27 CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------ IMPERIAL BANCORP AND SUBSIDIARIES AT DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks ........................................................................ $ 355,317 $ 316,600 Trading instruments ............................................................................ 52,971 35,782 Securities available for sale .................................................................. 694,814 669,266 Securities held to maturity (market value of $3,898 and $4,026 for 1998 and 1997, respectively) 3,898 4,026 Federal funds sold and securities purchased under resale agreements ............................ 1,446,000 765,000 Loans held for sale (market value of $19,416 and $4,120 for 1998 and 1997, respectively) ....... 18,287 3,763 Loans: Loans, net of unearned income and deferred loan fees .......................................... 3,452,115 2,788,608 Less allowance for loan losses .............................................................. (62,649) (51,143) - ------------------------------------------------------------------------------------------------------------------------------ TOTAL NET LOANS $ 3,389,466 $ 2,737,465 - ------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net .................................................................... 30,938 23,091 Accrued interest receivable .................................................................... 25,505 22,212 Real estate and other assets owned, net ........................................................ 2,309 3,284 Current income taxes receivable ................................................................ -- 6,086 Deferred tax asset ............................................................................. 21,809 355 Investment in Imperial Credit Industries, Inc. ................................................. 56,796 75,001 Other assets ................................................................................... 91,070 64,348 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 6,189,180 $ 4,726,279 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand ........................................................................................ $ 3,298,070 $ 2,378,830 Savings ....................................................................................... 25,135 23,375 Money market .................................................................................. 1,086,959 939,086 Time - under $100,000 ........................................................................ 171,224 128,543 Time - $100,000 and over ...................................................................... 988,259 704,764 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS $ 5,569,647 $ 4,174,598 - ------------------------------------------------------------------------------------------------------------------------------ Accrued interest payable ....................................................................... 5,428 5,205 Income taxes payable ........................................................................... 1,504 -- Short-term borrowings .......................................................................... 60,601 55,915 Long-term borrowings: Floating rate notes and fixed rate debentures ................................................. 2,105 3,257 Other borrowed funds .......................................................................... 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 .............. 73,372 73,314 Other liabilities .............................................................................. 94,411 61,966 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $ 5,807,358 $ 4,374,255 - ------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity: Common stock--no par, 50,000,000 shares authorized; 41,863,935 shares at December 31, 1998, and 42,374,917 shares at December 31, 1997, issued and outstanding ........................... 224,433 236,186 Accumulated other comprehensive (loss) income, net of tax ...................................... (515) 1,682 Retained earnings .............................................................................. 157,904 114,156 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY $ 381,822 $ 352,024 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,189,180 $ 4,726,279 - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. =============================================================================== 28 CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------- IMPERIAL BANCORP AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Interest income: Loans ..................................................................... $ 294,623 $ 233,124 $ 173,734 Trading instruments ....................................................... 1,813 2,473 2,971 Securities available for sale ............................................. 37,425 33,239 21,675 Securities held to maturity ............................................... 287 292 306 Federal funds sold and securities purchased under resale agreements ....... 24,170 13,145 9,970 Loans held for sale ....................................................... 1,141 699 500 - ------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME $ 359,459 $ 282,972 $ 209,156 - ------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits .................................................................. 90,666 72,786 64,551 Short-term borrowings ..................................................... 5,335 4,072 3,160 Long-term borrowings ...................................................... 6,647 4,779 343 - ------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE $ 102,648 $ 81,637 $ 68,054 - ------------------------------------------------------------------------------------------------------------------- Net interest income ........................................................ 256,811 201,335 141,102 Provision for loan losses .................................................. 33,375 22,892 6,881 - ------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $ 223,436 $ 178,443 $ 134,221 - ------------------------------------------------------------------------------------------------------------------- Noninterest income: Service charges on deposit accounts ....................................... 6,705 5,473 4,892 Trust fees ................................................................ 8,608 7,840 8,592 Gain on origination and sale of loans ..................................... 4,764 3,944 3,222 Equity in net (loss) income of Imperial Credit Industries, Inc. ........... (18,205) 20,260 21,444 Other service charges and fees ............................................ 16,537 10,622 4,981 Merchant and credit card fees ............................................. 7,242 3,570 2,395 International fees ........................................................ 11,751 7,857 5,141 Gain on securities available for sale ..................................... 173 987 229 Gain on trading instruments ............................................... 1,152 4,482 3,197 Gain on sale of investment in Imperial Credit Industries, Inc. ............ -- 4,977 25,650 Gain resulting from sale of stock by Imperial Credit Industries, Inc. ..... -- -- 10,761 Gain on exercise and sale of equity warrants .............................. 21,672 4,317 1,529 Gain on sale of equity investment ......................................... -- 3,544 311 Appreciation of donated Imperial Credit Industries, Inc. common stock ..... -- 2,816 3,698 Other income .............................................................. 5,288 949 3,449 - ------------------------------------------------------------------------------------------------------------------- TOTAL NONINTEREST INCOME $ 65,687 $ 81,638 $ 99,491 - ------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salary and employee benefits .............................................. 114,599 85,065 64,876 Net occupancy expense ..................................................... 10,426 9,077 9,165 Furniture and equipment ................................................... 9,792 6,702 5,048 Data processing ........................................................... 9,969 7,525 6,419 Customer services ......................................................... 27,212 18,663 11,178 Net real estate and other assets owned (income) expense ................... (989) 615 1,876 Restructuring charges ..................................................... 4,880 -- -- Professional and legal fees ............................................... 10,777 11,892 5,967 Business development ...................................................... 5,855 5,154 3,659 Charitable donations ...................................................... 288 3,802 5,024 Other expense ............................................................. 24,117 20,536 14,920 - ------------------------------------------------------------------------------------------------------------------- TOTAL NONINTEREST EXPENSE $ 216,926 $ 169,031 $ 128,132 - ------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes ...................... 72,197 91,050 105,580 Income tax provision ....................................................... 28,449 36,502 43,278 - ------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS $ 43,748 $ 54,548 $ 62,302 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from discontinued operation, net of tax ...................... -- 629 (8,168) - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 43,748 $ 55,177 $ 54,134 - ------------------------------------------------------------------------------------------------------------------- Basic income per share from continuing operations ......................... $ 1.03 $ 1.30 $ 1.54 Diluted income per share from continuing operations ....................... $ 0.99 $ 1.24 $ 1.47 Basic net income per share ................................................ $ 1.03 $ 1.32 $ 1.34 Diluted net income per share .............................................. $ 0.99 $ 1.25 $ 1.28 - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. ================================================================================ 29 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------ IMPERIAL BANCORP AND SUBSIDIARIES ACCUMULATED TOTAL NUMBER OTHER SHARE OF SHARES COMMON RETAINED COMPREHENSIVE HOLDERS' (DOLLARS IN THOUSANDS, EXCEPT NUMBER OF SHARES DATA) OUTSTANDING STOCK EARNINGS INCOME EQUITY - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 ............................... 22,390,223 $ 130,780 $ 94,709 $ 2,747 $ 228,236 - ------------------------------------------------------------------------------------------------------------------------------------ Stock splits and dividends .............................. 14,254,261 27,417 (27,446) -- (29) Common stock issued under employee stock option plans ... 868,339 4,140 -- -- 4,140 Retirement of common stock .............................. (123,684) (1,788) -- -- (1,788) Tax benefit of employee stock options ................... -- 3,199 -- -- 3,199 Comprehensive income: Net income .............................................. -- -- 54,134 -- 54,134 Other comprehensive income, net of tax: Reclassification adjustments, net of tax effect ....... -- -- -- -- -- Unrealized loss on securities available for sale, net of tax effect ($1,118) ........................... -- -- -- (1,541) (1,541) ----------- Total comprehensive income .............................. -- -- -- -- 52,593 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) ................................. 14,998,916 32,968 26,688 (1,541) 58,115 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 ............................... 37,389,139 $ 163,748 $ 121,397 $ 1,206 $ 286,351 - ------------------------------------------------------------------------------------------------------------------------------------ Stock splits and dividends .............................. 3,761,407 62,400 (62,418) -- (18) Common stock issued under employee stock option plans ... 1,379,828 4,787 -- -- 4,787 Retirement of common stock .............................. (125,001) (1,928) -- -- (1,928) Common stock repurchased ................................ (30,456) (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) ................................. 4,985,778 72,438 (7,241) 476 65,673 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 ............................... 42,374,917 $ 236,186 $ 114,156 $ 1,682 $ 352,024 - ------------------------------------------------------------------------------------------------------------------------------------ Common stock issued for acquisition ..................... 400,964 3,922 -- -- 3,922 Common stock issued under employee stock option plans ... 937,596 2,855 -- -- 2,855 Common stock repurchased ................................ (1,849,542) (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 (DECREASE) INCREASE ................................. (510,982) (11,753) 43,748 (2,197) 29,798 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1998 .............................. 41,863,935 $ 224,433 $ 157,904 $ (515) $ 381,822 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. ================================================================================ 30 CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------- IMPERIAL BANCORP AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ......................................................................... $ 43,748 $ 55,177 $ 54,134 Adjustments for non-cash charges (credits): Depreciation and amortization .................................................... (19,983) (14,155) (3,387) Accretion of purchase loan discount .............................................. -- (37) (227) Provision for loan losses ........................................................ 33,375 22,892 6,881 Provision for operational losses in discontinued operation ....................... -- -- 15,485 Provision for real estate and other assets owned ................................. -- 556 476 Equity in net loss (income) of Imperial Credit Industries, Inc. .................. 18,205 (20,260) (21,444) Gains - Imperial Credit Industries, Inc. stock ................................... -- (4,977) (36,411) Gain on exercise and sale of equity warrants ..................................... (21,672) (4,317) (1,529) Gain on sale of equity investment ................................................ -- 3,544 311 (Gain) loss on sale of real estate and other assets owned ........................ (1,164) (352) 151 Loss (gain) on sale of premises and equipment .................................... (9) 9 -- (Benefit) provision for deferred taxes ........................................... (21,454) (2,147) 6,621 Gain on securities available for sale ............................................ (173) (987) (229) Net change in trading instruments ................................................ (17,189) 29,105 (24,837) Net change in loans held for sale ................................................ (14,524) 1,768 (2,883) Net change in accrued interest receivable ........................................ (3,293) (6,665) (263) Net change in accrued interest payable ........................................... 223 (738) 367 Net change in income taxes ....................................................... 7,590 2,401 (4,506) Net change in other liabilities .................................................. 32,445 3,719 17,358 Net change in other assets ....................................................... (18,466) (19,851) (11,552) - ---------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 17,659 $ 44,685 $ (5,484) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from securities held to maturity .......................................... 128 167 183 Proceeds from sale of securities available for sale ................................ 4,293,282 2,901,745 2,785,935 Proceeds from maturities of securities available for sale .......................... 880,760 602,342 294,223 Purchase of securities available for sale .......................................... (5,197,928) (3,745,226) (3,208,635) Proceeds from sale of Imperial Credit Industries, Inc. common stock ................ -- 7,156 35,079 Proceeds from exercise and sale of equity warrants ................................. 10,572 4,458 1,529 Net change in Federal funds sold and securities purchased under resale agreements .. (681,000) (408,000) 68,300 Net change in loans ................................................................ (648,940) (716,649) (358,612) Capital expenditures ............................................................... (14,685) (10,146) (6,425) Proceeds from sale of real estate and other assets owned ........................... 3,972 875 4,207 Proceeds from sale of premises and equipment ....................................... 35 353 -- - ---------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES $(1,353,804) $(1,362,925) $ (384,216) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in demand deposits, savings and money market accounts ................... 1,068,873 1,261,676 482,513 Net change in time deposits ........................................................ 326,176 (37,355) 104,148 Net change in short-term borrowings ................................................ 4,686 11,018 (114,739) Proceeds from issuance of capital securities, net .................................. -- 73,314 -- Net change in long-term borrowings ................................................. (862) (1,198) (1,451) Proceeds from exercise of employee stock options ................................... 2,855 2,859 2,352 Repurchase of common stock ......................................................... (27,243) (470) -- Other .............................................................................. 377 (18) (127) - ---------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,374,862 $ 1,309,826 $ 472,696 - ---------------------------------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND DUE FROM BANKS $ 38,717 $ (8,414) $ 82,996 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS, BEGINNING OF YEAR $ 316,600 $ 325,014 $ 242,018 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS, END OF YEAR $ 355,317 $ 316,600 $ 325,014 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to consolidated financial statements. ================================================================================ 31 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, majority and minority-owned subsidiaries are summarized below. Certain amounts in the Consolidated Financial Statements for 1997 and 1996 have been reclassified to conform with the current year presentation. (a) Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly 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, 1998, the Company owned 8.9 million shares of Imperial Credit Industries, Inc. ("ICII") stock at an equivalent book value of $6.35 per share, representing approximately 24.3% of all outstanding ICII shares. The Company does not exercise significant control over the operations of ICII, therefore, the results of ICII operations are accounted for in the Company's Consolidated Financial Statements as an equity investment. The results of operations of ICII are reflected as "Equity in net (loss) income of Imperial Credit Industries, Inc." in the Consolidated Statement of Income. (b) Basis of Financial Statement Presentation The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles. In preparing the Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowances for loan losses and real estate and other assets owned. While management believes that these allowances are currently adequate, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as a part of their examination process, periodically review the allowances for loan losses and real estate and other assets owned. Such agencies may require the Company to recognize additions to these allowances based on their judgments about information available to them at the time of their examination. (c) Investments Purchases and sales of investments are recorded on the trade date. Amortization of premiums and accretion of discounts are recognized in interest income on securities held to maturity and securities available for sale using the interest method in the Consolidated Statement of Income. Trading Instruments Securities: Trading instruments, primarily Small Business Administration ("SBA") loan certificates, 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 futures positions, are valued at prevailing market rates. Realized and unrealized gains and losses are included in noninterest income as "Gain on trading instruments." Securities Available for Sale The Company holds certain securities, primarily U.S. Treasury and federal agency securities and mutual funds invested in short-term government securities, to manage its overall liquidity. These securities are carried at fair value. Unrealized gains and losses, net of tax, on securities available for sale are reported as a separate component of other comprehensive income 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. 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. (d) 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. Sale of Investment in Equity Investee The sale of shares of the Company's equity investment in ICII to the public was recorded as "Gain on sale of investment in Imperial Credit Industries, Inc." in the Consolidated Statement 32 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. GAIN RESULTING FROM SALE OF STOCK BY EQUITY INVESTEE The impact on the Company's investment in ICII from the sale of previously unissued stock by ICII to the public was recorded as "Gain resulting from sale of stock by Imperial Credit Industries, Inc." in the Consolidated Statement of Income. This gain resulted from ICII's sale of previously unissued stock in a public offering in 1996 at a per share offering price that exceeded the Company's per share carrying amount for its equity investment in the common stock of ICII. (E) LOANS HELD FOR SALE Currently, the Company designates its SBA loans originated as held for sale. These loans are carried at the lower of aggregate cost or market. Gains on the origination and sale of SBA loans are reported in "Gain on origination and sale of loans" in the Consolidated Statement of Income. (F) LOANS Loans are stated at the amount of principal outstanding. Nonrefundable loan fees and related direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The net deferred fees and costs are recognized into income over the loan term using the interest method. Interest income on loans is accrued as earned. Interest accruals on commercial and real estate loans are generally discontinued whenever the payment of interest or principal is 90 days past due. When a loan is placed on nonaccrual status, the accrued and unpaid interest is charged against current income and recognition of net deferred fees and costs into income is discontinued. 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 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 measure 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. (G) 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. (H) REAL ESTATE AND OTHER ASSETS OWNED Real estate and other assets owned ("OREO") is transferred from the loan portfolio at fair value as determined by an appraisal obtained at the time of foreclosure. The excess carrying value, if any, of the loan over the estimated fair value is charged to the allowance for loan losses. Estimated selling costs and any subsequent impairments in value are recognized through a valuation allowance. Subsequent increases in fair value are credited to income and reduce the valuation allowance, but only to the extent that decreases in fair value were recorded for the same property through the valuation allowance. Gains and losses from sales of OREO and net operating expenses are recorded in "Net real estate and other assets owned (income) expense" in the Consolidated Statement of Income. (I) INCOME TAXES The Company accounts for income taxes using an asset and liability approach, the objective of which is to recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in a company's financial statements or tax returns. The measurement of tax assets and liabilities is based on enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence. 33 (J) 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. (K) INTEREST RATE DERIVATIVE CONTRACTS Interest rate derivative contracts, such as swaps, futures, and options including interest rate caps and floors are used in conjunction with asset liability management strategies to synthetically alter the interest income or expense flows of certain assets or liabilities. Gains and losses on 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. (L) STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the intrinsic value method, to account for stock-based compensation. In accordance with Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company includes pro forma disclosures reflecting the impact of the fair value method on net income and income per share as if SFAS No. 123 had been adopted for purposes of preparing its basic financial statements for stock options granted in years after 1994. (M) 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. 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. (N) 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 strip receivable 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." (O) 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 a method which approximates the interest method. (P) COMPREHENSIVE INCOME On January, 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. 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. Prior year financial statements have been reclassified to conform with the requirements of SFAS No. 130. (Q) SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"), for the year ended December 31, 1998. The statement establishes standards for the way public companies are to report information about operating segments. Operating segments are determined by how management has organized the business for making operating decisions and assessing performance. Prior year disclosures have been presented to conform with the requirements of SFAS No. 131. 34 (R) YEAR 2000 Expenditures over $1,000 to acquire data processing or other equipment related to the Company's Year 2000 Program ("Y2K") are capitalized and included in "Premises and Equipment" in the Consolidated Balance Sheet. Operating expenses related to the Y2K project are expensed as incurred and included in the applicable expense category in the Consolidated Statement of Income. 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) 1998 1997 1996 - -------------------------------------------------------------------------------- Interest paid ........................... $102,425 $82,375 $67,687 Taxes paid .............................. 31,903 34,807 30,902 Taxes refunded .......................... -- 431 244 Significant noncash transactions: Loans transferred to real estate and other assets owned ..................... 1,827 2,762 731 Loans made in conjunction with the sale of real estate owned .............. -- 211 4,100 Net change in accumulated other comprehensive income, net of tax ....... (2,197) 476 (1,541) Acquisition of Altair Corp. for stock ... 3,922 -- -- - -------------------------------------------------------------------------------- NOTE (3) SECURITIES The amortized cost and fair value of securities held to maturity and securities available for sale at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
