<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________________________ to
____________________________ Commission file number 0-7722
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
California 95-2575576
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9920 South La Cienega Boulevard
Inglewood, California 90301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 417-5600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock: Aggregate market value of Common Stock held by non-affiliates as
of March 1, 1997: $496,492,406.
Number of Shares of Common Stock outstanding as of March 1, 1997: 25,608,354
shares.
Debt Securities: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due
1999. As of December 31, 1996, $3,373,000 in principal amount of such Notes and
$1,082,000 in principal amount of such Debentures were outstanding.
Documents Incorporated By Reference: Sections of a Proxy Statement which will be
filed within 120 days of Fiscal Year Ended December 31, 1996 are incorporated by
reference into Part III hereof.
This report includes a total of 67 pages. Exhibit Index begins on page 62.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Five Year Summary of Selected Financial Information......... 4
Financial Review............................................ 5
Average Balances, Yields and Rates Paid.................... 6
Interest Rate Sensitivity.................................. 10
Analysis of the Allowance for Loan Losses.................. 16
Allocated Allowance for Loan Losses........................ 16
Financial Statements
Consolidated Balance Sheet.................................. 21
Consolidated Statement of Income............................ 22
Consolidated Statement of Changes in Stockholders' Equity... 23
Consolidated Statement of Cash Flows........................ 24
Notes to Consolidated Financial Statements.................. 25
Independent Auditors' Report................................ 47
Selected Statistical Information
Securities................................................. 48
Maturity Distribution of Loans............................. 48
Deposits................................................... 48
Financial Ratios........................................... 49
Common Stock and Shareholder Data.......................... 49
Quarterly Data............................................. 50
Analysis of Changes in Net Interest Margin................. 51
Description of Business..................................... 52
Directory................................................... 57
Signatures.................................................. 59
Form 10-K Cross Reference Index............................. 60
Exhibits Index.............................................. 61
</TABLE>
3
<PAGE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
IMPERIAL BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, -----------------------------------------------------------------------------
EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income....................... $ 209,156 $ 174,779 $ 135,772 $ 139,704 $ 220,619
Interest expense...................... 68,054 60,154 37,415 36,280 101,683
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Net interest income................. 141,102 114,625 98,357 103,424 118,936
Provision for loan losses............. 6,881 16,122 12,174 41,977 20,859
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Net interest income after
provision for loan losses.......... 134,221 98,503 86,183 61,447 98,077
Noninterest income.................... 63,080 43,546 34,572 38,015 60,023
Gains - Imperial Credit
Industries, Inc. stock............... 36,411 -- -- 14,538 5,033
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Total operating income................ 233,712 142,049 120,755 114,000 163,133
Personnel expense..................... 64,876 47,702 47,087 40,483 58,538
Other noninterest expense............. 63,256 62,622 63,078 72,557 80,925
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes
and minority interest................ 105,580 31,725 10,590 960 23,670
Income tax provision (benefit)...... 43,278 10,071 3,968 (345) 12,756
Minority interest in income of
consolidated subsidiary............ -- -- -- -- 2,974
Income from continuing operations..... 62,302 21,654 6,622 1,305 7,940
(Loss) income from operations of
discontinued operation, net of tax.. (8,168) 1,523 21 (251) --
Net income............................ $ 54,134 $ 23,177 $ 6,643 $ 1,054 $ 7,940
- ----------------------------------------------------------------------------------------------------------------------
Income per Share(1)
Income per share from
continuing operations.............. $2.39 $0.86 $0.27 $0.06 $0.34
Net income per share................ 2.07 0.92 0.27 0.05 0.34
- ----------------------------------------------------------------------------------------------------------------------
At Year End
Assets................................ $ 3,350,170 $ 2,788,374 $2,378,709 $2,794,517 $3,405,971
Net loans............................. 2,026,997 1,661,945 1,335,074 1,431,959 1,615,641
Deposits.............................. 2,950,277 2,363,616 1,959,710 2,387,759 3,027,493
Short-term borrowings................. 44,897 159,636 190,919 193,616 149,273
Long-term borrowings.................. 4,455 5,906 8,153 9,866 11,252
Stockholders' equity.................. 286,351 228,236 197,776 185,205 184,048
Financial Ratios
Return on average equity.............. 20.83% 11.03% 3.46% 0.57% 4.35%
Return on average assets.............. 1.94 1.00 0.30 0.04 0.22
Average equity-to-average assets...... 9.33 9.04 8.64 7.02 5.11
Capital Ratios for Imperial Bank
Leverage ratio........................ 8.7% 8.6% 9.0% 6.9% 6.1%
Risk based capital
Tier I capital...................... $ 260,654 $ 211,212 $ 190,355 $ 185,142 $ 201,644
Total capital....................... 296,024 239,678 213,003 209,462 229,868
Tier I capital ratio................ 9.2% 9.3% 10.6% 9.6% 9.0%
Total capital ratio................. 10.5 10.6 11.9 10.9 10.2
Average Balances
Total assets.......................... $ 2,785,089 $ 2,326,308 $2,224,856 $2,645,492 $3,568,402
Earning assets........................ 2,449,148 2,031,551 1,887,389 2,207,159 3,189,583
Loans................................. 1,836,864 1,540,940 1,361,630 1,481,231 1,794,586
Total deposits........................ 2,412,150 2,006,737 1,903,203 2,258,201 3,122,316
Stockholders' equity.................. 259,823 210,188 192,172 185,712 182,362
Common Share and Stockholder Data(1)
Market price, end of year............. $21.82 $13.75 $6.75 $6.75 $4.61
Book value, end of year............... 11.28 9.27 8.24 8.02 8.00
Average common and common equivalent
shares outstanding................... 26,116,767 25,168,985 24,200,733 23,431,464 23,304,714
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(1) Adjusted for stock dividends declared and paid in 1992 through first quarter 1997 and a 3-for-2 stock split
effected in 1996.
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</TABLE>
4
<PAGE>
FINANCIAL REVIEW
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes in trends related to the
financial condition of Imperial Bancorp (the "Company") and its results of
operations. It should be read in conjunction with the audited consolidated
financial statements and footnotes appearing elsewhere in this report.
PERFORMANCE SUMMARY
The Company posted significantly improved income for 1996. Net income for the
year ended December 31, 1996 increased 134% to $54.1 million or $2.07 per share.
For 1995, the Company earned $23.2 million or $0.92 per share. Net income for
1996 was positively impacted by an after-tax gain of $21.0 million realized from
the sale of a portion of the Company's investment in Imperial Credit Industries,
Inc. (NASDAQ: NM: ICII) ("ICII"), and from the sale of stock by ICII.
Additionally, net income increased $6.8 million after-tax which represented the
Company's share of ICII's total gain associated with the sale of a portion of
its investment in Southern Pacific Funding Corporation (NYSE: SFC) ("SPFC")
through an initial public offering. These increases were partially offset by
losses of $8.2 million, net of tax, associated with the Company's discontinued
precious metals operation.
Income as measured by return on average total assets was 1.94% for the year
ended December 31, 1996, as compared to 1.00% for the year ended December 31,
1995. Return on average stockholders' equity was 20.83% for the year ended
December 31, 1996, a significant increase from the 11.03% return on average
stockholders' equity for 1995.
The increase in net income, excluding the gains associated with ICII mentioned
above, the discontinued operation, the impact of donations of ICII stock to not-
for-profit organizations, and the 1995 gain on sale of merchant accounts, ("core
net income") in 1996 was driven by several factors, including a 19% increase in
average loans from the prior year; improved net interest income; decreases in
loan loss provision and net real estate-owned ("REO") expense, and continued
growth in fee-based activities. The increase in core net income was partially
offset by increases in salaries and benefits expense, customer services and
professional and consulting fees.
Net interest income and net interest margin for the year ended December 31, 1996
were $141.1 million and 5.8%. This compares to net interest income and net
interest margin of $114.6 million and 5.7% for the year ended December 31, 1995.
Noninterest income for year ended December 31, 1996 totaled $99.5 million
compared to $43.5 million for 1995. Excluding non-core business items,
noninterest income for the year ended December 31, 1996 totaled $47.6 million
compared to $37.1 million for 1995, a 28% improvement. The increase for the year
was mainly attributable to a $16.3 million improvement in the Company's share of
income from ICII of which $11.8 million represented the Company's share of the
gains realized by ICII on its sale of SPFC stock. The Company also recorded
improvements in other fee-based income in 1996, including trust fees,
international fees, service charges on deposits and commissions related to the
sale of non-proprietary mutual funds. Offsetting these increases was a reduction
in merchant card servicing fees.
Noninterest expenses amounted to $128.1 million for the year ended December 31,
1996. This compares to $110.3 million reported for 1995. This increase was
primarily related to the addition of personnel and the opening of one new
regional office and several loan production offices during 1996 as well as
increases in customer services and professional and consulting expenses.
Partially offsetting these increases were reductions in REO expense, regulatory
assessments and data processing costs.
At December 31, 1996, the Company's total assets were $3.4 billion, total loans
were $2.1 billion and stockholders' equity and allowance for loan losses totaled
$322 million. This compares favorably to total assets of $2.8 billion, total
loans of $1.7 billion and stockholders' equity and allowance for loan losses of
$266 million at December 31, 1995.
Total deposits at December 31, 1996, were $3.0 billion of which $1.5 billion, or
50%, were noninterest bearing demand deposits. At the previous year end, total
deposits were $2.4 billion, including $1.1 billion, or 48%, demand deposits. The
overall funding base of the Company is enhanced by a sizable level of demand
deposits resulting from the Company's long standing relationships with the real
estate services industry.
Nonaccrual loans of $20.4 million at December 31, 1996 decreased $8.5 million
from year end 1995 while REO of $2.1 million at December 31, 1996, decreased
$8.2 million from year end 1995. For the year ended December 31, 1996, the
provision for loan losses totaled $6.9 million, a decrease of $9.2 million from
the year ended December 31, 1995. REO expenses totaled $1.9 million for 1996 as
compared to $8.5 million in 1995.
At December 31, 1996, the allowance for loan losses amounted to $36.1 million or
1.8% of total loans as compared to $37.4 million or 2.2% of total loans at
December 31, 1995. The allowance for loan losses coverage of nonaccrual loans at
year end 1996 approximated 177%, an increase from 129% at December 31, 1995.
Imperial Bank is classified "Well Capitalized" with leverage, Tier I and total
capital ratios at December 31, 1996, of 8.7%, 9.2% and 10.5%, respectively, as
compared to 8.6%, 9.3% and 10.6%, respectively, the year earlier.
5
<PAGE>
EARNINGS PERFORMANCE
AVERAGE BALANCES, YIELDS AND RATES PAID (1)
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<TABLE>
<CAPTION>
1996
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INTEREST
AVERAGE INCOME/ AVERAGE
(IN THOUSANDS) BALANCE EXPENSE RATE %
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<S>
Earning assets: <C> <C> <C>
Loans (2)............................. $1,836,864 $173,734(3) 9.5%
Deposits placed with banks............ -- -- --
Trading instruments................... 59,767 2,971 5.0
Securities available for sale......... 357,837 21,675 6.1
Securities held to maturity........... 4,313 306 7.1
Federal funds sold and securities
purchased under resale agreements.... 185,659 9,970 5.4
Loans held for sale................... 4,708 500 10.6
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TOTAL INTEREST-EARNING ASSETS $2,449,148 $209,156 8.5%
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Allowance for loan losses............... (39,429)
Cash.................................... 249,341
Other assets............................ 126,029
----------
Total assets.......................... $2,785,089
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Interest-bearing liabilities:
Savings............................... 18,277 $ 456 2.5%
Money market.......................... 485,295 14,802 3.1
Time - under $100,000................. 218,064 12,467 5.7
Time - $100,000 and over.............. 671,357 36,826 5.5
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TOTAL INTEREST-BEARING DEPOSITS $1,392,993 $ 64,551 4.6%
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Short-term borrowings................. 61,361 3,160 5.1
Long-term borrowings.................. 5,154 343 6.7
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TOTAL INTEREST-BEARING LIABILITIES $1,459,508 $ 68,054 4.7%
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Demand deposits....................... 1,019,157
Other liabilities..................... 46,601
Stockholders' equity.................. 259,823
----------
Total liabilities and
stockholders' equity.............. $2,785,089
----------
NET INTEREST INCOME/
NET INTEREST MARGIN $141,102 5.8%
-------- ----
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</TABLE>
(1) The yields are not presented on a tax equivalent basis as the effects are
not material.
(2) Average balance includes nonaccrual loans.
(3) Includes net loan fee income of $9.7 million, $5.4 million, $4.4 million and
$3.9 million for the years ended December 31, 1996, 1995, 1994 and 1993,
respectively.
NET INTEREST INCOME: The Company's operating results depend primarily on net
interest income. A primary factor affecting the level of net interest income is
the Company's interest rate margin between the yield earned on interest-earning
assets and cost of interest-bearing liabilities as well as the difference
between the relative amounts of average interest-earning assets and average
interest-bearing liabilities. For the year ended December 31, 1996, net interest
income increased to $141.1 million from $114.6 million in 1995.
The Company's net interest margin increased slightly to 5.8% for 1996 from 5.7%
for 1995. Net interest income and net interest margin for the year ended
December 31, 1995 were negatively impacted by the Company's derivative financial
instruments outstanding during 1995. The impact was a $7.2 million reduction in
net interest income and a 35 basis point reduction in net interest margin for
the year ended December 31, 1995. Excluding the $7.2 million reduction in net
interest income for the year ended December 31, 1995, net interest margin for
1996 decreased by 32 basis points. This decline in spread resulted primarily
from the decrease in the Company's base lending rate which averaged 8.29% for
1996 compared with 8.83% for 1995 and decreased more rapidly than its borrowing
rates. Despite the decline in spread, net interest income increased $19.3
million in 1996, excluding the $7.2 million reduction to net interest income in
1995.
6
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE % BALANCE EXPENSE RATE % BALANCE EXPENSE RATE %
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,540,940 $143,627(3) 9.4% $1,361,630 $112,799(3) 8.3% $1,481,231 $113,671(3) 7.7%
-- -- -- -- -- -- 14,953 846 5.7
52,759 3,516 6.7 42,179 2,366 5.6 85,916 4,709 5.5
265,422 17,349 6.5 295,283 12,459 4.2 329,903 10,423 3.2
5,619 311 5.5 5,860 345 5.9 12,383 813 6.6
164,359 9,707 5.9 172,070 7,153 4.2 273,964 8,663 3.2
2,452 269 11.0 10,367 650 6.3 8,809 579 6.6
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$2,031,551 $174,779 8.7% $1,887,389 $135,772 7.2% $2,207,159 $139,704 6.3%
- -----------------------------------------------------------------------------------------------------------------------------
(39,993) (41,869) (39,582)
210,500 229,031 292,365
124,250 150,305 185,550
- ------------ ------------- ------------
$2,326,308 $2,224,856 $2,645,492
- ------------ ------------- ------------
$ 24,554 $ 613 2.5% $ 26,420 $ 654 2.5% $ 29,812 $ 720 2.4%
442,702 12,614 2.8 465,755 11,129 2.4 480,751 11,092 2.3
233,726 14,682 6.3 174,655 7,575 4.3 178,103 7,243 4.1
462,818 27,582 6.0 324,384 13,826 4.3 330,667 12,017 3.6
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$1,163,800 $ 55,491 4.8% $991,214 $ 33,184 3.3% $1,019,333 $ 31,072 3.0%
- -----------------------------------------------------------------------------------------------------------------------------
72,077 4,135 5.7 99,208 3,606 3.6 170,194 4,486 2.6
7,260 528 7.3 9,176 625 6.8 10,607 722 6.8
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$1,243,137 $ 60,154 4.8% $1,099,598 $ 37,415 3.4% $1,200,134 $ 36,280 3.0%
- -----------------------------------------------------------------------------------------------------------------------------
842,937 911,989 1,238,868
30,046 21,097 20,778
210,188 192,172 185,712
- ------------ ------------- -------------
$2,326,308 $2,224,856 $2,645,492
- ------------ ------------- -------------
$ 114,625 5.7% $ 98,357 5.2% $103,424 4.7%
------------------------- ------------------------ -----------------------
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</TABLE>
As illustrated by the table above and the Analysis of Changes in Net Interest
Margin (see page 51), the growth in the Company's loan portfolio had a much
greater impact on net interest income than the change in rates. The Company's
average loan portfolio for the year ended December 31, 1996 grew $296 million,
or 19% from 1995. Average demand deposit levels for the year ended December 31,
1996 increased approximately $176 million from the prior year while average CD
balances increased $193 million. The growth in the Company's CD portfolio and
the demand deposit base funded the Company's growth in average earning assets
which grew $418 million, or 21% from 1995.
In conformity with banking industry practice, payments for accounting, courier
and other deposit related services provided to the Company's real estate related
customers are recorded as noninterest expense. If these deposits were treated as
interest-bearing and the payments reclassified as interest expense, the
Company's reported net interest income and noninterest expense would have been
reduced by $11.2 million and $8.8 million, respectively, for the years ended
December 31, 1996 and 1995. The net interest margin for both years would have
been 5.3%.
7
<PAGE>
NONINTEREST INCOME: Noninterest income amounted to $99.5 million for 1996 as
compared to $43.5 million for 1995. The table below shows the major components
of noninterest income.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Service charges on deposit accounts..... $ 4,892 $ 4,328
Trust fees.............................. 8,592 7,646
Gain on origination and sale of loans... 3,222 2,265
Equity in net income of Imperial Credit
Industries, Inc........................ 21,444 5,192
Other service charges and fees.......... 10,122 6,500
Merchant and credit card fees........... 2,395 4,855
Gain on securities available for sale... 229 260
Gain on trading instruments............. 3,197 2,852
Gain on sale of merchant card accounts.. -- 6,400
Gain on sale of investment in Imperial
Credit Industries, Inc................. 25,650 --
Gain resulting from sale of stock by
Imperial Credit Industries, Inc........ 10,761 --
Appreciation of donated Imperial Credit
Industries, Inc. common stock.......... 3,698 --
Other income............................ 5,289 3,248
- -------------------------------------------------------------
TOTAL $99,491 $43,546
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</TABLE>
Noninterest income for the year ended December 31, 1996 was significantly
impacted by gains realized from the sale of a portion of the Company's
investment in ICII. In April 1996, the Company sold 1.5 million shares of ICII
as a part of an offering which included the sale of approximately 2.2 million
new ICII shares by ICII to the public. An additional 0.5 million shares were
sold by ICII to the public in May 1996. The Company recorded a $25.6 million
pre-tax gain on the sale of its ICII shares. After the sales of ICII shares, the
book value of ICII common stock approximated $8.72 per share. As such, the
Company recorded a $10.8 million pre-tax gain which approximated the excess of
ICII's book value per share over the book value of the Company's remaining
investment in ICII.
In addition, the Company realized a significant increase in equity in the net
income of ICII in 1996. In June 1996, ICII sold 2.3 million shares of their
subsidiary, SPFC, in connection with SPFC's initial public offering of 5.7
million shares. In the fourth quarter of 1996, ICII sold an additional 1.0
million shares of SPFC to the public. ICII's sale of its SPFC stock resulted in
a pre-tax gain to ICII of $82.7 million. The Company's net equity in this pre-
tax gain realized by ICII approximated $11.8 million and is included in the
consolidated statement of income as "Equity in net income of Imperial Credit
Industries, Inc." Excluding the gains from the SPFC transaction, the equity in
net income of ICII increased $4.4 million in 1996 despite the reduction in
ownership percentage to approximately 25%. The improvement was due to ICII's
greater volume and higher profitability on loan sales executed through
securitization transactions as well as a full year of income realized by ICII
from new businesses acquired by ICII in 1995.
Also increasing noninterest income was $3.7 million in appreciation of ICII
stock which was donated to not-for-profit organizations during 1996. The
appreciation represents the difference between the market value and book value
of the ICII shares on the date they were donated. The Company recorded a
corresponding charitable donation expense in noninterest expenses (see
Noninterest Expense).
Excluding the non-core items, noninterest income for 1996 increased $10.4
million, or 28% from 1995. The Company recorded higher gains from the
origination and sales of SBA loans as loan volumes have increased over the prior
year. This line of business generated an additional $1.0 million for the year
ended December 31, 1996. Trust revenues from the Company's trust subsidiary,
Imperial Trust Company, increased $0.9 million, or 12% from 1995 as a result of
the Trust Company's increase in assets under management from $6.8 billion at
December 31, 1995 to $7.5 billion at December 31, 1996. The $3.6 million
increase in other service charges and fees that occurred in 1996 related to
various activities, most significant of which were the following: loan
processing and servicing fees increased $1.8 million; commissions related to the
sale of non-proprietary mutual funds improved $0.8 million; and international
fees increased $0.6 million. These increases were all related to larger volumes
in their respective operations. Other income improved $2.0 million in 1996
mainly due to an improvement in income on other equity investments and gain on
sales of the Company's other equity investments.
Partially offsetting the overall increase in noninterest income was a $2.5
million decline in merchant and credit card fees that resulted from the fourth
quarter 1995 sale of a portion of the Company's merchant card accounts.
NONINTEREST EXPENSE: Noninterest expense totaled $128.1 million for the year
ended December 31, 1996 compared to $110.3 million for the prior year. The table
below shows the major components of noninterest expense.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Salary and employee benefits....... $ 64,876 $ 47,702
Net occupancy expense.............. 9,165 8,861
Furniture and equipment............ 5,048 4,935
Data processing.................... 6,419 7,738
Customer services.................. 11,178 8,842
Net real estate owned expense...... 1,876 8,508
Regulatory assessments............. 298 3,225
Professional and consulting........ 5,967 3,526
Business development............... 3,659 3,079
Lawsuit settlements................ 679 (1,134)
Charitable donations............... 5,024 142
Other expense...................... 13,943 14,900
- -------------------------------------------------------------
TOTAL $128,132 $110,324
- -------------------------------------------------------------
</TABLE>
8
<PAGE>
The increase in noninterest expense was partially attributable to the charitable
donations of ICII stock during 1996 and to the favorable settlement of a lawsuit
which reduced noninterest expense for 1995.
Excluding the impact of the donations and prior year lawsuit settlement,
noninterest expense rose $11.7 million in 1996. This increase was primarily due
to the rise in salary and benefit costs. In addition to opening a new banking
office in Fresno, California and loan production offices in Boston,
Massachusetts: Austin, Texas: and Phoenix, Arizona, the Company's focus on
growth has centered around an investment in people resulting in a $5.9 million
increase in personnel expenses for the year ended 1996 when compared to the year
ended 1995. This investment was made to take advantage of the growing California
economy and to enhance the Company's existing presence in various industry
segments. Also, the Company adopted an additional deferred compensation plan on
January 1, 1996 which added approximately $3.2 million to benefit costs for the
year. As a result of the greater profitability realized in 1996, expenses
related to incentive compensation for the year ended 1996 increased $4.8 million
over the prior year. Effective January 1, 1996, the Company increased the match
on its 401-K Plan which increased expenses related to the plan by $0.6 million
for 1996 when compared to 1995.
Customer service costs related to demand deposits including accounting, courier
and other deposit related services increased $2.3 million in 1996 due to
increased average demand deposits volumes as these costs are a function of
deposit volume and interest rates. The Company incurred higher professional and
consulting fees during the year ended December 31, 1996. Increased consulting
expenses accounted for approximately $1.3 million of the increase. The Company
had retained the services of outside consultants to assist in the implementation
of its cost containment and revenue enhancement programs.
Offsetting these increases in noninterest expense were decreases in the
following components of noninterest expense. Regulatory assessments decreased
$2.9 million in 1996 due to a reduction in the FDIC deposit insurance premium
that occurred in the third quarter of 1995. The decline in data processing costs
of $1.3 million in 1996 resulted partially from the sale of the Company's
merchant card accounts in the fourth quarter of 1995. REO expenses totaled $1.9
million in 1996, a decrease of $6.6 million from 1995. This decline was mainly
due to a decrease in REO activity in 1996 resulting in direct holding costs
decreasing by $3.1 million and the provision for REO decreasing by $4.1 million
as compared to 1995.
INCOME TAXES
The Company recorded income tax expense from continuing operations of $43.3
million for the year ended December 31, 1996 representing an effective tax rate
of approximately 41.0%. For 1995, the Company's income tax expense from
continuing operations and effective tax rate approximated $10.1 million and
31.7%. During 1995, the Company recorded a $0.9 million reduction of tax expense
to reflect the finalization of prior years income tax issues. Also in 1995, the
Company reduced the valuation allowance on its deferred tax assets by
approximately $2.3 million. Excluding these items, the Company's effective tax
rate from continuing operations would have been 41.7% for 1995. At December 31,
1996, the Company had a net deferred tax liability of $1.5 million, compared to
a $4.4 million net deferred tax asset at December 31, 1995. The Company's
deferred tax asset is supported by carryback and carryforward provisions of the
tax laws as well as the Company's projection of taxable income for 1997.