- ---------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE ------------------------------------------------------------- AMORTIZED AMORTIZED (DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE - ---------------------------------------------------------------------------------------------------------- Due in one year or less .................... $ -- $ -- $144,311 $144,332 Due after one year through five years ...... -- -- 50 50 Due after five years through ten years ..... -- -- 2,254 1,847 Due after ten years ........................ 3,898 3,898 549,088 548,585 - ---------------------------------------------------------------------------------------------------------- TOTAL ..................................... $3,898 $3,898 $695,703 $694,814 - ----------------------------------------------------------------------------------------------------------
The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law totaled $475.0 million and $391.0 million as of December 31, 1998 and 1997, respectively. (A) 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 (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - ------------------------------------------------------------------------------- December 31, 1998 Industrial development bonds ... $3,898 $ -- $ -- $3,898 - ------------------------------------------------------------------------------- TOTAL .......................... $3,898 $ -- $ -- $3,898 - ------------------------------------------------------------------------------- December 31, 1997 Industrial development bonds ... $4,026 $ -- $ -- $4,026 - ------------------------------------------------------------------------------- TOTAL .......................... $4,026 $ -- $ -- $4,026 - ------------------------------------------------------------------------------- There were no gross realized gains or losses on securities held to maturity for the years ended December 31, 1998, 1997 and 1996. 35 (B) 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, 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 - ------------------------------------------------------------------------------- December 31, 1997 U.S. Treasury and federal agencies ................... $612,903 $ 2,378 $ (74) $615,207 Mutual funds ................ 37,532 -- -- 37,532 Other securities ............ 15,928 599 -- 16,527 - ------------------------------------------------------------------------------- TOTAL ....................... $666,363 $ 2,977 $ (74) $669,266 - ------------------------------------------------------------------------------- Mutual funds at December 31, 1998 and 1997, were comprised of government, muni, treasury and cash funds. Other securities at December 31, 1998 and 1997, were primarily interest-only strips associated with the guaranteed portion of Small Business Administration loans. The Bank's broker/dealer subsidiary, Imperial Securities Corp., receives fees for performing certain distribution and service activities on behalf of Monarch Funds (a family of mutual funds). These fees, totaling $3.6 million, $1.7 million and $832,900 for the years ended December 31, 1998, 1997 and 1996, 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, 1998 and 1997, the Company's investment in the Monarch Funds represented approximately 7.8% and 4.6%, respectively, of the net asset value of all Monarch Funds. Gross realized gains and losses related to the available for sale portfolio were $178,000 and $5,000, respectively, for the year ended December 31, 1998, $1.1 million and $71,000, respectively, for the year ended December 31, 1997, and $274,000 and $45,000, respectively, for the year ended December 31, 1996. At December 31, 1998 and 1997, the Company reported unrealized losses, net of tax, of $515,000 and unrealized gains, net of tax, of $1.7 million, 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) 1998 1997 - ------------------------------------------------------------------------------- Balance, end of year ....................... $1,446,000 $ 765,000 Weighted average interest rate, end of year ............................... 4.92% 5.58% Average amount outstanding during the year .................................. $ 454,651 $ 237,186 Weighted average interest rate for the year .............................. 5.32% 5.54% Maximum amount outstanding at any month end ............................. $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. Interest income associated with Federal funds sold and securities purchased under resale agreements totaled $24.2 million, $13.1 million and $10.0 million, respectively, for 1998, 1997 and 1996. NOTE (4) LOANS The carrying amount of loans, net of unearned income and deferred loan fees, consisted of the following: - ------------------------------------------------------------------------------- 1998 1997 CARRYING CARRYING AT DECEMBER 31, (DOLLARS IN THOUSANDS) AMOUNT AMOUNT - ------------------------------------------------------------------------------- Commercial loans ............................. $ 3,015,132 $ 2,350,438 Loans secured by real estate: Real estate term loans ...................... 142,866 232,954 Interim construction loans .................. 258,763 174,767 Consumer loans ............................... 35,354 30,449 - ------------------------------------------------------------------------------- Total loans .................................. 3,452,115 2,788,608 Less allowance for loan losses ............... (62,649) (51,143) - ------------------------------------------------------------------------------- NET LOANS ................................... $ 3,389,466 $ 2,737,465 - ------------------------------------------------------------------------------- 36 Net deferred loan fees included in total loans approximated $13.4 million and $14.7 million at December 31, 1998 and 1997, respectively. The following table contains information for loans deemed impaired: - -------------------------------------------------------------------------------- NET CARRYING SPECIFIC NET (DOLLARS IN THOUSANDS) VALUE ALLOWANCE BALANCE - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- December 31, 1997 Loans with specific allowances ............................... $ 85,612 $(11,881) $ 73,731 Loans without specific allowances ............................... 7,374 -- 7,374 - -------------------------------------------------------------------------------- TOTAL ..................................... $ 92,986 $(11,881) $ 81,105 - -------------------------------------------------------------------------------- Impaired loans were classified as follows: - -------------------------------------------------------------------------------- AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------- Current ............................................ $27,414 $79,109 Past due ........................................... 3,564 3,299 Nonaccrual ......................................... 30,615 10,578 - -------------------------------------------------------------------------------- TOTAL ............................................. $61,593 $92,986 - -------------------------------------------------------------------------------- Impaired loans totaled $61.6 million and $93.0 million at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, 15% and 83%, respectively, of impaired loans were secured by real estate. Impaired loans averaged $78.6 million in 1998, $101.3 million in 1997 and $131.0 million in 1996. During 1998, 1997, and 1996, total interest recognized on the impaired loan portfolio, on a cash basis, was $5.8 million, $8.5 million and $10.3 million, respectively. Nonaccrual loans included as impaired loans totaled $30.6 million, $10.6 million and $20.4 million at December 31, 1998, 1997 and 1996, respectively. There were no commitments to lend additional funds on nonaccrual loans at December 31, 1998. Interest income foregone on nonaccrual loans approximated $1.4 million in 1998, $1.3 million in 1997 and $2.2 million in 1996. Interest income recognized on nonaccrual loans was approximately $1.5 million in 1998, $0.4 million in 1997 and $1.1 million in 1996. At December 31, 1998, 1997 and 1996, restructured loans were $9.8 million, $24.0 million and $28.7 million, respectively. At December 31, 1998, restructured loans were performing in accordance with their modified terms. At December 31, 1998, commitments to lend additional funds on restructured loans totaled $19,000. Interest recorded in 1998, 1997 and 1996 on restructured loans totaled $2.2 million, $2.3 million and $2.7 million, respectively. Interest that would have been recorded in 1998, 1997 and 1996 had the loans performed in accordance with their original terms was $2.3 million, $2.3 million and $2.6 million, respectively. The average yield on restructured loans was 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 high 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 87% of the total loan portfolio at December 31, 1998, up from 84% of the total portfolio at December 31, 1997. As illustrated in the following table, 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. The Company experienced loan growth across most industry sectors, with substantial growth in loans to manufacturing, entertainment, high technology, healthcare, title and escrow and retail trade businesses. 37 The following table sets forth the distribution of average commercial loans by industry type: - -------------------------------------------------------------------------------- 1998 1997 AVERAGE PERCENT OF AVERAGE PERCENT OF (DOLLARS IN THOUSANDS) BALANCE PORTFOLIO BALANCE PORTFOLIO - -------------------------------------------------------------------------------- Industry type: Manufacturing ............... $ 507,298 17.62% $ 293,410 15.23% Entertainment ............... 359,804 12.50 234,479 12.17 Title/escrow ................ 357,799 12.43 122,072 6.34 High technology ............. 276,707 9.61 164,175 8.52 Healthcare .................. 203,834 7.08 136,283 7.07 Wholesale trade ............. 196,582 6.83 168,362 8.74 Retail trade ................ 161,415 5.61 101,927 5.29 Professional services ....... 149,541 5.19 102,361 5.31 Real estate services ........ 137,730 4.78 122,734 6.37 Consumers ................... 129,636 4.50 62,390 3.24 Gaming ...................... 87,489 3.04 77,355 4.02 Distribution ................ 73,984 2.57 60,167 3.12 Apparel and textile ......... 53,931 1.87 58,481 3.04 Other ....................... 182,852 6.37 222,345 11.54 - -------------------------------------------------------------------------------- TOTAL ..................... $2,878,602 100.00% $1,926,541 100.00% - -------------------------------------------------------------------------------- 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 1998, real estate loans totaling $401.6 million do not include commercial loans to real estate related customers totaling $230.1 million. At December 31, 1998, these loans consisted of the following: $64.1 million to real estate agents, operators and lessors, $43.6 million to subcontractors and developers, $90.5 million to title and escrow companies and $31.9 million to builders. The principal amount of loans pledged to secure public deposits and a credit line with the Federal Reserve approximated $231.0 million and $112.0 million at December 31, 1998 and 1997, 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 1998 1997 1996 - -------------------------------------------------------------------------------- Balance, beginning of year ........... $ 51,143 $ 36,051 $ 37,402 Provision for losses ................. 33,375 22,892 6,881 Provision for loan losses of discontinued operation .............. -- (3) 15 Loans charged off .................... (23,793) (10,365) (11,025) Recoveries on loans previously charged off ......................... 1,924 2,568 2,778 - -------------------------------------------------------------------------------- NET CHARGE-OFFS ..................... $(21,869) $ (7,797) $ (8,247) - -------------------------------------------------------------------------------- BALANCE, END OF YEAR ................ $ 62,649 $ 51,143 $ 36,051 - -------------------------------------------------------------------------------- 38 NOTE (6) PREMISES AND EQUIPMENT Premises and equipment consisted of the following: - -------------------------------------------------------------------------------- AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------- Land ........................................... $ 1,765 $ 1,765 Buildings & improvements ....................... 3,980 3,803 Leasehold improvements ......................... 9,041 7,358 Furniture, fixtures & equipment ................ 54,628 40,981 - -------------------------------------------------------------------------------- LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (38,476) (30,816) - -------------------------------------------------------------------------------- PREMISES AND EQUIPMENT, NET $ 30,938 $ 23,091 - -------------------------------------------------------------------------------- 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) 1998 1997 - -------------------------------------------------------------------------------- Real estate owned: Commercial ....................................... $ 1,362 $ -- Acquisition and land development ................. 255 2,719 Single-family residential ........................ 164 988 - -------------------------------------------------------------------------------- TOTAL $ 1,781 $ 3,707 - -------------------------------------------------------------------------------- Other assets owned: Film distribution rights ......................... $ 528 $ 666 - -------------------------------------------------------------------------------- REAL ESTATE AND OTHER ASSETS OWNED, GROSS $ 2,309 $ 4,373 - -------------------------------------------------------------------------------- Less valuation allowance .......................... -- (1,089) - -------------------------------------------------------------------------------- REAL ESTATE AND OTHER ASSETS OWNED, NET $ 2,309 $ 3,284 - -------------------------------------------------------------------------------- The following comprises net real estate and other assets owned (income) expense for the periods indicated: - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------- Net (gain) loss on sale of real estate and other assets owned ........ $(1,164) $ (352) $ 151 Valuation adjustments charged to operations ........................ -- 556 476 Direct holding costs .................. 175 411 1,249 - -------------------------------------------------------------------------------- Net real estate and other assets owned (income) expense $ (989) $ 615 $ 1,876 - -------------------------------------------------------------------------------- The following table sets forth information regarding the Company's valuation allowance for OREO: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------- Balance, beginning of year ........... $ 1,089 $ 769 $ 4,686 Provision for OREO ................... -- 556 476 OREO sold/charged off ................ (1,089) (236) (4,393) - -------------------------------------------------------------------------------- BALANCE, END OF YEAR $ -- $ 1,089 $ 769 - -------------------------------------------------------------------------------- NOTE (8) EARNINGS PER COMMON SHARE/COMMON STOCK OUTSTANDING The Company reports earnings per share ("EPS") in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). 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. 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: 39
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER PER-SHARE PER-SHARE PER-SHARE SHARE DATA) INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT - ---------------------------------------------------------------------------------------------------------------------------------- Basic EPS Income available to shareholders: Income from continuing operations .................... $ 43,748 42,587,418 $ 1.03 $ 54,548 41,900,852 $ 1.30 $ 62,302 40,570,578 $ 1.54 Income (loss) from discontinued operation, net of tax .................... -- -- 629 0.02 (8,168) (0.20) -------- ------ -------- ------ -------- ------ Net income .................... $ 43,748 $ 1.03 $ 55,177 $ 1.32 $ 54,134 $ 1.34 EFFECT OF DILUTIVE SECURITIES Incremental shares - from outstanding common stock options ................. 1,588,126 2,071,586 1,774,099 ---------- ---------- ---------- DILUTED EPS Income available to shareholders: Income from continuing operations .................... $ 43,748 44,175,544 $ 0.99 $ 54,548 43,972,438 $ 1.24 $ 62,302 42,344,677 $ 1.47 Income (loss) from discontinued operations, net of tax ........ -- -- 629 0.01 (8,168) (0.19) -------- ------ -------- ------ -------- ------ Net income $ 43,748 $ 0.99 $ 55,177 $ 1.25 $ 54,134 $ 1.28 - ------------------------------------------------------------------------------------------------------------------------------------
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 March 5, 1999, 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 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. In the fourth quarter of 1996, the Company split its common stock at the ratio of one new share for every two shares outstanding. In the first quarter of 1996, the Company declared and paid an 8% stock dividend. 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 1998 because their effect was antidilutive totaled approximately 515,000 shares. In September 1998, the Company announced that the Board of Directors had authorized the Company to repurchase 1,080,000 shares of its common stock, adjusted for the 8% stock dividend paid in March 1999, in addition to the existing repurchase plan announced in January 1997, under which 1,782,000 shares, as adjusted for stock dividends and splits, were authorized to be purchased. As of December 31, 1998, the Company had repurchased 1,849,542 shares, adjusted for the 8% stock dividend, of the total 2,862,000 shares authorized for repurchase. 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 the dilution from issuances in connection 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 $47.5 million in 1998, $38.5 million in 1997 and $36.8 million in 1996. 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 who provide accounting, courier and other deposit-related services for these customers. The costs associated with these deposits are included in "Customer services" in the accompanying Consolidated Statement of Income. During 1998 and 1997, the average balances of such deposit accounts were $1.4 billion and $767.1 million, respectively. 40 The following table shows the time remaining to maturity of time certificates of deposit at December 31, 1998 and 1997: - -------------------------------------------------------------------------------- $100,000 AND OVER UNDER $100,000 (DOLLARS IN THOUSANDS) 1998 1997 1998 1997 - ------------------------------------------------------------------------------- 3 months or less ............... $784,316 $486,747 $111,295 $ 59,409 Over 3 through 6 months ........ 166,094 140,831 37,049 28,403 Over 6 through 12 months ....... 37,180 71,143 20,035 37,069 1 year through 5 years ......... 669 6,043 2,845 3,662 - -------------------------------------------------------------------------------- TOTAL ......................... $988,259 $704,764 $171,224 $128,543 - -------------------------------------------------------------------------------- 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) 1998 1997 1996 - -------------------------------------------------------------------------------- Balance, end of year ................. $ 25,141 $ 39,000 $ 12,450 Weighted average interest rate, end of year ......................... 4.70% 5.39% 4.93% Average amount outstanding ........... during the year ..................... $ 34,659 $ 27,353 $ 16,489 Weighted average interest rate for the year ........................ 5.35% 5.32% 5.04% Maximum amount outstanding at any month end ....................... $140,850 $ 80,300 $ 37,700 ================================================================================ 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 $1.9 million, $1.5 million and $0.8 million for 1998, 1997 and 1996, respectively. At December 31, 1998, the Company had unused borrowing capacity under Federal funds lines of $205.0 million. The Company also had approximately $87.0 million available on a credit line with the Federal Reserve at December 31, 1998. The Company incurred no commitment fees relating to short-term credit lines during 1998. Federal funds purchased and securities sold under agreements to repurchase outstanding at December 31, 1998, matured on the next business day. 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) 1998 1997 1996 - -------------------------------------------------------------------------------- Balance, end of year ................. $30,447 $15,898 $ 8,011 Weighted average interest rate, end of year ......................... 5.01% 5.26% 5.11% Average amount outstanding during the year ..................... $24,677 $13,960 $18,613 Weighted average interest rate for the year ........................ 5.33% 5.30% 5.45% Maximum amount outstanding at any month end ....................... $30,812 $19,931 $25,707 ================================================================================ Commercial paper outstanding at December 31, 1998, matured within 30 days, except one issue of $100,000 that matured within 60 days. The Bank is a designated depository for federal tax collections. These tax collections, as set forth in the following table, bear interest at 25 points below the Federal funds rate: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------- Balance, end of year ............... $ 5,013 $ 1,017 $ 24,436 Weighted average interest rate, end of year ....................... 4.54% 5.59% 6.01% Average amount outstanding during the year ................... $ 38,014 $ 34,990 $ 26,259 Weighted average interest rate for the year ...................... 5.32% 5.35% 5.00% Maximum amount outstanding at any month end ..................... $107,910 $ 97,155 $ 89,579 ================================================================================ 41 NOTE (11) LONG-TERM BORROWINGS (A) FLOATING RATE NOTES AND FIXED RATE DEBENTURES In 1979, the Company issued $16,500,000 of Floating Rate Notes ("the Notes") which mature on August 1, 1999. The Notes were convertible at the option of the holder at any time prior to August 1, 1986, into an equivalent principal amount of Debentures. At December 31, 1998, $1,106,000 in Notes and $999,000 in Debentures were outstanding and the current interest rates on the Notes and Debentures were 6.00% and 9.00%, respectively. At December 31, 1997, the outstanding Notes and Debentures totaled $2,219,000 and $1,038,000, respectively. The Notes and Debentures may be redeemed after August 1, 1989, at the option of the Company until maturity at a declining premium, plus accrued interest. The Company was required under the indenture to make equal annual mandatory sinking fund payments of $1,650,000 in each of the years 1992 through 1998 which will be sufficient to retire at par approximately 90% of the aggregate principal amount of Notes and Debentures prior to maturity. The 1998 sinking fund payment was made in the third quarter. The Notes and Debentures will be paid off on their maturity date of August 1, 1999. The Trust Indentures for the Notes and Debentures include provisions which restrict the sale or issuance of capital stock of the Bank, the payment of dividends and the disposition of assets. The Company was in compliance with the provisions of the respective Trust Indentures at December 31, 1998. (B) OTHER BORROWED FUNDS Other borrowed funds include a total of $290,000 due on an equity line of credit, 5-year term loan and leases held by the Company's U S Audiotex subsidiary. The average balance of other borrowed funds for the year was $370,000 and the average rate paid was 9.75%. Interest expense on borrowed funds also includes $106,000 to maintain a line of credit for Imperial Financial Group. The line was never used. (C) 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 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 mandatorily 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 prepayable 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 prepayment. 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, 1998. 42 The unamortized discount on the Capital Securities was $1.6 million at December 31, 1998. 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, 1998. NOTE (12) INCOME TAXES Income tax expense (benefit) is included in the accompanying Consolidated Statement of Income as follows: - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------- Income tax expense (benefit) from: Continuing operations ............... $ 28,449 $ 36,502 $ 43,278 Discontinued operations ............. -- 456 (6,000) - -------------------------------------------------------------------------------- TOTAL ............................. $ 28,449 $ 36,958 $ 37,278 ================================================================================ The income tax provision for both continuing and discontinued operations in the Consolidated Statement of Income is comprised of the following current and deferred amounts: - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal ............................. $ 29,234 $ 24,704 $ 19,897 State ............................... 10,362 7,162 6,609 - -------------------------------------------------------------------------------- TOTAL ............................. $ 39,596 $ 31,866 $ 26,506 ================================================================================ Deferred: Federal ............................. (16,274) (2,701) 4,485 State ............................... (5,180) 554 2,136 - -------------------------------------------------------------------------------- TOTAL ............................. $(21,454) $ (2,147) $ 6,621 ================================================================================ Total: Federal ............................. 12,960 22,003 24,382 State ............................... 5,182 7,716 8,745 - -------------------------------------------------------------------------------- Taxes credited to shareholders' equity ............... 10,307 7,239 4,506 - -------------------------------------------------------------------------------- Reversal of overaccrued taxes from prior years ................... -- -- (355) - -------------------------------------------------------------------------------- TOTAL ............................. $ 28,449 $ 36,958 $ 37,278 ================================================================================ During 1997, the Company recorded a $0.4 million reduction of income tax expense to reflect the finalization of prior years income tax issues. The Company had a current income tax payable of $1.5 million at December 31, 1998, and a current income tax receivable of $6.1 million at December 31, 1997. Of the $10.3 million tax benefit recorded directly to shareholders' equity in 1998, $8.7 million represents current taxes receivable associated with employee stock options and $1.6 million represents the increase in deferred taxes associated with the unrealized loss on securities available for sale. 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: - -------------------------------------------------------------------------------- AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------- Components of the deferred tax asset: Bad debt deduction .................................. $ 22,699 $ 17,972 Deferred compensation ............................... 15,682 10,251 State franchise taxes ............................... 2,927 3,571 Accrued expenses .................................... 1,715 -- Deferred gain ....................................... 1,495 -- Goodwill amortization ............................... 1,194 1,143 Unrealized loss on securities available for sale .... 407 -- Other ............................................... 811 1,056 - -------------------------------------------------------------------------------- TOTAL ............................................. $ 46,930 $ 33,993 - -------------------------------------------------------------------------------- Valuation allowance ................................. -- -- - -------------------------------------------------------------------------------- DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE ...... $ 46,930 $ 33,993 - -------------------------------------------------------------------------------- Components of the deferred tax liability: Prepaid expense ..................................... (722) (454) Installment sale of real estate owned ............... -- (5) Depreciation ........................................ -- (207) Deferred loan fees .................................. (1,326) (1,114) Investment in Imperial Credit Industries, Inc. ...... (21,960) (30,306) Low income housing .................................. (411) (1,330) Other ............................................... (702) (222) - -------------------------------------------------------------------------------- TOTAL ............................................. $(25,121) $(33,638) - -------------------------------------------------------------------------------- NET DEFERRED TAX ASSET ............................ $ 21,809 $ 355 ================================================================================ 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. 43 The income tax provision related to income from continuing operations differs from the amount computed by applying the statutory Federal income tax rate for the following reasons: ---------------------------------------------------- 1998 1997 1996 ---------------------------------------------------- % OF % OF % OF PRETAX PRETAX PRETAX (DOLLARS IN THOUSANDS) AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME - ------------------------------------------------------------------------------- Income tax provision at statutory rate .......... $25,269 35.0% $31,867 35.0% $36,953 35.0% (Reduction) increase in taxes resulting from: Tax exempt interest ...... (102) (0.1) (102) (0.1) (167) (0.2) Cash surrender value of officers life insurance . (318) (0.4) (428) (0.4) (90) (0.1) Appreciation of donated Imperial Credit Industries, Inc. common stock ................... -- -- (986) (1.1) (1,294) (1.2) State franchise taxes, net of Federal income tax benefit ................. 5,096 7.1 6,222 6.8 7,510 7.1 Reversal of overaccrued taxes from prior year ... -- -- (410) (0.4) (355) (0.4) Low income housing tax credit .................. (1,854) (2.6) -- -- -- -- Other .................... 358 0.4 339 0.3 721 0.8 - -------------------------------------------------------------------------------- TOTAL .................... $28,449 39.4% $36,502 40.1% $43,278 41.0% ================================================================================ 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 March 5, 1999. IMPERIAL BANCORP PROFIT-SHARING/EMPLOYEE STOCK OWNERSHIP PLAN: The Company has a noncontributory profit-sharing/employee stock ownership plan ("combined plan") in which employees of the Company, Bank and certain subsidiaries are eligible to participate at year-end if they have been employed for at least 1,000 hours during the year. Investments and distribution of vested benefits to terminated participants are made in accordance with the contribution allocation form signed by the employee. Distributions are made at the option of the Company in either cash or common stock of the Company or a combination thereof. Prior to 1997, the Company had both an employee stock ownership plan ("ESOP") and a profit sharing plan. Effective December 31, 1996, the ESOP was merged with the profit-sharing plan and all assets of the ESOP transferred to the profit-sharing plan. The account of each participant or former participant in the ESOP as of December 31, 1996, was transferred to the profit-sharing plan and will continue to be held and administered under the terms of the profit-sharing plan as a separate account in the name of the participant. A contribution of $2.8 million was made to the plan in the first quarter of 1999 for 1998 performance. A total of $3.5 million was contributed for 1997 during the first quarter of 1998. During 1996, the Company contributed $2.5 million to the ESOP while no contribution was made to the profit sharing plan. The trusts created by the combined plan held 1,571,775 shares at December 31, 1998, and 1,898,332 shares at December 31, 1997. The shares held by the combined plan represented approximately 3.8% of the Company's total shares outstanding at December 31, 1998. 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 earnings contributed by the employee. Only active 401(k) Plan members at December 31 of any year are eligible to receive Company matching contributions for that year. The Company's matching contributions under the 401(k) Plan approximated $1.7 million in 1998, $1.2 million in 1997 and $950,000 in 1996. Distributions of employee and matching contributions to terminated participants are made in accordance with the contribution allocation form signed by the employee in either common stock of the Company or cash or a combination thereof. The trust created by the plan held 809,755 shares at December 31, 1998, and 767,595 shares at December 31, 1997. SUPPLEMENTAL COMPENSATION PLANS: DEFERRED COMPENSATION PLAN: In 1992, the Company adopted a Deferred Compensation Plan ("the 1992 Plan") in order to provide specified benefits to certain key employees and directors. Participants are allowed to defer portions of their compensation each plan year, subject to a minimum and a maximum dollar amount of deferral. In any plan year, the Company will make a matching contribution of not less than 10% nor more than 50% of the participants' deferral for that year. The exact 44 ratio will be determined by a formula based on return on shareholders' equity. The matching contribution ratio as calculated was 10% for 1998 and 50% for 1997. Effective January 1, 1996, the Company adopted a second Deferred Compensation Plan ("the 1996 Plan"), with features similar to the 1992 Plan. The 1996 Plan allows participants to alter their initial deferral percentage in subsequent plan years which is not allowable under the 1992 Plan. In addition, participants in the 1992 Plan were permitted to transfer certain compensation deferred under the 1992 Plan to the 1996 Plan when the 1992 Plan expired on December 31, 1998. Balances not transferred to the 1996 Plan will be paid out to the participants in accordance with the payout election made at the time they entered the Plan. Each participant's "account balance" 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 rate for 1998 was 8.37%. The rates for 1997 were 7.41% for the period January 1, 1997, to August 29, 1997, and 8.84% for the period September 1, 1997, to December 31, 1997. The rate for 1996 was 7.30%. The expense of funding the deferred compensation plans totaled $2.3 million, $2.9 million and $2.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. To offset the deferred compensation plan liability, the Company purchased life insurance policies during 1996 for which it is the beneficiary. The policies have a cash surrender value which substantially offsets the premiums paid for the policies. The net (income) expense derived from the policies included in the accompanying Consolidated Statement of Income approximated ($33,000), ($466,000) and $50,000 for the years ended December 31, 1998, 1997 and 1996, 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 DBO Plan was funded by the Company through the purchase of life insurance for which it is the beneficiary. The benefits specified by the DBO Plan are accrued over 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 all costs including life insurance premiums and benefits paid by it, plus a factor for the use of its money. The Company's income related to the funding of the DBO Plan amounted to $222,000, $254,000 and $276,000 for the years ended December 31, 1998, 1997 and 1996, 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 the estate of the Company's Chairman in amounts ranging from $10.5 million in year one to $5.2 million in year 26, depending on the time of death. The Company is obligated to make annual premium payments of $830,000 with respect to the policy for a twelve-year period. At the end of the thirteenth year, the Company will receive back an amount equal to the aggregate premiums paid without interest or earnings. The cash surrender value generated by the policy offsets the amount of premiums paid over the life of the policy. The net (income) expense derived from the policy in the Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996 approximated ($215,000), ($99,000) and $350,000, respectively. STOCK OPTION PLAN: The Company has a stock option plan for directors and certain employees. Options are granted at the market price of the Company's common stock at the date of grant, and become exercisable immediately for all directors. Options which have been granted to employees are exercisable at either 25% or 16.7% per year beginning one year after the date of grant. A summary of changes in outstanding options is as follows: - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Options outstanding, beginning of year .......... 4,157,779 5,160,228 4,221,827 Options granted ............. 2,569,189 413,098 2,283,234 Options exercised ........... (992,836) (1,410,752) (1,245,051) Options cancelled ........... (1,737,541) (4,795) (99,782) - -------------------------------------------------------------------------------- OPTIONS OUTSTANDING, END OF YEAR ................ 3,996,591 4,157,779 5,160,228 ================================================================================ There were 1.5 million option shares available for future grants at December 31, 1998. 45 Information regarding stock option activity and prices of the shares is as follows: - -------------------------------------------------------------------------------- AVERAGE OPTION NUMBER OPTION PRICE OF PRICE RANGE PER SHARES* PER SHARE* SHARE* - -------------------------------------------------------------------------------- Shares under option at: December 31, 1998 ............. 3,996,591 $2.24-$29.63 $10.06 December 31, 1997 ............. 4,157,779 $2.25-$29.94 $ 7.72 December 31, 1996 ............. 5,160,228 $2.25-$12.34 $ 5.78 Options exercisable at: December 31, 1998 ............. 2,464,747 $2.24-$29.63 $ 8.56 December 31, 1997 ............. 2,558,248 $2.24-$28.63 $ 6.31 December 31, 1996 ............. 3,309,500 $2.24-$10.24 $ 4.83 Options exercised during the year: December 31, 1998 ............. 992,836 $2.76-$11.47 $ 5.47 December 31, 1997 ............. 1,410,752 $2.53-$10.24 $ 3.44 December 31, 1996 ............. 1,245,051 $2.53-$ 7.70 $ 2.88 ================================================================================ *Adjusted for stock dividends declared and paid first quarter 1999 and 1997 and 3-for-2 stock splits effected in 1996 and first quarter 1998. The Company recorded additional shareholders' equity of $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 $8.7 million in 1998 and $7.6 million in 1997. During 1998 and 1997, $42,000 and $1.9 million of common stock was exchanged and retired in conjunction with the exercise of stock options. Due to adverse market conditions that 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 1.4 million options, with an average price of $26.82, were canceled and 829,625 new options issued under the program. The Company applies APB 25 in accounting for the stock option plan and, accordingly, no compensation cost has been recognized in the Consolidated Financial Statements for the fair value of stock options granted. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated in the table below: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 - -------------------------------------------------------------------------------- Income from continuing operations: As reported ......................... $ 43,748 $ 54,548 $ 62,302 Pro forma ........................... 41,234 52,317 60,735 Net income: As reported ......................... $ 43,748 $ 55,177 $ 54,134 Pro forma ........................... 41,234 52,946 52,567 Basic income per share from continuing operations: As reported ......................... $ 1.03 $ 1.30 $ 1.54 Pro forma ........................... 0.97 1.25 1.50 Basic net income per share: As reported ......................... $ 1.03 $ 1.32 $ 1.34 Pro forma ........................... 0.97 1.26 1.30 Diluted income per share from continuing operations: As reported ......................... $ 1.00 $ 1.24 $ 1.47 Pro forma ........................... 0.93 1.19 1.43 Diluted net income per share: As reported ......................... $ 1.00 $ 1.25 $ 1.28 Pro forma ........................... 0.93 1.20 1.24 - -------------------------------------------------------------------------------- The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for the years presented: - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Dividend yield .......................... -- -- -- Expected life of option (years): Officers ............................... 6.1 6.8 6.5 Directors .............................. 4.6 2.8 3.5 Stock price volatility: Officers ............................... 44% 42% 44% Directors .............................. 39 39 45 ================================================================================ The risk-free interest rates used in the Black-Scholes option-pricing model were equal to comparable U.S. Treasury rates at each respective grant date. A 10-year rate was used for valuing officers' options and a 5-year rate was used for valuing directors' options based upon the respective terms of the options. 46 The weighted average fair value at the date of grant for options granted during 1998, 1997 and 1996 was $14.13 per option, $10.13 per option and $5.20 per option, respectively. The full impact of calculating compensation cost for stock options is not reflected in the pro forma income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995, is not considered. NOTE (14) LOANS TO OFFICERS Pursuant to an Employee Loan Program and under by-laws approved by shareholders in 1984, the Company had $3.4 million and $3.5 million in loans to certain officers and directors, outstanding at December 31, 1998 and 1997, respectively. With respect to loans made to the Company's Chairman, one loan matures at the earlier of his termination of employment or January 1, 2002, and is secured by his interest in the DBO Plan (Note 13). A second loan to the Company's Chairman is unsecured and matures at the earlier of his termination of employment or August 15, 2000. During 1998, additional loans made to officers totaled $423,000 and payments received totaled $520,000. Loans to other officers are unsecured, are due in seven equal annual principal payments or on demand, and mature at the earlier of each individual's termination of employment or August 15, 2000. These loans accrue interest at a rate which is equal to 60% of the average of the one-year and three-year Treasury securities rates as published in the Wall Street Journal at the end of each calendar year, to be fixed at that rate for the coming year. The rate was 3.4% for 1998 and will be 2.8% for 1999. 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) 1998 1997 - -------------------------------------------------------------------------------- Commitments to extend credit ...................... $2,764,908 $2,072,020 Standby letters of credit ......................... 159,811 170,513 Commercial letters of credit ...................... 81,874 75,088 When-issued securities ............................ 18,341 2,730 Asset/liability management: Interest rate swaps ............................... 84,000 102,000 Interest rate caps and collars purchased .......... 1,025,593 -- Interest rate floors purchased .................... 4,750,000 5,250,000 Trading contracts: Spot and forwards to purchase foreign currency .... 71,259 76,055 Spot and forwards to sell foreign currency ........ 71,005 75,731 - -------------------------------------------------------------------------------- The Company's net interest margin is sensitive to sudden changes in interest rates. In addition, the Company's interest-earning assets, primarily its loans, are generally 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 and floors with strike prices that generally adjust quarterly and range from 100-250 basis points below or above (depending on the instrument) current market rates at the time the caps and floors were purchased. 