DISCONTINUED OPERATION: In the second quarter of 1996, management of the Company
decided to discontinue the precious metals business which had been engaged in
trading and leasing of precious metals in addition to making loans secured by
precious metals since 1993. The decision to exit this line of business was made
in the wake of several operational losses for which the Company provided
approximately $9.8 million, net of tax, in 1996. This included provisions for
operational losses of $2.8 million, net of tax, recorded as a result of recent
developments occurring during the fourth quarter of 1996. The provision, in
addition to all of the results of operations from this division, is reflected in
the consolidated statement of income as "(Loss) income from operations of
discontinued operation, net of tax." Substantially all of the activities of the
precious metals division were terminated as of December 31, 1996.
ASSET LIABILITY MANAGEMENT
LIQUIDITY: For the Company, as with most commercial banking institutions,
liquidity is the ability to roll over substantial amounts of maturing
liabilities and to acquire new liabilities at levels consistent with
management's financial targets. The key to this on-going replacement activity is
the Company's reputation in the domestic money markets, which is based upon its
financial condition and its capital base.
The overall liquidity position of the Company has been enhanced by a sizable
base of demand deposits resulting from the Company's long standing relationships
with the real estate services industry which have provided a relatively stable
and low cost funding base. Demand deposits averaged $1.0 billion for the year
ended December 31, 1996 compared to $843 million for 1995. The Company's average
demand deposits and average stockholders' equity funded 46% and 45%,
respectively, of average total assets for the years ended December 31, 1996 and
1995.
These funding sources are augmented by payments of principal and interest on
loans and the routine liquidation of securities from the trading and available
for sale portfolios and Federal funds sold and securities purchased under resale
agreements. During 1996, the Company experienced a net cash outflow from its
investing activities of $386 million. This net outflow in investing activities
resulted primarily from the growth in the Company's loan portfolio, an outflow
of $359 million. The outflows were offset by the $473 million net cash provided
by the Company's financing activities consisting mainly of deposit
9
<PAGE>
inflows including $104 million in certificates of deposit and $483 million in
demand deposits, savings and money market accounts. These deposit inflows were
partially offset by $115 million of outflows attributable to short-term
borrowings.
Imperial Bancorp (the "Parent Company") liquidity is managed through the
purchase and sale of securities available for sale. This activity is directly
correlated to the activity in commercial paper. The Parent Company's only source
of funds for its annual sinking fund obligations on the Floating Rate Notes and
Debentures and other operating expenses is preferred and common stock dividends
received from Imperial Bank, the Company's principal subsidiary (the "Bank").
10
<PAGE>
INTEREST RATE SENSITIVITY MANAGEMENT: The primary objectives of the asset
liability management process are to provide a stable net interest margin,
generate net interest income to meet the Company's earnings objectives, and
manage balance sheet risks. These risks include liquidity risk, capital adequacy
and overall interest rate risk inherent in the Company's consolidated balance
sheet. In order to manage its interest rate sensitivity, the Company has adopted
policies which attempt to limit the change in pre-tax net interest income
assuming various interest rate scenarios. This is accomplished by adjusting the
repricing characteristics of the Company's assets and liabilities as interest
rates change. The Company's Asset Liability Committee ("ALCO") chooses
strategies in conformance with its policies to achieve an appropriate trade off
between interest rate sensitivity and the volatility of pre-tax net interest
income and net interest margin.
Each month the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on pre-tax interest income
and net interest margin by simulating various interest rate scenarios over
future time periods. Through the use of these simulations, the Company can
approximate the impact of these projected rate changes on its entire on and off-
balance sheet position or any particular segment of the consolidated balance
sheet.
The following table sets out the maturity and rate sensitivity of the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
1996. The cumulative interest sensitivity gap ("gap") as reflected in the table
represents the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing, whichever is earlier, at a given point in
time and is not necessarily indicative of the position on other dates.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
GREATER GREATER GREATER GREATER
THAN THAN THAN THAN NON
0-3 3-6 6-12 1-5 5 INTEREST-
(IN THOUSANDS) MONTHS MONTHS MONTHS YEARS YEARS BEARING TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Trading instruments(1)............... $ 64,887 $ -- $ -- $ -- $ -- $ -- $ 64,887
Securities available for sale......... 398,284 10,039 406 10,309 7,298 -- 426,336
Securities held to maturity........... -- -- 998 -- 3,195 -- 4,193
Federal funds sold and securities
purchased under resale agreements.... 357,000 -- -- -- -- -- 357,000
Loans held for sale(1)............... 5,531 -- -- -- -- -- 5,531
Loans:(2)
Commercial loans.................... 1,520,237 1,809 8,614 44,253 10,307 9,382 1,594,602
Real estate loans................... 155,001 16,062 39,061 187,374 39,584 10,760 447,842
Consumer loans...................... 19,844 9 43 460 -- 248 20,604
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $1,695,082 $ 17,880 $ 47,718 $ 232,087 $ 49,891 $ 20,390 $2,063,048
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses............. -- -- -- -- -- (36,051) (36,051)
Non-earning assets.................... -- -- -- -- -- 465,226 465,226
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,520,784 $ 27,919 $ 49,122 $ 242,396 $ 60,384 $ 449,565 $3,350,170
- ------------------------------------------------------------------------------------------------------------------------------------
Sources of Funds:
Deposits:
Demand.............................. -- -- -- -- -- 1,465,324 1,465,324
Savings............................. 17,324 -- -- -- -- -- 17,3324
Money market........................ 596,967 -- -- -- -- -- 596,967
Time - under $100,000............... 81,652 29,509 55,821 2,511 -- -- 169,493
Time - $100,000 and over............ 517,644 100,959 80,614 1,952 -- -- 701,169
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $1,213,587 $ 130,468 $ 136,435 $ 4,463 $ -- $ 1,465,324 $2,950,277
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings................. 44,897 -- -- -- -- -- 44,897
Long-term borrowings.................. 3,373 -- -- 1,082 -- -- 4,455
Noninterest bearing liabilities....... -- -- -- -- -- 64,190 64,190
Equity................................ -- -- -- -- -- 286,351 286,351
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $1,261,857 $ 130,468 $ 136,435 $ 5,545 $ -- $ 1,815,865 $3,350,170
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY GAP $1,258,927 $ (102,549) $ (87,313) $ 236,851 $ 60,384 $(1,366,300) $ --
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE INTEREST SENSITIVITY GAP $1,258,927 $1,156,378 $1,069,065 $1,305,916 $1,366,300 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Trading account securities and loans held for sale are sold within 90 days.
(2) The noninterest bearing column consists of nonaccrual loans.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The gap is considered positive when the amount of interest rate sensitive assets
which reprice over a given time period exceeds the amount of interest rate
sensitive liabilities and is negative when the reverse is true. During a period
of rising interest rates, a positive gap tends to result in increased net
interest income while a negative gap would have an adverse effect on net
interest income. As illustrated by the table, the Company maintained positive
three month and one year gaps at December 31, 1996 of approximately $1.3 billion
and $1.1 billion, respectively, as compared to positive three month and one year
gaps of $986 million and $759 million at December 31, 1995. These positive
cumulative gap positions indicate that the Company is asset sensitive and
positioned for increased net interest income during a period of rising interest
rates but also exposed to an adverse impact on net interest income in a falling
rate environment. The Company's asset sensitivity, as measured by its cumulative
positive one year gap, increased from year end 1995 as it is no longer impacted
by its interest rate swaps which matured in the first quarter of 1996. In
addition, the Company's demand deposit balances at year end exceeded its average
demand deposits for the year by approximately $446 million. As this excess
liquidity at year end is invested in highly liquid instruments such as Federal
funds sold and securities available for sale, the result is an increase in the
three month and one year positive gaps and in turn, the Company's asset
sensitivity.
The Company's net interest margin is sensitive to sudden changes in interest
rates. In addition, the Company's interest-earning assets, primarily its loans
are tied to the Prime Rate, an index which tends to react more slowly to changes
in market rates than other money market indices such as LIBOR (London Interbank
Offered Rate). The rates paid for the Company's interest-bearing liabilities,
however, do correlate with LIBOR. This mismatch creates a spread relationship
risk between the Company's Prime based assets and LIBOR correlated liabilities.
An analysis of the historic relationship between the Prime Rate and LIBOR showed
that the spread between the indices narrows in an environment of rising interest
rates and widens in a falling rate environment.
The Company developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates both up and down.
These strategies involve purchasing interest rate floors and caps with strike
prices which generally adjust quarterly and are approximately 200 basis points
below or above (depending on the instrument) current market rates at the time
the floors and caps are purchased.
Based on its strategy and the general asset sensitive nature of the consolidated
balance sheet, the Company purchased over the counter interest rate floors in
the first quarter of 1996 to protect against a drop in interest rates. The
interest rate floors, with a notional value of $500 million at December 31,
1996, matured unexercised in the first quarter of 1997. In the first, second,
and third quarter of 1996, the Company purchased $2.0 billion of exchange traded
interest rate floors. The floors mature at the rate of $500 million per quarter
beginning in the second quarter of 1997. The floors maturing in the second and
third quarter of 1997 provide protection to the Company in the event that the
three month LIBOR drops below the strike price of 4.0% associated with the floor
while the remaining floors have a strike price of 4.25%. The unrealized gain of
these floors approximated $50,000 at December 31, 1996. In the fourth quarter of
1996, the Company purchased an additional $2.0 billion of exchange traded
interest rate floors. The floors mature at the rate of $1.0 billion per quarter
beginning in the second quarter of 1998. The floors provide the Company
protection in the event that the three month LIBOR drops below the strike price
of 4.0%. The unrealized gain of these floors approximated $150,000 at December
31, 1996.
In January 1996, the Company purchased exchange traded interest rate caps with a
notional value of $500 million at December 31, 1996. The caps provide protection
in the event that the three month LIBOR increases above the 6.5% strike price of
the caps and mature during the second quarter of 1997. The unrealized gain on
these caps approximated $6,000 at December 31, 1996. In the fourth quarter of
1996, the Company purchased an additional $1.0 billion of exchange traded caps.
The caps mature at the rate of $500 million per quarter beginning in the third
quarter of 1997 and provide the Company protection in the event that the three
month LIBOR increases above the 7.5% strike price. The approximate unrealized
gain of these caps at December 31, 1996 approximated $31,000. The unamortized
premiums paid for floors and caps described above approximated $0.5 million at
December 31, 1996.
The following table summarizes the Company's derivative instruments at December
31, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
NOTIONAL
(IN THOUSANDS) AMOUNT TERMS AND MATURITY
- -----------------------------------------------------------------------------
<S> <C> <C>
INTEREST RATE CAPS PURCHASED
Exchange traded.............. $ 1,500,000 $500,000 maturing per quarter in
second, third and fourth quarter
1997
INTEREST RATE FLOORS PURCHASED
Exchange traded.............. $ 4,000,000 $500,000 maturing per quarter in
second, third and fourth quarter
1997, first quarter 1998.
$1,000,000 maturing per quarter
in second and third quarter 1998
Over the counter............. $ 500,000 Matured but unexercised in first
quarter 1997
- -----------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Many of the derivative financial contracts entered into in late 1993 and 1994,
which included interest rate swaps with embedded options and associated written
options, and purchased options, expired during 1995 although some were still
outstanding at year end 1995. The interest rate swaps with embedded options had
a notional value of $200 million at December 31, 1995 and matured in the first
quarter of 1996. The swaps contained embedded option contracts with strike
prices which increased at the rate of 25 basis points per quarter which capped
the rate received on the interest rate swap. The embedded options were intended
to provide a limited degree of protection against a narrowing of the net
interest margin in the event of a decrease in short-term interest rates while
providing an increasing LIBOR indexed asset to retain some asset sensitivity.
The interest rate swaps with linked written options had a notional value of $100
million at December 31, 1995 and matured in the first quarter of 1996. The
linked options, in the same manner as the embedded options, were intended to cap
the rate received on the interest rate swaps at escalating strike prices built
into the options. These linked options expired during 1995.
The impact of the Company's derivative financial instruments discussed above was
a $0.7 million increase in net interest income and a 3 basis point increase in
net interest margin for the year ended December 31, 1996. For the years ended
December 31, 1995 and 1994, the economic impact of the Company's derivative
financial instruments were $7.2 million and $4.9 million reductions in net
interest income and 35 basis point and 27 basis point reductions in net interest
margin, respectively. The impact of these instruments in 1995 was partially
offset by the recognition of a $2.3 million premium received on the linked
written option which had been deferred until the final maturity of the these
options in the fourth quarter of 1995.
BALANCE SHEET ANALYSIS
CASH AND DUE FROM BANKS: On average in 1996, nine percent of the Company's
assets were maintained in cash and due from banks. This reflects the large
volume and size of demand deposits. Average cash and due from banks for the year
ended December 31, 1996 was $249 million, up from the prior year average of $211
million primarily due to the increase in average demand deposits.
SECURITIES: Trading instruments totaled $64.9 million at December 31, 1996 as
compared to $40.1 million at year end 1995. The Company maintained average
balances in its trading portfolio of $59.8 million and $52.8 million,
respectively, for the years ended 1996 and 1995. The Company engages in trading
SBA loan certificates, foreign currencies and in a limited capacity, precious
metals. Due to the discontinuance of the precious metals division in 1996, the
Company traded precious metals as a courtesy to those customers in the process
of leaving the Bank. Approximately $41.4 million of the Company's year end
trading account balances were related to SBA loan certificates, $16.5 million
related to the Company's net long position in its precious metals trading
portfolio and $3.2 million related to its physical position in foreign currency.
The increase in the trading instruments balance was mainly attributable to a
change from a net short position in 1995 to a net long position in the Company's
precious metals trading portfolio.
The Company's short-term investments, including securities available for sale
and Federal funds sold and securities purchased under resale agreements,
averaged $544 million for 1996 compared to $430 million for 1995. These
investments amounted to $783 million at year end 1996 and $721 million at year
end 1995. The increase in the year end 1996 balance of these securities is
directly related to the increase in demand deposits at year end 1996. The
following table illustrates the carrying value of the Company's investment and
available for sale portfolios for each of the past three years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities held to maturity:
Industrial development bonds.......... $ 4,193 $ 4,376 $ 4,546
Other securities...................... -- 599 1,600
- ------------------------------------------------------------------------------
TOTAL $ 4,193 $ 4,975 $ 6,146
- ------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and federal agencies.... $387,667 $245,919 $320,949
Mutual funds invested in short-term
government securities................ 31,095 43,052 56,915
Other securities...................... 7,574 6,341 10,385
- ------------------------------------------------------------------------------
TOTAL $426,336 $295,312 $388,249
- ------------------------------------------------------------------------------
</TABLE>
Securities available for sale were utilized as the primary liquidity tool during
1996 as they averaged $358 million in 1996 compared to $265 million in 1995. For
both 1996 and 1995, securities available for sale were comprised mainly of SBA,
federal agency, U.S. Treasury securities and short-term government cash mutual
funds. To a lesser extent, the Company also used Federal funds sold and
securities purchased under resale agreements to manage its liquidity during
1996. These securities averaged $186 million during 1996 compared to $164
million in 1995.
The Company maintains securities available for sale at fair value with
unrealized gains and losses reported as a separate component of stockholders'
equity net of tax. The Company reported unrealized gains of $1.2 million and
$2.7 million at December 31, 1996 and 1995, respectively.
LOANS HELD FOR SALE: Loans held for sale approximated $5.5 million and $2.6
million at December 31, 1996 and 1995, respectively. These balances are
comprised entirely of SBA loans originated by the Company. The Company sells the
guaranteed portion and the allowable unguaranteed portion of these loans into
the secondary market while retaining a percentage of the unguaranteed portion
for its own portfolio as well as the servicing rights.
13
<PAGE>
LOAN COMPOSITION: The loan portfolio totaled $2.1 billion at December 31, 1996,
an increase of $364 million from the prior year end. The increase in loan
balances came primarily from the Bank's commercial loan portfolio which grew
$356 million, or 29%, mainly as a result of increased loan demand in 1996.
Included in the commercial loan growth was increased participation in nationally
syndicated credit facilities which accounted for $140 million, or 39%, of the
Company's loan growth during 1996. These participated credits are primarily
Fortune 500 companies diversified among various commercial industries and the
gaming industry. All other commercial loans are broadly diversified among many
industries including high technology, entertainment, health care, manufacturing,
distribution, retail and garment with no significant concentrations. The
following table sets forth the amount of loans outstanding by type at the end of
each of the past five years, net of unearned discounts and deferred loan fees.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AT DECEMBER 31, (IN MILLIONS) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans................ $1,595 $1,238 $ 920 $1,002 $1,025
Loans secured by real estate:
Real estate term loans........ 362 389 337 347 403
Interim construction loans.... 86 65 117 123 216
Consumer loans.................. 20 7 1 3 11
- -------------------------------------------------------------------------------
TOTAL LOANS $2,063 $1,699 $1,375 $1,475 $1,655
- -------------------------------------------------------------------------------
</TABLE>
As illustrated by the above table, total real estate loans remained relatively
flat year to year. The Company saw reductions approximating $27 million in its
real estate term loan portfolio mainly as a result of loan payoffs. Offsetting
the decrease in this portfolio was growth in the Company's construction loan
portfolio of approximately $22 million due to the issuance of new construction
loans to builders of single-family tract housing. The Company's real estate
loans, both term and construction loans, are secured by first deeds of trust and
are distributed among a variety of project types including multi-family
residential, 28%, and retail facilities, 21% (see loans by project type in Note
(4)). While real estate lending activities are collateralized by real property,
these transactions are subject to similar credit evaluation, underwriting and
monitoring standards as those applied to commercial loans. At December 31, 1996,
85% were geographically concentrated in Southern California, 10% in Northern
California and 5% outside of California.
A certain degree of risk is inherent in the extension of credit. The Company
assesses and manages credit risk on an ongoing basis through diversification,
lending limits, credit review, approval policies and internal monitoring. As a
part of the control process, an independent credit review function regularly
examines the Company's loan portfolio. In addition, the Company's lending
policies require extensive evaluation of new credit requests and continuing
internal review of existing credits in order to identify early and quantify any
evidence of deterioration of quality or potential loss. The Company seeks to
manage and control its risk through diversification of the loan portfolio by
type of loan, geographic and industry concentration and type of borrower.
Diversification helps to reduce risk by minimizing the adverse impact of any
single event or set of circumstances.
NONACCRUAL LOANS, RESTRUCTURED LOANS AND REAL ESTATE OWNED: Nonaccrual loans,
which includes loans 90 days or more past due, totaled $20.4 million at December
31, 1996 as compared to $28.9 million at year end 1995. The decrease from year
end 1995 was related in part to charge-offs of loans on nonaccrual status at
year end 1995, approximating $3.5 million, paydowns approximating $8.8 million
and delinquencies which were cured, approximating $4.6 million. Offsetting these
decreases from year end 1995 were commercial loans approximating $8.6 million
placed on nonaccrual during 1996. Foregone interest on nonaccrual loans
approximated $2.2 million in both 1996 and 1995. Consistent with prior reporting
periods, there were no loans past due 90 days or more which were still accruing
interest and all interest associated with nonaccrual loans had been reversed. It
has been the Company's policy to recognize interest on nonaccrual loans only as
collected. Future collections of interest are included in interest income or
applied to the loan balance based on an assessment of the likelihood that the
principal will be collected.
Restructured loans, loans outstanding whose original terms have been modified,
totaled $28.7 million at December 31, 1996 compared to $33.6 million at prior
year end. The decrease in restructured loans resulted in part from a $13.7
million loan which was restructured in the fourth quarter of 1995 and performed
in accordance with its modified terms during 1996. As a result, the loan was no
longer classified as restructured at year end 1996.
Real estate owned ("REO") of $2.1 million, net of a $0.8 million valuation
allowance, at December 31, 1996 decreased $8.2 million from $10.3 million, net
of a $4.7 million valuation allowance, at year end 1995. The Company was
successful in disposing of 18 REO properties during 1996. The total net book
value of these properties approximated $8.6 million of which the Company
collected net sales proceeds of $4.2 million and made $4.1 million in loans to
facilitate the sales of the REO.
14
<PAGE>
Detailed information regarding nonaccrual loans, restructured loans and real
estate owned is presented below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial loans...................... $ 9,382 $ 11,714 $ 10,884 $ 23,489 $ 20,174
Real estate loans..................... 10,760 17,212 7,272 12,029 26,429
Consumer loans........................ 248 -- -- -- 65
- ------------------------------------------------------------------------------------------------------------------------
TOTAL NONACCRUAL LOANS $ 20,390 $ 28,926 $ 18,156 $ 35,518 $ 46,668
- ------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent
of total nonaccrual loans............. 176.8% 129.3% 220.7% 120.5% 84.0%
Total nonaccrual loans as a percent of
total loans outstanding............... 1.0 1.7 1.3 2.4 2.8
- ------------------------------------------------------------------------------------------------------------------------
RESTRUCTURED LOANS $ 28,681 $ 33,608 $ 5,948 $ 4,662 $ 65,003
- ------------------------------------------------------------------------------------------------------------------------
Real estate owned:
Foreclosed assets..................... $ 2,895 $ 15,015 $ 35,446 $ 30,171 $ 48,187
In-substance foreclosures............. -- -- -- 28,163 27,133
- ------------------------------------------------------------------------------------------------------------------------
REO, gross.......................... $ 2,895 $ 15,015 $ 35,446 $ 58,334 $ 75,320
Less valuation allowance.............. (769) (4,686) (6,475) (3,084) (6,500)
- ------------------------------------------------------------------------------------------------------------------------
REO, NET $ 2,126 $ 10,329 $ 28,971 $ 55,250 $ 68,820
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $ 51,197 $ 72,863 $ 53,075 $ 95,430 $ 180,491
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table contains information for loans deemed impaired.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NET
CARRYING SPECIFIC NET
(IN THOUSANDS) VALUE ALLOWANCE BALANCE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996
Loans with specific allowances........ $102,116 $(14,993) $ 87,123
Loans without specific allowances..... 15,484 -- 15,484
- -------------------------------------------------------------------------------
TOTAL $117,600 $(14,993) $102,607
- -------------------------------------------------------------------------------
December 31, 1995
Loans with specific allowances........ 85,242 (11,770) 73,472
Loans without specific allowances..... 37,512 -- 37,512
- -------------------------------------------------------------------------------
TOTAL $122,754 $(11,770) $110,984
- -------------------------------------------------------------------------------
</TABLE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Current................................ $ 97,210 $ 93,253
Past due............................... -- 575
Nonaccrual............................. 20,390 28,926
- -------------------------------------------------------------------------------
TOTAL $117,600 $122,754
- -------------------------------------------------------------------------------
</TABLE>
Included in current impaired loans were restructured loans of $26.5 million at
December 31, 1996 and $29.5 million at December 31, 1995. A significant portion,
77% at December 31, 1996 and 82% at December 31, 1995, of the impaired loans
were secured by real estate. Impaired loans averaged $131.0 million in 1996 and
$48.8 million in 1995. During 1996 and 1995, total interest recognized on the
impaired loan portfolio, on a cash basis, was $10.3 million and $3.4 million,
respectively.
ALLOWANCE AND PROVISION FOR LOAN LOSSES: The allowance for loan losses is
maintained at a level considered appropriate by management and is based on an
ongoing assessment of the risks inherent in the loan portfolio. The allowance
for loan losses is increased by the provision for loan losses which is charged
against current period operating results, and is decreased by the amount of net
charge-offs during the period. The Company's determination of the level of the
allowance for loan losses, and correspondingly, the provision for loan losses
rests upon various judgments and assumptions, including general economic
conditions (especially in California), loan portfolio composition and
concentrations, prior loan loss experience, collateral value, identification of
problem and potential problem loans and other relevant data to identify the
risks in the loan portfolio. While management believes that the allowance for
loan losses is adequate at December 31, 1996, future additions to the allowance
will be subject to continuing evaluation of inherent risk in the loan portfolio.