47 INTEREST RATE CAPS AND FLOORS: In March 1998, the Company purchased an over-the-counter interest rate cap with a notional value of $1.0 billion. The cap provides protection in the event the three-month LIBOR rate increases above the 8.33% strike price. The unrealized gain on the cap was approximately $454,000 at December 31, 1998. The unamortized premium on the cap was $353,000 at year end. The cap expires in March 2001. In addition, at December 31, 1998, the Company owned interest rate caps and collars with a notional value totaling $25.6 million that hedge specific lending transactions. The unrealized loss on these contracts approximated $31,000 at December 31, 1998. The strike prices on the caps and collars are tied to prime or LIBOR consistent with the pricing on the underlying lending transaction. These caps and collars expire as follows: $9.0 million in the first quarter of 1999, $6.0 million in the second quarter of 1999, $4.0 million in the fourth quarter of 1999 and $6.6 million in the first quarter of 2000. At December 31, 1998, the Company owned exchange traded floors totaling $4.75 billion that expire at the rate of $1.25-$1.75 billion per quarter through the third quarter of 1999. The floors provide the Company protection in the event that the three-month LIBOR rate drops below their respective strike prices. The floors have an average strike price of 4.0%. The unrealized gain on the floors approximated $344,000 at December 31, 1998. The unamortized premium relating to the floors was $1.8 million at year end. Exchange traded floors owned at December 31, 1997, expired at the rate of $1.0 billion per quarter in the first, second and third quarters of 1998. In June 1998, the Company purchased exchange traded floors with a notional value of $1.5 billion. The floors had a strike price of 4.75% and expired in June 1999. In July 1998, the Company purchased exchange traded floors with a notional value of $250.0 million. The floors had a strike price of 4.75% and expired in June 1999. In August 1998, the Company purchased exchange traded floors with a notional value of $500.0 million. The floors had a strike price of 4.75% and expired in September 1999. In October 1998, following a decline in the LIBOR rate, the Company sold exchange traded floor contracts with a notional amount totaling $4.5 billion in order to reset the strike price on the floors from 4.75% to 4.00%. The Company concurrently purchased exchange traded floor contracts with a notional amount totaling $4.75 billion. The gain on the sale of the floors, net of the remaining unamortized premium, is being amortized over the term of the original floors. The balance of the deferred gain at December 31, 1998, was $3.3 million. INTEREST RATE SWAPS: In June 1998, the Company entered into two fixed-for- floating interest rate swaps with a total notional value of $5.0 million. The swaps require the Company to pay three-month LIBOR and receive a fixed rate of 5.95%. The swaps mature in June 1999. Concurrently, the Company entered into interest rate swaps with its subsidiary, Crown American Bank. The notional amount, maturity and payment due dates on the swaps coincide with the original swaps, however, the payment terms require the Company to pay a fixed rate of 5.95% and receive three-month LIBOR. The purpose of the swaps is to convert to a floating rate a similar amount of one-year fixed rate time certificates of deposit acquired on behalf of Crown American Bank as part of a $35.0 million time deposit acquisition program. The unrealized gain on the swaps approximated $11,000 at December 31, 1998. In July 1998, the Company entered into an interest rate swap with a notional value of $4.0 million. The swap requires the Company to pay a fixed rate of 5.95% and receive three-month LIBOR. The swap matures in July 2004. The purpose of the swap is to convert a fixed rate loan to a commercial borrower to a floating rate. The unrealized loss on the swap approximated $151,000 at December 31, 1998. 48 The following table summarizes the Company's derivative instruments for the years ended December 31, 1998 and 1997:
- ----------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 (Dollars in NotionaL Weighted thousands) Amount Average Rate Terms and Maturity - ----------------------------------------------------------------------------------------------------------------------------------- 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 first quarter 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 quarters 1999. Interest rate swaps Loans: Pay-fixed rate. . . . . . . . . . . . . $ 4,000 5.95% Matures third quarter 2004. Receive-3 month LIBOR . . . . . . . . . $ 4,000 5.31% Deposits: Pay-3 month LIBOR plus 32 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% - ----------------------------------------------------------------------------------------------------------------------------------- At December 31, 1997 (Dollars in Notional Weighted THOUSANDS) Amount Average Rate Terms and Maturity - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate floors purchased Exchange traded . . . . . . . . . . . . $5,250,000 n/a $1.0 billion expiring per quarter in first, second, third and fourth quarter 1998. $1.25 billion expiring first quarter 1999. Interest rate swaps Time deposits: Pay-3 month LIBOR less 10 basis points. $ 27,000 5.63% Matures first quarter 2007, callable by the Company first quarter 1998 and semi-annually thereafter. Receive-fixed rate. . . . . . . . . . . $ 27,000 7.15% Capital securities: Pay-3 month LIBOR . . . . . . . . . . . $ 75,000 5.75% Matures second quarter 2007. Receive-fixed rate. . . . . . . . . . . $ 75,000 7.18% - -----------------------------------------------------------------------------------------------------------------------------------
In the first quarter of 1997, the Company sold $27.0 million of ten-year certificates of deposit with a fixed rate of 7.15%. These long-term certificates of deposit were callable by the Company after one year and semi-annually after that. In order to minimize the interest rate risk of paying out a fixed rate for ten years, the Company executed an interest rate swap transaction with a notional value of $27.0 million in the first quarter of 1997. The swap was callable at the option of the counter-party after one year and semi-annually thereafter. The interest rate swap required the Company to pay a rate of three-month LIBOR less 10 basis points, quarterly for ten years. Simultaneously, the Company received quarterly interest payments at a fixed rate of 7.15% for ten years. On July 28, 1998, the swap was called by the counterparty and the Company paid off the certificates of deposit. In April 1997, the Company issued $75.0 million of 9.98% capital securities (the "Capital Securities") and entered into three fixed-for-floating interest rate swaps with a total notional value of $75.0 million in order to convert the Capital Securities to a floating rate. The swaps require the Company to pay three-month LIBOR and receive a fixed rate of 7.18% on $25.0 million, 7.186% on $25.0 million and 7.187% on the remaining $25.0 million. The maturity and fixed payment due dates on 49 the swaps coincide with the call date and payment dates of the Capital Securities. The unrealized gain on the swaps approximated $9.1 million at December 31, 1998. The impact of the Company's use of derivative financial instruments was a $1.5 million and $507,300 increase in net interest income, and a 3 basis point and 2 basis point increase in net interest margin for the years ended December 31, 1998 and 1997, respectively. For the year ended December 31, 1996, the Company's use of derivative financial instruments resulted in a $700,000 increase in net interest income and a 3 basis point increase in net interest margin. OTHER COMMITMENTS: As of December 31, 1998 and 1997, SBA loans serviced for others approximated $103.4 million and $81.1 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 representations or warranties. The Company's wholly owned subsidiary, Imperial Trust Company, a California licensed trust company, had total assets under management of approximately $9.6 billion and $8.7 billion at December 31, 1998 and 1997, respectively. LEASE COMMITMENTS: The Company leases the land and buildings for certain of its premises under noncancelable operating leases which expire in various years to 2012. Lease payments, net of sublease income, charged to net occupancy expense in the Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996, amounted to approximately $7.9 million, $6.8 million and $6.3 million, respectively. Aggregate minimum rental commitments under these leases net of $532,000 of income to be received from noncancelable subleases are as follows: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) AMOUNT - -------------------------------------------------------------------------------- 1999 .............................................. $ 7,972 2000 .............................................. 6,387 2001 .............................................. 6,138 2002 .............................................. 5,441 2003 .............................................. 4,534 Thereafter ......................................... 13,270 - -------------------------------------------------------------------------------- TOTAL .............................................. $43,742 - -------------------------------------------------------------------------------- Certain of the aforementioned leases contain provisions such that the Company may at its option renew the leases at a specified rental for a specified period. Certain of the leases also contain provisions such that the Company must pay all property taxes on the premises or any increase in property taxes after specified years. In addition, the Company has entered into long-term agreements for certain data processing and computer software products and services. These agreements expire in various years to 2002 and contain provisions that allow renewal at a specified amount for a specified period. Total expense from these agreements equaled $3.7 million in 1998, $3.3 million in 1997 and $2.9 million in 1996 and are included in data processing in the Consolidated Statement of Income. Aggregate minimum contractual payments under these agreements are as follows: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) AMOUNTS - -------------------------------------------------------------------------------- 1999 ....................................................... $2,514 2000 ....................................................... 2,519 2001 ....................................................... 2,518 2002 ....................................................... 1,469 - -------------------------------------------------------------------------------- TOTAL ...................................................... $9,020 - -------------------------------------------------------------------------------- DIRECTOR CLAIMS: A dispute has arisen between the Bank and Second Southern Corp, a corporation owned by one of its directors, G. Louis Graziadio, III as to the existence and content of an alleged modification to the Consulting Agreement dated as of November 1, 1991, which agreement arose out of the formation of Imperial Credit Industries, Inc. Mr. Graziadio claims that the Consulting Agreement was modified during 1997 to pay Second Southern a fixed amount based on the market value at modification of 2.5% of the Bank's stake in ICII less the basis established in the agreement. The Bank has maintained that the Agreement has not been modified. Mr. Graziadio also has made claims against the Bank in connection with Imperial Financial Group, Inc. for expenses and compensation from its formation, which the Bank disputes. The claims in total are not material to the financial condition of the Company. Negotiations have taken place and a special committee of the Company's board consisting of the outside directors recommended a settlement, but no agreement has yet been reached to resolve the claims. No proceeding has been brought by either party to resolve the claims. 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 receivable, time deposits, borrowings and various off-balance sheet items. Because no market exists for a significant portion of the Company's loan portfolio, fair value estimates are based on judgments regarding credit risk, investor expectations of future economic conditions, normal cost of administration of these instruments and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered to be financial instruments. For example, the value of the Company's fiduciary contracts for trust services and the value of the Company's investment in subsidiaries are not considered 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 50 which is unrelated to the interest rate assumptions used to compute the fair value estimates. Such demand deposits are a significant source of low cost funds to the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS: The carrying values reported in the balance sheet approximate fair values due to the short-term nature of the assets. SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE AND TRADING 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 : The fair value of the loan portfolio is generally estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such instruments. Expected future cash flows are estimated using maturity dates for performing loans, with cash flows on nonaccrual loans estimated on an individual basis. For nonaccrual and potential problem loans secured by real property, estimated fair value has been determined on an individual basis, considering the value of the collateral as determined by a current third party appraisal and estimated foreclosure, holding and selling costs. For consumer loans, market rates of interest are based on current market rates charged for these loans. DEPOSITS: The fair values for demand, savings and money market accounts are estimated at the amount payable on demand. Fair values for certificates of deposit are estimated by discounting the expected cash flows at current market rates over expected maturities. SHORT-TERM BORROWINGS: The carrying amounts of Federal funds purchased, borrowings under repurchase agreements, federal tax collection accounts and commercial paper approximate their fair values due to the short-term nature of the borrowings. LONG-TERM BORROWINGS: Fair value is estimated using market prices or by discounting the expected future cash flows at market rates for similar instruments trading currently. OFF-BALANCE SHEET INSTRUMENTS: Fair values of the Company's interest rate swaps, caps, floors, futures, spot and forward contracts are based on quoted market prices. Fair values of letters of credit and commitments to extend credit are based on fees currently charged to enter into similar agreements. 51 The estimated fair values of the Company's financial instruments are as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997 Estimated Estimated Carrying Fair Carrying Fair At December 31, (Dollars in Thousands) Amount Value Amount Value - ----------------------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and due from banks ........................................... $ 355,317 $ 355,317 $ 316,600 $ 316,600 Trading instruments ............................................... 52,971 52,971 35,782 35,782 Securities available for sale ..................................... 694,814 694,814 669,266 669,266 Securities held to maturity ....................................... 3,898 3,898 4,026 4,026 Federal funds sold and securities purchased under resale agreements ......................................... 1,446,000 1,446,000 765,000 765,000 Loans held for sale ............................................... 18,287 19,416 3,763 4,120 Loans: Commercial loans ................................................. 3,015,132 2,999,639 2,350,438 2,377,887 Real estate loans ................................................ 401,629 404,596 407,721 398,032 Consumer loans ................................................... 35,354 35,235 30,449 30,347 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans ...................................................... $ 3,452,115 $ 3,439,470 $ 2,788,608 $ 2,806,266 - ----------------------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses ................................... $ (62,649) $ -- $ (51,143) $ -- - ----------------------------------------------------------------------------------------------------------------------------------- Net loans ........................................................ $ 3,389,466 $ 3,439,470 $ 2,737,465 $ 2,806,266 - ----------------------------------------------------------------------------------------------------------------------------------- Financial liabilities: Deposits: Demand ........................................................... $ 3,298,070 $ 3,298,070 $ 2,378,830 $ 2,378,830 Savings .......................................................... 25,135 25,135 23,375 23,375 Money market ..................................................... 1,086,959 1,086,959 939,086 939,086 Time deposits - under $100,000 .................................. 171,224 171,379 128,543 128,545 Time deposits - over $100,000 .................................... 988,259 988,059 704,764 704,366 Short-term borrowings ............................................. 60,601 60,601 55,915 55,915 Long-term borrowings: Floating rate notes and fixed rate debentures .................... 2,105 2,126 3,257 3,295 Other borrowed funds ............................................. 290 290 -- -- Capital securities ............................................... 73,372 77,272 73,314 83,214 - ----------------------------------------------------------------------------------------------------------------------------------- Off-balance sheet financial instruments: asset/liability management: Interest rate swaps/(1)/ .......................................... $ -- $ 8,916 $ -- $ 5,893 Interest rate caps and collars purchased/(1)/ ..................... (353) 423 -- -- Interest rate floors purchased/(1)/ ............................... (1,813) 344 (388) 384 Trading contracts: Spot and forwards to purchase foreign currency .................... 1,661 1,661 (3,239) (3,239) Spot and forwards to sell foreign currency ........................ (2,359) (2,359) 3,573 3,573 Credit instruments: Commitment to extend credit ....................................... -- (41,474) -- (31,080) Standby letters of credit ......................................... -- (2,397) -- (2,558) Commercial letters of credit ...................................... -- (1,228) -- (1,126) When issued securities ............................................ -- (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 certain reserve balances on deposit with the Federal Reserve Bank. Cash balances maintained to meet reserve requirements are not available for use by the Bank or the Company. During 1998 and 1997, the Bank maintained average balances with the Federal Reserve of approximately $71.1 million and $59.9 million, respectively. NOTE (18) IMPERIAL CREDIT INDUSTRIES, INC. At December 31, 1998, the Company owned 8,941,106 shares, or approximately 24.3%, of the common stock of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII) ("ICII"). 52 The following table summarizes changes in the Company's investment in ICII during 1998 and 1997: - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Shares owned, beginning of year ............. 8,941,106 9,396,106 Sale of shares .............................. -- (320,000) Charitable donation of shares ............... -- (135,000) - -------------------------------------------------------------------------------- Shares owned, end of year ................... 8,941,106 8,941,106 - -------------------------------------------------------------------------------- In 1992, the Bank entered into two consulting agreements, one between the Bank and a senior executive of the Bank, and the second between the Bank and a director of the Company, that obligate it to pay commissions upon the sale of ICII shares. According to the terms of the agreements, each individual is entitled to receive an incentive fee of 2.5% of the pretax gains realized by the Bank, from the disposition of ICII shares it holds. If such a sale by the Bank has not occurred, the agreements require that the Bank be considered to have sold an amount equal to 20% of the ICII shares held as of January 1 of each year from 1997 through 2001, at a price equal to the arithmetic average of the daily average stock price of ICII common stock as reported by NASD during the preceding year. The Company settled the consulting agreement with the senior executive of the Bank in 1997. In connection with this settlement, the Company sold 2.5%, or 231,528 shares, of its investment in ICII at various times during 1997. An additional 88,472 shares were also sold to reduce the financial impact of the transaction to the Company. As a result of the sales, the Company recorded gains of $5.0 million in "Gain on sale of investment in Imperial Credit Industries, Inc." in the Consolidated Statement of Income. Offsetting the gain on sale was a $5.0 million consulting charge recorded in "Professional and legal fees" which represented full satisfaction of the Company's obligation under one of the consulting agreements. The agreement with the director remains an obligation of the Company at December 31, 1998. Based on the daily average market price for 1998 of $17.15 per share, less the director's basis of $0.88 per share as of December 31, 1998, as adjusted for stock splits and dividends, the liability relating to the remaining agreement approximated $3.8 million at December 31, 1998. This liability is being accrued over the vesting period and will be remeasured quarterly for changes in the average market price. The Company does not exercise significant control over the operations of ICII. The results of ICII operations are accounted for in the Company's financial statements as an equity investment. The equity investment in ICII is carried at cost adjusted for equity in undistributed (losses) income and evaluated for impairment on a regular basis. Transactions between ICII and the Company occur during the normal course of business. All transactions are carried out at substantially the same terms as those prevailing at the same time for comparable transactions with others. The following represents summarized financial information with respect to the operations of ICII. Certain amounts reported for 1997 relating to operations that were discontinued in 1998 have been reclassified for consistency. - -------------------------------------------------------------------------------- (Dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Loans held for sale ............. $ 323,699 $ 153,469 $ 940,096 Loans held for investment ....... 1,320,095 1,252,487 1,068,599 Total assets .................... 2,397,922 2,094,389 2,470,639 Deposits ........................ 1,711,328 1,156,022 1,069,184 Total liabilities ............... 2,164,401 1,770,456 2,231,131 Retained earnings ............... 101,265 174,898 88,977 Total equity .................... 233,521 323,933 239,508 - -------------------------------------------------------------------------------- Total revenues .................. 16,183 314,904 256,933 Total expenses .................. 120,836 114,861 99,049 (Loss) income before taxes, minority interest & extraordinary item ............. (104,653) 200,043 157,884 Minority interest ............... (1,464) 10,513 12,026 Discontinued operations ......... (14,509) (25,347) -- Extraordinary item .............. -- (3,995) -- Net (loss) income ............... (73,634) 85,921 75,984 - -------------------------------------------------------------------------------- ICII's net loss of $73.6 million for 1998 reflects a number of one-time charges including: the write-off of its investment in a finance company specializing in sub-prime mortgages, reductions in the carrying value of its securities and held for sale loan portfolios attributed to volatility in the financial markets, and charges related to the discontinued operations of a sub-prime auto lending subsidiary. The Company's share of ICII's losses was approximately $10.6 million after tax. In the fourth quarter of 1998, the Company canceled the previously announced spin-off of certain specialty lending and finance businesses to shareholders due to volatility in the financial markets. The Company's shares of ICII common stock were among the assets that were to have been included in the spin-off. The Company has received notification from the Federal Reserve Board that it is in violation of Section 4(c)(8) of the Bank Holding Company Act and Section 225.22(d)(2)(II) of Regulation Y with regards to its ownership of ICII common stock. On December 19, 1998, the Company announced, in a Schedule 13D filing with the Securities and Exchange Commission, its intention to sell the 8.9 million shares of ICII common stock it owns. The Company is actively pursuing opportunities to sell these shares. The violations of banking regulations will be corrected once a sale of the ICII stock has been completed. 53 NOTE (19) 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, 1998, 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, 1998, the Bank could distribute up to $132.4 million to the Parent Company in the form of dividends. As of December 31, 1998 and 1997, 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. The following table compares the Company's actual capital ratios at December 31, 1998 and 1997, to those required by regulatory agencies for capital adequacy and well capitalized classification purposes:
- --------------------------------------------------------------------------------------------------------------- For Capital Adequacy Actual Purposes (Dollars in thousands) Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------- At December 31, 1998 Total capital (to risk weighted assets): Company ............. $507,556 10.89% Greater than or equal to $373,025 Greater than or equal to 8.0% Bank ................ 480,571 10.45 Greater than or equal to 367,968 Greater than or equal to 8.0 Tier I capital (to risk weighted assets): Company ............. $447,112 9.59% Greater than or equal to $186,512 Greater than or equal to 4.0% Bank ................ 423,015 9.20 Greater than or equal to 183,984 Greater than or equal to 4.0 Tier I capital (to average assets): Company ............. $447,112 8.12% Greater than or equal to $165,147 Greater than or equal to 3.0% Bank ................ 423,015 7.76 Greater than or equal to 163,454 Greater than or equal to 3.0 - --------------------------------------------------------------------------------------------------------------- At December 31, 1997 Total capital (to risk weighted assets): Company ............. $471,898 12.48% Greater than or equal to $302,542 Greater than or equal to 8.0% Bank ................ 398,741 10.65 Greater than or equal to 299,519 Greater than or equal to 8.0 Tier I capital (to risk weighted assets): Company ............. $421,321 11.14% Greater than or equal to $151,271 Greater than or equal to 4.0% Bank ................ 351,890 9.40 Greater than or equal to 149,759 Greater than or equal to 4.0 Tier I capital (to average assets): Company ............. $421,321 10.28% Greater than or equal to $122,973 Greater than or equal to 3.0% Bank ................ 351,890 8.70 Greater than or equal to 121,405 Greater than or equal to 3.0 - --------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio - -------------------------------------------------------------------------------------------- At December 31, 1998 Total capital (to risk weighted assets): Company ............. Greater than or equal to $466,281 Greater than or equal to 10.0% Bank ................ Greater than or equal to 459,960 Greater than or equal to 10.0 Tier I capital (to risk weighted assets): Company ............. Greater than or equal to $279,769 Greater than or equal to 6.0% Bank ................ Greater than or equal to 275,976 Greater than or equal to 6.0 Tier I capital (to average assets): Company ............. Greater than or equal to $275,246 Greater than or equal to 5.0% Bank ................ Greater than or equal to 272,423 Greater than or equal to 5.0 - -------------------------------------------------------------------------------------------- At December 31, 1997 Total capital (to risk weighted assets): Company ............. Greater than or equal to $378,178 Greater than or equal to 10.0% Bank ................ Greater than or equal to 374,398 Greater than or equal to 10.0 Tier I capital (to risk weighted assets): Company ............. Greater than or equal to $226,907 Greater than or equal to 6.0% Bank ................ Greater than or equal to 224,639 Greater than or equal to 6.0 Tier I capital (to average assets): Company ............. Greater than or equal to $204,954 Greater than or equal to 5.0% Bank ................ Greater than or equal to 202,342 Greater than or equal to 5.0 - --------------------------------------------------------------------------------------------
NOTE (20) DISCONTINUED OPERATION In the second quarter of 1996, management of the Company decided to discontinue the precious metals business which had been engaged in trading and leasing of precious metals in addition to making loans secured by precious metals since 1993. The decision to exit this line of business was made in the wake of several operational losses for which the Company provided approximately $9.8 million, net of tax, in 1996. The provision, in addition to all of the results of operations from this division, is reflected in the Consolidated Statement of Income as "Income (loss) of discontinued operation, net of tax." In accordance with the Company's termination plan, customers of the precious metals division were notified of the Company's decision to exit the business and given an appropriate amount of 54 time to liquidate their outstanding positions. Substantially all of the activities of the precious metals division were terminated as of December 31, 1996. During 1997, the Company recovered approximately $1.6 million pretax related to the precious metals business. - ----------------------------------------------------------------- For the years ended December 31, (Dollars in thousands) 1998 1997 1996 - ----------------------------------------------------------------- Income (loss) from discontinued operation, net of income taxes of $456 and ($6,000)................ $ -- $ 629 $(8,168) - ----------------------------------------------------------------- Total $ -- $ 629 $(8,168) ================================================================= Summary financial information pertaining to the precious metals division is provided below: - ---------------------------------------------------- At December 31 (Dollars in thousands) 1998 1997 1996 - ---------------------------------------------------- Loans...................... $ -- $ 306 $ 3,797 Total assets............... -- 329 19,931 Total liabilities.......... -- 183 14,769 ==================================================== NOTE (21) NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 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 position and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. 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 (22) IMPERIAL BANCORP (PARENT COMPANY ONLY) - ------------------------------------------------------------------------------- Condensed Balance Sheet At December 31, (Dollars in thousands, except share data) 1998 1997 - ------------------------------------------------------------------------------- ASSETS Cash..................................................... $ 433 $ 2,365 Interest bearing time deposit at Imperial Bank........... -- 37,242 Securities available for sale............................ 5,346 14,412 Securities purchased under resale agreements from Imperial Bank........................................... 4,900 7,925 Loans to officers........................................ 3,422 3,519 Investments in subsidiaries: Imperial Bank.................................... 492,151 355,869 Other subsidiaries............................... 23,755 13,842 Other assets............................................. 28,137 19,059 - ------------------------------------------------------------------------------- Total assets $495,154 $454,233 - ------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper........................................ $ 30,477 $ 15,898 Floating rate notes and fixed rate debentures........... 2,105 3,257 Junior subordinated debentures.......................... 75,641 75,582 Other liabilities....................................... 5,138 7,472 - ------------------------------------------------------------------------------- Total liabilities $113,332 $102,209 - ------------------------------------------------------------------------------- Shareholders' equity: Common stock, no par 50,000,000 shares authorized: 41,863,935 shares at December 31, 1998, and 42,374,917 shares at December 31, 1997, issued and outstanding................... 244,433 236,186 Accumulated other comprehensive income, net of tax..................................... (515) 1,682 Retained earnings.............................. 157,904 114,156 - ------------------------------------------------------------------------------- Total shareholders' equity $381,822 $362,204 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $495,154 $454,233 =============================================================================== 55 NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
- ---------------------------------------------------------------------------------------- CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Revenue: Dividends - Imperial Bank ....................... $ 11,120 $ 1,120 $ 4,120 Interest income: Securities available for sale ................. 971 1,327 1,195 Securities purchased under resale agreements from Imperial Bank ........................... 366 166 141 Interest-bearing time deposit at Imperial Bank. 171 2,101 -- Loans to officers ............................. 123 131 119 Other income .................................... 9 8 15 - ---------------------------------------------------------------------------------------- TOTAL REVENUE $ 12,760 $ 4,853 $ 5,590 - ---------------------------------------------------------------------------------------- Expense: Salary .......................................... 211 171 137 Other employee benefits(1) ...................... (260) (168) 206 Interest expense: Commercial paper .............................. 1,315 740 1,015 Floating rate notes and subordinated debentures 197 270 343 Junior subordinated debentures, net ........... 6,684 4,669 -- Other expense ................................... 1,039 915 890 - ---------------------------------------------------------------------------------------- TOTAL EXPENSE $ 9,186 $ 6,597 $ 2,591 - ---------------------------------------------------------------------------------------- Income (loss) before income taxes ................ 3,574 (1,744) 2,999 Applicable income tax benefit .................... (3,535) (1,522) (603) - ---------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries .................................... 7,109 (222) 3,602 - ---------------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries ... 36,639 55,399 50,532 - ---------------------------------------------------------------------------------------- NET INCOME $ 43,748 $ 55,177 $ 54,134 - ----------------------------------------------------------------------------------------
(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). - -------------------------------------------------------------------------------- 56 NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
- ---------------------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ....................................... $ 43,748 $ 55,177 $ 54,134 Adjustments for non-cash charges (credits): Undistributed income of subsidiaries ........... (36,639) (55,399) (50,532) Net change in other liabilities/(1)/ ............. (5,840) 3,164 1,198 Net change in other assets ....................... (1,670) (3,758) (1,034) - ---------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES .................................... $ (401) $ (816) $ 3,766 - ---------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sale of securities available for sale ............................................ 492,760 231,794 416,117 Purchase of securities available for sale ........ (483,694) (232,409) (413,471) Maturity (investment) in time deposit at Imperial Bank ............................................ 37,242 (37,242) -- Investments in subsidiaries ...................... (40,067) (39,179) (1,750) Net change in securities purchased under resale agreements ...................................... 3,025 (4,725) (3,200) Net change in loans made to officers ............. 204 114 605 - ---------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES .................................... $ 9,470 $ (81,647) $ (1,699) - ---------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in commercial paper ................... 14,549 7,887 (3,551) Retirement of floating rate notes and subordinated debentures ...................................... (1,152) (1,198) (1,451) Issuance of junior subordinated debentures ....... -- 75,540 -- Net proceeds from exercise of employee stock options ......................................... 2,855 2,407 2,352 Repurchase of common stock ....................... (27,243) -- -- Other ............................................ -- 4 (29) - ---------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES .................................... $ (10,991) $ 84,640 $ (2,679) - ---------------------------------------------------------------------------------------------- NET CHANGE IN CASH ............................. $ (1,922) $ 2,177 $ (612) - ---------------------------------------------------------------------------------------------- CASH, BEGINNING OF YEAR ........................ $ 2,365 $ 188 $ 800 - ---------------------------------------------------------------------------------------------- CASH, END OF YEAR .............................. $ 443 $ 2,365 $ 188 - ----------------------------------------------------------------------------------------------
(1) The Parent Company recorded a tax benefit in shareholders' equity for its employee stock options of $3,947,000 in 1998, $2,025,000 in 1997 and $1,863,000 in 1996. - -------------------------------------------------------------------------------- In 1998, 1997 and 1996, the Parent Company paid $8.2 million, $5.7 million and $1.4 million in interest, respectively. Dividends received from the Bank are subject to certain limitations. See - Note 19 Capital Matters. 57 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 1998, 1997 and 1996. 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. . 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 eleven regional offices located in the major metropolitan areas of California, and branches 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 three offices in California located in Menlo Park, San Diego and San Jose; and offices in key technology centers outside of California: Boston, Massachusetts; Austin, Texas; Reston, Virginia; and Bellevue, 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 58 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 management and lockbox services. The Division has four offices in California: Beverly Hills, 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-NMS-ICII) ("ICII") is a diversified financial services company offering a variety of commercial, real estate and consumer loan products, investment banking and asset management services. The Company holds 8.9 million shares, or approximately 24.3%, of the outstanding shares of ICII as an equity investment. ICII offers its products through its subsidiaries and affiliates and is headquartered in Torrance, California. 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. 59 OPERATING SEGMENT RESULTS
- ----------------------------------------------------------------------------------------------------------- COMMERCIAL SPECIAL FOR THE YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) BANKING MARKETS REAL ESTATE - ----------------------------------------------------------------------------------------------------------- Net interest income .................................... $ 89,710 $ 37,057 $ 28,610 Provision for loan losses .............................. 15,354 7,149 2,463 Noninterest income ..................................... 14,695 6,467 916 Noninterest expense .................................... 59,265 23,859 6,233 - ----------------------------------------------------------------------------------------------------------- Income before taxes .................................... 29,786 12,516 20,830 Income taxes ........................................... 12,524 5,263 8,758 - ----------------------------------------------------------------------------------------------------------- Income from continuing operations ...................... $ 17,262 $ 7,253 $ 12,072 - ----------------------------------------------------------------------------------------------------------- Average net loans ...................................... $1,231,975 $ 486,221 $ 426,761 Average assets ......................................... 1,261,980 489,652 435,068 Average deposits ....................................... 1,235,995 480,368 13,587 - ----------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------------------- Net interest income .................................... $ 75,428 $ 28,128 $ 27,081 Provision for loan losses .............................. 5,218 2,245 (2,473) Noninterest income ..................................... 11,970 5,443 730 Noninterest expense .................................... 50,785 17,351 6,187 - ----------------------------------------------------------------------------------------------------------- Income before taxes .................................... 31,395 13,975 24,097 Income taxes ........................................... 13,200 5,876 10,132 - ----------------------------------------------------------------------------------------------------------- Income from continuing operations ...................... $ 18,195 $ 8,099 $ 13,965 - ----------------------------------------------------------------------------------------------------------- Average net loans ...................................... $ 947,422 $ 303,352 $ 452,164 Average assets ......................................... 953,987 304,676 460,616 Average deposits ....................................... 1,045,941 406,839 6,932 - ----------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 - ----------------------------------------------------------------------------------------------------------- Net interest income .................................... $ 54,241 $ 49,252 $ 22,655 Provision for loan losses .............................. 2,439 1,640 2,339 Noninterest income ..................................... 8,462 4,517 1,061 Noninterest expense .................................... 37,457 36,206 8,169 - ----------------------------------------------------------------------------------------------------------- Income before taxes .................................... 22,807 15,923 13,208 Income taxes ........................................... 9,684 6,761 5,608 - ----------------------------------------------------------------------------------------------------------- Income from continuing operations ...................... $ 13,123 $ 9,162 $ 7,600 - -----------------------------------------------------------------------------------------------------------
60
- ---------------------------------------------------------------------------------------------------------------------------------- ENTERTAINMENT AND FOR THE YEAR ENDED DECEMBER INDEPENDENT FILM SYNDICATED FINANCIAL OTHER 31, 1998 (DOLLARS IN THOUSANDS) PRODUCTION FINANCE SERVICES ICII SEGMENTS UNALLOCATED CONSOLIDATED - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income ................ $ 29,944 $ 14,788 $ 62,257 $ -- $ 8,580 $ (14,135) $ 256,811 Provision for loan losses .......... 2,550 944 614 -- 937 3,364 33,375 Noninterest income ................. 2,479 1,910 435 (18,205) 50,919 6,071 65,687 Noninterest expense ................ 10,581 1,975 45,384 -- 44,811 24,818 216,926 - ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes ................ 19,292 13,779 16,694 (18,205) 13,751 (36,246) 72,197 Income taxes ....................... 8,111 5,793 7,019 (7,655) 5,782 (17,146) 28,449 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations .. $ 11,181 $ 7,986 $ 9,675 $ (10,550) $ 7,969 $ (19,100) $ 43,748 - ---------------------------------------------------------------------------------------------------------------------------------- Average net loans .................. $ 391,275 $ 414,182 $ 297,909 $ -- $ 73,341 $ (61,334) $ 3,260,330 Average assets ..................... 394,171 416,874 298,268 72,260 1,212,459 403,153 4,983,885 Average deposits ................... 81,396 -- 1,807,964 -- 700,209 31,706 4,351,225 - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income ................ $ 22,821 $ 11,007 $ 39,284 $ -- $ 8,563 $ (10,977) $ 201,335 Provision for loan losses .......... 3,212 635 616 -- 1,422 12,017 22,892 Noninterest income ................. 3,209 954 272 28,053 27,576 3,431 81,638 Noninterest expense ................ 7,552 2,233 28,027 8,676 31,616 16,604 169,031 - ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes ................ 15,266 9,093 10,913 19,377 3,101 (36,167) 91,050 Income taxes ....................... 6,419 3,823 4,589 8,147 1,304 (16,988) 36,502 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations .. $ 8,847 $ 5,270 $ 6,324 $ 11,230 $ 1,797 $ (19,179) $ 54,548 - ---------------------------------------------------------------------------------------------------------------------------------- Average net loans .................. $ 218,430 $ 285,735 $ 97,024 $ -- $ 61,556 $ (10,165) $ 2,355,518 Average assets ..................... 219,462 287,390 96,706 60,203 879,520 390,707 3,653,267 Average deposits ................... 86,044 -- 993,939 -- 596,288 206 3,136,189 - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income ................ $ 13,719 $ 5,512 $ 5,013 $ -- $ 8,997 $ (18,287) $ 141,102 Provision for loan losses .......... (176) 1,095 250 -- 518 (1,224) 6,881 Noninterest income ................. 1,701 631 114 61,553 22,584 (1,132) 99,491 Noninterest expense ................ 5,916 1,537 6,351 5,024 20,923 6,549 128,132 - ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes ................ 9,680 3,511 (1,474) 56,529 10,140 (24,744) 105,580 Income taxes ....................... 6,159 1,491 (626) 23,768 4,264 (13,831) 43,278 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations .. $ 3,521 $ 2,020 $ (848) $ 32,761 $ 5,876 $ (10,913) $ 62,302 - ----------------------------------------------------------------------------------------------------------------------------------
61 Detail of amounts included in unallocated is provided below:
- -------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------- Net interest income: Internal funding ................................ $(10,711) $ (9,590) $(15,433) Deferred loan fees .............................. (5,295) (4,161) (2,854) Other ........................................... 1,871 2,774 -- - -------------------------------------------------------------------------------------- TOTAL $(14,135) $(10,977) $(18,287) - -------------------------------------------------------------------------------------- Provision for loan losses: Unallocated allowance ........................... $ 2,989 $ 11,224 $ (1,618) Mortgage loans .................................. 251 755 247 Other ........................................... 124 38 147 - -------------------------------------------------------------------------------------- TOTAL $ 3,364 $ 12,017 $ (1,224) - -------------------------------------------------------------------------------------- Noninterest income: Item processing revenue ......................... $ 3,974 $ 3,915 $ 526 Other ........................................... 2,097 (484) (1,658) - -------------------------------------------------------------------------------------- TOTAL $ 6,071 $ 3,431 $ (1,132) - -------------------------------------------------------------------------------------- Noninterest expense: Unallocated administration and operations ....... $ 18,750 $ 18,690 $ 13,179 Spin off and restructuring costs ................ 9,421 2,341 -- Formation of leasing division ................... 942 -- -- Deferred loan costs ............................. (5,131) (4,633) (2,807) Operating loss recovery ......................... (1,320) -- -- Other ........................................... 2,156 206 (3,823) - -------------------------------------------------------------------------------------- TOTAL $ 24,818 $ 16,604 $ 6,549 - --------------------------------------------------------------------------------------