15
<PAGE>
At December 31, 1996, the allowance for loan losses amounted to $36.1 million or
1.8% of total loans as compared to $37.4 million or 2.2% of total loans at
December 31, 1995. The following table summarizes changes in the allowance for
loan losses over the past five years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance, beginning of year............ $ 37,402 $ 40,072 $ 42,800 $ 39,219 $ 36,640
Loans charged off:
Commercial............................ (7,265) (13,432) (9,120) (27,396) (12,784)
Real estate........................... (3,734) (7,470) (8,506) (10,148) (5,558)
Consumer.............................. (26) (60) (108) (704) (902)
- ------------------------------------------------------------------------------------------------------------------
TOTAL LOANS CHARGED OFF $(11,025) $(20,962) $(17,734) $ (38,248) $ (19,244)
- ------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial............................ 2,745 1,690 2,729 1,506 703
Real estate........................... 12 445 47 118 171
Consumer.............................. 21 35 56 191 90
- ------------------------------------------------------------------------------------------------------------------
TOTAL LOAN RECOVERIES $ 2,778 $ 2,170 $ 2,832 $ 1,815 $ 964
- ------------------------------------------------------------------------------------------------------------------
Net loans charged off................. (8,247) (18,792) (14,902) (36,433) (18,280)
Net effect of deconsolidation of
Imperial Credit Industries, Inc...... -- -- -- (1,963) --
Provision for loan losses............. 6,881 16,122 12,174 41,977 20,859
Provision for loan losses of
discontinued operation............... 15 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 36,051 $ 37,402 $ 40,072 $ 42,800 $ 39,219
- ------------------------------------------------------------------------------------------------------------------
LOANS OUTSTANDING AT END OF YEAR $2,063,048 $1,699,347 $1,375,146 $1,474,759 $1,654,860
- ------------------------------------------------------------------------------------------------------------------
AVERAGE AMOUNT OF LOANS OUTSTANDING $1,836,864 $1,540,940 $1,361,630 $1,481,231 $1,794,586
- ------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans................................ 0.45% 1.22% 1.09% 2.46% 1.02%
Ratio of allowance for loan losses to
average loans........................ 1.96 2.43 2.94 2.89 2.19
Ratio of allowance for loan losses to
loans outstanding at end of year..... 1.75 2.20 2.91 2.90 2.37
Ratio of provision for loan losses to
net charge-offs...................... 83 86 82 115 114
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses totaled $6.9 million for the year ended December
31, 1996 as compared to $16.1 million for 1995. Net charge-offs totaled $8.2
million for the year ended December 31, 1996 down from $18.8 million for the
year ended December 31, 1995. The decrease in net charge-offs experienced in
1996 resulted from management's efforts to improve the quality of the Company's
loan portfolio, a stabilizing real estate market and an improving California
economy. As a percentage of average loans outstanding, net charge-offs were
0.45% and 1.22%, respectively, for the years ended December 31, 1996 and 1995.
Although the Company evaluates the adequacy of its allowance on an overall basis
rather than by specific categories of loans, the following table reflects
management's allocation of the allowance for loan losses by loan category and
the ratio of each loan category to total loans over the past five years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 % 1995 % 1994 % 1993 % 1992 %
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial....................... $17,545 77% $17,365 73% $24,628 66% $ 29,196 67% $ 23,137 62%
Real Estate...................... 16,248 22 16,773 26 11,515 33 10,161 32 11,275 37
Consumer......................... 165 1 809 1 175 1 433 1 867 1
Unallocated...................... 2,093 -- 2,455 -- 3,754 -- 3,010 -- 3,940 --
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $36,051 100% $37,402 100% 40,072 100% $ 42,800 100% $ 39,219 100%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
The allowance allocated to the loan categories shown in the previous table is
based on previous loan loss experience and management's evaluation of the
current loan portfolio and should not be interpreted as an indication that
charge-offs will occur in these amounts or proportions. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories as the total allowance is a
general allowance applicable to the entire portfolio.
FUNDING SOURCES
DEPOSITS: Total deposits amounted to $3.0 billion at December 31, 1996 as
compared to $2.4 billion at the end of 1995. Of the year end balance of total
deposits, 50% and 48%, respectively, represented noninterest-bearing demand
deposits at December 31, 1996 and 1995. Average demand deposits were $1.0
billion for 1996, a $176 million, or 21%, increase from 1995. Average interest-
bearing time certificates of deposit grew $193 million, or 28%, in 1996. The
Company utilized the time deposit market to supplement its funding base in order
to keep pace with loan demand in 1996.
OTHER BORROWINGS: The Company uses short-term borrowings as a means to manage
the interest rate sensitivity and liquidity position of the balance sheet.
Average short-term borrowings totaled $61.4 million for 1996, a decrease of
$10.7 million, or 15%, from 1995. As a percentage of average interest-bearing
liabilities, average short-term borrowings approximated 4.2% for 1996 and 5.8%
for 1995.
CAPITAL: Retained earnings from operations has been the primary source of new
capital for the Company, with the exception of its long-term debt offering in
1979, and on a smaller scale, the exercise of employee stock options. At
December 31, 1996, stockholders' equity totaled $286 million compared to $228
million at December 31, 1995. The Company recorded an additional $4.1 million in
1996 and $3.4 million in 1995 of stockholders' equity from the exercise of
employee stock options. The Company generally receives a tax deduction for the
difference between the option price and the market value of the shares issued.
The tax benefit associated with shares exercised, which is recorded as a
component of stockholders' equity, approximated $3.2 million in 1996 and $1.9
million in 1995.
Management is committed to maintaining capital at a sufficient level to assure
stockholders, customers and regulators that the Company and the Bank are
financially sound. Risk-adjusted capital guidelines, issued by bank regulatory
agencies, assign risk weightings to assets both on and off-balance sheet and
place increased emphasis on common equity. Under the Prompt Corrective Action
Law, institutions whose Tier I and total capital ratios meet or exceed 6% and
10%, respectively, are deemed to be "well capitalized". Tier I capital basically
consists of common stockholders' equity and noncumulative perpetual preferred
stock and minority interest of consolidated subsidiaries minus intangible
assets. Based on the guidelines, the Bank's Tier I and total capital ratios at
December 31, 1996 were 9.2% and 10.5%, respectively, compared to 9.3% and 10.6%,
respectively, the year earlier. From the prior year, total assets have increased
approximately 20% resulting in lower capital ratios.
17
<PAGE>
CAPITAL RATIOS FOR IMPERIAL BANK(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Tier I:
Common stockholders' equity and
preferred stock(2)................... $ 261,551 $ 213,286
Disallowed assets..................... (897) (2,074)
- --------------------------------------------------------------------------
TIER I CAPITAL $ 260,654 $ 211,212
- --------------------------------------------------------------------------
Tier II:
Allowance for loan losses allowable
in Tier II........................... 35,370 28,466
- --------------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL $ 296,025 $ 239,678
- --------------------------------------------------------------------------
RISK WEIGHTED BALANCE SHEET ASSETS $2,344,383 $1,942,903
- --------------------------------------------------------------------------
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans. 364,814 259,363
Standby letters of credit............. 104,330 64,775
Other................................. 16,985 12,277
- --------------------------------------------------------------------------
TOTAL RISK WEIGHTED
OFF-BALANCE SHEET ITEMS $ 486,129 $ 336,415
- --------------------------------------------------------------------------
Disallowed assets....................... (897) (2,074)
Allowance for loan losses not included
in Tier II............................. (512) (8,936)
- --------------------------------------------------------------------------
TOTAL RISK WEIGHTED ASSETS $2,829,103 $2,268,308
- --------------------------------------------------------------------------
Risk-based capital ratios:
Tier I capital........................ 9.2% 9.3%
Total capital......................... 10.5 10.6
Leverage ratio........................ 8.7 8.6
- --------------------------------------------------------------------------
</TABLE>
(1) As reported on the December 31, 1996 and 1995 FDIC call reports.
(2) Excludes unrealized gain on securities available for sale.
In addition to the risk weighted ratios, all banks are required to maintain
leverage ratios, to be determined on an individual basis, but not below a
minimum of 3%. The ratio is defined as Tier I capital to average total assets
for the most recent quarter. The Bank's leverage ratio was 8.7% at December 31,
1996 as compared to 8.6% the prior year well in excess of the regulatory minimum
of 3.0% and the Bank's regulatory requirement of 6.5%.
SUBSEQUENT EVENT
On February 20, 1997, the Company's Board of Directors approved a plan to spin
off to stockholders in a tax-free distribution a portion of its specialty
lending and finance businesses that focus on the entertainment industry, as well
as certain other operations. These businesses and assets will be transferred to
a newly formed corporation.
The spin-off company, to be known as Imperial Financial Group, Inc. ("IFG"),
will comprise Imperial Bank's Lewis Horwitz Organization, which specializes in
entertainment industry lending; the Bank's small business lending group;
Imperial Trust Company, a California-licensed trust company; and the Bank's
interest in ICII. Also, in connection with the spin-off, IFG intends to form a
separate broker-dealer and a thrift and loan, which also will be part of its
business.
The spin-off is subject to receipt of a private letter ruling from the Internal
Revenue Service to the effect that the transaction will not be taxable to the
Company's stockholders, the Company or the Bank, as well as approval from the
Company's regulators. It is anticipated that the separation will occur in late
1997 or early 1998.
Total assets of the entities comprising IFG approximated $140 million at
December 31, 1996. Revenues of IFG, including interest income and noninterest
income but excluding the gains on ICII shares realized in 1996, approximated $40
million for the year ended December 31, 1996.
The Company has retained a financial advisor to assess alternatives to assure
that capital levels at the Company and the Bank meet regulatory guidelines after
the spin-off and provide for future growth.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," ("FAS 125") which
establishes accounting for transfers and servicing of financial assets and
extinguishment of liabilities. This statement specifies the following: when
financial assets and liabilities are to be removed from an entity's financial
statements; the accounting for servicing assets and liabilities; and the
accounting for assets that can
18
<PAGE>
be contractually prepaid in such a way that the holder would not recover
substantially all of its recorded investment. Under FAS 125, an entity
recognizes only assets it controls and liabilities it has incurred, discontinues
recognition of assets only when control has been surrendered, and discontinues
recognition of liabilities only when they have been extinguished. FAS 125
requires that the selling entity continue to carry retained interests relating
to assets it no longer recognizes. Such retained interests are based on the
relative fair values of the retained interests of the subject assets at the date
of transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral. Under FAS 125,
certain collateralized borrowings may result in assets no longer being
recognized if the assets are provided as collateral and the secured party takes
control of the collateral. This determination is based upon whether: (1) the
secured party is permitted to repledge or sell the collateral and (2) the debtor
does not have the right to redeem the collateral on short notice.
Extinguishments of liabilities are recognized only when the debtor pays the
creditor and is relieved of its obligation for the liability, or when the debtor
is legally released from being the primary obligor under the liability, either
judicially or by the creditor. FAS 125 requires an entity to recognize its
obligation to service financial assets that are retained in a transfer of assets
in the form of a servicing asset or liability. The servicing asset is to be
amortized in proportion to, and over the period of, net servicing income.
Servicing assets and liabilities are to be assessed for impairment based on
their fair value. FAS 125 modifies the accounting for interest-only strips or
retained interests in securitizations, such as capitalized servicing fees
receivable, that can be contractually prepaid or otherwise settled in such a way
that the holder would not recover substantially all of its recorded investment.
In this case, it requires that they be classified as available for sale or as
trading securities. Interest-only strips and retained interests are to be
recorded at market value. Changes in market value are included in operations, if
classified as trading securities, or in stockholders' equity as unrealized
holding gains or losses, net of the related tax effect, if classified as
available for sale.
During 1996, the FASB issued Statement of Financial Accounting Standards No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No
125" ("FAS 127"). FAS 127 defers for one year the effective date (a) of
paragraph 15 of FAS 125 and (b) for repurchase agreement, dollar-roll,
securities lending, and similar transactions, of paragraphs 9 - 12 and 237 (b)
of FAS 125. FAS 127 provides additional guidance on the types of transactions
for which the effective date of FAS 125 has been deferred. It is required that
if it is not possible to determine whether a transfer occurring during calendar-
year 1997 is part of a repurchase agreement, dollar-roll, securities lending or
similar transaction, then paragraphs 9 - 12 of FAS 125 should be applied to that
transfer. The Company adopted the applicable provisions of FAS 125 effective
January 1, 1997. Management does not expect the adoption of FAS 125 to have a
material impact on the Company's financial position, results of operations or
liquidity.
COMPARISON OF 1995 VERSUS 1994
At December 31, 1995, the Company's total assets were $2.8 billion, total loans
were $1.7 billion and stockholders' equity and allowance for loan losses totaled
$266 million. This compares favorably to total assets of $2.4 billion, total
loans of $1.4 billion and stockholders' equity and allowance for loan losses of
$238 million at December 31, 1994.
Income from continuing operations for the year ended December 31, 1995 increased
227% to $21.7 million or $0.86 per share. For 1994, the Company earned $6.6
million or $0.27 per share. Income as measured by return on average total assets
was 1.00% for the twelve months ended December 31, 1995, compared to 0.30% for
the twelve months ended December 31, 1994. Return on average stockholders'
equity was 11.03% for the year ended December 31, 1995, a significant increase
from the 3.46% return on average stockholders' equity for 1994.
Nonaccrual loans of $28.9 million at December 31, 1995, increased $10.7 million
from year end 1994 while REO of $10.3 million at December 31, 1995, decreased
$18.7 million from year end 1994. For the year ended December 31, 1995, the
provision for loan losses totaled $16.1 million an increase of approximately
$4.0 million from the year ended December 31, 1994. REO expenses totaled $8.5
million for 1995 as compared to $7.7 million in 1994. These expenses increased
in 1995 as the Company incurred higher costs while disposing of over $42 million
of REO during the year. In 1995, restructured loans increased $27.7 million
primarily as a result of two loans secured by real estate which were modified in
the fourth quarter.
The provision for loan losses was $16.1 million for 1995, up from $12.2 million
for 1994. Net charge-offs amounted to $18.8 million in 1995 versus $14.9 million
in 1994. The allowance for loan losses at December 31, 1995 was $37.4 million or
2.2% of total loans as compared to $40.1 million or 2.9% of total loans the year
earlier.
Net interest income and net interest margin for the year ended December 31, 1995
were $114.6 million and 5.7%. This compares to net interest income and net
interest margin of $98.4 million and 5.2% for the year ended December 31, 1994.
The 1995 improvement was negatively impacted by derivative financial instruments
outstanding during 1995. There was a $7.2 million reduction in net interest
income and a 35 basis point reduction in net interest margin for the year ended
December 31, 1995 as a result of the Company's derivative financial instruments.
The impact of these derivative financial instruments was partially offset by the
recognition of a $2.3 million option premium which had been deferred until the
final maturity of the associated options in the fourth quarter of 1995. The
impact of these instruments for the year ended December 31, 1994 were $4.9
million and 27 basis point reductions in net interest income and net interest
margin, respectively.
19
<PAGE>
Noninterest income for year ended December 31, 1995 totaled $43.5 million,
compared to $34.6 million for 1994. The Company sold a portion of its merchant
card accounts for an after-tax gain of $3.7 million in the fourth quarter of
1995. Excluding the gain associated with the sale of merchant card accounts and
a gain recognized in 1994 from the sale of a bank owned premises, noninterest
income for 1995 increased $2.6 million, or 7.4%, from 1994. The improvement
partially results from increased gains in the Company's various trading
activities: SBA securities trading income improved $1.3 million and foreign
currency exchange income was up $1.5 million. Also in 1995, the Company recorded
improvements in other fee based businesses. Trust revenues from the Company's
trust subsidiary, Imperial Trust Company, increased $0.8 million, or 12% from
1994 as a result of both the Trust Company's strategy to target higher margin
business relationships and its increase in assets under management.
Noninterest expenses amounted to $110.3 million for the year ended December 31,
1995, compared to $110.2 million reported for 1994. Excluding the recovery of a
$1.6 million operational loss which reduced noninterest expense in 1994,
noninterest expense for the year ended December 31, 1995 decreased $1.4 million
from 1994. Regulatory assessments in 1995 decreased $2.7 million due to a
reduction in the FDIC deposit insurance premium in the third quarter of 1995.
During 1995, the Company renewed several of its operating leases for office
space at terms more favorable to the Company. Also, the Company saw the positive
results of its major data processing conversion which occurred during 1994
through reduced costs related to data processing. Combined, these items along
with reduced professional and consulting fees related to the prior year data
processing conversion, decreased $3.8 million from 1994.
Offsetting these decreases in noninterest expense were increases the following
components of noninterest expense. Salaries expense for the year ended December
31, 1995 increased $0.6 million from 1994 resulting primarily from the Company's
$2.0 million contribution to its employee profit sharing plan in 1995. In the
prior year, the Company made a contribution to its Employee Stock Ownership Plan
approximating $1.2 million. Service costs related to demand deposits including
accounting courier and other deposit related services increased $1.5 million in
1995 due to increased interest rates during the year as these costs are a
function of interest rates and deposit volume. Excluding the collection of a
$1.6 million operational recovery in 1994, other expenses increased $2.6 million
in 1995 as a result of the following: a $1.6 million charge related to mortgage
repurchase obligations; $0.9 million in amortization expense related to the
deposit premium paid in early 1995 to acquire the insured deposits of Guardian
Bank; and a $1.5 million charge to write off an equity investment in
Healthtronics, Inc. as this entity was liquidated in 1995.
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
AT DECEMBER 31, (iN IHOUSANDS, EXCEPT SHARE DATA) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks.................................................................... $ 325,014 $ 242,018
Trading instruments........................................................................ 64,887 40,050
Securities available for sale.............................................................. 426,336 295,312
Securities held to maturity (market value of $4,193 and $4,975 for 1996 and 1995,
respectively)............................................................................. 4,193 4,975
Federal funds sold and securities purchased under resale agreements........................ 357,000 425,300
Loans held for sale (market value of $6,058 and $2,842 for 1996 and 1995,
respectively)............................................................................. 5,531 2,648
Loans:
Loans, net of unearned income and deferred loan fees..................................... 2,063,048 1,699,347
Less allowance for loan losses....................................................... (36,051) (37,402)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET LOANS $2,026,997 $1,661,945
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net................................................................ 18,413 16,003
Accrued interest receivable................................................................ 15,547 15,284
Real estate owned, net..................................................................... 2,126 10,329
Income taxes receivable.................................................................... 1,893 4,008
Investment in Imperial Credit Industries, Inc.............................................. 57,736 36,126
Other assets............................................................................... 44,497 34,376
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,350,170 $2,788,374
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand.................................................................................... $1,465,324 $1,145,720
Savings................................................................................... 17,324 15,708
Money market.............................................................................. 596,967 435,674
Time-under $100,000....................................................................... 169,493 227,262
Time-$100,000 and over.................................................................... 701,169 539,252
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $2,950,277 $2,363,616
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued interest payable................................................................... 5,943 5,576
Short-term borrowings...................................................................... 44,897 159,636
Long-term borrowings....................................................................... 4,455 5,906
Other liabilities.......................................................................... 58,247 25,404
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $3,063,819 $2,560,138
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock--no par, 50,000,000 shares authorized; 23,079,715 shares at December 31,
1996 and 13,821,125 shares at December 31, 1995 issued and outstanding................... 163,748 130,780
Unrealized gain on securities available for sale, net of taxes............................ 1,206 2,747
Retained earnings......................................................................... 121,397 94,709
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 286,351 $ 228,236
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,350,170 $2,788,374
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans....................................................................... $173,734 $143,627 $112,799
Trading instruments......................................................... 2,971 3,516 2,366
Securities available for sale............................................... 21,675 17,349 12,459
Securities held to maturity................................................. 306 311 345
Federal funds sold and securities purchased under resale agreements......... 9,970 9,707 7,153
Loans held for sale......................................................... 500 269 650
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $209,156 $174,779 $135,772
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits.................................................................... 64,551 55,491 33,184
Short-term borrowings....................................................... 3,160 4,135 3,606
Long-term borrowings........................................................ 343 528 625
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 68,054 $ 60,154 $ 37,415
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income.......................................................... 141,102 114,625 98,357
Provision for loan losses.................................................... 6,881 16,122 12,174
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $134,221 $ 98,503 $ 86,183
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts......................................... 4,892 4,328 4,635
Trust fees.................................................................. 8,592 7,646 6,857
Gain on origination and sale of loans....................................... 3,222 2,265 3,840
Equity in net income of Imperial Credit Industries, Inc..................... 21,444 5,192 3,489
Other service charges and fees.............................................. 10,122 6,500 6,116
Merchant and credit card fees............................................... 2,395 4,855 6,152
Gain (loss) on securities available for sale................................ 229 260 (272)
Gain on trading instruments................................................. 3,197 2,852 31
Gain on sale of merchant card accounts...................................... - 6,400 -
Gain on sale of investment in Imperial Credit Industries, Inc............... 25,650 - -
Gain resulting from sale of stock by Imperial Credit Industries, Inc........ 10,761 - -
Appreciation of donated Imperial Credit Industries, Inc. common stock....... 3,698 - -
Other income................................................................ 5,289 3,248 3,724
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $ 99,491 $ 43,546 $ 34,572
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salary and employee benefits................................................ 64,876 47,702 47,087
Net occupancy expense....................................................... 9,165 8,861 9,724
Furniture and equipment..................................................... 5,048 4,935 5,339
Data processing............................................................. 6,419 7,738 9,304
Customer services........................................................... 11,178 8,842 7,311
Net real estate owned expense............................................... 1,876 8,508 7,719
Regulatory assessments...................................................... 298 3,225 5,934
Professional and consulting................................................. 5,967 3,526 4,920
Business development........................................................ 3,659 3,079 3,277
Lawsuit settlements......................................................... 679 (1,134) (1,334)
Charitable donations........................................................ 5,024 142 157
Other expense............................................................... 13,943 14,900 10,727
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $128,132 $110,324 $110,165
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes........................ 105,580 31,725 10,590
Income tax provision......................................................... 43,278 10,071 3,968
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS $ 62,302 $ 21,654 $ 6,622
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from operations of discontinued operation, net of tax.......... (8,168) 1,523 21
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 54,134 $ 23,177 $ 6,643
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations per share.................................. 2.39 0.86 0.27
(Loss) income per share of discontinued operation............................ (0.32) 0.06 -
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 2.07 $ 0.92 $ 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
NUMBER UNREALIZED TOTAL
(IN THOUSANDS, EXCEPT NUMBER OF OF SHARES COMMON GAIN (LOSS) RETAINED STOCKHOLDER'S
SHARES DATA) OUTSTANDING STOCK ON SECURITIES EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 11,757,136 $ 102,065 $ - $ 83,140 $ 185,205
- ------------------------------------------------------------------------------------------------------------------------------------
Net income--1994............................... - - - 6,643 6,643
Stock dividends............................... 587,204 8,294 - (8,304) (10)
Common stock issued under employee
stock option plans........................... 497,004 4,143 - - 4,143
Retirement of common stock.................... (8,735) (175) - - (175)
Net change in guarantee of ESOP debt.......... - 1,159 - - 1,159
Effect of difference between fair value
and cost of ESPO shares released............ - 180 - - 180
Tax benefit of employee stock options......... - 1,478 - - 1,478
Unrealized loss on securities available
for sale, net of taxes...................... - - (847) - (847)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) 1,075,473 15,079 (847) (1,661) 12,571
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 12,832,609 $ 117,144 $ (847) $ 81,479 $ 197,776
- ------------------------------------------------------------------------------------------------------------------------------------
Net income--1995............................. - - - 23,177 23,177
Stock dividends.............................. 641,017 9,936 - (9,947) (11)
Common stock issued under
employee stock option plans................ 417,924 3,377 - - 3,377
Retirement of common stock................... (70,425) (1,538) - - 1,538
Tax benefit of employee stock options........ - 1,861 - - 1,861
Net change in unrealized gain on securities..
available for sale, net of taxes............. - - 3,594 - 3,594
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE 988,516 13,636 3,594 13,230 30,460
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 13,821,125 $ 130,780 $ 2,747 $ 94,709 $ 228,236
- ------------------------------------------------------------------------------------------------------------------------------------
Net income--1996.......................... - - - 54,134 54,134
Stock splits and dividends................ 8,798,926 27,417 - (27,446) (29)
Common stock issued under employee
employee stock option plans.............. 536,012 4,140 - - 4,140
Retirement of common stock................ (76,348) (1,788) - - (1,788)
Tax benefit of employee stock options..... - 3,199 - - 3,199
Net change in unrealized gain on securities
available for sale, net of taxes......... - - (1,541) - (1,541)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) 9,258,590 32,968 (1,541) 26,688 58,115
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 23,079,715 $ 163,748 $ 1,206 $ 121,397 $ 286,351
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 54,134 $ 23,177 $ 6,643
Adjustments for non-cash charges (credits):
Depreciation and amortization.................................. (3,387) 1,775 542
Accretion of purchase loan discount............................ (227) (2,129) -
Provision for loan losses...................................... 6,881 16,122 12,174
Provision for operational losses in discontinued operation..... 15,485 - -
Provision for real estate owned................................ 476 4,547 5,291
Equity in net income of Imperial Credit Industries, Inc........ (21,444) (5,192) (3,489)
Gains - Imperial Credit Industries, Inc. stock................. (36,411) - -
Loss (gain) on sale of real estate owned....................... 151 (384) (446)
Gain on sale of real property held for sale or investment...... - (75) (462)
Gain on sale of premises and equipment......................... - (27) (1,357)
Provision (benefit) for deferred taxes......................... 6,320 1,621 (3,452)
Write down for impairment of equity investment................. - 1,500 503
(Gain) loss on securities available for sale................... (229) (260) 272
Net change in trading instruments.............................. (24,837) 33,978 (51,384)
Net change in loans held for sale.............................. (2,883) (1,880) 21,936
Net change in accrued interest receivable...................... (263) (2,515) (4,290)
Net change in accrued interest payable......................... 367 367 2,524
Net change in income taxes receivable.......................... (4,205) (2,056) (11,835)
Net change in other liabilities................................ 17,358 8,462 1,556
Net change in other assets..................................... (11,341) (754) (11,563)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (4,055) $ 76,277 $ (13,167)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from securities held to maturity....................... 183 170 3,079
Purchase of securities held to maturity......................... - (499) (1,600)
Proceeds from sale of securities available for sale............. 2,785,935 1,592,179 2,032,510
Proceeds from maturities of securities available for sale....... 294,223 503,136 977,511
Purchase of securities available for sale....................... (3,208,635) (1,997,393) (2,977,483)
Proceeds from sale of Imperial Credit Industries, Inc.
common stock................................................... 35,079 - -
Net change in Federal funds sold and securities purchased
under resale agreements........................................ 68,300 (148,800) 293.519
Net change in loans............................................. (358,612) (336,201) 99,744
Capital expenditures............................................ (6,425) (4,083) (7,476)
Proceeds from sale of real estate owned......................... 4,207 16,072 15,030
Proceeds from sale of real property held for sale or
investment..................................................... - 309 15,297
Proceeds from sale of premises and equipment.................... - 21 2,037
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $ (385,745) $ (375,089) $ 452,168
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits, savings and
money market accounts.......................................... 482,513 150,077 (445,058)
Net change in time deposits..................................... 104,148 253,829 17,009
Net change in short-term borrowings............................. (114,739) (31,283) (1,538)
Retirement of long-term borrowings.............................. (1,451) (2,247) (1,713)
Repayment of ESOP debt.......................................... - - (1,159)
Proceeds from exercise of employee stock options................ 2,352 1,839 3,968
Other........................................................... (27) (11) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 472,796 $ 372,204 $ (428,501)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND DUE FROM BANKS $ 82,996 $ 73,392 $ 10,500
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, BEGINNING OF YEAR $ 242,018 $ 168,626 $ 158,126
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, END OF YEAR $325,014 $ 242,018 $ 168,626
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of Imperial Bancorp (the "Company") and its
wholly owned subsidiaries are summarized below. Certain accounts in the
consolidated financial statements for 1995 and 1994 have been reclassified to
conform with the current year presentation.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The principal subsidiary is Imperial Bank (the
"Bank"), a commercial bank. All material intercompany balances and transactions
have been eliminated.
At December 31, 1996, the Company owned 9.4 million shares of Imperial Credit
Industries, Inc. ("ICII") stock at an equivalent book value of $6.16 per share,
representing approximately 25% of all outstanding ICII shares. The Company does
not exercise significant control over the operations of ICII, and therefore, the
results of ICII operations are accounted for in the Company's consolidated
financial statements as an equity investment. The results of operations of ICII
are reflected as "Equity in net income of Imperial Credit Industries, Inc." in
the consolidated statement of income.
(b) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the balance sheets and the results of operations for the periods presented.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the allowances for loan losses and real estate owned.
While management believes that these allowances are currently adequate, future
additions may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as a part of their examination process,
periodically review the allowances for loan losses and real estate owned. Such
agencies may require the Company to recognize additions to these allowances
based on their judgments about information available to them at the time of
their examination.
(c) INVESTMENTS
Purchases and sales of investments are recorded on the trade date. Amortization
of premiums and accretion of discounts are recognized in interest income on
securities held to maturity and securities available for sale using the interest
method in the consolidated statement of income.
TRADING INSTRUMENTS
SECURITIES: Trading securities, primarily the guaranteed portion of Small
Business Administration ("SBA") loans, are carried at market value with
unrealized market value adjustments recorded in the consolidated statement of
income as "Gain on trading instruments."
PRECIOUS METALS: Precious metals activities included leasing, purchases and
sales of precious metals for forward delivery and options on precious metals.
Precious metals, outstanding open positions in contracts for forward delivery
and option contracts are revalued monthly at prevailing market rates. The
resultant net realized and unrealized gains or losses are reflected in "(Loss)
income from operations of discontinued operation, net of tax."
FOREIGN EXCHANGE: Trading positions in foreign currencies, including spot,
forward and futures positions, are valued at prevailing market rates. Realized
and unrealized gains and losses are included in noninterest income as" Gain on
trading instruments."
SECURITIES AVAILABLE FOR SALE
The Company holds certain securities, primarily U.S. Treasury and federal agency
securities and mutual funds invested in short-term government securities, to
manage its overall liquidity. These securities are carried at fair value.
Unrealized gains and losses are excluded from income and reported as a separate
component of stockholders' equity reflected as "Unrealized gain on securities
available for sale, net of taxes" in the consolidated balance sheet and
statement of changes in stockholders' equity, unless the security is determined
to be other than temporarily impaired. Realized gains and losses on securities
available for sale are computed using the specific identification method. For
other than temporarily impaired securities, unrealized losses are recorded in
the consolidated statement of income.
SECURITIES HELD TO MATURITY
Securities held to maturity are so designated when acquired based upon intent
and ability to hold them until maturity. These securities are carried at
amortized cost using the specific identification method. When a decline in value
has occurred and is deemed to be other than temporary, such decline is charged
to income.
(d) LOANS HELD FOR SALE
Currently, the Company designates its SBA loans originated as held for sale.
These loans are carried at the lower of aggregate cost or market. Origination
fees on loans held for sale, net of certain costs of processing and closing the
loans, are deferred until the time of sale and are included in the computation
of the gain or loss from the sale of the related loans.
25
<PAGE>
(e) LOANS
Loans are stated at the amount of principal outstanding. Nonrefundable loan fees
and related direct costs associated with the origination or purchase of loans
are deferred and netted against outstanding loan balances. The net deferred fees
and costs are recognized into income over the loan term using the interest
method.
Interest income on loans is accrued as earned. Interest accruals on commercial
and real estate loans are generally discontinued whenever the payment of
interest or principal is 90 days past due. When a loan is placed on nonaccrual
status, the accrued and unpaid interest is charged against current income and
recognition of net deferred fees and costs into income is discontinued. Future
collections of interest are included in interest income or applied to the loan
balance based on an assessment of the likelihood that the principal will be
collected.
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized by
recording a valuation allowance with a corresponding charge to provision for
loan losses.
Loans deemed by management to be uncollectible are charged to the allowance for
loan losses. Recoveries on loans previously charged off are credited to the
allowance. Provisions for loan losses are charged to expense and added to the
allowance to maintain it at an appropriate level. In evaluating the adequacy of
the allowance, management considers numerous factors including economic
conditions, loan portfolio composition and risk, loan loss experience, ongoing
review of specific loans and the review of the Company's regulators. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in the
aforementioned factors.
(f) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation on the Company's owned premises is calculated using the straight-
line method over its estimated useful life of 39 years. Depreciation on
equipment is calculated using the straight-line method over the estimated useful
lives of the assets (3 to 7 years). Leasehold improvements are amortized using
the straight-line method over the terms of the respective leases or the
estimated useful lives of the leasehold improvements, whichever is shorter.
(g) REAL ESTATE OWNED
Real estate owned ("REO") is transferred from the loan portfolio at fair value
as determined by an appraisal obtained at the time of foreclosure. The excess
carrying value, if any, of the loan over the estimated fair value is charged to
the allowance for loan losses. Estimated selling costs and any subsequent
impairments in value are recognized through a valuation allowance. Subsequent
increases in fair value are credited to income and reduce the valuation
allowance, but only to the extent that decreases in fair value were recorded for
the same property through the valuation allowance. Gains and losses from sales
of REO and net operating expenses are recorded in "Net real estate owned
expense" in the consolidated statement of income.
(h) INCOME TAXES
The Company accounts for income taxes using an asset and liability approach, the
objective of which is to recognize the amount of taxes payable or refundable for
the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in a company's financial statements or
tax returns. The measurement of tax assets and liabilities is based on enacted
tax laws. Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based on available evidence.
(i) SALE OF INVESTMENT IN EQUITY INVESTEE
The sale of shares of the Company's equity investment in ICII to the public is
recorded as "Gain on sale of investment in Imperial Credit Industries, Inc." in
the consolidated statement of income. This gain represents actual proceeds from
the sale of stock reduced by the Company's recorded investment in those shares
and expenses related to the stock offering.
(j) GAIN RESULTING FROM SALE OF STOCK BY EQUITY INVESTEE
The impact on the Company's investment in ICII for the sale of previously
unissued stock by ICII to the public is recorded as "Gain resulting from sale of
stock by Imperial Credit Industries, Inc." in the consolidated statement of
income. This gain results from ICII's sale of previously unissued stock in a
public offering at a per share offering price that exceeds the Company's per
share carrying amount for its equity investment in the common stock of ICII.
(k) INTEREST RATE DERIVATIVE CONTRACTS
Interest rate derivative contracts, such as swaps, futures, and options
including interest rate caps and floors are used in conjunction with asset
liability management strategies to synthetically alter the interest income or
expense flows of certain assets or liabilities. Gains and losses on linked
financial futures and options used in asset liability management are recorded as
a component of the interest income or expense reported on the related asset or
liability. Amounts payable and receivable relating to interest rate swaps are
accrued until settled, the effect of which is included in the interest income or
expense reported on the asset or liability whose payment streams have been
synthetically altered. Fees received for linked financial contracts are deferred
and recognized into interest income upon expiration of the related contracts.
Fees paid for financial contracts are amortized over their contractual life as a
component of the interest reported on the related asset or liability.
26
<PAGE>
(l) STOCK BASED COMPENSATION
On January 1, 1996, the Company adopted Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("FAS 123"). FAS 123 applies to all
transactions in which the Company acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the Company's common stock price, except for the Employee Stock Ownership Plan.
A new method of accounting for stock based compensation arrangements with
employees is established by FAS 123. The new method is based on the fair value
method rather than the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). FAS 123 does not require
companies to adopt the new fair value method for purposes of preparing their
basic financial statements. Entities are allowed to either continue to use the
APB 25 method or adopt the fair value method set forth in FAS 123. Companies
that do not adopt the new fair value method in FAS 123 for purposes of preparing
their basic financial statements are required to include pro forma disclosures
in the notes to the basic financial statements. The Company did not adopt the
fair value standards set forth in FAS 123 for purposes of preparing its basic
financial statements. The pro forma disclosures include the impact of the fair
value method on net income and income per share as if FAS 123 had been adopted
for options granted during 1996 and 1995.
NOTE (2) STATEMENT OF CASH FLOWS
The following information supplements the statement of cash flows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, (In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid........................... $ 67,687 $59,787 $ 34,891
Taxes paid.............................. 30,902 13,506 4,107
Taxes refunded.......................... 244 1,089 10,611
Significant noncash transactions:
Real estate loans transferred to real
estate owned........................... 731 13,913 9,176
Loans made in conjunction with the sale
of real estate owned................... 4,100 14,206 16,171
Net change in unrealized gain (loss) on
securities available for sale, net of
taxes.................................. (1,541) 3,594 (847)
================================================================================
</TABLE>
NOTE (3) SECURITIES
The amortized cost and fair value of securities held to maturity and securities
available for sale at December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
---------------------------------------------------------------
Amortized Amortized
(In Thousands) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less................. $ -- $ -- $ 105,156 $ 105,149
Due after one year through five years... -- -- 20,327 20,338
Due after five years through ten years.. -- -- -- --
Due after ten years..................... 4,193 4,193 298,927 300,849
- ----------------------------------------------------------------------------------------------------------
Total $ 4,193 4,193 $ 424,410 $ 426,336
==========================================================================================================
</TABLE>
The carrying value of securities pledged to secure public deposits and for other
purposes as required or permitted by law totaled $224 million as of December 31,
1996.
27
<PAGE>
(a) Securities Held to Maturity
The following is a summary for the major categories of securities held to
maturity.
<TABLE>
<CAPTION>
=======================================================================================================
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996
Industrial development bonds... $ 4,193 $ -- $ -- $ 4,193
- -------------------------------------------------------------------------------------------------------
Total $ 4,193 $ -- $ -- $ 4,193
- -------------------------------------------------------------------------------------------------------
December 31, 1995
Industrial development bonds... $ 4,376 $ -- $ -- $ 4,376
Other securities............... 599 -- -- 599
- -------------------------------------------------------------------------------------------------------
Total $ 4,975 $ -- $ -- $ 4,975
=======================================================================================================
</TABLE>
There were no gross realized gains and gross realized losses for the years ended
December 31, 1996 and 1994. For the year ended December 31, 1995, gross realized
gains and losses were zero and $1,500,000, respectively.
(b) Securities Available for Sale
The following is a summary for the major categories of securities available for
sale.
<TABLE>
<CAPTION>
========================================================================================================
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury and federal agencies... $385,903 $ 1,772 $ (8) $ 387,667
Mutual funds......................... 31,095 -- -- 31,095
Other securities..................... 7,412 226 (64) 7,574
- --------------------------------------------------------------------------------------------------------
Total $424,410 $ 1,998 $ (72) $ 426,336
- --------------------------------------------------------------------------------------------------------
December 31, 1995
U.S. Treasury and federal agencies... $241,649 $ 4,274 $ (4) $ 245,919
Mutual funds......................... 43,052 -- -- 43,052
Other securities..................... 5,837 504 -- 6,341
- --------------------------------------------------------------------------------------------------------
Total $290,538 $ 4,778 $ (4) $ 295,312
========================================================================================================
</TABLE>
Mutual funds at December 31, 1996 and 1995 were comprised of Monarch government
cash, cash and treasury funds. Other securities at December 31, 1996 and 1995
were primarily comprised of certificates of originator fees associated with the
guaranteed portion of Small Business Administration loans.
The Bank's broker/dealer subsidiary, Imperial Securities Corp, receives fees for
performing certain distribution and service activities on behalf of Monarch
Funds (a family of mutual funds). These fees, totaling $1.3 million, $0.4
million and $0.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively, are reflected as "Other service charges and fees" in the
consolidated statement of income. Of the five trustees of the Monarch Funds, two
are members of the Company's management. As of December 31, 1996, the Company's
investment in the Monarch Funds represented approximately 4.6% of the net asset
value of all Monarch Funds.
Gross realized gains and losses related to the available for sale portfolio were
$274,000 and $45,000, respectively, for the year ended December 31, 1996,
$423,000 and $163,000, respectively, for the year ended December 31, 1995 and
$125,000 and $397,000, respectively, for the year ended December 31, 1994. At
December 31, 1996 and 1995, the Company reported unrealized gains, net of tax,
of $1.2 million and $2.7 million, respectively, in the consolidated balance
sheet.
28
<PAGE>
NOTE (4) LOANS
The carrying amount of loans, net of unearned income and deferred loan fees,
consisted of the following:
<TABLE>
<CAPTION>
====================================================================
1996 1995
Carrying Carrying
At December 31, (In Thousands) Amount Amount
- --------------------------------------------------------------------
<S> <C> <C>
Commercial loans................. $1,594,602 $1,238,148
Loans secured by real estate:
Real estate term loans......... 361,426 388,713
Interim construction loans..... 86,416 64,869
Consumer loans................... 20,604 7,617
- --------------------------------------------------------------------
Total loans...................... 2,063,048 1,699,347
Less allowance for loan losses... (36,051) (37,402)
- --------------------------------------------------------------------
Net loans $2,026,997 $1,661,945
====================================================================
</TABLE>
Net deferred loan fees and costs, included in total loans, approximated $8.7
million and $5.5 million at December 31, 1996 and 1995, respectively.
The following table contains information for loans deemed impaired.
<TABLE>
<CAPTION>
================================================================================
Net
Carrying Specific Net
(In Thousands) Value Allowance Balance
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996
Loans with specific allowances........ $102,116 $(14,993) $ 87,123
Loans without specific allowances..... 15,484 -- 15,484
- ---------------------------------------------------------------------------------
Total $117,600 $(14,993) $102,607
- ---------------------------------------------------------------------------------
December 31, 1995
Loans with specific allowances........ 85,242 (11,770) 73,472
Loans without specific allowances..... 37,512 -- 37,512
- ---------------------------------------------------------------------------------
Total $122,754 (11,770) $110,984
=================================================================================
</TABLE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
====================================================================
At December 31, (In Thousands) 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Current................................. $ 97,210 $ 93,253
Past due................................ -- 575
Nonaccrual.............................. 20,390 28,926
- --------------------------------------------------------------------
Total $117,600 $122,754
====================================================================
</TABLE>
Included in current impaired loans were restructured loans of $26.5 million at
December 31, 1996 and $29.5 million at December 31, 1995. A significant portion,
77% at December 31, 1996 and 82% at December 31, 1995, of the impaired loans
were secured by real estate. Impaired loans averaged $131.0 million in 1996 and
$48.8 million in 1995. During 1996 and 1995, total interest recognized on the
impaired loan portfolio, on a cash basis, was $10.3 million and $3.4 million,
respectively.
At December 31, 1996, 1995 and 1994, total restructured loans were $28.7
million, $33.6 million and $5.9 million, respectively, and were performing in
accordance with their modified terms. There were $327,000 of related commitments
to lend additional funds on restructured loans at December 31, 1996. There were
no related commitments to lend additional funds on restructured loans in 1995 or
1994. In 1996, 1995 and 1994, respectively, $2.6 million, $2.8 million and $0.7
million of gross interest income would have been recorded had the loans been
current in accordance with their original terms compared to $2.6 million, $2.7
million and $0.4 million of interest income which was included in net income for
the same periods. The average yield on restructured loans was 8.4% at December
31, 1996.
Nonaccrual loans totaled $20.4 million, $28.9 million and $18.2 million at
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
the related commitments to lend additional funds approximated $319,000 and
$607,000, respectively. There was no recorded interest receivable on nonaccrual
loans at December 31, 1996 or 1995. Interest income foregone on nonaccrual loans
approximated $2.2 million in 1996, $2.2 million in 1995 and $2.0 million in
1994. Interest income recognized on nonaccrual loans was approximately $1.1
million in 1996, $2.0 million in 1995 and $1.0 million in 1994.
An effort is made to pool and diversify risk with the objective of achieving
high rates of return and minimizing losses for the benefit of stockholders and
protection of depositors. Diversification of the loan portfolio by type of loan,
geographic and industry concentration and type of borrower also tends to reduce
the overall risk by minimizing the adverse impact of any single event or set of
occurrences. At December 31, 1996, within the loan portfolio, approximately 77%
were categorized as commercial and 22% as real estate. Commercial loans are
broadly diversified by industry and geographically concentrated in California.
At year-end 1996, real estate loans totaled $447.8 million. Not included in the
following table are commercial loans to real estate related customers totaling
$79.1 million. At December 31, 1996, these loans consisted of the following:
$59.5 million to real estate agents, operators and lessors, $9.1 million to
subcontractors and developers, $5.8 million to title and escrow companies and
$4.7 million to builders.
29
<PAGE>
The following table shows the distribution of real estate loans and unfunded
commitments by type of project.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996 (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL %
TOTAL LOANS % LOANS NONACCRUAL NONACCRUAL UNFUNDED
CONSTRUCTION BY TYPE BY TYPE BY TYPE BY TYPE COMMITMENTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Acquisition and land development............. $ 9,240 11 % $ -- -- % $ 3,667
Condominiums................................. 6,330 7 -- -- 23,737
Multi-family residential..................... 693 1 -- -- 6,501
Single-family residential.................... 66,840 77 -- -- 133,906
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RESIDENTIAL $ 83,103 96 % $ -- -- % $167,811
- ---------------------------------------------------------------------------------------------------------------------------
Other non-residential........................ 3,313 4 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL NON-RESIDENTIAL $ 3,313 4 % $ -- -- % $ --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CONSTRUCTION $ 86,416 100 % $ -- -- % $167,811
- ---------------------------------------------------------------------------------------------------------------------------
TERM LOANS
- ---------------------------------------------------------------------------------------------------------------------------
Acquisition and land development............. $ 317 -- % $ -- -- % $ --
Condominiums................................. 17,388 5 -- -- --
Multi-family residential..................... 117,424 34 6,079 56 323
Single-family residential.................... 8,168 2 4,468 42 130
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RESIDENTIAL $143,297 41 % $ 10,547 98 % $ 453
- ---------------------------------------------------------------------------------------------------------------------------
Retail facilities............................ 92,538 26 -- -- 115
Office building.............................. 71,025 20 213 2 11
Industrial................................... 6,159 2 -- -- --
Hotels....................................... 23,678 7 -- -- 48
Other........................................ 13,969 4 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL NON-RESIDENTIAL $207,369 59 % $ 213 2 % $ 163
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL TERMS LOANS $350,666 100 % 10,760 100 % $ 616
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REAL ESTATE LOANS $437,082 $ 10,760 $168,427
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, 85% of the Company's real estate loan portfolio was
geographically concentrated in Southern California, 10% in Northern California,
and 5% outside of California.
The principal amount of loans pledged to secure public deposits and for other
purposes required or permitted by law approximated $102 million at December 31,
1996.
30
<PAGE>
NOTE (5) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year........................ $ 37,402 $ 40,072 $ 42,800
Provision for losses.............................. 6,881 16,122 12,174
Provision for loan losses of
discontinued operation........................... 15 -- --
Loans charged off................................. (11,025) (20,962) (17,734)
Recoveries on loans previously 2,778 2,170 2,832
charged off......................................
- -------------------------------------------------------------------------------------------------
NET CHARGE-OFFS $ (8,247) (18,792) $(14,902)
- -------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 36,051 $ 37,402 $ 40,072
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE (6) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Land.............................................. $ 1,765 $ 1,765
Buildings & improvements.......................... 3,737 3,682
Leasehold improvements............................ 7,110 8,082
Furniture, fixtures & equipment................... 31,955 26,331
- -------------------------------------------------------------------------------------------------
LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION (26,154) (23,857)
- -------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, NET $ 18,413 $ 16,003
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE (7) REAL ESTATE OWNED
The following table presents real estate owned by type of
project.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Acquisition and land development.................. $ 2,708 $ 6,908
Multi-family residential.......................... -- 162
Single-family residential......................... 187 1,325
- -------------------------------------------------------------------------------------------------
TOTAL RESIDENTIAL $ 2,895 $ 8,395
- -------------------------------------------------------------------------------------------------
Acquisition and land development.................. -- 5,420
Retail facilities................................. -- 1,200
- -------------------------------------------------------------------------------------------------
TOTAL NON-RESIDENTIAL $ -- $ 6,620
- -------------------------------------------------------------------------------------------------
REO, GROSS $ 2,895 $ 15,015
- -------------------------------------------------------------------------------------------------
Less valuation allowance (769) (4,686)
- -------------------------------------------------------------------------------------------------
REO, NET $ 2,126 $ 10,329
- -------------------------------------------------------------------------------------------------
</TABLE>
Net real estate owned expense was comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss (gain) on sale of real estate
owned........................................... $ 151 $ (384) $ (446)
Valuation adjustments charged to
operations...................................... 476 4,547 5,291
Direct holding costs............................. 1,249 4,345 2,874
- -------------------------------------------------------------------------------------------------
NET REAL ESTATE OWNED EXPENSE $ 1,876 $ 8,508 $ 7,719
- -------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth information regarding the Company's
valuation allowance for REO.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year....................... $ 4,686 $ 6,475 $ 3,084
Provision for REO................................ 476 4,547 5,291
REO charged off.................................. (4,393) (6,336) (1,900)
- -------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 769 $ 4,686 $ 6,475
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE (8) INCOME PER COMMON SHARE
Income per common share is computed based on the weighted average number of
shares of common stock outstanding during each year after giving retroactive
effect to stock dividends and splits. Common stock equivalents are included in
the calculations unless the effect is determined to be antidilutive or
immaterial.
The weighted average number of shares including common stock equivalents was
26,116,767 in 1996, 25,168,985 in 1995 and 24,200,733 in 1994. The weighted
average number of shares used to compute income per common share was
retroactively adjusted to reflect stock splits and dividends as appropriate. On
January 24, 1997, the Company declared a 10% stock dividend payable on February
24, 1997 to stockholders of record on February 17, 1997. In the first quarter of
1996, the Company declared and paid an 8% stock dividend. In the fourth quarter
of 1996, the Company split its common stock at the ratio of one new share for
every two shares outstanding. In 1994 and 1995, the Company declared and paid 5%
stock dividends.
On January 24, 1997, the Company's Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to one million
shares of its common stock from time to time in the open market depending on
market conditions, share price and other factors. The stock repurchase program
will reduce the shares outstanding and shares repurchased may later be issued to
the Company's employee stock ownership plan and under the employee stock option
plan. The repurchased shares will reduce the dilution from issuances in
connection with those plans as well as from any future stock dividends. The
stock repurchase program will continue until the full number of shares are
acquired or the program is discontinued.