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 and the balance of deferred fees. Unallocated deposit balances include official checks and Treasury, Tax and Loan accounts. - -------------------------------------------------------------------------------- 62 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California January 25, 1999 63 SELECTED STATISTICAL INFORMATION SECURITIES The following table shows the maturities of securities held to maturity and securities available for sale at December 31, 1998, and their weighted average yields:
- ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) MATURING - ---------------------------------------------------------------------------------------------------------------------------------- Less than Greater than Greater than Greater than 1 YEAR 1 - 5 YEARS 5 - 10 YEARS 10 YEARS TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ---------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Industrial development bonds ..... $ -- -- $ -- -- $ -- -- $ 3,898 7.53% $ 3,898 7.53% - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL .......................... $ -- -- $ -- -- $ -- -- $ 3,898 7.53% $ 3,898 7.53% ================================================================================================================================== Securities available for sale: U.S. Treasury and federal agencies $ 30,974 5.05% $ -- --% $ -- --% $532,381 5.64% $563,355 5.61% Mutual funds ..................... 112,579 5.27 -- -- -- -- -- -- 112,579 5.28 Other securities ................. 779 3.63 50 7.99 1,847 10.43 16,204 5.16 18,880 5.62 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL .......................... $144,332 5.22% $ 50 7.99% $ 1,847 10.43% $548,585 5.63% $694,814 5.56% ==================================================================================================================================
MATURITY DISTRIBUTION OF LOANS The following table shows the maturity schedule of the Company's loan portfolio at December 31, 1998, net of unearned income and deferred loan fees and costs: - ------------------------------------------------------------------------------- Less than Greater than Greater than (DOLLARS IN THOUSANDS) 1 YEAR 1 TO 5 YEARS 5 YEARS TOTAL - ------------------------------------------------------------------------------- Commercial loans: Floating rate ............ $ 1,401,192 $ 1,154,310 $ 236,474 $ 2,791,976 Fixed rate ............... 124,639 69,040 29,477 223,156 Real estate loans: Floating rate ............ 212,846 87,432 341 300,619 Fixed rate ............... 36,648 55,814 8,548 101,010 Consumer loans: Floating rate ............ 12,510 22,537 -- 35,047 Fixed rate ............... 23 284 -- 307 - ------------------------------------------------------------------------------- TOTAL LOANS ............ $ 1,787,858 $ 1,389,417 $ 274,840 $ 3,452,115 - ------------------------------------------------------------------------------- Allowance for loan losses (62,649) - ------------------------------------------------------------------------------- NET LOANS .............. $ 3,389,466 =============================================================================== FINANCIAL RATIOS - ------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- Net income as a percentage of: Average shareholders' equity ..... 11.58% 17.53% 20.83% 11.03% 3.46% Average total assets ............. 0.88 1.51 1.94 1.00 0.30 Average earning assets ........... 0.97 1.70 2.10 1.14 0.35 Shareholders' equity at year-end as a percentage of: Total assets at year-end ......... 6.17% 7.45% 8.55% 8.19% 8.31% Total gross loans at year-end .... 11.06 12.62 13.88 13.43 14.38 Total deposits at year-end ....... 6.86 8.43 9.71 9.66 10.09 Average shareholders' equity as a percentage of: Average total assets ............. 7.58% 8.62% 9.33% 9.04% 8.64% Average gross loans .............. 11.39 13.13 14.14 13.64 14.11 Average total deposits ........... 8.68 10.04 10.77 10.47 10.10 - ------------------------------------------------------------------------------- ---- 64 COMMON STOCK AND SHAREHOLDER DATA - -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- Market price: High for year ..................... $ 30.56 $ 30.63 $ 13.75 $ 8.49 $ 6.34 Low for year ...................... 9.89 12.98 7.70 3.95 4.00 At year end ....................... 15.40 30.44 13.47 8.49 4.17 Book value at year end ............. 9.12 8.31 6.96 5.65 5.10 Market price/book value at year end 168.8% 366.6% 193.5% 150.3% 81.8% ================================================================================ On February 3, 1999, the Company announced an 8% stock dividend to be 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. In addition, 5% stock dividends were declared on January 24, 1995, payable February 24, 1995, to shareholders of record on February 15, 1995, and on January 20, 1994, payable February 28, 1994, to shareholders of record on February 10, 1994. 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, 1999, shareholders of record approximated 1,577 exclusive of shares held in street name at brokerage firms. QUARTERLY DATA The following table sets forth the range of the high and low prices for the calendar periods indicated as adjusted for the 8% stock dividend paid in March 1999: - ----------------------------------------------------------------------------- 1998 1997 --------------------------------------------- STOCK MARKET QUOTATIONS HIGH LOW HIGH LOW - ----------------------------------------------------------------------------- First Quarter .................. $30.56 $25.92 $17.67 $12.98 Second Quarter ................. 30.16 24.31 17.82 13.27 Third Quarter .................. 28.81 11.17 23.07 17.56 Fourth Quarter ................. 25.39 9.89 30.63 21.77 ============================================================================= - ---- 65 Quarterly financial information for the Company and its subsidiaries for the years ended December 31, 1998 and 1997, is summarized below.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------------------------------------------------------- 1998 DECEMBER 31 SEPTEMBER 30 - --------------------------------------------------------------------------------------------------------------------------------- Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $93,615 $91,627 Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 66,645 64,460 Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 7,799 5,610 Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . 22,149 (10,066) Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 51,994 55,775 Income from continuing operations before taxes. 29,001 (6,991) - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $16,905 $(3,099) - --------------------------------------------------------------------------------------------------------------------------------- BASIC NET INCOME (LOSS) PER SHARE $ 0.40 $ (0.07) DILUTED NET INCOME (LOSS) PER SHARE $ 0.40 $ (0.07) - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- 1997 DECEMBER 31 SEPTEMBER 30 - --------------------------------------------------------------------------------------------------------------------------------- Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $81,372 $74,372 Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 59,491 53,844 Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 8,107 7,068 Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . 30,504 19,046 Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 46,638 41,886 Income from continuing operations before taxes . . . . . . . . . . . . 35,250 23,936 Income (loss) from operations of discontinued operation, net of tax. . 150 690 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $21,392 $14,873 - --------------------------------------------------------------------------------------------------------------------------------- Basic income per share from continuing operations. . . . . . . . . . . 0.50 0.34 Basic income per share of discontinued operation . . . . . . . . . . . 0.01 0.02 - --------------------------------------------------------------------------------------------------------------------------------- BASIC NET INCOME PER SHARE $ 0.51 $ 0.36 - --------------------------------------------------------------------------------------------------------------------------------- Diluted income per share from continuing operations. . . . . . . . . . 0.48 0.32 Diluted income per share of discontinued operation . . . . . . . . . . -- 0.02 DILUTED NET INCOME PER SHARE $ 0.48 $ 0.34 - ---------------------------------------------------------------------------------------------------------------------------------
Per share data has been adjusted for stock dividends declared and paid in 1999 and 1997, and 3-for-2 stock splits effected in 1996 and first quarter 1998. Earnings per share for the current year and all prior periods presented reflects the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." - --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------------------------------------------------- 1998 JUNE 30 MARCH 31 - -------------------------------------------------------------------------------------------------------------------------- Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $90,146 $84,071 Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 65,069 60,637 Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 14,127 5,839 Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . 35,501 18,103 Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 59,074 50,083 Income from continuing operations before taxes. . . . . . . . . . . . 27,369 22,818 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME $16,567 $13,375 - -------------------------------------------------------------------------------------------------------------------------- BASIC NET INCOME (LOSS) PER SHARE $0.39 $0.31 DILUTED NET INCOME (LOSS) PER SHARE $0.39 $0.31 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- 1997 JUNE 30 MARCH 31 - -------------------------------------------------------------------------------------------------------------------------- Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $68,495 $58,733 Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 47,839 40,161 Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 4,427 3,290 Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . 15,959 16,129 Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 40,793 39,714 Income from continuing operations before taxes.. . . . . . . . . . . . 18,578 13,286 Income (loss) from operations of discontinued operation, net of tax . (132) (79) - -------------------------------------------------------------------------------------------------------------------------- NET INCOME $10,959 $ 7,953 - -------------------------------------------------------------------------------------------------------------------------- Basic income per share from continuing operations . . . . . . . . . . 0.26 0.19 Basic income per share of discontinued operation . . . . . . . . . . . -- -- - -------------------------------------------------------------------------------------------------------------------------- BASIC NET INCOME PER SHARE $ 0.26 $ 0.19 - -------------------------------------------------------------------------------------------------------------------------- Diluted income per share from continuing operations. . . . . . . . . . 0.25 0.18 Diluted income per share of discontinued operation . . . . . . . . . . -- -- DILUTED NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . $ 0.25 $ 0.18 - --------------------------------------------------------------------------------------------------------------------------
Per share data has been adjusted for stock dividends declared and paid in 1999 and 1997, and 3-for-2 stock splits effected in 1996 and first quarter 1998. Earnings per share for the current year and all prior periods presented reflects the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." - -------------------------------------------------------------------------------- --- 66 ANALYSIS OF CHANGES IN NET INTEREST MARGIN Changes in the Company's net interest income are a function of both changes in rates and changes in volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the years indicated. The total change is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). The change in interest due to both rate and volume (changes in rate multiplied by changes in volume) is classified as rate/volume. 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.
- ------------------------------------------------------------------------------------------------------------------------------------ 1998 OVER 1997 1997 OVER 1996 RATE/ RATE/ (DOLLARS IN THOUSANDS) VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Increase/(decrease) in: Loans /(1)/ . . . . . $66,966 $(20,255) $14,788 $61,499 $53,038 $4,866 $1,486 $59,390 Trading instruments. (240) (390) (30) (660) (1,102) 960 (356) (498) Securities available for sale. . . . . . 4,474 (1,522) 1,234 4,186 12,522 (607) (351) 11,564 Securities held to maturity. . . . . . (9) 4 -- (5) (13) (1) -- (14) Federal funds sold and securities purchased under resale agreements. 9,014 (536) 2,547 11,025 2,767 319 89 3,175 Loans held for sale. 445 (82) 79 442 173 19 7 199 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest income $80,650 $(22,781) $18,618 $76,487 $67,385 $5,556 $ 875 $73,816 - ----------------------------------------------------------------------------------------------------------------------------------- Savings. . . . . . . 119 4 41 164 66 4 1 71 Money market. . . . 4,431 352 1,576 6,359 8,660 1,134 663 10,457 Time - under $100,000 1,736 64 602 2,402 (3,967) (40) 13 (3,994) Time - $100,000 and 7,503 (854) 2,306 8,955 1,938 (225) (12) 1,701 over/(2)/ . . . . . - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits $13,789 $ (434) $ 4,525 $17,880 $ 6,697 $ 873 $665 $8,235 - ----------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 840 81 306 1,227 769 115 28 912 Long-term borrowings: Floating rate notes and subordinated debentures. . . . (55) 21 (4) (38) (81) 10 (2) (73) Capital 2,000 (40) (18) 1,942 4,509 -- -- 4,509 securities/(3)/ . - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE $16,574 $ (372) $ 4,809 $21,011 $11,894 $ 998 $ 691 $13,583 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGES IN NET INTEREST INCOME $64,076 $(22,409) $13,809 $55,476 $55,491 $4,558 $ 184 $60,233 - -----------------------------------------------------------------------------------------------------------------------------------
(1) The rate change for interest income on loans includes a $163,000 positive and a $519,000 negative impact of derivative instruments for the years ended December 31, 1998 and 1997, respectively. Loans are net of unearned income and deferred loan fees. (2) The rate change for interest expense on time deposits under $100,000 includes a $245,000 and $360,000 positive impact of derivative instruments for the years ended December 31, 1998 and 1997, respectively. (3) The rate change for interest expense on capital securities includes a $1.1 million and $666,000 positive impact of derivative instruments for the years ended December 31, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- - --- 67 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 12 banking offices located throughout California, banking offices located in Phoenix, Arizona and Denver, Colorado and loan production offices located in Menlo Park and San Diego, California; Austin, Texas; Bellevue, Washington; Boston, Massachusetts and Reston, Virginia. 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 Division, International Banking Division, Financial Services Division, Corporate Cash Management, The Lewis Horwitz Organization, 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. However, Imperial Trust Company, a subsidiary of the Bank, is licensed to operate a trust business under the laws of the State of California and operates from offices in Los Angeles, Costa Mesa and San Francisco. The Bank is licensed as an insurance agent and can engage in insurance activities as permitted under applicable law. As of December 31, 1998, the Bank and its subsidiaries had total assets of $6.1 billion and total deposits of $5.6 billion. Net income for 1998 was $39.0 million. COMPETITION - The banking and financial services business in the Bank's market areas is highly competitive. The competitive environment is a result of 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 principally relies upon 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 open market operations in U.S. government securities, varying the discount rate on member bank borrowings and setting reserve require-ments 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: Crown American Bank ("CAB"), a state-chartered industrial bank, was formed in mid-1998 to provide secured small business loans, the majority of which are guaranteed in part by the Small Business Administration. CAB had assets of $58.0 million and total deposits of $21.5 million at December 31, 1998. CAB had net income of 68 $489,000 for 1998. The small business lending activities are being returned to a division of the Bank and the CAB charter is expected to be sold. Imperial Trust Company, a California licensed trust company, had total assets under management of approximately $9.6 billion at December 31, 1998. The Trust Company reported net income of $1.2 million for 1998. Imperial Ventures, Inc. ("IVI") was organized in 1977 and is licensed as a small business investment company. IVI reported net income of $31,600 for 1998. At December 31, 1998, IVI had total assets of $1.4 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, reported net income of $1.2 million for 1998. At December 31, 1998, ISC had total assets of $6.8 million. Pacific Bancard Association, Inc. ("PBA") was formed in 1976 to facilitate merchant bankcard processing activities. In the fourth quarter of 1997, PBA sold its 50% investment in American Heritage Pacific Bancard Association which was formed in 1994. PBA recognized a $3.5 million pretax gain on the sale. PBA's assets at December 31, 1998, consisted of deposits totaling $3.1 million at Imperial Bank. PBA reported net income of $123,900 for 1998. U S Audiotex, LLC, is an 80% owned subsidiary of the Bank that provides payment processing services to government agencies and municipalities. U S Audiotex had a net loss of $104,000 for 1998. 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 reported net income of $77,000 for 1998. 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, 1998, Realty's total assets consisted of deposits with Imperial Bank totaling $636,900. Net income for 1998 was $16,400. 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, 1998, the Trust had assets of $76.0 million, of which $75.6 million reflects its investment in the Junior Subordinated Debentures issued by the Company. The Trust had net income of $138,800 for 1998. Imperial Creditcorp ("ICC") seeks to generate capital appreciation through medium-term equity investments made in financial sector businesses. At December 31, 1998, ICC's total assets were $20.4 million. Net income for 1998 of $8.4 million was derived primarily from the exercise of an equity option and sale of the acquired common stock. Altair Corporation, acquired in September 1998, provides software systems to bankruptcy trustees and practitioners. Altair had total assets of $6.8 million at December 31, 1998, and reported a net loss of $10,600 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. 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. The Company accounts for its investment in ICII using the equity method of accounting. On December 19, 1998, the Company announced in a Schedule 13D filing with the Securities and Exchange Commission, its intention to sell the 8.9 million shares of ICII common stock it owns. The Company is actively pursuing opportunitis to sell these shares. 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 69 number of changes to laws and regulations affecting the Bank and the Company and additional legislative and regulatory changes have occurred in the past several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted. BANK HOLDING COMPANY - The Company is regulated under the BHC Act and as such is required to file annual reports of its operations with the Board and is subject to examination by it. The BHC Act requires, among other things, the Board's prior approval whenever a bank holding company proposes to (i) acquire all or substantially all the assets of a bank, (ii) acquire direct or indirect ownership or control of more than 5% voting shares of a bank, or (iii) merge or consolidate with another bank holding company. As contemplated by the BHC Act, numerous states have enacted laws, and nearly every state in the nation has contemplated laws, which would permit the acquisition of banks located within the state by out-of-state bank holding companies. In September 1994, full interstate banking legislation was adopted by Congress in the Riegle-Neal Interstate Banking and Branch Efficiency Act ("the Riegle-Neal Act"). Under the Riegle-Neal Act, interstate banking is allowed in three different ways: (i) effective September 1995, a bank owned by a holding company may acquire a subsidiary bank anywhere in the U.S., (ii) effective September 1995, a bank owned by a holding company may act as an agent in accepting deposits or servicing loans, and (iii) effective June 1, 1997, a bank may establish a branch or merge with a bank in another state, but only if the bank's home state permits interstate mergers and branches, and the other state has not passed a law to prohibit interstate mergers or branches. The Riegle-Neal Act is subject to certain phase in and opt out provisions. The State of California has passed interstate banking legislation. Any out-of-state bank holding company is permitted to acquire a California bank provided that reciprocal rights are granted to California bank holding companies. The BHC Act prohibits a bank holding company, with certain exceptions, from engaging in or acquiring direct or indirect control of 5% or more of the voting shares of any company engaged in non-banking activities. The Board is authorized to approve, among other things, a bank holding company's acquisition of control of any company engaged in activities which the Board has determined to be closely related to banking or managing or controlling banks. In making such determination, the Board is required to weigh the expected benefits of the acquisition to the public, such as greater convenience and increased competition or gains in efficiency, against the risks of possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest and unsound banking practices. The Company has received notification from the Board that it is in violation of Section 4(c)(8) of the BHC Act and Section 225.22(d)(2)(II) of Regulation Y with regards to its ownership of ICII common stock. In a December 1998 filing with the Securities Exchange Commission, the Company stated its intention to sell its investment in ICII. The violations of banking regulations will be corrected once a sale of the ICII stock has been finalized. 