NOTE (9) DEPOSITS
Interest expense on time certificates of deposit with balances of $100,000 or
more amounted to $36.8 million in 1996, $27.6 million in 1995 and $13.8 million
in 1994.
Included in the Company's noninterest bearing demand deposits are deposits of
customers in the real estate related services industry. While these deposits are
noninterest bearing, the Company incurs customer service expenses in the form of
payments to third parties who provide accounting, courier and other deposit
related services for these customers. The costs associated with these deposits
are included in "Customer ser-
31
<PAGE>
vices" in the accompanying consolidated statement of income. During 1996 and
1995, the average balances of such deposit accounts were $670.5 million and
$546.0 million, respectively.
NOTE (10) SHORT-TERM BORROWINGS
The following table sets forth information with respect to Federal funds
purchased and securities sold under agreements to repurchase.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, end of year............................. $ 12,450 $126,500 $103,246
Weighted average interest rate, end of
year............................................ 4.93 % 4.31 % 6.22 %
Average amount outstanding during the
year............................................ $ 16,489 $ 19,121 $ 26,906
Weighted average interest rate for the
year............................................ 5.04 % 5.57 % 2.90 %
Maximum amount outstanding at any
month-end....................................... $ 37,700 $156,930 $166,134
- -------------------------------------------------------------------------------------------------
</TABLE>
Securities subject to repurchase agreements are retained by the Company's
custodian under written agreements that recognize the customers' interests in
the securities. Interest expense associated with Federal funds purchased and
securities sold under repurchase agreements totaled $0.8 million, $1.1 million
and $0.8 million, respectively, for 1996, 1995 and 1994.
The Company issues commercial paper which matures within 270 days. The following
table sets forth information regarding the Company's outstanding commercial
paper.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, end of year............................. $ 8,011 $ 11,562 $ 11,903
Weighted average interest rate, end of
year............................................ 5.11 % 5.73 % 5.52 %
Average amount outstanding during the
year............................................ $ 18,613 $ 7,849 $ 13,890
Weighted average interest rate for the
year............................................ 5.45 % 5.89 % 3.50 %
Maximum amount outstanding at any
month-end....................................... $ 25,707 $ 11,861 $ 19,758
- -------------------------------------------------------------------------------------------------
</TABLE>
In connection with the issuance of commercial paper, the Company had a back-up
line of credit established with a bank for $15,000,000 which matured in 1995 and
was not renewed or utilized during 1995.
The Bank is a designated depository for federal tax collections. These tax
collections, as set forth in the following table, bear interest at 25 points
below the Federal funds rate.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, end of year............................. $ 24,436 $ 21,574 $ 75,770
Weighted average interest rate, end of
year............................................. 6.01 % 4.48 % 4.69 %
Average amount outstanding during the
year............................................ $ 26,259 $ 38,427 $ 57,383
Weighted average interest rate for the
year............................................. 5.00 % 5.60 % 3.92 %
Maximum amount outstanding at any
month-end........................................ $ 89,579 $ 91,339 $ 89,211
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE (11) LONG-TERM BORROWINGS
In 1979, the Company issued $16,500,000 of Floating Rate Notes ("the Notes")
which mature on August 1, 1999. The Notes were convertible at the option of the
holder at any time prior to August 1, 1986 into an equivalent principal amount
of Debentures. At December 31, 1996, $3,373,000 in Notes and $1,082,000 in
Debentures were outstanding and the current interest rates on the Notes and
Debentures were 6.25% and 9.0%, respectively. At December 31, 1995, the
outstanding Notes and Debentures totaled $4,824,000 and $1,082,000,
respectively.
The Notes and Debentures may be redeemed after August 1, 1989 at the option of
the Company until maturity at a declining premium, plus accrued interest.
The Company is required under the indenture to make equal annual mandatory
sinking fund payments of $1,650,000 in each of the years 1992 through 1998 which
will be sufficient to retire at par approximately 90% of the aggregate principal
amount of Notes and Debentures prior to maturity. The 1996 sinking fund payment
was made in the third quarter of the year.
The Trust Indentures for the Notes and Debentures include provisions which
restrict the sale or issuance of capital stock of the Bank, the payment of
dividends and the disposition of assets. The Company was in compliance with the
provisions of the respective Trust Indentures at December 31, 1996.
NOTE (12) INCOME TAXES
Income tax expense (benefit) is included in the accompanying consolidated
statement of income as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense from:
Continuing operations......................... $ 43,278 $ 10,071 $ 3,968
Discontinued operations....................... (6,000) 1,118 16
- -------------------------------------------------------------------------------------------------
TOTAL $ 37,278 $ 11,189 $ 3,984
- -------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal............................... $19,858 $ 8,152 $ 3,575
State................................. 6,949 1,978 1,757
- -------------------------------------------------------------------------------------------------
TOTAL $26,807 $10,130 $ 5,332
- -------------------------------------------------------------------------------------------------
Deferred:
Federal............................... 4,524 2,880 (2,041)
State................................. 1,796 2,138 (1,225)
- -------------------------------------------------------------------------------------------------
TOTAL $ 6,320 $ 5,018 $ (3,266)
- -------------------------------------------------------------------------------------------------
Total:
Federal............................... 24,382 11,032 1,534
State................................. 8,745 4,116 532
- -------------------------------------------------------------------------------------------------
Taxes (charged) credited to
stockholders' equity................. 4,506 (792) 2,104
- -------------------------------------------------------------------------------------------------
Reversal of overaccrued taxes from
prior years.......................... (355) (907) --
- -------------------------------------------------------------------------------------------------
Change in valuation allowance for
deferred tax receivable.............. -- (2,260) (186)
-------------------------------------------------------------------------------------------------
TOTAL $37,278 $11,189 $ 3,984
- -------------------------------------------------------------------------------------------------
</TABLE>
The amounts previously reported as the current and deferred portions of the tax
provision for 1995 were revised based upon determinations made when the 1995 tax
returns were filed. Such changes within the total provision occur because all
tax alternatives available to the Company are not decided upon until all
relevant tax data have been accumulated several months after year-end.
During 1996 and 1995, the Company recorded $0.4 million and $0.9 million
reductions of income tax expense to reflect the finalization of prior years
income tax issues.
The Company had a current income tax receivable of $3.4 million at December 31,
1996. Current income taxes payable totaled $394,000 at December 31, 1995. Of the
$4.5 million in taxes charged directly to stockholders' equity, $3.2 million
represents current taxes receivable associated with employee stock options and
$1.3 million representing the reduction in deferred taxes associated with the
unrealized gain on securities available for sale.
Deferred income taxes arise from differences on the timing of recognition of
income and expense for tax and financial reporting purposes. The following table
shows the primary components of the Company's net deferred tax (liability)
receivable.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Components of the deferred tax asset:
Bad debt deduction..................................................... $ 12,612 $ 14,334
Deferred compensation.................................................. 6,277 3,605
State franchise taxes.................................................. 3,261 1,017
Goodwill amortization.................................................. 831 367
Other.................................................................. 388 142
- ---------------------------------------------------------------------------------------------------------
TOTAL $ 23,369 $ 19,465
- ---------------------------------------------------------------------------------------------------------
Valuation allowance.................................................... -- --
- ---------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE $ 23,369 $ 19,465
- ---------------------------------------------------------------------------------------------------------
Components of the deferred tax liability:
Prepaid expense........................................................ (614) (361)
Installment sale of real estate owned.................................. (21) (55)
Depreciation........................................................... (225) (297)
Deferred loan fees..................................................... (847) (786)
Investment in Imperial Credit Industries, Inc.......................... (22,184) (10,798)
Unrealized gain on securities available for sale....................... (883) (2,210)
Charitable donations................................................... -- (463)
Other.................................................................. (86) (93)
- ---------------------------------------------------------------------------------------------------------
TOTAL $ (24,860) $ (15,063)
- ---------------------------------------------------------------------------------------------------------
NET DEFERRED TAX (LIABILITY) ASSET $ (1,491) $ 4,402
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Company's deferred tax asset, net of valuation allowance, is supported by
carry back and carry forward provisions of the tax laws as well as certain tax
strategies which create future taxable income.
33
<PAGE>
The total income tax provision differs from the amount computed by applying the
statutory Federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
(IN THOUSANDS) AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at statutory rate...................... $ 31,994 35.0% 12,028 35.0% $ 3,720 35.0%
(Reduction) increase in taxes resulting from:
Tax exempt interest......................................... (167) (0.2) (146) (0.4) (169) (1.6)
Cash surrender value of officers life insurance............. (90) (0.1) (220) (0.7) (357) (3.4)
Appreciation of donated Imperial Credit Industries, Inc
common stock............................................... (1,294) (1.4) -- -- -- --
State franchise taxes, net of Federal income tax benefit.... 6,470 7.1 2,537 7.4 715 6.8
Change in valuation allowance............................... -- -- (2,260) (6.6) (186) (1.8)
Reversal of overaccrued taxes from prior year............... (355) (0.4) (907) (2.6) -- --
Other....................................................... 720 0.8 157 0.5 261 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 37,278 40.8% $11,189 32.6% $ 3,984 37.5%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE (13) EMPLOYEE BENEFIT PLANS
The Company has established the following employee benefit plans.
IMPERIAL BANCORP PROFIT-SHARING PLAN: The Company has a noncontributory profit-
sharing plan in which employees of the Company, Bank and certain subsidiaries
are eligible to participate at year-end if they have been employed for at least
1,000 hours during the year. Investments and distribution of vested benefits to
terminated participants are made in accordance with the contribution allocation
form signed by the employee. Distributions are made at the option of the Company
in either cash or common stock of the Company or a combination thereof.
There were no discretionary contributions to the plan during 1996. The Company
contributed $2.0 million to the profit-sharing plan in 1995. The trust created
by the plan held 1,037,479 shares at December 31, 1996 and 1,065,638 shares at
December 31, 1995. The shares held by the plan represented approximately 4.1% of
the Company's total shares outstanding at December 31, 1996.
IMPERIAL BANCORP EMPLOYEE STOCK OWNERSHIP PLAN: During 1990, the Company
established an Employee Stock Ownership Plan ("ESOP") in which employees of the
Company, Bank and certain subsidiaries are eligible to participate at year-end
if they have been employed for at least 1,000 hours during the year.
Distribution of vested benefits to terminated participants is made in common
stock of the Company.
The trust created by the plan held 302,946 shares at December 31, 1996 and
329,406 shares at December 31, 1995. The Company contributed $2.5 million to the
ESOP in 1996. Using the $2.5 million contribution, the plan purchased 107,317
shares in January 1997. There were no discretionary contributions to the plan
during 1995.
Effective December 31, 1996, the ESOP was merged with the profit-sharing plan
and all assets of the ESOP transferred to the profit-sharing plan. The account
of each participant or former participant in the ESOP as of December 31, 1996
was transferred to the profit-sharing plan and will continue to be held and
administered under the terms of the profit-sharing plan as a separate account in
the name of the participant.
IMPERIAL BANCORP 401-K PLAN: The Company has a 401-K Plan in which all employees
of the Company, Bank and certain subsidiaries may elect to enroll each January 1
or July 1 of every year provided that they have been employed for at least six
months prior to the semi-annual enrollment date. Employees may contribute up to
14% of their salaries with the Company matching 50% of any contribution, not to
exceed 4% of the employee's salary.
Only active 401-K Plan members at December 31 of any year are eligible to
receive Company matching contributions for that year. The Company's matching
contributions under the 401-K Plan approximated $950,000 in 1996, $453,000 in
1995 and $403,000 in 1994. Distributions of employee and matching contributions
to terminated participants are made in accordance with the contribution
allocation form signed by the employee in either common stock of the Company or
cash or a combination thereof. The trust created by the plan held 497,065 shares
at December 31, 1996 and 492,235 shares at December 31, 1995.
SUPPLEMENTAL COMPENSATION PLANS
DEFERRED COMPENSATION PLAN: In 1992, the Company adopted a Deferred Compensation
Plan ("the 1992 Plan") in order to provide specified benefits to certain key
employees and directors. Participants are allowed to defer portions of their
compensation each plan year, subject to a minimum and a maximum dollar amount of
deferral. In any plan year, the Company will make a matching contribution of not
less than 10% or more than 50% of the participants' deferral for that year. The
exact ratio will be determined by a formula based on return on stockholders'
equity. The matching contribution ratio as calculated was 50% for 1996 and 40%
for 1995. Each par-
34
<PAGE>
ticipant's "account balance" earns interest at a rate established annually
(Moody's Seasoned Corporate Bond Rate). The rates for 1996 and 1995 were 7.30%
and 8.94%, respectively. The rate for 1997 will be 7.41%.
Effective January 1, 1996, the Company adopted a second Deferred Compensation
Plan ("the 1996 Plan"), with features similar to the 1992 Plan. The 1996 Plan
allows participants to alter their initial deferral percentage in subsequent
plan years which is not allowable under the 1992 Plan. In addition, participants
in the 1992 Plan will be permitted to transfer compensation deferred under the
1992 Plan to the 1996 Plan when the 1992 Plan expires in 1999.
The expense of funding the deferred compensation plans totaled $2.3 million,
$1.0 million and $0.8 million, respectively, for the years ended December 31,
1996, 1995 and 1994.
To offset the deferred compensation plan liability, the Company purchased life
insurance policies during 1996 for which it is the beneficiary. The policies
have a cash surrender value which substantially offsets the premiums paid for
the policies. The net expense of the policies included in the accompanying
consolidated statement of income approximated $50,000 for the year ended
December 31, 1996.
DEATH BENEFIT ONLY PLAN: The Death Benefit Only Plan ("DBO Plan") was
established in 1986 to provide certain death benefits to the Company's then
Chairman and current Chairman, then Vice Chairman, so long as they remain in the
employ of the Company. The DBO Plan provides for lump sum payments to the estate
of each individual in amounts ranging from $2.5 million in year one to $5.1
million in year fifteen, depending on the time of death. The DBO Plan was funded
by the Company through the purchase of life insurance for which it is the
beneficiary. The benefits specified by the DBO Plan are accrued over 15 years
(expected mortality). The DBO Plan was designed such that, if the assumptions
made with respect to mortality experience, policy dividends and other factors
are realized, the Company will recover all costs including life insurance
premiums and benefits paid by it, plus a factor for the use of its money.
As a result of the death of George M. Eltinge, then Chairman of the Board, on
August 12, 1994, his estate received the benefit from the DBO Plan during 1994.
The Company recorded a $935,000 pre-tax compensation expense during the year
related to this death benefit, net of life insurance proceeds in the amount of
$741,000 received in 1994. The after-tax effect of funding the death benefit
obligation approximated $225,000.
Excluding the expense related to the death of George M. Eltinge, as described
above, the Company's net benefit of funding the death benefit only plan amounted
to $276,000, $277,000, and $223,000, respectively, for the years ended December
31, 1996, 1995 and 1994.
SPLIT DOLLAR LIFE INSURANCE PLAN: In 1996, the Company established a Split
Dollar Life Insurance Plan to provide certain death benefits to the estate of
the Company's Chairman and his spouse. The insurance policy purchased under the
plan provides for a lump sum payment to the estate of the Company's Chairman in
amounts ranging from $10.5 million in year one to $5.2 million in year 26,
depending on the time of death. The Company is obligated to make annual premium
payments of $830,000 with respect to the policy for a twelve-year period. At the
end of the thirteenth year, the Company will receive back an amount equal to the
aggregate premiums paid without interest or earnings. The cash surrender value
generated by the policy offsets the amount of premiums paid over the life of the
policy. The net expense of the policy in the consolidated statement of income
for the year ended December 31, 1996 approximated $350,000.
STOCK OPTION PLAN: The Company has a stock option plan for directors and certain
employees. Options are granted at the market price of the Company's common stock
at the date of grant, and become exercisable immediately for all directors.
Options which have been granted to employees are exercisable at either 25% or
16.7% per year beginning one year after the date of grant.
A summary of changes in outstanding options is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS) 1996* 1995*
- -------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, beginning of year.. 2,727,852 3,276,852
Options granted......................... 1,364,583 215,619
Options exercised....................... (885,099) (744,952)
Options cancelled....................... (66,807) (19,667)
- ------------------------------------------------------------------------------
OPTIONS OUTSTANDING, END OF YEAR 3,140,529 2,727,852
- ------------------------------------------------------------------------------
</TABLE>
There were 206,328* option shares available for future grants at December 31,
1996.
Information regarding stock option activity and prices of the shares is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
AVERAGE
OPTION OPTION
NUMBER PRICE RANGE PER PRICE
OF SHARES* SHARE* PER SHARE*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option at:
December 31, 1996................... 3,140,529 3.64 - 19.89 $ 9.24
December 31, 1995................... 2,727,852 3.64 - 12.49 5.25
Options exercisable at:
December 31, 1996................... 2,031,915 3.64 - 16.59 7.78
December 31, 1995................... 2,000,863 3.64 - 8.15 4.72
Options exercised during the year:
December 31, 1996................... 885,099 11.43 - 21.48 4.59
December 31, 1995................... 744,952 8.42 - 13.47 4.47
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for stock dividends declared and paid in 1996 and first quarter 1997
and a 3-for-2 stock split effected in 1996.
The Company recorded an additional $4.1 million in 1996 and $3.4 million in 1995
of stockholders' equity from the exercise of employee stock options. The Company
receives a tax deduction from the exercise of non-qualified stock options for
the difference between the option price and the market
35
<PAGE>
value of the shares issued. The tax benefit associated with shares exercised
which was recorded as a component of stockholders' equity approximated $3.2
million in 1996 and $1.9 million in 1995. During 1996 and 1995, $1.8 million and
$1.5 million of common stock were exchanged and retired in conjunction with the
exercise of stock options.
The Company applies APB 25 in accounting for the stock option plan and,
accordingly, no compensation cost has been recognized in the consolidated
financial statements for the fair value of stock options granted. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under FAS 123, the Company's net income would have been
reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations....... As Reported $ 62,302 $ 21,654
Pro Forma 60,735 21,568
Net income.............................. As Reported $ 54,134 $ 23,177
Pro Forma 52,567 23,091
Fully diluted income per share from
continuing operations.................. As Reported $ 2.39 $ 0.86
Pro Forma 2.32 0.86
Fully diluted net income per share...... As Reported $ 2.07 $ 0.92
Pro Forma 2.01 0.92
- -------------------------------------------------------------------------------
</TABLE>
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 1996
and 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------
1996 1995
- ---------------------------------------------------
<S> <C> <C>
Dividend yield.................. -- --
Expected life of option (years):
Officers..................... 6.5 6.5
Directors.................... 3.5 --
Stock price volatility:
Officers..................... 44% 44%
Directors.................... 45% --
- ---------------------------------------------------
</TABLE>
The risk-free interest rates used in the Black-Scholes option-pricing model were
equal to comparable U.S. Treasury rates at each respective grant date. The
weighted average fair value at the date of grant for options granted during 1996
and 1995 was $8.43 per option and $6.32 per option, respectively.
Pro forma income from continuing operations and pro forma net income reflect
only options granted in 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options is not reflected in the pro forma income
amounts presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to January 1,
1995 is not considered.
NOTE (14) LOANS TO OFFICERS
Pursuant to an Employee Loan Program and under by-laws approved by stockholders
in 1984, the Company had $3,633,000 and $4,238,000 in loans to certain officers
and directors, outstanding at December 31, 1996 and 1995, respectively. With
respect to loans made to the Company's Chairman, one loan matures at the earlier
of his termination of employment or January 1, 2002 and is secured by his
interest in the DBO Plan (note 13). A second loan to the Company's Chairman is
unsecured and matures at the earlier of his termination of employment or August
15, 2000. During 1996 additional loans made to officers were $124,000 and
payments received were $729,000. Loans to other officers are unsecured, are due
in seven equal annual principal payments or on demand, and mature at the earlier
of each individual's termination of employment or August 15, 2000.
These loans accrue interest at a rate which is equal to 60% of the average of
the one year and three year Treasury securities rates as published in the Wall
Street Journal at the end of each calendar year, to be fixed at that rate for
the coming year. The rate was 3.1% for 1996 and will be 3.6% for 1997.
NOTE (15) COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: The Company is a party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees, interest rate cap and floor contracts, interest rate swaps, options,
and forward and financial futures contracts. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
Commitments to extend credit, standby letters of credit and financial guarantees
only represent exposure to off-balance sheet risk in the event the contract is
drawn upon and the other party to the contract defaults. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. The Company does not
anticipate any material losses as a result of these transactions.
For interest rate cap, floor and swap transactions, forward and financial
futures contracts, and options, the contract or notional amounts do not
represent exposure to credit loss. Risk originates from the inability of
counterparties to meet the terms of the contracts and from market movements in
securities' values and interest rates. It is currently estimated that the
related credit risk of these investments is an immaterial percentage of the
notional amounts. The Company controls the credit risk of
36
<PAGE>
its interest rate cap, floor and swap agreements and forward and financial
futures contracts through credit approvals, limits and monitoring procedures.
A summary of the contract or notional amounts of significant commitments and
contingent liabilities is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit............ $1,381,980 $ 840,340
Standby letters of credit............... 132,079 82,115
Commercial letters of credit............ 53,314 55,633
When-issued securities.................. 2,416 1,794
Asset/liability management:
Interest rate swaps..................... -- 300,000
Interest rate caps purchased............ 1,500,000 1,300,000
Interest rate floors purchased.......... 4,500,000 500,000
Trading contracts:
Spot and forwards to purchase foreign 110,856 51,655
currency...............................
Spot and forwards to sell foreign 105,960 46,583
currency...............................
Futures and forwards to purchase 3 14,213
precious metals........................
Futures and forwards to sell precious 17,006 14,253
metals.................................
- -------------------------------------------------------------------
</TABLE>
The Company's net interest margin is sensitive to sudden changes in interest
rates. In addition, the Company's interest-earning assets, primarily its loans
are tied to the Prime Rate, an index which tends to react more slowly to changes
in market rates than other money market indices such as LIBOR (London Interbank
Offered Rate). The rates paid for the Company's interest-bearing liabilities,
however, do correlate with LIBOR. This mismatch creates a spread relationship
risk between the Company's Prime based assets and LIBOR correlated liabilities.
An analysis of the historic relationship between the Prime Rate and LIBOR showed
that the spread between the indices narrows in an environment of rising interest
rates and widens in a falling rate environment.
The Company developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates both up and down.
These strategies involve purchasing interest rate floors and caps with strike
prices which generally adjust quarterly and are approximately 200 basis points
below or above (depending on the instrument) current market rates at the time
the floors and caps are purchased.
Based on its strategy and the general asset sensitive nature of the consolidated
balance sheet, the Company purchased over the counter interest rate floors in
the first quarter of 1996 to protect against a drop in interest rates. The
interest rate floors, with a notional value of $500 million at December 31,
1996, matured unexercised in the first quarter of 1997. In the first, second,
and third quarter of 1996, the Company purchased $2.0 billion of exchange traded
interest rate floors. The floors mature at the rate of $500 million per quarter
beginning in the second quarter of 1997. The floors maturing in the second and
third quarter of 1997 provide protection to the Company in the event that the
three month LIBOR drops below the strike price of 4.0% associated with the floor
while the remaining floors have a strike price of 4.25%. The unrealized gain of
these floors approximated $50,000 at December 31, 1996. In the fourth quarter of
1996, the Company purchased an additional $2.0 billion of exchange traded
interest rate floors. The floors mature at the rate of $1.0 billion per quarter
beginning in the second quarter of 1998. The floors provide the Company
protection in the event that the three month LIBOR drops below the strike price
of 4.0%. The unrealized gain of these floors approximated $150,000 at December
31, 1996.
In January 1996, the Company purchased exchange traded interest rate caps with a
notional value of $500 million at December 31, 1996. The caps provide protection
in the event that the three month LIBOR increases above the 6.5% strike price of
the caps and mature during the second quarter of 1997. The unrealized gain on
these caps approximated $6,000 at December 31, 1996. In the fourth quarter of
1996, the Company purchased an additional $1.0 billion of exchange traded caps.
The caps mature at the rate of $500 million per quarter beginning in the third
quarter of 1997 and provide the Company protection in the event that the three
month LIBOR increases above the 7.5% strike price. The unrealized gain of these
caps at December 31, 1996 approximated $31,000. The unamortized premiums paid
for floors and caps described above approximated $0.5 million at December 31,
1996.