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 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, 1998, the Bank could distribute up to $132.4 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 70 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 1999 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 is occurring. During this initial period, SAIF member institutions pay 0.0630% of domestic deposits while BIF member institutions, such as the Bank, pay 0.0126% of domestic deposits. Full pro rata sharing of the FICO bond interest payments will take effect on January 1, 2000. FDICIA also requires each insured depository institution to prepare annual financial statements in accordance with generally accepted accounting principles which must be audited by an independent public accountant. Each institution must also prepare a management report stating management's responsibility for preparing the institution's annual financial statements, for complying with designated safety and soundness laws and regulations and for other related matters. In addition, the report must contain an assessment by management of the effectiveness of internal controls and procedures over financial and regulatory reporting and of the institution's compliance with designated laws and regulations. The institution's independent public accountant must examine, attest to, and report separately on, assertions of management concerning internal controls and procedures. The Bank is complying with these requirements. FDICIA required the establishment of minimum acceptable operational and managerial standards, and standards for asset quality, earnings, and valuation of publicly traded shares for depository institutions and their holding companies. The operational standards must cover internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and employee compensation. The asset quality and earnings standards must specify a maximum ratio of market value to book value for publicly traded shares. An institution which fails to meet such standards must submit a corrective action plan within 30 days. The federal bank regulatory agencies have adopted final regulations which require institutions to adopt written real estate lending policies that, among other things, must be consistent with guidelines adopted by the agencies. Among the guidelines adopted are maximum loan-to-value ratios for land loans (65%), development loans (75%), construction loans (80- 85%), loans on owner occupied 1-4 family property, including home equity loans (no limit, but loans at or above 90% require private mortgage insurance), and loans on other improved property (85%). The guidelines permit institutions to make loans in excess of the supervisory loan-to-value limits if such loans are supported by other credit factors, but the aggregate of such nonconforming loans should not exceed the institution's risk-based capital, and the aggregate of nonconforming loans secured by real estate other than 1-4 family property should not exceed 30% of risk-based capital. 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 portfolio. 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. 71 In 1995, the federal bank regulatory agencies determined that the allowance for loan losses established pursuant to Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("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 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 continues to take steps to comply with the requirements in all respects. CAPITAL ADEQUACY GUIDELINES - Risk-adjusted capital guidelines, issued by bank regulatory authorities, assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity. The guidelines currently require a minimum Tier I capital ratio of 4% and a total risk weighted capital ratio of 8% in order for an institution to be classified as adequately capitalized. Institutions which maintain a Tier I ratio of 6% and total capital ratio of 10% are defined as well capitalized. Tier I capital basically consists of common 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, 1998, were 9.20% and 10.45%, 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, 1998, was 7.76%. 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 $7.9 million for 1998. The Bank houses its Corporate Service Center at 2015 Manhattan Beach Boulevard, Redondo Beach, California. The property is owned by the Bank. 72
DIRECTORY IMPERIAL BANCORP, SUBSIDIARIES AND ENTERPRISES IMPERIAL BANCORP & IMPERIAL BANK EXECUTIVE OFFICES IMPERIAL CREDITCORP Century Boulevard at the San Diego Freeway Century Boulevard at the San Diego Freeway P. O. Box 92991 P. O. Box 92991 Los Angeles, California 90009 Los Angeles, California 90009 (310) 417-5600 (310) 417-5600 - ------------------------------------------------------------- -------------------------------------------------------------- IMPERIAL BANK REALTY COMPANY, INC. ALTAIR CORP. Century Boulevard at the San Diego Freeway 5757 Memorial Drive, Suite 200 P. O. Box 92991 Houston, Texas 77007 Los Angeles, California 90009 (800) 868-5755 (310) 417-5600 - ------------------------------------------------------------- -------------------------------------------------------------- DIRECTORS GEORGE L. GRAZIADIO, JR. WILLIAM L. MACDONALD Chairman of the Board, President and Chief Executive Officer, President and Chief Executive Officer, Compensation Imperial Bancorp Resource Group Chairman of the Board and Co-Founder, Imperial Bank Director, Imperial Bancorp and Imperial Bank - ------------------------------------------------------------- -------------------------------------------------------------- NORMAN P. CREIGHTON DANIEL R. MATHIS Vice Chairman and Chief Executive Officer, Imperial Bank President and Chief Operating Officer, Imperial Bank Director, Imperial Bancorp and Imperial Bank Director, Imperial Bank - ------------------------------------------------------------- -------------------------------------------------------------- JOHN A. ANDREINI LEE E. MIKLES Andreini & Company Chairman, Mikles/Miller Management Director, Imperial Bank Director, Imperial Bancorp and Imperial Bank - ------------------------------------------------------------- -------------------------------------------------------------- RICHARD K. EAMER PAUL A. NOVELLY Venture Capitalist President, Apex Oil Co. Director, Imperial Bancorp and Imperial Bank Director, Imperial Bancorp and Imperial Bank - ------------------------------------------------------------- -------------------------------------------------------------- G. LOUIS GRAZIADIO, III CHARLES T. OWEN President, Ginarra Holdings, Inc. President and Publisher, San Diego Business Journal Director, Imperial Bancorp Director, Imperial Bank - ------------------------------------------------------------- -------------------------------------------------------------- ROBERT L. HARRIS GREGG E. TRYHUS President, Entertainment Properties Trust President and Owner, Grayhawk Director, Imperial Bank Development Company Director, Imperial Bank - ------------------------------------------------------------- -------------------------------------------------------------- IMPERIAL BANK MANAGEMENT COMMITTEE NORMAN P. CREIGHTON JAMES R. DALEY Vice Chairman and Chief Executive Officer Executive Vice President - ------------------------------------------------------------- -------------------------------------------------------------- DANIEL R. MATHIS CHRISTINE M. MCCARTHY President and Chief Operating Officer Executive Vice President and Chief Financial Officer - ------------------------------------------------------------- -------------------------------------------------------------- J. RICHARD BARKLEY MAHLON L. VIGESAA Executive Vice President and Director, Human Resources Executive Vice President - ------------------------------------------------------------- -------------------------------------------------------------- RICHARD J. CASEY STEPHEN P. YOST Executive Vice President Executive Vice President and Chief Credit Officer - ------------------------------------------------------------- -------------------------------------------------------------- H.W. DUKE CHENOWETH Executive Vice President - -------------------------------------------------------------
73 DIRECTORY OF BANK OFFICES ARIZONA . Phoenix (602) 417-1100 SOUTHERN CALIFORNIA . Beverly Hills (310) 281-2400 . Downtown Los Angeles (213) 484-3700 . Los Angeles International Airport (310) 417-5600 . Orange County - Costa Mesa (714) 641-2200 . San Diego (619) 338-1500 . San Fernando Valley - Sherman Oaks (818) 379-2901 . San Gabriel Valley - City of Industry (626) 810-1186 NORTHERN CALIFORNIA . Central Valley - Fresno (559) 244-3900 . East Bay - Walnut Creek (925) 941-1900 . Sacramento (916) 491-1300 . San Francisco (415) 954-5000 . Santa Clara Valley - San Jose (408) 451-8508 COLORADO . Denver (303) 294-3340 LOAN PRODUCTION OFFICES . Austin, Texas (512) 349-2333 . Bellevue, Washington (425) 454-6604 . Boston, Massachusetts (617) 521-9400 . Menlo Park, California (650) 233-3000 . Reston, Virginia (703) 689-3768 . San Diego, California (619) 509-2360 SPECIALTY OFFICES . Apparel and Textile Industries Division . Commercial Real Estate Mortgage Banking . Imperial Entertainment Group . International Division and Foreign Exchange . Wine Industry Division IMPERIAL BANK -- SUBSIDIARIES & DIVISIONS . Commercial Banking Division . Corporate Cash Management . Equipment Leasing Division . Financial Institutions Division . Financial Services Division: Association Bank Services Bankruptcy Deposit Division Labor Management Division Title/Escrow Division . Imperial Processing Division: Gaming Industry Division Imperial Technology Solutions Merchant Card Services Division Pacific Bancard Association US Audiotex, LLC . Imperial Securities Corporation . Imperial Trust Company . Imperial Ventures, Inc. . Lewis Horwitz Organization . Mortgage Warehouse Division . Real Estate Division: Residential Construction Lending . Small Business Lending Division . Special Markets Division: Emerging Growth Division Factoring and Commercial Finance Merchant Banking Division . Syndicated Finance Division 74 SHAREHOLDER INFORMATION Requests for financial information, annual reports, quarterly reports and SEC filings should be addressed to: IMPERIAL BANCORP Investor Relations Department P. O. Box 92991 Los Angeles, California 90009 (800) 957-8483 For other information visit our World Wide Web site: www.imperialbank.com STOCK TRANSFER AGENT AND REGISTRAR American Stock Transfer and Trust Co. 40 Wall Street, 46th Floor New York, NY 10005 (800) 937-5449 INDEPENDENT AUDITORS KPMG LLP STOCK LISTING Imperial Bancorp - NYSE - IMP 75 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 31, 1999, on its behalf by the undersigned, thereunto duly authorized. Date /s/ George L. Graziadio, Jr. March 31, 1999 ---------------------------------- George L. Graziadio, Jr. Chief Executive Officer /s/ Christine M. McCarthy March 31, 1999 ----------------------------------- Christine M. McCarthy Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below on March 31, 1999 by the following persons on behalf of the registrant and in the capacities indicated. Date /s/ George L. Graziadio, Jr. March 31, 1999 ----------------------------------- George L. Graziadio, Jr. Chairman of the Board, President and Chief Executive Officer /s/ William L. MacDonald March 31, 1999 ----------------------------------- William L. MacDonald Director /s/ Norman P. Creighton March 31, 1999 ----------------------------------- Norman P. Creighton Director /s/ G. Louis Graziadio, III March 31, 1999 ----------------------------------- G. Louis Graziadio, III Director /s/ Richard K. Eamer March 31, 1999 ----------------------------------- Richard K. Eamer Director /s/ Lee E. Mikles March 31, 1999 ----------------------------------- Lee E. Mikles Director /s/ Paul A. Novelly March 31, 1999 ----------------------------------- Paul A. Novelly Director 76 FORM 10-K CROSS-REFERENCE INDEX - -------------------------------------------------------------------------------- Part I PAGE - -------------------------------------------------------------------------------- ITEM 1. Business Financial Review.........................5 Selected Statistical Information.........4, 8-9, 13, 18, 20-21, 64-67 Market Risk..............................16 Description of Business..................68-72 ITEM 2. Properties...............................72 ITEM 3. Legal Proceedings........................50 ITEM 4. Submission of Matters to a vote of security holders.......................* Executive Officers of the Registrant.....73 - -------------------------------------------------------------------------------- PART II. PAGE - -------------------------------------------------------------------------------- ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters................................4, 65 ITEM 6. Selected Financial Data..................4 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............5-27 ITEM 8. Financial Statements and Supplementary Data Imperial Bancorp and Subsidiaries - Consolidated Financial Statements......28-31 Notes to Consolidated Financial Statements...................32-62 Independent Auditors' Report.............63 Selected Statistical Information.........4, 8-9, 13, 18, 20-21, 64-67 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................* - -------------------------------------------------------------------------------- PART III PAGE - -------------------------------------------------------------------------------- ITEM 10. Directors and Executive Officers of the Registrant......................** ITEM 11. Executive Compensation...................** ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................** ITEM 13. Certain Relationships and Related Transactions...................** - -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements (See Item 8 for a listing of all financial statements). (2) Financial Statement Schedules All schedules normally required by Form 10-K are omitted since they either are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits. Exhibit 10. Split Dollar Insurance Agreement and Assignment Agreement Exhibit 21. Subsidiaries of Registrant. Exhibit 23. Independent Auditors' Consent Exhibit 27. Financial Data Schedule. (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, 1998. 77 EXHIBIT INDEX - -------------------------------------------------------------------------------- Exhibit Number Description - -------------- ----------------------------------------------------------- 10 Split Dollar Insurance Agreement and Assignment Agreement 21 Subsidiaries of Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule - -------------------------------------------------------------------------------- 78 EX-10 2 SPLIT DOLLAR INSURANCE AGREEMENT EXHIBIT 10 SPLIT DOLLAR INSURANCE AGREEMENT AND TRANSFER OWNERSHIP AND ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL This Agreement is entered into as of the 9th day of Dec, 1998 at --- --- LOS ANGELES, California, by and among (i) IMPERIAL BANCORP, a California - ----------- corporation ("Employer"), (ii) G. LOUIS GRANZIADIO, III, MARY LOU GRANZIADIO AREA, AND ALIDA GRAZIADIO CALVILLO, Trustees under the GRAZIADIO DYNASTY TRUST II dated DECEMBER 9, 1998 ("Trust"), (iii) GEORGE L. GRAZIADIO, JR ("Employee"), ---------------- and (iv) REVA M. GRAZIADIO ("Reva"). Employer, Trust, Employee and Reva shall referred to individually as a "Party" or collectively as the "Parties". W I T N E S S E T H: A. WHEREAS, the Employer is the owner of a life insurance policy, John Hancock Mutual Life Insurance Company ("Insurer") Policy No. 80140387 (together with any supplementary contracts issued by the Insurer in conjunction therewith, "the Policy") on the life of Employee in the original face amount at the time of issue of $10,5000,00; B. WHEREAS, Employer is a bank holding company, and Employee is a valuable employee of Employer, and is its duly elected Chairman of the Board, President and CEO; C. WHEREAS, the Policy was previously subject to a Split Dollar Life Insurance Agreement entered into October 17, 1996 by Employer and a different trust, under which that other trust undertook to pay a portion of the policy premiums, but which was terminated by mutual agreement with and resulted in Employer becoming sole owner of the Policy; D. WHEREAS, Employer is willing to continue to pay a portion of the premium payments on the Policy, wishes to provide benefits to Employee in consideration of the performance of services by Employee for Employer, and desires to enter into this Agreement as an investment; E. WHEREAS, Employer, in order to induce Trust to pay the remaining premium payments previously being paid by the other trust under the now terminated agreement referred to in Recital C above, is willing to assign the Policy to Trust if its interest in the policy is secured by a reassignment and pledge of the Policy to Employer by the Trust as collateral; F. WHEREAS, Trust is willing to pay that portion of the premium payments which are not paid by the Employer if the Policy is assigned to it subject to a collateral reassignment of the Policy to the Employer to secure the Employer's interest in the policy; and G. WHEREAS, the Parties desire to enter into this Agreement in order to secure payment, out of the proceeds of the Policy, of the portions of the Policy proceeds due to Trust and to the Employer under the terms of this Agreement; NOW, THEREFORE, for value received, the receipt and sufficiency of which are hereby acknowledged, the Parties mutually agree as follows: 1. OTHER DEFINITIONS. In this Agreement: ----------------- a. Advances. Advances refer to: -------- (i) the cumulative total (without interest) of all premiums paid by the Employer including $2,490,000 of premiums paid prior to the date of this Agreement; (ii) reduced by any amounts received by Employer as reimbursement of premiums paid; and 2 (iii) reduced further by any indebtedness with respect to the Policy from Employer to Insurer. b. Change in Control. "Change in Control" refers to the first to occur ----------------- of any of the following events: (i) Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act") becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of the Employer's capital stock entitled to vote in the election of directors; (ii) During any period of not more than two consecutive years, not including any period prior to the adoption of this Agreement, individuals who at the beginning of such period constitute the board of directors of the Employer, and any new director (other than a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in clauses (i), (ii), (iii) or (iv) of this Paragraph 1.b) whose election by the board of directors, or nomination for election by the Employer's stockholders was approved by a vote of at least three- fourths (3/4th) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof. (iii) The shareholders of the Employer approve any consolidation or merger of the Employer, other than a consolidation or merger of the Employer in which the holders of the common stock of the Employer immediately prior to the consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the consolidation or merger; (iv) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or (v) The shareholders of the Employer approve the sale or transfer of substantially all of the assets of the Employer to parties that are not within a "controlled group of corporations" (as defined in Code (S) 1563) in which the Company is a member. c. "Code" shall refer to the Internal Revenue Code of 1986, as amended. ---- d. "Assignment Agreement" shall refer to the document attached as Schedule -------------------- A assigning the Policy to the Trust and collaterally reassigning the Policy to secure the Employer's Interest as determined pursuant to Paragraph 5.b herein. e. "Death Benefit" shall refer to the amount payable by Insurer to ------------- Beneficiary on the death of the Survivor. 3 f. "Disability" shall refer to the total and permanent incapacity, ---------- as determined by the Employer based upon competent medical advice, of the Employee to render substantial services to the Employer by reason of mental or physical disability. g. "Imputed Income Amount" shall refer to the amount equal to the --------------------- Trust's Share of Death Benefit divided by 1,000 and then multiplied by the applicable Imputed Income Rate, regardless of whether or not the Trust Premium Payment is paid by the Trust. h. "Imputed Income Rate" shall refer to the rate published by the ------------------- Internal Revenue Service in the P.S. 58 Table or U.S. Life Table 38, as applicable as amended from time to time, or if lower, Insurer's standard one-year term rates for original issue insurance on a single life, as allowed by Revenue Rulings 66-110 and 67-154. The currently published Imputed Income Rate is set forth on Schedule B attached hereto and incorporated herein by reference. i. "Insureds" shall collectively refer to the Employee and Reva or -------- to the Survivor. j. "Survivor" shall refer to the second to die of Employee and Reva. -------- k. "Trust Premium Payment" shall refer to the amount of Policy --------------------- premium allowed to be paid by the Trust (at the Trustee's sole option) directly to the Insurer, pursuant to Paragraph 3.c herein. l. "Trust's Share of Death Benefit" shall refer to the amount of the ------------------------------ Death Benefit, less the Employer's interest in the Policy proceeds at death of the Survivor, determined pursuant to Paragraph 5.b herein. m. "Trust's Interest" shall mean all to the rights and interests in ---------------- the Policy not specifically retained by the Employer, including but not necessarily limited to the Trust's Share of Death Benefit and the Trust's interest in the balance of the Proceeds as defined in Paragraph 5.c. herein. 2. DESCRIPTION OF POLICY/POLICY OWNERSHIP. In furtherance of the purposes -------------------------------------- of this Agreement the Trust shall own the Policy. The Trust's ownership of the Policy shall be subject to the terms and conditions contained in this Agreement. 3. POLICY PREMIUM PAYMENTS. ----------------------- a. Payment of Premium by Employer. Except as otherwise provided in ------------------------------ Paragraph 3.b herein, the Employer may pay 10 equal annual payments of $830,000. The premium shall not be reduced by the premiums paid by the Trust, if any. The Employer may pay the premium paid pursuant to this Paragraph 3.a directly to the Insurer and may continue paying said amounts until the 10 annual payments have been paid. 4 b. Change in Control, Death or Disability. In the event of a Change in -------------------------------------- Control, or the death or Disability of the Employee, the Employer shall pay the equal annual payments of $830,000 remaining under the terms of the Agreement in accordance with Paragraph 3.a herein. c. Trust Premium Payment. The Trust may, at the Trustee's sole option, --------------------- pay all or part of the premium on the Policy. The Trust Premium Payment shall be first allocated to satisfy the imputed Income Amount. 4. COLLATERAL ASSIGNMENT AND POSSESSION OF POLICY. ---------------------------------------------- a. Assignment Agreement Form. To secure repayment of the Advances to the ------------------------- Employer and secure the Trust's Interest, Employer and the Trust shall execute the Assignment Agreement attached hereto as Schedule A. Employer shall nevertheless retain possession of the policy until all of the Advances have been repaid. b. Exercise of Rights. The Employer shall have possession of the Policy ------------------ from the Effective Date of this Agreement until the return of its Advances paid pursuant to Paragraph 11.a herein. The Employer shall make the Policy available to the Insurer in order to make any change desired by the Trust as to the designation of beneficiary or the selection of a settlement option, subject, however, to the terms of the Assignment Agreement. The Trust shall have no power or authority to borrow against the Policy, except on behalf of the Employer as provided in Paragraph 4.1 (a) of the Assignment Agreement. 5. BENEFICIARY DESIGNATION AND PAYMENT OF POLICY PROCEEDS. ------------------------------------------------------ a. Beneficiary. The Trust shall have the right to name the Policy ----------- beneficiary, subject to the Employer's interest in the Policy as determined pursuant to Subparagraph b of this Paragraph. b. Employer's Interest in Policy. ----------------------------- (i) Payment of Death Benefit. If the Survivor dies during the term of ------------------------ this Agreement, the Employer shall have an interest in the Policy proceeds equal to the amount of the Advances as of the date of death of the Survivor, plus an amount equal to $120,000. (ii) Surrender of Policy. If the Policy is surrendered during the term ------------------- of this Agreement prior to the death of the Survivor, the Employer shall have an interest in the Policy equal to the greater of: (i) the amount of the Advances as of the date of surrender, or (ii) the cash surrender value of the Policy as of the date of surrender, less reimbursed Advances. 