37
<PAGE>
The following table summarizes the Company's derivative instruments for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996 (IN NOTIONAL WEIGHTED
THOUSANDS) AMOUNT AVERAGE RATE(1) TERMS AND MATURITY
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate caps purchased
Exchange traded............................. $1,500,000 n/a $500,000 maturing per quarter in second,
third and fourth quarter 1997
Interest rate floors purchased
Exchange traded............................. $4,000,000 n/a $500,000 maturing per quarter in second,
third and fourth quarter 1997 and first
quarter 1998. $1,000,000 maturing
per quarter in second and third quarter 1998
Over the counter............................ $ 500,000 n/a Matured but unexercised in first quarter
1997.
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS WITH EMBEDDED OPTIONS
Pay - Prime less a
designated spread.......................... $ 200,000 6.3% First quarter 1996
Receive - 3 month LIBOR..................... 200,000 4.8
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS SYNTHETICALLY ALTERED BY
LINKED EXCHANGE TRADED OPTIONS
Pay - Prime less a
designated spread.......................... $ 100,000 6.7% First quarter 1998
Receive - 3 month LIBOR (1)................. 100,000 4.9
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CAPS PURCHASE
Exchange traded............................. $1,200,000 n/a $400,000 maturing per quarter through
third quarter 1996
Over the counter............................ 100,000 n/a Resets quarterly in first, second and
third quarter 1996; matures fourth quarter
1996
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FLOORS PURCHASED
Over the counter............................ $ 500,000 n/a First quarter 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Weighted average rate reflects impact of linked exchange traded options.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company entered into interest rate swaps in which it was committed to pay
the daily average of the Prime Rate less a designated spread and receive three
month LIBOR. The swaps were intended to reduce the potential compression of the
Company's net interest margin in the event that LIBOR rose faster than Prime.
The interest rate swaps had a notional value of $200 million at December 31,
1995 and matured in the first quarter of 1996. The swaps contained embedded
option contracts with strike prices which increased at the rate of 25 basis
points per quarter which capped the rate received on the interest rate swap. The
embedded options were intended to provide a limited degree of protection against
a narrowing of the net interest margin in the event of a decrease in short-term
interest rates while providing an increasing LIBOR indexed asset to retain some
asset sensitivity.
Also in 1994, the Company entered into a similar transaction consisting of
interest rate swaps with a notional value of $300 million of which a notional
value of $100 million was outstanding at December 31, 1995. In conjunction with
these interest rate swaps, the Company sold exchange traded options to cap the
rate received on the swaps at escalating strike prices associated with the
options. These packaged options were stacked and expired at the rate of $300
million per quarter during the first three quarters of 1995 with the final $100
million expiring in the fourth quarter of 1995. These linked option expirations
mirrored the interest rate resets of the linked interest rate swaps which
matured in the fourth quarter of 1995 and the first quarter of 1996. Using
both swaps with embedded options and linked exchange traded options to yield the
same result, the Company utilized the combination which provided the most
economical method of accomplishing the synthetic alteration. The interest rate
swaps and linked options, as synthetic alterations of the Company's interest
received on its loan portfolio, are recorded "as settled" (or according to the
settlement accounting method) with the resulting gains or losses recorded as an
adjustment to interest income.
The impact of the Company's derivative financial instruments discussed above was
a $0.7 million increase in net interest income and a 3 basis point increase in
net interest margin for the year ended December 31, 1996. For the years ended
December 31, 1995 and 1994, the economic impact of the Company's derivative
financial instruments were $7.2 million and $4.9 million reductions in net
interest income and 35 basis point and 27 basis point reductions in net interest
margin, respectively. The impact of these instruments in 1995 was partially
offset by the recognition of a $2.3 million premium received on the linked
written option which had been deferred until the final maturity of the these
options in the fourth quarter of 1995.
38
<PAGE>
As of December 31, 1996, SBA loans serviced for others approximated $57.4
million. In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers of loans. Under certain
circumstances, loans must be repurchased if there has been a breach of
representations or warranties.
The Company's wholly owned subsidiary, Imperial Trust Company, a California
licensed trust company, had total assets under management of approximately $7.8
billion and $6.8 billion at December 31, 1996 and 1995, respectively.
LEASE COMMITMENTS: The Company leases the land and buildings for certain of its
premises under noncancelable operating leases which expire in various years to
2012. Lease payments net of sublease income charged to net occupancy expense in
the consolidated statement of income for the years ended December 31, 1996, 1995
and 1994 amounted to approximately $6,277,000 $6,609,000 and $7,774,000,
respectively.
Aggregate minimum rental commitments under these leases net of $1,780,000 of
income to be received from noncancelable subleases are as follows:
<TABLE>
<CAPTION>
- -----------------------------
(In Thousands) Amounts
- -----------------------------
<S> <C>
1997............. $ 6,075
1998............. 4,991
1999............. 4,610
2000............. 3,206
2001............. 3,357
Thereafter....... 18,272
- -----------------------------
Total $40,511
- -----------------------------
</TABLE>
Certain of the aforementioned leases contain provisions such that the Company
may at its option renew the leases at a specified rental for a specified period.
Certain of the leases also contain provisions such that the Company must pay all
property taxes on the premises or any increase in property taxes after specified
years.
In addition, the Company has entered into long-term agreements for certain data
processing and computer software products and services. These agreements expire
in various years to 2002 and contain provisions that allow renewal at a
specified amount for a specified period. Total expense from these agreements
amounted to $2,890,000 in 1996, $2,911,000 in 1995 and $3,836,000 in 1994 and
are included in data processing in the consolidated statement of income.
Aggregate minimum contractual payments under these agreements are as follows:
<TABLE>
<CAPTION>
- ---------------------------
(In Thousands) Amounts
- ---------------------------
<S> <C>
1997............. $1,515
1998............. 1,641
1999............. 1,701
2000............. 1,706
2001............. 1,706
Thereafter....... 995
- ---------------------------
Total $9,264
- ---------------------------
</TABLE>
LEGAL ACTION: The Company and its subsidiaries are defendants in various
lawsuits arising from the normal course of business. Management believes, based
upon the opinion of legal counsel, that the ultimate resolution of the pending
litigation will not have a material effect upon the financial position or future
results of operations of the Company.
NOTE (16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("FAS 107") requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate. Such instruments include
securities, loans receivable, time deposits, borrowings and various off-balance
sheet items. Because no market exists for a significant portion of the Company's
loan portfolio, fair value estimates are based on judgments regarding credit
risk, investor expectations of future economic conditions, normal cost of
administration of these instruments and other risk characteristics, including
interest rate and prepayment risk. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
The fair value estimates presented do not include the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the value of the Company's fiduciary
contracts for trust services and the value of the Company's investment in
subsidiaries are not considered financial instruments; therefore, their values
are not incorporated into the fair value estimates. Additionally, there is a
value in the Company's core deposit base which is unrelated to the interest rate
assumptions used to compute the fair value estimates. Such demand deposits are a
significant source of low cost funds to the Company.
39
<PAGE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER
RESALE AGREEMENTS: The carrying values reported in the balance sheet approximate
fair values due to the short-term nature of the assets.
SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE AND TRADING ACCOUNT
SECURITIES: Fair values are based on bid prices and quotations published and/or
received from securities dealers.
LOANS HELD FOR SALE: Fair value is based on quoted market prices and/or forward
delivery contracts.
LOANS: The fair value of the loan portfolio is generally estimated by
discounting expected future cash flows at an estimated market rate of interest.
A market rate of interest is estimated based on the AAA Corporate Bond Rate,
adjusted for credit risk and the Company's cost to administer such instruments.
Expected future cash flows are estimated using maturity dates for performing
loans, with cash flows on nonaccrual loans estimated on an individual basis. For
nonaccrual and potential problem loans secured by real property, estimated fair
value has been determined on an individual basis, considering the value of the
collateral as determined by a current third party appraisal and estimated
foreclosure, holding and selling costs. For consumer loans, market rates of
interest are based on current market rates charged for these loans.
DEPOSITS: The fair values for demand, savings and money market accounts are
estimated at the amount payable on demand. Fair values for certificates of
deposit are estimated by discounting the expected cash flows at current market
rates over expected maturities.
SHORT-TERM BORROWINGS: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, federal tax collection accounts and
commercial paper approximate their fair values due to the short-term nature of
the borrowings.
LONG-TERM BORROWINGS: Fair value is estimated using market prices or by
discounting the expected future cash flows at market rates for similar
instruments trading currently.
OFF-BALANCE SHEET INSTRUMENTS: Fair values of the Company's interest rate swaps,
caps, floors, futures, spot and forward contracts are based on quoted market
prices. Fair values of letters of credit and commitments to extend credit are
based on fees currently charged to enter into similar agreements.
40
<PAGE>
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AT DECEMBER 31, (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks................. $ 325,014 $ 325,014 $ 242,018 $ 242,018
Trading account assets.................. 64,887 64,887 40,050 40,050
Securities available for sale........... 426,336 426,336 295,312 295,312
Securities held to maturity............. 4,193 4,193 4,975 4,975
Federal funds sold and securities
purchased under resale agreements...... 357,000 357,000 425,000 425,300
Loans held for sale..................... 5,531 6,058 2,648 2,842
Loans:
Commercial loans...................... 1,594,602 1,609,344 1,238,148 1,256,580
Real estate loans..................... 447,842 430,443 453,582 444,390
Consumer loans........................ 20,604 20,425 7,617 7,607
- -------------------------------------------------------------------------------------------------------
Total loans $2,063,048 $2,060,212 $1,699,347 $1,708,577
------------------------------------------------------------------------------------------------------
Less allowance for loan losses........ $ (36,051) $ -- $ (37,402) $ --
- -------------------------------------------------------------------------------------------------------
Net loans $2,026,997 2,060,212 $1,661,945 $1,708,577
- -------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits:
Demand................................ $1,465,324 1,465,324 $1,145,720 $1,145,720
Savings............................... 17,324 17,324 15,708 15,708
Money market.......................... 596,967 596,967 435,674 435,674
Time deposits - under $100,000........ 169,493 169,624 227,262 227,722
Time deposits - over $100,000......... 701,169 700,883 539,252 539,687
Short-term borrowings................... 44,897 44,897 159,636 159,636
Long-term borrowings.................... 4,455 4,501 5,906 5,975
- -------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
ASSET/LIABILITY MANAGEMENT:
Interest rate swaps(1).................. $ -- $ -- $ -- $ (166)
Interest rate caps purchased(1)......... (95) 38 (180) --
Interest rate floors purchased(1)....... (347) 200 1,606 170
Trading contracts:
Spot and forwards to purchase foreign
currency............................... (170) (170) (136) (136)
Spot and forwards to sell foreign
currency............................... 528 528 520 520
Futures and forwards to purchase
precious metals........................ -- -- -- --
Futures and forwards to sell precious
metals................................. (4) (4) 26 26
Credit instruments:
Commitment to extend credit............. -- (20,730) -- (12,605)
Standby letters of credit............... -- (1,981) -- (1,232)
Commercial letters of credit............ -- (800) -- (834)
- -------------------------------------------------------------------------------------------------------
(1) Estimated fair value represents net unrealized (losses) gains.
- -------------------------------------------------------------------------------------------------------
</TABLE>
NOTE (17) RESTRICTIONS ON CASH BALANCES
Federal Reserve Board regulations require that the Bank maintain certain reserve
balances on deposit with the Federal Reserve Bank. Cash balances maintained to
meet reserve requirements are not available for use by the Bank or the Company.
During 1996, the Bank maintained average reserves of approximately $81.4
million.
NOTE (18) IMPERIAL CREDIT INDUSTRIES, INC.
At December 31, 1996, the Company owned 9,396,016 shares, or 24.5%, of the
common stock of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII) ("ICII").
41
<PAGE>
The following table illustrates the changes in the Company's investment in ICII
during 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Shares owned, beginning of year.... 5,801,052 3,867,368
Stock splits and stock dividends... 5,281,658 1,933,684
Sale of shares..................... (1,500,000) --
Charitable donation of shares...... (186,604) --
- -------------------------------------------------------------
SHARES OWNED, END OF YEAR 9,396,106 5,801,052
- -------------------------------------------------------------
</TABLE>
In accordance with two consulting agreements, one between the Bank and a senior
executive of the Bank, and the second between the Bank and a director of the
Company, the Bank is obligated to pay commissions upon the sale of ICII shares.
Each individual will receive an incentive fee of 2.5% of the realized pre-tax
gains received by the Bank, when and if realized, from the disposition of the
remaining ICII shares held by the Bank. If such sale by the Bank has not
occurred, the agreements require that the Bank will have considered to have sold
an amount equal to 20% of any such security as of January 1 of each year from
1997 through 2001, at a price equal to the arithmetic average of the daily
average stock price of ICII common stock as reported by NASD during the
preceding year. Based on the daily average market price for 1996 of $14.50 per
share, less each individual's basis of $0.89 per share as of December 31, 1996,
as adjusted for stock splits and dividends, the liability relating to these
agreements approximated $6.4 million at December 31, 1996. This liability is
being accrued over the vesting period and will be remeasured quarterly for
changes in the average market price. If the Company had sold all of its
investment in ICII on December 31, 1996, the liability related to these
agreements would have been $9.5 million. The commissions paid as a result of the
shares sold in 1996 approximated $1.7 million and were netted against "Gain on
sale of investment in Imperial Credit Industries, Inc." in the consolidated
statement of income.
At December 31, 1996, the Company carried its investment in ICII at an
equivalent book value of $6.16 per share. On February 28, 1997, the market value
of ICII common stock was $24.13, representing a pre-tax unrealized gain of the
Company's investment of over $160 million.
As the Company does not exercise significant control over the operations of
ICII, the results of ICII operations are accounted for in the Company's
financial statements as an equity investment. The equity investment in ICII is
carried at cost adjusted for equity in undistributed income. Transactions
between ICII and the Company occur during the normal course of business. All
transactions are carried out at substantially the same terms as those prevailing
at the same time for comparable transactions with others.
The following represents summarized financial information with respect to the
operations of ICII.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans held for sale..................... $ 943,623 $ 1,341,810 $ 263,807
Total assets............................ 2,472,881 2,510,635 1,420,409
Deposits................................ 1,076,707 1,092,989 934,621
Total liabilities....................... 2,233,373 2,416,533 1,344,536
Total equity............................ 239,508 94,102 75,873
- --------------------------------------------------------------------------------
Total revenues.......................... 257,054 90,759 77,954
Total expenses.......................... 99,170 66,629 66,664
Income before taxes, minority interest
& extraordinary item................... 157,884 24,130 11,290
Minority interest....................... 12,026 208 --
Extraordinary item...................... -- -- 919
Net income.............................. 75,984 14,193 7,524
- --------------------------------------------------------------------------------
</TABLE>
NOTE (19) CAPITAL MATTERS
Imperial Bank is subject to various regulatory requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amount and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1996, that
the Bank meets all capital adequacy requirements to which it is subject.
The Bank, as a California corporation, is limited in making distribution to its
stockholder, the Company, to the lesser of the retained earnings of the Bank or
the net income of the Bank for its last three fiscal years, less the amount of
any distributions during such period. The Indentures of the Notes and Debentures
also have restrictions on distributions. At December 31, 1996, the Bank could
distribute at least $73.1 million.
As of December 31, 1996, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the following table. There are no conditions or events since that
notification that management believes have changed the institution's category.
42
<PAGE>
The following table compares the Company's actual capital ratios at December 31,
1996 to those required by regulatory agencies for capital adequacy and well
capitalized classification purposes.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) TO BE WELL CAPITALIZED UNDER
ACTUAL FOR CAPITAL ADEQUACY PURPOSES PROMPT CORRECTIVE ACTION PROVISIONS
-----------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets):
Company.............................. $320,708 11.3% *$227,927 *8.0% *$284,909 *10.0%
Bank................................. $296,024 10.5% *$226,013 *8.0% *$282,516 *10.0%
Tier I Capital (to risk weighted assets):
Company.............................. $284,248 10.0% *$113,964 *4.0% *$170,945 *6.0%
Bank................................. $260,654 9.2% *$113,006 *4.0% *$169,509 *6.0%
Tier I Capital (to average assets):
Company.............................. $284,248 9.4% *$ 90,297 *3.0% *$151,042 *5.0%
Bank................................. $260,654 8.7% *$ 90,297 *3.0% *$150,496 *5.0%
- ------------------------------------------------------------------------------------------------------------------------------------
*greater than or equal to
</TABLE>
NOTE (20) DISCONTINUED OPERATION
In the second quarter of 1996, management of the Company decided to discontinue
the precious metals business which had been engaged in trading and leasing of
precious metals in addition to making loans secured by precious metals since
1993. The decision to exit this line of business was made in the wake of several
operational losses for which the Company provided approximately $9.8 million,
net of tax, in 1996. This included provisions for operational losses of $2.8
million, net of tax, recorded as a result of recent developments occurring
during the fourth quarter of 1996. The provision, in addition to all of the
results of operations from this division, is reflected in the consolidated
statement of income as "(Loss) income from operations of discontinued operation,
net of tax." In accordance with the Company's disposal plan, customers of the
precious metals division were notified of the Company's decision to exit the
line of business and given an appropriate amount of time to liquidate their
outstanding positions. Substantially all of the activities of the precious
metals division were terminated as of December 31, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(Loss) income from operations of
discontinued operation, net of income
taxes of $(6,000), $1,118, and $16..... $ (8,168) $ 1,523 $ 21
Loss on disposal of discontinued
operation.............................. -- -- --
- --------------------------------------------------------------------------------
Total $ (8,168) $ 1,523 $ 21
- --------------------------------------------------------------------------------
</TABLE>
Summary information of the precious metals division's assets and liabilities are
provided below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Loans................................... $ 3,797 $ 24,382
Total assets............................ 19,931 25,475
Total liabilities....................... 14,769 583
- ------------------------------------------------------------------------------
</TABLE>
NOTE (21) NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("FAS 125") which
establishes accounting for transfers and servicing of financial assets and
extinguishment of liabilities. This statement specifies the following: when
financial assets and liabilities are to be removed from an entity's financial
statements; the accounting for servicing assets and liabilities; and the
accounting for assets that can be contractually prepaid in such a way that the
holder would not recover substantially all of its recorded investment. Under FAS
125, an entity recognizes only assets it controls and liabilities it has
incurred, discontinues recognition of assets only when control has been
surrendered, and discontinues recognition of liabilities only when they have
been extinguished. FAS 125 requires that the selling entity continue to carry
retained interests relating to assets it no longer recognizes. Such
43
<PAGE>
retained interests are based on the relative fair values of the retained
interests of the subject assets at the date of transfer. Transfers not meeting
the criteria for sale recognition are accounted for as a secured borrowing with
a pledge of collateral. Under FAS 125, certain collateralized borrowings may
result in assets no longer being recognized if the assets are provided as
collateral and the secured party takes control of the collateral. This
determination is based upon whether: (1) the secured party is permitted to
repledge or sell the collateral and (2) the debtor does not have the right to
redeem the collateral on short notice. Extinguishments of liabilities are
recognized only when the debtor pays the creditor and is relieved of its
obligation for the liability, or when the debtor is legally released from being
the primary obligor under the liability, either judicially or by the creditor.
FAS 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset or liability. The servicing asset is to be amortized in proportion to, and
over the period of, net servicing income. Servicing assets and liabilities are
to be assessed for impairment based on their fair value. FAS 125 modifies the
accounting for interest-only strips or retained interests in securitizations,
such as capitalized servicing fees receivable, that can be contractually prepaid
or otherwise settled in such a way that the holder would not recover
substantially all of its recorded investment. In this case, it requires that
they be classified as available for sale or as trading securities. Interest-only
strips and retained interests are to be recorded at market value. Changes in
market value are included in operations, if classified as trading securities, or
in stockholders' equity as unrealized holding gains or losses, net of the
related tax effect, if classified as available for sale.
During 1996, the FASB issued Statement of Financial Accounting Standards No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No
125" ("FAS 127"). FAS 127 defers for one year the effective date (a) of
paragraph 15 of FAS 125 and (b) for repurchase agreement, dollar-roll,
securities lending, and similar transactions, of paragraphs 9 - 12 and 237 (b)
of FAS 125. FAS 127 provides additional guidance on the types of transactions
for which the effective date of FAS 125 has been deferred. It is required that
if it is not possible to determine whether a transfer occurring during calendar-
year 1997 is part of a repurchase agreement, dollar-roll, securities lending or
similar transaction, then paragraphs 9 - 12 of FAS 125 should be applied to that
transfer. The Company adopted the applicable provisions of FAS 125 effective
January 1, 1997. Management does not expect the adoption of FAS 125 to have a
material impact on the Company's financial position, results of operations or
liquidity.
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CONDENSED BALANCE SHEET
- -------------------------------------------------------------------------------
At December 31, (In Thousands, Except Share Data) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash.................................... $ 188 $ 800
Securities available for sale (at fair
value at December 31, 1996 and 1995)... 14,022 16,442
Securities purchased under resale
agreements from Imperial Bank.......... 32,000 --
Loans to officers....................... 3,633 4,238
Investments in subsidiaries:
Imperial Bank......................... 264,359 216,417
Other subsidiaries.................... 4,447 538
Other assets............................ 15,301 14,267
- -------------------------------------------------------------------------------
TOTAL ASSETS $305,150 $252,702
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper........................ $ 8,011 $ 11,562
Long-term borrowings.................... 4,455 5,906
Other liabilities....................... 6,333 6,998
- -------------------------------------------------------------------------------
TOTAL LIABILITIES $ 18,799 $ 24,466
- -------------------------------------------------------------------------------
Stockholders' equity:
Common stock, no par 50,000,000
shares authorized; 23,079,715 shares
at December 31, 1996 and 13,821,125
shares at December 31, 1995 issued
and outstanding...................... 163,748 130,780
Subsidiaries' unrealized gain on
securities available for sale, net
of tax............................... 1,206 2,747
Retained earnings..................... 121,397 94,709
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $286,351 $228,236
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $305,150 $252,702
- -------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Dividends - Imperial Bank and
Imperial Bank Realty Company, Inc.... $ 4,120 $ 2,367 $ 4,610
Interest income:
Securities available for sale....... 1,195 694 456
Securities purchased under resale
agreements from Imperial Bank....... 141 12 --
Loans to officers................... 119 199 179
Other income.......................... 15 16 25
- --------------------------------------------------------------------------------------------
TOTAL REVENUE $ 5,590 $ 3,288 $ 5,270
-------------------------------------------------------------------------------------------
Expense:
Salary................................ 137 137 198
Other employee benefits(1)............ 206 (206) 1,284
Interest expense:
Commercial paper.................... 1,015 463 487
Long-term borrowings................ 343 528 625
Other expense......................... 890 535 518
- --------------------------------------------------------------------------------------------
TOTAL EXPENSE $ 2,591 $ 1,457 $ 3,112
- --------------------------------------------------------------------------------------------
Income before income taxes.............. 2,999 1,831 2,158
Applicable income tax benefit........... (603) (490) (1,472)
- --------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 3,602 2,321 3,630
- --------------------------------------------------------------------------------------------
Equity in undistributed income of
subsidiaries........................... 50,532 20,856 3,013
- --------------------------------------------------------------------------------------------
NET INCOME $54,134 $23,177 $ 6,643
- --------------------------------------------------------------------------------------------
(1) Includes the accrual for benefit costs less the benefit associated with the policies
funding the plan (see Note 13).
- --------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 54,134 $ 23,177 $ 6,643
Adjustments for non-cash charges (credits):
Undistributed income of subsidiaries (50,532) (20,856) (3,013)
Net change in other liabilities(1).. 1,198 798 235
Net change in other assets.......... (1,034) (693) 1,603
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,766 $ 2,426 $ 5,468
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities
available for sale................... 416,117 188,630 217,179
Purchase of securities available for
sale................................. (413,471) (189,966) (223,952)
Investments in subsidiaries........... (1,750) -- --
Net change in securities purchased
under resale agreements.............. (3,200) -- --
Net change in loans made to officers.. 605 244 3,579
- -----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $ (1,699) (1,092) $ (3,194)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in commercial paper........ (3,551) (341) (5,497)
Retirement of long-term borrowings.... (1,451) (2,247) (1,713)
Advances from subsidiaries............ -- -- 990
Net proceeds from exercise of
employee stock options............... 2,352 1,839 3,968
Other................................. (29) (11) (10)
- -----------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES $ (2,679) $ (760) $ (2,262)
- -----------------------------------------------------------------------------------------------
NET CHANGE IN CASH $ (612) $ 574 $ 12
- -----------------------------------------------------------------------------------------------
CASH, BEGINNING OF YEAR $ 800 $ 226 $ 214
- -----------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 188 $ 800 $ 226
- -----------------------------------------------------------------------------------------------
(1) The Parent Company recorded a tax benefit in stockholders' equity for its employee stock
options of $1,863,000 in 1996, $153,000 in 1995 and $1,478,000 in 1994.
- -----------------------------------------------------------------------------------------------
</TABLE>
In 1996, 1995 and 1994, the Parent Company paid $1.4 million, $1.0 million and
$1.3 million in interest, respectively.