5 c. Balance of Proceeds. The balance, if any, of the proceeds of the ------------------- Policy, including proceeds attributable to insurance purchased with annual dividends-and Trust Premium Payments shall be paid to the Trust. 6. PROCEDURE AT SURVIVOR'S DEATH. Upon the death of the Survivor while ----------------------------- the Policy and this Agreement are in force, the Employer shall promptly take all necessary steps, including rendering of such assistance as may reasonably be required by the Trust, to obtain payment from the Insurer of the amounts payable under the Policy to the respective Parties, as provided under Paragraph 5 hereof. 7. CHOICE OF DIVIDEND OPTION(S). To the extent that the Insurer declares ---------------------------- dividends on the Policy, such dividends shall be reinvested in the Policy, as specified by the Trustee. 8. TERMINATION OF AGREEMENT. This Agreement will terminate when the first ------------------------ of any of the following events occurs: a. Performance Upon Survivor's Death. Performance of the Agreement's --------------------------------- terms, following the death of the Survivor; b. Mutual Agreement: The Employer and the Trustee mutually agree to ---------------- terminate the Agreement. c. Exercise of Trustee's Option to Reimburse Employer Advances. The ----------------------------------------------------------- Trustee exercises its option, pursuant to Paragraph 10.b, to reimburse the Employer for the Advances at the time when the amount of the Advances equals or exceeds the cash surrender value of the Policy. 9. DISPOSITION OF POLICY UPON TERMINATION OF AGREEMENT. --------------------------------------------------- a. Purchase of Insurance. Upon the termination of this Agreement by --------------------- mutual agreement as provided in Paragraph 8.b., the Trust shall have a 30 day option to reimburse the Employer for an amount equal to greater of the Advances, or the cash surrender value of the Policy as of the date of termination of the Agreement, and thereby obtain ownership of the Policy free of any encumbrances. b. Encumbrance. If the Policy shall then be encumbered by an ----------- assignment, policy loan, or other means, the Employer shall either remove such encumbrance, or reduce the amount necessary to reimburse the Employer pursuant to Paragraph 10.a hereof by the total amount of indebtedness outstanding against the Policy, from which Trust has previously made any reimbursement of Employer Advances. If the Trust does not exercise its right to reimburse the Employer, the Trust shall execute all documents required by the Insurer to transfer ownership of the Policy to the Trust. Such transfer shall constitute satisfaction of any obligation the Trust has to the Employer with respect to this Agreement. If the Trust exercises its right, Employer shall, execute all documents 6 required by the Insurer to remove and satisfy the Collateral Assignment outstanding on the Policy under the Assignment Agreement. 10. RETURN OF PREMIUMS PAID TO EMPLOYER. ----------------------------------- a. Return of Premiums Paid After Ten Years. If the Agreement has not --------------------------------------- terminated pursuant to Paragraph 8, upon the earlier of: (i) the thirteenth (13th) anniversary of the Policy issue date, or (ii) if there has been no Change in Control, the failure of both the Employer and the Trustee to make Premium Payments On the Policy within 30 days of the premium due date, the Employer shall, in order to satisfy the Trust's obligation to repay the Advances to the Employer, borrow against the Policy, pursuant Paragraph 4.b of the Assignment Agreement, an amount equal to the Advances; provided, however, that the Trustee may satisfy its obligation by tendering to the Employer an amount equal to the Advances. The Collateral Assignment thereunder shall secure the Trust's performance under this provision. b. Trust's Option. -------------- (i) Right to Reimburse Employer. At any time prior to the termination --------------------------- of the Agreement, the Trust shall have the option to reimburse the Employer for the Advances. The Trust shall exercise said option by tendering to the Employer an amount equal to the Advances. If the Policy shall then be encumbered by an assignment, policy loan, or other means, the Employer shall either remove such encumbrance, or reduce the amount necessary to reimburse the Employer pursuant to this Paragraph 10.b.(i). (ii) Effect on Agreement. ------------------- (a) If, at the time the Trust exercises its option pursuant to Paragraph 10.b.(i), the amount of the Advances equals or exceeds the cash surrender value of the Policy, this Agreement shall terminate upon the Trustee's exercise of said option and the Employer shall execute all documents required by the Insurer to remove and satisfy the Collateral Assignment outstanding on the Policy under the Assignment Agreement. (b) If, at the time the Trustee exercises its option pursuant to Paragraph 10.b.(i), the amount of the Advances is less than the cash surrender value of the Policy, this Agreement shall continue until terminated pursuant to Paragraph 8; however, the Employer's obligation to pay the Policy premiums pursuant to Paragraph 3.a shall cease (c) No Right of Reimbursement. Except as provided in Paragraphs ------------------------- 9.b and 10.b, the Trust shall have no right of reimbursement from the Employer for any amounts borrowed by the Employer pursuant to the Assignment Agreement. 7 11. TAXABLE INCOME. The Employer will comply with all federal, state and -------------- local reporting and withholding requirements applicable to this Agreement throughout the term of this Agreement. If withholding is required, the Employer may satisfy its withholding obligations from any and all compensation to be paid to the Employeee and if necessary, Employee shall provide cash to Employer to enable the Employer to satisfy its withholding obligation. 12. TRUST'S RIGHT TO ASSIGN ITS INTEREST. The Trust shall have the right ------------------------------------ to transfer its entire interest in the Policy (subject to the Employer's Interest hereunder). If the Trust makes such transfer, all its rights shall be vested in the transferee, and the Trust shall have no further interest in the Policy and no further rights or obligations under this Agreement. 13. CLAIMS PROCEDURE. The following claims procedure shall apply to the ---------------- Agreement: a. Filing of a Claim for Benefits. The Employer or the beneficiary of ------------------------------ the Policy shall make a claim for the benefits provided under the Policy in the manner provided in the policy. The Employer is hereby appointed the attorney-in-fact of either the Trust or the beneficiary to make such claim if not made within ten days of notice from the Employer. b. No Limitation of Rights. Nothing contained herein shall be ----------------------- construed to limit the rights or remedies of the Employer, or the Trust against the Insurer. 14. AMENDMENTS. Amendments may be added to this Agreement by a written ---------- agreement signed by each of the Parties and attached hereto. 15. GOVERNING LAW/VENUE. This Agreement shall be subject to, and construed ------------------- according to, the laws of the State of California. 16. INSURANCE COMPANY NOT A PARTY TO AGREEMENT. The Insurer shall not be ------------------------------------------ deemed a party to this Agreement, but will respect the rights of the Parties as herein developed upon receiving an executed copy of this Agreement. 17. A BINDING AGREEMENT. This Agreement shall bind the Employer and the ------------------- Employer's successors, the Employee and assigns, the Trust and its successors and assigns, and any Policy beneficiary. 18. COUNTERPARTS. This Agreement may be executed in One or more ------------ counterparts, each of which when executed and delivered shall be an original, and all of which when executed shall constitute one and the same instrument. 8 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year first above written. "EMPLOYER" IMPERIAL BANCORP, a California corporation By: /s/ Richard Baker ---------------------------------- RICHARD BAKER Its: Senior Vice President/General Counsel/Secretary By: /s/ Christine M. McCarthy ---------------------------------- CHRISTINE M. McCARTHY Its: Executive Vice President/ Chief Financial Officer "TRUST" GRAZIADIO DYNASTY TRUST II, dated DECEMBER 9, 1998 ---------- By: /s/ G. Louis Graziadio III ---------------------------------- G. LOUIS GRAZIADIO III Its: Trustee By: /s/ Marylou Graziadio Area ---------------------------------- MARYLOU GRANZIADIO AREA Its: Trustee By: /s/ Alida Graziadio Calvillo ---------------------------------- ALIDA GRAZIADIO CALVILLO Its: Trustee "EMPLOYEE" /s/ George L. Graziadio, Jr. ------------------------------------- GEORGE L. GRAZIADIO, JR. 9 "REVA" /s/ Reva M. Graziadio ----------------------------- REVA M. GRAZIADIO ACKNOWLEDGED: John Hancock Mutual Life Insurance Co. By: ------------------------------ The John Hancock Mutual Life Insurance Company JAMES C. MAGNER without assuming any responsibilities for the validity or the sufficiency of this instrument, has on this date, filed a Its: Executive Director duplicate thereof at it's Home Office. Estate and Business Planning Group Date: 1/22/99 ----------- JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY The John Hancock Variable Life Insurance Company without assuming any responsibility for the validity or the sufficiency of this instrument, has on this date, filed a duplicate thereof at it's Home Office. Date: 1/22/99 ----------- JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: /s/ [ILLEGIBLE SIGNATURE] Secretary
10 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT is entered into and effective this 9th day of December 1998, by and between (i) IMPERIAL BANCORP, a California - --- corporation ("Employer"), as owner and as a beneficiary of date certain life Insurance Policy No. 80140397 issued by John Hancock Mutual Life Insurance Co., located in the City of Boston, State of Massachusetts, ("Insurer"), and any supplementary contracts issued in connection therewith ("Policy"), upon the lives of GEORGE L. GRAZIADIO, JR. and REVA M. GRAZIADIO (collectively "Insureds"), and (ii) G. LOUIS GRAZIADIO, M, MARY LOU GRAZIADIO AREA, and ALIDA GRAZIADIO CALVILLO, Trustees, of the GRAZIADIO DYNASTY TRUST II, dated December 9, 1998 ("Trust"),. ---------- WHEREAS George L. Graziadio, Jr. ("Employee") is a valued employee of Employer; and WHEREAS the Employer desires to provide the Employee with a split-dollar life insurance arrangement by assigning the Policy to the Trust and paying certain parts of some of the annual premiums due on the Policy ("Advances"), as more specifically provided for in that certain Split-Dollar Life Insurance Agreement("Agreement"), dated as of December 9, 1998, ---------- entered into by and among the Trust, the Employee, Reva, and the Assignor; and WHEREAS, in consideration of the Employer's making of the Advances and of Employer's assignment of the policy to the Trust, the Trust has agreed to grant Employer a security interest in the Policy as collateral security for the repayment of the Advances. NOW, THEREFORE, for value received, the undersigned Employer hereby assigns, transfers and sets over to the Trust, all of its right title and interest in the policy, while the Trust assigns back to the Employer, its successors and assigns the following specific rights in the Policy, subject to the following terms and conditions: 1. OTHER DEFINITIONS. Capitalized terms shall have the meanings set ----------------- forth herein or as provided in the Agreement. The assignment by the Trust to the Employer is referred to herein as the Collateral Assignment. 2. ASSIGNMENT. This Collateral Assignment is made, and the Policy is to ---------- be held, as collateral security to secure performance of all the obligations of the Trust to the Employer, either now existing or that may hereafter arise, pursuant to the terms of the Agreement. 3. LIMITATIONS. The Employer's interest in the policy shall be as ----------- follows: a. Surrender or Cancellation. If the Policy is surrendered during ------------------------- the term of the Agreement, the right to receive an amount equal to the greater of (i) the Advances as of the date of surrender, or (ii) the cash surrender value of the Policy as of the date of surrender, less reimbursed Advances. (i) The Employer retains the power and authority to borrow from the Insurer, in the name of the Trust, the amount payable under the Agreement (including amounts due under Paragraph 10 of the Agreement), and to pledge or otherwise encumber the Policy to ensure repayment of the loan. The Employer shall have the right to receive the loan proceeds and shall have no obligation to make any payments on the loan. (ii) To Employer shall not have the authority to cancel or surrender the policy. b. DEATH BENEFIT. If the Agreement is in effect upon the death of ------------- the Survivor, the right to receive an amount equal to: (i) The Advances as of the date of the Survivor's death, plus (ii) $120,000. c. INCIDENTS OF OWNERSHIP. Except as specifically retained by the ---------------------- Employer herein or in the Agreement, the Trust shall have all incidents of ownership in the Policy, including but not limited to: (i) To name the Policy beneficiary, subject to Employer's interest in the Policy as determined pursuant to Paragraph 5.b of the Agreement. (ii) The right further to assign its interest in the Policy; (iii) The right to change the beneficiary of that portion of the proceeds to which it is entitled under Paragraph 5 of the Agreement; and (iv) The right to exercise all settlement options permitted by the terms of the Policy, provided, however, that all rights assigned to the Trust shall be subject to the terms and conditions of the Agreement. 4. ENDORSEMENT. The Employer shall, upon request, forward the Policy to ----------- the Insurer without unreasonable delay, for any designation or change of beneficiary, for any election of optional mode of settlement, or for the exercise of any other right granted to the Trust hereunder. 5. EMPLOYER'S RIGHT. The Insurer is hereby authorized to recognize the ---------------- Employer's claims to rights hereunder without investigating the reason for any action taken by the Employer, the validity or amount of any of the liabilities of the Trust to the Employer under 2 the Agreement, the existence of any default therein, the giving of any notice required herein, or the application to be made by the Employer of any amounts to be paid to the Employer. The signature of the Employer shall be sufficient for the exercise of any rights under the Policy assigned hereby to the Employer and the receipt of the Employer for any sum received by it shaft be a discharge and release therefore to the Insurer. 6. REASSIGNMENT. Upon receiving full payment for its interest in the ------------ Policy pursuant to the Agreement, the Employer shall reassign to the Trust the Policy any all specific rights retained by it under this Collateral Assignment. 7. CONFLICT. In the event of any conflict between the provisions of this -------- Assignment Agreement and the Agreement, or any other evidence of any liability with respect to the Policy or the rights of collateral security herein, the provisions of this Assignment Agreement shall prevail, as to the Insurer, and the Agreement shall prevail between the Parties thereto. 8. ASSIGNMENT FOR SECURITY. It is the intent of the undersigned that the ----------------------- assignment to the Trust makes the Trust the owner of the policy and the holder of all incidents of ownership, as defined in Treasury Regulation (S)(S) 20.2042-1(c)(2)-(6), in the Policy, and that the Collateral Assignment assign an interest in proceeds becoming payable under the Policy as security for the Employer's Interest without granting to Employer any such incidents, and it is agreed that this Assignment Agreement shall be construed so as to accomplish this intent. IN WITNESS WHEREOF the Parties have executed this Assignment Agreement as of the day and year first above written. TRUST: GRAZIADIO DYNASTY TRUST, II dated December 9, 1998 By: /s/ G. Louis Graziadio, III ------------------------------------ G. LOUIS GRAZIADIO, III Its: Trustee By: /s/ Marylou Graziadio Area ------------------------------------ MARYLOU GRAZIADIO AREA Its: Trustee By: /s/ Alida Graziadio Calvillo ------------------------------------ ALIDA GRAZIADIO CALVILLO Its: Trustee 3 BENEFICIARY: By: /s/ G. Louis Graziadio, III ---------------------------------- G. LOUIS GRAZIADIO, III Its: Trustee By: /s/ Marylou Graziadio Area ---------------------------------- MARYLOU GRAZIADIO AREA Its: Trustee By: /s/ Alida Graziadio Calvillo ---------------------------------- ALIDA GRAZIADIO CALVILLO Its: Trustee EMPLOYER: IMPERIAL BANCORP, a California corporation By: /s/ Richard M. Baker ---------------------------------- RICHARD M. BAKER Its: Senior Vice President/General Counsel/Secretary By: /s/ Christine M. McCarthy ---------------------------------- CHRISTINE M. McCARTHY Its: Executive Vice President/Chief Financial Officer INSUREDS: /s/ George L. Graziadio, Jr. - ------------------------------------- GEORGE L. GRAZIADIO, JR. /s/ Reva M. Graziadio - ------------------------------------- REVA M. GRAZIADIO 4 SCHEDULE B TO SPLIT DOLLAR LIFE INSURANCE AGREEMENT AND COLLATERAL ASSIGNMENT IMPUTED INCOME RATES (Per $1,000 of Trust's Share of Death Benefit)
==================================================================================================================================== Standard One-Year Rates for Original Issue Insurance U.S. Life Table 38 (Per John Hancock Life) P.S. 58 Table Rates - ------------------------------------------------------------------------------------------------------------------------------------ Mr. Graziadio Mrs. Graziadio Insured's Insured's AGE AGE RATE AGE RATE AGE RATE - ------------------------------------------------------------------------------------------------------------------------------------ 76 74 $ 5.50 74 $ 9.69 74 $ 67.33 - ------------------------------------------------------------------------------------------------------------------------------------ 77 75 6.50 75 10.93 75 73.23 - ------------------------------------------------------------------------------------------------------------------------------------ 78 76 7.68 76 12.53 76 79.63 - ------------------------------------------------------------------------------------------------------------------------------------ 79 77 9.08 77 14.38 77 86.57 - ------------------------------------------------------------------------------------------------------------------------------------ 80 78 10.71 78 16.43 78 94.09 - ------------------------------------------------------------------------------------------------------------------------------------ 81 79 12.64 79 18.77 79 102.23 - ------------------------------------------------------------------------------------------------------------------------------------ 82 80 14.90 80 21.38 80 111.04 - ------------------------------------------------------------------------------------------------------------------------------------ 83 81 17.56 81 23.90 81 120.57 - ------------------------------------------------------------------------------------------------------------------------------------ 84 82 20.65 82 26.57 82 130.86 - ------------------------------------------------------------------------------------------------------------------------------------ 85 83 24.27 83 29.39 83 141.95 - ------------------------------------------------------------------------------------------------------------------------------------ 86 84 29.83 84 32.44 84 153.91 - ------------------------------------------------------------------------------------------------------------------------------------ 87 85 33.68 85 35.67 85 166.77 - ------------------------------------------------------------------------------------------------------------------------------------ 86 39.06 86 180.60 - ------------------------------------------------------------------------------------------------------------------------------------ 87 40.54 87 195.43 - ------------------------------------------------------------------------------------------------------------------------------------ 88 44.36 88 211.33 - ------------------------------------------------------------------------------------------------------------------------------------ 89 48.40 89 228.31 - ------------------------------------------------------------------------------------------------------------------------------------ 90 52.64 90 246.45 - ------------------------------------------------------------------------------------------------------------------------------------ 91 54.61 91 265.76 - ------------------------------------------------------------------------------------------------------------------------------------ 92 62.93 92 286.25 - ------------------------------------------------------------------------------------------------------------------------------------ 93 71.96 93 307.98 ====================================================================================================================================
ACKNOWLEDGED: John Hancock Mutual Life Insurance Co. By: ------------------------------------- JAMES C. MAGNER Its: Executive Director, Estate and Business Planning Group The John Hancock Variable Life Insurance Company without assuming any responsibility for the validity or the sufficiency of this instrument, has on this date, filed a duplicate thereof at it's Home Office. Date 1/22/99 ----------------- JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY BY: [/s/ SIGNATURE ILLEGIBLE] Secretary 5 EX-21 3 SUBSIDIARIES OF IMPERIAL BANCORP EXHIBIT 21 SUBSIDIARIES OF IMPERIAL BANCORP All of the following subsidiaries of the Company are California corporations except Imperial International Bank which is organized under the laws of the United States and Imperial Trade Services, Ltd., which is incorporated in Hong Kong. Each subsidiary is included in the Company's consolidated financial statements. PERCENTAGE OF VOTING SECURITIES OWNED BY NAME IMMEDIATE PARENT IMMEDIATE PARENT - ------------------------------------------------------------------------------- Altair Corporation Imperial Bancorp 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% Crown American Bank Imperial Bank 100% Imperial Asset Advisors, Inc. Imperial Bank 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% Pacific Bancard Association, Inc. Imperial Bank 100% U S Audiotex, LLC Imperial Bank 80% 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 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 4 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Imperial Bancorp: We consent to incorporation by reference in the registration statements (No. 2-75352), (No. 2-61660), (No. 2-98462) and (No. 2-75353) on Forms S-8 and S-16 of Imperial Bancorp of our report dated January 25, 1999, relating to the consolidated balance sheet of Imperial Bancorp and subsidiaries as of December 31, 1998 and 1997 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, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Imperial Bancorp. KPMG LLP Los Angeles, California March 31, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 355,317 0 1,446,000 52,971 694,814 3,898 3,898 3,452,115 (62,649) 6,189,180 5,569,647 60,601 101,343 75,767 0 0 224,433 157,389 6,189,180 294,623 39,525 25,311 359,459 90,666 102,648 256,811 33,375 173 216,926 72,197 43,748 0 0 43,748 1.03 0.99 5.72 30,615 0 9,770 0 51,143 23,793 1,924 62,649 0 0 0
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