NOTE (23) SUBSEQUENT EVENTS (UNAUDITED)
On February 20, 1997, the Company's Board of Directors approved a plan to spin
off to stockholders in a tax-free distribution a portion of its specialty
lending and finance businesses that focus on the entertainment industry, as well
as certain other operations. These businesses and assets will be transferred to
a newly formed corporation.
The spin-off company will be known as Imperial Financial Group, Inc. ("IFG") and
will comprise Imperial Bank's Lewis Horwitz Organization, which specializes in
entertainment industry lending; the Bank's small business lending group;
Imperial Trust Company, a California-licensed trust company; and the Bank's
interest in ICII. Also, in connection with the spin-off, IFG intends to form a
separate broker-dealer and a thrift and loan, which also will be part of its
business.
The spin-off is subject to receipt of a private letter ruling from the Internal
Revenue Service to the effect that the transaction will not be taxable to the
Company's stockholders, the Company or the Bank, as well as approval from the
Company's regulators. It is anticipated that the separation will occur in late
1997 or early 1998.
Total assets of the entities comprising IFG approximated $140 million at
December 31, 1996. Revenues of IFG, including interest income and noninterest
income but excluding the gains from sale of ICII shares in 1996, approximated
$40 million for the year ended December 31, 1996.
The Company has retained a financial advisor to assess alternatives to assure
that capital levels at the Company and the Bank meet regulatory guidelines after
the spin-off and provide for future growth.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
IMPERIAL BANCORP:
We have audited the accompanying consolidated balance sheet of Imperial Bancorp
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Imperial Bancorp and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 22, 1997
47
<PAGE>
Selected Statistical Information
SECURITIES
The following table shows the maturities of securities held to maturity and
securities available for sale at December 31, 1996 and their weighted average
yields.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) MATURING
- -----------------------------------------------------------------------------------------------------------------------------------
LESS THAN GREATER THAN GREATER THAN GREATER THAN
1 YEAR 1 - 5 YEARS 5 - 10 YEARS 10 YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
Industrial development bonds....... $ -- --% $ -- --% $ -- --% $ 4.2 7.1% $ 4.2 7.1%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ -- -- $ -- -- $ -- -- $ 4.2 7.1% $ 4.2 7.1%
- -----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and federal agencies.. $ 74.0 5.2% $20.3 5.6% $ -- --% $293.3 6.6% $387.6 6.3%
Mutual funds........................ 31.1 5.3 -- -- -- -- -- -- 31.1 5.3
Other securities.................... -- -- 0.1 7.9 -- -- 7.5 8.8 7.6 8.8
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $105.1 5.3% $20.4 5.6% $ -- -- $300.8 6.7% $426.3 6.3%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MATURITY DISTRIBUTION OF LOANS
The following table shows the maturity schedule of the Company's loan portfolio
at December 31, 1996, net of unearned income and deferred loan fees and costs.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
GREATER
LESS THAN GREATER
THAN 1 TO 5 THAN
(IN THOUSANDS) 1 YEAR YEARS 5 YEARS TOTAL
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans:
Floating rate............... $ 777,993 $543,367 $159,051 $1,480,411
Fixed rate.................. 57,300 46,583 10,308 114,191
Real estate loans:
Floating rate............... 81,240 22,529 16,759 120,529
Fixed rate.................. 91,202 193,449 42,663 327,313
Consumer loans:
Floating rate............... 16,444 3,637 -- 20,081
Fixed rate.................. 63 460 -- 523
- -------------------------------------------------------------------------------
TOTAL LOANS $1,024,242 $810,025 $228,781 $2,063,048
- -------------------------------------------------------------------------------
Allowance for loan losses... (36,051)
- -------------------------------------------------------------------------------
NET LOANS $2,026,997
- -------------------------------------------------------------------------------
</TABLE>
DEPOSITS
The following table shows the schedule of time remaining to maturity of time
certificates of deposits of $100,000 and over at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
3 months or less...................... $517,644 $372,228
Over 3 through 6 months............... 100,959 132,993
Over 6 through 12 months.............. 80,614 33,051
Over 12 months........................ 1,952 980
- -----------------------------------------------------------------
TOTAL $701,169 $539,252
- -----------------------------------------------------------------
</TABLE>
48
<PAGE>
FINANCIAL RATIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income as a percentage of:
Average stockholders' equity...................... 20.83% 11.03% 3.46% 0.57% 4.35%
Average total assets.............................. 1.94 1.00 0.30 0.04 0.22
Average earning assets............................ 2.10 1.14 0.35 0.05 0.25
Stockholders' equity at year-end as a percentage of:
Total assets at year-end.......................... 8.55% 8.19% 8.31% 6.63% 5.40%
Total gross loans at year-end..................... 13.88 13.43 14.38 12.56 11.12
Total deposits at year-end........................ 9.71 9.66 10.09 7.76 6.08
Average stockholders' equity as a percentage of:
Average total assets.............................. 9.33% 9.04% 8.64% 7.02% 5.11%
Average gross loans............................... 14.14 13.64 14.11 12.54 10.16
Average total deposits............................ 10.77 10.47 10.10 8.22 5.84
- -------------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK AND STOCKHOLDER DATA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market price:
High for year..................................... $ 22.27 $ 13.75 $10.28 $ 7.64 $ 7.27
Low for year...................................... 12.48 6.41 6.48 4.48 3.52
At year end....................................... 21.82 13.75 6.75 6.75 4.61
Book value at year end.............................. 11.28 9.27 8.24 8.02 8.00
Market price/book value at year end................. 193.4% 148.4% 81.9% 84.1% 57.6%
- -------------------------------------------------------------------------------------------------------
</TABLE>
On January 24, 1997, the Company declared a 10% stock dividend, payable on
February 24, 1997 to shareholders of record on February 17, 1997. In the fourth
quarter of 1996, the Company split its common stock at the ratio of one new
share for every two shares outstanding.
The Company declared an 8% stock dividend on January 25, 1996, payable on
February 23, 1996 to stockholders of record on February 15, 1996. In addition,
5% stock dividends were declared on January 24, 1995, payable February 24, 1995
to stockholders of record on February 15, 1995, on January 20, 1994, payable
February 28, 1994 to stockholders of record on February 10, 1994, on January 21,
1993, payable February 26, 1993 to stockholders of record on February 5, 1993
and on January 23, 1992, payable on February 28, 1992 to stockholders of record
on February 10, 1992. The ratios and amounts in the above table have been
adjusted for the effect of these dividends for all periods presented.
During the first eleven months of 1996, the common stock of the Company was
traded in the over-the-counter market on the National Market System and quoted
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ") under the ticker symbol "IBAN." On December 9, 1996, the Company's
common stock began trading on the New York Stock Exchange ("NYSE") under the
stock symbol "IMP." As of March 1, 1997, stockholders of record approximated
1,490 exclusive of individual participants in security position listings.
49
<PAGE>
QUARTERLY DATA
The following table sets forth the range of the high and low prices for the
calendar periods indicated as adjusted for stockdividends declared and paid in
1996 and first quarter 1997 and a 3-for-2 stock split effected in 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1996 1995
-----------------------------------
STOCK MARKET QUOTATIONS HIGH LOW HIGH LOW
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter............. $15.36 $12.48 $ 9.68 $ 6.41
Second Quarter............ 15.30 13.48 11.64 8.70
Third Quarter............. 17.88 13.48 13.33 10.66
Fourth Quarter............ 22.27 16.59 13.75 12.48
- ---------------------------------------------------------------
</TABLE>
Quarterly financial information for the Company and its subsidiaries for the two
years ended December 31, 1996 is summarized below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------
1996 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income................... $56,227 $54,513 $50,326 $48,090
Net interest income..................... 37,908 36,084 34,889 32,221
Provision for loan losses............... (2,948) 3,803 3,357 2,669
Noninterest income...................... 14,974 12,586 23,229 12,291
Gains - Imperial Credit Industries,
Inc. stock............................. -- -- 36,411 --
Income from continuing operations
before taxes........................... 21,368 14,347 58,185 11,680
(Loss) income from operations of
discontinued operation, net of tax..... (2,543) 373 (6,114) 116
- ------------------------------------------------------------------------------------------------------------
NET INCOME $10,009 $ 8,676 $28,653 $ 6,796
- ------------------------------------------------------------------------------------------------------------
Net income from continuing operations
per share.............................. 0.47 0.32 1.34 0.26
(Loss) income per share of discontinued
operations............................. (0.10) 0.01 (0.24) --
- ------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.37 $ 0.33 $ 1.10 $ 0.26
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
1995 DECEMBER 1 SEPTEMBER 30 JUNE 30 MARCH 31
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income................... $48,104 $45,014 $43,234 $38,427
Net interest income..................... 33,155 29,036 27,542 24,892
Provision for loan losses............... 5,305 6,261 3,176 1,380
Noninterest income...................... 16,421 10,453 8,753 7,919
Income from continuing operations
before taxes........................... 12,662 7,080 6,677 5,306
Income from operations of discontinued
operation, net of tax.................. 465 480 350 228
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,723 $ 5,150 $ 4,648 $ 4,656
- ------------------------------------------------------------------------------------------------------------
Net income from continuing operations
per share LDRS......................... 0.32 0.18 0.17 0.18
Income per share of discontinued
operations............................. 0.02 0.02 0.01 0.01
- ------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.34 $ 0.20 $ 0.18 $ 0.19
- ------------------------------------------------------------------------------------------------------------
Per share data has been adjusted for stock dividends declared and paid in 1996 and 1997 and a 3-for-2 stock
split effected in 1996.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
- -------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN NET INTEREST MARGIN
Changes in the Company's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in
interest income and interest expense for the years indicated. The total change
is segmented into the change attributable to variations in volume (changes in
volume multiplied by old rate) and the change attributable to variations in
interest rates (changes in rates multiplied by old volume). The change in
interest due to both rate and volume (changes in rate multiplied by changes in
volume) is classified as rate/volume. Non-accrual loans are included in average
loans used to compute this table. The table is not presented on a tax equivalent
basis as the effects are not material.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1996 OVER 1995 1995 OVER 1994
RATE/ RATE/
(IN THOUSANDS) VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(Decrease) in:
Loans (1)...................... $27,817 $ 897 $1,393 $30,107 $14,883 $14,978 $ 967 $30,828
Trading instruments............ 470 (912) (103) (545) 592 464 94 1,150
Securities available for sale... 6,007 (1,175) (506) 4,326 (1,254) 6,792 (648) 4,890
Securities held to maturity.... (72) 90 (23) (5) (14) (23) 3 (34)
Federal funds sold and
securities purchased
under resale agreements....... 1,257 (871) (123) 263 (324) 2,925 (47) 2,554
Loans held for sale............ 248 (9) (8) 231 (498) 487 (370) (381)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $35,727 $(1,980) $ 630 $34,377 $13,385 $25,623 $ (1) $39,007
- ---------------------------------------------------------------------------------------------------------------------------------
Savings........................ (157) (1) 1 (157) (41) -- -- (41)
Money market................... 1,193 1,107 (112) 2,188 (553) 1,863 175 1,485
Time - under $100,000.......... (987) (1,362) 134 (2,215) 2,540 3,493 1,074 7,107
Time - $100,000 and over....... 12,512 (2,382) (886) 9,244 5,953 5,515 2,288 13,756
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $12,561 (2,638) (863) $ 9,060 $ 7,899 $10,871 $ 3,537 $22,307
- ---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings.......... (611) (397) 33 (975) (977) 2,083 (577) 529
Long-term borrowings........... (154) (47) 16 (185) (130) 46 (13) (97)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $11,796 (3,082) (814) $ 7,900 $ 6,792 $13,000 $ 2,947 $22,739
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGES IN NET INTEREST $23,931 $ 1,102 $1,444 $26,477 $ 6,593 $12,623 $(2,948) $16,268
INCOME
- ---------------------------------------------------------------------------------------------------------------------------------
(1) The rate change for interest income on loans includes a $0.7 million positive impact and a $7.2 million negative impact of
derivative instruments for the years ended December 31, 1996 and 1995. Loans are net of unearned income and deferred loan
fees.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
Description of Business
Imperial Bancorp: Imperial Bancorp ("the Company") is a bank holding company
registered under the Bank Holding Company Act of 1956 ("the BHC Act"), as
amended. The Company was incorporated under the laws of California on November
13, 1968, and has its principal executive offices at 9920 South La Cienega
Boulevard, Inglewood, California 90301. The Company functions primarily as the
sole stockholder of Imperial Bank ("the Bank") and the Bank's non-bank
subsidiaries, and establishes general policies and activities of the operating
subsidiaries.
Imperial Bank: The Bank is engaged in general commercial banking at 11 banking
offices located throughout California and loan production offices located in
Boston, Massachusetts; Austin, Texas; and Phoenix, Arizona. The Bank, among the
eighth largest in California, was incorporated in 1963 under the laws of the
State of California and became a subsidiary of the Company in 1969.
The Bank offers a wide variety of financial services. For business customers the
Bank's services currently include: checking accounts; savings accounts; money
market deposit accounts; certificates of deposit; business and real estate
loans; ESOP financing; venture capital financing; SBA loans; depository of
federal income, excise and withholding taxes; collection services; Mastercard
and Visa depository; business account reconciliation; cash management services;
automated payroll systems; accounts receivable financing; letters of credit,
foreign currency exchange and trade financing; asset management services; escrow
accounting system and other accounting systems. The Bank has historically
devoted the major portion of its business development efforts toward customers
in the medium size business range consisting of companies having annual sales of
between $5 and $100 million. Additionally, the Bank has established specialized
divisions to more directly serve certain market segments, such as the
Entertainment Industries Group, International Banking, Asset Based Lending,
Title/Escrow Administration and Corporate Cash Management, Merchant Card
Services, The Lewis Horwitz Organization, Special Markets, Health Care and Small
Business Administration Lending. The accounts of any single depositor or
affiliated group of depositors are not considered material in relation to the
Bank's total deposits.
For individual customers the Bank provides: personal checking, interest checking
and savings accounts; individual retirement accounts and Keogh Plans; money
market deposit accounts; certificates of deposit; auto, home improvement, home
equity and other types of consumer loans; traveller's checks; money transfer
services; and automatic overdraft protection. While the Bank offers these retail
type services, it does so primarily as an accommodation to its business oriented
customers within the geographic areas served.
The Bank does not have trust powers. However, Imperial Trust Company, a
subsidiary of the Bank, is licensed to operate a trust business under the laws
of the State of California and operates from offices in Los Angeles, Costa Mesa
and San Francisco. The Bank is licensed as an insurance agent and engages in
insurance agency activities as permitted under applicable law.
As of December 31, 1996, the Bank and its subsidiaries had total assets of $3.3
billion and total deposits of $3.0 billion. Net income for 1996 was $54.5
million.
Competition - All phases of the Bank's business are highly competitive. Some of
the nation's largest commercial banks are headquartered in California and
maintain large branch bank networks throughout the Bank's marketing areas. These
large commercial banks have substantially greater assets and resources than the
Bank. A number of California banks, as well as out-of-state banks, have larger
total lending limits than the Bank and perform some banking related functions
which the Bank does not presently offer. For customers needing services the Bank
does not directly offer, the Bank makes arrangements with correspondent
institutions to provide such specialized services. In addition, the Bank and all
other banks compete in making loans and obtaining deposits with a variety of
other financial institutions including savings and loan institutions, thrift and
loan companies, small loan companies and others.
Increased competition from foreign banks and nonbanks such as investment banking
firms, insurance companies, credit unions and money market funds has intensified
in recent years. In competing for banking business, including deposits and other
related activities, the Company, the Bank and their affiliates employ personal
contact, localized advertising, interest rate competition and availability of
specialized services in order to meet the needs of various types of customers.
Monetary policy - Banking, as a business, is affected by general economic
conditions, both domestic and international, as well as the monetary and fiscal
policies of the United States and its agencies. In particular, the Board of
Governors of the Federal Reserve System ("the Board") exerts substantial
influence on interest rates and credit conditions, primarily through open market
operations in U.S. government securities, varying the discount rate on member
bank borrowings and setting reserve requirements against deposits. The Board's
monetary policies have had a significant impact on the operating results of
financial institutions in the past and are expected to continue to do so in the
future.
Imperial Bank Subsidiaries: Imperial Trust Company, a California licensed trust
company, had total assets under management and administration of approximately
$7.5 billion at December 31, 1996. The Trust Company reported net income of $1.7
million for 1996.
Imperial Ventures, Inc. ("IVI") was organized in 1977 and is licensed as a small
business investment company. IVI reported net income of $0.2 million for 1996.
As of December 31, 1996, IVI had total assets of approximately $1.3 million.
52
<PAGE>
Imperial Securities Corporation ("ISC"), a registered broker dealer, engages in
the purchase and resale of financial instruments to corporations, financial
institutions and high net worth individuals. ISC, organized as a broker dealer
in 1993, reported net income of $0.7 million for 1996. As of December 31, 1996,
ISC had total assets of $3.6 million.
Pacific Bancard Association, Inc. ("PBA") was implemented in 1994 to facilitate
merchant bankcard processing activities. PBA had total assets of $0.8 million at
December 31, 1996, and reported net income of $0.2 million for 1996.
Nonbank Subsidiaries: In addition to the Bank and its subsidiaries, the Company
has two active wholly owned direct subsidiaries.
Imperial Bank Realty Company, Inc. ("Realty") holds leases on certain real
property occupied by the Company and the Bank. Realty is responsible for
purchasing, leasing and maintaining all Bank and Company operating real
properties. As of December 31, 1996, Realty's total assets approximated $0.6
million. Net income in 1996 was approximately $42,000.
Imperial Creditcorp ("ICC") seeks to generate capital appreciation through
medium term equity investments made in financial sector related opportunities.
As of December 31, 1996, ICC's total assets approximated $1.7 million. Net
income for 1996 approximated $167,000.
Investment in Imperial Credit Industries, Inc.: Imperial Credit Industries, Inc.
("ICII"), capitalized in late 1991, is a diversified finance company. In 1992,
ICII sold 2.3 million shares of stock in an initial public offering. During the
second quarter of 1993, the Bank sold 2.8 million shares of ICII common stock
reducing its ownership from 72.4% at December 31, 1992, to 40.3% at December 31,
1993 and 1994. During 1995, ICII common stock was split at the ratio of three
new shares for every two shares outstanding. In addition, ICII declared and paid
a 10% stock dividend in February 1996 and effected a two-for-one stock split in
late 1996.
In the second quarter of 1996, the Company sold 1.5 million shares of its
investment in ICII. At the same time, ICII completed a secondary public offering
in which 2.8 million new shares were sold to the public. These events reduced
the Company's ownership of ICII to approximately 24.5%.
As the Company does not exercise significant control over the operation of ICII,
the results of operations are accounted for as an equity investment in the
Company's consolidated financial statements.
On February 20, 1997, the Company's Board of Directors approved a plan to spin
off to stockholders, in a tax-free distribution, a portion of specialty lending
and finance businesses that focus on the entertainment industry, as well as
certain other operations including its investment in ICII. The spin-off is
subject to receipt of a private letter ruling from the Internal Revenue Service
to the effect that the transaction will not be taxable to the Company's
stockholders or the Company. It is anticipated that the separation will occur in
late 1997 or early 1998.
Supervision and Regulation: Bank holding companies, banks and their non-bank
subsidiaries are extensively regulated under both federal and state law. The
following is not intended to be a complete description of the statutes and
regulations applicable to the Company's or the Bank's business. The description
of statutory and regulatory provisions is qualified in its entirety by reference
to the particular statutory or regulatory provisions. A number of changes to
laws and regulations affecting the Bank and the Company and additional
legislative and regulatory changes have occurred in the past several years and
can be expected to occur in the future. The nature, timing and impact of new and
amended laws and regulations cannot be accurately predicted.
Bank Holding Company - The Company is regulated under the BHC Act and as such is
required to file annual reports of its operations with the Board and is subject
to examination by it. The BHC Act requires, among other things, the Board's
prior approval whenever a bank holding company proposes to (i) acquire all or
substantially all the assets of a bank, (ii) acquire direct or indirect
ownership or control of more than 5% voting shares of a bank, or (iii) merge or
consolidate with another bank holding company.
As contemplated by the BHC Act, numerous states have enacted laws, and nearly
every state in the nation has contemplated laws, which would permit the
acquisition of banks located within the state by out-of-state bank holding
companies. In September 1994, full interstate banking legislation was adopted by
Congress in the Riegle-Neal Interstate Banking and Branch Efficiency Act ("the
Riegle-Neal Act"). Under the Riegle-Neal Act, interstate banking is allowed in
three different ways: (i) effective September 1995, a bank owned by a holding
company may acquire a subsidiary bank anywhere in the U.S., (ii) effective
September 1995, a bank owned by a holding company may act as an agent in
accepting deposits or servicing loans, and (iii) effective June 1, 1997, a bank
may establish a branch or merge with a bank in another state, but only if the
bank's home state permits interstate mergers and branches, and the other state
has not passed a law to prohibit interstate mergers or branches. The Riegle-Neal
Act is subject to certain phase in and opt out provisions.
The State of California has passed interstate banking legislation. Any out-of-
state bank holding company is permitted to acquire a California bank provided
that reciprocal rights are granted to California bank holding companies.
The BHC Act prohibits a bank holding company, with certain exceptions, from
engaging in or acquiring direct or indirect control of 5% or more of the voting
shares of any company engaged in non-banking activities. The Board is authorized
to approve, among other things, a bank holding company's acquisition of control
of any company engaged in activities which the Board has determined to be
closely related to banking or
53
<PAGE>
managing or controlling banks. In making such determination, the Board is
required to weigh the expected benefits of the acquisition to the public, such
as greater convenience and increased competition or gains in efficiency, against
the risks of possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest and unsound banking
practices.
The Company, its non-banking subsidiaries and ICII are affiliates of the Bank
within the meaning of the Federal Reserve Act. Under the Federal Reserve Act
there are certain restrictions on loans by the Bank to the Company and to its
non-banking affiliates and all such affiliates in the aggregate, on investments
by the Bank in any affiliate's securities and on the Bank taking any affiliate's
securities as collateral for loans to any borrower. The Bank is subject to
certain restrictions with respect to engaging in the issue, flotation,
underwriting, public sale or distribution of certain types of securities and the
Company and all other affiliates may be subject to such restrictions. Under the
BHC Act and the Board's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit or lease or sale of any property or the furnishing of
services.
State Banks - The Bank is supervised by California's Superintendent of Banks
("the Superintendent"), and is a member of the Federal Deposit Insurance
Corporation ("FDIC"). It is subject to the provisions of the Federal Deposit
Insurance Act and to regular examinations by the Superintendent and the FDIC.
The Bank is not a member of the Federal Reserve System ("Fed"), although it is
subject to reserve requirements of the Fed. There are various requirements and
restrictions under the laws of the State of California and of the United States
affecting the Bank in its operations, and these laws and extensive
administrative regulations cover many aspects of the Bank's business such as
investments, branching, municipal securities and other activities, including
restrictions on the nature and amount of loans which may be made. Although the
Bank is governed by regulation of the Superintendent and the FDIC, the policies
of the Board so permeate the banking industry as a whole, that the Bank, while
not a member of the Fed, is to a large degree subject to the same policies that
affect member banks.
The Bank, as a California corporation, is limited in making distribution to its
stockholder, the Company, to the lesser of the retained earnings of the Bank or
the net income of the Bank for its last three fiscal years, less the amount of
any distributions during such period. The Indentures of the Notes and Debentures
also have restrictions on distributions. At December 31, 1996, the Bank could
distribute at least $73.1 million.
The Bank is insured by the FDIC and therefore subject to its regulations. Among
other things the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provided authority for special assessments and required the FDIC to
develop a general risk-based assessment system. Under this regulation, the
amount of FDIC assessments paid by insured depository institutions is based on
their relative risk as measured by regulatory capital ratios and certain other
factors. Under this new system, in establishing the insurance premium assessment
for each bank, the FDIC will take into consideration the probability that the
Bank Insurance Fund ("BIF") will incur a loss with respect to the bank, and will
charge a bank with perceived higher inherent risks a higher insurance premium.
The FDIC will also consider the different categories and concentrations of
assets and liabilities of the institution, the likely amount of any such loss,
the revenue needs of the BIF, and any other factors the FDIC deems relevant.
In September 1996, Congress passed the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Budget Act") which provided that, among other
things, Savings Association Insurance Fund ("SAIF") members and BIF members
would have the same risk-based deposit insurance assessment schedule with
respect to FDIC deposit insurance premiums, effective January 1, 1997, whereas
previously, FDIC insurance premiums were based on the level of reserves in the
BIF and the SAIF. The assessment schedule proposed by the FDIC ranges from 0% to
0.27% of deposits and is based upon the capital position and a supervisory
evaluation of each institution. As of January 1, 1997, assessments have been set
at the following percentages of deposits:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Group A Group B Group C
- --------------------------------------------------------------
<S> <C> <C> <C>
Well Capitalized......... 0.00% 0.03% 0.17%
Adequately Capitalized... 0.03% 0.10% 0.24%
Undercapitalized......... 0.10% 0.24% 0.27%
- --------------------------------------------------------------
</TABLE>
The Bank has been assigned the assessment risk classification of Group A and is
well capitalized. As a result, its FDIC insurance premium for the semi-annual
period of January to June 1997 is zero.
Prior to the enactment of the Budget Act, FDIC assessments for interest payments
on bond obligations issued by the Financing Corporation ("FICO") were solely
paid by SAIF member institutions. Under the Budget Act, both BIF and SAIF
members will now share in the cost of the FICO bond interest payments. Beginning
January 1, 1997 and continuing through December 31, 1999, partial sharing will
occur. During this initial period, SAIF member institutions will pay 0.0648% of
domestic deposits while BIF member institutions, such as the Bank, will pay
0.013% of domestic deposits. Full pro rata sharing of the FICO bond interest
payments will take effect on January 1, 2000.
FDICIA also requires each insured depository institution to prepare annual
financial statements in accordance with generally accepted accounting principles
which must be audited by an independent public accountant. Each institution must
also prepare a management report stating management's responsibility for
preparing the institution's annual financial statements, for complying with
designated safety and soundness laws and regulations and for other related
matters. In addition, the report must contain an assessment by management of the
effectiveness of internal controls and procedures over financial and regulatory
reporting and of the institution's compliance with
54
<PAGE>
designated laws and regulations. The institution's independent public accountant
must examine, attest to, and report separately on, assertions of management
concerning internal controls and procedures. The Bank is complying with these
requirements.
FDICIA required the establishment of minimum acceptable operational and
managerial standards, and standards for asset quality, earnings, and valuation
of publicly traded shares for depository institutions and their holding
companies. The operational standards must cover internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. The asset quality and earnings standards must specify a
maximum ratio of market value to book value for publicly traded shares. An
institution which fails to meet such standards must submit a corrective action
plan within 30 days.
The federal bank regulatory agencies have adopted final regulations which
require institutions to adopt written real estate lending policies that, among
other things, must be consistent with guidelines adopted by the agencies. Among
the guidelines adopted are maximum loan-to-value ratios for land loans (65%),
development loans (75%), construction loans (80-85%), loans on owner occupied 1-
4 family property, including home equity loans (no limit, but loans at or above
90% require private mortgage insurance), and loans on other improved property
(85%). The guidelines permit institutions to make loans in excess of the
supervisory loan-to-value limits if such loans are supported by other credit
factors, but the aggregate of such nonconforming loans should not exceed the
institution's risk-based capital, and the aggregate of nonconforming loans
secured by real estate other than 1-4 family property should not exceed 30% of
risk-based capital.
On December 21, 1993, the FDIC and other regulatory agencies issued an
interagency policy statement on the allowance for loan losses ("the Policy
Statement"). The Policy Statement requires that federally insured depository
institutions maintain an allowance for loan losses adequate to absorb credit
losses associated with the loan portfolio, including all binding commitments to
lend. The Policy Statement defines an adequate allowance for regulatory purposes
as a level that is no less than the sum of all expected losses with respect to
classified loans and losses expected over the following twelve months with
respect to all other loans, given the appropriate facts and circumstances as of
the evaluation date.
The Policy Statement specified that the amount of allowance determined by the
rules as described above is neither a floor nor a "safe harbor" level. However,
examiners will review a shortfall relative to this amount as indicating a need
to more closely review management's analysis to determine whether it is
reasonable, supported by reliable evidence and that all relevant factors have
been appropriately considered. This policy did not impact the level of the
Company's allowance for loan losses.
In 1995, the federal bank regulatory agencies determined that the allowance for
loan losses established pursuant to Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan," ("FAS 114") should
be characterized as a general allowance (created against unidentified losses)
rather than a specific allowance (created against identified losses). As a
general allowance, the FAS 114 allowance is includable in Tier 2 capital,
subject to existing regulatory capital limitations.
The Bank is subject to the Community Reinvestment Act of 1977 as amended
("CRA"). CRA requires the Bank to ascertain and meet the credit needs of the
communities it serves, including low and moderate income neighborhoods. The
Bank's compliance with CRA is monitored by the FDIC, which assigns the Bank a
publicly available CRA rating. An assessment of CRA compliance is required by
both the FDIC and the Board in connection with applications for approval of
certain activities, such as mergers with or acquisitions of other banks or bank
holding companies. In April 1995, the federal regulatory agencies issued a
comprehensive revision to the rules governing CRA compliance. In assigning a CRA
rating to a bank, the new regulations place greater emphasis on measurements of
performance in the areas of lending (specifically, the bank's home mortgage,
small business, small farm and community development loans), investment (the
bank's community development investments) and service (the bank's community
development services and the availability of its retail banking services),
although examiners are still given a degree of flexibility in taking into
account unique characteristics and needs of the bank's community and its
capacity and constraints in meeting such needs. The new regulations also require
increased collection and reporting of data regarding certain kinds of loans.
Although the new regulations became generally effective on July 1, 1995, various
provisions have different effective dates, and the new CRA evaluation criteria
will go into effect for examinations beginning on July 1, 1997. Although
management cannot predict the impact of the substantial changes in the new rules
on the Bank's CRA rating, it will continue to take steps to comply with the
requirements in all respects.
Capital adequacy guidelines - Risk-adjusted capital guidelines, issued by bank
regulatory authorities, assign risk weighting to assets and off-balance sheet
items and place increased emphasis on common equity. The guidelines currently
require a minimum Tier I capital ratio of 4% and a total risk weighted capital
ratio of 8% in order for an institution to be classified as adequately
capitalized. Institutions which maintain a Tier I ratio of 6% and total capital
ratio of 10% are defined as well capitalized. Tier I capital basically consists
of common stockholder's equity and non-cumulative perpetual preferred stock and
minority interest in consolidated subsidiaries minus intangible assets. The
Bank's Tier I and total risk-weighted ratios at December 31, 1996 were 9.2% and
10.5%, respectively.
In addition to the risk-weighted ratios, the highest rated banks are required to
maintain a minimum leverage ratio of 3%. All other banks are expected to
maintain higher leverage ratios, to
55
<PAGE>
be determined on an individual basis. This ratio is defined as Tier I capital to
average total assets for the most recent quarter. The Bank's leverage ratio at
December 31, 1996 was 8.7%.
The banking agencies issued a final rule which requires them to revise their
risk-based capital guidelines to ensure that their standards take adequate
account of interest rate risk ("IRR"). These amendments to risk-based capital
guidelines had not been finalized for banks as of December 31, 1996.
PROPERTIES
The principal executive offices of the Company and the Bank are located in
leased premises in the Imperial Bank Building at 9920 South La Cienega
Boulevard, Inglewood, California. The leases are either long-term or contain
sufficient options for extension to assure availability of the space for 10
years.
The Company leases office space for branches and subsidiaries locations with
expiration dates ranging from 1997 to 2012, exclusive of renewal options. Annual
rentals, net of sublease income, for all leased premises were $6,277,000 for
1996.
The Bank houses its Corporate Service Center at 2015 Manhattan Beach Boulevard,
Redondo Beach, California. The property is owned by the Bank.
56
<PAGE>
Directory
IMPERIAL BANCORP, SUBSIDIARIES AND ENTERPRISES
Imperial Bancorp & Imperial Bank Executive Offices
Century Boulevard at the San Diego Freeway
P. O. Box 92991
Los Angeles, California 90009
(310) 417-5600
- ------------------------------------------------------------------------------
Imperial Bank Realty Company, Inc.
Century Boulevard at the San Diego Freeway
P. O. Box 92991
Los Angeles, California 90009
(310) 417-5600
- ------------------------------------------------------------------------------
Imperial Credit Industries, Inc.
23550 Hawthorne Blvd., Building 1, Suite #110
Torrance, CA 90505
(310) 373-1704
- ------------------------------------------------------------------------------
Imperial Creditcorp
Century Boulevard at the San Diego Freeway
P. O. Box 92991
Los Angeles, California 90009
(310) 417-5600
- ------------------------------------------------------------------------------
Imperial Financial Group, Inc.
Century Boulevard at the San Diego Freeway
P. O. Box 92991
Los Angeles, California 90009
(310) 417-5600
- ------------------------------------------------------------------------------
DIRECTORS
George L. Graziadio, Jr.
Chairman of the Board, President and Chief Executive Officer, Imperial Bancorp;
Chairman of the Board and Co-Founder, Imperial Bank;
Chairman of the Board, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
Norman P. Creighton
Vice Chairman and Chief Executive Officer, Imperial Bank;
Director, Imperial Bancorp and Imperial Bank
- ------------------------------------------------------------------------------
Richard K. Eamer
Chairman Emeritus, Tenet Healthcare Corp.;
Director, Imperial Bancorp and Imperial Bank
- ------------------------------------------------------------------------------
Robert M. Franko
President, Director, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
G. Louis Graziadio III
President, Ginarra Holdings, Inc.; Director, Imperial Bancorp;
Co-Chairman of the Board, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
Robert "Chip" Harris
Senior Vice President, AMC Entertainment;
Director, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
Bernard G. LeBeau
Retired Chairman of the Board, Imperial Bank;
Director, Imperial Bancorp and Imperial Bank
- ------------------------------------------------------------------------------
Perry A. Lerner
Managing Director, Crown Capital Group; Director, Imperial Financial Group,
Inc.
- ------------------------------------------------------------------------------
Jack H. Leylegian II
President, Leylegian Investment Management;
Director, Imperial Bank
- ------------------------------------------------------------------------------
William L. MacDonald
President and Chief Executive Officer, Compensation Resource Group;
Director, Imperial Bank
- ------------------------------------------------------------------------------
Lee E. Mikles
Chairman, Mikles/Miller Management;
Director, Imperial Bancorp and Imperial Bank;
Director, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
Paul A. Novelly
President, Apex Oil Co.; Director, Imperial Bank;
Director, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
Charles T. Owen
President and Publisher, San Diego Business Journal;
Director, Imperial Bank
- ------------------------------------------------------------------------------
H. Wayne Snavely
Chairman and Chief Executive Officer, Imperial Credit Industries, Inc.;
Director, Imperial Bancorp and Imperial Bank;
Director, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
Dr. M. Norvel Young
Chancellor Emeritus, Pepperdine University;
Director, Imperial Bancorp and Imperial Bank
- ------------------------------------------------------------------------------
IMPERIAL BANK MANAGEMENT COMMITTEE
Norman P. Creighton
Vice Chairman and Chief Executive Officer
- ------------------------------------------------------------------------------
Daniel R. Mathis
President and Chief Operating Officer
- ------------------------------------------------------------------------------
J. Richard Barkley
Executive Vice President and Director, Human Resources
- ------------------------------------------------------------------------------
William L. Capps
Executive Vice President and Chief Administrative Officer
- ------------------------------------------------------------------------------
Richard J. Casey
Executive Vice President
- ------------------------------------------------------------------------------
H.W. Duke Chenoweth
Executive Vice President
- ------------------------------------------------------------------------------
James R. Daley
Executive Vice President
- ------------------------------------------------------------------------------
Robert M. Franko
President, Director, Imperial Financial Group, Inc.
- ------------------------------------------------------------------------------
Eldon K. Lloyd
Executive Vice President, Chief Credit Officer
- ------------------------------------------------------------------------------
Christine M. McCarthy
Executive Vice President and Chief Financial Officer
- ------------------------------------------------------------------------------
Robert S. Muehlenbeck
Executive Vice President
- ------------------------------------------------------------------------------
57
<PAGE>
DIRECTORY OF BANK OFFICES
SOUTHERN CALIFORNIA
. Beverly Hills
(310) 281-2400
. Downtown Los Angeles
(213) 484-3700
. Los Angeles International Airport
(310) 417-5600
. Orange County - Costa Mesa
(714) 641-2200
. San Diego
(619) 338-1500
. Sherman Oaks
(818) 379-2901
NORTHERN CALIFORNIA
. Central Valley - Fresno
(209) 244-3900
. East Bay - Walnut Creek
(510) 941-1900
. Sacramento
(916) 491-1300
. San Francisco
(415) 954-5000
. Santa Clara Valley - San Jose
(408) 451-8500
LOAN PRODUCTION OFFICES
. Austin, Texas
(512) 349-2333
. Boston, Massachusetts
(617) 521-9400
. Phoenix, Arizona
(602) 952-6028
SPECIALTY OFFICES
. Apparel and Textile Industries Group
Downtown Los Angeles
. Imperial Entertainment Group
Beverly Hills
. International, Foreign Exchange
Redondo Beach; San Francisco
. The Lewis Horwitz Organization
Century City
. Merchant Card Processing
Redondo Beach
. Residential Lending
San Diego; Fresno; Sacramento; Los Angeles
. SBA Loan Department
Fresno; Los Angeles; Oakland; Orange County; Sacramento;
San Diego; San Francisco; Santa Barbara; Santa Clara;
Sherman Oaks; Torrance; Walnut Creek; Phoenix, Arizona;
Las Vegas, Nevada; Portland, Oregon; Seattle, Washington
. Special Markets Group - Emerging Technology
Costa Mesa; Menlo Park; San Diego; Austin, Texas;
Boston, Massachusetts
. Wine Industry Group
Sacramento
IMPERIAL BANK -- SUBSIDIARIES & DIVISIONS
. Commercial Banking Division
. Corporate Cash Management
. Financial Accounts Management Services
Division (Factoring)
. Financial Institutions Division
. Financial Services Group: Association Bank Services, Bankruptcy Deposit
Division, Title/Escrow Division, Labor Management Division
. Health Care Technology Group
. Imperial Securities Corporation
. Imperial Trust Company
. Imperial Ventures, Inc.
. Mortgage Warehouse Division
. Pacific Bancard Association
. Real Estate Division
. Real Estate Finance Division
. Syndicated Finance
STOCKHOLDER INFORMATION
Requests for financial information, annual reports, quarterly reports and
SEC filings should be addressed to:
Imperial Bancorp
Investor Relations Department
P. O. Box 92991
Los Angeles, California 90009
(800) 957-8483
[email protected]
Stock Transfer Agent and Registrar
American Stock Transfer and Trust Co.
40 Wall Street
New York, NY 10025
(800) 937-5449
Independent Auditors
KPMG Peat Marwick LLP
Stock Listings
NYSE - IMP*
NASDAQ - ICII*
*Stock Symbol: IMP - Imperial Bancorp
ICII - Imperial Credit Industries, Inc.
For other information visit our World Wide Web site:
http:/www.imperialbank.com
58
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
March 20, 1997, on its behalf by the undersigned, thereunto duly authorized.
Date
/s/ George L. Graziadio March 20, 1997
---------------------------------
George L. Graziadio, Jr.
Chief Executive Officer
/s/ Robert M. Franko March 20, 1997
---------------------------------
Robert M. Franko
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below on March 20, 1997 by the following persons on
behalf of the registrant and in the capacities indicated.
Date
/s/ George L. Graziadio, Jr. March 20, 1997
---------------------------------
George L. Graziadio, Jr.
Chairman of the Board, President and
Chief Executive Officer
/s/ Bernard G. LeBeau March 20, 1997
---------------------------------
Bernard G. LeBeau
Director
/s/ Norman P. Creighton March 20, 1997
---------------------------------
Norman P. Creighton
Director
/s/ G. Louis Graziadio, III March 20, 1997
---------------------------------
G. Louis Graziadio, III
Director
/s/ Richard K. Eamer March 20, 1997
---------------------------------
Richard K. Eamer
Director
/s/ M. Norvel Young March 20, 1997
---------------------------------
M. Norvel Young
Director
/s/ H. Wayne Snavely March 20, 1997
---------------------------------
H. Wayne Snavely
Director
/s/ Lee E. Mikles March 20, 1997
---------------------------------
Lee E. Mikles
Director
59
<PAGE>
Form 10-K Cross-Reference Index
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Part I Page
- --------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Business
Financial Review ...........................5-20
Selected Statistical Information ...........4, 6-7, 11, 15-16,
48-51
Description of Business ....................52-56
Item 2. Properties .................................56
Item 3. Legal Proceedings ..........................39
Item 4. Submission of Matters to a vote of
security holders ..........................*
Executive Officers of the Registrant .......57
<CAPTION>
- --------------------------------------------------------------------------------
Part II Page
- --------------------------------------------------------------------------------
<S> <C> <C>
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters ...................................4, 49
Item 6. Selected Financial Data ....................4, 49
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations .................5-20
Item 8. Financial Statements and
Supplementary Data
Imperial Bancorp and Subsidiaries -
Consolidated Financial Statements .........21-24
Notes to Consolidated
Financial Statements ......................25-46
Independent Auditors' Report ...............47
Selected Statistical Information ...........4, 6-7, 11, 14-16,
48-51
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure ......................*
<CAPTION>
- --------------------------------------------------------------------------------
Part III Page
- --------------------------------------------------------------------------------
<S> <C> <C>
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 ......................**
<CAPTION>
- --------------------------------------------------------------------------------
Part IV++
- --------------------------------------------------------------------------------
<S> <C>
Item 14. Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for a listing of all financial
statements).
(2) Financial Statement Schedules
All schedules normally required by Form 10-K are omitted
since they either are not applicable or the required
information is shown in the financial statements or notes
thereto.
(3) Exhibits.
Exhibit 10. Special Compensation Agreements re: George L.
Graziadio, Jr. and Norman P. Creighton.***
Exhibit 11. Computation of Income Per Share.
Exhibit 21. Subsidiaries of Registrant.
Exhibit 23. Independent Auditors' Consent.
Exhibit 27. Financial Data Schedule.
Exhibit 99. Undertakings.
Exhibit 99.1 Consulting Agreements. ***
(b) No reports on Form 8-K have been filed during the fourth
quarter of the last year.
- --------------------------------------------------------------------------------
</TABLE>
* This item is omitted because it is either inapplicable or the answer thereto
is in the negative.
** Incorporated by reference from the Company's proxy statement which will
be filed within 120 days of fiscal year ended December 31, 1996.
*** Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1995 which was filed on March 22, 1996.
++ Exhibits listed in Part IV have been filed with the Company's 1996 10-K.
60
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Exhibit Number Description
- -------------- ---------------------------------------------
<S> <C>
11 Computation of Income Per Share
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
99 Undertakings
</TABLE>
61
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
62
<PAGE>
EXHIBIT 11
COMPUTATION OF INCOME PER SHARE
As more fully described in note 13 of the notes to consolidated financial
statements herein, the Company has outstanding certain employee stock option
plans and a stock purchase plan. The shares and options within such plans have
been determined to be common stock equivalents for purposes of computing income
per share.
During the years ended December 31, 1996 and 1995, the market price of the
Company's common stock exceeded the exercise price of certain of these common
stock equivalents.
The weighted average number of primary shares including common stock equivalents
was 26,043,809 in 1996, 25,083,959 in 1995 and 24,200,588 in 1994. The weighted
average number of shares used to compute income per common share was
retroactively adjusted to reflect a 10% stock dividend declared and paid in the
first quarter of 1997, a 3-for-2 stock split effected in the fourth quarter of
1996, an 8% stock dividend declared in the first quarter of 1996 and a 5% stock
dividend declared in the first quarter of 1995.
The weighted average number of fully diluted shares including common stock
equivalents was 26,116,767 in 1996, 25,168,985 in 1995 and 24,200,733 in 1994.
The weighted average number of shares used to compute income per common share
was retroactively adjusted to reflect a 10% stock dividend declared and paid in
the first quarter of 1997, a 3-for-2 stock split effected in the fourth quarter
of 1996, an 8% stock dividend declared in the first quarter of 1996 and a 5%
stock dividend declared in the first quarter of 1995.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF IMPERIAL BANCORP
All of the following subsidiaries of the Company are California corporations
except Imperial International Bank which is organized under the laws of the
United States. Each subsidiary is included in the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Percentage of
Voting Securities
Owned By
Name Immediate Parent Immediate Parent
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Imperial Bank Imperial Bancorp 100%
Imperial Bank Realty Company, Inc. Imperial Bancorp 100%
Company, Inc.
Imperial Creditcorp Imperial Bancorp 100%
Imperial Trust Company Imperial Bank 100%
Imperial Asset Advisors, Inc. Imperial Bank 100%
Imperial Ventures, Inc. Imperial Bank 100%
Imperial International Bank Imperial Bank 100%
Pacific Bancard Association, Inc. Imperial Bank 100%
Imperial Securities Corporation Imperial Bank 100%
Imperial Management, Inc. (1) Imperial Bank 100%
TNT Mortgage Services, Inc. (1) Imperial Bank 100%
Imperial Global Trading Company, Inc. (1) Imperial Bank 100%
Imperial Plan, Inc. (1) Imperial Bank 100%
Imperial Municipal Services Group, Inc. (1) (2) Imperial Bank 100%
Imperial Capital Markets Group, Inc. (1) Imperial Bank 100%
I.B. Mortgage Network, Inc. (1) Imperial Bank 100%
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Not currently active
(2) Previously known as Imperial Municipal Services Corporation
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Imperial Bancorp:
We consent to incorporation by reference in the registration statements (No. 2-
75352), (No. 2-61660), (No. 2-98462) and (No. 2-75353) on Forms S-8 and S-16 of
Imperial Bancorp of our report dated January 22, 1997, relating to the
consolidated balance sheet of Imperial Bancorp and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the December 31, 1996
annual report on Form 10-K of Imperial Bancorp.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 325,014
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 357,000
<TRADING-ASSETS> 64,887
<INVESTMENTS-HELD-FOR-SALE> 426,336
<INVESTMENTS-CARRYING> 4,193
<INVESTMENTS-MARKET> 4,193
<LOANS> 2,063,048
<ALLOWANCE> 36,051
<TOTAL-ASSETS> 3,350,170
<DEPOSITS> 2,950,277
<SHORT-TERM> 44,897
<LIABILITIES-OTHER> 64,190
<LONG-TERM> 4,455
0
0
<COMMON> 163,748
<OTHER-SE> 122,603
<TOTAL-LIABILITIES-AND-EQUITY> 3,350,170
<INTEREST-LOAN> 173,734
<INTEREST-INVEST> 24,952
<INTEREST-OTHER> 10,470
<INTEREST-TOTAL> 209,156
<INTEREST-DEPOSIT> 64,551
<INTEREST-EXPENSE> 68,054
<INTEREST-INCOME-NET> 141,102
<LOAN-LOSSES> 6,881
<SECURITIES-GAINS> 229
<EXPENSE-OTHER> 128,132
<INCOME-PRETAX> 105,580
<INCOME-PRE-EXTRAORDINARY> 62,302
<EXTRAORDINARY> (8,168)
<CHANGES> 0
<NET-INCOME> 54,134
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.07
<YIELD-ACTUAL> 5.8
<LOANS-NON> 20,390
<LOANS-PAST> 0
<LOANS-TROUBLED> 28,681
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 37,402
<CHARGE-OFFS> 11,025
<RECOVERIES> 2,778
<ALLOWANCE-CLOSE> 36,051
<ALLOWANCE-DOMESTIC> 36,051
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<ALLOWANCE-UNALLOCATED> 2,093
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<PAGE>
EXHIBIT 99
To Be Incorporated By Reference Into Forms S-8 and S-16 Registration Statement
Nos. 2-75352, 2-61660, 2-98462 and 2-75353.
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or most
recent post-effective amendment thereof) which, individually or in
the aggregate, represents a fundamental change in the information
set forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8 and
the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) Employee plans on Form S-8.
(1) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus to each employee to whom the
prospectus is sent or given a copy of the registrant's annual report
to stockholders for its last fiscal year, unless such employee
otherwise has received a copy of such report, in which case the
registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of
the employee. If the last fiscal year of the registrant has ended
within 120 days prior to the use of the prospectus, the annual report
of the registrant for the preceding fiscal year may be so delivered,
but within such 120 day period the annual report for the last fiscal
year will be furnished to each such employee.
<PAGE>
(2) The undersigned registrant hereby undertakes to transmit or
cause to be transmitted to all employees participating in the plan who
do not otherwise receive such material as stockholders of the
registrant, at the time and in the manner such material is sent to its
stockholders, copies of all reports, proxy statements and other
communications distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the
undersigned registrant and plan hereby undertake to transmit or cause
to be transmitted promptly, without charge, to any participant in the
plan who makes a written request, a copy of the then latest annual
report of the plan filed pursuant to section 15(d) of the Securities
Exchange Act of 1934 (Form 11-K). If such report is filed separately
on Form 11-K, such form shall be delivered upon written request. If
such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered
upon written request. If such report is filed as a part of the
registrant's annual report to stockholders delivered pursuant to
paragraph (1) or (2) of this undertaking, additional delivery shall
not be required.
(i) Insofar as indemnification of liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
